The author and investment advisor on the danger of chronic deficits, the importance of central bank independence, warning signs in private credit, and why he’s still optimistic about America’s future.
Our guest on the podcast today is Mark Higgins. Mark serves as senior vice president for IFA Institutional, where he specializes in providing advisory services to institutional plans such as endowments, foundations, pension plans, defined-contribution plans, and various corporate plans. He’s the author of Investing in US Financial History: Understanding the Past to Forecast the Future. Mark graduated from Georgetown University, Phi Beta Kappa, and Magna Cum Laude with a bachelor’s degree in English and psychology. He received an MBA from the Darden School of Business at the University of Virginia. He is a CFA Charterholder and CFP professional. Mark, welcome to The Long View.
Investing in US Financial History: Understanding the Past to Forecast the Future
“The Story of Hetty Green: America’s First Value Investor and Financial Grandmaster,” by Mark Higgins, ssrn.com, March 11, 2022.
“Rediscovering an American Treasure: The True Value of Hetty Green’s Legacy,” by Mark Higgins and Bethany Bengtson, researchgate.net, February 2025.
“Investors Can Temper Their Inflation Fears: Post-Covid Inflation Is Unlikely to Resemble the Great Inflation of 1968-1982,” by Mark Higgins, papers.ssrn.com, Aug. 15, 2021.
“The Phantom Menace: Inflated Expectations,” by Mark Higgins, finhistory.substack.com, Sept. 26, 2023.
“Six Stages of Asset Bubbles: The Crypto Crash,” by Mark Higgins, businesstimes.com, Jan. 24, 2023.
“Origins of the Great Inflation,” by Allan Meltzer, fedinprint.org, 2005.
“The Anguish of Central Banking,” Lecture by Arthur F. Burns, perjacobsson.org, Sept. 30, 1979.
“A Rediscovered Masterpiece by Benjamin Graham,” by Jason Zweig, jasonzweig.com, March 31, 2015.
“Portraits in Oversight: Ferdinand Pecora and the 1929 Stock Market Crash,” levin-center.org.
Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, by David Swensen
“Private Equity Confronts Swollen Investment Backlogs With Dealmaking Stuck,” by Maria Armental, wsj.com, June 2, 2025.
“The Future Ain’t What It Used to Be for These Funds,” by Jason Zweig, wsj.com, June 6, 2025.
The Great Inflation and Its Aftermath: The Past and Future of American Affluence, by Robert Samuelson
The Big Board: A History of the New York Stock Market, by Robert Sobel
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Amy Arnott: Hi, and welcome to The Long View. I’m Amy Arnott, portfolio strategist for Morningstar.
Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Arnott: Our guest on the podcast today is Mark Higgins. Mark serves as senior vice president for IFA Institutional, where he specializes in providing advisory services to institutional plans such as endowments, foundations, pension plans, defined-contribution plans, and various corporate plans. He’s the author of Investing in U.S. Financial History: Understanding the Past to Forecast the Future. Mark graduated from Georgetown University, Phi Beta Kappa, and Magna Cum Laude with a bachelor’s degree in English and psychology. He received an MBA from the Darden School of Business at the University of Virginia. He is a CFA Charter Holder and CFP professional. Mark, welcome to The Long View.
Mark Higgins: Thank you for having me, Amy and Christine. Excited to talk to you.
Arnott: Well, it’s great to have you here. We wanted to focus most of the discussion on your book, Investing in US Financial History. But before that, we wanted to talk a little bit about your background. And your main job is as an institutional investment advisor for Index Fund Advisors. But you also serve as an editorial board member and guest curator for the Museum of American Finance. How did you first get involved with that organization?
Higgins: So, I wrote a paper on Hetty Green, who, we may get to this later, but was, as far as I’m concerned, she’s the best investor in US financial history. She’s from the Gilded Age. And I wrote a paper in April of 2022. It was one of the first papers I wrote using the financial history research I was doing. And I posted it on a site called SSRN, and Kristin Aguilera, who is the editor of Financial History Magazine, saw it and asked if we could convert it into an article for the magazine. We did. And I ended up writing several more articles over the years. They asked me to join the editorial board, I believe, last year, maybe two years ago, I’m losing track a little.
And then, it’s actually really exciting. They’re creating a physical location in Boston. It’s part of the Fidelity building in Boston. And it’s going to be amazing. It opens next year in July. And they’re using, I licensed the content for the book for one of the exhibits for $10 for the Hamilton kind of symbolism. And as part of that, I’m one of the guest curators with Dick Sylla, who’s a very well-known economic historian. So they’ve been extremely supportive. I’m thrilled to help in any way I can with the magazine and with the museum that’s opening. But it’s been a great story.
Benz: So you mentioned Hetty Green. And we often hear her referred to as the “Witch of Wall Street.” But you argue, and you just said, that she was actually one of the best investors in US history. Since you mentioned her, can you quickly talk about why you think her story isn’t widely known and also what made her so successful as an investor?
Higgins: This would be a whole episode. If you could take every quality that she was maligned for and to justify the term “Witch of Wall Street,” it wasn’t a vice; it was a virtue. They characterized her as a miser. She was very thrifty, which she was a Quaker. And she learned that in the whaling industry, which is a lot like venture capital, where you have to wait a long time for your wealth to come back if it comes back at all. And she was also very charitable. And a shout out to Bethany Benson, who wrote an article and follow-up to the initial article on Hetty Green that I wrote. She was also very charitable. She just did it very quietly. So those are just two things. Literally, I could go for an entire episode talking about what an exceptional investor and an exceptional person she was. But it’s just completely misunderstood. She didn’t fit the times, but it wasn’t because she was bad. It’s because she was actually good.
Arnott: And so it looks like you wrote that paper, was it in 2022 when that first came out?
Higgins: The first one came out in 2022. And then Bethany and I did a follow-up, and I believe it was late last year or early this year. I forget exactly when it came out. But she found the will of Sylvia Wilks, who was the last heir to Hetty Green. And her entire fortune was distributed to 63 charities. And she found the will in a New York probate court. And we found the 63 organizations and published an article on that. It was really fun.
Arnott: That’s fascinating. It was actually a couple years before that, right at the beginning of the pandemic, that you became convinced that you needed to start learning more about financial history. What was it about that moment in time that prompted you to start looking back at the earlier history of finance in the United States?
Higgins: I was an investment consultant working with institutions at the time. And like everybody, in March 2020, when the pandemic hit, I was caught flat-footed. I felt like nothing like this had ever happened, even remotely similar—essentially the entire world economy, just almost shutting down unexpectedly. I had plenty of time on my hands. You couldn’t go out and do anything. So I started reading financial history books. And the more I read, the more I realized that it actually wasn’t unprecedented, that the March 2020 panic almost looked identical to the July 1914 panic. World War I, most people don’t know, it really came out of nowhere. And, you know, similar effects. The entire world just kind of shut down and went to a total war bearing. I also, this was later on, but was reading about the inflation that followed the great influenza, the second wave, which was the deadliest, ended in the end of 1918, simultaneously with World War I, which ended on Nov. 11, 1918. And the inflation that followed, it was not transitory. It required aggressive monetary action. It looked a lot like post-covid.
So the more I was reading, the more I realized that we’re so focused on what’s around us, not just daily, but, maybe people look back 10 years at most, and they miss really, really important patterns that if you paid attention to them, you could invest better and you could create much better monetary and fiscal policies.
Arnott: Yeah, I’m embarrassed to say that before I read this book, my investment knowledge kind of started in 1926, which is with the SBBI indexes. So it was really helpful to go back much, much earlier than that.
Higgins: And it’s more relevant than people think. People think—and I did too, by the way—before I started doing this research, it was the most educational thing I ever did. They think that human behavior evolves, and it doesn’t. The conditions evolve, but the human behaviors are the same. So it makes it easy to dismiss things that happened 100, 200 years ago, even 300, 400 years ago, when they’re actually really relevant to today. And it’s a big blind spot.
Benz: As part of your research for the book, you toured the West Coast by train with your family. What were some of the highlights of that trip?
Higgins: You read the intro to the book. I think I mentioned this in like a sentence, and in the acknowledgments. You’re the first person to ask this, and I’m glad you did because it was one of the highlights. And so I went on this trip with my son, Jack, who is at Penn State Altoona, in the railroad engineering program. And, from a very early age, from age like two, he was really passionate about trains and his entire life, he’s just been building that passion and now he’s building it into a career. And it was really cool when the stories of the development of the railroads, which is a huge theme in the late 1800s, kind of overlapped with his passion.
And we decided to do a trip to see some of the famous sites like the Trans-Promontory Summit, where the Transcontinental Railroads met. And it was just, it was a great highlight. Now, the most memorable thing about it was when my son convinced my father—and my father and my mother went on the trip with us—convinced us to eat this ridiculously spicy beef jerky while we were driving through Utah. That was the most memorable. But really, I talked to Jack about this last night and asked him what was most memorable. And he said, just being with you and being with my grandparents. And I’ll never forget it. And it was, it was a really cool moment where our passions, which we’re both very passionate about, overlapped and we were able to bond on that. I’ll never forget that.
Arnott: That’s amazing. So we wanted to get into the book. And I think each chapter of the book starts with a quote from some figure in financial history. And I noticed the first and last chapters of the book both start with quotes from Alexander Hamilton. And I’m wondering if you could talk about what made him such a pivotal figure in the financial history of the United States.
Higgins: I always tell people there are really two people that stand out. Hetty Green stands out as, in my opinion, the best investor. And then the most versatile and brilliant financial mind would be Alexander Hamilton. And it is uncanny how much he foresaw in terms of the development and the challenges of this nation more than well over 200 years ago. And the most lasting thing is repairing the US debt. We were basically bankrupt in 1790. And he basically repaired it by consolidating all the state and federal debts, modestly raising tariffs to ensure there was revenue. There was no income tax back then. And really solidifying the credit of the United States, which we would need over the next 230 years. The other thing is he established the first central bank.
And I remember reading it. Most people don’t know this, but the Federal Reserve is the third central bank. The first one was established by Alexander Hamilton. It was chartered in 1791, only a 20-year charter. Disappeared for about five years. And the second bank came and disappeared in the mid-1830s. So he was brilliant in that regard too. And we may talk about this later, some of the challenges for the US right now, but one of the things that really struck me about Alexander Hamilton is when he repaired the debt, he established two principles. One was the debt should be used primarily in times of emergency, public dangers, mainly foreign war. And then once the danger subsides, we should pay it back with budgets or pluses. We actually did this: the War of 1812 hit, we ran up debt, paid it back. The Civil War hit, ran up debt, paid it back. World War I, same thing. And then World War II hit. And we stopped doing it.
And there are reasons for that. We were very wealthy. We thought that would continue. We were generating more wealth because the whole world was destroyed, and we had the reserve currency. So this is becoming a very relevant issue today. And it’s another example of most people don’t realize that chronic deficits are not normal in this country. They’re normal over the last 70 years, but they’re not normal in the broader history.
Benz: We’d like to follow up on some of those points, Mark. I wanted to stick with central banks for the moment. The first central bank in the US closed in 1811 when the US House of Representatives narrowly voted to reject the proposal to renew its charter. Why was the idea of a central bank controversial back then?
Higgins: It’s been controversial for a long time in US history. And there are a lot of reasons. I would say the most powerful one is, particularly around 1811, there was just a lot of fear of centralized power under the federal government. The colonies had rebelled against Great Britain. And there was just a lot of fear of consolidation. And also, banking tended to benefit the northern states, the merchant class, the financiers, more than the farmers. They’re the ones taking out the loans. So, it was really fear of centralized power and, just kind of aversion, mainly with the more agricultural states to banks.
Arnott: Another great example of current events that have really interesting historical parallels is the whole topic of central bank independence. And Alexander Hamilton was a strong believer that a central bank had to operate independently without political interference. And we did see under the Johnson and Nixon presidencies, there was a lot of political pressure applied to the Federal Reserve, which was one of the reasons inflation spiraled out of control in that era. And I’m curious, now we’re again seeing the president trying to threaten the fed’s independence. How worried should investors be about that?
Higgins: So, I am worried about it. It’s not the first time it’s happened. The worst was actually Andrew Jackson. He actually got rid of the central bank, the second bank in the United States. But it was pretty bad in the ‘60s and ‘70s. And you’re right, that was a big cause of the Great Inflation was that they couldn’t keep, the Fed had so much political pressure on them, and they succumbed to it. And they failed on really three occasions to tighten rates sufficiently to tame inflation. So it’s not a good thing. I’m absolutely against what’s going on. But what is missing from the conversation is—and I’m actually pretty surprised about this—there are really two mistakes that the Fed made after post-covid inflation started picking up in 2021. The first was, I don’t know if they ignored or discounted the lessons from the inflation after the last pandemic. The great influenza and World War I ended simultaneously. It was not transitory. It lasted about two years. It required aggressive action. The Fed was late. So, they kind of missed that. And the less excusable one was when they pivoted last year, over a year ago now. If there’s one lesson from the Great Inflation, and it’s very clear, it’s very well documented, is that when inflation emerges and persists, you need to tame it.
You need to extinguish it decisively. And that’s why recessions usually follow events like this, because you need to overcorrect. And that’s rarely talked about. And the price of not doing that is it allows inflation—first of all, their miss of the World War I, great influenza precedent allowed inflation to really ramp up and persist. And then their premature pivot allowed it to last. And that actually leads to a lot of civil discontent, first of all, which is going to make political pressure seem more rewarding. And now you have that situation. So, this is going to sound harsh, but I really believe it. I think the Fed made two material errors. The first one, maybe it’s excusable. You had a precedent that happened 100 years earlier. The second one, it’s hard to excuse it. The Great Inflation is well documented in books. It’s well documented in Fed speeches, like “The Anguish of Central Banking,” which Burns delivered in September 1979. It’s well documented in an article, “The Origins of Inflation” by Allan Meltzer. It’s just they really missed it. And that’s rarely talked about. And I think we’re going to pay a price for it. We already are.
Benz: Sticking with historical precedent for the current environment, I wanted to ask you about Charles Merrill, who you talk about in the book. He founded Merrill Lynch in 1914. And he thought stocks were overvalued in 1928 and early 1929 but was ridiculed and criticized when stocks continued to post gains, to the extent that he had to meet a psychiatrist to reassure himself that he wasn’t losing his mind. So why is it so hard to go against the crowd as an investor, even if you’re convinced that you’re right?
Higgins: It is hard. And the irony is it is really hard to outperform markets. Can some people do it? Yes, but it’s very, very hard. But if you’re going to do it, the only way you can do it is to be different from the crowd. Because if you’re going with the crowd, really the only way that it makes sense is to index and reduce your cost because you’re not going to beat them. And I don’t know, I think people you get ridiculed if you’re wrong. I mean, Charles Merrill experienced that. People made fun of him in the newspapers. His colleagues made fun of him. And you risk being ridiculed and ostracized. I think the risk is less than people think. I don’t think there’s any shame in making a prediction based on sound logic, being wrong, learning from it, admitting it, and moving on. I’ve been wrong.
You just admit it, figure out what you did wrong, and move on. So, I think people underestimate the costs involved psychologically. Now, if you’re making a bad bet investment wise and you make a huge bet, there’s financial costs to it. But, psychological costs, I think as long as you have sound logic and you learn from your mistakes, I don’t see the downside to being different as much as most people think.
Arnott: You mentioned how difficult it is for active managers to beat the market. And I thought one interesting thing that you mentioned in the book is that even if you go way back to the 1920s and ‘30s, there was a lot of evidence that active management consistently failed to beat a relevant market index. And this is something that Ben Graham also wrote about back in 1963. So, why do you think it took so long for passive management to gain broad acceptance?
Higgins: I think as it usually is, it’s the incentive. So, first of all, people did know that it was very difficult to beat the market intuitively. So, the way you beat the market in the Gilded Age in early 1920s was to manipulate it. And there are these things called stock pools where you would get a pool capital, there’d be a pool manager, and then they would buy off newspapers, buy off journalists, spread rumors, do wash sales, do all kinds of nonsense to manipulate the market. And basically fleece the public. And in 1934, during the Pecora Hearings a couple years earlier, people got sufficiently disgusted with that, that they passed the Securities Act of 1933, which required disclosure, and then the Securities Exchange Act of 1934, which outlawed market manipulation and insider trading. And once that happened, the only game in town was to beat the market through securities analysis. And that was really the birth of the security analyst profession.
So, I think it almost arose out of default. People kind of intuitively knew that it was hard to beat the market. There was an SEC study in 1940 that shows the same things that Morningstar’s studies show that most funds underperformed. But that was really the last thing that Wall Street had. And that’s what they invested in. And you mentioned Ben Graham, it’s not a coincidence that securities analysis was such a hit in 1934. That was the last game in town. Ben Graham was a rarity, and he wasn’t manipulating the market. He was analyzing securities and that’s why it took off then.
Benz: You write that the Federal Reserve’s failure to contain growth in the money supply was the root cause of the Great Inflation in the ‘60s and ‘70s. Should people be concerned about all of the money printing that has happened more recently?
Higgins: I mean, yeah, absolutely. And Ray Dalio recently came out yesterday and said this is like the early 1970s. I agree with him. I think that’s the best comparable for what we’re going through right now. There was a lot of spending on social programs associated with—it started with the great society in the 1960s. We had the Vietnam War, but more importantly, and this is really what drives inflation, you had a Federal Reserve that was too accommodative. And it’s actually been surprising to me. I wrote probably three years ago, a paper saying that this was unlikely to be a Great Inflation-level event because the lessons were too recent. The Fed knows what happened in 1965 to 1982. They know that Volcker had to turn the screws like never before in order to prevent it. They’re not going to repeat that error. And I’m beginning to think I was wrong. I think they have repeated the error and it’s very concerning.
Arnott: Another topic you wrote about was the danger of policymakers being less sensitive to the federal debt and the consequences of running unsustainable budget deficits. And you also think that the next major financial crisis might happen after foreign countries start abandoning the US dollar as a reserve currency. Is that something that investors should be worried about now that we have started to see a lot of countries de-dollarizing their reserve assets?
Higgins: Yeah, this is by far the biggest concern that I have because it is a true anomaly. Ever since Hamilton repaired the debt in 1790, we have not had debt at this level at all. We’re now above World War II peak levels, which we had a global two-front war to fight. And we’re not in a crisis. So this is very, very anomalous. And the real anomaly is not necessarily the response to the global financial crisis and covid, although I do think covid went too far. It’s running all those deficits in the peaceful years where we should have been running surpluses. And I would probably reverse what you said in terms of this causing a financial crisis where past dominant reserve currencies have lost their status because there was a crisis that bankrupted them. So the Dutch lost to the British in the Fourth Anglo-Dutch War in the 1700s. And that’s when Great Britain took over; the Pound Sterling became the dominant reserve currency.
World War I and definitely World War II bankrupted Great Britain. And that’s when the dollar replaced it. So it’s more, it goes all the way back to Hamilton. So Hamilton knew that it was critical to have abundant borrowing capacity and sterling credit to deal with emergencies, not just to fund continuous deficits for the government. And what worries me is that we are eroding our debt capacity. There will be some unforeseen crisis. What is it? I don’t know. Maybe there’s some type of war that we didn’t anticipate. Maybe there’s some type of cataclysmic natural disaster. It’s impossible to predict what it is and when it’ll occur. But if it does occur and we have insufficient debt capacity, well, we’re just going to have to deal with the consequences. And that’s what worries me the most.
Benz: The book details shadow banking and how it contributed to the global financial crisis. Could you discuss first what are shadow banks, and what are some of the major problems with them?
Higgins: Shadow banks are basically banklike entities that are operating outside of the purview and support ultimately of the Federal Reserve System. And it was a problem in 2008 and 2009. It’s a bit complex and you can read about it in the book. But there was a big banklike entities, mainly with the investment banks and what they were doing with securitizing mortgages. And the problem with a situation where you have a large banking system operating in the shadows is when you’re borrowing short and buying long-term assets, if everyone wants their money back at the same time, you can’t give it to them. And one of the key functions of the Federal Reserve is being a lender of last resort. So what they can do is when you have a situation like that, is you can buy assets or lend to them to provide the funds that they need to do to supply to depositors who are demanding it. And just the knowledge that they can do that is often sufficient to prevent a run. And when you have a shadow banking system that doesn’t have access to that, when there’s a run, which there was in 2008 and 2009, the Fed is impaired in what they can do to help and that’s essentially what happened.
Arnott: We also wanted to spend a bit of time talking about the current market environment. And you’ve written about the dangers of unrealistic return expectations. And that’s something that really hurt institutional investors going back to the 2010s because they overloaded on asset classes like hedge funds and private equity. Do you see any similar issues brewing with those asset classes today?
Higgins: I think it’s worse. So this goes all the way back. You have to go all the way back to the early 1980s when alternative investments like venture capital, which was desperately needed back then to fund the computing age, and buyout funds, they had a lot of tailwinds at their back, back then because of declining inflation and interest rates and rising equity valuations. So they got monster returns. That’s when David Swensen came to Yale in 1985. He got in on that early. And he generated amazing returns for the Yale University Endowment. And then he published a book in 2000 called Pioneering Portfolio Management. And he didn’t say this, but a lot of people interpreted the book as if I just allocate to private equity and hedge funds and now private credit and venture capital, I can get Yale-like returns.
But they dismissed the fact that he was, and his organization was, uniquely talented early and he was a great teacher and had great access. And so it really started ramping up in 2000. And now you’re to the point where there are trillions and trillions of dollars allocated to these asset classes, and there are clear signs that it’s overallocated. The distributions have dried up. There’s an article in The Wall Street Journal that I think is about 30,000 companies awaiting exit. And now you have this push. The institutions are getting out. A lot of them are selling assets in the secondary market, including Yale, by the way. I don’t know if they’ve executed the sale, but they were looking into it. And now it’s being marketed to retail investors in 401(k) plans and defined-contribution plans. And what people don’t realize is that this is not the beginning of a cycle. This is the end of the cycle. And what is typical of the end of the cycle is that retail investors are the targets. And that’s what’s going on now. And it’s very concerning.
Benz: You’ve been particularly skeptical about the return prospects for private credit. So maybe you can talk about what are some of the warning signs that you see there?
Higgins: It’s just that if there’s one thing I can put my finger on, it’s the lack of fear. And you have seen some fear pick up a little after the bankruptcy of First Brands. But there’s just this general perception that there’s free money to be had here. And what happens in these situations, which has definitely happened here, is you have some kind of false narrative that you hear all the time, well, there’s so much private lending needed because of the aftermath of the 2008-2009 global financial crisis. Well, that happened 16 years ago. That was legitimate in the early years. I don’t buy it now. And it’s just the herd instinct. People make monster returns at a time where it made sense—there was a legitimate gap in the market, which there was after the global financial crisis.
And then the herds descend, yields decline, people start underestimating risk, and it breaks. And look, if I’m wrong, I will be the first to admit it. But I don’t see how we’re not near the end of this cycle, much closer to the end of the cycle, rather than the beginning. And can I put my finger on specific data that indicates this? Well, I can, but it will take a little longer. And a lot of this is with financial institutions. You see big patterns. You don’t necessarily see one data point that is fatal. It’s the pattern. And that’s the pattern I see.
Arnott: And with private credit, I think people look at the yields available on some of those funds. And I don’t know if they realize that the default rate is actually pretty high. I think I was reading something this morning where the default rate on private credit is something like 10%. So, hopefully the First Brand’s bankruptcy will be a bit of a wake-up call. But it seems like people are just focused on the return potential and kind of turning a blind eye to the risk side.
Higgins: Yeah, I think it’ll break. But we’ll see.
Arnott: So you were talking about patterns. And another thing you discussed in the book is the six different phases of an asset bubble. And I think if you look at the market right now as we’re taping this toward the beginning of October, you could point to a bunch of different areas that might seem a bit bubbly: US stocks, bitcoin, gold, artificial intelligence. Are there any asset classes that you think people should be especially worried about at the moment?
Higgins: The one that worries me the most is private markets. And I’ve written about this recently. I’m converting a newsletter that I did on the evergreen funds that are basically investing in private markets. And I laugh about this, but it’s actually not funny. It’ll be funny in like 30 years or something. But it’s amazing what they’re doing. So what they’re doing, and now there’s a big push to go into defined-contribution plans to hit the retail market, which is that in and of itself is a red flag. And what these funds are doing is they are investing in secondary positions that a lot of the institutions are selling for reasons that we discussed earlier that there’s too much capital there and not enough opportunities. And the evergreen funds are buying secondary positions. And then there’s this obscure accounting rule that was established in 2009 when secondaries were a very, very small market and the market was legitimately distressed because of the global financial crisis.
So there’s this thing called a practical expedient that was really just for reporting purposes. When you buy a secondary position and the general partner is reporting an NAV that differs from what you paid for the secondary position, just at a convenience for it to make reporting easier, you’re allowed to literally in one day mark it up to the NAV. So what a lot of these funds are doing is they’re starting by buying some direct investments but buying a lot of secondaries, immediately marking them up using this practical expedient and reporting these very big returns. And it, I mean, it doesn’t take a genius to figure out the problem with this. There are a lot of problems with it. The biggest problem is the only way to maintain your returns is to keep buying bigger and bigger slugs of secondary so you can get those one-day markups. And a lot of people, it’s surprising, but a lot of people just don’t know that this is happening, that not only are these returns potentially—I would argue that likely—are not real because people are getting rid of them for the reason that a lot of them have multiple bids now. There’s evidence they’re overpaying for them.
And then on top of that, they’re marking them up to levels that may never be realized. And some of the funds are even, or even a lot of them actually, are paying themselves based on the markup. They’re paying themselves incentive fees based on the markup. And there’s a recent article in The Wall Street Journal by Jason Zweig on the practices at Hamilton Lane, the Hamilton Lane Private Assets Fund. And they are distributing massive amounts of money on returns that are shaped by, to various degrees depending on the fund. But a lot of it’s coming from these accounting markups, and it’s really disturbing. I feel like I’ve seen a lot of interesting ways to take advantage of loopholes that probably shouldn’t exist. And I’ve seen worse than this, but this one’s pretty bad.
Benz: So AI is often pointed to as potentially another bubbly area in the market. I wanted to ask about the CFA Charter. There were more than 190,000 CFA charterholders globally as of March 2023. And passing the CFA exam has historically been one of the best ways for people to get ahead early in their careers. You’re a CFA charterholder, as is Amy. But we recently saw a news report that ChatGPT can easily pass the level-three CFA exam. So are advances in artificial intelligence and existential threat for investment analysts in your view?
Higgins: I don’t know. I’m not surprised that it was able to do it. They’re mostly multiple choice, but it is really, really impressive that it was able to do that. That’s one I just, I don’t know how that’s going to play out. I will say that I always looked at the CFA, like when I see people have passed the three levels of the CFA, it may not be what they intend. But I look at it as somebody who’s pretty darn dedicated and a hard worker. So I don’t think it reduces that signal value. But in terms of, I talk about like the educational things that—I’m probably going to offend people here and I apologize, but it’s just my impression. I look at four educational things that I did over the past 25 years and by far, it’s not even close. By far the most valuable was the reading and research that I did independently to write my book. Second, it’s probably a tie between the CFA and CFP. The CFP was a little more practical in terms of how you can help people. The CFA was just kind of deeper on the investment stuff. So it’s probably a tie there.
And then my apologies to Darden, but MBA is last on the list. And the funny thing about it is it’s inversely correlated to the cost. So the cheapest thing was buying books and reading, but a lot of stuff was free. CFA and CFP were pretty cheap, too. I’m just talking about like financial expense, obviously, it was big time investment. And then by far the most costly was the MBA. So, I don’t know how this plays out in terms of value proposition, but I think some of the things, particularly the showing commitment, I don’t know if it’s the most time-efficient way of showing it, but I think there’s value there. But I don’t know how it plays out.
Benz: Mark, you referenced how valuable steeping yourself in financial history was. If you were to recommend a couple of books for people, obviously your book is incredibly comprehensive. But what were the ones that you found just so useful and eye-opening?
Higgins: Yeah, some of it is time sensitive. So I think the most important book for people to read right now is a book by Robert J. Samuelson, it’s called The Great Inflation. I forget exactly the subtitle. It’s called The Great Inflation. Just because I think we are going through a lot of the same issues right now. There’s one I just have an attachment to just because it was the first one I read. It was called The Big Board and it’s on the history of the New York Stock Exchange from, it stops I think in like 1960, 1970, but I don’t know if I’d recommend that, but it was a really interesting book. I’d have to think about some others. I haven’t really thought about lower down the list, but the number one I would recommend right now is the Robert J. Samuelson book.
Arnott: I also wanted to touch on the topic of tariffs, and a lot of tariff proponents point to William McKinley, who was a Republican president who championed tariffs and Congress passed several tariff bills back in the 1890s. But I haven’t heard a lot about the trade policies in the 1930s, which did not work out well. Do you see any parallels with the recently enacted tariffs, or do you think the situation is different this time?
Higgins: Initially, I was very concerned and especially when Trump came out with the wildly inflated tariff levels. There were two concerns. One, it just seems unrealistically and damagingly high. They’ve since backed off that. The bigger concern though was if this turns into a tit for tat trade war with everyone throughout the world, that actually was a pretty important contributor to World War II. Well, it’s actually more important in Japan in terms of the rise of militarists in Japan. I write about this in the book. The depression was sufficient to allow the rise of the Nazis. So I was concerned about that. We haven’t seen that yet. So the way I would describe it is very risky. Some of those risks have not come to fruition yet, but it’s risky. I’m relieved that the Trump administration has backed down on just the level of tariffs and that there isn’t a tit-for-tat response because it’s a tit-for-tat response that gets really concerning.
Benz: One of the things you’ve been critical about is some of the agency conflicts in investment consulting. Can you unpack what the main conflicts are and what types of negative outcomes they’ve led to?
Higgins: This is a frustrating one because it’s tough to balance. I feel like it’s an important message to get through, but I don’t want to alienate people either because I was part of this for quite some time. And, and this came from the research that when I got to the 1960s and 1970s and really 1980s, I started seeing where the investment consulting industry came from, and it’s actually a really interesting history. So it really started in the 1970s with computing, and consultants essentially revealed that the bank asset management departments, which were managing institutional money were not performing well and they were charging a lot of fees. And this was revealed with their performance reports. And the consulting firms essentially emerged as performance reporters. And then as they moved the trustees away from the bank asset management departments, they started doing manager searches and then they started offering asset-allocation services.
And by 2000, they started getting into alternatives and then the OCIO concept came. And the funny thing is, is you saw over several decades, a lot of these consulting firms became exactly what they replaced. And there’s this assumption—and this is my conversion when I was as at an investment consulting firm—there’s this assumption that being a little different in terms of your asset allocation, picking and hiring and firing active managers, and adding alternative asset classes to portfolios is adding value. But there’s a lot of evidence, and I would say my personal experience as well, that it isn’t. It’s detracting value. And they’re focusing on the wrong things. They’re institutions that need a lot of help in terms of managing their finances and simplifying their portfolios at this point and reducing costs.
And instead, consultants are just so wedded to business models that are dependent on things that are not adding value in aggregate. Can you get lucky, or can somebody have extraordinary skill? Yes. But the odds are against them. And there’s plentiful evidence. And I think one of the best pieces of evidence is an article I wrote for the Museum of American Finance. I did a case study on the Nevada PERS, which has over 60 billion in assets for 20 years, more than 20 years now. But at the time, I think it was, I think the period was ending in March. I may not get this time exactly right, but about a year ago. And for 20 years they had outperformed, and this is before fees are taken into account. They have much lower fee levels. They had outperformed between 89% and 98% of their peers, depending on the time frame. And the evidence is overwhelming that consultants should be moving institutions and trustees to less-complex lower-cost portfolios, and they’re going in the opposite direction. I think it’s just institutional inertia.
Arnott: I think we’ve seen a lot of evidence on the retail side as well that simplicity can actually lead to much better results for individual investors. And, things like the 60/40 portfolio or target-date funds for 401(k) plans tend to end up with pretty good results in terms of risk-adjusted returns, but also behaviorally, people tend to stick with them, which is another main driver behind getting better results over time.
Higgins: It’s not rocket science. I saw this article the other day. It was like the new 60/40 is the 50/30/20, and I was like, I know what the 20 is. It’s alternative investments. And sometimes I feel like it’s, so now it’s 50% equity, 30% high-quality fixed income, 20% esoteric stuff that you don’t need. Some combination of the previous two and really big fees. And that’s the cynic in me, but that to me is roughly what’s going on.
Arnott: Yeah, and you can see, a lot of proponents of that type of asset mix will point to projected returns on alternative assets, but there’s no guarantee that you’re actually going to get those returns. And as you point out, in the meantime, you are guaranteed that you’re going to be paying higher costs, no matter what.
Higgins: It depends on the study, but a lot of those assumptions are suspect for two reasons. Some of it is just the methodology. I saw a study the other day, and I can’t say who the organization was, but it assumed that you were going to get several hundred basis points of alpha from those allocations. That’s a big assumption that you’re going to be much better than average. And that study is being used to justify broad allocations to alternatives, which by definition can’t apply. Are there small segments that might not perform? Sure. But if you’re using an assumption of alpha and applying it to everybody, that’s impossible. It can’t happen. So there’s flaws there. And this is where history comes into play. Just because something worked in the past, it worked under a different set of conditions. And what you’ve seen over the past 45 years, first of all, the returns aren’t what a lot of these studies are saying. They’re not as attractive as people think. There’s a lot of evidence of that. But even if they are, that was in the runup. That was in early stage of the cycle. We’re in the late stage of the cycle. Those rules don’t apply anymore. And people rarely consider that.
Arnott: So for our last question, we wanted to zoom out and look at things from a big-picture perspective. And you spent about three and a half years working on the book. And you wrote at the very end that at the beginning of that process, you were pessimistic about America’s future, but now you feel more confident. What made you change your mind there?
Higgins: I was pessimistic, because when you’re caught in the present, everything looks like a disaster. And the way I wrote this book, and I can’t say this was a methodology, it just kind of happened this way, is I started—I actually started before 1790, but I started the book in 1790. And I just over three and a half years gradually read myself to the present. That meant reading books on I don’t know how many—100, 200, something like that—reading studies, reading newspapers. So around major events, I would literally sit on the couch and Katie, my wife, would be like, “What are you reading?” I’m like, “I’m reading a newspaper from 1850.” And I would sample newspapers from like one a week around major events to see what it was like to live then. And, one thing you pick up on is, first of all, we’ve had some really bad times. Can you imagine living in the 1930s where average unemployment was roughly 20% for 10 years? And by the way, after that, you had 100 million people die in a world war. I mean, that was really bad.
And I also watched war movies, and I tried to, I developed a real appreciation for the sacrifices that soldiers make. I watched the most brutal gruesome war movies; read the most brutal gruesome memoirs just to get a taste of what it must be like to be in a war. And it’s horrible. And, but anyway, by the time I got to 2000s, I said to Katie, I was like, “This actually isn’t that bad.” And that’s what gave me the hope. It’s seeing that every generation thinks the whole world’s going to fall apart after they leave. You read the newspapers, that’s where you pick that up. And, this country has seen, we’ve seen horrible depressions, and the Great Depression wasn’t the only one. The 1840s was probably just as bad. We’ve seen horrible wars, pandemics, natural disasters. We had civil war; we’ve had civil unrest. We’ve had everything. And there’s something about this country that our institutions and our people are more resilient than people often think.
Sometimes it’s suppressed, sometimes it goes dormant. But I really believe in this country. I think we have a great culture. I think we have stronger institutions than people think. I think we have people that are better than people often appreciate. And we are innovative. We’re not scared of failure. And I think we have a really good formula. And will it end someday? Sure. I don’t think it’s close. I always couch that, and there’s a lot of this in history. It’s cognitive dissonance. You got to hold two things simultaneously. That does not mean we don’t have problems. The debt is a big problem. The monetary failures are a big problem. Political divisiveness is a big problem. I just think we’ll get through it. And a 230-year track record is not something to take lightly and sneeze at. I think it will continue.
Arnott: Well, Mark, thank you so much. It’s been great talking with you. And I really enjoyed reading the book. And I think anyone who is an analyst, or financial advisor, or individual investor should definitely read it. I think it’s a great foundation for understanding what’s happened in the past and what that might mean for things that are happening now.
Higgins: Well, thank you so much both Christine and Amy. This has been a really fun interview. And thank you for having me.
Benz: Thanks so much, Mark.
Arnott: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
You can follow me on social media at Amy Arnott on LinkedIn.
Benz: And @Christine_Benz on X or at Christine Benz on LinkedIn.
Arnott: George Castady is our engineer for the podcast, and Kari Greczek produces the show notes each week.
Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
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