Join host Steven Pesavento and special guest Mark J Higgins as they delve into the intricacies of financial history in the United States. Mark, author of an expansive book detailing centuries of financial evolution, shares his insights on how historical events shape today's investment landscape. From World War One to the Great Depression and beyond, discover key takeaways to empower your investment decisions.
Key Takeaways
Resources Mentioned
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About our Guest:
Mark J Higgins is an esteemed financial consultant and author with a passion for unraveling the complexities of financial history. With years of experience advising large institutional plans, Mark brings a unique perspective to the table, blending intellectual curiosity with extensive research to provide actionable insights for investors. His groundbreaking book offers a comprehensive look at the financial evolution of the United States, empowering readers to make informed investment decisions grounded in historical wisdom.
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00;00;01;00 - 00;00;09;07
Steven Pesavento
Welcome back to the Investor Mindset podcast. I'm your host, Steven Pesce Evento and today I have Mark Higgins in the studio. How you doing today, Mark?
00;00;09;09 - 00;00;11;17
Mark J Higgins
I'm doing great. Thanks for having me, Steve.
00;00;11;19 - 00;00;35;01
Steven Pesavento
I'm I'm super excited to talk with you because you've done what many people don't do. You've taken the time to write a book, let alone a very large book. Write the financial history of the United States, and it's super detailed. It's incredible. We're going to talk about a lot of the big takeaways today. But before I get into all that, I want to start with a personal question.
00;00;35;03 - 00;00;42;05
Steven Pesavento
So if we look back to your childhood, what events or influences from your childhood shaped who you are today?
00;00;42;10 - 00;01;06;13
Mark J Higgins
You know, I've always been I don't know if there's a single event, but I've always been somebody who is intellectually curious. The joke people use to call me question mark. I always ask a million questions and wanted to figure out everything how everything worked. So, you know, I was always the academics were kind of naturally suited to me because it's constantly learning new things.
00;01;06;13 - 00;01;11;07
Mark J Higgins
So there wasn't one event, but I'd been somebody who's been intellectually curious their whole life.
00;01;11;08 - 00;01;29;26
Steven Pesavento
Yeah, I think there's something really powerful about that because when you can look at how you were acting as a kid, what continues to repeat, you can start thinking, okay, well, you know, that's something that people either loved or was annoying about something that I did. And I did the same thing. I always asked why? What's the reason?
00;01;29;26 - 00;01;47;27
Steven Pesavento
I need to know more information, but that it's actually a superpower and it's led you down this road to be able to answer questions and help advise people. So from the perspective of this book, what led you down the path of wanting to put together the whole history of finance in the US?
00;01;47;29 - 00;02;11;24
Mark J Higgins
So it wasn't I've never written a this is my first book and I've been writing a lot in my career in different positions for a long time. So that wasn't really that much of a stretch, but it really started in March 2020 when COVID hit, and at the time I was an investment consultant advising large institutional plans like foundations, endowments and foundation and pension funds.
00;02;11;24 - 00;02;40;17
Mark J Higgins
And I was pretty flat footed when when that happened. And I started reading. I forget what prompted it. I think it was something that Ray Dalio said about the importance of understanding history. And I started reading financial history books just to get a sense of if anything like this happened before. And the more I was reading, the more I realized that that was actually much more useful in advising clients than just kind of keeping track of the markets and really relying only on your your personal experience.
00;02;40;17 - 00;03;03;08
Mark J Higgins
So at some point, what I discovered was I actually couldn't believe that there was no book on the complete financial history of the United States. I mean, there were great there are probably 200 at this point. There are great books out there, but they're usually very period specific. And there are some that go maybe 100 years, but nothing that went from 1790 to 2023.
00;03;03;10 - 00;03;21;00
Mark J Higgins
So at least in a single volume, there's one out there with like, you know, seven different books, but at least in a single volume. So I mean, I decided to take a shot at it. I knew it was an ambitious endeavor, but writing is a skill that I've had. I've always been intellectually curious and I took a shot at it, took about three and a half years.
00;03;21;02 - 00;03;50;18
Mark J Higgins
I like I said, I've I've read more than you can imagine. I used to sit on the couch during the weekend and read newspapers from the 1800s and 1900s to get a sense of what it was really like to live then. And what I really tried to do with this book is take all of that and synthesize it into Here's what was really important that happened, you know, from 1790 to 1865 when the foundation was set for the for the U.S. financial system and really synthesize it so people don't have to go out and read 200 books like I did.
00;03;50;18 - 00;04;06;00
Steven Pesavento
I think it's such a powerful thing to do because you've read all these books. You synthesize it into one book that somebody can sit down and read, although it's a significant book to read 500 and some pages, I haven't finished it myself.
00;04;06;03 - 00;04;06;17
Mark J Higgins
100 with.
00;04;06;17 - 00;04;41;07
Steven Pesavento
Graphic, but I haven't finished. I haven't finished it myself, but I've read through quite a bit. And what I love about the concern and that's the important thing, I think from this is when I started investing in real estate about a decade ago, I was in a position where, you know, I didn't have all of the experience and I went and started interviewing and connecting directly with mentors and friends, people who had already done it, and getting emotional into the experience of what it was like to go through 28, emotional into the experience of previous recessions and what that felt like and what came up and and those things.
00;04;41;07 - 00;04;49;23
Steven Pesavento
And what it did for me is it gave me a position that when those things came up, I had less fear because I was recognizing something that was, you know.
00;04;49;26 - 00;04;52;13
Mark J Higgins
I mean, absolutely. And so that that is.
00;04;52;13 - 00;05;02;17
Steven Pesavento
What what can people do using this information to be able to not only be better investors, but to be able to be better emotionally connected to the decisions they make.
00;05;02;20 - 00;05;31;16
Mark J Higgins
Yeah, I mean, you nailed it. And that's exactly what I hope to do with this book, is to allow people to supplement their memory. Many, most investors rely on their personal experience, and maybe their education goes back 50 years, but they haven't they haven't put together the full experience, the financial experience of the United States. And my hope with this book is that people will be able to use this to recognize things that are happening in the present, tie back to something that happened in the past.
00;05;31;16 - 00;05;49;14
Mark J Higgins
And you can't predict the future entirely. You can't do it precisely, but you can narrow down the scenarios and a lot of what happened in COVID 19, where, I mean, I'm on the record in writing. It was very similar to some past events and it helped me forecast what was would likely happen.
00;05;49;17 - 00;06;11;16
Steven Pesavento
I think that's a perfect place to start because I want to go through some examples of current and connected in some of these examples from the past to give people a little feeling. But COVID 19, you know, this comes up. We've never closed the economy the way that we did as quickly as we did. But what happened in COVID and what times in history is that's similar to it.
00;06;11;17 - 00;06;41;08
Mark J Higgins
So first of all, we did close things like we did during COVID. So that's an important point right there. The comparable there is July 1914. At the end of July 1914, when World War One broke out. Nobody saw that coming because it was it was prompted by an assassination that people didn't really think was a big deal. But it kind of all these existing defense pacts got triggered and all of a sudden, out of nowhere in a month, the entire European continent was essentially at war.
00;06;41;08 - 00;07;11;16
Mark J Higgins
And the reaction was very similar. I mean, people just went into a complete panic. The New York Stock Exchange shut down and for four, four and a half months. But a lot of the tactics that were used to to make sure that there wasn't a complete financial implosion were also used in July 1914. So, again, if you had and there's another important point that the panic of 1907 had happened recently, so government was pre and was predisposed to using aggressive tactics because they'd just done it.
00;07;11;21 - 00;07;31;26
Mark J Higgins
Same thing with the global financial crisis. And that's why we were we were able to act so quickly in 2020. So there actually is a comparable for that. And but, you know, another important point from history is it's tempting to think that some events are going to repeat entirely, you know, similarly to a previous event, but you have to piece them together.
00;07;31;26 - 00;07;57;28
Mark J Higgins
So that was kind of the onset of the crisis. But the comparable once we reached April 20, 21 and inflation was starting to heat up, was the post-World War One great influenza inflation that happened in 1919 and 1920. And the Fed reacted the same way. They were very aggressive, raised rates by 225 basis points within six months, and it actually triggered a nasty but relatively short recession.
00;07;57;28 - 00;08;12;17
Mark J Higgins
So I'll stop there because there are other comparables we can get into. But there really isn't anything that happened over the past four years. That's that was unprecedented. But it's not a single event. You have to know three or four events and know how to piece them.
00;08;12;20 - 00;08;30;27
Steven Pesavento
That's so that's the key, right? It's easy to say, Hey, well, we didn't do it exactly like this, but we can look at those different examples and how that actually influenced. So what happened in World War One or after World War One, and how does that relate to what could potentially happen today?
00;08;31;00 - 00;08;50;02
Mark J Higgins
There are a lot of similarities, and I do detail them in the book, but some of the most important were during the war. The United States didn't get involved in the war of 1917, but during the war there were there was rationing and but there was also a lot of, believe it or not, wealth accumulation in the United States.
00;08;50;04 - 00;09;14;10
Mark J Higgins
And then then when the pandemic hit it, you actually weren't allowed to talk about it because of censorship in the press. But, you know, people knew that there are a lot of people getting sick and dying around them. So there was a lot of pent up savings. And once the War and Great Influenza second wave ended simultaneously, all of a sudden it got unleashed, which was a lot I mean, it was a complete mirror image of what happened after.
00;09;14;13 - 00;09;33;12
Mark J Higgins
It wasn't there wasn't an exact date, but call it around April 20, 21 when when people started getting comfortable that we're kind of toward the end of the acute phase and that and that pent up savings started getting spent. So it was really the same underlying dynamic that caused these two inflations. And when the Fed said, No, I was admitted.
00;09;33;19 - 00;09;56;29
Mark J Higgins
I wish I trust my instinct more because I was making that comparison. But the Fed kept assuring people that, you know, it's going to be the it was transitory, the inflation was going to be transitory. But if the 1919 and 1920 inflation was really the comparable, which I strongly believe it was, it wasn't going to be transitory now, it wasn't going be like the 1960s and 1970s.
00;09;57;01 - 00;10;03;12
Mark J Higgins
Of course, if if the Fed did the right thing. But, you know, saying it was gonna be three or four months was was probably not going to be accurate.
00;10;03;16 - 00;10;16;04
Steven Pesavento
And so knowing that information, let's say we we feel really confident in it. We believe it's going to be similar to that past event. What can investors do with that information to be able to either hold tight?
00;10;16;07 - 00;10;49;04
Mark J Higgins
Well, I there's the temptation to think that you can trade on it and there probably are some people out there that can trade on it and and make a profit. But the vast majority and these are the types of people that I serve, institutions are not equipped to do that. What the usefulness of it is that it can help you contextualize what's happening now to demystify it so that they don't panic and do something that they're going to reduce equities because the whole world seems to be falling apart.
00;10;49;07 - 00;11;09;13
Mark J Higgins
You know, it's most useful in grounding people, calming people and reassuring them that we have seen something like this before and the world is not going to end because a lot of times people react. The biggest mistake that I see in investing is when there's a crisis like like COVID 19 and people sell their stocks at the worst possible time.
00;11;09;17 - 00;11;12;14
Mark J Higgins
And it's very helpful in preventing people from doing that.
00;11;12;17 - 00;11;31;28
Steven Pesavento
Yeah, because what I've seen, right, I run a private equity real estate company. We invest in in in real estate assets in some businesses. And what I saw was, you know, a lot of our clients were very scared. They were very concerned. Yeah. They fortunately don't have an option to be able to exit, which has its pros and its cons.
00;11;32;01 - 00;11;43;23
Steven Pesavento
But because of that, they didn't they weren't able to make that decision. But if it was a public equity, they may have liquidated right before, you know, something great could actually happen.
00;11;43;23 - 00;11;44;21
Mark J Higgins
It happens all the time.
00;11;44;25 - 00;11;47;14
Steven Pesavento
In a very an emotional way.
00;11;47;17 - 00;12;10;02
Mark J Higgins
Yeah, it happens all the time. And that is I believe that that's the for the for the majority of people, that is the greatest value of understanding financial history. When you walked from 1790 to today, you see these panics every ten years or so. And to be honest with you, to be fair, the Global Fund, the last two we had were actually pretty significant even by historical standards.
00;12;10;05 - 00;12;24;16
Mark J Higgins
But we've also learned to deal with them. I mean, if this had happened in the 1800s, we would have been we we'd be in a major depression. That's what happened back then. So in the Great Depression, by the way, was not the first depression is private, I would argue is the third Great Depression, but some would argue it's fourth.
00;12;24;18 - 00;12;34;16
Steven Pesavento
And so let's talk about what is happening today that's different from what had happened in the past that had led to those types of depressions.
00;12;34;18 - 00;13;16;20
Mark J Higgins
So the two major mistakes of sorry, the two major mistakes of the Federal Reserve and the federal government were in the 1930s not stopping the Depression, and particularly the bank runs that occurred in the early 1930s. And really the great inflation is their second big mistake, which was the inflation that lasted from 1965 to 1982. So if you look at the past 20 years, learning from the mistakes of the Great Depression and acting aggressively, not quite as quickly as I would have hoped, but acting aggressively in the face of the global financial crisis, it absolutely prevented another Great Depression.
00;13;16;20 - 00;13;44;29
Mark J Higgins
We would have gone into a Great Depression if there was an intervention. And now what you're saying now the verdict is not out. But the big lesson from the great inflation was you need to nip inflation in the bud early because once it becomes entrenched, it's really it's very hard to get rid of. And that's why Paul Volcker had to raise rates all the way up to 20% in the early 1980s to get rid of it because it had gone so long, it was so entrenched.
00;13;45;01 - 00;14;09;10
Mark J Higgins
So I think there can be arguments on whether the federal government, you know, hit it perfectly or, you know, did too much or too little for these events. But compared to what happened when they didn't do this, they learned a lot. And I think they did the right thing to to stop the global financial crisis from spiraling into a Great Depression.
00;14;09;13 - 00;14;16;23
Mark J Higgins
And they seem to be doing the right thing in terms of maintaining monetary policy until inflation is decisively extinguished.
00;14;16;26 - 00;14;36;05
Steven Pesavento
So I know the book goes all the way back to the 1700s, but the major areas that I pulled out was World War One, World War two, the Great Depression and the Great Inflation. Is there any others? And do you want to kind of walk us through chronologically maybe a very high level overview of what happened and how that could relate to today?
00;14;36;07 - 00;15;07;14
Mark J Higgins
Yeah, I mean, the World War One, we probably talked about it a bit in terms of the what's relevant to today is mostly the, you know, the the reaction to the postwar inflation, the Great Depression. The a lot of people I think the big lesson of the Great Depression that people don't appreciate is World War Two was really the consequence of the Great Depression.
00;15;07;16 - 00;15;34;07
Mark J Higgins
And, you know, people often think of depressions as the loss of money, but the real danger is the fabric of society gets torn apart. And you probably read this chapter, but it goes through how the Great Depression Hitler was on his last legs in the late 1920s and Japan was not in the position it was in in the early thirties as it wasn't in the late 1930s.
00;15;34;07 - 00;15;56;04
Mark J Higgins
And the book explains why. But it was really the Great Depression that enabled the Nazis to take power and inspired the Japanese militarists to invade China and move through Southeast Asia. So that was a big lesson from when I was reading about it. But I didn't realize this. You think of the Great Depression and you don't want people to lose a lot of money.
00;15;56;05 - 00;16;08;02
Mark J Higgins
That's true. But the real risk is society. The fabric of society starts tearing apart. Desperate people will do desperate things. And that that the Great Depression was absolutely the primary cause of World War Two.
00;16;08;04 - 00;16;22;18
Steven Pesavento
And we're not there yet. But you can absolutely start to see that fabric of society starting to pull apart, which could lead to, you know, any type of, you know, hot or cold War or negative things that could happen for us.
00;16;22;20 - 00;17;01;14
Mark J Higgins
Yeah, it's funny you mention that, because I thought a lot about that. And there are some people that are comparing what's happening now to the 1930s. I actually don't see that the it seems bad now. You know imagine 20% average unemployment for a decade. Yeah and things were a lot worse in the 1930s than they are now. It strikes me more of what we're going through as the 1960s and 1970s where you have kind of cultural clashes and, you know, there's there's an inflation element here as well that it's not a direct comparison.
00;17;01;14 - 00;17;18;12
Mark J Higgins
But that's that strikes me as the better comparable from the 1930s I don't see we have a stronger, much stronger economy, better employment situation, much better than we did in the 1930s. So yeah, I don't see that comparison. I mean, there are elements, but that doesn't seem like the strongest comparison.
00;17;18;12 - 00;17;39;05
Steven Pesavento
So yeah, yeah, no, and I don't necessarily disagree. I just think that idea that if we end up getting to a point where not only is the economy collapsing, but also is that social fabric that's bringing everyone together to unite them in one direction that we've already got some of that starting to build. But yeah, there are the financial story in here.
00;17;39;05 - 00;17;40;06
Steven Pesavento
So.
00;17;40;08 - 00;17;56;09
Mark J Higgins
You know, I mean, we do, I mean there are elements of it and but if I had to pick the most comparable, it would be the sixties and seventies. But yeah, there, I mean there are, there are elements of some of the polarization that you saw and then in the 1930s you're definitely seeing that now.
00;17;56;15 - 00;17;59;20
Steven Pesavento
And so what happened after that.
00;17;59;23 - 00;18;00;25
Mark J Higgins
Happened after the 19.
00;18;00;25 - 00;18;04;23
Steven Pesavento
30, 1960s and 1970s?
00;18;04;25 - 00;18;26;09
Mark J Higgins
so I'm sorry. So well, moving ahead. So the last section of the book really details there's an important point that I had never seen talked about. And I found this this obscure book, that kind of detail that by Frank Vanderbilt was he was a famous financier in the early 1900s. It's called the American Commercial Invasion of Europe.
00;18;26;09 - 00;18;52;25
Mark J Higgins
And it was a ten year period that started in 1896 and ended in 1906, where we essentially took over as the world's workshop. And a lot of that was related to being able to produce interchangeable parts in mass. And it sounds very boring, but that's what did it. And the chapter is called the American Commercial Invasion. So the opening chapter in the last section is called the Second American Commercial Invasion, and it tracks the development of Silicon Valley.
00;18;52;27 - 00;19;23;19
Mark J Higgins
And that has really, as everybody knows, has shaped the economy that we're in today and also shaped an important bubble that we experienced at the end of the 1900s. So the last section, I mean, there are a bunch of different parts, but that's a key part was the development of the technology industry in the United States. Another key part is some of the new asset classes like private equity and hedge funds, and why institutions started piling into them, which I would argue they are way overexposed at this point.
00;19;23;22 - 00;19;41;06
Mark J Higgins
And I and I go into some of the reasons why, and then the last few chapters are really on the crises, the global financial crisis, which was a very significant crisis, and even reminded me a little more of the panic of 19, of a lot more of the panic of 1907 than the Great Crash in 1929, because it was a big shadow banking problem.
00;19;41;13 - 00;20;14;24
Mark J Higgins
The name of the chapter is actually the Great Shadow Bank run and the dot com. Now that was it was more of an isolated type bubble, but that was an important event that that I talk about in that chapter. And then it ends with COVID. And the cool thing about I mean, I don't want to take over, it's quite obvious it's a horrible event, but the interesting thing about COVID is it explains the last chapter, explains the initial shock, the inflation that we experienced, the the Federal Reserve's response and what's what they're thinking about really in terms of not repeating the sixties and seventies all in the context of history.
00;20;14;24 - 00;20;27;18
Mark J Higgins
When you read that chapter, it's kind of like you know, I'm outlining the different things that are happening and say, you know, refer to chapter X, refer to chapter one. It's the same thing over again. And you can see it in the different chapters that I reference.
00;20;27;18 - 00;21;01;02
Steven Pesavento
Yeah, I think it's really interesting. So obviously we get into a lot of examples, but what I'm curious about, you have a unique perspective in the institutional world, right? You're very focused on, Hey, the index is actually a better tool than having these institutions invest in a private equity. Obviously have a somewhat of a disagreement, although what I agree on is that if you don't invest in the right private equity companies, in the best managers, then you absolutely won't get those types of returns because it's a much harder business.
00;21;01;05 - 00;21;17;12
Steven Pesavento
So let's talk first. What is the difference in how an institution should be thinking about investing their wealth versus a high net worth individual? And how can they use the information that you've been able to discover still to make those decisions?
00;21;17;15 - 00;21;43;18
Mark J Higgins
So the issue with institutions, the primary issue with institutions is they have unstable governance. So and you don't see this until you've been doing it long enough, but pension plans and endowments and foundations, they circulate trustees called every four or five years. So the problem is they can invest in a strategy that if they had stable governance, maybe makes sense, but somebody unwinds it at the at the wrong time four or five years later.
00;21;43;18 - 00;22;02;06
Mark J Higgins
So it's kind of a unique challenge. And index funds kind of act like a hedge against that. Right? If you're just tracking the index, you're not you're going to hedge that risk that something's going to be unwound at the wrong time. And with respect to two alternative asset classes, this is a you see these there are long wave cycles that you see in history.
00;22;02;06 - 00;22;36;24
Mark J Higgins
You saw it with whaling and you see it where these products, it just takes a couple of decades for them to run through their cycle. And the alternatives boom really started in the 1990s, actually probably more right around the turn of the century because of David Swensen at Yale. So David Swanson was the chief. The fortunately he passed away recently, but the chief investment officer at Yale who has had exceptional returns for, I don't know, around 35 years at this point said I actually want 40 years at this point.
00;22;36;27 - 00;23;08;24
Mark J Higgins
And what were people got wrong, in my opinion is they data. Swanson wrote a book detailing his strategy. It was published in 2000, and people assumed that they did make very good returns by investing in private equity buyout funds and hedge funds, although a very specific type of hedge fund and venture capital and people read the book and assumed if we just do that, we can get Yale like returns.
00;23;08;24 - 00;23;31;29
Mark J Higgins
And what was missing and I and I detail this in four pages, I read countless Yale Endowment annual reports and talked to a few people at Yale. And what they were missing is you first have to get the infrastructure to make sure you can do it right. And that infrastructure includes a very talented investor on top who can mentor and develop replacements.
00;23;31;29 - 00;23;56;24
Mark J Higgins
So you kind of you're constantly refreshing the team that somebody who can manage manage the governance so you don't have people, you know, abandoning the strategy or forcing change the strategy. And that's really what Yale had and has that is very difficult to replicate. And could you replicate the Yale strategy? Yes, but you can't do it with having that infrastructure of people management in place first.
00;23;56;24 - 00;24;12;07
Mark J Higgins
And that's the mistake that people are making. It's not that private equity is you know, every private equity fund is not worth I know that's not true. I mean, Yale's proven it's not true, but if you are not a skilled investor and have an infrastructure that is durable, it's a very dangerous place to put your money.
00;24;12;10 - 00;24;41;16
Steven Pesavento
So from your perspective, what I'm really understanding what I'm hearing is that you're saying, hey, all these institutions, that Yale did a great job at this and a few other big institutions followed suit and they also got disproportionately higher returns. But the difference was that they had the infrastructure in place. They were choosing the right managers and the organization as a whole understood both the duration and the focus and strategy needs to stay consistent.
00;24;41;16 - 00;24;57;11
Steven Pesavento
It can't just change every couple of years, otherwise you miss out on the biggest return potential that could come. And it's not necessarily that the strategies are bad. It's that if implemented incorrectly, it's like using a hammer to try to paint the wall. You're going to have some pretty bad results.
00;24;57;11 - 00;25;19;10
Mark J Higgins
Yes, And it's especially dangerous in alternatives because if you pick a wrong active manager in large cap equity, I mean, maybe the underperformer is not going to be massive if you pick the wrong private equity firm or venture capital firm, you know, their returns versus the top, the bottom quartile versus top quartile is enormous. So you can really mess up badly.
00;25;19;14 - 00;25;48;25
Steven Pesavento
Yeah, it blows me away when I look at the projected returns of venture capital and the average returns, I often think to myself, well, I don't even I'd only invest in this for fun because it almost seems like why would I take that kind of risk when I, I could buy a hard asset or I could go into the kind of a traditional market and get something that's a lot more stable, but it is kind of sexy to say that you're invested in something, you know, that is a name brand startup.
00;25;48;27 - 00;26;12;25
Mark J Higgins
Yeah. And, you know, going back to the alternatives that David Swanson came out and said this as well, you know, toward the end of his career, he was saying that most institutions are better off indexing everything and avoiding alternatives, not because it's an automatic death sentence to get into these. It's it's more because it's just it's just you have to have that infrastructure in most don't.
00;26;12;27 - 00;26;20;18
Steven Pesavento
And so why don't people do that? Why don't the institutions do that? And then let's separately talk about the individuals and how they can.
00;26;20;24 - 00;26;52;18
Mark J Higgins
Use because nobody's telling them not to. You know, from what I've observed is looking at the investment consulting industry's evolution, staff serving large institutions as well, there is an incentive to maintain the status quo, if only because going to something more simpler, something more simple and less complex and less costly. I'm sorry, there's the fear that you're going to you're going to be obsolete and out of job or you're going to lose client.
00;26;52;20 - 00;27;16;27
Mark J Higgins
And and I talk about this a little in the opening of the book that that was my fear when I started moving clients to more simple allocations. And the truth is that forces you to find a new way to add value. And there are plenty of ways for advisors of institutions and individuals to add value, and it becomes clear what some of these are once what once you admit what you can't do.
00;27;17;00 - 00;27;21;25
Mark J Higgins
But my experience and my observations from reading history is most people are unwilling to do.
00;27;21;25 - 00;27;42;21
Steven Pesavento
People are afraid of losing their job. I think a lot of traditional financial advisors on the individual side have kind of the same perspective because, you know, if I'm going into the stock market, I'm either picking stocks individually that I personally believe in. I have some industry knowledge about and I'm going to hold it for a very long time or I'm going to index.
00;27;42;21 - 00;28;11;07
Steven Pesavento
And so when I meet people and they're paying a financial advisor and it's a, you know, a fee based revenue and it's not like a fixed fee for advice, I have to think, well, that that seems silly for my perspective on the private side, although I do run a private equity company and I do manage, you know, tens if not hundreds of millions of dollars of people's money, I also, at the same time will not personally invest in other managers that are not top performers.
00;28;11;07 - 00;28;42;12
Steven Pesavento
And it's very difficult for people to know the difference. And I think that's one of the biggest challenges that I see in the industry is my team will be talking directly with with our clients and we hear about some of the managers that they're investing in. And I personally know that they're not doing a good job. And it's a difficult industry because it's hard to be able to speak up against your competition negatively because our perspective is we're very much like, Hey, we just want to partner with you and do good things together.
00;28;42;12 - 00;28;53;18
Steven Pesavento
Yeah, we don't want that energy of us versus them, but yet it's difficult to get an average person to understand that there is truly a difference in who's actually making those decisions.
00;28;53;21 - 00;29;30;08
Mark J Higgins
Yeah, I mean, I, I never looked at it really as an option. I, I had and have a fiduciary duty to recommend what is in the best interest of clients. And if it is not in their best interest to have a lot of active managers in the portfolio that are not long term expected to perform if the structure is not there to allocate to alternatives in a way that is expected to be beneficial, then it's my obligation to tell them that and and when I did, they appreciate that and you start looking for new ways to add value.
00;29;30;08 - 00;29;49;25
Mark J Higgins
So there are know a lot of particular with institutions. There are often multiple pools of capital. And what I found was that, well, once we simplified one, now they wanted me to advise them on others. So a lot of times your relationship actually expands and becomes better once you admit what you can't do. That's that's been my experience.
00;29;49;27 - 00;30;09;15
Steven Pesavento
I think the average person, from my perspective, if you don't have some type of financial education or personal relation ships with people who have strong track records, the simplest option is 100% the best option. And even with those relationships, you know, I would never recommend somebody invest 100% of their money into our firm, nor would we allow it.
00;30;09;17 - 00;30;21;08
Steven Pesavento
Yeah, but when it comes to balancing a portfolio, how do institutions look at it and how do individuals look at it? I know you're very focused on the institutional side.
00;30;21;11 - 00;30;50;26
Mark J Higgins
I mean, my my experience is mostly, yeah, I'm very skewed toward institution. And so I can say probably less about individuals. But the biggest problem that I saw with institutions is the eagerness to get into areas that they're not prepared to get in. Like we talked about the over I mean, if you look at pension plans, the allocation to alternatives, I don't have the precise numbers, but it was negligible 20 years ago and now it's I think it's somewhere around 20% in alternatives.
00;30;50;28 - 00;31;11;08
Mark J Higgins
And there's no way you can convince me that most of those institutions have the appropriate infrastructure to do that effectively. And, you know, there's a lot of evidence coming out now, too, that it's not paying off in aggregate. Are there certain institutions that are doing it effectively? Sure. I mean, Yale is one of them, but in aggregate.
00;31;11;11 - 00;31;28;15
Steven Pesavento
So what value does a what value does a financial advisor who is going to direct people into index funds bring to an institution versus their ability to go to Vanguard or any of these other options and and go direct?
00;31;28;15 - 00;31;48;21
Mark J Higgins
And that's well, that was the question where I went, where I thought I was going to add, you know, maybe they terminate me because they wouldn't need me. But there's some there's coordination of other asset pools and institutions that have multi asset pools. You know, it was almost like I morphed into more of a financial advisor for institutions rather than just an investment advisor for institutions.
00;31;48;21 - 00;32;10;18
Mark J Higgins
So there was an insurance captive that I worked with and did a lot to understand their, their cash flows and risk to understand what the risk profile of should should be. So there are other things to do. It's going to vary by institutions. But the way I would say it generally is a lot of investment consulting firms limit themselves to just being the investment piece.
00;32;10;20 - 00;32;21;20
Mark J Higgins
But once you broaden it to become more of a financial advisor, there are things that have nothing to do with an investment but have a lot to do with how to manage your organization financially that they need advice on, and you focus more on that.
00;32;21;25 - 00;32;38;05
Steven Pesavento
So overall, your philosophy is simplify your portfolio as much as possible. I also in I may be wrong here, I'm also gathering that your perspective is take the very amount, the least amount of risk possible and hedged yourself against against what's happening in the market.
00;32;38;06 - 00;33;00;18
Mark J Higgins
Well, I mean, not so understanding what your return objectives are and your return objectives or, you know, long term objectives versus your risk tolerance, which is pretty much how much can you stomach if everything you know, goes crazy and you have a big you have a crisis, you have a big drop. And so a lot of that is really how much equity you have in the portfolio.
00;33;00;21 - 00;33;24;13
Mark J Higgins
So there's a lot of discussion on how much equity risk can you afford because long term that's going to produce better returns that are expected to produce better returns. And in the very long term, you can go long periods where it doesn't, but in the very long term it will. And then, you know, another thing that and then setting an allocation, you know, we use domestic equity, international equity, some real estate and and fixed income.
00;33;24;13 - 00;33;54;00
Mark J Higgins
And that's that's pretty much it. And but another thing that often gets neglected, which is extremely valuable, is rebalancing the portfolio religiously, you know, whether it's quarterly every six months or annual to maintain the desired return and and risk expectations of the portfolio. And a lot of that we are not gets neglected because there's it's very hard to rebalance a portfolio that's very complicated.
00;33;54;00 - 00;34;05;26
Mark J Higgins
So that's another benefit of simplifying the portfolio in liquid asset classes you can rebalance and that that is extremely important to maintain the desired return and risk exposures.
00;34;06;02 - 00;34;32;11
Steven Pesavento
So kind of shifting gears a little bit here, the Fed has, you know, raised rates extremely fast over the last couple of years. We're in an environment where it's unclear exactly what's going to happen. There's a likelihood that rates are going to stay higher for longer. There's a potential that rates might start coming down. How does fixed income or bonds play a role in your portfolio and how are you personally thinking about it today?
00;34;32;13 - 00;34;46;03
Steven Pesavento
Because from a long term bond perspective, it's very difficult for my firm, from my opinion, to be able to understand well, what is where are things really going to go and how do I bake that into my portfolio so I'm not.
00;34;46;08 - 00;35;06;00
Mark J Higgins
Yeah, I mean, it's it's less focus on that and more the role of fixed income in a portfolio is to provide a cushion when you have when you have panics and when you have major draw down drawdowns in equities. So we're not really thinking about, you know, do we change our allocation to fixed income based on where we think rates are going to go?
00;35;06;00 - 00;35;13;29
Mark J Higgins
It's more a steady and durable cushion that you have in the portfolio. So it's not really influencing our allocation.
00;35;14;01 - 00;35;22;20
Steven Pesavento
And what's the typical range? Obviously, every client is going to have unique situation. What's a typical range that that these institutions are looking for in that bucket?
00;35;22;22 - 00;35;47;13
Mark J Higgins
Yeah, I mean, it depends on the institution, but generally they can take more risk than individuals. I mean. I guess it depends. It depends on a lot of things. I mean, young and young people can take a lot of risk. But, you know, there's there's typically a lot of equity risk, although you do have some sometimes you have institutions with operating capital that, you know, you're just going to put it in fixed income essentially.
00;35;47;16 - 00;35;59;20
Mark J Higgins
But so it a lot. But I would say generally institutions have more risk tolerance than than most individuals, maybe with the exception of people that are very early in their career and their retirement.
00;35;59;20 - 00;36;11;27
Steven Pesavento
And what is how would someone from a numeric percentage perspective, what's a range that somebody would say, hey, well, that they're they're willing to take a lot of risks so they only have this allocation. What does that look like.
00;36;12;00 - 00;36;26;01
Mark J Higgins
If you're in this 70% equity, 80% equity exposure, that's that's pretty high. I mean, there are some people out there that I go 100%. There aren't many out there that are willing to do that. But, you know, kind of 70% equity makes sense.
00;36;26;03 - 00;36;48;06
Steven Pesavento
I know we're getting the end of time. So what I'd love to talk about is after doing all this work, writing this book, researching all this information about history, you've suggested some changes from an institutional level on investing in indexes. What were some other big takeaways from the book that you feel like is important for listeners to understand before they dive in and read?
00;36;48;13 - 00;37;14;16
Mark J Higgins
You know, that's a good question and I'm glad you asked it at the end. So if there's one thing that is unprecedented that is not good, it's getting more attention now. But it was striking starting from 1790 and going to today, it stood out. It really stood out. And that is the attitude toward the public debt. And if you look back in 1790, what Alexander Hamilton did, we were a disaster.
00;37;14;22 - 00;37;49;11
Mark J Higgins
We were bonds. And by issued by the states to fund the war, we're trading at ten $0.20 on the dollar. And Alexander Hamilton is the first chapter of the book established. First of all, establish a central bank. He consolidated all of the state debt into federal debt and then raised tariffs to make sure that we could pay it down and in that first report on the public credit, which he delivered to Congress, he also started an informal precedent that the public credit was critical, but it was only to be used during emergencies, mostly foreign war.
00;37;49;14 - 00;38;12;00
Mark J Higgins
And we abided by that. So we ran up the debt. In the war of 1812. We put it back, ran up the debt in the Civil War, paid it back. World War One, same thing, paid it back, and we stopped after World War Two. And the reason is because we were abnormally wealthy. And that emboldened us to spend in ways that we had never spent before.
00;38;12;04 - 00;38;35;11
Mark J Higgins
And we've been doing that now for for 60 years. And, you know, it's funny because a lot of the debate hones in on spending too much during the COVID 19 pandemic and spending too much during, you know, in the aftermath of the global financial crisis. But the real problem, those were actually legitimate emergencies. The real problem was running deficits in years when we didn't need to.
00;38;35;13 - 00;38;56;06
Mark J Higgins
And this is a very difficult problem to solve because there aren't any Americans alive today who remembers what it was like to live within our means. You have to go back to really the 1920s because we were deficit spending during the Great Depression as well. So I don't know how you solve this problem, but I do know that it the math doesn't work.
00;38;56;08 - 00;39;20;05
Mark J Higgins
If we keep spending at this level, we are going to have a problem. Now, is it going to be tomorrow? No, it's going to be in ten years. Maybe it's going to be in 30 years if we keep going at this rate. Yes. And that's a big problem to solve. And it's one that a lot of people don't appreciate how severe it is because they don't there's nobody alive today that remembers what it was like to spend within our means.
00;39;20;07 - 00;39;21;21
Mark J Higgins
And that's what we did for 175 years.
00;39;21;21 - 00;39;30;24
Steven Pesavento
Yeah, it's a huge problem. But what kind of problems could that bring up for investors and how should they be thinking about that as we head into the next coming decades?
00;39;30;24 - 00;39;49;12
Mark J Higgins
Yeah, I mean, from an investment perspective, that one, I can't see how you would trade on it, because to trade on it would be to have assumptions as to how it's going to play out. And I don't think anybody can make the projection. All the only thing that's really apparent is if we keep spending at this rate, it doesn't work.
00;39;49;14 - 00;40;00;08
Mark J Higgins
But the United States has a good habit of when we're forced to address things, we do address them. But how and when it plays out, I don't see how anybody could make a reasonable prediction. Yeah.
00;40;00;10 - 00;40;07;27
Steven Pesavento
Predicting the future is what investors often want to do, but unfortunately we can't. We can only react and.
00;40;08;01 - 00;40;25;22
Mark J Higgins
You can get to where you could, where you could get a good sense. Was it was pretty clear that the that the Fed, if you knew that they knew that about the big mistakes that they made in the sixties and seventies which you do know they know because you can look at the minutes and see them referencing it.
00;40;25;25 - 00;40;46;00
Mark J Higgins
It wasn't too hard to tell in it when they started raising rates that they meant business. And, you know, I'm on record as saying that and in writing. So but it was clear, pretty clear, not because, you know, I'm some masterful genius or anything. It's just because I read about and knew that they knew what they had to avoid.
00;40;46;02 - 00;40;48;23
Mark J Higgins
And, you know, that's the value of studying financial history.
00;40;48;25 - 00;40;57;18
Steven Pesavento
Well, it's super valuable. I've got one last question before we wrap up, but why don't you tell people how they can follow you or or get a copy of the book or.
00;40;57;20 - 00;41;17;10
Mark J Higgins
The easiest way to follow me is probably on LinkedIn. That's where I post most of my stuff. I do have a newsletter. If you go to Substack and just, you know, look out in history, you'll find it. And then the book is available on Amazon. Barnes Noble bookstores are starting to hold that. It's got a notice from Powells books, which is big in Portland, Oregon, that they're going to be stocking it.
00;41;17;12 - 00;41;22;04
Mark J Higgins
So, you know, it's pretty easy to find if you're interested. And I hope people get value out of it.
00;41;22;04 - 00;41;24;22
Steven Pesavento
Yeah, well, this has been really great. Mark.
00;41;24;24 - 00;41;27;17
Mark J Higgins
sorry. The book is called The.
00;41;27;20 - 00;41;28;13
Steven Pesavento
Investing.
00;41;28;18 - 00;41;31;04
Mark J Higgins
BLOCK. But anyway, what will you able to see.
00;41;31;07 - 00;41;54;07
Steven Pesavento
In U.S. financial history? It's available everywhere. Books are sold and now I really appreciate you being on. I'd love to get deeper and, you know, into the history maybe in another episode in the future. But thanks for giving us a great overview of kind of what's happening as we wrap up on this topic. Somebody is listening to this.
00;41;54;13 - 00;42;13;06
Steven Pesavento
They're thinking to themselves, Hey, there's so much information out there, but I, I just don't know how to take action and actually put this stuff into practice. What advice would you give them after all the research you've done in order to actually step into taking control of their financial future.
00;42;13;08 - 00;42;41;05
Mark J Higgins
That it is extremely difficult to outperform the market even for people that do this every day, that for the average person, their best bet is to use index funds and to allocate in a way that they're they're getting their best odds of hitting their long term return objectives. But at a risk level where they're not going to be impaired if there's a major event.
00;42;41;07 - 00;42;47;18
Mark J Higgins
And if you can do that, it's not it doesn't have to be that complicated. I think that's the solution for most people.
00;42;47;20 - 00;42;51;25
Steven Pesavento
Simple patient and read the book.
00;42;51;26 - 00;43;16;28
Mark J Higgins
Yes. And don't get spooked. I've seen enough of these things to know that it's scary when they happen. But the United States, the world is more resilient than people think. And to be honest with you, people who every generation thinks the world is going to fall apart. And that's another thing that came from reading newspapers. Every generation thinks the whole world's going to fall apart.
00;43;17;00 - 00;43;35;10
Mark J Higgins
You know, they're the last one to, have a have a good place and they never place out. And this whole process made me a lot more confident in America's future, even though it seems bad right now and there are bad things now. But it's always there's always something. And that's what gives me confidence that we're going to be fine.
00;43;35;11 - 00;43;40;00
Steven Pesavento
I love it. The future looks bright. Well, thanks, Mark. Super appreciate you being on.
00;43;40;01 - 00;43;42;06
Mark J Higgins
All right. Thanks, Steve. Thanks for having me this month.
00;43;42;07 - 00;43;44;12
Steven Pesavento
And we'll see you all next week.