John Donvan

Hi, everybody. John Donvan here, and if you have heard the term meme stock, you’re gonna like this debate. And even if you haven’t, you’re gonna learn real fast what a meme stock is and the question that the term suggests. And that question is, has the world of investing changed so much in just the past few years that the retail investor can do just as well as the big time Wall Street pros, even beat them at what is in so many ways a zero-sum David and Goliath game?

Some vocab that you’ve heard and will hear in this debate, GameStop, AMC, Robinhood, Revolution. So, get ready. We’re gonna be testing the proposition that the retail investor really can do it, can win, and not just every once in a blue moon.

Our debaters are Tom Sosnoff, who is founder of tastytrade, and that’s a media company that also gives investors a trading platform. They’ve just come out with the book called The Unlucky Investor’s Guide to Options Trading. And the other debater is Spencer Jakab, a Wall Street Journal editor and author of the book The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Retail Investors.

So, to draw the dividing lines here, I’m gonna ask both of you a question, and it’s the same question for both of you. Spencer, you are up first. Here is the question, it is a Do You Agree question. So, here it is. Do you agree with this statement, “Today the technology and the information available to everyone means that retail investors can and should invest and trade all on their own because they can expect to do well on their own.”? Do you agree with that statement, Spencer?

Spencer Jakab

No, in a nutshell, no, they shouldn’t. They can if they are, uh, very passive. The evidence is quite strong about that. But the, the very active type of investing that they’ve been doing recently, uh, is deleterious to their performance. Uh, the evidence is very strong that it causes them to lag the market and, and often lose money.

John Donvan

And, and, Spencer, you just wrote a book about a, a very, very, uh, notable episode in which, uh, the small investor seemed to be doing really, really well, and then for most of them, it didn’t turn out that well. I, uh, is, is the argument of your book and the argument that you’ll be making here that, that that’s the lesson that the small investor might get seduced into thinking that they have the tools and the know-how and the ability and almost invariably will be crushed?

Spencer Jakab

If they’re very active, then not necessarily crushed, but crushed relative to what they should be earning, what they could be earning with, with no effort. Uh, I think the people should be in the market. Uh, I think that it’s important to be invested in the stock market, but it’s, uh, it’s m-, far more profitable to do it in a, in a hands-off way. Uh, the evidence is extremely strong.

John Donvan

Thank you, Spencer. And it sounds like already what we’re talking about is the role of expertise in this and whether the small investor really should be leaving it to the big pros to do most of the work for them, w- w-, basically the model of passive investing, which has been, become very popular in the last 10 years. But I wanna now turn to Tom Sosnoff and also have him answer this question. Tom, again, the question is today the technology and the information that’s available to everyone means that retail investors can and should invest and trade on their own because they can expect to do well, are you a yes or no on that?

Tom Sosnoff

Yes, I am 1,000% in disagreement with Spencer, and I believe that retail investors, um, have an incredible opportunity now on a very level playing field, and people that, um, don’t take finance into their own hands and do it yourself are putting themselves at a great disadvantage long-term with their wealth building prospects.

John Donvan

All right, let me take that back to you, Spencer. Um, uh, yo- you’re, you both agree that people should be in the market. You’re disagreeing on, I, I gu-, it sounds like the degree to which the individual should be making his or her own decisions, trading, how frequently that investor should be trading. Um, and I know, again, Spencer, I wanna give you a chance to talk about your book, the Revolution That Wasn’t, when we talk about the GameStop incident that took place last year, I think we should maybe tell that story, uh, at the outset because I think we’re gonna be referring to it quite a bit.

Spencer Jakab

Well, it, it was really a perfect storm in the, in the markets, and, uh, it’s a crazy story where you had this, uh, stock of, uh, an obscure re- you know, mall-based chain that sold video games that became the most traded security in the world, that drew in millions of people, uh, to trade and to open accounts. Just that month, you had six million Americans open stock trading accounts. The year before that, you had 10 million accounts opened, retail brokerage accounts opened in the US, which is a, a huge number. And many of them were young people with no prior exposure to the market. And, and this is the thing that, that got them the most excited. Uh, but the evidence is extremely strong that frequency of trading, that, uh, the, the, which is the more active that, that people are in choosing securities, uh, the worse they do.

So, I think that people should be in the market, of course, because you can’t build a nest egg, and you have to build. You know, that’s, that’s our responsibility in this country. You know, the government’s not really looking out for you. We, we don’t have a real welfare state. If you want to build a nest egg, you have to multiply your money. You can’t just add it up, right? And, and the stock market is the easiest, simplest place to do it. And it’s a human foible to say, “I’m smart. I can do it,” but the smarter you are, it’s a- a- you’re almost m- more handicapped you are when it comes to the stock market, where you, you think you know something and you hear something on TV, and then you, you go in and you, you… You know, more times than not, of course, there are exceptions, but, uh, you do worse than you would have if you had just been completely passive buying a bunch of index funds or having a robo advisor do it for you.

John Donvan

So, Tom, we, what we hear Spencer saying is that by and large, most of us, even given the tools, are, we’re gonna kinda blow it, that maybe a few of us will do well, but that we’re almost, it sounds like, hardwired to fail at this. And I’d like you to take that on that impression.

Tom Sosnoff

I fundamentally disagree with, with that entire argument. In fact, it is so outdated. I mean, most of those studies are from the ’90s, before there was any kind of technology like there is today. And most of those studies are when there was large commissions and most of those studies are when there was extremely wide markets. I have been a market-maker for 20 years, and I’ve built two of the, the most, um, uh, most widely used trading platforms in the world, Thinkorswim and, um, and tastyworks. They probably together account for 40% of all the retail flow in America.

So, um, this is something I’ve done basically every day of my life for the last 40 years. And what I’ve seen in the process is the argument that Spencer’s making is very much the old-school conflicted argument from, you know, money managers and RIAs and, and all the people that actually don’t trade and don’t wanna trade.

But what I like to do is I like to get people engaged in finance, because finance is in, in the sense of listed markets, especially in America, it’s the driver behind mostly all of our growth. Liquidity in the US markets is the driver behind all of our growth. And if we can get more people involved in the markets, we can create a completely different course for wealth building over lifetime.

Okay, maybe you get involved in the markets when you’re 22 and you lose, you know, a couple thousand dollars or whatever it is, who cares? You’ve the rest of your life to build wealth, and you have the rest of your life to use that decision-making, that risk-taking process, and to build from it. It is, it is be- I, I have trouble even, um, I have trouble even processing people who say, “Hey, you shouldn’t do this.” Our argument is, and also our research shows, and this is research that we’ve done on our own customers and research that we’ve done on, you know, the literally, the hundreds of billions of dollars that have come through our platform over the last 20 years, or platforms, over the last 20 years, is the people that are most active, the people that trade the most, the people that participate in the most underlyings, and the people that make the most decisions have the best results. And those are also the people that ultimately are most successful and have the most money to work with.

John Donvan

Just this, just, let me stop you, Tom-

Tom Sosnoff

Sure.

John Donvan

… on that. W- wh- where, where does this number, where does this data come from?

Tom Sosnoff

Our data just comes from us. You know, we spend I, I don’t ev- I don’t even know how much money just doing, um, uh, with data scientist just working on our own customer base, just recognizing what we’re looking at every single day. I mean, our whole business is maintaining the kind of the lifeblood of our customers. And-

John Donvan

And, and you’re, and, and so you’re finding… I, I, I just wanted to get that sense of where your data was coming from. You’re finding, your data is telling you that the most active traders are doing the best?

Tom Sosnoff

The most active traders are always the ones that do the best, and the most active traders are also the ones that create the most predictable outcomes with respect to their returns. You see, the data that, that Spencer and the data that most people like him quote in financial media is stuff from studies that happened decades ago or, uh, a long time ago. And they happened with people that trade very infrequently. So you take somebody that trades 10 times a year and you convince them to trade 20 times a year, 50 times a year, whatever it is, that’s still an insignificant number to get to kind of law of large numbers to deliver whatever your expected outcome is.

Wh- On our platforms we have hundreds of thousands of traders. And the average trader trades about 1,100 or 1,200 times a year. That’s the numbers where all of a sudden, you know, it’s, it, y- you start to get to the point where your expected outcome is very close to what you actually deliver. I’m not talking about-

John Donvan

Okay, T- T- Tom, I’m, I’m gonna jump in just because you’ve said so much, and I wanna give Spencer a chance-

Tom Sosnoff

Sure.

John Donvan

… to respond to some of it, and, and, and Spencer-

Tom Sosnoff

Okay.

John Donvan

… again, I, I just finished reading your book, and you tell, tell the story of, uh, Robinhood, which is another trading platform, which became-

Spencer Jakab

Right.

John Donvan

… especially popular, uh, 10 years old but became especially popular among young, young men with suddenly had money during the pandemic ’cause they weren’t spending it, and they were getting checks from the government, and they did a lot of trading. And you come to a very different conclusion with, um, with data that’s not very old. It’s brand new. So I wanted you to take that on.

Spencer Jakab

Yeah, no, I mean, th- they and, uh, for what it’s worth, Robinhood, and other brokers as well, um, have refused to share that data. I mean, they, uh, Vlad Tenev, the CEO of Robinhood, was asked during, um, uh, Congressional hearings last February, “How have your customers done?” And, uh, you know, he gave a very, uh, evasive, incomplete answer. And he was asked, uh, a different way, which is, “How have your customers done compared to just putting their money in an index fund?” And he wouldn’t give the answer. The company had many opportunities to answer that question. For me, I did speak with them for the book, of course, and they never did.

Uh, the… I just want to say that they, um, Tom, uh, I have, I have not seen data at, like that at, at all, so I would be very interested in seeing it disaggregated. The, the classic study, uh, done on it, you’re correct, was done in the 1990s, um, but it did not include commissions. So, yeah, commissions were higher then. But it, it subtracted the effect of commissions. And it se- it separated people into five groups, most to least active. And it was clear, that was, it was crystal clear that the m- more active customers did worse.

But there was a more recent study when commissions were pretty low, uh, by SigFig of 200,000 retail investors in 2012, and, eh, during that study, the average return of, uh, retail people who didn’t trade options was 5.1% that year. The average return of people, and it was a small minority, who did trade options, was 1.1% that year. And, uh, just an index fund went up 16% that year with, uh, and it, it’s not, also it’s not, the study doesn’t ask people like, “Hey, go out and trade.” It retrospectively looks at it. So it didn’t get 60,000 people in the original study and say, “Go out and trade and see what happens.” It, it, it got the data without their names on it, and their account number, of course, and looked at how they had, had done over a period of years. So, it’s, it’s not, uh, a, “Hey, guys, go and, go and try trading, and let’s see how you do,” and the ones who trade more did best.

And, and also just to, to put kind of point to the fact that, that knowledge and education and reading books, and I, I know you came out with, uh, with a, a, or you, rather you wrote the forward to a book recently ’bout options trading, people who, uh, who buy these, these books, um, people who describe themselves as being very interested in finance, it’s been shown tend to have worse results. Eh, people who work in finance, uh, tend to have worse results than teachers, for example. Um, and it’s because they think they know something. It’s, it’s not that people are dumb. It’s just that we’re not very well wired to, to do well as, as active traders.

John Donvan

More from Intelligence Squared US when we return.

Welcome back to Intelligence Squared US. Let’s get back to our debate.

I’m curious though, Tom, can you tell me last year how did your typical customer do? What was the average growth in, in, uh, account value netting out, you know, money added and taken out?

Tom Sosnoff

Well, first of all, I, well, I can’t give you that answer, ’cause I don’t know the answer. Actually, and I don’t wanna quote something I don’t know. And, and no US brokerage firm actually has those numbers or publish those numbers or does it. They, it, it is a requirement in some places around the world, but no US brokerage firm, it’s not a requirement here.

And the other thing is I’m-

John Donvan

But, but, but I, I just have to stop you, ’cause you did tell us-

Tom Sosnoff

Yeah.

John Donvan

… a few minutes ago that the most active traders are doing the best. So you must have some read on that.

Tom Sosnoff

We do. We track the performance, and what we’ve found is, and we don’t track the, the, the P&L per se, it’s not that, it’s not that important to us, because we don’t know, um, uh, we don’t know what… So, so here’s… With firms like us, people come here to trade. They don’t come here with their core, with their core assets. So we don’t know what people are holding elsewhere. So, let me just finish the, the argument here.

The argument is I’m not even going to say that what’s, anything that Spencer just said is inaccurate, even though, even though I understand the, the report, it was commissioned in the ’90s and, and it didn’t include commissions, it also had much different markets, and half the markets that we trade today weren’t even available back then, or any of that stuff. But that’s… But I’m not even gonna argue the results of, of the latest study.

What I’m going to suggest to you is that people that participate in the markets, whether they are young Robinhood traders, whether they are Millennials or Boomers or whatever they are, people that participate in the markets, and even if it’s on an option level, if it’s on a futures level, if it’s on futures options, if it’s in crypto, whatever it is, every single time that you participate in the markets, and you make decisions, whether they have, and as long as they have an emotional and a monetary outcome, what you’re doing is you are fundamentally changing what, what we call the, your economic bias. And that’s, that’s, um, uh, uh, very well-published study by University of Chicago talking about the number of times you do something, specifically in the financial markets, changes your economic status over your lifetime dramatically. Like, they did a study showing if you make 10, 10 trades on Ebay, which isn’t even a financial market, you know, it changes the way you think, it changes your outcomes, it changes your whole portfolio mentality.

For people that come to Tasty and that hold, you know, we have billions of dollars of trading capital at Tasty from hundreds of thousands of customers from all over the world, those people are holding portfolios in other places that they are doing significantly better than they would’ve done in a passive environment, because they’ve learned how to take risk, they’ve learned how to make decisions, they’ve learned how to make fast decisions. And they put themselves in a very different spot than most passive investors. And that’s our argument.

:

John Donvan

Well, I, I, I think that learning to, to make decisions is a, is a good thing. You can learn to make decisions, uh, through games. You can learn to make decisions through a game like poker, for example, which is an, an excellent game for thinking-

Tom Sosnoff

No.

John Donvan

… about risk-

Tom Sosnoff

That’s not, but that’s not true because poker has a rake, and that rake is much greater than the big ass spread, so in the world of gambling, the, the draw-down in the world of gambling is almost 100 times the size of the draw-down in the financial markets, because the, when you talk about notional flow in the financial markets, it’s a penny to 10 dollars in, in the gambling world. So the rake in poker and the, the idea, and this is a very classic mistake, the idea that games provide the same opportunity, it’s not true, because they have a negative embedded edge, like all casino games have a negative embedded edge. So they don’t give you an opportunity to make up that difference in decision making where there’s an emotional and monetary outcome. It’s really only financial markets. There’s nothing else out there.

Spencer Jakab

Sure. I, I mean, I’ve been, listen, I, I, I was a, an analyst. I was a top-rated analyst for many years, uh, before I, uh, decided to become, take a huge pay cut and become a journalist 19 years ago. So, I mean, it, I don’t like to, to call the financial markets or the stock market a casino, because it isn’t the casino. That’s… People say that a lot. It’s very, sort of a glib thing to say, but I, I think in, in the course of, of researching my book, and just in, in my experience, um, you know, just be, as a Wall Street Journal reporter and before that as an analyst, just, you know, people approach you for financial advice and come to you with, with dumb ideas, you know, a lot of the time.

Uh, I remember, gosh, it was 23 years ago, uh, almost exactly, because my son’s 23 now, and he was a newborn, and, uh, some friends of the family came to, to see him, uh, older people, some friends of my mother-in-law’s, and, um, that guy told me he was going to retire. I said, “Oh, congratulations.” He said, “Yeah, I’m going to trade options full time.” And, you know, this is not a, a dumb guy at all. Uh, but, you know, this, this was my first experience seeing someone lose everything, lost his house and everything, because, you know, he was going to be trained to, to trade options by somebody. And I, I tried as hard as I could to talk him out of it.

And that, I think that I kinda marked that as the point where I became, you know, in- interested in, in personal finance, and just kind of, you know, more and more shocked. And that was as the, the dot com bubble was, was inflating and, you know, that kinda set me on, on the path today, you know, to writing about personal finance and all the mistakes that, that people make.

It’s very, very hard to convince people, uh, even people who, who think that you have some kind of expertise, which I certainly did then as a, a top-rated stock analyst, wearing nice suits and everything, uh, to tell them to maybe think twice and not do it, because people want to do this. People like to play. Um, but I, I, it’s not fruitful for the vast majority of people.

John Donvan

Spencer, is it play or is it a sense “I want to take control of my life”?

Spencer Jakab

Well, it’s both. I mean, people… There’s the, you know, th- there’s a psychological need to be in control, so if you tell somebody, “Listen, I, I know that you’re smart,” uh, you know, that’s why it’s classically dentists and doctors and whoever, you have to be fairly smart to be in that profession, are the worst investors, because you, you can, you can be fairly intelligent and you can even be, uh, somewhat knowledgeable a- about finance and do a, a terrible job, uh, in investing your own money. Um, and you can be, uh, I guess, smart enough or wise enough to, to know what you don’t know, and just engage in things passively and hopefully no one sort of, you know, talks you into doing something, talks, into some high commission expensive product. But you, you know, you buy index funds and things like that, which are very sound. Uh, and, and you can do much better. O- over a 20 year period, I would estimate if you were a passive investor, if you were, you know, robo advisor or just buy a basket of index funds, look at them infrequently, um, you, you will outperform 85% of, of your peers and 80% of, of fund managers, as well. Uh, so you, you’ll do better-

John Donvan

Again, I-

Spencer Jakab

… because they cost money.

John Donvan

I just want to come back to how do we know that, because I was getting the sense from listening to the two of you that we don’t really know in year, say, 2019 to the present day, we don’t really know if, uh, we-

Spencer Jakab

We, we, we do know.

John Donvan

… increased-

Spencer Jakab

It’s, it’s, it’s sliced and diced. There have been many studies of, of individual investor returns, uh, that show that they’re several percentage points, active investor returns, that are several percentage points lower than, uh, just a passive investment in the market.

Tom Sosnoff

We, we also know that, um, people that have not participated in the market or that are passive investors are going to wake up one day and have no idea what the markets are all about or what they should do with their money or how they should invest or what kind of strategies they can use to reduce their basis or improve their returns. I mean, as much as I’d like to believe that just buying a passive fund is a, is an investment strategy, it’s not. And, and to make, to simplify the things that we do, if somebody went out and just sold a naked put every single month in the S&Ps, including the dividend and everything else, you, even in the biggest bull market in history over the last 12 or 13 years, you outperformed with a single naked put against buying the stock outright.

So from a capital efficiency standpoint, I mean, it’s a ridiculous argument that, you know, somebody can’t participate in the markets and use a, a more aggressive strategy about, with a higher probability of success, with a, um, with a, uh, with a greater potential return to outperform a classic passive strategy even in hindsight, knowing what the markets did in the greatest bull market ever. So, I just don’t buy into that. I just think it’s, it’s such, it’s such a, um, a negative approach to, to wealth creation and to portfolio creation to really understanding how markets and business work. I just, I just can’t imagine that anybody, that anybody thinks that is a strategy that’s gonna help you get to a different, you know, to a different level. I’ll leave it there.

John Donvan

Let, Tom, at this point, I, I wanna, I wanna make a statement without prejudice, uh, to, to point out that, that, uh, tastytrade is, you know, has a platform for people to trade. So you’re in a situation, personally, or your, your company, where the more people trade, the better for you. I just wanna put that out there, again, with- without prejudice. I just think in, in the interest of full disclosure, we should put that out there.

Tom Sosnoff

Yeah, yeah, no, no, no, no, I’ve, I’ve been in this business, like I said, you know, for 40 years. I’ve been either a market maker or building trading platforms, but I also trade. Last year I made 14,800 trades for myself, and, because it’s huge part of my life. I’m an absolute junkie with it, and the idea that some institutional investor, some money manager, some RIA can do a better job by, by, by listening to some analyst or by blindly picking stocks recommended his firm, as opposed to an individual investor who has, who can be much more nimble, smaller, and use all the different strategies that are not available and that are very capital efficient, I just don’t buy it. I’ve never bought it, and in today, in 2022, I don’t buy it at all.

Spencer Jakab

It, it’s a, it’s a hard sell to tell people that, um, that being passive is better than, than being active, for sure. That’s why it, it took such a long time for, uh, index funds to get off the ground. But it’s also a hard sell because there’s an industry that, that profits greatly, for one, and h-, makes hardly any money off of the other. I mean, if you buy the, the largest S&P 500 index ETF, you know, they earn 0.03% a year. That’s, that’s the expense ratio. You’re, you’re paying hardly anything. So it’s, it’s a, a threat to the, the profitability of, of Wall Street rit large if, if people are, are passive. And there’s a, there’s a big industry that, that likes it.

I mean, if you look at last year, for example, uh, stock options trading, which is shown to be more deleterious to investor returns than just active stock trading, um, it’s, it’s a much more profitable product. So, through last June, for example, the 11 largest, uh, US retail brokers got 60% more or earned 60% more selling, uh, options orders as payment for order flow than selling equity orders, even though a minority of their customers were active in the options market, because they’re so much more profitable. So they, they make, uh, I don’t know what it is specifically for you, but they make a- approximately four times as much per equivalent options order. Uh, and, and that’s, that’s where you’ve seen a real explosion. Last year, you had, uh, about twice the number of options contracts traded that you did just two years earlier. Uh, you had-

John Donvan

Bu- But, Spencer-

Spencer Jakab

[inaudible

].

John Donvan

… just be-, just-

Spencer Jakab

… in 2000.

John Donvan

Just because of, just because the firms are making money with more active trading doesn’t mean that Tom’s argument is wrong.

Tom Sosnoff

And, and also, can I just jump in to say there’s a reason for it, Spencer. The, the reason people, A, don’t trade stocks anymore is because stocks are too expensive. I mean, when you’re, when the, when the major stocks that dominate the market, like Tesla, you know, being $900, or, or, or Google being, you know, a couple thousand dollars, or Amazon being, you know, $3,500 per, per share, it’s, stocks have priced themselves out of the retail investor’s hands. So this is not a function of brokerage firms like us or any other brokerage firm on the street. When I first started in, in the brokerage business 20 years ago, we built Thinkorswim, only 9% of the industry business was in derivatives. But stocks have gotten so expensive that they’re no longer capital efficient. They’re incredibly inefficient product for most retail customers, when you can’t even buy 100 shares of stock with a, with an average size account.

So, what’s happened is people have moved to efficient products. The beautiful thing about options and the growth of the option market has absolutely nothing to do with the reasons you just said. It has to do 100% with capital efficiency. Somebody can trade Amazon, um, a $5 wide spread in Amazon, which is a $3,500 stock, putting up $250. So all of a sudden, now I can trade Amazon directionally if I want to for a very small amount of money, and that’s why people trade options.

And the, the payment for order flow is, is a non-factor because we’ve reduced the commission in options to basically zero. So, the brokerage firms, I mean, listen, we built unbelievable technology. We’re entitled to make a few pennies. And on stock business, we do it as a net loss. Like I, our, our firm loses money every time somebody trades stocks. That’s a horrible business model. So we make a little bit back when they trade options, crypto, or futures. That’s fair. Everybody wins. We build unbelievable technology. I think the whole argument that, that, that’s in some way unfair because we find capital efficient products and deliver them to customers, I think we’re doing everybody a favor, not the other way around.

John Donvan

Spencer, is that part of your argument, encouraging people to, to use passive vehicles as opposed to active trading? Is it part of your argument that the guys on the other side are making a lot of money from those trades? ‘Cause, ’cause it seems to me that doesn’t go, that might be true, but it doesn’t really bear directly in the argument of whether it’s good or bad for the small investor, or does it?

Spencer Jakab

I don’t know. I think, uh, I, I do remember, uh, the, the first thing told to me by, uh, the professor on the first day of class at Columbia Business School many years ago was, uh, “There ain’t no such thing as a free lunch in finance.” You know, that if someone is, is making money out of a product regularly, it’s, uh, it’s coming out of someone’s pocket. It’s not coming out of, of thin air.

I mean, the, the notion that, uh, Tesla stock costs a lot of money or that Amazon stock costs a lot of money has absolutely nothing to do with it, because today, um, you can buy a fraction of a stock. You can open up a brokerage account with $50 if you want to. And you can buy, uh, a few different stocks because you can buy a fraction of a stock or you can buy, even better, which I would recommend, uh, fraction of an index ETF. So that, that’s, the fact that stocks, that the price per share is expensive has nothing to do with it anymore. It did 30 or 40 years ago, but it doesn’t, doesn’t today.

Uh, I mean, if somebody makes a lot of money, if some insurance agent comes to you, uh, and wants to sell you a, a product or anything like that, you know, you have to always ask them like, “What’s in it for you? How much are you earning?” You know, you have to as-, th-, there’re a lot of people in finance who get paid on the front end, and there’s some people who get paid on the backend. And the people who get paid in the front end, like through, uh, uh, either as a commission or through selling your trade, not that it’s an onerous amount. I understand that you, you know, Tom, you, your company has to make, make money for what it does. It’s not, it’s, it’s… We live in a capitalist society, but you, you have to ask wh- why are they being paid to sell my trade? Wh- why is that, that a good business for them?

John Donvan

Tom, I’d like you to tell us the difference between trading and investing, especially as you’re a proponent, in this conversation, of trading.

Tom Sosnoff

Uh, I look at trading as taking a very, um, uh, statistical, probabilistic, and a quantitative approach to, um, to the, to the different strategies that are available, because of liquid markets. And I think it’s, it’s really important to somebody to understand strategic finance. I mean, just because… If somebody told me that I can outperform, you know, active, active… Now, when we defines active, by the way, we’re talking about active, like, money managers, that make a few adjustments per year to a mutual fund or to some kind of a fund where they’re, all they’re trying to do is outperform a benchmark. You know, that is not active in my world. That’s just active in a traditional sense. To me, that world should’ve been shut down a long time ago.

Our world of active is an individual investor who is trying to outperform risk-free rates by some huge multiple or, or you can use, um, the S&P, you know, a- a- average S&P move by some multiple. But, so when I look at active, I think of somebody that’s trying to not outperform a benchmark by one or two percent, ’cause I think that is a ridiculous approach to investing, so I would never invest in an active fund over a passive fund, if those were my two choices. But we’re talking about active trading, which is taking a strategic approach to the financial markets, being capital efficient with what we do with our money and trying to outperform by multiples of. So instead of making 7%, you’re trying to make, I don’t know, 21% to 40%, which makes the time, effort, and resources completely worthwhile.

Now, if you don’t do it, it doesn’t matter, because you still-

John Donvan

Just to be, just to be, just to be clear, Tom, if you, you know, you do 100 trades a day.

Tom Sosnoff

Yeah.

John Donvan

If on a Monday you buy Apple and on Wednesday you sell Apple, those two trades in the space of a week, I don’t know if you’ve ever done that, but if you had, that tells me that you didn’t get into Apple because you thought it was a great company with a great future with great products that was gonna go places in 10, 15, 20 years. You’re playing, you’re playing a different game. And that’s what I’m trying to get at, and please, explain the difference between investing and trading.

Tom Sosnoff

Yeah, I am playing a different game. I do not invest. I do not look at companies and go… I mean, there’s a, a million companies out there that I think, “Oh, man, this is a, this is a great company.” You know, like, like, for example, the other day I was talking about how much I love DocuSign, not because I really think DocuSign’s a great company. I just love their product. And so there’s, there’s a million, or I shouldn’t say million, but there’s probably hundreds of companies out there that I love what they’ve built and I love the way they are. But I would never buy the stock because I like the company. I don’t buy stocks for long-term investment other than, you know, we’re a public company, so I own our own stock. I invest in ourselves. But I rarely buy stocks unless I think they’re super cheap, and I wanna hold them for some time. But it’s such a small percentage of what I do. It’s less than, I would say, definitely less than 1% of what I do as a trader is buy stocks for buy and hold purposes.

I look at something opportunistically based on implied volatility. And I look at all financial markets with an eye towards just opportunity, “Hey, is the expect move greater than what, what I assume may be a realized move? And because of this level of volatility, is there something interesting here to do?” And I think that is the single greatest approach to finance, and I think that changes the way people, um, the way people can predict their own outcomes in life, and that’s the way I approach trading.

John Donvan

This is Intelligence Squared US. More debate in a moment.

Welcome back. I’m John Donvan. And this is Intelligence Squared US. Let’s jump right back into our discussion.

Spencer, you are telling most people, “Don’t do that. Invest instead, and invest passively.” In other words-

Spencer Jakab

Yeah-

John Donvan

… buy and hold. Go for the long haul.

Spencer Jakab

Yeah, I think it’s, I mean, I think there’s, there’s a difference between, um, investing and, and speculation, I guess. Uh, and it’s, it’s a, a gray line. It’s not a, uh, a stark line, but that’s, you know, that’s pretty far on the side of speculation by, by definition.

And let’s just, let’s do a logic test, okay? Um, let’s say, uh, I don’t know, the, the, I, I don’t know what the figure is, it’s approximately 20 trillion. Let’s say the, the US stock market is, is worth $20 trillion, right? It’s just a collection of businesses. You’re owning shares in a bunch of businesses that are on the stock, not your local barber shop but a lot of big businesses that you, Starbucks and whatever, that you deal with every day, AT&T. And then it, with dividends it goes up 10% this year. So then the whole value of it is $22 trillion after a year, right? So, that $2 trillion, uh, is wealth that accrued to somebody.

Now, if, you’re, you’re telling me that you are, uh, very actively trading and you can make 40% or more, you know, and you should be out there making 40% when the whole market went up 10%, well, you, you only could’ve made that, that money didn’t come out of thin air. So you had to make it someone’s expense. So in order for you to win, I’m not saying it’s impossible, and Tom is probably, uh, uh, a great trader. I mean, he has long experience. But, um, I’m, I’m sure he hasn’t done well every year. And in order for you to make a, a return that’s three or four times as, as high as the, the overall market, someone somewhere had to make, had to have a bad year, had to lose money. Uh, it wasn’t me, because I’m just investing in index. I just made that 10%. So, someone else somewhere did poorly. Who, who is that? Who’s, who’s giving you that money?

I mean, th- there’s no, th- th- there’s not, like no tooth fairy that’s, that’s giving you those returns. You have to, to outsmart someone else who, who wasn’t, uh, as lucky or as smart as you. So that’s, that’s the basic challenge there. And it’s very, very hard to be consistently smart. Uh, I don’t think that it’s a, a, a good thing for most people to, to attempt. Uh, it’s kinda hurts to say that, uh, especially to someone who’s educated and smart.

John Donvan

Let me pause, sto- stop you right there. It’s not a good thing for most people to attempt. Those seemed, that seems to be the core disagreement here. Tom, do you agree that that’s what you disagree over?

Tom Sosnoff

Yeah. Yeah. I mean, I mean, that’s, eh, at, at, at the end of this argument, you know, I think that people that take a passive approach and a conservative approach, and I don’t care anybody says, “If you invest in passive index funds, you’re talking conservative approach.” And I’m one of these people that believe, even as early as, you know, 18, 19 or 20 years, old, every time you have an opportunity to speculate and take risk, you should. And I have a lifetime of, of you know, proving that, that if you make the riskier decision throughout your life, there’s, there is a lot more opportunity than there is failure.

John Donvan

Tom, you, um, you mentioned in passing in a sort of joking way, uh, you said, uh, I’m a junkie about trading but it, it, it, it tweaked me because I just finished reading Spencer’s book in which he talks about one of the harms that the, uh, act of training approach can take as, uh, as, and, and promoted by organizations like, uh, Robinhood and others, um, is that there are people other there who have real gambling problems and that this surfaced during, um, the pandemic when, uh, so many people went into the market for the time.

And S- Spencer, I want, I want you to talk a little bit about, about that harm. Is that sort of tangential to your argument or is that core to your suggestion that this is something that this kind of level of trading is something that people should stay away from.

Spencer Jakab

No. It’s, unfortunately, it’s an important thing to understand about the, uh, the business model at, at, at least of a company. Like Robinhood, wh- which is i- if you take some random group of people and have them spend, uh, uh, a long time in a casino or on a gaming app, um, eventually, uh, a- about 3%, uh, uh, of people, just like some percent of people will become alcoholics, some percent of people will become hooked, you know, to get the dopamine rush. The same sort of nerve centers will, will go off in, in their brains that goes off with someone who’s, uh, who’s addicted to a substance, uh, can be addicted to, to gambling.

And what, what I learned in the process o- of writing this book is that while human psychology is, is the same, I mean, that’s why you have manias and panics and crashes, and you have them in the 1600s and you have them today and you’ll have them in 400 years, is that the human psychology changes very slowly, or our brains were wired, you know, in, uh, Neolithic times, uh, which is why we, we’re, we’re not good investors. But, but could these companies that, uh, engage us, uh, social media companies as well, not just, uh, in- investing companies. They have, uh, gotten very good at understanding what makes us tick psychologically.

So, for example, Robinhood, if you look at that and you look at, uh, uh, an outright gambling app like DraftKings, the- they’re very, very similar in terms of the inducement to play, the gamification, the sense of FOMO that they introduced, even the fonts and the colors that they used, and it’s not an accident. You know, you wanna make it as frictionless as possible, give you as little time to think about things as possible, just like there’s not a clock in the casino that tells you, “Okay, maybe I should get going.” There’s not a window that tells you it’s dark outside or it’s morning now.

You know, the, the, they, they get their, their customers to look at the app and in inordinate number of times a day. And by the way, that’s another thing that, uh, correlates with poor returns, it’s just how often you check your account. Uh, there’s a, there’s a direct inverse correlation between how frequently you look at your broker’s account than how y- how you do as an investor for reasons that have been, “I can get into it,” but have been explained by socia psychologists and economists.

Uh, so, yeah. I, I think that the gambling aspect is, um, for a minority of, uh, of the people involved, uh, unfortunately is, um, you know, there’s a real thing to look in.

John Donvan

That wa- that was always there though for people when it, when it came to training on Wall Street, which is, you know, um, um, the discount brokers have been in the business for 35 years now, so commissions went down, people could do this now for 25, 30 years.

Spencer Jakab

But, but it, but it’s much, much easier. It’s free. And now that it’s free, wha- when it costs zero, then it you, it just, you, it kinda, you cross the Rubicon psychologically.

John Donvan

Yeah. Well, talk for a mo- I wanna get back to Tom in a moment, but just, just remind people ’cause you go into the history in the book about the cost of trading and how it dropped dramatically over the last 30 years. And then, all of a sudden again in 2019.

Spencer Jakab

Sure. Well, I, yeah. I- if you go back to the, uh, the 19- early 1970s, it was… You know, you really have to have a lot of money for broker to help, uh, help themselves to your money. You know, it wasn’t worth it if you just had hundreds of dollars. You really couldn’t open up a brokerage account and trade because it, you would just whittle it away very quickly. It became cheaper and cheaper, and, uh, you know, during, uh, the, as the convention of the internet and discount brokers and computerization, everything has become much more efficient. There is no doubt about that. Uh, you know, Tom mentioned mentioned that a number of times that things have become more competitive and efficient, and that is, that is absolutely true.

So, the what Robinhood always says in their defense is, “We’re democratizing finance.” Well yeah, y- they democratized finance but it was democratized already by the technology that, that exists. But going to zero dollar commissions kinda crossed a line because people don’t… when they think that something is free, and it’s not really free, uh, ’cause there are costs, hidden costs behind it, but when they think that something is totally free, then they don’t think about it at all. They’re much more free to trade. And that the advent of zero dollar commissions, uh, coincided with an absolute explosion in, in stock and options trading.

John Donvan

And it just happened, um, less than three years ago?

Spencer Jakab

Yeah, that’s right.

John Donvan

All right. And I wanna take all this back to Tom. Tom, we started with the, with the conversa- that part of the conversation about the, the issue of people having, um, psycholo- say, you know, true additions to, uh, to trading to the point where it’s-

Tom Sosnoff

Mm-hmm.

John Donvan

… detrimental to them.

Tom Sosnoff

Sure.

John Donvan

Uh, what, what’s your, what, what’s, what’s your approach to traders you think are having those sorts of problems?

Tom Sosnoff

Well, first of all, I don’t, I don’t think it’s a problem, um, because I look at the world very differently. I mean, I’m, I said I’m a trader junkie but I’m also a workaholic. And so, I look at my life and I say, “Hey, you know what? I could’ve taken lots of different paths. I chose to be a workaholic.” And it’s, you know, we’ve built multiple billion dollar businesses. I don’t have any regrets about doing that. I don’t have any regrets about trading a lot. I mean, I think, again, I think it’s a ridiculous argument from people that don’t use the financial markets.

[NEW_PARAGRAPH]I mean, I, I live in the financial markets but I also respect those markets. And I, you know, it bothers me when people talk about, you know, how dangerous that is because I’ll argue there’s a lot of other things we do in life that are, you know, that like… It, it just doesn’t make any sense to me to pick on that one specific topic because it, it doesn’t, I don’t think it plays out the way people think it does, specifically that, that discussion though.

John Donvan

Let’s look a little bit to the future. There are gonna be people listening to this who have not yet made a decision about what they wanna do-

Tom Sosnoff

Mm-hmm. Sure.

John Donvan

… uh, as investors or traders in life, or maybe some who wanna, an update on what they should be doing. Um, Tom, what’s the best thing a young person could do now and what’s the worst thing a young person could do now in the context of the things we’re talking about?

Tom Sosnoff

The worst thing a young, the worst thing a young person can do is when they get out of school or they’re s- still in school, you know, undergraduate or graduate or whatever, they get their first job. The worst thing they can do is think if they have an IRA or 401k and, or, or they invest passively, that that’s really gonna be helpful to them in the long run because it’s not. And they’re gonna wake up 25 years from now, they’re gonna close their eyes when they’re 25 and wake up when they’re 55, and they’re gonna figure out, “Oh my God, where did my life go? I don’t know anything.”

And the best thing a young person can do, whether it’s stocks, options, futures, crypto, digital assets, it doesn’t matter to me, whatever they can do to take speculative risks at a young age, the learning process and the value, everything that you do when you take risks when you’re a young person and you speculate, is valuable to everything you’re going to do in the future, to how you network, to how you can articulate things. You know, for people that can articulate finance, it is really difficult to move forward in the world of business. But people that can articulate risks, they can articulate strategy, they, they can, they can talk about probabilities, it’s a completely different world and they move faster through the system, they network better.

And their, their lives, I, I mean if you’re talking about measuring your life by, you know, certain types of, of traditional success, and I think we are when we talk about passive investing as, you know, as, as the alternative, I think the people that, that do that, whether or not they make zero for three years in a row and the passive investor takes a $2,000 account and makes 6% a year, to me, that has absolutely no value. And the person that learns how to speculate and take risks, that’s what the 22-year old should be doing, that’s what the 24-year old should be doing. That’s why the whole…

You know, for whether, whether I like Robinhood or hate Robinhood, and I don’t even wanna comment on that ’cause they’re just a competitor, I mean, that is one of the things that they’ve done, um, and for, for, in my opinion, for better, for society, is we’ve introduced a lot of people to finance that normally would not have been introduced to finance, and I think that’s incredibly important. Because America is the center of global liquidity, and in order to keep the machine going, we’ve got to keep generations understanding why there’s so much money available here and why, how you can raise money and how you can use that capital and how you can put, apply strategies and, around that capital. And I think that that’s just incredibly important, that we…

And we, and passive investors going s- going all the way back to, you know, to Jack Vogel and the whole deal. I mean, they basically kind of blew up the whole story. And I hate it. And I think what we’re doing right now is re-inventing the story and redefining the story for the future, and I think it is all about speculation.

John Donvan

And you’re saying it’s not just for the returns but for life lessons?

Tom Sosnoff

That’s exactly right.

John Donvan

Your turn, Spencer, what is the best thing and the worst thing that a young person could do now?

Spencer Jakab

Tom said, I mean, there are a couple of things you said that funnily enough, I do, I do agree with because I, I worked at, uh, in Wall Street. It, um… I worked on trading floors. Uh, and so, I didn’t go and gambled, uh, or speculate or whatever, my own money, uh, because I couldn’t, but that, uh, that decade or so I spent in finance, did teach me to, to think better and gave me a better understanding of human nature for sure, so I’m not, I wouldn’t dispute that. And I wouldn’t dispute that all these young people opening accounts and getting on the financial ladder is, uh, necessarily a bad thing because there’s a retirement crisis in this country. A lot of people are, aren’t starting early enough.

But what I would tell a young person is to get started early, to start saving. Uh, I would give them, uh, a chart and saying that, you know, if you, if you start saving, you know, as soon as you start earning money, even when you’re in, in high school or in college, put a bit of that money away and get a discipline in putting that money away. But I, I would not advise them to, to be active.

Let’s… You know, compound interest is a really hard think to understand intuitively. And you, you… Oh, I have three sons. And I’ve shown all them this and they’re… you know, all of them are like, “Wow.” Then they got bored and, you know, kind of whatever. They’re, they don’t wanna hear that much about it. But I mean, you show them that i- if, it, during the first 10 years of your working life, if you, even if you’re making a fairly low salary, if you ser- save a, uh, uh, a certain percentage of your salary, and then stop saving, you’re going to have as much savings compounded over the years, uh, as someone who stars after that 10 years, but saves as twice as many years as you do.

So getting started early, saving money is very, very important. I would absolutely recommend doing it in a, uh, uh, a passive way. In terms of being educated about finance, I would become educated about the, just the rules of finance. Finance is, is complicated enough in terms of how much can you put away, what’s tax-efficient, what’s an IRA, what’s a 401k, what’s the best place to do it, should you open a Roth, and so on and so forth, all those persnickety rules that change every few years. That’s a good thing to know. A lot of them don’t know those things.

In terms of, of knowing how to derive the Black-Scholes optio- option pricing formula? No, unless you’re going to work in finance, I don’t think it’s important at all. I don’t think it’s important at all. I think that you should stay very far away from that, uh, understand what you don’t understand, know what you don’t know, and, and don’t try to outsmart the market. The market’s full of tens of thousands of sharks who would love to separate you from some of your money. And if, if it only costs you one or two percentage points in performance a year, uh, that in and of itself might mean that you wind up, just because of compound interest with half as large of an nest egg when it comes to retirement day. Um, it’s just, uh, a small drag has a, has a big end result. You can do the math on, on paper.

John Donvan

Where does crypto fit into all of this for you, Spencer?

Spencer Jakab

Uh, I, I (laughs), I, I have no… It’s totally above my pay grade. I have no idea what a Bitcoin is worth, whether it’s worth $41,000, which it is today as we’re speaking or $4,000 or $400 or $400 million. I have no… There is no anchor because crypto doesn’t produce money. A, a stock, uh, or a group of stocks, I can tell you, roughly speaking, it’s going to pay this much in dividends. It’s going to have this much in profits and uh, I have a very rough idea of what it’s worth because you’re owning up a business with assets and buildings and patents and scientists and things like that. Uh, some of them will succeed, some of them will fail. Very hard to pick which ones, so just buy tho- don’t look for a needle in a haystack, buy the whole haystack, you know, if they’re an index fund.

Crypto, I, I have no way of valuing it and so, um, um, I, I have no insight to give you, I’m afraid (laughs), about crypto. I will stay away. I don’t, I don’t dabble it in myself, you know?

John Donvan

(laughs) All right. Tom, Tom, you get the last work on crypto.

Tom Sosnoff

I’m actually very bullish on digital assets in decentralized finance. Um, I think it has a complete, especially after the last couple of weeks as a completely validated position, as a non-correlated asset. I think that it has reached a level of credibility w- uh, you know, just based on market size. But, um, as a non-correlated asset, I love the digital asset space. And as the future, um, I mean, looking towards the future, I think that, uh, decentralized finance, which means many things, um, including I, I think a couple of years from now, especially our kids are going to have very different looking portfolios.

They’re gonna have active trading in their portfolio and listed products and they’re also going to have a non-traditional part of their portfolios, which will include NFTs, fractional NFTs. It’ll, it’ll have validation through, like something like an NFT or people be trading secure tokens around the clock and I also think we’ll even have digital collectibles inside of our traditional brokerage portfolio.

So, we’re making right now into the world of decentralized finance our largest financial commitment ever with new technology, you know, looking down the road a couple of years. And you know, I wanna be ahead of all of our competitors and I also wanna compete with a lot of the crypto firms out there right now, but I think the marketplace…

And I’m not talking about just cryptocurrencies or digital assets in the sense that the way they exist today. I’m talking about being able to potentially trade and product anywhere in the world, anytime of the day, you know, seven days a week. And also, not have to convert currency and also, not have to worry about, you know, clearing in some place that you’ve never heard of. And I think that the future of decentralized finance is gonna be gigantic. And I’m really looking forward to regulatory clarity sooner than later, so that we know exactly what we can build and how fast we can deliver it to our customers.

I think everybody will have a digital wallet attached to their brokerage firms in a very short period of time. And what we do inside of that wallet, what we store in there is going to be critical to, you know, to wealth creation over the next 10 years. So yeah, I’m, uh, super bull.

John Donvan

All right. I wanna take Tom Sosnoff and Spencer Jacob for, for this very robust conversation and, uh, a very robust disagreement. Uh, w- I, I know that our, our listeners got a lot of advice that was totally in conflict with itself but, um, that’s okay. That’s why do these debates because there’s at least two sides to every story and we explored the two sides of this one.

Tom and Spencer, thank you so much for joining us at Intelligence Squared.

Tom Sosnoff

Thanks, Jon. Thanks, Spencer.

Spencer Jakab

Thank you. Thanks.

John Donvan

I wanna thank you, our audience for tuning in to this episode of Intelligence Squared. I hope you enjoyed it just as much as I did. Intelligence Squared is a non-profit that is generously funded by listeners like you, members of Intelligence Squared, academic institutions and other partners and by the Rosenkranz Foundation.

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