Guest User

March 10, 2022

Emerging Markets, Portfolio Management, Portfolio Theory, Advanced Topics, Expected Returns, Historical Data

Episode 191: Emerging Markets: Diversifying Asset or a Reverse Lottery? (plus Reading Habits w/ Morgan Housel)

Guest User

March 10, 2022

Emerging Markets, Portfolio Management, Portfolio Theory, Advanced Topics, Expected Returns, Historical Data

There seem to be many differing opinions out there about investing in emerging markets, and unfortunately, many of these are inaccurate. This is mostly due to the fact that emerging markets and your involvement in them, perform in ways that are somewhat counterintuitive. In today's episode, we tackle this tricky subject from a number of angles and try to give all of our listeners a better understanding of the strengths and weaknesses of using emerging markets within your portfolio, without falling prey to some common traps. To kick off the episode we talk about some financial news and the interesting recent book Making Numbers Count, before diving into the main course of the show. Listeners can expect to come away with some new insight into the history of emerging markets theory, realistic emerging markets returns, the appropriate amount of caution to exercise when investing in them, and more. Towards the tail end of the show, we are joined by our friend Morgan Housel, author of the prominent new book, The Psychology of Money, and we briefly discuss reading habits and how implementing a few small practices for learning can have an extraordinary impact on ones' life. Don't miss out on this great show.

Key Points From This Episode:

Rounding up some interesting recent content; TV shows, articles, and more. [0:01:16]
This week's book review of about the powerful, Making Numbers Count. [0:07:23]
Standout data points; Twitter's valuation, Deere Corp, and more. [0:13:14]
A few pieces of the most interesting financial news from the last week. [0:16:18]
The roots of the idea of emerging markets and its appearance in the 1980s. [0:20:05]
Unpacking the findings on emerging markets and the best examples of the thesis. [0:21:20]
What to expect with regards to returns from emerging markets. [0:26:37]
Reasons for the benefits of diversifying a portfolio using emerging markets. [0:29:26]
The importance of market integration segmentation and how this relates to emerging markets. [0:33:46]
Portfolio skewness and how assets contribute to this. [0:35:18]
Reasons for surprising yields with emerging markets for Canadian investors. [0:41:26]
The cautious place that emerging markets deserve in a balanced portfolio. [0:47:20]
The dangers of mixing and matching products relating to emerging markets. [0:49:45]
Morgan's opinion on how reading can take us beyond our mundane bubble. [0:51:38]
The approach that Morgan uses to gain and learn the most from what he reads. [0:52:47]
Decisions on what to start reading and exploring a variety of your interests. [0:54:03]
Weighing the value of conversations and discussions about the books we have read. [0:57:32]
Morgan's process for capturing and retaining useful information from books. [0:58:35]
Parting advice from Morgan about finding the time for a healthy reading habit. [1:00:11]

Read the Transcript:

Ben Felix: This is The Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision making from two Canadians.

You're hosted by me, Benjamin Felix and Cameron Passmore, Portfolio Managers at PWL Capital. Welcome to Episode 191, kick it off with recent content. Don't know if you have some content you want to share or not, Ben.

I'll say something quickly. I've been working on a project and it's not an NFT drop. That's what people often mean when they say they're working on a project. It's not that. I've been working on a project that's related to content, not going to say what it is yet. Cameron knows about it. It's a project that we're working on together. But I've been putting a lot of hours into it. Anytime that I sometimes used to spend watching shows and stuff in the evening has been completely absorbed by this thing that I'm working on. So, yep. Anything you asked me about stuff that's on Netflix or whatever, the answer for the next little while is going to be no.

Cameron Passmore: It's the project. So you're in flow with the project.

Ben Felix: Yeah, that's right.

Cameron Passmore: Cool. Well, we've been grinding through Succession on to season three, amazing series. It's crazy. I also watch the Carl Icahn documentary called The Restless Billionaire. We talked about it with Michael Dell. Some call him activist, some call him a corporate raider, basically takes significant stakes in public companies and then pushes them to change either management or strategy or whatever. Some people love him. Some people hate him. Boy, sure, not a likable character. I'll tell you that. And he doesn't really ... Couldn't care less what anyone thinks about him. Some people said he's as pleasant as a stucco bathtub, I think one person said. So it's a really interesting story of the guy that ... I think he was the inspiration for young Gordon Gekko back in the 80s in Wall Street. If you're into the markets and that kind of thing, it's really interesting. I don't think Lisa was crazy about it, but I sure enjoyed it.

Interesting article I came across in the Atlantic, which kind of shocked me. It asked the question, is old music killing new music? Can you believe that old songs represent 70% of the US music market and new music market is actually shrinking. 200 of the most popular new tracks, a new track is defined as less than 18 months since the release, are now less than 5% of all streams in the state. It was 10% Three years ago. So the old music is bands like The Police, CCR, Eagles, that genre. And they also talk about how the viewership of Grammys, the Grammys is plummeting. Was 40 million people 10 years ago, and last year, the audience was less than 9 million people.

The article I thought was interesting just makes the case that bands can now make more money by getting a placement in a video game such as fortnight than in signing a record deal. And they also talked about how so much music is now streamed or we've given up the music selection to be it Spotify or Sirius or whatever, that a lot of people don't know band names like they used to with the older music. Needle takeaway, I don't know what kind of music you listen to. Do you listen to much streaming?

Ben Felix: Yeah. We listen a lot of music on our house. I think the data that this talked about sounds about right for our house. Definitely not a whole lot of new music happening.

Cameron Passmore: Interesting. Update on the Reading Challenge. 369 people have entered the challenge and so far 594 books have been completed. It's also cool to see that 200 People have connected with me as friends in the app. It'll be kind of cool once we can see, hopefully we can see how many books people have read to date. Right now you can only see the last 30 days. Most popular books so far, Psychology of Money by Morgan Housel, Dopamine Nation by Dr. Anna Lembke, Atomic Habits by James Clear and balanced by Andrew Hallam.

Ben Felix: We should let Andrew know.

Cameron Passmore: That is cool. And speaking of Morgan, he's the special guest this week at the end of the episode. So he's the author of Psychology of Money. So he came in to talk about reading and the importance of reading his life. So he's at the back end of today's episode. Coming up next week is economist and professor, Alex Edmans. He's also the author of Grow the Pie.

Ben Felix: That one's come up in the Rational Reminder community. There have been a bunch of discussions where the stuff that he said in his episode was highly relevant. So I've taken little snippets of the transcript out and posted them in the community. But he's is a very ... It was more interesting than I had expected. Like I knew it was going to be a good episode during the preparation for it, but it was even better than I had anticipated. I found that to be a really good discussion.

Cameron Passmore: And then Larry Swedroe was back in two weeks to talk about reading. And then week after that, economist and venture capitalist, Bill Janeway is here.

Ben Felix: That was another one where I put a lot of work into the prep for that one. I can't remember what you said to me after the episode, but you were blown away by the content.

Cameron Passmore: Yeah. And we were held to one our firm, and we could have gone on. He was so interesting and so well spoken. And then two weeks after that, so in five week's, Professor Sebastian Betermier from McGill will be joining us.

Ben Felix: That's another one. We've had some good conversations recently. Yeah, that one was also ... I posted about that in The Rational Reminder community too. We talked to John Cochran a little bit about those topics, about how asset pricing is related to the hedging needs of individuals. And basically, the whole episode with Betermier was about that for stocks and the empirical evidence on that. He's done studies where he asked the question, theoretically, we understand that people may have hedging demands based on their individual circumstances. And that may describe the cross section of stock returns. And so a lot of his research, or I guess most of the stuff that we talked about, actually is related to getting datasets where you can empirically investigate that. So who owns value stocks, for example, is another absolutely fascinating episode.

Cameron Passmore: Speaking of John Cochran, I looked earlier and he's our number one most popular episode.

Ben Felix: No way.

Cameron Passmore: Yeah.

Ben Felix: Not surprising, I guess. But I didn't even realize that. Interesting.

Cameron Passmore: I had some really nice connections lately on Twitter. Tyler sent me a note saying that she welcomes all meaningful life topics. On LinkedIn, [Pondan 00:06:12] in Australia reached out to say how much he enjoys a podcast. And get this one, I think I mentioned this to you. But Mario from Dusseldorf also connected on LinkedIn, and wondering if we knew any firms in Europe that he could connect with professionally. So we made a connection to someone we know in Germany, who's looking to get into the industry. On iTunes, DMC from the US excellent, thoughtful content. Talked about how we consume a ton of information, summarize the main takeaways without being dry. So who knew we weren't dry.

Frederick in Belgium said, literally changed my life. That's amazing podcast, together with your YouTube channel has convinced me to find a financial advisor in Belgium. I eventually quit my job as a programmer to start working for that company to help more people here become aware of science based investing. You guys had a huge influence on all of this. Thanks so much for all the knowledge you've shared.

Ben Felix: That's pretty crazy.

Cameron Passmore: Yeah.

Ben Felix: Right?

Cameron Passmore: It is crazy. When you think about how small the planet becomes in a medium like this, like we hear from people all over the world, often.

Ben Felix: Yeah.

Cameron Passmore: Anything else?

Ben Felix: No. Let's go ahead to the episode. Welcome to Episode 191 of the Rational Reminder Podcast. We you have a great book review for you. I think it's good for all of us. It's certainly good for us in the business of numbers, but the books called Making Numbers Count: The Art and Science of Communicating Numbers by Chip Heath and Karla Starr. So this book was released in February. And we've talked about Chip Heath in the past as an author. He wrote or co-authored, Made to Stick, Switch and Decisive. And the bottom line is that we all live in a world flooded with numbers, their statistics, facts, percentages, prices, inflation, employment, the market, COVID death rate, survival rate and these numbers are constant. And once you're aware of it since reading this book, that numbers just kind of are like a river flowing over us. And numbers matter.

Cameron Passmore: But the authors argue that we need to be better equipped to appreciate, to learn from, to recall and to share these numbers in a way that they make sense. And the reality is humans are not wired to be able to appreciate the magnitude of numbers. Nor do we recall these numbers in order to make sense of them later and explain them to others. So that's what this book is about. It's about how you can make numbers count. And it's based on a very simple observation, we lose information when we don't translate numbers into some sort of instinctive human experience. So they talk about how the higher numbers get, the less sensitive we are to them. And this is a phenomenon that psychologists have labeled psychophysical numbing.

So for example, if you move a scale, say a number from 10 to 20, that feels like a big jump. But moving an equal distance, say from 340 to 350. Even though it's the same increase, we don't really feel anything about that. And that's the numbing part. So this book gives you concrete real life techniques to improve your odds of overcoming this kind of numbing. And the simplest rule that I can communicate here is to bring it all back to something very simple. Bring the example back to a single point of comparison. And the book kicks off with an incredible example to me.

So to illustrate how much of the Earth's water is fresh that humans can consume, they say imagine a single bucket, a gallon bucket, and that bucket represents all the water on the planet. So if you fill it up almost to the top, that is a salt water on the planet. If you add in three ice cubes to this one gallon bucket, that's all the freshwater on the planet. The liquid that's melting off the top of the ice cubes is the fresh, not frozen freshwater. That's all the humans get to consume is the melting off of three ice cubes. So that's a representation of the water on the planet. It's incredible to think of all the lakes we all live around. That's just the melting part of those three ice cubes.

Another example I gave is the ship that blocked the Suez Canal last year. Instead of saying the ship is a quarter mile long, you're better off saying that it's as long as the Empire State Building is tall. When you think of it like that, that will stick forever. Another great one that gave was the US government ran what was called a 5 A Day campaign to encourage kids to eat five servings of fruit or vegetables per day. McDonald's out spends the 5 A Day campaign 350 to 1. So I say 350 to 1, that doesn't really make a whole lot of sense. So they suggest another way to illustrate it is that for every 5 hours and 50 minutes a child spends watching a McDonald's commercial, they spend one minute watching a 5 A Day commercial from the US government.

Another great example, get this one. How would you illustrate the odds of winning the Powerball lottery, which are 1 in 292 million. So one way they say is, imagine you had to guess a date between January 1, year 1, so 2021 years ago. So pick a day between then and September 18th, 2667. So pick one of those 1 million days. So let's imagine, Ben, you got that winning day. Now to get the same odds as the Powerball lottery, you have to then go to a wall that has 300 envelopes stuck to it and pick the winning envelope out of the 300. Those are the odds.

Another example they gave to illustrate that same chance was imagine walking into a football field and placing a penny. So you've done that. You go place a penny in the football field. For me to the same odds, I have to go in and put the penny exactly where you put your penny. Right? That chance of me doing that as 15 times more likely than winning the Powerball jackpot. Anyways, the book is jammed with examples like that.

Another one is the history of the universe. This is something I remember seeing with the kids at the American Museum of Natural History in New York City. So imagine the history of the universe was one day, so that single unit was one day. So the Big Bang happened 14 billion years ago. Imagine that happens at midday, the day starts. Well, at 4:10 The next afternoon, so 16 hours later, the sun comes, life and planets start forming. Single celled life appears at 5:30. Dinosaurs appeared 11:37 p.m. The entire history of humankind does not even take up the final second. That's just shocking.

Ben Felix: Yeah, that is interesting.

Cameron Passmore: Anyway, so the point of the book is there's techniques on how to do this. There's all kinds little rules and ideas. And they make the point that whenever you give, for example, in your career, your day job, whenever you're presenting a number, try to bring it back to some context that people understand. Look for an example, how can you boil that number down to singles, to single units of something that will make it meaningful comparison. Great-

Ben Felix: That is really interesting. And as you're talking to the examples, you can feel how they would be more memorable. Very interesting.

Cameron Passmore: There you go. A couple interesting data points that caught our eyes this week, kind of going back to your discussion around good companies and price of what you pay matters. Shares of Deere Corp, which traces its roots back to John Deere's invention of the steel plow in 1837 has outperformed Alphabet's, so Google, over the last five years. 29% versus 25.6% per year. And this next one I thought was interesting about Twitter. Twitter went public in 2013. Its sales at the time revenue is 535 million. Today, what's that, over eight years later, revenue is $5 billion today, but the share price is 20% below what it was back in IPO. So back then investors were paying 41 times sales. Today they're paying six times sales.

Ben Felix: I mean, it's not unexpected, but it is very interesting to see real life examples of individual companies.

Cameron Passmore: So do you want to jump into the next one?

Ben Felix: Yeah. Meb Faber tweeted, I didn't go in reverse engineer his data point to make sure it was true, but I'm sure it is. He tweeted that over the past 70 years the US stock market has outperformed foreign stocks by 1% per year, so that $10,000 invested in US stocks 1950 turned into 14 million versus only 8 million in foreign stocks. Big compounding difference. But all of that outperformance has come since 2009. That's wild.

Cameron Passmore: That is totally wild.

Ben Felix: Wild enough that I feel like I should verify it. But we're going to trust Meb on this one. And then the other chart that I saw that was very interesting, or sad, maybe both is a home country bias chart. So it's a column graph. We'll put it in the YouTube video, but if you're listening it's columns with countries on the X-axis and the home country bias level on the Y-axis. And some countries probably because the markets are closed, is my guess at least, which we'll talk about in our main topic, but Bangladesh for example, the home country bias is 100% or very close to 100%. India, same thing.

But Russia, which has seen its stock values drop almost 100%. I checked the iShares Russia ETF, it's down like 99.8% year to date or something like that. And the home country bias for Russian investors is like 95%. I don't know to what extent the Russian households own stock at all. I don't know the answer to that question. But it's still pretty staggering to see. For those who do, the home country bias is pretty extreme. Canada's on this chart too, 50% home bias. Not actually bad relative to the rest of the world. Canada is one of the lowest home country biases than Austria, but Canada's right near the front of the pack there.

Cameron Passmore: The US is mid-70s.

Ben Felix: Yeah. Interesting.

Cameron Passmore: Very interesting. So I came across a couple of interesting stories regarding Vanguard. So one was from the Financial Times earlier this year titled of Vanguard fires a fresh salvo in asset management fee war. So the CEO, Tim Buckley, said they'll be cutting, get this, a billion dollars in fees over the next four years. They reduce their fees by $140 million last year. Vanguard has over 30 million clients and picked up 300 billion in assets last year. And here's a neat stat that was in the article only, one quarter of their clients trade in any given year.

Ben Felix: That is interesting.

Cameron Passmore: And then another article from The Wall Street Journal in December The Mutual Fund That Ate Wall Street—Based on an Index Few People Know About. So this was interesting story on the monster fund from Vanguard, the Vanguard Total Stock Market Index Fund, BTSA, Xfund and ETF (VTI), total assets are $1.3 trillion. And it now accounts for 10% of all assets and US stock market, mutual funds and ETFs and no other fund or ETF is even close.

Ben Felix: That's crazy.I didn't know that. That's not nuts.

Cameron Passmore: And of course, in second place is the Vanguard S&P 500 fund and ETF at over $800 billion. So a lot of people don't know is that, that index that that first fund tracks is the CRSP index, which we've talked about many times, including with Robin Wigglesworth a few weeks ago, and this one is designed by the Center for Research in Securities Prices, and it was a subsidiary of the University of Chicago's Business School until it recently became a university owned limited liability company last year.

Interesting story there too. It includes more than 4,000 stocks and to be included, you must have market cap of greater than $15 million and at least 12 and a half percent of the shares must trade publicly. Changes are made every quarter and can reflect IPOs and secondaries and day's. Top holdings, no surprise, Apple, Microsoft alphabet, Amazon, Tesla, Meta. MER is seven basis points. And here's another thing I didn't know, there's only 100 subscribers to the CRSP database.

Ben Felix: I'm not surprised. I'll tell you why. I inquired once and it was expensive.

Cameron Passmore: Well, they pay $20 million per year is what the article said Vanguard pays. And they moved to CRSP and MSCI back in 2013 to save, "very significant costs." And lots a little bit of news, I could have mentioned it earlier, I guess. But for the year to date through February 28, Vanguard ETF inflows are $56 billion. That's $26 billion more than year to date flows for its nine largest competitors combined.

Ben Felix: Crazy.

Cameron Passmore: Just wild data points.

Ben Felix: Yeah. Ray at PWL is working on his passive active report that he does every year. We hear stats about how much of the fund market is in passive versus active funds. But Ray and I were talking about it, it's kind of the way that they're categorized is does the fund track an index? But we talked like with Adriana Robertson that we had on the podcast a while ago, there are a lot of indexes that are more like actively managed funds or like stock selection funds. So just saying, well, this percentage of the market is in index funds is an incomplete picture. Because a lot of those index funds aren't cap weighted like true index funds.

So for the Canadian market data, Ray is going to break it down into cap weighted index, like what share the market is in cap weighted indexes, factor indexes. So you can do like single factor and multifactor tilted funds. I can't remember what the last category is going to be called, but the other stuff like the thematic and the more actively managed index funds. I think that'll be really interesting data to see. How does the, what we call index funds, how does that market break down in Canada? Very, very curious to see the results there.

Cameron Passmore: All right, on to your main topic.

Ben Felix: Yep. So it's a topic that I know people have been looking forward to and I haven't finished the paper that I was working on took up a few topics. It's in process though, but that was taking a bunch of my time. Anyway, I'm sure people are looking forward to hearing more portfolio theory heavy analytical topic, which this definitely is. So the term emerging markets was coined in 1981 by the International Finance Corporation as effectively a marketing term to help make the case for foreign investors to invest in developing economies. Today in terms of market cap weights, emerging markets make up 10 to 12% of the global free float market capitalization. And we'll talk more about why that free float word is important in a sec, is about 25 countries, depending on how you choose to classify emerging markets.

China, Taiwan, India, South Korea, are some of the biggest holdings and Russia, until recently, which we'll touch on more later. Characteristics of emerging markets like high economic growth expectations, and often attractive valuations compel lots of investors to look at overweighting emerging markets as a source of higher expected returns. But there are some important facts and some costs and some risks that are unique to emerging markets that I think need to be weighed pretty carefully before diving into this thinking that you're going to get a high probability of higher expected returns. It's a lot messier than that.

So the first thing, and we've talked about this in a bunch of different contexts in past podcast episodes, but in the emerging markets context, one of the big myths in investing is that economic growth, and investment returns are positively related. So if you invest in the highest growth economies or sectors or whatever, and we talked about this with thematic ETFs, too, so that people think that if you invest in a high growth thing, you're going to get high investment returns, but the reality is the opposite.

A couple of good sources for this, there's the Dimson, Marsh, Staunton in the 2014 Credit Suisse Global Investment Returns Yearbook, they ran this analysis on 21 countries with continuous stock market histories and their database from 1900 to 2013. And they find a cross sectional correlation of negative 0.29 between real equity returns and real per capita GDP growth. So there it is, negative relationship. And then there's a 2012 paper with past Rational Reminder guest, Jay Ritter, Is Economic Growth Good for Investors? He looked at 19 primarily developed markets from 1900 to 2011. And he found a similar as Dimson or Staunton, a cross-sectional correlation between the compound real return on equities and the compound growth rate of real capita GDP, real per capita GDP, -0.39 was the cross-sectional correlation that he found.

So similar, but he also looked at 15 emerging market countries for the 24-year period, 1988 through 2011. And he found a even more negative cross-sectional correlation of -0.41. So all that evidence pretty clearly suggests that countries with stronger economic growth, at least historically have had lower stock market returns. Is that just a random chance result? I don't know, probably not. There's some pretty good reasons why we would expect that relationship to be persistent. One of them is high growth expectations. So I mean, people look at China 30 years ago, and say, there's a lot of growth potential there. So that gets priced into the market. That's one thing. People, as we know, are often willing to overpay for growth, which drives down expected returns.

And then the other one that I find to be pretty compelling, is that when you have growing profits in a country or a sector, like growing aggregate earnings, if those aggregate earnings are being spread across increasing number of companies, or increasing number of shares in existing companies, because new businesses and existing businesses need to raise capital to meet the demands, that's going to spread the aggregate earnings across a larger number of shares. The effect of that can be the your earnings per share, which is what matters to stock valuation or stock returns that per share earnings can lag pretty substantially behind aggregate growth and earnings.

So if we take economic growth as a big piece of pie, if lots of new businesses are forming or existing businesses or raising new capital to meet the demands of that economic growth, you can end up with a huge gap between aggregate earnings growth and earnings per share growth. A pretty cool place to look at this trend is in a war torn and non-war torn countries. So this is what William Bernstein and Rob Arnott did, a couple of our guests, in their 2003 paper. They looked at 1900 to 2000 war torn and non-war torn countries. And they found that the war torn countries clearly had their economies devastated by war, and they were selected for this analysis on that basis. And then within a little bit more than a generation, their GDP had caught up to or surpass the GDP of the non-war torn countries. That's pretty significant economic growth to go from close to zero to looking like the countries that had not been devastated by war.

But the growth and their dividends, which is what they used to measure as a proxy for per share earnings, their dividend growth trailed their economic growth by about twice as much as non-war torn countries. So the war torn countries catch up in terms of aggregate economic growth or per capita economic growth. You can look at it either way, the gap is bigger for aggregate growth. But anyway. So that gap is larger for these countries that had to recapitalize to regrow their economy. So it's evidence supporting what I was saying earlier about that. That's pretty interesting.

And then China, I think, is a very interesting anecdotal example. It had, as everybody knows now, massive economic growth over the last 30 or so years. And if you look at its stock market performance over the full period, it's been terrible. That one's anecdotal. It's not a big sample. But it's very interesting to see like, we'll put a chart up in the YouTube version of this. It's compared to developed markets, which you'd expect if you looked at GDP growth, you would think, China has have done really well in terms of their stock returns, but it's been terrible. You're much better off investing in the lower growth, lower GDP growth developed markets than you were in China. Okay.

So that's, should you expect higher returns from emerging markets because they have higher economic growth expectations? No. You should actually expect the opposite, at least, if you believe in theory and evidence. Now, another reason that I think is pretty interesting to think about how much weight should he give to emerging markets, not because they have high economic growth expectations, that's not a reason, it's maybe a reason to underweight them, if anything, but this thing, I think, is quite interesting. So the emerging markets have a much larger footprint, if you measure them by their GDP, or their population, or their landmass, all sorts of different ways that you can measure how big as that market. Their weight by those measures is much larger than their market capitalization in like an MSCI All Country World Index. So why is that?

One big reason is that index providers tend to focus on investable market index from the perspective of a global or a foreign investor foreign to that country. So any countries that have foreign ownership restrictions, that's going to reduce the size of the investable market from the perspective of a foreign investor. Even in Canada, we have this funding for some types of companies. There's a difference between a domestic index and a foreign index if you look at different Canadian index funds or indexes. And then China's A-shares is another good example. So they've got foreign ownership restrictions. MSCI excluded them from the index until 2018. And even now, they only allocate 20% of their actual free float capitalization to the MSCI indexes.

And then the other big contributor to this underweight relative to economic footprint is that free float word that I just used, that measures the value of shares that are available for trading. And it excludes shares owned by things like state owned enterprises or company founder shares. Now, if you look at emerging markets and developed markets, typically the free float weight as a percentage of total company value is going to be much higher in developed markets than it is in emerging markets. So that reduces, again, the weight that you're going to get it in an index, because they're measuring it by free float than the actual size of those financial markets. So if you're looking for a true reflection of the size of the market, maybe you would want overweight emerging markets based on that piece of information. But we continue.

Emerging markets tend to be more volatile than developed markets. But volatility on its own doesn't matter a whole lot. Well, it can. What matters is the volatility relative to a portfolio. Like if you're looking at a volatile asset, you don't necessarily care that it's volatile, you care how it's going to affect the volatility of your overall portfolio. So emerging markets are volatile, yes, but they do also have a diversification benefit in a portfolio. Now one of the reasons for that diversification benefit is probably the fact that a lot of emerging markets are not fully integrated with global developed markets. An integrated market is fully open to foreign investors and for domestic investors to own foreign assets. So that means foreign investors can invest in the companies listed in that country and domestic investors to that country can invest in foreign assets. That's an integrated market.

A segregated market is completely closed in both directions. So if you think about an investor in a country who can't invest outside of their own country, and no companies in that country can raise capital from foreign investors. In that case, only local economic risks are going to matter in determining an asset's expected return. And expected returns are going to tend to be higher because investors can't diversify. But then you think of an investor in a country like Canada, where markets are pretty open, we can invest globally and companies can raise capital from foreign investors. So investors in Canada are going to tend to assess expected returns based on the risk contribution to a broader portfolio as opposed to just local risk factors.

Cameron Passmore: Exactly.

Ben Felix: So in a segregated market, you're going to have assets priced just based on those local risk factors, and expected returns are going to tend to be higher, because you can't diversify your risk. And then in an integrated market, you're going to expect as has to be priced based on their contribution to the risk of the overall market portfolio. And therefore expected returns are going to tend to be lower due to that diversification effect. So that's market integration, very important for emerging markets.

Now, when I talk about expected returns being lower for markets that integrate with global financial markets, that sounds maybe bad to investors, but for the real economy in that country, it's actually really, really good. They want lower expected returns. Lower expected return is lower cost of capital to the businesses in that country. So when you're a business in whatever country with a segregated market, and you're deciding what projects to invest in, well, your cost of capital is going to be high. But as the market integrates, and liberalizes, meaning foreign capital can start flowing in and domestic capital can flow out, you'd expect cost of capital to go down, meaning more projects become viable.

And there's some really interesting empirical work that Cam Harvey has done on this, a couple papers from the year 2000, foreign speculators and emerging equity markets and equity market liberalization in emerging markets. And he found empirically exactly what I just said that when countries liberalized, when they open up their financial markets, expected returns do tend to fall and GDP does tend to increase. So that's quite interesting. Now, the other implication for investors in emerging markets is that if you're invested before complete liberalization, you would expect to earn an unexpected return. You'd expect to earn a premium, because if you own the stocks in the market, pre-liberalization, discount rates are going to be relatively high. And if markets are liberalized, discount rates are going to fall. When discount rates fall, prices increase.

So that sounds pretty cool. But you of course, can't time when the markets going to be liberalized. And even if you could time when it was going to be liberalized, you can't time when it's going to be integrated. Those are two slightly different things. Even if a market is liberalized, it's not guaranteed that it will integrate and it's not guaranteed how quickly it will integrate and all that kind of stuff. So that's a potential boost in returns that if you could predict it, it might be nice, but of course you can't. So a partially integrated financial market can deliver a diversification benefit in a developed market portfolio, in a global portfolio and a high expected return, because there's still that local risk pricing.

But as emerging markets liberalize and start to integrate with global markets, which allows foreign investors in, expected returns should fall or the covariances with the market portfolio should increase as foreign capital absorbs the diversification benefit that otherwise would have existed or did exist before market integration. And that's an arbitrage right like a an asset with a low covariance with the market and a high expected return. That's a free lunch. And its price is going to be bid up or its expected return is going to fall to the point that its expected return matches its risk contribution to a diversified portfolio. And that's just basic CAPM Portfolio Theory. Thinking.

So I mentioned market integration, segmentation being important. The extent to which emerging markets are integrated is an important question to think about for people considering investing in emerging markets. There's another Cam Harvey paper, he's done a ton of great work on emerging markets with co-authors. So he's got a 2010 paper, What Segments Equity Markets? And he finds in that paper that emerging markets have become more integrated over time, but they are still more segregated than developed markets. So that implies that there is still a diversification benefit, although it has declined over time. I look at this just using MSCI World and MSCI Emerging Markets from 1989. And I did a just a decade by decade look. And we'll put the chart in the video. Cameron, you can't see the chart. I didn't put it in our notes.

But it's a monotonic increase in monthly correlations over each decade. And then the most recent time period ... It wasn't a decade, it was from 2018 until now. The correlation has increased to 0.81. So it's gone up over time for sure which matches with the idea that markets have become more integrated, but it's still an imperfect correlation. So there is still a diversification benefit available for adding emerging markets. Okay. So we've talked about expected returns, we talked about variance, we talked about risk contributions to a diversified portfolio. All of that is mean variance CAPM Portfolio Theory. But another one of Cam Harvey's big contributions to finance that he talked about when he was a guest on our podcast is the idea of co-skewness.

So how does an asset contribute to the skewness of a portfolio, which is another moment in the distribution. So we've got the mean, we've got the variance, and now we're talking about the skewness. It's like the asymmetry of the distribution. So negative skewness means you're going to have more good returns than bad. But you can have some really, really bad returns. And stock returns in general, exhibit that negative skew. But with emerging markets, it's more extreme. I mean, you can think about as disaster risk is an easy way to describe it. So because emerging markets exhibit more negative skewness than stocks in general, we start to worry, okay, how did that affect the overall portfolio. And then, importantly, it's the co-skewness because again, in that Portfolio Theory idea, we care about how an asset affects the skewness of the overall portfolio, we don't care as much about its standalone skewness.

So Cam Harvey has got another paper, Drivers of Expected Returns in International Markets. And he shows that emerging markets do have significantly higher co-skewness with the MSCI World portfolio. So adding them to the developed world does increase the overall skewness. Now, people don't like that, people want negative skewness because it's pain, like that's risk, that's real financial risk. So investors demand compensation for it. And that's one of Cam Harvey's biggest papers that he's written is in the Journal of Finance, Conditional Skewness in Asset Pricing Tests. In that paper, he talks with the theory behind it and he also shows the empirical result that there is a significant negative co-skewness premium. So it's a another risk premium.

Now, some people may hear that and think I want that. I like risk premiums. I think it's a little different. I think skewness is a little different from volatility. And if you look back in the historical data, the type of disaster risk that has shown up in emerging markets, like we talked about that negative co-skewness, what does it actually look like? Well, it doesn't look very good. If you look at the developed and emerging markets portfolios from 1900 through 2020, emerging markets have actually underperformed developed markets for the full period. Now, a lot of that comes in a really bad left tail, negative skewness period from 1945 to '49.

So Japan lost, we talked about this at our stocks, bonds and war episode, Japan lost 97% of their market value. And Chinese markets in that same little 1945 to '49 period, Chinese markets were closed, following the communist victory. And there were some other really poor performing countries in that same period. But those two big examples, they really illustrate the left tail risks that can show up in emerging markets. Now, it will be easy to say and in fact, Dimson, Marsh and Staunton do say in their Global Returns Yearbook that I pulled that data point from, that that type of collapse couldn't happen today. It's unlikely to happen today. But you look at emerging markets, they generally have more political risk, they're generally less developed stock markets, and they've got tighter controls on foreign investors than developed markets do.

I see that like that. It's unlikely to happen again. Is it? I don't know. I don't know if anybody has the answer to that question. But I don't know if we can just look at the history and say, that one really bad left tail event, it characterizes emerging markets in general. No, that's not going to happen again. I don't know if you can say that, especially when you look at what's happening with Russia right now. Russia is down 100%, basically, and it didn't make up a huge, huge portion of the emerging markets index, but it wasn't zero. It made up a portion of the index. And it's been excluded now. It's out. Like, from the index calculation perspective, it's gone to zero, they've removed it from the index at I think a -99.9% assumed return. So it did happen. How can we say that it can't happen again what it just did. For a small market, fine, but still.

So that risk premium for the negative skewness, it's there for a reason. And maybe you won't get hit with extreme left tail event. And if you don't, from 1960 to now, emerging markets did outperform developed markets, because that extreme left tail didn't show up. I looked at 25 year rolling periods from 1900 to 2020. And emerging markets have beaten developed markets 42% of the time. I don't know. I don't know. that left tail risk, it's compensated, fine. But if it shows up in your investment lifetime, there could be a lot of pain. Factor premiums in emerging markets. Just like in other markets, their returns in emerging markets do seem to have a multi factor structure of expected returns. That's something that you can take advantage of there just as you can with anywhere else.

Interestingly, the premiums in emerging markets have shown up recently when value died in the last 20 years in the United States, value in emerging markets was doing just fine. So value, of course being stocks at low prices relative to their business fundamentals, many of our listeners are familiar with what a value stock is. Typically, they outperform over most periods. But the last 20 years in the US, ending December 2021, value stocks have trail the US market by 1.69% per year. That's bad. Like that hurts over 20 years. That's a value index, that's a heavy tilt toward value and they're not example. Like I mentioned, that's led a lot of people to say, well, value is dead, or the metric that people are using, like that was a book to market value number, maybe value is not dead, but book to market is dead, whatever.

But over the same period, emerging markets value has beaten the emerging markets index by 1.91% per year. And it's beaten the US equity market by 2.77% per year over that same 20-year period. And then, of course, other factors like company size and profitability, they have also had positive premiums in emerging markets. So emerging markets are volatile, but they do offer diversification to a developed markets portfolio. They've got high expected returns. Some of that's from partial segmentation or incomplete integration with global markets. But you've also got the skewness, which is probably priced, but if the extreme event shows up, it could be pretty uncomfortable. I mean, I guess it's like the opposite of a lottery, right?

With a lottery, you expect to lose money by buying inexpensive lottery tickets. And if you win, it's going to have a dramatic effect on your life. With negative skewness, it's the opposite, right? You expect to collect smaller positive premiums. But if you get the negative left tail, it's going to be disastrous.

Cameron Passmore: Right. It's a good analogy.

Ben Felix: And that shows up in the data where emerging markets have underperformed because of that enormous left tail. So definitely a unique asset class. But then the last thing to think about is costs. So we might say so far, okay, this sounds all right. Maybe I do want to have a larger allocation to get some of those higher expected returns. And I'll take that. I'll take the gamble on the negative skewness. Sounds fine. And look at those factor premiums. They look pretty good. But the other big one for emerging markets is costs. They're expensive to invest in, which makes sense. Like I mentioned earlier, their financial markets tend to be less developed, so it shouldn't come as a surprise.

But if you compare XEC, which is the iShares MSCI Emerging Markets IMI index ETF to XEF, which is the developed markets index ETF, the EAFE IMI index ETF, just on the management fee and trading expenses, XEC is about five basis points more expensive. Not a big deal, five basis points. Foreign withholding tax is where you're going to get killed though. When a stock in a country pays a dividend to a foreign investor, the source country will often withhold some tax. And withholding tax in Canada is typically recoverable if it's withheld for investments that you own in a taxable account, because you can use it as a credit to offset your Canadian taxes. But in a registered account like an RRSP or a TFSA, the foreign withholding tax is not recoverable.

Now, why does this matter for emerging markets more so than developed markets? Emerging markets tend to have higher yields than developed market stocks For the reasons that we've talked about, they have lower prices for risk related reasons. So that means that more of your returns in emerging markets are coming in the form of foreign dividend income. Now that on its own increases your cost of ownership, regardless of account type, because in a taxable account, you're paying tax on foreign dividends as income. So it's inefficient in a taxable account to have a higher yield. And then likewise, in a non-taxable account, the unrecoverable withholding tax is going to be higher as well, because you've got the higher yield. But you've also got the fact that emerging markets tend to withhold more than developed market countries. So you're getting higher yields, you're also getting higher withholding tax rates. So it's a bit of a double whammy.

And then there's one more detail that [crosstalk 00:44:02]. I know. If you own a Canadian listed ETF that owns a US listed ETF of emerging market stocks, rather than owning the underlying stocks directly, you get hit with a second layer of foreign withholding tax. So in Canada, at the moment, there are no Canadian domiciled emerging markets index funds that target large, mid and small caps. So investment market index funds that also hold the securities directly. So like XEC and VEE, they hold their US listed equivalent at the moment. As the funds get more scale, maybe they'll transition to holding individual securities, I don't know what their plans are there.

So I looked at the unrecoverable holding tax cost for XEF which is a developed market index fund which does hold the securities directly in that fund. In a taxable account, you'd pay 0% If you can offset the foreign taxes with Canadian taxes. So it's fully recoverable in a taxable account. But with EXC, because there are two layers of holding tax, one of the layers is not going to be recoverable even in a taxable account. So I estimated about 30 basis points that you're going to pay on XEC even in a taxable account. You can recover the layers withholding tax from the US when the US ETF pays a dividend to a Canadian holder, you can offset that. But the second layer, even in a taxable account is going to be lost because the foreign country pays a dividend to the US ETF and then the US ETF pays a dividend to the Canadian listed ETF. So you lose one of those permanently. It's unrecoverable.

And then in a TFSA, it's even worse. In a TFSA XEF, the developed markets ETF, it is going to have some unrecoverable withholding tax, but it's going to be about 20 basis points, by my estimation. And XEC in a TFSA, you're losing more than 70 basis points, because you're losing two layers of unrecoverable XEC tax in the TFSA. So of course, those additional fees and costs add up. Dimson, Marsh and Staunton they actually do in there, I mentioned that I don't know if I agree with their assertion that you shouldn't expect that left tail risk to show up again in the future. But they don't seem to think that's going to be a problem. And they assume in their numbers that emerging markets will deliver a 1.5%, I believe, premium in excess of developed.

So say we believe that's true. So we take the Dimson, Marsh and Staunton number 1.5%. Well, in TFSA, you're losing half of that premium to withholding tax. Plus the fees are a little bit higher, too. So it really does start to eat away. And that's if you believe that. I don't know if I buy the left tail disappearing just because I don't know what the ... Because the internet exists, like what's changed in the last ... I guess lots change, but uncertainty hasn't gone away. Now one alternative is to own an ETF that does own stocks directly. So ZEM is a BMO emerging markets ETF. It's large and mid-cap, not small caps, and generally hold stocks directly. Sometimes it does hold other ETFs. So it's not perfect in terms of holding stocks directly, but it's a little better, but you're giving up small cap exposure. So I don't know, bit of a trade off to think about there.

The dimensional funds that we use in their emerging markets allocation, they do hold the securities directly. So that's nice for us getting the factor tilted emerging markets exposure without the second layer of the holding tax. So then the last question to think about is, I guess the question to think about is how much emerging markets should you have in your portfolio. Additional costs that we were just talking about, they wouldn't matter if we expected a large premium, large enough to offset the costs, obviously, over-developed markets. But I don't think that's a sure thing, as I've said a few times, especially if that left tail decides to show up. It's like I said, it's a bit of a gamble. It's a reverse lottery.

Maybe you go through an investment lifetime where the left tail doesn't show up, and you get the premium that existed in emerging markets since 1960. But maybe you don't. And Russia is a reminder that just because it's 2022 doesn't mean that the left tail has gone away for emerging markets. Now, I don't think it's ... We talked a lot about portfolio theory in this discussion, I don't think it makes sense to run a portfolio optimization process. Like you take your expected return, your covariance, your co-skewness. And you find the theoretically optimal allocation based on those inputs to give you the optimal mean variance, and I don't know what you call the co-skewness, the optimal portfolio.

The output of that kind of optimization is going to be extremely sensitive to the inputs. And all we have is past data or assumptions about the future as inputs. We don't have the actual future. There's a really good chance that the actual future is going to be different than whatever our assumptions are, which means that whatever is deemed the optimal portfolio based on those assumptions is probably not going to be optimal based on reality. But I think with just some common sense, emerging markets, they do deserve a place in a well diversified portfolio. I wouldn't exclude them completely, they are part of the investable market globally.

Over lots of time periods, they have added realized returns and they and they always add a diversification benefit. I would be careful applying an aggressive overweight to the asset class expecting higher returns because of the unique characteristics that these things have. I think the free float capitalization weights that the index providers are using is probably sensible. I don't know if you need to tinker beyond that by adding additional emerging markets to make up for the difference between their economic footprint and their free float capitalization. I mean, you could. I don't know if you need to.

I think seeking exposure, as with any equity asset class, seeking exposure to multiple risk factors makes a lot of sense. And the good news for investors, and yes, we need to update our model portfolios. But the good news for investors is that Dimensional Fund Advisors and Avantis both now have factor tilted emerging markets products that are pretty low fee, they're US listed though. So for the Canadian investors, you are going to have to deal with that extra layer of withholding tax which is a hassle. And then one final point that I want to make on emerging markets before we sign off. I didn't really know where to fit this into this discussion, but I thought it was important enough to include it because it can trip people up.

Mixing and matching investment products from different providers can lead to problems when you start getting into emerging markets. The biggest example is Korea. That's the second largest emerging market by capitalization after China if you follow MSCI's indexes, but FTSE Russell classifies it as a developed market. So that means that if you buy a developed market product from MSCI and then emerging markets product from FTSE, well, not from those companies, but index funds tracking those companies, you will have excluded South Korea completely from your portfolio. And then the other example is Poland, which MSCI classifies as emerging and FTSE classifies as developed. I mean, that's a small detail, I guess. But it's just something that you got to know when you're building a portfolio that includes emerging markets. That's it.

Cameron Passmore: Amazing analysis. And I'm sure very welcome based on a lot of the feedback we've been getting waiting for this.

Ben Felix: I hope so. I hope so. Reviewing the data on the factor premiums in emerging markets, I didn't put this in there, but the dimensional funds, because they've been around since the mid to late '90s, the dimensional funds that invest in emerging markets. Those big premiums that have shown up there were captured successfully, at least a large portion of them, by the dimensional emerging markets, like the emerging markets value portfolio has done very well. It's worth noting that those factor premiums aren't just on paper, like there are products that have existed over the period that they showed up and they were able to be captured. So I think it's definitely worth considering factor tilting even in that asset class, especially now that there are more products coming online that target those exposures.

Cameron Passmore: Awesome. Okay. So we're good to go to our conversation with Morgan.

Ben Felix: Let's do it.

Cameron Passmore: So Morgan, welcome back to The Rational Reminder.

Morgan Housel: Thanks for having me. Happy to be here.

Cameron Passmore: It's great to have you play a role in our reading challenge. First, congratulations again on the success of your book, The Psychology of Money. It's currently the most popular book among listeners that are participating in a reading challenge.

Morgan Housel: That's great to hear. That's awesome. I love it.

Cameron Passmore: And also congratulations on the great interview last week with Tim Ferriss.

Morgan Housel: Thanks.

Cameron Passmore: So tell us, Morgan, why do you think reading is so important?

Morgan Housel: I just think it's so easy for all of us to get trapped in our own little life bubble. And assume that what we've seen in the world firsthand is how the world works. Everyone does this, naturally, I do it. I'm a product of what I've seen in the world. But reading is just the best way to just expand your mind to ways that the world works that you've never imagined. And just trying to put yourself in the shoes of somebody else. If you think that you can get inside of somebody's brain who lived in the 1800s or the 1500s or 800 BC for like 15 bucks, that's pretty amazing. And so for me, it's just an endeavor, it's a tool to try to see the world through someone else's shoes through a different lens that I had not seen before.

Ben Felix: Very cool. What's your personal reading habit.

Morgan Housel: Two things that I think people get wrong with reading is that one, they only read things that they know they're going to enjoy. And two is they feel that they are required to finish the books that they start. Those are the two problems that I think push people away from reading that create people who don't want to read. And so what I do as a reader is I will try, I will start any book that looks even remotely interesting to me. If there's like the slightest little nugget of like, that's kind of interesting, I'll start reading it. And you can do this for free with almost any book by getting a Kindle sample. You get a free sample from Kindle, it'll give you like the first 20 pages of any book that's out there. So you can try to start reading it.

And then the second thing that I do in this task is I will quit books very quickly. If I start reading a book, sometimes the first page, or the first five pages, I can tell very quickly, like, no, this is not going to work for me. This might be good for someone else but like the style of the writing or the insight, whatever it is, this is not going to click with me. And then I'll just abandon it. And I have no guilt, I don't feel ashamed, not at all to quit and move on to the next one. There's millions of books out there, you have to have that filtering process to go through. So that's it. That's how I do. I try to cast the widest net that I can, and then kill off the bad books as quickly as possible.

Cameron Passmore: Speaking of filtering process, your book is on so many people's recommended book list, which must feel great for you as an author. So how do you decide what you start reading?

Morgan Housel: I mean, I have a wide variety of interests. I'm a financial writer, but I almost never read investing books or finance books or economic books. What I'm really interested in, in finance is the behavioral side of money, like how do people think about risk and greed and fear? And those topics like risk and greed and fear apply to so many different industries, and fields and professions. So I read a lot of history. I read a lot of biographies. I like reading about biology and military history and all kinds of different things. I'm reading a book right now by Will Durant called the Heroes of History that just talks about some of the most important characters throughout the whole human civilization, the whole time span we've been around, all kinds of different fields.

I just finished a book on Charles Lindbergh, the pilot who flew across the Atlantic for the first time. All kinds of different things that might be interesting to me. But I feel like a lot of people to answer your question in reverse, what do most people get wrong? A lot of people only read the genre that they're really interested in. They approach reading like they do with music. And with music, most people are like, I like one of these genres. I like classic rock, I like hip hop, and they only listen to that. Because there's very few people that love hip hop and classical music. It's usually one or the other. But with reading, I think most people can really enjoy a huge variety of genres. So when I'm looking at books, anything that's slightly interesting, I'll dive into or at least try it.

Cameron Passmore: So in listening to your interview with Tim last week, I jotted down ... I sent myself an email a few books I wanted to read based on your conversation. How do you correlate the ideas of what to read? And then how do you put them in order afterwards?

Morgan Housel: I would say almost every book that I start reading, I read on somebody is recommended list. That's the majority of it. Here's what will happen a lot of times, sometimes I'll be reading a book, and the author will quote another book with a really insightful paragraph, a really insightful sentence on a topic that I'm now interested in. And I'll be like, "Let's go check out that book. This author just quoted this one sentence from this book. But that sounds really interesting. Let's go check it out." I'll download the Kindle sample for free and see if I like it. Between like recommended lists that I stumble across and that second version of just like quotes within another book that I'm reading, that's where like 90% of my book recommendations come from.

I would also say that I don't read a lot of new books. And this is another flaw I think a lot of readers have is that they will only read books that like came out in the last 12 months. And that's what's by and large going to be on the most recommended list, the new stuff. But all good books, at least, are timeless. And there's so many books that were written 50 years ago, 80 years ago, 20 years ago that are wonderful. And they're not on any bestseller lists anymore. They're not on anyone's recommended list, but they're amazing books.

So I think if you can really like take out the filter of I'm only going to read new books, remove that and just expand it all throughout the last 100 years last 200 years. That's really interesting. If you go back more than about 100 years, even books written in English tend to be written in a prose that is really dense and hard to get through. It's like on the verge of Old English, like what are you trying to say here? So if you go back a long time, then it gets difficult. But definitely books written 80 years ago, 50 years ago, some of those are amazing.

Ben Felix: This reading challenge that we have going on is taking place in our online community. A lot of people are discussing the books they're reading to Cameron, and almost every podcast episode talks about books that he's reading. Do you take the time to talk about the books that you read with other people that you know have read them?

Morgan Housel: Not really. It tends to be kind of a private endeavor. I don't know if it's good or bad. I don't know if that's the right way to do it. Sometimes, if a friend recommends a book, then all I'll shoot him or her a few text messages, like I like this. I like that. But again, I don't know if this is good. When you bring it up, I think it's probably not good. But no, I think reading for me is a pretty personal thing where I read and I try to take a couple of notes.

The thing for me too, is that since I'm a professional writer, always when I'm reading, I have this filter in my head of like, how can I turn this little thing I just learned into my next article, into my next book? Most people don't have that bug in their head but that's always what's in my head. So I'm always taking notes of like, this sentence reminds me of something that I read a couple months ago. Maybe I could put these together for my next article. So that's a bug in my head that is constantly there for how I'm going through these books and what I'm looking for.

Cameron Passmore: Something you and Tim talked about last week was how do you keep ideas from books? Do you have a process like he described in terms of capturing ideas for later reference?

Morgan Housel: I have a very bad way of doing it that I wish I had a better. I'm totally open to suggestions of what I do. For years, I would read on Kindle and on Kindle, you can highlight and search. It's pretty good. About two or three years ago, I went back to physical books that I far prefer, it's a much better experience, but it's much harder to take notes. So I'll tell you the terrible thing that I do. I take pictures with my phone of the page. Sometimes I'll be like pointing to a paragraph, I'll take a picture of it and try to save it for later. It's the worst system especially for searching after the fact. I have a folder on my phone called Book Notes. It has like thousands of pictures of pages. And sometimes I take a picture of the page, but I don't even know what book it came from. So I can't like go back and find it later. It's a terrible process that I wish I could do better. So I'm the last person to ask for advice on this front. But it's something that I hope to work on.

Cameron Passmore: So something I've done, I talked about on our last podcast was, take the note in the Kindle, then uploads to Amazon and then use the apple Readwise which then captures it, puts it in order based on the book and then it also shoves it over to your Evernote account so you can use it after. So there's an idea for you.

Morgan Housel: I tried one time. Have you seen the optical pens? It's a pen and it has a tiny little optical camera at the end and you can scan the physical book. I got one of those and I was really excited and optimistic about it and it was total junk. It didn't work at all. It would get about half the letters right. So you would scan it and then you go back to your computer to check it and it was just complete garbage. You couldn't make any sense of it.

Cameron Passmore: So any last words of advice for listeners who truly have an objective to read more this year?

Morgan Housel: I think for most people, the hardest part about reading is just finding the time to do it. And to me, this similar to investing where it's like, if you're young and you don't have that much money, like just start. Like a little bit of money, like compounded over time, it's great. That's the right advice. And for reading, it's like, hey, if you can do it 10 minutes a day, great. If you can do 10 minutes a day, 7 days a week, 365 days a year, you're going to read some good stuff over time. I tend to do most of my reading before bed and in bed. I'm the kind of person where it's like, once I get in bed with a book, I fall asleep quickly. So a lot of my reading is only 10, 20 minutes at a time doing it. But I feel like if you do that consistently over time, every day, you can really get through some good material.

Cameron Passmore: It's awesome. Well, Morgan, thanks for the inspiration. Thanks for joining us. It was great to see you again. So thanks so much.

Morgan Housel: Thanks, guys.

Ben Felix: Thanks, Morgan.

Cameron Passmore: And thanks, everyone, for listening this week.