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  • The rise of social gaming and the metaverse
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Okay, back to our regular programming…

Brief History of Post-Bubble Markets

Happy Sunday, readers! I recently went back onto the We Study Billionaires podcast, a show that is thankfully loose with its definition of “billionaire”! The episode dropped late this week, and I thoroughly enjoyed the conversation so wanted to share it with you all.
I hope you enjoy my discussion with Trey Lockerbie!


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off-timestamps may be present due to platform differences.

[00:00:00] Trey Lockerbie: In this episode, I welcome back financial historian Jamie Catherwood. Jamie is a client portfolio specialist at O’Shaughnessy Asset Management and also the author of the popular blog, Investor Amnesia. In my conversation with Jamie, from about nine months ago (Episode 427), we dove into what drives market bubbles, fraud, and mania.

[00:00:21] Trey Lockerbie: After witnessing the largest asset bubble in history begin to burst, I wanted Jamie’s historical perspective on a post-bubble world. In this episode, you’ll learn how markets from the 1800s can inform our understanding of the market today, how the frauds of today (such as FTX) draw similarities to frauds of the past, exactly why market regulations were developed in the US, how the crypto market resembles the early days of the stock market, where the term ‘bankruptcy’ originates from, and a host of other fascinating facts and stories from the past.

[00:00:49] Trey Lockerbie: It’s always a pleasure to speak with Jamie and hear his encyclopedic knowledge of financial markets. I hope you enjoy it. So, with that, here’s my conversation with Jamie Catherwood.

[00:01:02] Intro: You are listening to The Investor’s Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

[00:01:22] Trey Lockerbie: Welcome to The Investor’s Podcast. I’m your host, Trey Lockerbie, and I’m thrilled to welcome back to the show Jamie Catherwood. Jamie, welcome back.

[00:01:30] Jamie Catherwood: Thank you so much for having me. I’m honored to be here.

[00:01:32] Trey Lockerbie: Well, given the last year we just experienced and it being about a year since you and I last spoke, as a historian, I’ve been eager to ask you a question that has come up a lot, what period in history most resembles today?

[00:01:45] Trey Lockerbie: I know that many have compared today to the 1970s, but I figured you might have different perspectives and possibly draw comparisons to other periods in time that resemble what we’re seeing today.

[00:01:55] Jamie Catherwood: Yeah, so anyone that’s familiar with my work will know that I like to look at things before the 1970s.

[00:02:06] Jamie Catherwood: I’m talking about the 1870s, In all seriousness, if you want to read about it, my colleague at O’Shaughnessy Asset Management, Ehren Stanhope, a member of our research team and client portfolio manager, wrote a great paper called “The Great Inflation.” You can find it on our website,, where he walks through the similarities and, more importantly, the key differences between the 1970s and today and why this is not like the 1970s Great Inflation.

[00:02:38] Jamie Catherwood: But to actually answer your question, I would say that the period I find most interesting in terms of a parallel to today would be the 1920s, which I’m sure most people know by now. I’ve found it really interesting since, honestly, COVID started, the similarities in progression and timeline between the early 1910s and 1920s with today.

[00:03:02] Jamie Catherwood: Because while we obviously, at least knock on wood, didn’t have a world war today, it looks like that might also be following the path of when the Russia-Ukraine conflict started. But thankfully, so far that has been avoided. A hundred years ago, you had a pandemic with the Spanish flu. After that, you had a wave of summer protests around race called the Red Summer of 1919, which was similar to the George Floyd Black Lives Matter summer of protests and demonstrations.

[00:03:33] Jamie Catherwood: And then you had a reopening where things were really kind of speculative and surging to make up for the pent-up demand that had existed while we were all locked. Which also occurred coming out of World War I and the Spanish flu a hundred years ago. But then in 1920-1921, you had a really sharp and severe recession, which was very short.

[00:03:55] Jamie Catherwood: But again, it was a problem of, in that case, rampant inflation very quickly turning into rampant deflation. It was an interesting period, but then after that is when you got the roaring twenties. But people tend to skip over that part when they talk about the roaring twenties – the one that came out of the pandemic.

[00:04:14] Jamie Catherwood: And then we had a recession, and then we had the roaring twenties. And so today, obviously the parallels are pretty obvious. We had a pandemic, we had the George Floyd Summer, and then we had the recession. And now the question is kind of, are we going to keep following roughly in line with the twenties, or, and by that, we would be experiencing or on the precipice of experiencing a true like roaring twenties.

[00:04:40] Jamie Catherwood:  Or is it going to be something different, where the economy takes longer to rebuild and truly get back to the pre-COVID levels? And so, time will tell, but I think in terms of similarities, there are a few periods that have so much in common. And so, we’ll see. I know we’re going to talk about that later, but it will also be interesting to see, like the twenties, obviously a great deal of speculation in a largely unregulated asset class.

[00:05:06] Jamie Catherwood: In that case, equities, because it was before the 1929 crash and a lot of the regulation that came in after that. And today, we have crypto, so we’ll come back to that. But it’ll be interesting to see how that narrative also falls in line with each other between a hundred years ago and today.

[00:05:22] Trey Lockerbie: In the article you just mentioned, and we’ll be sure to add it to the show notes so that our listeners can find it, there’s a quote in it that I wanted to emphasize. I think it summarizes pretty well. It says, “As we dive into the impact on equity markets, there does not appear to be a link between high inflation and lower equity returns, most likely associated with the compression in valuations that occurs, as it did during the Great Inflation.

[00:05:45] Trey Lockerbie: That said, certain factors like value, momentum, and shareholder yield historically hold up quite well in moderate to high inflation regimes. So I thought that was a really interesting point. I think a lot of people think there is a high correlation between inflation and performance of stocks, so it’s interesting to dig in a bit more. Can you highlight anything else on that subject around performing assets, sectors, etc., that actually do perform or even factors that are best to focus on during periods like this?

[00:06:19] Jamie Catherwood: Yeah, so factors in general tend to hold up very well to earn inflationary regimes. In addition to this paper by Aaron, which goes through and shows the returns across different factors in different inflation regimes since 1926, there is a great paper by JP Morgan aptly titled The Best Strategies for Inflationary Times ,pretty to the point. And in that paper, which I think came in like two years ago, at this point, they argue for factors that they looked at essentially eight high inflation regimes starting with I think coming out of World War II. And then there’s been like eight kinds of main inflation regime since then. And so they look at how different assets and kinds of investing styles were sectors performed in each of those regimes.

[00:07:08] Jamie Catherwood: And then also on average. And so they found that across those eight regimes, from a factor standpoint, momentum was the best performing factor across all inflation regimes, and the size factor was the worst. And then for sectors, energy was the best sector across all eight inflation regimes, and consumer durables, and so like consumer staples was the worst performing sector by some margin. And so it’s a really interesting paper and it was interesting to see that momentum in their research was the highest performer.

[00:07:44] Trey Lockerbie: I was also very surprised to see that. What do you think is causing the momentum? Is it just that there’s more speculation that comes around periods like this?

[00:07:52] Jamie Catherwood: I guess so. Honestly, I’d have to look back into it. It’s been a little while since I read the paper, but yeah, I was pretty surprised, honestly. But I’m sure there’s some good reason listed in the paper.

[00:08:02] Trey Lockerbie: When you and I spoke about a year ago, the market was just sort of beginning to crack. I mean, the S&P was down from a high, about 11%. So there was a lot of speculation at that time around whether this was just a correction or if we were actually going to enter into a bear market. And so I’m curious, just from history, if you’ve learned anything from sort of post bubble markets, because obviously our last conversation was built a lot around bubbles, how they occur and why they might burst. So I’m kind of curious about what you see happening in the, you know, aftermath of a big bubble bursting like the one we’re seeing now.

[00:08:37] Jamie Catherwood: Yeah, I think you see a couple different things, which I know again, we’ll come back to. It’s a whole FTX kind of unraveling, but what you tend to see in general, Is a lag between, as a friend, Jim Chanos likes to say in his class that he teaches on the history of fraud, that the fraud cycle lags the market cycle.

[00:08:58] Jamie Catherwood: And so what that means is that when there’s a bull market and people are more willing to kind of suspend their sense of disbelief, and they’re a little more willing to kind of, not even willing, but they just inadvertently kind of subconsciously do less due diligence, because when things are going up, you just feel less of a need to kind of find reasons to, you know, find a negative problem with an investment.

[00:09:22] Jamie Catherwood: As long as it’s making money, there’s a little reason to question it. And then conversely, when everybody starts losing money in a downturn and financing dries up, but also your asset values are dropping, then that tends to be throughout history where frauds, and not even full-blown frauds, but just kind of bad business models and bad businesses in general that might have been able to.

[00:09:46] Jamie Catherwood: Kind of skate by on hype and momentum in a bull market. You see a lot of those companies get unraveled and called out in the bear market because they’re just not able to kind of smooth over the cracks with stories and narratives anymore. And, you know, precarious financing, the market definitely prefers facts and statistics over exciting stories when people are losing money.

[00:10:13] Jamie Catherwood: I think another, not to just keep quoting him, but Chanos has said that a stock price is the best prosecutor and defense that you can have because when stock price is good, you’re kind of untouchable. And when it’s bad, people have questions and you need to have answers. And so I think today we’ve definitely seen, even if not as much in equity markets, certainly in some other asset classes that might be more digital , you’ve seen some unraveling of many of the players.

[00:10:41] Jamie Catherwood: And large exchanges in some cases. And so we’ll continue to see. I mean, we saw in equity markets, not with necessarily frauds, but just the wave of downsizing and layoffs and specifically the tech sector and a lot of these kind of VC funded startups either slashing their valuations or slashing their headcount once the bear market started.

[00:11:04] Jamie Catherwood: Because a lot of, even in the private sector, the comparisons to publicly traded tech companies move to private markets in a negative direction. And so I think some of that stuff, in hindsight, you could have seen coming, like, how many employees do some of these companies really need, and how many benefits do they need to offer?

[00:11:21] Jamie Catherwood: In a bull market that matters a little less, but when your company’s losing money and the stock price is going down, then you have to make kind of tougher decisions. And so just generally I’d say whether it’s fraud or just kind of questionable business models, I think those all get found out in the bear market.

[00:11:42] Trey Lockerbie: It’s reminding me of you know, the Bernie Madoff. You know, there’s a great new docuseries on Netflix. I haven’t watched the whole thing. I’m about halfway through. But when you mentioned when the stock market does go, you know, when the prices are bad, you, you have to have some answers. This was interesting because apparently as he was starting his kind of market maker business, which was fairly, which was legit as I understand it, he also had this kind of shadow advisory firm and he lost everyone’s money early on, and it was about $30,000.

[00:12:10] Trey Lockerbie: And he borrows it from a friend, gives it back to everybody, and instead tells him, Hey, I lost all your money and I’m gonna make you whole. He said, I was, you know, I sold everything before this happened, and luckily, you know, you’re gonna get your money back, which just made him look like a genius. much more money.

[00:12:25] Trey Lockerbie: Yeah. Piled in and just talked. It speaks to sort of the you know, the psychology around markets, right? If instead of hearing, you know, Hey, the market’s going bad, but he had a good answer for it. That meant it actually did the opposite. You might expect, and more people wanted to give him money.

[00:12:40] Jamie Catherwood: Yeah, it’s like we just describe, it’s funny when we have no idea of the context, but we know the outcome.[00:12:45] Jamie Catherwood: So we ascribe a narrative to it without actually knowing if it’s even remotely true. , oh, he’s just a genius investor that avoided the crash, not, oh, he actually lost everything. and had a friend give him a loan.

[00:12:58] Trey Lockerbie: Yeah. So sometimes we believe what we want to, we want to believe. Right,

[00:13:01] Jamie Catherwood: Exactly but he’s a great example of that kind of unraveling with the 2008 crisis is when his kind of pyramid scheme got highlighted and run after the .com bubble burst is another example.

[00:13:13] Jamie Catherwood: There’s no shortage throughout all of history. Basically every big kind of speculative bubble. Once you see that unravel, you tend to see a lot of these sketchy and questionable actors and businesses get outed.

[00:13:27] Trey Lockerbie: So on that note, the biggest fraud we’ve seen so far in this downturn is, obviously FTX.

[00:13:33] Trey Lockerbie: And while that’s not market or equity related, it’s obviously in the crypto space, it still seems to be pretty influential. And I’m curious if we’ll see anything like that in equities, you know, given all the re-regulation we have around it. But, you know, many people were surprised to see FTX. And, and just to give you some idea, apparently Bernie Madoff’s game was around 65 billion.

[00:13:55] Trey Lockerbie: You know, FTX is, I think, around 8 billion. And, but it’s still huge, right? And, a lot of people were very surprised to see them file bankruptcy essentially overnight. So it brought up the phrase bankruptcy to me. I was kind of curious about this, so I wanted to learn a little bit about the history of bankruptcy.

[00:14:12] Trey Lockerbie: I would look to you or someone like you to share something about, you know, where the term bankruptcy comes.

[00:14:18] Jamie Catherwood: Essentially back in the 14th century in Italy, their bankers at that time were conducting their business and transactions off of a bench. A bench is what they called it. But it really looked kind of more like a big table.

[00:14:34] Jamie Catherwood: But for all intents & purposes, it was this bench that they would sit on. They have the table, and that’s where they would basically sit in squares in Italy. So you know, you can picture somewhere like Venice and all these Venetian bankers sitting out in a courtyard and they’re doing their banking from this table.

[00:14:48] Jamie Catherwood: If a banker went insolvent though, and they could not continue lending out money or meeting their payments, then to signal and kind of shame that banker publicly and to let people know that he was insolvent and had gone, busted the kind of authorities or other bankers would. That person’s bench in half is just a kind of public signal.

[00:15:09] Jamie Catherwood: Like this guy literally blew up. He broke his bench in half. He’s insolvent. And the Italian, sorry to any Italian listeners, , brace yourself. The Italian phrase at that time was banca rta. That meant a broken bench. And so obviously you can see how over time, Bancta’s broken bench goes from broken bench to bankruptcy.

[00:15:34] Jamie Catherwood: So Banta bankruptcy, that’s where we get the term bankrupt from because it goes back to broken benches. When a banker went insolvent, they smashed his bench. And so a broken bench equals bankruptcy.

[00:15:48] Trey Lockerbie: So for those who stayed away from FTX and the like, and even crypto in general, a lot of them are probably taking a victory lap now and saying, I told you so.

[00:15:57] Trey Lockerbie: I love that you highlighted in your blog that for those that view crypto and digital assets as nothing but a lawless cesspool of frauds and scams, it’s worth remembering that equity markets were no different in the 19th century and early 20th century. The 18 hundreds endured a full century of rampant fraud and market manipulation before finally getting its act together.

[00:16:17] Trey Lockerbie: So I wanted to see if you could give us some analogous examples to FTX that we saw in the 1800s.

[00:16:25] Jamie Catherwood: Yeah, so there’s no kind of shortage there. I would say that the 18 hundreds, so essentially the point of my piece was that today we’re seeing everything in crypto kind of play out at a much faster speed simply because of the technology available today.

[00:16:44] Jamie Catherwood: But also we’re. Witnessing more of it in real time just because of social media and news and the internet, obviously compared to the 18 hundreds. And so everything’s just kind of happening faster. But in the 18 hundreds, I mean, there was everything that’s going on in crypto today that was happening in the 18 hundreds in the stock market.

[00:17:05] Jamie Catherwood: And even in the early 1900s, it wasn’t really until the 1929 crash that substantial regulation came into place. I think it was not until 1909 that any type of ruling around insider trading was made. And even that was like a court case ruling and didn’t really lead to widespread kind of legislation or regulation.

[00:17:29] Jamie Catherwood: But it was the first time that any kind of ruling was made. And so basically anytime before 1909 and really in 1929, There weren’t, not really any rules around insider trading. One of my favorite stories was of a stenographer at a company. I think it was like a mining company. And she knew because of her position that there was $10,000 missing from the company, companies like Treasury.

[00:17:59] Jamie Catherwood: And she knew that it was going to become public. And so she shorted the stock and from shorting the stock because she made a ton of money, once the news came to light that, oh, like there’s $10,000 missing. Like someone’s taking money from the corporate coffers, the stock price plunged and she made a bunch of money from it.

[00:18:19] Jamie Catherwood: But when everyone discovered the missing money and then saw that she’s, you know, wearing nicer clothing and really like upgrading her jewelry and everything, and she has been spending a lot, people just assumed, oh, she took the money , but it really was, no, she just knew that the money was missing because of her access to the documents.

[00:18:35] Jamie Catherwood: And so at that time, that was perfectly legal. Like no one questioned her motives or made her give back the money once it was found out. But today you just, I mean, can you imagine someone using their position to look at the documents shorting their own company’s stock, and then be just totally, like, totally allowed to keep all those profits?

[00:18:56] Jamie Catherwood: And so at a higher level though, a point in that piece was that really the crypto market today to me, isn’t a stage of democratization, even though that’s the most annoying buzzword today. It’s democratization without regulation. And so what you had with the equity markets in the 19th century and 20th century was you had the period in the 18 hundreds, you know, the Gilded Age where it’s the Robber Barons, like Jay Goul, Jim Fisk, et cetera, all basically just manipulating the market.

[00:19:30] Jamie Catherwood: Not obviously everything, but that was the era of Robert Barons who got their name from doing sketchy things in the stock market and just kind of business generally. And so you had rug poles, you had insider trading, you had pools like moving stock prices for their benefit while leading, leaving kind of retail investors holding the bag.

[00:19:50] Jamie Catherwood: And it wasn’t until the kind of what do you call it, bucket shop explosion and then shutting down in the 19, I think it was 1915, that the last kind of bucket shop or the federal ban on bucket shops was put in place where the reason bucket shops have been so popular. I mean, those were just kind of degenerative speculating dens.

[00:20:12] Jamie Catherwood: They used to call ’em gambling dens because you weren’t actually buying or selling the underlying stock. You were just betting on the direction of the price. And so bucket shops were created one, just because people love to speculate, but two, at that time, the. Like minimum order sizes on the traditional stock exchanges were way too large for the average retail trader to participate in.

[00:20:35] Jamie Catherwood: And so they were kind of barred out. Generally just people that weren’t wealthy were kind of barred from the stock exchange because of the prohibitively high minimums. So the bucket shops, even though you weren’t actually buying or selling the stocks, kind of gave you a way if you weren’t rich enough for the stock exchange to participate in financial markets or at least kind of feel like you were.

[00:20:56] Jamie Catherwood: And so when the bucket shops were eventually shut down by the government, suddenly these people had nowhere to really go. And so because the exchanges still at that point had not realized that hey, you know, this crowd is actually a new business. They’re a whole new group of leads essentially, and a customer base if we just lower our minimums, which is what they ended up doing.

[00:21:20] Jamie Catherwood: And so suddenly you had this sea of like retail. Investors and speculators came into the actual market because they couldn’t no longer trade at bucket shops, which had been shut down. And so you had a wave of retail investors and speculators coming into the market at a time when the market was heavily influenced by the speculators and Robert Barons, and there was no real protection in place to help them.

[00:21:50] Jamie Catherwood: And so one of the reasons the 1929 crash was so bad was it had, up to that point, it was like the record level of retail participation in a market bubble and crash, because again, bucket shops being closed down, that was really the first bubble that they could broadly participate in because they were finally allowed to come onto the traditional stock exchanges after they lowered their minimums.

[00:22:14] Jamie Catherwood: And so it was after the 29 crash where the average kind of person that had been participating in the market and. Had they not been discouraged from taking on too much leverage, they got destroyed in the aftermath. And so having such a high retail participation rate in that crash and them being so affected afterwards led to all these acts and you know, establishment of the SEC, etc.

[00:22:38] Jamie Catherwood: And it was that kind of regulation that really helped institutionalize the asset class from a regulatory standpoint. Because again, before there was really nothing in place to protect the average investor. And so it went from democratization where the average investor that had been in the bucket shop moves over to the traditional stock exchange.

[00:23:00] Jamie Catherwood: And so theoretically markets have been kind of democratized because a larger number of people can access them. But before the 1929 crash, there was not a concurrent level of regulation alongside that democratization. So that led to a lot of people being wiped out in 29. Not even just wiped out by the crash, because market crashes are just a part of investing, but that they were not kind of steered away from just outright frauds that people were knowingly pedaling because they knew that there was the C kind of innocent retail investor crowd coming in the twenties.

[00:23:38] Jamie Catherwood: And so today, where I think we are with crypto and this whole FDX thing is that, because I don’t want to speak in generalities, but for this purpose, it’s just simpler. The crypto community by and large is obviously against any kind of government intervention and regulation because it’s kind of antithetical to crypto itself.

[00:23:58] Jamie Catherwood: It’s all about, you know, decentralization. But having said that, I think that there is a need for at least some level of regulation just to have some safeguards in place because right now it’s kind of at that point of a hundred years ago where. There’s democratization because that’s, I mean, crypto is like ultimate democratization, but not enough regulation.

[00:24:21] Jamie Catherwood: And so you have just, I mean if you look at the last like year , no shortage of high profile bankruptcies, frauds, et cetera, where a lot of people are left holding a lot of losses and there’s no real regulation in place to protect them. And so while crypto and government regulation kind of go against each other, I think that in order for the long-term success of crypto and digital assets as an asset class, for that to be successful, I think there has to be some sort of regulation so that people not currently in the community will feel more, will feel safer about making a first investment if they feel like the asset class and space as a whole is less kind of sketchy and dangerous like it is today.

[00:25:13] Jamie Catherwood: For a completely new investor. There’s just, it’s hard to tell as someone just entering the space, whether you’re buying like a shitcoin scam or an actual quality investment, and so we’ll see what happens. We’ll see. I think FTX could be that kind of tipping point where regulators really figure out that they need to put some type of framework in place to avoid something like this happening.

[00:25:35] Trey Lockerbie: It seems like we’re getting close to that because Yeah. You know, SCC are considering all of these coins outside of Bitcoin as securities, so they’re kind of falling under that regulation. I think that’s gonna only increase, you know, and the difference there, right. Bitcoin being actually decentralized versus a lot of these coins like FTT, right?

[00:25:52] Trey Lockerbie: Which is just made out of thin air from FTX you know? Yeah. There’s a big difference, right? Between something that’s truly decentralized and, and something that’s just basically, I don’t know, a tech company more or less, right? So yeah, it’s an interesting dichotomy and I think. There is gonna be a lot of regulation on crypto itself, in that same kind of way.

[00:26:09] Trey Lockerbie: Something you mentioned there about bucket shops was interesting to me and I, I wanted to kind of dig on that because just so I get the history right, the way I understand it, well, first of all, in the early 19 hundreds, I, I think the ticker machine was created, and that’s just spawn this whole new era of speculation.

[00:26:24] Trey Lockerbie: So much so that I guess the medical times in 1904 called it titis because the, there’s all these, these guys supposedly being hypnotized, so to speak, by just the, the ticker noise that you wrote about, which I found so fascinated. And with the bucket shop example, You were speaking about how there is sort of this, the retailers were only bullish.

[00:26:45] Trey Lockerbie: You know, it would, it would seem right, they’re only buying, which just keeps driving things up and up. Whereas the bucket shops would be forced to just take the sell side and so much so that it would overwhelm the market and eventually, you know, draw down the price because otherwise the bucket shops are, you know, owed a lot of money.

[00:27:00] Trey Lockerbie: So I just feel like that part of Wall Street hasn’t changed. And I, I’m curious to know, like even though these, these retailers went from bucket shops to exchanges, is that dynamic still the same or is it just that, you know, nowadays retailers can get more short and, and and are doing so?

[00:27:16] Jamie Catherwood: Yeah, so I think like the lesson that I took from that kind of wash sale idea, so for crypto, I feel like the true Bitcoin kind of like maximalist are very bullish on Bitcoin, but they would agree with a lot of other crypto skeptics, not Bitcoin skeptics that like a lot of crypto outside of Bitcoin is sketchy.

[00:27:39] Jamie Catherwood: That’s what I’ve been told by a Bitcoin Maximalist. And so when I wrote this, a lot of what I’m talking about is from an article I wrote for Bitcoin Magazine. And the point I was making with this wash sale kind of anecdote is, so for the wash sales, the difference between a bucket shop and a traditional stock exchange was that on the stock exchange, you know, I place a trade through, you trade, you get a commission for making the trade, whatever, but you’re still working with me on the same team.

[00:28:06] Jamie Catherwood: Essentially, you’re just getting a commission from doing business or placing my business. Whereas in a bucket shop, it was a zero sum game where because you’re not buying the actual underlying stock as a speculator in a bucket shop, you’re just betting on the direction if you bet on the stock to go. Say XYZ railroad is what everybody wants to trade in 18 94 1 day.

[00:28:31] Jamie Catherwood: And so everybody in a bucket shop is trading X Y, Z railroad stock, and they’re all betting on it to go up. If the stock does go up and the bucket shop is wrong, or not even the buck shop is wrong, but it’s that all its customers were right, then the bucket shop loses money because they have to pay out the winnings.

[00:28:48] Jamie Catherwood: And so there’s like this opposing relationship between the bucket shop owner and the speculator in there because basically every dollar that the speculator wins, the bucket shop loses. And so because obviously no bucket shop wanted to lose a ton of money, so when the speculators in a bucket shop were all betting on the price of a stock to go up and.

[00:29:09] Jamie Catherwood: They were all doing it at the same time, and the bucket shop would know they were on the hook if it got paid out. What they would do is they would go place a massive sell order at a lower price than the stock was trading at on the actual stock exchange to then bring down the price so that when the ticker tape brought through the price and information for X ,Y, Z railroad, it would show, oh, the stock price actually fell a lot and is falling.

[00:29:35] Jamie Catherwood: And so the customers did not correctly bet on the price of the stock. And so they lost. And so the bucket shop manipulates the market essentially to get out of paying out all these winnings to its customers by driving down the price. But what was interesting about that is that this basically needs bucket shop owners to try and avoid paying out money to their customers.

[00:29:57] Jamie Catherwood: That mechanism proved to be the link between the fictitious trades in a bucket shop. Because again, you’re not ever owning the underlying stock. You’re just betting on the price. It took that fictitious trading and actually provided a link to the real stock exchange because customers, how they bet in the bucket shop, again, if it became too large and everybody all at once is betting on positive price movement for X ,Y, Z railroad, then the bucket shop has to go make a huge sell order on X Y, Z railroad in the real market, which brings down that price.

[00:30:31] Jamie Catherwood: And so the real market is actually being moved by the kind of sketchy speculative activity in these bucket shops. And so for crypto, I think there’s a real analogy there where the Bitcoin kind of maximas, even though they think just like people, you know, the top hat people in the stock exchanges in the 19 like tens, early 19 hundreds who thought, you know, these bucket shops are nothing other than gambling dens where degenerates go to hang out.

[00:31:01] Jamie Catherwood: They had a very morally superior view of themselves. They thought, you know, this is just this little speculative den, but it doesn’t really affect our markets. Until then it did because of all these wash sales. And so today, I think the Bitcoin people that almost want to ignore the kind of shady stuff that goes on goes on in crypto more broadly because they feel that Bitcoin is not sketchy like that.

[00:31:23] Jamie Catherwood: They think it’s kind of separate. But the problem is, is that what goes on in these like more sketchy ecosystems of crypto, do affect Bitcoin because Bitcoin is the main asset that companies are using. Like when the whole Luna coin blew up in all that, like the price of Bitcoin was affected. And so just like activities and these more speculative bucket shops ended up influencing negatively the price of a bit of the stock on the stock exchange.

[00:31:53] Jamie Catherwood: These kinds of side episodes in the crypto world that are not actually. Bitcoins are still moving Bitcoin in more mainstream crypto prices because it’s just bringing that kind of sketchiness to everyone. It kind of brings down the whole system. Not brings it down, but affects the whole system.

[00:32:12] Jamie Catherwood: And so again, I think to cut that link more regulation will be needed because what basically happened after the 29 crash is that the real kind of focus was making it a better pool to invest in by discouraging or catching more of the frauds and sketchy companies that would’ve gone public before government regulation.

[00:32:38] Jamie Catherwood: And so it’s just ensuring that the individual investor kind of has the best chance, because at least there will be a higher level of company on average in the market because of these greater regulations. So to kind of highlight how much of an impact this regulation had in the. Kind of quality of companies trading at the time.

[00:33:02] Jamie Catherwood: One of the stats that really stood out to me was around IPOs on stock exchanges before and after the Securities Act. So before the Security Act of 1933 was put into place, the average five year return of IPOs on stock exchanges that were not New York Stock Exchange. So basically all normal non-New York stock exchanges.

[00:33:30] Jamie Catherwood: The average five year return for IPOs was negative 52% . So pretty terrible. And that was the average before the 33 Act. And then afterwards, The average five year return for IPOs on non New York stock exchanges changed to a positive 5.7% after the securities Act. So the average five year return for IPOs before the securities act was negative 52%.

[00:33:59] Jamie Catherwood: And then after the Securities Act, the average five year return for IPOs on these exchanges was positive 5.7%

[00:34:08] Trey Lockerbie: Was part of that because, you know, during 1929, you know, boom, there was a lot of IPOs happening, much like, you know, the SPAC, you know, 2021 we were seeing.

[00:34:19] Jamie Catherwood: Yeah, so it’s a great question because that’s obviously the first thing you kind of think is like, oh, well, I mean, are these terrible returns just because of the 1929 crash?

[00:34:27] Jamie Catherwood: And I’d have to go back and look at the appendix of the paper that I got this from, but they do construct their analysis in a way that accounts for the 1929 crash. And so like a rolling five year effort that doesn’t like it. Yeah, it’s something like that where it’s not distorted. They specifically call out the 29 crashes and how they account for it.

[00:34:48] Jamie Catherwood: So it’s not skewing the numbers. They’re still that kind of stark, surprisingly. So to me, what those numbers kind of point to is that the just amount of terrible companies that were IPO-ing before regulation was put in place, if the average return is negative 50%. And again, it shows because there were no rules around like prospectuses and anything like that before all of the post 29 regulation was put in place.

[00:35:13] Jamie Catherwood: There was really no, there was nothing discouraging you from launching your sketchy, shady company. Much like, you know, when the ICO boom was going on, there was not much stopping. You know, even celebrities, some of which are getting in trouble now for their involvement in pushing ICOs. But there’s just nothing really stopping someone from floating these questionable companies.

[0:35:33] Jamie Catherwood: Whereas after the regulation was put in place, you know, Someone that might have floated a sketchy company before the 29th crash now knows that they will be liable for any misrepresentations or lies put in a prospectus that has to be sent to the SEC. And so you’re just obviously not gonna go through all that effort if you know from day one, this company is really just like a scam for me to raise money.

[00:35:58] Jamie Catherwood: And so the just average quality of companies available to invest in improves. And I think that’s what’s kind of missing today from the crypto landscape is that level of regulation where you know that the worst, like bottom 25% of companies like just straight scams and frauds, have already been kind of taken out of the market.

[00:36:20] Jamie Catherwood: And so you have a better chance of success by if you just blindly, you know, through a dart at a board, you’d have a better quality company than if there was no regulation put in place.

[00:36:32] Trey Lockerbie: SBF obviously still in the news was once compared to JP Morgan. For bailing out a lot of crypto companies, which is also kind of interesting leading up to, you know, the demise, let’s say of FTX. Talk to us about the panic of 1907 and why this comparison to JP Morgan is being made.

[00:36:50] Jamie Catherwood: So it’s really interesting, always in hindsight, these are like comparisons for people that turn out to be not so great. Cause I think he was also called like the next Warren Buffet. But yeah, so 1907 Panic was a really interesting one.

[00:37:03] Jamie Catherwood: A large reason why it started was actually from a year earlier in April, 1906 with the San Francisco Earthquake. Quick history it’s kind of a quirk at that period. Over 50% of fire insurance companies in San Francisco were British, which becomes very important because I think it’s like April 6th, 1906, the San Francisco earthquake happened and what a lot of people I think don’t know is that it wasn’t actually the earthquake that did the most damage. It was the fires because essentially the earthquake took out the city’s water mains. And so an earthquake happens, it hits a bunch of pipes and whatever. It causes fires. But then because the city’s water mains had been taken out, there was no water to put out the fire.

[00:37:50] Jamie Catherwood: And so for four straight days, the whole city just burned. And something like 20,000 blocks were destroyed in between 30 and like 70%, which I know is a huge gap of the San Francisco population went into homelessness because of that fire. I mean, even if it’s just 30, that’s still a lot of people. And at the time there was no earthquake insurance.

[00:38:12] Jamie Catherwood: And so people that had had their house destroyed by the earthquake, but it didn’t catch on fire. They had no real way to get insurance because it was just from the earthquake. But if they did have fire insurance, what a lot of people started doing was literally just setting their house on fire because there was no earthquake insurance.

[00:38:31] Jamie Catherwood: So they knew like, if we’re gonna get anything out of this, it’s by lighting our house on fire and then saying like the earthquake caused our house to catch on fire. But this is important because again, as over 50% of the fire insurance companies in San Francisco were British when this event happened, suddenly British fire insurance firms had a lot of money that they were on the hook for to pay out.

[00:38:58] Jamie Catherwood: And so what happened was Britain ended up sending the equivalent of 13% of their nation’s gold supply to San Francisco. On ships because these firms were just, they needed to pay out so much money and after Britain sends out 13% of their gold supply, they hike up their rates afterwards and really contract their kind of market because they’re trying to bring gold back over to London after depleting its reserves so much.

[00:39:32] Jamie Catherwood: And so this had knock-on effects for global markets, specifically in New York because this was happening at a time of year where financial markets were already kind of fragile because of just seasonal funding and capital needs around kind of more agricultural stuff. And so, even though it seems like an unrelated event, this earthquake had knock on effects because it was really kind.

[00:39:55] Jamie Catherwood: Tightened up markets. And then alongside that, you have the Knickerbocker Trust Company and all these other sketchy trust companies that were highly levered and taking a lot of risk on speculative stocks. And so markets were already kind of fragile because of the San Francisco earthquake issue. And then alongside that, you had a failed corner of the copper market and then the collapse of Knickerbocker Trust Company and all these other trust companies.

[00:40:20] Jamie Catherwood: And at the time, we didn’t have a Federal Reserve. And so JP Morgan, the person ended up basically acting like the Federal Reserve and as a lender of last resort and providing capital and doing deals with companies and individuals that needed help because there wasn’t really another place for them to turn.

[00:40:40] Jamie Catherwood: So basically what ended up happening was the government realized we can’t continue to rely on a single person, you know, to bail us out of future crises. That panic also highlighted. Downsides of relying on gold as the base of kind of your monetary system because something like an earthquake and a lot of British fire insurance firms leading to a lot of gold needing to be moved, causing financial markets to tighten and become more fragile.

[00:41:12] Jamie Catherwood: It just really highlighted how kind of susceptible the gold standard was to these types of shocks. And so that, and the need for a Federal Reserve or some type of central bank were really two of the lasting kind of impacts from the 1907 panic because it just really highlighted, you know, JP Morgan dies, what are we gonna do?

[00:41:30] Jamie Catherwood: So it led to the creation of the Federal Reserve in 1913. So yeah, panic in 1907 is kinda like the last pre-Fed real panic.[00:41:40] Trey Lockerbie: That’s what we call keyman risk. When you are relying on JP Morgan only, and you know, that stock market around that time felt almost 50% and it started this huge run on banks.

[00:41:51] Trey Lockerbie: You know, to your point and. So one piece of history related to that, I’ll detour for a second, is, you know, Warren Buffett lost 244 million on Irish banks in 2008. For this reason, they were, they were over levered, and he said in his shareholder letter that year that they appeared to be cheap. , but they were levered 30 to one.

[00:42:10] Trey Lockerbie: And so when the great financial crisis happened, geez, they were wiped out or nationalized and buffet lost about 89% on those bets. He, they actually, after he wrote ’em down, they actually went down further . So at least he got out a little bit before his zero . But it’s not often recognized that even the greats, you know, miss every now and then.

[00:42:28] Trey Lockerbie: And those over-leveraged banks Yeah. Do cause issues. But getting back to the Fed, I was kind of curious about this because, you know, speaking about pros and cons of regulation, right, we, I wouldn’t say we’ve necessarily seen less volatility, although that’s fairly debatable. Was our Federal Reserve bank the first of its kind in theory, right?

[00:42:46] Trey Lockerbie: Or, or in just structure when it was established in 1913 and not so much, you know, as we know it in this modern era today, but just going back centuries even, was there ever anything like a centralized bank of this kind of, sort of magnitude that was proven out in the concept prior to our own?

[00:43:04] Jamie Catherwood: Yeah, definitely so first I realized I didn’t fully answer your last question. So the parallel to SBF with FTX is that earlier in the summer of 2022 when there were a bunch of crypto companies going bust, he was stepping in to provide liquidity and save these companies. I think Celsius was one of them. And so the comparisons were kind of clear where he was supposed to be the revered kind of banking God and exchange God of finance today.

[00:43:36] Jamie Catherwood: And he was like a good guy. And he was coming in to provide liquidity and safety essentially for struggling companies in a downturn just like JP Morgan did. But it worked out a little differently for JP Morgan and SPF in terms of a central bank. And the Fed, the US was actually, I don’t know in the grand scheme of things where the US kind of nets out in founding a federal or like a central bank, but.

[00:44:03] Jamie Catherwood: There are definitely earlier examples. So in 1609, this wasn’t necessarily a full fully fledged central bank, but most economic historians consider the Amsterdam Visa Bank, , the Bank of Amsterdam, to be the kind of first central bank or Precentral bank. It might not have done one or two things like a kind of standard central bank does today, but at the time it was doing many things that a central bank would do today, similarly in 16, which also makes sense because the first stock exchange opened in Amsterdam in 1609, actually too the same year.

[00:44:45] Jamie Catherwood: So that was a big year for finance. And in 1694, the Bank of England opened, which was actually happening at a time when, I think we talked about it last time. That was during the London treasure hunting tech bubble boom. That the Bank of England was founded. So there’s definitely precedent for the US to follow.

[00:45:08] Jamie Catherwood: And in fact, early on the panics in the US were kind of really modeled upon Walter what’s his face, Walter Bad’s kind of rules for acting as lender of last resort based off of the British experience, specifically in panics, like the panic of 1825 and how the Bank of England acted in that episode influenced the way that we structured and thought about our own central banks.

[00:45:33] Jamie Catherwood: So it was definitely, I don’t know, on the later I, that’d be interesting to see, you know, of like major countries when they founded theirs. I don’t know if we were really late to the game or somewhere in the middle, but there’s definitely much earlier examples, but it’s also just a function of Europe being a lot older than that.

[00:45:52] Trey Lockerbie: So going back to those earlier days of insider trading and lack of regulation, it was once true that access, speed and analysis were the three main competitive advantages in markets. Probably still true today, but access and speed have definitely, I think, declined in relevance because they’ve been democratized.

[00:46:10] Trey Lockerbie: So since we’re now in this age of information, I mean, so walk us through how technology has evolved since the curb traders of 1837 to the systems we have today. And maybe throw in the mention of carrier pigeons because that one just you know, tickles me.

[00:46:26] Jamie Catherwood: Yeah. That’s always a good one. So yeah, essentially, so I wrote this article about how throughout history the sources of competitive advantages have kind of followed this cyclical pattern where there’s three stages, access, speed, and analysis, and.

[00:46:45] Jamie Catherwood: as you referred to in your question, the first stage is access. So at this point you can get an edge over the competition. You know, just by getting access to market information that’s not widely available. So if you have some unique data set or there’s just general market information that’s not democratized and you know, not everybody can just find it on their phone.

[00:47:07] Jamie Catherwood: You having access to that information in itself is a competitive kind of edge over the competition. But then over time, as more and more investors do get access to that same information, obviously you lose your competitive advantage because everybody has the same info. So then the competitive advantage becomes much more about speed.

[00:47:27] Jamie Catherwood: So it’s not getting access to the same information as everyone else, but it’s developing methods which we will come back to , whether it be technology or carrier pigeon. Just to get you that information faster than anybody else. So you can trade off it before anybody else knows. But carrier pigeons get arbitraged away.

[00:47:46] Jamie Catherwood: And so what Trey is referring to there is in the 18 hundreds, there was a guy in Boston who was offering a news service for investors where essentially he had, he would station himself in Halifax which was like the northernmost point for ships coming in from I think Liverpool. And he would use carrier pigeons to go out, out, meet the boat, basically discover the news, and then send the carrier pigeons back home to Boston to his colleagues there who would unravel the pieces of paper attached to the pigeons.

[00:48:23] Jamie Catherwood: Find out what the news. From Europe had been and then distributed to their subscribers so that they would know the news from Europe far, I mean relatively long before anybody else would know. And so while that seems like, you know, how much could you really get from that when it comes to things like discovering the outcome of a big battle or like the death of a leader or something, that small window of time, just like a few hours, can make a huge, huge difference.

[00:48:52] Jamie Catherwood: So that again, is a perfect example of the kind of speed phase where you’re just trying to receive information faster after technology kind of gets democratized so that everybody’s getting the same information at the same speed. The third stage of this kind of competitive edge cycle is the analysis phase.

[00:49:12] Jamie Catherwood: everybody’s by and large getting the same information and they’re getting it at the same time. And so at that point, outperforming the competition and kind of getting your competitive advantage is sourced through just superior analysis of the widely available information. So today, you’re not gonna get an edge by, you know, finding out what a company’s revenue for Q3 was from their 10 K, because everybody’s gonna get that information and it’s released at the same time.

[00:49:43] Jamie Catherwood: And most people, by and large, I would say 98% of investors have access to the internet readily available. And so that’s not gonna be your source of advantage, but just being able to kind of use that information for better insights than your competition is where you can. Kind of a source of alpha. And so over history, what you see is that once that cycle kind of completes one iteration, usually there’s some either new data set that becomes available or new technology that allows access to new information or you can get the information faster, kind of like resets that cycle.

[00:50:20] Jamie Catherwood: And so in this paper I wrote, I used an example of these curb traders that in this period of history, which was like the mid 18 hundreds and throughout the rest of the century, there was like a two-tiered system on the New York Stock Exchange where, what they call it I think almost like a dual class board system.

[00:50:41] Jamie Catherwood: Board. Yeah. I’m trying to remember what the two were called, but I think the open board was like the very old money wealthy elite. They literally traded in Tailcoats and Top hats and they would sit in like armchairs that were dead. Like it was their personal armchairs, like they had to assign seats and you had to pay a lot of money to get a seat on that open board.

[00:51:04] Jamie Catherwood: And they traded, I think, for like five hours a day and took like a break for lunch. Yeah. It was very, very aristocratic and bougie. Alternatively, for the people that couldn’t buy those seats, because you know, they’re tens of thousands of dollars, they traded on the curb exchange, which was literally just the curb outside the traditional stock exchange where it was in the street.

[00:51:27] Jamie Catherwood: Open cry, you know, there’s no top hats or armchairs out there. And these curb traders though, because the, the snooty like open board trading inside from the armchairs, they obviously are moving a lot of money in prices based on their trading because they’re the. Large capitalists because the curb traders weren’t paying for the seats.

[00:51:49] Jamie Catherwood: They obviously weren’t privy to that information and that trading like in real time. And so a group of curb traders drilled a hole in the side of the building so that they could spy on the open board trading sessions and learn information that way. And so going back to that kind of cycle, obviously that access to information in itself was a competitive advantage for them.

[00:52:12] Jamie Catherwood: But soon over time, that kind of dual class structure dissipates, it breaks away and more investors figure out how to get access to that information from trading sessions inside. And so that’s no longer an edge. So then you move to the speed component where we have the pigeon system type things and then finally it gets reset.

[00:52:34] Jamie Catherwood: But what really reset or kind of brought Marcus to that analysis phase. In the 19th and early 20th century markets was the ticker because before that, again, without technology providing everyone the same information at the same time, you had to drill holes in walls or you know, use pigeons or something else.

[00:52:54] Jamie Catherwood: Some people were using these optical telegraphs where they’re like these chain on hilltops, you know, stretching from like Philadelphia to New York, where if people in Philadelphia learned a price, they would set on a telegraph that looks like a windmill, like it’s a visual tower basically. And just like a windmill has the rotating arms that spin around these optical telegraphs had long like wooden arms that could be.

[00:53:22] Jamie Catherwood: Put in certain shapes, which would communicate different numbers and letters. And so if someone in Philadelphia in that first tower knows the price of this stock is, you know, $48.50 cents before anybody else, they can communicate that info using these optical telegraphs from Philadelphia to New York in like 30 minutes.

[00:53:41] Jamie Catherwood: So again, just another way outside of pigeons to get that speed faster. But after the ticker came along in 1867, suddenly everybody hooked up to a ticker, receiving price information from the New York Stock Exchange at the same time. So before the ticker, just being near the New York Stock Exchange, physically provided you with a huge advantage because you would know price information faster than anybody not living in New York, because they would have pad shovers is what they called them.

[00:54:10] Jamie Catherwood: They’re just people who literally just ran to and from the exchange, back to the brokerage office, back to the exchange, et cetera, et cetera. And so just being physically near the exchange got you an advantage. But the ticker through Telegraph cables just used technology to distribute that information, and so the ticker helped investors spend more time doing actual analysis of prices in the market and looking at trends than simply trying to get access to that information.

[00:54:40] Jamie Catherwood: Once the ticker comes along, that’s when you start to see a lot of more sophisticated kinds of investment strategies. Approaches because not only did the ticker in real time give everyone access to information, but someone in the 19th century called the ticker a recorded history of the market, which I think is a really cool idea.

[00:55:01] Jamie Catherwood: And that’s technically kind of what it is because it’s not even just what’s this price right now in the exchange. But once you get that price, you now have it. And so just from having the ticker, you suddenly are able to, you know, do an analysis of the last five years of railroad stock prices. And now that you have that, like a recorded history of the market, you can actually study trends because you have the data and you don’t have to spend, you know, 80% of your time as an investor just trying to get information and get it faster.

[00:55:33] Jamie Catherwood: You can actually just spend more time on doing analysis. And so today, in the age of information, by and large, obviously, you know, high frequency traders and. Alternative data sets that hedge funds use, et cetera. Ignoring that, because it’s a smaller percentage, by and large, all investors are getting the same information at the same time.

[00:55:55] Jamie Catherwood: Like I don’t think you’re gonna find out the S&P 500 price faster than I am unless your WiFi’s a little bit faster, but nothing that’s gonna give you a competitive advantage. And so today I think a lot of the tools that are coming to market, the first one that comes to mind is like Daloopa. A lot of the tools I think today are ones less around like for investors I think are less around like getting better information necessarily that other investors can’t access.

[00:56:27] Jamie Catherwood: And it’s more around how do we automate the data gathering and data kind of synthesizing processes that you do and take a lot of time, but. Are nothing really special. They can be automated so that you, as The Investor’s Podcast and analysts, can spend more time actually analyzing these companies and getting an edge that way.

[00:56:46] Jamie Catherwood: So Tolu is just an example in my mind. Like their thing is that they just automatically pull numbers from 10 Ks and stuff and 10 or yeah, 10 Ks as they’re released and update your models in Excel with the click of a button. So instead of you as The Investor’s Podcast having to go do all that yourself and update your models manually, which is just, even though it’s small, it’s like all that stuff is manually mentally draining.

[00:57:11] Jamie Catherwood: That just gets automated. So you can spend more time on the analysis of that information and hopefully generate more actionable and insightful investment decisions because you’re able to spend more time doing what you should be doing as an investor, as an investment analyst, which is analyzing. So I think that’ll be interesting.

[00:57:31] Jamie Catherwood: I feel like we’re just kind of entering that stage of the cycle now where there’s a lot of companies dedicated to helping investors do more analyzing than just gathering data or gathering it faster.

[00:57:43] Trey Lockerbie: Regarding the optical telegraph that you mentioned, there’s a funny part in this article, everyone should check out it because I, in some ways it’s like the first early examples of cryptography it would seem in a way.

[00:57:53] Trey Lockerbie: And almost as you mentioned, I think the first sort of cybercrime that happened as you did, which is, which is pretty interesting. But you know, on that note about competitive advantages, obviously Jim O’shaughnessy the founder of OSAM where you work his edge was built on, on quant investing and he’s been the, he was the pioneer of that.

[00:58:10] Trey Lockerbie: He’s, he’s actually, I think he will retire at the end of this year. So before we talk about some of the tools that you guys have been focused on there, I’m kind of curious about your experience in Jim stepping away doing his new venture and what OSAM looks like. Right. Without the founder at the helm.

[00:58:29] Jamie Catherwood: Yeah, so Jim, obviously someone who’s had a profound impact on my career and kind of personal and professional development.

[00:58:37] Jamie Catherwood: So he will be sorely, sorely missed at the firm. I joke with him that he’s been in, he’s been in the industry for decades and after like three years of me being at his firm, he retired. But yeah, in all seriousness, Jim over his very successful career, built an incredible team at OSAM and so his retirement and departure is just sad on a personal note, but also exciting

.[00:59:01] Jamie Catherwood: Everyone’s very excited for his new venture, literally O’Shaughnessy Ventures, but so we have a great team in place. The day-to-day isn’t changing at all, and it’s a really exciting time at OSAM with our Canvas platform and custom indexing and everything. For me, even though this is more than recent history, I think it’s really cool to see Canvas be so successful today because it’s really an iteration of what Jim tried to launch in the nineties, but the technology and timing of the market was just not there, I think. But he had a company called Net Folio, which was all about building personalized funds for the individual investor using technology, but didn’t really lead to anything just because of the late nineties.

[00:59:52] Jamie Catherwood: But then, you know, now, like 20 years later, same idea is now implemented in Canvas. So it’s kind of cool to see that full, full circle happen.

[01:00:00] Trey Lockerbie: Yeah. Last time Jim was on the show, we kind of touched on that and he was mentioning the idea of custom indexing and how revolutionary it would be, but I know that the tool is only available for advisors.

[01:00:12] Trey Lockerbie: So I’m curious to know your thoughts on how this technology may ultimately help investor returns whether through advisors or maybe eventually even to retail.

[01:00:23] Jamie Catherwood: Anytime we get an inbound from someone that’s interested in Canvas as an individual investor, we’ll always try to pair them up with one of our Canvas partner firms.

[01:00:34] Jamie Catherwood: So if anybody is interested, certainly don’t hesitate to reach out if you’re willing to work with an advisor. But yeah, in terms of competitive advantage, we think that this one canvas and custom indexing in general is one of the best competitive advantages an advisor can have because especially right now, With technology, there’s always that kind of flipping point where having a new technology or software, what have you at the beginning is a competitive advantage because you’re offering something to the end client, in this case your, you know, investor that other companies can’t offer.

[01:01:12] Jamie Catherwood: But then as everyone kind of recognizes the power of the new technology and it becomes table stakes to have, it’s interesting how it becomes, oh wow, you have canvas like you do custom indexing to, oh, you don’t have canvas, or you don’t do custom indexing. And so while we’re obviously not there now, we think that that’s where it will be, that’s where things are trending towards because you know, in every other facet of life, we want personalization and something tailor made versus an off the shelf, you know, cookie cutter product.

[01:01:42] Jamie Catherwood: And so our view is why would financial markets be any different? And the examples people tend to use are just related to stuff like, you know, S&P 500 without, you know, Exxon or other stocks like that that they don’t like. But that really kind of under sells and understates the level of customization and impact you can have at scale when you’re personalizing each client’s individual account for things even like taxes.

[01:02:14] Jamie Catherwood: So in terms of boosting investor returns, the ability to, because just, I guess stepping back for a second, custom indexing for anyone that doesn’t know is building your portfolio using single stocks instead of an underlying commingled fund. So just like an advisor would create a model of using ETFs and mutual funds, they can create using canvas.

[01:02:39] Jamie Catherwood: Our custom indexing platform at OSAM, the asset management to build a model with those same exposures, but using individual stocks. And so why that’s important is because it allows you to customize basically anything because you own the individual stocks instead of just an S&P 500 et t f. But by owning the individual stocks, you can also do a lot of tax loss harvesting that you could not do in a commingled fund because you know, say the market, the S&P 500 was up 15% in a year and the ETF, all you can do is sell that share of the ETF, which would be at a gain.

[01:03:16] Jamie Catherwood: So that would trigger a taxable event. But if you own the S&P 500 as a custom index just part of your exposure in your account, then even in a year where the overall index is up, they’re still on average, like 36% of companies, at least in the Russell 1000 on a given year. 36% of companies in the Russell 1000 are at a loss.

[01:03:38] Jamie Catherwood: Regardless of whether the market is up or not. And so if you have a custom index you can sell those stocks at a loss to offset your tax bill on the 64% of stocks in the index that went up. And so like in the first half of 2022, we’re still getting our data for the second half of the year.

[01:03:58] Jamie Catherwood: From January 1st to June 30th, 2022, we harvested losses 6,000 times across our canvas accounts and generated a hundred million in net losses, which led to, on average, 170 basis points in tax alpha for our canvas accounts. So if the index was, you know, 7% on average, the canvas after tax return was 8.7% for those canvas taxable accounts.

[01:04:25] Jamie Catherwood: So you can have a huge impact on investor returns from a tax side, but there’s also a bunch of other interesting stuff that we can do with that kind of power of customization at scale.

[01:04:37] Trey Lockerbie: Super fascinating stuff. Jamie. This was so fun, man. I always enjoy having you on. I always learned so much and it’s almost refreshing to go past the 1900’s every now and then just to get some more perspective.

[01:04:49] Trey Lockerbie: So I always enjoy, keep doing what you’re doing, and let’s do it again. I hope we can do it sometime again this year. Before I let you go, Jamie, please hand off to our audience where they can learn more about you and Investor Amnesia, the Sunday reads, and all the great stuff, including maybe Canvas or anything else you want to share.

[01:05:04] Jamie Catherwood: Yeah. So if anyone listening enjoyed this conversation, hopefully all of you, then you can find my website, which has all things financial history at because we never learned from and you can sign up for my newsletter there, which goes out every Sunday morning to 14 and a half thousand subscribers.

[01:05:27] Jamie Catherwood: And I also have some online financial history courses available on my site where you can learn financial history from people like Jim Chanos and Neil Ferguson and Marc Andreessen. If you want to learn more about Canvas, you can go to

[01:05:45] Trey Lockerbie: All right, Jamie. Thanks again, man. Let’s do it again sometime this year. I appreciate you coming on.

[01:05:49] Jamie Catherwood: Awesome. Thank you so much, my man.




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