Rolling Dice

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S1: This ad free podcast is part of your Slate plus membership.

S2: Hello. Welcome to the Rolling Dice edition of Slate Money, your guide to the business and Finance News of the Week.

S1: I’m Felix Salmon of Axios. I’m here with Emily Peck of Huff Post. Hello. I’m here with Alicia Manski of Breakingviews. Hello. And boy, did we have big news this week. The entire system of monetary policy for the United States of America was unexpectedly transformed. It’s a big deal, people. So we are going to talk about that. We are going to talk about direct listings on the stock market, which are a new and fabulous thing that I think are going to become much more popular. And yes, we are going to talk about rolling dice. We’re going to talk about all of the answers that you guys sent in to the question I posed last week. Thank you so much for sending in your answers. We’re going to talk a lot more about that. I am going to do all of this. I have to mention from the glorious studio is a seaplane armada, the Jessamine Mali multinational organization, which is soon to go public in a direct listing on the New York Stock Exchange. Fill your boots. It’s an exciting show. Stay tuned. It’s all coming up on sleep money. OK, this is a huge week, I mean, we’re in August and nothing happens in August except a bunch of central bankers disappear off to Jackson Hole and go fly fishing. This is, by the way, exactly why it happens. Jackson Hole, it is because Paul Volcker was a big fan of fly fishing. And the only way they could get Paul Volcker to come to this conference is by doing it in Jackson Hole. Now, of course, it’s all virtual, but for the first time that I can ever remember, Jackson Hole has actually committed like major news. Jackson Hole is now like more of a news. Place than Davos ever has been.

S3: Well, most things are a bigger news place than Davos has ever been.

S1: This is true. But yeah, this is the first time ever that, like some boondoggle conferences, committed news. And that is because the Fed came out Jackson Hole and dumped a huge pile of speeches and white papers and press releases and everything, all in support of what seems to me at least to be a very, very big change in the whole conception of how they’re going to do monetary policy going forwards. You are nodding. You agree with me? I can’t believe we agree on something.

S3: Well, thus far we agree. I feel at some point probably not so much. So the Fed has been working for a long time on what was called this framework review, where they were going to figure out if they needed to make some changes in terms of how they conducted monetary policy and their dual mandate. So a lot of people expected there to be announcements at this at this meeting. And if you looked at the name of Jerome Powell speech, it was very clear he was going to be talking about this framework. And he, I think, said more than even people thought. So I would say the two biggest takeaways, one is the move towards average inflation targeting. And basically that just means that if you’ve undershot the inflation target for a while, you can overshoot it for a while. And you don’t have to like the minute it gets to two percent, immediately start hiking rates.

S1: And to be clear, we have undershot the inflation target for a while, quite consistently for years, ever since we’ve had a two percent target, we have, in fact, undershot. And so and we’ve had inflation for many years. I mean, we’ve undershot two percent for many years, which means that. According to this new framework, just to be symmetrical about things, we should at some point overshoot two percent for many years and they will be fine.

S3: But with that well, though, this probably brings up the biggest question about this announcement. The Fed has been incapable of creating two percent inflation. Why does anyone think they’re going to be capable of creating three or four percent inflation?

S1: So. Right. So we have a very different way of doing monetary policy. We just don’t know whether they’re going to be any more successful at this new way of doing monetary policy than they were the old way of doing monetary policy. Their intention has changed, but the outcome obviously is yet to be seen. Let’s just finish the thought that you started, though. You said there were two things that were very big. The first one is average inflation targeting. And the second one, I’m going to assume, is about the second part of the dual mandate, which is employment rate.

S3: And so the idea here is that they’re going to be looking at the how they deal with full employment is not going to be symmetrical. So if the unemployment rate is lower than anticipated, that doesn’t mean they then need to act to increase rates. The goal is going to be having a floor unemployment, not necessarily being too concerned about unemployment getting too low. Right.

S1: They have this idea of maximum employment, which is still in there. But if they exceed maximum employment, if employment is at more than Max, as it were, then that’s not going to worry them. There are going to be members of the FOMC, I’m sure, who still believe in the Phillips curve, which if you don’t know what the Phillips curve is, I’m jealous of you and I’m not going to explain. But some of these members of the FOMC are going to believe that if you if employment is, quote unquote too high, then that will cause inflation, which may or may not be true. But the point about this new framework is that the Fed is going to wait and see if and when that inflation occurs to raise interest rates rather than raising interest rates in order to stop it from happening.

S3: Yes. What we’re really seeing here, if you kind of look at the history of the Fed in the history of monetary policy after the Fed becomes independent in nineteen fifty one, you have this period where there is a focus on inflation and price stability. But then in the 1960s, that really changes and the focus starts to become much more on employment. And there’s this idea that you can run the economy a bit hotter because you can accept a little bit more inflation. That’s fine. But then the problem is that that didn’t work. You ended up creating a ton of inflation and in the 1970s, at the same time, you had a weak economy and then there became this big concern about inflation. So then you have the shift in monetary policy, which is obviously people think about Volcker, this idea of massively increasing rates to fight inflation. And so since then, the focus of the Fed, the focus of policy has really been on inflation. And over the past few years, there’s been a lot of pushback on that because the ideas like, look, we have an inflation for how many years yet we’ve had a very, very tepid growth. And so why are we focusing so much on inflation and why aren’t we looking more at the growth side of it?

S4: I obviously love this because I, I want the Fed to be focused on human beings getting jobs. And I like the idea that I’ve never really been a fan of the idea that you can have too much employment, though I understand the theoretical underpinnings there. I want people to have jobs. And the problem for for so long now has been wage stagnation. And unemployment is really low. Theoretically, wages are supposed to go up. And that was only barely starting to happen back in the before times. And Powell, you know, started raising rates pretty quickly. And it was like, but can’t we have a chance to get people more of the of the moneys before we do other stuff? So I really like and I think a lot of liberals like me maybe like putting more of a focus on employment and saying, like, there is no limit to how we want people to have jobs, we want employment. So that just seems like good on its face, especially since we haven’t had much inflation and a very, very, very, super long time.

S1: Not just people, but especially what Jerome Powell called low and middle income people, which, as my colleague Courtney Brown explains, is actually a really effective way of addressing the fact that an inflation targeting system is really part of. You can consider it to be part of systemic racism. And the reason you can consider inflation targeting to be racist is precisely that the last people to get jobs are black folks, basically. Yes. And so the Fed starts saying, oh, we have more or less full employment. You can start raising interest rates exactly at the point that the black folks were about to start getting jobs. And so it’s really discouraging the employment of black folks because that’s when they start raising rates rather than keeping them low, which is what you would need for those people to get more employment. And quite explicitly now saying we’re not going to do that anymore. We are very happy keeping rates low until everyone, even the black folks, get jobs.

S4: Right. And now my question is, is this going to be. Well, first it’s funny, sort of funny, maybe not the right word, but they’re doing this at a time of extremely high unemployment where this isn’t something that’s on the table right now, although it’ll be interesting as we go into recovery. This this may be a helpful thing. And then the second thing I’m thinking about or looking at is will this be meaningful when it comes to wage growth? I mean, wages have really stagnated for most working people, lower income people for a long time. And the reasons for that really aren’t just at the Fed. It has to do with competition between employers going away as a business becomes more concentrated and there’s more monopoly power. So it would be interesting to see if this actually has a big effect on wage growth. And I kind of am worried that it won’t.

S3: Yeah, I this I very much agree with you on the latter point. I mean, if the world that the Fed described and if the world we were just describing were true, then I would be totally on board with this. I’m not not on board with it, but I don’t think that the Fed has significant control over employment or over wages the way it may have had 30 years ago when rates and markets and capital flows and everything were so different to me. Right now, what the Fed is very good at is pumping up asset prices. And that is essentially the only thing the Fed is very good at. And so what I see happening here is that we are going to have the Fed keep policies very low. We are going to create massive asset price inflation over already, which is completely destabilizing. And Powell himself even said that if you look at the last decades and decades when we’ve had problems, it hasn’t been because of kind of traditional goods price inflation. It’s been because of these kind of financial crises, which he apparently doesn’t care that he may be creating another one. So, number one, I think that’s going to be a problem. And the number two, I don’t think it’s going to do anything because once you get so low, especially once you get towards the zero lower bound, the idea that whether you’re kind of moving a tad bit here or there, it’s going to have a significant impact. No fiscal policy is what has a significant impact on creating aggregate demand. To me, I don’t necessarily think this is going to lead to the positive things people think it will.

S4: Yeah, I mean, the one hand seeing the Fed make a move like this was sort of heartening because once again, the Fed is the only federal agency or group that seems to be thinking clearly, rationally, planning for the future. We have no fiscal the fiscal response in the current crisis is like throwing our hands up in the air and being like it’s their fault, it’s their fault, and no one does anything. So it’s it’s nice that they’re doing something. But it’s clear that the doing something place really needs to be over in Congress.

S1: Absolutely. And we’re all on the same page here. It’s good that the Fed is doing this, but as we have seen from the Bank of Japan for many decades, we might have reached the limits of what central banks can do. The central bank really only has one tool at its disposal, which is interest rates, interest rates zero. Yeah, this is a little bit like forward guidance on steroids. They’re not just promising to keep interest rates at zero until inflation picks up. They’re promising to keep interest rates at zero even after inflation picks up. Great. That’s looser monetary policy than we had before. But monetary policy is not going to solve this. We do need a bunch of. Money coming out the door of the government, and it really is beginning to look like that’s not going to happen until January twenty first at the earliest.

S4: Also, my question when I was thinking about all this is like, will there ever be inflation again? What has to happen?

S3: It’s interesting. I mean, I would probably argue I mean, it’s funny. So two things. One, I was recently reading a bunch of Warren Buffett letters because I was using it for an article and it was very funny because I was looking back or he was like, we’re in the land of 12 percent inflation and we always will be. So I do think people always need to be very wary of saying that what has happened in the recent past will continue to happen forever, because that has always been shown to not be the case. So I do think we should be aware of that. But I think partly what would affects inflation right now is very, very global, which was not the case back in when you had much more closed economies with much more closed capital accounts. The way things work now in terms of either through globalization, in terms of offshoring, in terms of keeping prices low, in terms of other countries having lower wages and then thus affecting wages over here in a way that that wouldn’t necessarily have happened in the past. The Internet also lowering prices and a number of ways. We have a lot of forces that are keeping prices low. So that’s why I don’t necessarily think that. Fed policy is going to affect that that much, however, I think other things could I think that if you started to have more kind of continuation of trade wars and you started to bring more supply chains back home, which would probably then increase prices.

S1: Yeah, I think that the the thing that has kept prices low has been competition and efficiency. And if you get less competition because the trade was and if you get less efficiency because companies want to be more robust to things like pandemics and global warming and other things that can hit them unexpectedly, then maybe that will that will mean price increases. But yet again, if those kind of things cause price increases and inflation, that’s the kind of inflation that the Fed raising interest rates doesn’t prevent and doesn’t stop. So anyway, that’s a that’s a future problem for years in the future. Right now, we are worried about employment and we’ll see whether the Fed can do much about it. I fear the answer is no. This is my favorite subject, direct listings, this in payments to other subjects. It’s true, I love I love payments and the biggest payments company in the world is about to go public. And we’re not even going to talk about that. But if you want to buy shares in and you need to be able to buy shares in either Hong Kong and Singapore, we will talk about and in a future show. But right now, we’re going to talk about direct listings, which is the super geeky way that I guess like market structure. Geeks love the idea of direct listings because they’re so pure. Right? You can instead of doing an IPO where you allocate your stock to certain investors and they and you set the price and you try and set the price below where the market is going to be so the investors can have a pop on the first day. So they’re more likely to want to buy more shares and all of this kind of very dirty, squidgy human aspect of IPOs. You just have to just let the shares start trading and the shares will find their natural price. And that is what they do in every company and every stock, every day, every minute, every second. So why not just do that for the IPO, let the shares start trading and just see what happens. And Spotify did this selected this? It has been proved that it doesn’t fail in any obvious way at all. It seems to work fine. And now the SEC has come out and said, you know what? We’re going to allow companies not only to do this, to just let their shares start trading, but we’re going to allow them to sell stock at the same time. So you can even do the one thing they haven’t been able to do until now is raise money in a direct listing from here on in. Companies are going to be able to raise money in a direct listing. I love all of this and I do love it as much as I do.

S3: I mean, I think it’s positive. I mean, and to me, a, I just think having more options and trying more things out is is very positive. I mean, to me, this kind of competition between direct listings and IPOs just kind of shows you how much the whole IPO process is about relationships. It just shows you how much finance is not about all of this kind of perfect world of supply meeting demand. It’s about relationships, whereas direct listing really isn’t, as you say, it really is about saying like, let’s actually see where demand meets supply. So I do I do like it. I do agree that obviously you need it to allow people to be able to raise funds to do it, because there’s only so many companies that can go public but have no need for money. So I think that’s a that’s a big step. I think that I don’t necessarily see too many downsides.

S1: So the main downside is not knowing how much money you raise, but is is just a lack of certainty. So what’s interesting to me is we’re seeing this a big increase in direct listings. We’re having like we had two companies come out in one week saying they were going to do direct things, the Sun and Palant here. So direct listings seem to be popular even before this money raising opportunity at the same time as specs are becoming more popular, which is like it, I would say, directly to IPOs, as opposed to specs like specs, a large move in the opposite direction. The reason why IPOs are more attractive than direct listings is that. You know, the company knows exactly how much money it’s raising in a direct listing because it’s an auction, you don’t really know how much you’ve raised until you’ve raised it and you find out what the price was. A espec goes one step further than that. This is a special purpose acquisition company and basically guarantees you a lot more money than you would get in an IPO and comes with billions of dollars and lots of certainty, even more certainty than an IPO because there’s still a bunch of uncertainty in an IPO process. You don’t really know how much people are going to be able going to be willing to pay. You don’t really know whether you’re going to be able to get the deal out the door and whether Spack, you know, all of that, certainly. And so that’s the kind of spectrum. Now, if you want complete certainty and a guaranteed amount of money, you can go to Speck’s if you want a little bit of uncertainty. But still, you know, before day one how much you’re going to raise. You go IPO. And if you want uncertainty, like minimizing the amount of money you leave on the table, then you go direct listings.

S4: You have three kind of good choices now in which choice or the investment banks losing out the most direct listings. OK, so that’s good in my opinion. And although I don’t let things prejudice or something.

S1: But my other question, I don’t remember what it is and I’m really sorry, but the investment bank question is a really good question, because the one blog post that I wrote at Reuters, which has had the longest tail of any blog post I’ve ever written in my life, was this piece I wrote about the time that Goldman Sachs took E toys public in nineteen ninety nine. And this was a very different era. And if you ask Goldman Sachs, they’ll tell you they don’t do this anymore. I was saying like this kind of gives you a window into exactly how gold, how Goldman Sachs and other investment banks used to make money on IPOs. And it’s not from the IPO fees which are high, that seven percent of the total amount raised normally, which is a lot of money. But what they would do is they would allocate the hot IPO stock to certain investors. And then the investors who were lucky enough to get that allocation would then basically kick back some of their profits to Goldman Sachs in the form of soft dollar commissions on on trading. And everyone says that doesn’t happen and no one believes that that doesn’t happen. So investment banks really do make a lot of money on IPOs, even more than the fees they’re ostensibly making. There will still be some fees on. Taking direct listing’s public, there are lots of investment banks which are working for Palantir in the sun and they’re making money. They’re maybe not making quite as much money as they would in an IPO, but they’re definitely not making kind of that hidden money on the client relationships.

S4: I remember my other question so that the two direct listings that you wrote about this week, Ossana and Palant here, I think you said neither company makes a profit.

S1: And I was one the company has ever made a profit. Palencia has lost four or five hundred and eighty million dollars in each of the last two years. Asthana has said in its prospectus that, yeah, we might never make a profit. It’s like, what? How are you going public? Why would you even want to buy these companies?

S4: Yeah, I don’t I don’t understand that at all. I was hoping you could either one of you could explain, is this like Amazon? Like we didn’t we’re not making a profit because we’re plowing back everything into the business. And one day I will be Amazon or whatever it is, they’ll grow quickly.

S3: You think that there will be quick growth in revenue and that you will be able to sell it to someone else for a higher price?

S1: Volunteer has been around since 2003. It’s a 17 year old company. If it’s not showing super quick growth and if you can’t make money after 17 years, when are you going to be able to make money?

S4: Right. And it was also addressed, the two companies, because they’re both founded and run by Facebook founders. Right. And one is Peter Thiel, who is like this like conservative villain who ruined Gawker. And the other one is Dustin Moskovitz.

S1: Yeah.

S4: Who like Moscovitz, he’s kind of a progressive, like good guy type who’s like, you know, using his money where he can to help the for the good and not ruining Gawker, stuff like.

S1: But the one thing they have in common is that neither of them seem to have had any ability to found a company that actually makes money.

S3: Yeah, no, that makes sense. But it doesn’t matter as long as the Fed continues with its current policy choices and the equity markets just keep increasing. And it has absolutely nothing to do with anything other than monetary policy. What could possibly go wrong here? Yeah, exactly.

S1: OK, I think it’s the moment we’ve all been waiting for the results of the dice thought experiment, how many emails did we get? And we got a lot, right?

S3: We did. We got sixty eight.

S1: And they were incredibly thoughtful. And thank you to everyone who wrote in with a bunch of mathematical calculations and spreadsheets and spreadsheets on Twitter. We had this amazing guy, Ian Chen, who actually worked out the Kelly criterion for every single roll, which is a level of leakiness that I truly adore. So the mathematical. Analysis of this is most of the people who wrote in will understand is that your expected return just goes up with every extra role you take. If you multiply your potential winnings by your probability of getting that amount of money, that number just goes up and up and up and up and it converges to infinity. So if you approach this problem with the intention of saying, well, I’ll just maximize my expected winnings, then you end up taking an infinite number of roles, which can’t be the answer.

S4: Wait, so you keep going. You should probably repeat what the what the thing is.

S1: Right, right. So basically what you’re doing is you’re rolling a set number of dice. Let’s put the sequential thing to one side. You’re writing a set number of dice. And if any of those dice comes up a six, you lose all of your money. But if. None of the dice come up six then you. Double your money for every day that you grow. So if you go three days, then you go to four eight, you get eight times as much money. If you do nine days, you get five hundred and twelve times as much money. So the question is, how much are you going to bet and how many days are you going to roll? And that you have analyzed the answers.

S3: Indeed. So the median number of roles was three and there were some pretty consistent reasons for that. I think people are just doing the five, six times to the third power and basically arguing, OK, I want to stay above 50 percent. So that’s why I’m going to 50 percent.

S1: Turns out to be an incredibly important psychological level. There was a huge number of people saying either three or four because people like the idea. They understand the coin flip on the kind of intuitive level. And so they’re like some people said to me, some people said for it started getting rarer. Once you get above four, that was much less common, right?

S3: Exactly. Exactly. Although some people said, well, we’re doing it like, well, you’d actually want, like an incredibly large number, like your end to be extremely high. So that’s why the average was actually seven. But I’m going to go with the median because I think it’s more accurate. And then in terms of the amount, the the median was a thousand dollars.

S1: So I’m going to suggest I haven’t put this spreadsheet together because I outsource such things to Anisha Mansky. I’m going to suggest that the. Amount was actually bimodal and there were two types of people there, the kind of people who bet. What I think of as a poker sized bet, like the amount of money you would lose that playing poker for an evening, and then there are the people who would bet what I think of as a stock market size bet, the amount of money that you would invest in like investments in the stock market. And I’m going to say that it really does kind of fall into most people fall into one of those two camps. Would you would you say that’s true?

S3: Yeah. I mean, I think that that definitely makes sense. A lot more of our listeners are risk averse. I would say both self reported risk aversion and looking in terms of how much people are willing to bet. We didn’t have that many people who were willing to bet an extremely high amount of money. We did have some, but we definitely had far more who were on the the smaller side.

S1: And the paradox here is that I’m sure that if you took a bunch of those people who came out with poker sized bets, a bunch of those people who are risk averse and said, I’m going to go once or three times, you would find that they have a lot of money invested in the stock market and on any kind of. You know, risk adjusted return calculation on any kind of CAPM model, whatever you want to do to this, taking this bet and putting lots of money like an investment sized amount of money into this bet is a vastly more attractive proposition on any number of roads than investing in stocks. But people didn’t seem to think that way. And already I am seeing Emily shaking her head and scrunching up her nose. Emily, come in.

S4: Well, I mean, I think the difference here and the stock market would be the fact that and you say it in your in your newsletter or in your blog post that you wrote about it, Felix, you can go to zero on one roll, you can get a six and you completely get wiped out. Whereas with your 401k that you’re not going is zero. That’s pretty unlikely. Right? You have a tolerance and you can go back up, whereas like once you go to here, you’re at zero and game over on the stock market.

S3: Yeah. And also, I think we didn’t you know, while you’re arguing that. Yes, of course, the more you’re rolling the obviously the exponential increase of how much you can earn, but obviously also your probability is of continuing to roll to not get a six is also obviously decreasing.

S4: Yeah. I mean, we’ve all played Parcheesi, right? I mean, you got to have a five to go out and, you know, like eventually you get a five or, you know, you have to do it again. You eventually you get a five. So that’s in my head. I was just thinking Parcheesi.

S3: Yes. You you end up with this extremely small probability of of an extraordinarily large amount of money. It’s an interesting, interesting mathematician there. But yeah, I mean, it’s the connections with the stock market I do think are interesting and increasingly probably more valid because I feel like in theory, of course, stock market investments are supposed to be based on capital allocation, even in terms of on the secondary market of trying to say, well, I like I think this company is going to be. Outperforming versus this other company, because I did this analysis of their cash flows, blah, blah, blah, blah, and I feel like what we’ve seen, not even just in the last few months, but what we’ve seen, I would say probably in the last 10 years is that honestly, it’s like it doesn’t really matter. Like it doesn’t appear that a lot of the traditional analysis is bearing any type of fruit just based on the fact of what we’re saying, that you have companies that are basically saying we will never be profitable ever, and yet we will end up with this large valuation. Where does that come from?

S1: So I want to know what your answer is now that you’ve read all of the emails and you’ve had a week to think about this. Anna, what’s your answer to my question?

S3: I’m going to try to have one answer, but I don’t really have one answer. I mean, part of me feels like I would be like, you know what? I’m just going to do a very small amount of money, but I’m going to an extremely large number of roles and say like, well, the probability may be shrinking, but fairly quickly the the actual value would skyrocket. So much like, well, if I don’t care about losing this money, then why not just do? However, if I were actually doing this in real life, I probably would do an amount of money, like probably a thousand five thousand dollars, something that is enough that’s meaningful, but not like if you lose it, you’re going to not be able to pay your mortgage or something and and probably do it again. I probably see a little bit of my risk aversion. I would probably do like three or four roles.

S1: You’re going to stick to that roughly coin flip.

S3: It’s not the most it’s it’s really not the most rational thing in the world. But I know myself enough to know that in the real world, that’s probably what I would do. My fake my fake world. It would be a million rolls.

S4: But, you know, OK, so I looked at all the math everyone did. And I was like, I’m not doing any of this math. I just need to I just need to think of amount of money that wouldn’t bother me if I lost it, but which I could get to a really nice number on a limited number of roles, assuming that, like I’m going to in my Parcheesi, mind my mind, I know I’m hitting a six pretty early on, like these people who are doing like a lot of rules. It’s not happening. Like, I’ll just tell you, I haven’t I don’t have statistics or probability numbers in my head, but I just know, like, you’re going to hit a six pretty quick. So I said first, I said pick five thousand and two rolls because that would get me to twenty thousand. And then I said, oh, but what if I just do a little more than five thousand. I picked sixty seven hundred because I think somewhere someone wrote something about sixty seven percent, I don’t know. So I pick sixty seven hundred dollars and two rolls that would get me to twenty six thousand eight hundred dollars, which seems like a lot of money to me. And I could use it to like redo my kitchen or something and still have a little leftover.

S1: I really like that answer that I have put my answer up on Felix Salmon Dotcom, if you guys want to check that out, but my answer is a little bit like what Emily said, which is work backwards from the amount of money that you want to end up with. And for me, this is a once in a lifetime opportunity to make a completely life changing amount of money and. Emily will have her life changed by a new kitchen, and I may be a little bit greedier than that. And so I’m thinking that what you want to do is really kind of go for the brass ring and say, what’s a completely life changing amount of money that you could transform your life and stop their. And so let’s say that 20 million dollars, then what you do is if you’re me and you’re a complete nerd, if you start playing around with, like how many times you need to roll in order to be able to satisfy the Kelly criterion and. Yeah, I think I would probably roll maybe. Nine times and bet, you know, maybe twenty thousand dollars, something like that, or thirty thousand dollars and nine times for that, get me to 20 million ish and then like yeah. And and that would be just a transformative amount of money. And it would be. And amount of money that I’m not going to if I invest thirty thousand dollars in the stock market, I’m not going to lose thirty thousand dollars, but if I invest eighty thousand dollars in the stock market, I can lose thirty thousand dollars and with a pretty high probability. And so I reckon this is a much better bet in that.

S3: I mean, I think it’s an interesting thought experiment in terms of how you whether you’re looking at it as how much am I willing to lose versus how much do I want to gain, which I think is also probably a bit of a sign of your risk tolerance. Like I think the revealed risk tolerant tolerance of Felix Salmon is higher, not just in terms of how you’re thinking about it.

S1: I also mentioned in my piece that the smart thing to do if you’re able to and no to everyone who wrote in and saying, well, I will just play the game, you know, 100 times and become a gazillion, that you can only play one, that you can’t do that. But the other thing you can do but which is the obvious thing to do is to just say, hey, anyone want to play this game instead of me and then just take bids. And very rapidly, you would people you would find people bidding hundreds of millions or even billions of dollars just for the opportunity to play this game once.

S3: I really enjoy the fact of how you can tell our listeners like finance and how they think that they’re like, well, how am I going to these other people involved and make them much more complicated. Yeah.

S4: So, Felix, why do you like why did you think of this game? I’m like, why do you think it’s interesting?

S1: Bigger picture I think is interesting because I think it really sheds quite a lot of light on, I would say, a little bit of a paradox in terms of how we invest money when the downside is made. Incredibly salient, as I’m doing in this thought experiment, people become very risk averse. If you go up to someone and say you have a relatively low probability, like a, you know, one in six or a 50 percent chance of losing money, people say, oh, I’ll bet like 100 hundred bucks, but I don’t I don’t want to bet more than that. And the way that the investment world is structured is that it talks a lot about how much you can gain. And like, you know, if you stop investing now and you do it for this many years and there’s this much on your return, then you’ll wind up with that much of retirement and. And people are like, oh, OK, and they buy into that, but the way that the rhetoric around it and the marketing around it very, very rarely talks about how much you can lose. And I think that if the potential losses in the investment world were more salient, then many fewer people would be investing in the stock market. And if you look at the difference between countries like Germans don’t invest in stocks, Americans invest in stocks, you know, those kind of differences, I think, you know, it’s it’s both that both of those behaviors are rational and it just kind of depends how you think about it. And there are ways and I really liked the people who wrote in and said zero dollars, whoever rules this is just not a game I want to play. And that’s a 100 percent rational thing to do. If you don’t need a lot of money and if you’re perfectly happy with the amount of money you have right now, then there’s no need to take risks and there’s no need to put money into stocks and there’s no need to play those games.

S3: Right. Although if you took like a dollar and you’re like you’re saying like most people could lose a dollar, that’s the lottery right now. It’s true. It’s very true. Exactly.

S1: Yeah. If you ever play the lottery, it’s irrational not to treat this as a lottery. Just take a dollar and roll it 30 times and you’ll become a multimillionaire.

S4: That’s true. Well, that’s interesting. Yeah, I guess that’s true. Like investing and all the jargon around finance is is meant to obscure what it is, which is just rolling dice and gambling like we make it seem.

S1: Well, it’s a positive some rolling dice and gambling, but it is rolling dice and gambling. Yeah. OK, let’s have a numbers round, and if you remember, I do my number is 30 percent.

S3: So in a few different polls, about 30 percent of Americans say they will not take a covid-19 vaccine if it becomes available, which isn’t that surprising, I would say, how high it is. This is surprising, but it’s just interesting to me because we are basing so many things on this idea. Like once we get this vaccine, everything will go back to normal and all these things. And it’s you, in fact, have to be able to get people to actually take it. And that may be more difficult than people are currently factoring in to making it worse.

S4: Right where he’s politicizing the whole process, making like people who would normally be pro science and pro vaccine like like me. I’m like, yeah, if this happens under his watch, I am very reluctant actually to take a chance to roll the dice on a Trump vaccine.

S1: That’s one of the things that fascinates me is the. Normal rhetoric, the normal anti vax rhetoric is all like vaccines cause autism or like there are the these are the side effects and look at all of the bad things that happens if you take this vaccine, which obviously you can’t apply to a hypothetical future vaccine. You can’t say the hypothetical future vaccine causes autism. You have no reason to believe that. But even so, people don’t want to take it. And there’s no particularly rational reason to not want to take it. If it has been, you know, if it’s received FDA approval and it’s been shown to be safe and in phase three trials, which we’ve got to assume it would be, and yet you still get this answer. And I don’t entirely understand I understand where the complete loonies come from who are like it’s being developed by Bill Gates and he’s putting a microchip into it and he’s going to use the microchip. You go like, OK, fine. That’s like zero point five percent of people like what, the other twenty nine point five percent. What what’s their reason for not taking it? It’s what I said.

S3: Do you think? Well, I just think it’s also the fact that it’s things are being done so quickly that it then makes people wonder, like, are you really going through all the proper procedures? And I mean, you did have that thing in the under Ford, I think it was Ford were like they were they were worried that this particular strain of flu was going to be similar to the 1918 flu until they really, like, fast tracked this vaccine. And then it turned out it paralyzed a bunch of people. So, like I’m not saying that that will happen this time, as I feel like clearly we have a far more protections hopefully in place. But maybe people are thinking back to Gerald Ford or maybe that’s just me.

S1: But although I will take the vaccine, say, and I not many people ever think back to Gerald Ford, to be honest, it’s just like one of the more forgettable presidents, a point I thought was really good that I hadn’t thought about that I heard, I don’t know, on a podcast or read somewhere.

S4: It was like the risk of taking a vaccine, like relative like you’re a healthy person taking a new chemical compound versus like if you’re a dying person, they’re like, try this medicine. It probably works. It’s fine. It was just passed. You’re like, great, I’ll try anything. But if you’re like a healthy person and you’re like, try the medicine. Trump fast tracked it versus don’t do anything and just like wear a mask and stay home for a while. Like, I feel like that’s a different calculation.

S1: Right. You have like I think that’s exactly right. The people who aren’t taking the vaccine are the people who on some kind of psychological level, just believe they are not at risk of getting covid. Yeah. Yeah. Because they think that covid is fake news.

S3: Yeah. Great. That’s probably more reasonable than people thinking about Gerald Ford.

S1: Emily, what’s your number.

S4: My number is one hundred and thirty million. That is how much money gap made from selling masks in the most recent quarter. A new business that it started from scratch and is the quote unquote bright spot in retail right now. Face masks got to get them. And so, I don’t know, their sales were still kind of down, but not as bad as usual and in part helped by selling face masks.

S1: All of my face masks were accumulated over a period of weeks by a certain member of my family who will remain nameless, just clicking on every face mask ad on Instagram, which works out pretty well. We got some good ones. My number is three point three billion dollars. And this is in relation to what I think we’re going to be talking about next week. Three point three billion dollars is the amount of money that Wal-Mart spent to acquire jet dotcom. Do you remember Jet? Oh, yeah. Oh yeah. Short lived Amazon competitor. It was around for a couple of years. It got bought by Wal-Mart and then got closed down by Wal-Mart. Wal Wal-Mart loves looking at like shiny objects and spending three point three billion or maybe even ten billion or 15 billion dollars on them. We’ll see whether Wal-Mart ends up winning a bid for tick tock. But like the idea that tick tock would be any more successful for Wal-Mart than jet dotcom, I think it’s kind of hilarious.

S4: Well, Jack, no, tick tock is much better than jet dotcom. Do you remember at some point, I think there was a story that jet dotcom was like buying stuff on Amazon and then reselling it. Yes, on its own platform. Tic-Tac, I feel like adds value. People like to talk.

S3: Yeah, we’ll have a good discussion about OK, sorry. And Walmart next week.

S1: Everybody else who’s buying, whoever buys it, whether it’s Oracle, Microsoft or Wal-Mart. We will talk about that next week. Assuming that the announcement has been made by then, which probably will have been. I think that’s it for us this week. Thank you. The gentleman, Molly, for producing. Thank you to all of you guys for writing in with your eye rolling answers.

S2: Keep the emails coming in, sleep money at sleep dot com, and we will talk to you next week on sleep. Money.

S1: OK, so the Dow, we’re going to talk about the Dow Jones Industrial Average when we were planning out this episode in our extremely extensive episode, planning discussions that we always have every week, Emily said, I thought you guys hated the Dow and it’s stupid. Why would we want to talk about something that we hate and which is stupid, I think. Yes. So good question. And A, why do we want to what do we hate the Dow? Is it stupid? And if it is, why are we talking about it?

S3: Well, the answers to the first two questions are definitely yes, we are talking about it because the Dow has now the Dow has changed. So the basically apple, because Apple is going through this stock split, they are now going to have a lower price on their stock. And because Dow is a very stupid price weighted index, that means that their representation in the Dow will not be a lot smaller. And that then would mean that the representation of technology stocks would be a lot smaller.

S1: So there are 30 stocks in the Dow. Just to put some numbers on this, there are 30 stocks in the Dow. And Apple single handedly was about 13 percent of the Dow. It is now splitting. So it’s going to be about three percent of the Dow. But what that means is that technology in general would drop by 10 percentage points unless they did something. So they did something and something. Something Salesforce. So that’s Salesforce, honey. So that’s my favorite thing. They decided to bring in Salesforce to make up for the fact that Apple was the much lower weight. So they get more tech, but then they have to kick someone out in order to bring Salesforce in. And who do they kick out? But the last company that had been in there since 1928, ExxonMobil, Exxon Mobil, there is now only one energy company left in the Dow. It’s Chevron. And even that’s only got about a two percent weighting energy. Just remember when Exxon Mobil was this world beating for some of the most valuable public company in the world, you know, it’s kind of not anymore.

S4: Am I meant to read into this that like the energy sector, the gas and oil sectors are kaput and like dying. And this is good news for people who care about the climate and all this, like it’s really happening.

S1: One of the fascinating things I saw on Twitter this week was someone showing the top holdings of the S&P 500 versus the top holdings of like a pretty mainstream large ESG fund. And they said, look at this, these two listed stocks and try and guess which is which. And you basically you can’t they’re exactly the same.

S4: That’s heartening, right? Or it doesn’t seem like they’ve made big strides in this area. So I don’t quite understand it actually from being on. Yeah.

S3: I mean, I don’t know, like, we may be giving a little bit too much. I have a little bit too much faith in the Dow. What the Dow represents that shows it’s stupid. I mean, like it is. It doesn’t make any I mean, it exists because it’s also has existed for so long. So it’s useful for historical purposes, but it’s not exactly how I think anyone has ever invested since.

S4: As you I think you feel like you may have said back in the day when they were like only 30 stocks and you were like, yes, that was actually so helpful to me in understanding the Dow and why it exists, because back in the day before, computers could do things really fast. You could just invest in these 30 stocks and it was easy to calculate, but spread your risk around.

S1: Exactly. And instead of trying to have to calculate how many shares can I get in the stock for a thousand dollar investment or something, you just buy one share of each. And that’s basically the Dow, which thankfully we are a little bit more sophisticated than that right now. But yeah, it used to be difficult to buy five hundred stocks. Now it’s the easiest thing in the world. You just hop on your phone, press spy and boom, you’ve own your own 500 stocks.

S4: And the Dow just has a really good branding. Like people like to hear about it. They know sort of vaguely that it means like stocks. Yeah. Yeah.

S1: Well, the Dow I will tell you why the Dow still exists in the public mind. And it’s because it’s the way that people think about daily stock market moves. People do not think about, say, the stock market moves is one percent and one point five percent or two percent. They’re like five hundred points on the Dow, 600 points on the Dow, a thousand points on the Dow. That’s big. If it’s only twenty points on the Dow, that’s small. It’s like this weird points thing. Like no one knows. If I said to you the Dow moved fifteen points today, you’d, like, blink at me and you wouldn’t have a clue what it meant. But if I said the Dow fell a thousand points today, you’d be like, wow, that’s a big move, which is also stupid as people are stupid and irrational.

S3: So why not just get rid of it? Because but I also think it has a cultural meaning. And I probably said that’s not like six times, but it has a historical meaning. It again, it has existed for a very long time and allows you to make comparisons that you can create comparisons, but it’s useful in that way and you can look at how much it is underperformed the broader stock market.

S1: Yes, back when I started being a financial journalist, you would look at the Dow versus the S&P. Five hundred and amazingly, more by luck than judgement. The Dow and the S&P more or less did the same thing every day. It was very rare for them to diverge. Very much more recently, they started diverging a lot. And especially if you compare it to the Nasdaq, they’ve been diverging enormously. So it does if you look at if you look at the reasons why the Dow has underperformed, even with Apple accounting for 13 percent of it, you start to understand just how narrow this stock market boom is, how much it really is. Google and Microsoft or Google and Facebook are the two big ones that aren’t in the Dow really account for massive amount of the performance of the entire stock market. One of the interesting data points I saw just this morning, the US tech sector, the market capitalization of the US technology sector is now bigger than the market capitalization of every single European stock combined was not overly surprising.

S4: It makes it was making me think like because Trump because it was the RNC this past week and like Trump saying like how the stock market’s doing really well, but it’s not really the stock market doing really well. It’s these tech companies doing this to trump the Japanese. Right. Like he’s not even that into them.

S3: No, I don’t like Europe. So it it is it is definitely true that there is a large concentration of tech companies that are doing very well. However, like. I would argue, though, that the kind of narrative that that’s all it is and that you aren’t seeing, like you aren’t seeing as much movement in other in other parts of the market, but you are still seeing far more than one would anticipate based on fundamentals.

S1: I think next week I’m going to be writing about General Electric, this new book about it from a couple of guys from The Wall Street Journal. I’m talking to them on Sunday on Zoome. But yeah, is a stock that hasn’t rebounded.