The transcript from this week’s MiB podcast with Ed Mendel is below.
You can stream/download the full conversation, including the podcast extras, on Bloomberg, iTunes, Overcast, and Soundcloud. Our earlier podcasts can all be found on iTunes, Soundcloud, Overcast and Bloomberg.
This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, BLOOMBERG COLUMNIST: This week on the podcast, I have an extra special guest; his name is Ed Mendel. What can I say about Eddie? He is the co-founder of Ned Davis Research which is an enormously successful institutional research shop, sold to Euromoney about six or seven years ago for a price tag that is Googleable but I could tell you it’s in the hundreds of millions of dollars.
He very successfully took the genius that was Ned Davis and wrapped an entire business model around it. And while Ed himself is very humble and credits Ned’s genius for the success of the firm, really he is one of these underappreciated people in finance who took a great idea and found a way to turn it into a very, very successful business. I don’t think there would have been a Ned Davis Research without Ed Mendel’s contributions.
He is also very actively involved in philanthropy. He is one of the minority owners of the Atlanta Falcons and just an all-around inspirational guy. I’ve relied on his insights over the years not just for helping to put together the forerunner of Masters in Business; we discuss a little bit about how his contributions actually helped lead to the show, but also his insights about running a business and managing people and managing capital and assets and being able to think about the various ways that business is done properly, intelligently, ethically and just being smart about how to run a shop.
And so, I have a tremendous amount of gratitude to him personally for sharing his insights with me over the years. He mentors a lot of people. And he’s just one of these people who aren’t a household name but have had an enormous influence on finance and business. And even though you may not have heard of him, you probably should have.
So, with no further ado, here is my conversation with Eddie Mendel.
My special guest today is Ed Mendel. He is co-founder of Ned Davis Research as well as the brokerage firm Davis, Mendel & Regenstein which were both founded in 1980; collectively they’re known as the Ned Davis Research Group.
Ed helped to build one of the largest stock and bond research followings on Street working closely with Ned Davis since 1971. Their research is best characterized as an objective, disciplined approach to investing, focusing on risk management, primary trends and avoiding major financial disasters.
Ed has been associated philanthropically with numerous national and Atlanta charities. He is also a minority owner of the NFL football team, the Atlanta Falcons.
Ed Mendel, welcome to Bloomberg.
ED MENDEL, CO-FOUNDER, NED DAVIS RESEARCH: Thank you.
RITHOLTZ: So, I’ve been looking forward to this for a while. I think I know you for more than a decade, maybe close to two decades because of your work at Ned Davis Research and being a partner to Ned.
Let’s ask the first question. You guys began in the middle of a bear market in the 1970s, in your work in markets, how did that impact your psychology the rest of your career?
MENDEL: It got us focused, and we really became an institutional research firm and we were very fortunate that when we started, it was 95 percent retail and it ended up being 95 percent institutional. And so, it wasn’t a matter of anything but being at the right place at the right time with the right product. And I just knew that Ned was a genius and that we would somehow be successful.
RITHOLTZ: The ’70s, you guys were at a brokerage firm; how did you and Ned hook up? How did you guys find each other?
MENDEL: I started at J.C. Bradford in Nashville and Ned came home from Harvard and started working for J.C. Bradford, I went in and introduced myself to Ned and we struck a friendship and eight years later we left to start our own firm.
RITHOLTZ: You mentioned being, launching your career in the 1970s and Ned Davis Research in 1980, you started mostly at retail but it eventually morphed to institutional. Was that because the retail investor was not a participant? Was it the psychology? How did you shift to such a heavily-weighted institutional practice?
MENDEL: Bradford I don’t think really understood what they had on their hands with Ned. So, I was one of the first people to go out and market Ned in Texas, in the State of Texas and in Houston. And going backwards, I was a retail broker and my career really got helped tremendously by May Day, May 1, 1975.
RITHOLTZ: When all the commission structures changed.
MENDEL: Yes. So, I became really one of the first discount brokers. And so, it was $0.82 to sell 100 shares of IBM but Merrill Lynch and Kidder and PaineWebber would not let you discount, so I went around to all the wealthy people I could find in Atlanta and offered them a 40 percent discount.
MENDEL: So, I became the biggest producer at Bradford. But then, I started asking Ned to leave and we were going to leave in ’78 and we ended up leaving in 1980 which is another story which I’ll get to later.
RITHOLTZ: OK. Well, let’s get to it right now. You started in 1980; why did you wait until that year?
MENDEL: We were going to leave in ’78 and Ned was going to move to Sarasota, Venice, Florida and we were going to start the firm. But Bradford came to Ned and made him a partner and he stayed. But then in 1979, he went to Jimmy Bradford and told Jimmy that he wanted a computer and Jimmy told him I’ve seen computers and you’re doing fine just the way it is.
And so, Ned went out on his own and spent $35,000 on a Hewlett-Packard computer that did graphics. And within six months you could buy a chip that made it 10 times faster and within a year you could buy the computer with the chip in it that was 10 times faster for a total of $7,000.
RITHOLTZ: And I recall Ned saying that he had pitched Bradford on technology and computerization and the ability to crunch a lot of numbers, and the response was sort of hey, what you’re doing is working fine.
MENDEL: Yes. Jimmy said he’s working just fine. But Ned was such genius and among many other things, it was clean data. We cleaned data for Ibbotson and S&P and we were known for our charts and our data among many other things.
But the other great story that came out of that is Ned told me I think the fourth biggest lie ever told, and he told me when we started that we were going to need a programmer but just for a year. And I think when we sold the company we had 14 programmers.
RITHOLTZ: So, the fourth biggest lie is we’re going to get a programmer but just for a year.
MENDEL: Just for a year.
RITHOLTZ: Let’s talk a little bit about you guys hanging your shingle in 1980, really the final innings of a 16-year bear market; how did you guys have the nerve to launch into that environment and how did you get clients?
MENDEL: We started and Ned thought that within four months we would have the products that he had in his head up and running, but it was two years later.
MENDEL: So, we never took any money out of the business for two years and put it back into the business completely and totally.
MENDEL: And I had a big retail business and so, the retail helped carry us until we got up and running with the institutional business.
RITHOLTZ: And that eventually morphed to almost all purely institutional.
MENDEL: Totally, which was a blessing.
RITHOLTZ: Why do you say that?
MENDEL: Retail is where’s my check, where’s my dividend, I’m going to sue you. It’s just a…
RITHOLTZ: It’s a tough gig. It really is.
MENDEL: Yes. And so, if you’re going to do it, you might as well get paid big. And we were blessed that as far as the right time and the right place, we got paid in soft dollars, in commissions.
RITHOLTZ: So, explain soft dollars because a lot of listeners may not be familiar with it.
MENDEL: Well, we would go to the State of Texas and tell them we wanted $25,000. And if I went to you and said I have this service and you’ll like it but you had to write a check personally for $25,000, you go I really like it, it’s a lot of money.
RITHOLTZ: That’s a lot of money.
MENDEL: But the State of Texas was going to buy a million shares of Boeing through one of our clearing firms, PaineWebber, Goldman Sachs or especially Bear Stearns and so, they buy a million shares and it’s $0.10 a share back then or $0.15 and give us $10,000 or $15,000.
RITHOLTZ: So, in other words, you guys set up the broker dealer in order to allow, hey we’re going to spend the money on the commission anyway, it might as well pay for the research.
MENDEL: Right. It was other people’s money. And so, that’s what made the business very successful.
RITHOLTZ: Were you ever actively involved in trading yourself or were you mostly doing institutional sales?
MENDEL: Mostly institutional sales.
RITHOLTZ: And so, the business was sold in 2010. Do you still have any involvement? Because I know Ned still does.
RITHOLTZ: So, you are free and clear for seven years now, right?
MENDEL: That’s right. The Falcons and grandchildren…
RITHOLTZ: Is what’s keeping you busy. So, when you guys launched in 1980, who were your competitors? Who was out there selling the sort of quantitative technical research that you guys were doing?
MENDEL: Again, we were just at the right place at the right time with the right product. And one of the products though ended up by accident was the chart service. We did the charts for Ned and…
RITHOLTZ: As long as you’re doing it for him, you might as well make it available for everybody.
MENDEL: Yes. And we really didn’t have an idea that that would be such a huge hit for client presentations, for marketing and meetings and brochures. And so, we had a huge publishing complex by sending out these huge chart books that were three or four inches thick and then we got into customized research.
RITHOLTZ: So, let’s talk about customized research because at present and for the past decade or so, Ned Davis Research generates 2,000 custom research projects a year. Am I getting that right?
MENDEL: It’s been six years since I’ve been there but…
MENDEL: But more or less.
MENDEL: A lot. A lot.
RITHOLTZ: So, what’s a typical request? How has this ramped up over time? That sounds like a lot of specific individualized research or is there a ton of overlap from one to the next.
MENDEL: Again, some of the best projects and ideas have come from our clients. And so, Ned is just incredible about devouring data and information and studies. And so, we had a whole research department of people that would do projects that other people thought of doing or they would want a model or stuff built just for them on a proprietary basis. So, once we got in their back pocket, we stayed there.
RITHOLTZ: So, let me share one of my favorite Ned Davis quotes and you could perhaps give me a little color on it.
“We are in the business of making mistakes. The only difference between winners and losers is that winners make small mistakes, while losers make big mistakes.” Discuss.
MENDEL: Well, Ned is also famous for saying the only thing worse than making a forecast is sticking by it.
MENDEL: And so…
RITHOLTZ: He famously wrote a book Would You Rather be Right or Make Money.
RITHOLTZ: Being Right or Making Money I think is the exact title.
MENDEL: Being Right or Making Money. And risk control, I’m reminded of one of the biggest hedge fund people here in New York once told me, he puts on a trade and then starts worrying about everything that can go wrong. But having a stop loss and controlling risk and not letting a little mistake become a disastrous mistake is incredibly important.
RITHOLTZ: The version of that I learned when I began in the business was, it’s OK to be wrong; it’s unforgiveable to stay wrong and I think there’s a lot to that.
RITHOLTZ: So, I keep coming back to the risk management side of this. How much did really making your bones in the 1970s in the midst of that horrific bear market plus inflation plus 12 percent risk-free treasury yields, how much did that impact the psychology of what you guys were doing? Because you keep talking about and everything I’ve read from both of you is manage your risk, don’t let disasters happen, pay attention to the primary trends, how formative were the 1970s to Ned Davis Research?
MENDEL: Again, Ned’s genius is what I banked on. I realized very early that it wasn’t Ed Mendel Research, it was Ned Davis Research.
MENDEL: So, we…
RITHOLTZ: And I appreciate your humility but you were instrumental in taking his brilliant insights and building a business around it, because left to his own devices, I get the feeling that Ned would be very happy to just stare at the computer, crunch numbers but perhaps not monetize that in the ways that you’ve managed to.
MENDEL: Well, yes, I had to go out on the road and hire the people. Ned did not want to deal with lawyers or accountants and he wanted to do research, that’s his forte. And he did it unbelievably well and he wasn’t distracted. And so, he did not go out on the road a whole lot and so it was left up to me to do the marketing the build the firm.
RITHOLTZ: And that started in 1980, and then 30 years later the firm was sold to who?
RITHOLTZ: You guys built a reputation for being fact-based, quantitative and really one of the first major technical analysis firms. So, let’s talk about that a little bit. You’re an institutional sales person. Ned is looking at charts. How did you perceive the value of technicals for your institutional clients way back in the ’70s and 1980 when you launched?
MENDEL: Ned would be the first to tell you that technical analysis doesn’t work half the time, but neither does fundamentals.
MENDEL: And so, the genius which Ned has is to be able to mesh and look at everything. And so, we also did an incredible deal on sentiment and so we had some of the sentiment charts around. So, Ned’s genius is that he looked at everything.
MENDEL: And he just didn’t hang his hat on technical analysis.
RITHOLTZ: But you were out in the trenches selling the product to institutions.
RITHOLTZ: Did you find that when you were discussing charts, sentiment, everything else, that all the work that was being generated in-house, was there an advantage to working with charts and technicals? Was it different than what everybody else was selling? What made this so successful, because it’s easy to say in retrospect well, we were more wrong than right, but at that time you’re the guy who’s selling is and you don’t know how much wronger or righter it’s going to be.
MENDEL: Well, Ned had incredible historical perspective on the market and everything. And so, we went after — we had a broad-based service; we had like 10 different services. And so, we just didn’t hang our hat on the bond commentary or the stock rankings but through Ned’s hotline which is probably the best historical perspective and Fed watching around and then the chart service where people really depended on us for their client presentations, marketing and meetings and brochures.
And then we added to that where we were doing all this customized research. So, it’s a service business. So, I came from a southern town retail in…
RITHOLTZ: You grew up in Little Rock, Arkansas, is that right?
MENDEL: Yes. But the customer is always right and we tried to do more than our share in relationship. And we tried not to gouge the customers and for value received, we gave them a great total product, but we were very lucky that the soft dollars…
RITHOLTZ: Were able to cover the cost.
MENDEL: And it was painless for them to pay us.
RITHOLTZ: And by the time you guys ended up selling in 2010, I want to say Ned Davis Research was institutionally one of the most widely followed institutional services out there. Is that a fair statement?
MENDEL: Yes. Fair statement.
RITHOLTZ: We know that the early days, Ned was attracted to computers but here we are in 2017, computers are running everything from high frequency trading to analyzing SEC filings to just about anything you could think of. How have computers changed the game of institutional investing?
MENDEL: Again, I’ve been out of the business for seven years and it’s ETFs and the trading that have diminished everything. And it wasn’t the computer; it was Ned’s interpretation of the data and the information. And so, you layered upon the computer, you had Ned’s historical perspective and economic view, monetary view and that’s what made us different.
We had to differentiate ourselves, and so the computer, this goes back to ’82, Reagan deserves a lot of credit for things that he did, but he was very lucky the personal computer came along and created 26 million jobs. But it also made us unbelievably productive, I mean, unbelievably. It used to take us all day to do a mailing list, literally.
RITHOLTZ: And once you started working with the computer in ’82?
MENDEL: It was seconds, I mean, once we got everything up and running. So, it’s the productivity that made us unbelievably successful also.
RITHOLTZ: But the pushback to that would be well, computers were available and they can make everybody productive, why were you guys able to take advantage of it when others didn’t?
MENDEL: Well, again, I alluded to the data; Ned was the first with data and clean data. And so, he could look at 500 charts a day and with a red pen and knows when a chart is a 16th or the slightest bit off.
RITHOLTZ: Just by eyeballing.
MENDEL: Yes. So, one of his many genius things is we were a freak about clean data and there was a lot or probably still is a lot of bad data out there.
RITHOLTZ: Let’s talk a little bit about the modern stock market, how did you guys think about managing risk when you launched the firm in the early ’80s?
MENDEL: I was 30 years old and I was too naive or stupid to really worry. I knew it would be a big success and so, there wasn’t any question that between our retail business in having Nerd as a partner that it was going to be successful.
So, it wasn’t a question of managing risk; it was about putting money back into the business and building it. And so, not taking money out for two years and by hiring sales people and hiring people and programmers and that’s what helped lay the foundation for the thing to be successful.
RITHOLTZ: So, you didn’t take money out for two years and basically the revenue is coming from the high net worth side, but you guys had to be taking salaries, you weren’t just doing nothing.
RITHOLTZ: Nothing, not a penny.
MENDEL: Nothing. Not a penny.
RITHOLTZ: Every dollar went back into the business for two years. And so, you were really paying your dues in that period.
MENDEL: Yes. I remember writing checks for $35 and $70 and cringing.
RITHOLTZ: And cringing. So, at what point did the firm begin to be able to allow the two of you to take a salary?
MENDEL: In two years.
RITHOLTZ: It took two years.
MENDEL: Two years.
RITHOLTZ: And what was it that changed, the launch of the new products?
MENDEL: No. We were building an institutional base that was taking off and we started clearing through Bear Stearns. Ace Greenberg was very helpful in convincing Ned, that he took us aside for his eight seconds to say just come here, we’ll take care of everything. They had an unbelievable clearing operation.
RITHOLTZ: This is Bear Stearns in the early ’80s?
RITHOLTZ: At that time they were the third or fourth largest brokerage firm, is that right?
MENDEL: Yes. They were probably the biggest clearing firm for what we did.
RITHOLTZ: Institutional trade.
MENDEL: Institutional trading. And so, we didn’t have to have floor brokers or clearing or back office. So, the Bank of New York would call up Bear Stearns and buy a million shares of Boeing for a dime.
MENDEL: And they would credit…
RITHOLTZ: Per share.
MENDEL: Yes, and give credit to this one, this one and this one or Ned Davis Research.
RITHOLTZ: So, that’s a $100,000 commission on that transaction.
MENDEL: No. Actually, back then what ever it was…
MENDEL: … we made it so easy for people to pay us.
RITHOLTZ: So, in other words, they would pay for the research via the institutional trades which they’re going to do anyway and really, what the heck is $0.10.
MENDEL: It did not cost them anything.
RITHOLTZ: Right, $0.10 on a share of Boeing then at 50-60 (ph) plus.
MENDEL: Yes. But even then it wasn’t their money.
RITHOLTZ: So, because it’s institutional and other people’s money.
MENDEL: It was a pension fund of Kmart.
RITHOLTZ: Yes. But what they spend, I guess it doesn’t really matter who they’re trading for; what matters is who they’re executing through when we’re the money man, in other words, whether they paid a nickel or a dime or $0.15 didn’t affect their bottom line.
MENDEL: That’s right.
RITHOLTZ: So, OPM and big institutional trading made it easy but you guys are fairly full service, you guys were and Ned Davis still is a fairly full service research shop. If I go to NDR and say I want everything, how much can I spend a year with them?
MENDEL: Again, I’ve been out for six years.
RITHOLTZ: Give me a ballpark from 10 years ago.
MENDEL: Twenty-five, fifty, $100,000, I think.
RITHOLTZ: OK. So, that’s a lot of data, a lot of charts, a lot of custom research.
MENDEL: Yes. But Goldman Sachs used to have 600 cash traders; they have now two. The soft dollar about has diminished.
RITHOLTZ: Two, from 600 to 2.
MENDEL: Yes. Yes.
RITHOLTZ: And that’s computers essentially.
MENDEL: Yes. And also now everything is going to ETFs and volume is actually way down. It’s a very different business.
RITHOLTZ: So, we’ve seen a move towards passive investing from a lot of the mom and pop investors as well as on the institutional side we’ve seen the rise of ETFs and as these two things have happened, we’ve seen a huge decrease in trading volume. What does this mean for what used to be called institutional trading and now is called I don’t even know what. What do you call it these days? Is it just buy side research? How do you describe it?
MENDEL: If you have to pay hard dollars for a service…
RITHOLTZ: It’s tough.
MENDEL: … it’s tough. And you have to justify, and it’s tough. So, people that used to pay us $100,000, I just heard of somebody going to $40,000.
MENDEL: So, it’s the margin gets squeezed and everything was wonderful when you could pay with other people’s money.
RITHOLTZ: No longer.
MENDEL: No. There is still some of it out there, but Europe is going to the MiFID and that’s I think…
RITHOLTZ: It would a hard dollar squeeze as well.
MENDEL: Yes. But the SEC let people off the hook here, but still BlackRock I think went from 220 providers down to 100.
RITHOLTZ: And what does that mean in terms of hard research dollars drying up?
MENDEL: Drying up.
RITHOLTZ: So, you’re no longer as involved in the business as you were. You’re doing other stuff. How closely do you watch the stock market as a retiree?
MENDEL: I get up in the morning and I love reading. And so, and I’m somewhat addicted to the market. So, I get up very early.
RITHOLTZ: I mean’s tough to pull the needle out the rock, isn’t it, Ed, after 40 years?
MENDEL: Yes, it is. Yes, it is. Yes, it is. And it’s still the greatest game ever. And so, I love the game and I love reading and the market is still my number one love.
RITHOLTZ: Are you still invested in the market or have you moved more towards a fixed income portfolio?
MENDEL: A third, a third, a third and…
RITHOLTZ: Stocks, bonds, cash, is that it?
MENDEL: Real estate.
RITHOLTZ: Stocks, bonds, real estate.
MENDEL: Well, the Falcons are a very big investment also.
MENDEL: And we have a big that’s really nice. So, I’m very big on having goals and…
RITHOLTZ: Meaning investing towards goals or just personal?
MENDEL: No. Personal goals. Years ago, I always had something in my wallet of all the goals, and it changes because at 30 it’s very different than 60 or 40 and so, right now accumulating more wealth won’t make me any happier, maybe give more money to charity. But I really don’t want to accumulate any more things except for a Super Bowl ring.
RITHOLTZ: So, let’s talk a little bit about the Falcons. How do you like them and what changes are coming to the NFL?
MENDEL: I’m from Arkansas, so a Razorbacks fan, it was always wait until next year.
MENDEL: And you don’t appreciate how hard it is to get to the Super Bowl and to win it.
RITHOLTZ: It’s the most competitive thing in the world to reach that level; so many things have to go right plus you have to get lucky.
MENDEL: You just appreciate the good times and if everything breaks right but, again, two or three key injuries and…
RITHOLTZ: It’s problematic.
RITHOLTZ: So, the big issue we won’t even talk about — we’ll save the kneeling and the football anthem for later — in general, we’ve been seeing sports, see a lot of pressure with cable, people unbundling and moving to the Internet, what does the future of sports broadcast look like? Is it going to be mobile and Internet, because the idea of television and cable and saying here I’m subscribing to cable and I have to get these 200 channels whether I want them or not, is that going to change — how rapidly is that going to change? We know it’s changing.
RITHOLTZ: What do we think happens?
MENDEL: Again, Jeff (inaudible) in Barron’s basically talks about the sports entertainment is just still one of those things, football, NHL is something that you want to see…
MENDEL: … live.
RITHOLTZ: Right. You can’t read about it afterwards.
RITHOLTZ: You can but it’s not the same.
MENDEL: It’s not the same.
MENDEL: It’s not the same. And so, we have a product that people want to have. And I had a partner named John Emily (ph) who died recently. He was one of the most successful venture people in Atlanta. And he always told me, he says, “Eddie, no matter whether we win or whether we lose, the value of the franchise goes up every day.”
RITHOLTZ: That’s a pretty interesting point.
We have been speaking with Ed Mendel of Ned Davis Research and the Atlanta Falcons. If you enjoyed this conversation, be sure and check out our podcast extras where we keep the tape rolling and continue chatting about all sort of interesting things. You can find that wherever fine podcasts are sold – iTunes, Overcast, Soundcloud, Bloomberg.com, et cetera. Be sure and check out my daily column, you’ll find that on Bloomberg.com. You can follow me on Twitter @ritholtz.
I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.
Welcome to the podcast.
Eddie, thank you so much for doing this. There are two things I have to thank you for. One is, when I first had the idea a decade ago for hey, let’s not ask people what’s their favorite stock or where the Dow is going to be in a yr; let’s find out who they are and how they got that way. Let’s find smart, successful people and say, “So, what can we learn from you?”
One of the very first versions of this show was Ned Davis, we did on the phone; you helped to arrange that. I want to say that’s almost 10 years ago, am I ballpark with that?
RITHOLTZ: So, that was a fascinating conversation and it was so clear after we did it even though it sounded terrible, it was on the phone and I had no idea what the hell I was doing, it was clear to me that wow, not doing four minutes and then a commercial but letting people hey, tell me about this and letting them speak and share their histories, their anecdotes, their experiences was really valuable. And that’s led to a whole run of fascinating people telling me really amazing stories and I have you to help for setting that up to begin with.
MENDEL: Thank you.
RITHOLTZ: The other thing I had to say is when I was thinking about launching my shop, I came to you and said, “Hey, I’m wrestling with these ideas.” And you gave me a lot of really good advice and I want to thank you for that. It was very, very helpful.
MENDEL: Thanks for remembering.
RITHOLTZ: Oh, trust me, I remember everything. So, let’s talk a little bit about football. Are we going to ever see live football on Facebook, Twitter, et cetera? I know there have been some contracts and some announcements made. Are we going to ever be in a situation where I don’t need to be home in front of a television; I could just pull up my phone and watch a game?
MENDEL: I’m a minority owner so…
RITHOLTZ: But you have some insight. Is that something that we’re thinking about?
MENDEL: Yes. They’re looking at all aspects of everything to monetize this, and keep millennials and keep people interested in football. But we have a lot of people at the NFL home office and they’re constantly…
RITHOLTZ: Working away.
MENDEL: … working away.
RITHOLTZ: So, there’s a couple of really interesting things going on in football. And I know you don’t speak on behalf of the league, of the team, so I’m being circumspect in what I can ask you; you’re not an authorized spokesperson for NFL, but you’re certainly an astute observer.
Three things that I’ve been thinking about or aware of; the first is the idea of people’s phones being the most important screen in their life, I have to think we’re going to see Netflix or Twitter or Facebook eventually doing a regular broadcast.
The other thing which we haven’t heard a lot about this year but was pretty big the past couple of years and I’ve been reading about some of the new technologies was the concussion issues. And I’ve been reading about these new helmets that’s supposedly lighter, stronger, more dissipating of energy; how much is technology going to be the basis of a solution for keeping players safer over time?
MENDEL: We recognize that as a big deal and I think $4 million a year I think we were spending on research to come up with safer, better helmets. But it is a big issue and it’s a major concern.
RITHOLTZ: The most recent piece of technology I was reading about is this new helmet, a couple of, I don’t remember if it was MIT or Caltech, but a couple of professors developed this helmet. If the standard helmet is $300, this is $900, but supposedly the physics underlying impact energy dissipation has progressed to the point where we should really expect to see some significant changes going forward. I know you can’t speak publicly officially, but is it fair to say that technology is going to be a big part of the solution?
MENDEL: It just about has to be.
MENDEL: But they’re finding from junior high school, high school, college, this is a cumulative effect.
MENDEL: It’s not just the NFL.
RITHOLTZ: Sure. So, that’s an issue that kind of got overwhelmed this year by other stuff. What else do you see that’s interesting taking place in football? I just read a fascinating review of the commissioner.
RITHOLTZ: Goodell. And he’s about to re-up his contract, basically the owners seem to think he’s doing a tremendous job in a very difficult environment. Is that a fair assessment?
MENDEL: Again, I’m still the minority partner from 15 minutes ago.
RITHOLTZ: Right. So, you’re not turning around to say anything. If you Google, there was a recent story about on ESPN and a handful of other places, the consensus seems to be very challenging couple of years especially under this president but he’s done about as good a job as anybody really has kind of expect of him. Fair assessment?
MENDEL: Yes. You know this better than anybody. Everything changes.
MENDEL: There’s never been a time when there wasn’t something to worry about in the market or in life.
RITHOLTZ: Of course. We were just discussing this the other day, that we are biologically programmed to notice bad news. And one of my colleagues in the office, Mike Batnick, wrote a piece, Why Good News is Overlooked. Good news is never a threat but bad news is a threat and that’s why we basically place such disproportionate weight on that.
MENDEL: Well, expect for right now I think good news in the market is good news and bad news just isn’t true.
RITHOLTZ: Well, what sort of bad news in the market isn’t true? What do you see as t he memes that are out there that are negative for the market but we’re overemphasizing, we’re putting too much weight on?
MENDEL: We’ll get back to black swan events which I’m not big on.
RITHOLTZ: OK. Right.
MENDEL: But in Japanese folklore, there’s a thing called white swans. And a white swan is something right in front of you that you just…
RITHOLTZ: Can’t see.
MENDEL: … just not paying attention to. And so, this next time around just like in ’01, the dotcom was right in front of you.
MENDEL: Fed didn’t see it. In ’08 you…
RITHOLTZ: They saw it. They just said, “What can we do, it’s easy to clean up afterwards.”
MENDEL: But ’08, no money down, pay what you want, interest only, no documentation. How can anybody not be surprised, but it was right in front of you and so this…
RITHOLTZ: Right. In fact, I have to, again, give kudos to Ned Davis Research. One of my favorite charts that if you looked at, you couldn’t help but not see something coming. There were three charts that I tracked in the early 2000s; some of which came from you. One was cost of owning versus cost of renting; that was a pretty standard chart.
The one that I first noticed from Ned Davis Research was median income versus median home price. Ned was putting that out and for decades it moved up and down a little bit and then in ’04-’05 it went straight up to the roof. And it was clear something strange was going on. There was no other way to describe that.
And then the third one was, and I think this also might have been you guys, was total value of the housing stock meaning all the homes in America relative to GDP. And similarly, it was pretty steady for decades and then suddenly three standard orders of magnitude.
I called the financial crisis the jumping dolphin of crises. Do you remember the 3D paintings that people used to have and if you stared at it right, suddenly you would see the leaping dolphin, those charts with the leaping dolphin, if you saw those charts, it was obvious hey, this is all going to blow up.
But if you weren’t looking in the right place, well, the market keeps going higher, the market must know that this isn’t important, I heard over and over again.
MENDEL: Well, getting back the white swan, things are really great right now. There’s no economist not saying, there’s no recession for a couple of years and earnings are…
RITHOLTZ: Record highs, NASDAQ record high.
MENDEL: … going, going, going. And so, the white swan that’s out there is that maybe things are too good and you’re going to have a blow-off.
RITHOLTZ: That’s going to tighten the economy; you can’t lower unemployment any further, can you?
MENDEL: Again, there’s lies, damn lies and statistics.
MENDEL: So, nothing would surprise me.
RITHOLTZ: I understand.
MENDEL: But this thing is somewhat manipulated, 280…
RITHOLTZ: Because of the Fed, QE?
MENDEL: Because of the Fed and no, EU especially.
RITHOLTZ: And Japan.
MENDEL: And Japan, they own 65 percent of all the EPS and 65 percent of the top picks and Switzerland owns $280 billion worth of stock out of thin air. Mother Nature doesn’t like to be fooled, so whatever happens will come out in inflation or currencies or the bond market.
RITHOLTZ: So, let me push back…
MENDEL: If I had to guess, the white swan right in front of us is just everything is good.
MENDEL: Maybe too good.
RITHOLTZ: So, let me push back against that, every time there’s some sort of financial crisis be it ’08-’09 or 2000 or ’74 or ’29 or pick your crisis in the United States, the government always steps in to do something. We created the SEC. We created the FDIC. Isn’t that standard that some disaster befalls us and the free marketers suddenly become, ah, maybe we can manage this a little more aggressively?
MENDEL: Well, again, I had breakfast with the president of the Atlanta Fed and I asked him, the next speed bump, what are you going to do? This is last year at breakfast. And he says, “We’re just going to do more QE.” And…
RITHOLTZ: So, that’s not the solution to everything?
MENDEL: It must be because they don’t – I asked if there’s a plan B.
RITHOLTZ: There isn’t.
MENDEL: There isn’t a plan B. And so, they’ll buy real estate and ETFs or whatever this next time. But they’re already doing that in Europe.
RITHOLTZ: So, every general fights the last battle. QE worked fine when the issue was a frozen credit market, but if you just have a cyclical slowdown and a recession, what is QE going to do.
MENDEL: That’s the question. And it’s going to be very interesting.
RITHOLTZ: Yes, to say the least. I want to get to our favorite questions, but there’s one thing I have to ask about sentiment. You’re raising that issue, things are too good. Do you think the investing public thinks things are too good? Because up until recently they did not embrace this rally? They were not, I mean, the market tripled since the March ’09 lows and they seemed to constantly be waiting for the black swan, not the white swan.
MENDEL: Yes. But you have record low mutual fund cash and the market has tripled, revenue is only up 30 percent. And so, there’s been…
RITHOLTZ: The profits are higher.
MENDEL: No, profits are higher but some of that is financial engineering.
RITHOLTZ: Meaning share buybacks and things like that.
MENDEL: Yes. Yes. I just read the $2.5 trillion overseas, Apple and Oracle and all these companies have already spent $560 billion.
RITHOLTZ: Borrowing money, buying back shares against that overseas cash.
MENDEL: Borrowing money, buying back shares. Yes. They still have stellar balance sheets. But it’s not the public. It’s the public or whoever is buying $20 billion of ETFs a month and the $64 trillion question is when they ever start selling that ETFs it could get ugly very fast.
MENDEL: Let the bull market be bullish, so this is just a good time to be bullish.
RITHOLTZ: To say the least. Let’s jump to our favorite questions. These are what I asked all of our guests. Tell me the most important thing people don’t know about your background.
MENDEL: I had a grandfather who got me interested in the market when I was seven.
MENDEL: And started buying stocks when I was seven. And he gave me a healthy disrespect for the banking system.
RITHOLTZ: Oh really?
MENDEL: Yes. And he had all his money in a safety deposit box when the crash came. And he also taught me about being a scavenger buyer of fixed income, because he made his money buying railroad bonds a penny and a nickel on the dollar.
MENDEL: And then he thought he invented tax straddles back in the ’30s.
RITHOLTZ: Did he or no?
MENDEL: Well, he did it so he was way ahead of his time. He also was a socialist and…
RITHOLTZ: A socialist market trader?
MENDEL: Yes, he was.
RITHOLTZ: That’s interesting.
MENDEL: And he claimed he was Secretary-Treasurer of the Socialist Party between 1915 and 1918 and voted for Eugene Debs five times.
MENDEL: And he said they’d expanded the Socialist Party when FDR was elected because he was the biggest socialist that ever lived.
RITHOLTZ: Well, we created social security. We did a lot of things under FDR.
MENDEL: Yes. Yes.
RITHOLTZ: Medicaid, certainly the SEC, there’s a ton of stuff that he did. I find a lot of people who have been successful in the market and have accumulated wealth are starting to get pretty concerned about inequality, because they would rather the public be fairly satisfied and not calling for revolution.
MENDEL: If you ask me for the one thing that bothers me is that this has not been distributed, it’s been great for wealthy people. I think blue collar, middle class people are struggling and this is the white swan that you saw in Trump being elected, which you saw in the British exit, on Spain last week and…
RITHOLTZ: Sure. Catalonia, absolutely.
MENDEL: … Czechoslovakia and Austria. You saw France, the two major parties were cut off even Merkel had her knees buckled.
MENDEL: And then nationalism is out there and bad things happen when the…
RITHOLTZ: And you’re tracing this to income inequality and…
MENDEL: No. I’m just tracing it that I think that just what you said, there’s a whole class of people out there that haven’t participated and are not happy and if the numbers are right of 51 percent or something can’t come up with $200 or whatever….
RITHOLTZ: That’s shocking.
MENDEL: Yes. There’s a problem out there. And I haven’t got the answer, but you’re seeing something right in front of you and you got the people in Brussels, unelected bureaucrats…
MENDEL: … that are sort of like Monty Python, the black knight that lost one arm, one leg, the other arm, the other leg, it says it’s just a…
RITHOLTZ: We’ll call it a draw.
MENDEL: No. He said it’s just a flesh wound.
MENDEL: But they’re not paying attention that right underneath, what’s happening right underneath their noses. But Greece and Italy had these parties and Le Pen, nationalism.
RITHOLTZ: Right. Populism, nationalism, people are pushing back against globalization and the loss of jobs to low cost providers, it’s not just China, but it’s Turkey and Vietnam and elsewhere.
MENDEL: And computers and robots.
MENDEL: And no, if you had to pick one thing that is worrisome, you hit on it that it’s, this has not been a broad based wonderful thing for everybody.
RITHOLTZ: And that is of a concern. So, perhaps that’s the white swan you talked about. Let’s talk about your early mentors. Who were the people who affected the way you think about business and markets?
MENDEL: Well, first was my grandfather. And then second was Ned.
MENDEL: And Marty Zweig.
RITHOLTZ: What was your relationship with Marty Zweig?
RITHOLTZ: For you young’uns listening, Zweig was a very famous technician, owned I think it was the most expensive home in America at one point on the top of the Pierre.
MENDEL: Yes. The Pierre Hotel.
MENDEL: The Pierre ballroom.
RITHOLTZ: And regular on Rukeyser and…
MENDEL: He had all the Beatles outfits, Marilyn Monroe’s outfit and he was quite a remarkable individual.
RITHOLTZ: And how did Marty affect your thoughts?
MENDEL: Just his studies and he was just brilliant, and also I would tell you that this is under Ripley’s Believe it or Not, that talking about failures, that I was partners with Marty and Ned in not one but two retail letters and both went south.
MENDEL: Which I would have thought would be impossible to do
RITHOLTZ: Let me tell you, that’s question number seven. Let’s ask it now. Tell me about the time you failed and what did you learn from it. Marty Zweig and Ned Davis, two of the most successful technicians in history, how did you not make a go of those newsletters?
MENDEL: Good question. But I think one was a bond letter.
MENDEL: And it goes back to…
MENDEL: No. Well, Einstein dies and goes up to heaven and the holy one calls him in and says can you explain the bond market to me. So, I don’t think anybody can explain the bond market.
RITHOLTZ: That’s very funny.
MENDEL: We had a bond letter and for whatever reason I think Ned and Marty’s forte was not in bonds but I really don’t remember, I tried to…
RITHOLTZ: Suppress that?
MENDEL: … But I think more importantly I think it was the retail, it’s just a much more difficult market.
RITHOLTZ: Than selling to institutions like NDR does.
MENDEL: So, the one lesson I learned from that is that dance with them who brung you.
RITHOLTZ: That’s a fair question. What about investors, any investors affect the way you look at business or finance?
MENDEL: I’m a big believer in Blink, going out and finding people that can do things that you cannot do. And there are plenty of those, but I’m not a big believer in hedge funds. I had eight or nine at one time.
MENDEL: Yes. But, I’m…
RITHOLTZ: Meaning money invested in it, not running?
MENDEL: Yes. But they can’t perform now for whatever reason.
RITHOLTZ: The conditions have changed. At one time interest time some of them were creating alpha, very few these days.
MENDEL: Very few. Yes, maybe two or three percent.
RITHOLTZ: Wow. That’s fascinating. Let’s talk about books. This is everybody’s favorite question. Tell us about books that you read, what sort of stuff do you like, fiction, non-fiction?
MENDEL: OK. Well, I read three or four hours every day.
MENDEL: But I don’t read fiction or nonfiction anymore.
RITHOLTZ: So, what are you reading?
MENDEL: My favorite author is Malcolm Gladwell, Blink and Tipping Point. And the tipping point is AIDS epidemic, syphilis epidemic, crime epidemic, stock market, buying market, everything goes to a tipping point.
MENDEL: And life goes to a tipping point and it’s always good to remember that there’s a tipping point out there at some point for everything.
RITHOLTZ: For everything.
MENDEL: For everything.
RITHOLTZ: Things that cannot go on eventually stop.
MENDEL: Stop. And then Blink is, again, one of my favorite books whether it’s an electrician or car mechanic, finding these people that can do things and they know things in a blink.
MENDEL: And that keeping them dear makes your life a lot easier.
RITHOLTZ: Have you read Outliers yet?
MENDEL: Yes, I have.
RITHOLTZ: That was a really interesting book.
MENDEL: Yes. Everything he does is great.
RITHOLTZ: Always fascinating, although I will tell you yes, the Beatles played the Cavern Club eight hours a day for a year. I could play the Cavern Club eight hours a day for 100 years; I will never be the Beatles and vice versa. There are people who pick stuff up so rapidly that they’re just built for certain things.
RITHOLTZ: But I find all his books thought-provoking and interesting and he’s an excellent writer, I mean, his prose is just lovely.
MENDEL: Yes. His podcasts from last year were great, only maybe two of the ones this year were outstanding.
RITHOLTZ: The ones from last year was a history of – what’s the name of his podcast?
MENDEL: Revisionist History.
RITHOLTZ: Revisionist History, that’s what it was. Yes, I listened to a few of them. I thought they were very interesting. He’s always interesting.
Who else do you read? Anybody else?
MENDEL: Well, I read you. I think that you have the best service out there and I especially like your 10 AM reads.
RITHOLTZ: The morning or 10 things each day, the morning reads. Thank you for saying that. They’re usually out 7-7:30 in the morning and I try to get them out as early as possible. I sift through a lot of junk to get to that.
There’s a long story behind the reads. I’ll have to share them one day. But thank you so much for saying that. It is an interesting thing that forces me to realize how much of what’s produced is just noise and finding something that is insightful, educational and helpful is hard. So, out of the thousands of things, identifying those 10 things each day is a little bit of a challenge.
RITHOLTZ: Well, I appreciate the kind words. What do you do outside of the office to stay either mentally or physically fit?
MENDEL: Well, the mental part is reading. But in the morning, all the CBS sports, feature report, I’m a sports junkie but also…
RITHOLTZ: No surprise.
MENDEL: But also there are lots of things that I like reading in the morning whether it’s Wall Street…
RITHOLTZ: So, what else do you read?
MENDEL: The Wall Street Journal, Barron’s, Zulauf, there are 10 or 20 people that I really like getting their stuff.
RITHOLTZ: Zulauf, give me a couple of other names. Who else do you like to read?
MENDEL: I like to read the PIMCO people. The one person that is brilliant and is DoubleLine…
RITHOLTZ: Jeff Gundlach.
MENDEL: Jeff Gundlach.
RITHOLTZ: Fascinating, fascinating guy.
MENDEL: Fascinating. And he’s out there thinking on another level.
RITHOLTZ: He definitely is and every now and then I’ll read something of his and I’m like wow, he’s not afraid to really put it all out there, and as often as not he’s right on some of these real outlier calls that you would think is a much lower success rate.
MENDEL: He was one of the first people to come out on Trump.
RITHOLTZ: That’s exactly right. I remember reading him saying you’re underestimating the anger in the country and you’re underestimating the potential for a change candidate to win and Trump is a change candidate.
MENDEL: And he wanted to buy the Buffalo Bills and…
RITHOLTZ: They didn’t let him?
MENDEL: I don’t know what happened. But he…
RITHOLTZ: He would be a fantastic owner.
MENDEL: But he – two things – he forecasted that they wouldn’t win many games this year which is not, but they had a good team. And the other most fascinating thing which we could have a whole another segment on, he talks about his autism. And I found that lots of the really unbelievable people on the street just like in The Big Short had Asperger’s.
RITHOLTZ: Asperger’s or somewhere on the spectrum…
RITHOLTZ: … across the board. I’ve heard that about – Ken Fisher mentioned his dad was pre-diagnosis, he thought he was Asperger’s. Ken himself very easily could be. Go down the list of people who have the ability to remove their emotions from the decision-making process and if you could do that, there might be a little spectrum going on with that for sure.
MENDEL: Yes. And that’s what you need to do to be great.
RITHOLTZ: You need to be different from the average human in some way.
MENDEL: Yes. But they disseminate information completely and totally different than a normal person.
RITHOLTZ: Not to namedrop, but I’m going to namedrop, Marc Andreessen has pointed out that Mark Zuckerberg at Facebook is a learning machine, He said he’s never met anybody who learned as aggressively as him, constantly reading, constantly assimilating data and your description immediately made me think of him that way.
MENDEL: But Jobs, socially disturbed.
RITHOLTZ: Inept. Totally inept.
MENDEL: Terrible. Terrible to work for.
RITHOLTZ: Just a bull in a China shop.
MENDEL: But he didn’t have any committees and he did all those things.
MENDEL: Him. But he knew things other people…
MENDEL: … didn’t know and he knew it in a blink.
MENDEL: And you can’t teach that.
MENDEL: It’s just…
RITHOLTZ: That’s intuitive. That’s instinctual.
MENDEL: That is also a curse.
RITHOLTZ: Right. Why? Why a curse because —
MENDEL: No. No. You’re socially inept. And The Big…
RITHOLTZ: The Big Short.
MENDEL: The Big Short, life, I don’t do this. I don’t do that. I don’t shave. It’s just the kind of man I’m looking for.
RITHOLTZ: Michael Lewis is another one of those writers are just…
MENDEL: Oh, unbelievable.
RITHOLTZ: So, any favorite Lewis books since–
MENDEL: Everything he’s put out.
MENDEL: Everything he’s put out.
RITHOLTZ: So, it’s Lewis and Gladwell, those are your favorites.
MENDEL: It doesn’t matter. Yes. But I’m more interested in life, in how it affects life.
RITHOLTZ: Did you read The Undoing Project by Lewis, the book about…
RITHOLTZ: Oh, well, I’m going to give you a book recommendation. Lewis wrote about Daniel Kahneman and Amos Tversky who discovered all of these behavioral issues that not just economists and economic behavior but across the board the way humans behave. And it’s a fascinating story. If you like Michael Lewis, it’s a little different than some of his other books but it’s just as fascinating. I now envy you for not having read it because you get to read it. I’ve already read it.
RITHOLTZ: So, let’s get to our last two questions, my favorite questions. So, if a millennial or someone who just graduated college came to you and said hey, I’m looking for some advice on career and finance, what sort of advice would you give them?
MENDEL: Well, I actually try to mentor millennials. And I have a packet, I found that most do not have a clue about interviewing. So, I give them a packet on how to interview and I try to take them to or dinner and I could tell you there are 5 or 10 things that I reinforce that they must do to make a good first impression.
And then there are three, four, five questions I try to teach them of questions they need to ask. But helping them with the interview process is very, very important because they really do not show up ready to make a good first impression.
RITHOLTZ: Give us an example of each. What do you suggest they do on their interview and what sort of questions do you suggest.
MENDEL: OK. They need to put their resume on slightly thicker paper. They need to have at the bottom…
RITHOLTZ: Like nice bonded linen paper that feels substantial, not Xeroxed.
MENDEL: That’s right. That’s right. It gets noticed. And then they need to have community service at the bottom of the resume. They have to have no spelling or punctuation or grammar, zero.
RITHOLTZ: No errors whatsoever.
MENDEL: No errors whatsoever. They need to walk in with a briefcase, OK?
RITHOLTZ: Open up the briefcase, here’s my resume.
MENDEL: Well, it has to be organized. You walk in with the left hand, a firm handshake. A lot of them don’t know how to handshake.
MENDEL: With a firm handshake. If they go to lunch or dinner and the boss…
RITHOLTZ: Don’t order spaghetti.
MENDEL: No. But, yes, don’t order spaghetti, OK?
RITHOLTZ: I learned that too late.
MENDEL: But if the boss orders fish and chips and scotch on the rocks, you order the same exact thing. Commonality is the most important thing and so you want to learn everything you can about that person and the company, everything.
And if you walk in and see that he’s a tennis player, you love tennis. And then the process also, the second thing is you want to ask them why is this position open. How do you measure success?
RITHOLTZ: Good questions.
MENDEL: Yes. And what’s the next stage in the process. You also want to take a card when you leave and write them a personal thank you and tell them you want to be part of their team and how impressed you were and even if you get rejected, you want to go back again.
RITHOLTZ: Send a thank you note for being rejected and please keep me in mind in the future.
MENDEL: Yes. But persistence pays off.
RITHOLTZ: Good advice for any millennial. And our final question, what is it that you know about the world of investing today that you wish you knew 40 years ago when you were first starting?
MENDEL: That is a good question.
RITHOLTZ: Isn’t that?
RITHOLTZ: It’s my favorite question.
MENDEL: Is it really?
RITHOLTZ: I’ve saved it for the best. That is my encore. After everybody cheers, you come out, you do the last song, that’s my last song.
MENDEL: Well, 40 years ago I think I was too naive and stupid to know how much risk I was taking at that time. But it also goes back to women (inaudible) at 25 and men at 30 and so 30 is just a wonderful age to matriculate and to do things.
And so, I’ll tell you one final story about Jesus.
RITHOLTZ: Sure. OK.
MENDEL: Jesus is the son of God. Average life expectancy back then was 32 years of age. It’s a misnomer because half the people died in childbirth at 32.
MENDEL: So, did you ever wonder they don’t anything about it between the age 3 and 30, zero. Why at 30 all of a sudden that he emerged?
RITHOLTZ: Because he peaked to 30.
MENDEL: Not quite. But Jewish people do not allow you to become a rabbi until you’re 29 or 30.
RITHOLTZ: Oh, really?
MENDEL: You cannot teach life until you’ve experienced, same thing with medicine, OK? You don’t want a doctor that…
RITHOLTZ: Who’s 22. No Doogie Howser.
MENDEL: Yes. So, the lots of things in Judaism are well thought out and this is why at 30 he emerged because nobody would listen to him until he was 30. So, I tell millennials also that college is the time to grow up and mature and then go out and get your MBA and experience life before you go out and try to do something.
RITHOLTZ: So, eventually you’re teeing yourself up to become somebody at 30 when you can have…
MENDEL: A more successful chance of being successful, I think. This is just me.
RITHOLTZ: I like that. That’s fascinating. Ed, thank you so much for doing this.
We have been speaking with Ed Mendel. He is a co-founder of Ned Davis Research as well as minority owner of the Atlanta Falcons. If you enjoyed this conversation, be sure and look up an inch or down an inch on Apple iTunes, Overcast, Soundcloud, Bloomberg.com, wherever fine podcasts are sold. And you could see the other 160 or so such conversations that we’ve had previously.
We love your comments, feedback and suggestions, write to us at MIBpodcast@bloomberg.net. I would be remiss if I forgot to mention our crack staff that helps put together this weekly podcast, Medina Parwana is our audio producer; Taylor Riggs is in charge of booking; and Michael Batnick is our head of research.
I am Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.