James Surowiecki returns to our podcast to review previous predictions of a cryptocurrency bubble, look at the future of meme stocks, and play a round of the time-honored Foolish game of buy, sell, or hold.
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This video was recorded on July 19, 2023.
David Gardner: Do you remember that friend of yours, the one who didn’t believe in crypto? “It’s a bubble,” he said. It’s a bubble. Now if that friend had been really early, really observant, that might’ve been as early as say 2011, when my guest this week was saying just that, or it might have been 2017 when Bitcoin started the year around a $1,000 a coin and close the year closer to $15,000. “It’s a bubble,” said your friend. At that stage, it may not have just been your friend. You could just as easily have encountered the same thoughts on the cover of a respectable financial magazine or website, or it might have been 2021 when it became increasingly clear that Bitcoin digital gold, if you will, might well be very valuable. But one thing that clearly wasn’t was a currency. I mean, sure, Elon was enabling people to buy a Tesla with Bitcoin. But my guess this week, who was on this podcast in 2021 February, to be exact, was pointing out then, as has become quite evident now, that whatever Bitcoin is, it’s really not a transactional currency. It’s a bubble. You may have friends like that. You may be that person. I’m not that person myself, but I do respect well-reasoned and articulated viewpoints on all sides. My longtime friend Jim Surowiecki is that friend for me. Now Jim was not a big fan of crypto when he last visited us in 2021 and part of my interest in having him back now two years later is to give them a victory lap moment or two because FTX, because meme stocks crashing, because an extremely well-read, brilliant, intellectually curious source of financial opinion for 20 years plus. Now, Jim Surowiecki has often been very and very helpfully right. For those who listen, and that’s you and I, who get to listen in this week only on Rule Breaker Investing.
My freshman year at the University of North Carolina at Chapel Hill, there was this underage member of our class I got to meet. By the way, people who are under aged in college are shall we say, quite bright. Jim Surowiecki was a fellow Morehead-Cain scholar coming down from the north to get a free-ride scholarship in the south for his leadership potential. I met and befriended Jim that year, circa 1984, and we’ve been friends ever since. In fact, as we started the Motley Fool in our earliest days on America Online before the world wide web was a thing. There was Jim Surowiecki working right there at Fool HQ for a few years, working hard on this promising new medium online. People called it later the internet working with me and Tom, and our married band of Fools back then to figure out how to build a business online. Well, Jim has since gone on to prove that his leadership potential recognized at North Carolina would turn into real leadership. Today, he wears many hats in addition to being a family man with at least one of his young children occupying his lap. During our conversation this week, Jim writes regularly now for the Atlantic and Fast Company, having written in 2004 the best-selling Wisdom of Crowds book and for the New Yorker for years today living in New Haven, Connecticut, where he also today teaches at Yale and helps out with the Yale Review. Jim, welcome back to Rule Breaker Investing.
James Surowiecki: Thanks for having me on, David.
David Gardner: I’m just delighted to have you back. As I said at the top of the intro, it was two years since you last appeared on this podcast. To my slight credit, I said we’re not going to let three years pass before revisiting each other in this topic, and so I’m happy to say inside three years, we’re back. But Jim, a lot of things have happened in the world of cryptocurrency, which since it’s a rather large world, I would say, have happened in the world at large.
James Surowiecki: Yes.
David Gardner: These days. I definitely want to touch some of those, but I want to start with where things were in February of 2021. The title of that podcast was Bitcoin 2021, my good friend Aaron Bush, joining you and me, Bitcoin was sky-high. That week, it touched over $50,000 per Bitcoin. Just to quickly trace these back. Now, I don’t follow this actively. We have listeners who know this down pat, but I’m about to take us all briefly through the stock graph of Bitcoin since February of 2021. Fifty thousand dollars, as you and I talked two-and-a-half years ago, dropped to 35,000 later that year, but was back up to 64,400 all-time-high that November of 2021. You talk about volatility while we’ll spend it forward one year, 2022. Last year it spent a lot of its time at or below $20,000, and as we started 2023, Bitcoin was trading right around $17,000 a Bitcoin. Today, mid-July, 29,000. You began writing about Bitcoin Jim Surowiecki in 2011. Even then, I think you said you thought it was in a bubble, but your January 21 piece, you had just written for marker two years ago said, “Measured as a currency, Bitcoin has failed.”
James Surowiecki: Yes.
David Gardner: You probably raised some eyebrows and that’s a good headline for a headline editor to get clicks. But Jim, what were you saying then and do you still feel the same way today?
James Surowiecki: Yeah, I do feel the same way. In fact, I think in a way, the argument I was making in that piece, which is essentially that the original vision of Bitcoin, which was essentially that it was going to become a digital currency that could compete, or in theory, I guess, even replace traditional, what are now called fiat currencies, that that original vision was basically dead. That the nature of Bitcoin, both in terms of just literally technologically that the fact that it could only do a certain limited number of transactions per hour. I know how Bitcoin evangelists will tell me that there are various ways they have been working on that problem, but it remains a real issue. But then I think the second thing which is a bigger problem, is it really inherent in the way Bitcoin itself it’s not true of all cryptocurrencies, but Bitcoin is set up, is just that because Bitcoin has a limited and that is to say permanently limited number of Bitcoins that will ever exist in the world. It basically creates an incredible incentive for people who believe in Bitcoin to hold onto it rather than to use it because it essentially means that you assume the value will rise over time if more people want Bitcoin and so using it to buy a pizza, which is the famous example, was someone used it to buy a pizza [laughs] way many many years ago and I can’t remember how much he would have now if he hadn’t done that. It was the most expensive pizza purchased probably in the history of the world. I do think that the argument that I was making which I think is now a fairly familiar one, is that Bitcoin really was now functioning more like digital gold and that it was really serving more as to the extent that it had any value as a currency, it was really more as a store of value. It was really an asset rather than a currency which you basically want people to be using. That argument I think is essentially correct. you will still hear people trying to make an argument that Bitcoin will someday be real currency, but I feel like that’s faded away.
David Gardner: Jim, would you say the same thing of any other cryptocurrency at this point. My assumption is the Bitcoin being the brand leader and the top dog over history would be the one that has the best shot of all currencies to be a so-called future fee out currency. Do you see anything else emerging in the Ether or do you think this is just not a thing?
James Surowiecki: Ether actually is the only other one that I think has simultaneously the brand name and then structurally could also actually in some ways probably work better as a currency because it doesn’t have that limited number of permanent number.
David Gardner: Ethereum?
James Surowiecki: Yeah. Set on it basically. Ethereum is used now within the crypto ecosystem to fund certain projects and the like. But I don’t think there’s any real evidence that Ethereum is being used as a currency in day-to-day transactions. One thing that’s important to note is people will sometimes point to the volume of transactions in different cryptocurrencies; Bitcoin being the most obvious. But obviously what we’re interested in is if you want it to be a currency. We’re not interested in how many trades are made in that we’re interested in how many times it is used to actually buy goods and services. That number has remained very low over time. The one thing it is still used to buy is drugs and to participate in other elicit transactions. It definitely does still have some value there. But I think even there, it has paradoxically become somewhat less valuable as people have realized that, even though it’s punitively anonymous, it’s actually not as it’s in some ways more traceable than certain dollar transactions. I think that’s it. I basically view these cryptocurrencies as very speculative assets, and I think that’s the way they’re essentially used in the world at large.
David Gardner: Jim, you pointed out last time we talked to years ago on this topic that Bitcoin over the previous decade had been the best performing asset class. But also, and I quote, almost completely uncorrelated with most other assets. Now I’m wondering, in the couple of years since then, seeing the market bounce back this year, I’m talking about the overall stock market here. Then Bitcoin bouncing back, looking like it’s correlation with the movements of the market. Do you think that that’s a change?
James Surowiecki: I think that’s a great question and I think it’s actually one of the reasons why when I look at crypto, let me back up a second. But the question I have always had about crypto is, why would I buy crypto versus buying an index fund or the rule-breaker portfolio or whatever. Why would I do it? What is it that gives me? I’m not obviously the kind of person that’s concerned about the government. I don’t know whatever are taking my money or whatever the things are that inspiratory, open-minded people worry about. The one plausible argument that you had in the 2010s was that Bitcoin was uncorrelation that it wasn’t even really a hedge exactly, but it essentially diversified your portfolio. But yeah, you’re right. Over the last two years and it was probably even happening around the time we were talking. In fact, I think you could go back to 2020 when you saw you had the stimulus payments that went to younger people who probably didn’t need them and so spent them on either meme stocks or cryptocurrency and the like. What you’ve really seen over the last two or three years is, to my mind, a very tight correlation between Bitcoin and cryptocurrencies more generally. Then what’s happening not just in the stock market, but more specifically in the Nasdaq. I think when you look at crypto over the last couple of years, what it actually looks like is just a tech stock with higher data than the Nasdaq does, basically. The moves up and down just tend to be bigger. Although I guess in 2023, not as big as the Nasdaq stocks event. That again to me raises the question of why? Why do I want to buy an asset whose value depends entirely on the opinion, maybe not entirely, but almost entirely on sentiments rather than a stock that has actual cash flow that’s going to drive valuation in the long run? My answer, of course, is, I don’t really think there is a good reason to do it. Let me add one other point about this, which I think is important, which is the other argument for Bitcoin historically was that it was a hedge against inflation. In theory, as inflation rose, the value of Bitcoin should rise as well. But we didn’t see that actually. In fact, what we saw was as inflation rose in 2021 and in 2022, the value of Bitcoin cratered and as interest rates rose evaluate along with socks. That again just made me think like what? It’s not actually even hedging in the way that you might think gold wood or something.
David Gardner: Really good points. We’re talking about the stock market a little bit, and why buy this versus that? Let’s broaden this because something else has become popular in the last couple of years. I’m thinking of so-called meme stocks.
James Surowiecki: Yes.
David Gardner: As we talked down, this was already happening a little bit as we got into the start of 2021. But it’s really become much more of a thing now. I wanted to talk about two stocks, both of which we talked about two years ago. You’ll recognize these even if you’re not spending a lot of time rolling up your sleeves doing individual stock research. One of them is certainly MicroStrategy. Michael Saylor, the CEO of the company, who decided to take his mobile software consulting company in an unusual direction when he began converting the company’s assets from cash into Bitcoin, and then even went so far as to start raising money on the public markets simply to buy more Bitcoin. Now this is a rule-breaker stock of mine, one that I’ve bought and held for a long period of time because I like the story of MicroStrategy, pre-Bitcoin. MicroStrategy for about 10 years bounced between $100 a share and $200 a share from 2010-2020. In 2021, ticker symbol MSTR, briefly skyrocketed from below 200 to over $1,200 a share. It was backed out 150 by the start of this year, 2023. I will note it’s back to nearly 457 months later. Now I’m not saying this is a straight-up one-to-one proxy for Bitcoin. But if you look across the world of the entire stock market, I’m not sure there’s any public company that is more correlated to Bitcoin itself. The market cap, by the way, $5.9 billion for the stock today, they own about $4.2 billion of Bitcoin.
James Surowiecki: Is that’s true. I didn’t realize that. [inaudible]. [laugh]
David Gardner: Part of the debate we were having, it wasn’t really a debate, but the conversation with Aaron was, why buy MicroStrategy? Why not just buy Bitcoin? You got us a few minutes go into the why on any of these things like what are we trying to do with our money? Do you have any additional thoughts about MicroStrategy? We’re not even going into FTTX yet. Do you have any additional thoughts about MicroStrategy vis-a-vis Bitcoin?
James Surowiecki: [laugh] MicroStrategy is the kind of stock that I look at and just have no idea what to do with basically. Because sailor strategies seems very eccentric to me. You know, it’s funny if you look on like yahoo finance, it has micro-strategy’s ESP as negative $84 a share.
David Gardner: [laugh] Wow, earnings-per-share.
James Surowiecki: I have no idea what would it’s agile earnings-per-share are. But so I look at that and I’m a very risk-averse investor. Much more risk averse than I think is probably good for me. My concern when I look at Bitcoin or the meme stocks generally and or MicroStrategy specifically is that I just don’t see what stops the stock from falling once it starts, because, the valuation of Bitcoin essentially depends, like I said, on public sentiment. I insofar as MicroStrategy has to some degree hitched its business to bitcoins wagon. I had the same kinds of of anxieties about it. But I do think that in some paradoxical way, I guess I could see the logic of actually buying a stock in a real public company rather than in Bitcoin, especially because MicroStrategy does have some business underneath it. But you know, that I didn’t realize it went as high as 1,200. I thought it had peaked at like.
David Gardner: It was brief.
James Surowiecki: But that ride 1200-150 and then tripling or close to tripling this year. Just makes me feel anxious, just thinking about it looks equally.
David Gardner: Well. This has been an ongoing, I would say, constructive criticism that you’ve been leveling at this situation, which is that especially a Bitcoin, how can they really be stores of value when they’re this incredibly volatile? Now, gold has been volatile at different points. Especially if we imagine when humanity, I can’t date this, I’m not sure we all know, but whenever humanity decided efficiently to start saying, yeah, gold. Yeah, I’ll trade you that for food whenever that officially happened. I bet gold was a volatile asset class back then, and it remains so thousands of years later, but it nevertheless does, to my mind anyway, once again, confirm how right you were Jim, going back more than a decade basically saying, this is not a currency.
James Surowiecki: Yeah.
David Gardner: This might be a store of value. But in fact, I remember Aaron saying on that podcast two years ago and I quote, I think that even if it has failed as a currency set, Aaron Bush, it doesn’t really matter. It doesn’t necessarily need to have lots of utility in order to hold lots of value in some ways, Aaron concluded that’s the point. But it does remind me, James, and you were talking to this earlier a little bit that in fact that it’s not spent on a regular basis makes it, in some sense it’s a better store of value and so just sitting there in digital vaults, being speculated on, ironically makes it more valuable than it were being used. At least that’s how some people seem to think about.
James Surowiecki: When I think the other thing that’s true is there is obviously to some degree, thinking makes it so right. If, as with gold, if we collectively decide or enough people collectively decided as something is valuable and it will continue to be valuable, etc, at some point it becomes genuinely valuable. The one thing I would say which is really obvious is that the structure of Bitcoin, this limited number of coins will ever exist, does give it the fundamentals that will allow it to essentially it can allow it to hold value over time because you don’t have to worry about more bitcoins being produced. It does have that. Remain somewhat baffled that Bitcoin is one Bitcoin now cost $30,000 a coin, I am less baffled by big point than I am by the surely utterly speculative things like Shiba Inu or Doge or whatever. The multiple other, as they call them coins that are out there. I mean, I guess people bet on those like they’d bet they go to the casino, maybe that’s the best analogy somebody’s.
David Gardner: That leads us to the one other main stock I wanted to talk about. And this is one a lot of people now, and that’s GameStop. GameStop is a company that I was a customer up for so many years. It was a stock recommendation of mine a long time ago, back in its golden age, back when I was buying new games at GameStop, the bricks-and-mortar stores and then returning it to GameStop to get value back so someone else could buy the used copy and GameStop. As the video game industry really became mainstream, whether it was sales of hardware or sales of software, I highly esteemed GameStop. However, it too got caught up in the craze. I think most of us know this wasn’t the only one, AMC and others. Our meme stocks James, a meme themselves for our age and if you want to go there, would you put bitcoin in there with them and what conclusions are you starting to draw about how we’re investing our money?
James Surowiecki: Well, the way I think about it is that are clearly our connections between meme stocks and crypto. There’s a lot of overlap, I think, in the kinds of people that investing them on, at least historically you saw the bouncing crypto. That huge bouncing crypto happened around, somewhat roughly coterminous with the balancing meme stocks. Although meme stocks, it was up and down even in 2021. I think the thing that’s been most interesting to me about it, and to me in some ways, the meme stock phenomenon has been, if not more confusing or let’s say disturbing than the Bitcoin thing, it seemed odder in a way. The way I would put it is I come at investing and I think mainly because of the time I spent at the Fool in the mid 1990s. I come at it in some ways from a very traditional point of view. And that is to say that the value of accompany really should reflect the discounted free cash flow of that company in the future, with some real option value attached to it in terms of other possibilities. But then that’s basically what you’re trying to do. What you’re really trying to think about is if I own this company, literally, if I own the entire company, how much cash would I be able to get out of this company over in the future? Then how much am I willing to pay for it in order to get a reasonable return on my investment? While that sounds traditional, it obviously applies to all kinds of companies.
As obviously, the Fool and Rule Breakers have demonstrated, you can use it to think about a whole range of companies, including ones where the future earnings are entirely on the come, where right now they have no earnings, whatever. We’ve seen that with the tech companies that dominate today. When you come at it from that perspective, that was the part of the meme stock frenzy where really did feel like a pure bubble. Where really did feel like people were buying these stocks, not because they thought these companies were going to be really valuable in the future. There was some rhetoric around GameStop that Ryan Cohen was going to transform it. Obviously, even now, it’s at $23 a share, which I think it’s low was around six or something like that before the thing took off. They may very well have improved certain things about their underlying business. But when you look at the valuations at the peak, what it really felt like, and I think that this is the part of it that feels symptomatic of a cultural moment. It felt like people were basically just saying value of a stock is entirely in the eye of the beholder. If the market says it’s worth X, then it is really worth X.
I just found that and still find it, as someone who thinks a lot about investing and valuation, I found it just a wrong and also just really disconcerting and amazed that people were very familiar with bubbles. This was different from a bubble where everyone’s buying it and it makes you think, wait, you know what, maybe they’re seeing something I’m not, so I should just get on this train and maybe they’re right, maybe Cisco really is going to be worth 600 billion or whatever it was worth in 2000. This felt more like, we all know it’s not really going to be worth this. It’s not worth this, but we are going to essentially make it worth this by collectively deciding it is. That was just like it was so wild to watch. I wrote about it and the backlash against stuff if you criticize this was incredible. Because if it is all about what we believe, you don’t want anyone to try to question what you believe because you can shape the thing. That’s all this stuff on Wall Street bets about diamond hands and urging everyone to stay strong. It was amazing to watch, credible.
David Gardner: It is amazing. You’re right, that feeling of, I’m going to buy this thing. I don’t really know if it’s worth this, anything close to this or not, but I have a near-term conviction and by the way, it’s always near-term.
James Surowiecki: Can I give you one other example? The stock that to me was the extreme version of this was Bed Bath & Beyond, where, especially toward the end. Bed Bath & Beyond was one of these meme stocks and it saw similar rises and falls. That was a stock where for a short period of time, people were convinced that again, Ryan Cohen, who’s this secret wizard behind these stocks. That Ryan Cohen who was going to transform Bed Bath & Beyond and he was going to spin out the baby business, which people were saying was worth huge sums of money, billions of dollars. But if you went to a Bed Bath & Beyond store just to do that old Peter Lynch thing. If you went to a Bed Bath & Beyond store you just realize like, there’s nothing here, this is chaos. Basically, this is a retailer that no longer has a real reason to exist and is just not doing any of the things you need a retailer to do. Then if you look at its balance sheet and it’s debts, it just seemed clear, but that it was doomed essentially. But even when Bed Bath & Beyond would say things like, we’re not sure we’re going to be able to continue as a going concern, people would still find a reason to buy. That was what was amazing. Even as it fell down, you still had days where it would double or triple over the course of a day because it essentially became a slightly more expensive version of a penny stock.
David Gardner: Of course, you are now using the past tense which is appropriate and was, I think, inevitable. I’m glad that you cite that because that’s probably the poster child in part because it’s evaporated first of these companies. I think it’s a good one to mention. I will say I think the prevailing sentiment is not, this is valuable or I know how valuable this is. It is a near-term conviction that you can get somebody else to buy it for more.
James Surowiecki: Very true.
David Gardner: I really do think fundamentally that is what’s there. I guess because part of what we tried to do on this podcast is turn our thoughts into advice, or a perspective for those listening to us, Jim, I want a little bit more from you. I’m going to ask you a little bit more in that direction because you are somebody who’s stuck by his guns in the face of a lot of countervailing theories and sometimes a lot of emotion. I think you’ve been right. I want to know, we want a bottle a little bit more of that Surowiecki magical potion of being rational and persistent and ultimately being right. That’s how I hear you and that’s how I see you, Jim. I’ve watched you over the years, so I really respect that. But I think at least one of the early guides to not falling into this speculation is, are you near-term or long-term? It does feel most people who have something very speculative are largely just thinking about exiting as quickly as possible with somebody buying it from them. That of course, runs directly antithetical to our organization which says stuff like, we buy and try never to sell. It’s a little bit of proof positive avoidance of these kinds of things. What are the dynamics? We’re going to go to some other crypto topics in a sec, Jim, but any other dynamics that you have exhibited or learned as a consequence of going contrary to lots of prevailing speculation.
James Surowiecki: I do think some of it is temperamental and I do think that my temperament I think is not always a good thing. As I said, I’m risk-averse. I think while that helps me in avoiding getting caught up in things like this or seeing through the rhetoric. Because one of the other things that was very striking about the meme stock bubbles was that there were lots of people who, while they may have originally thought they were near-term investors, instead kept holding. Like GameStop was the classic case, because GameStop went to 350. Did it go as high as 450? I can’t remember whatever it was. There were lots of people who did not sell. To me, I said, there is no way this stock can possibly be worth 350. There’s literally no way it could get there. Why would you not just dump it? The fact that people didn’t was absolutely fascinating. What I would say is, I think temperamentally there are aspects of my risk aversion or lack of impulsiveness when it comes to investing that helps in this regard. But the downside of that is that it also has made me more cautious about investing in certain stocks, or even just getting in at the bottom. The only really good historical investment I made was that I got in at the bottom in 2009 where I had money that was in cash and I basically got in. It was in 2009, basically when everything was falling. I basically got to the point where I was like, well, either the entire future system is gone or is going to come back. But I think being at risk-averse can also cost you. I think you can also keep you out of stocks. The one thing I would say, I’m just going to repeat myself, but I think it’s really important. I think as an investor, if you are going to buy individual stocks and not just invest in index funds or whatever, I continue to think the best thing you should do is ask yourself, if I owned this company, if I was literally the owner of this company, would it generate enough cash in the future for me to get a reasonable return from it? That if you start with that question, it doesn’t answer all the problems because obviously that’s a very hard thing to do, forecast 20 years into the future, etc. But if you start there, that at least lets you think through it in a more rational and in some ways actually also easier to understand way.
David Gardner: Really great points. Before we buy stocks, I often say, does this fit in with your best version of our future? Is this a company that’s going to do good, help our kids, going to be good for the world? But Jim is saying, what if you own the entire thing though? Pretend you on the entire thing. Are you going to make money with this based on what you’re paying today? Really sound thinking. Jim, thank you for that. Now, we do want to touch on some other things besides crypto. But before we get there, I want to ask you about the decentralized ecosystem that has been part of the promise of cryptocurrencies broadly, this idea that, hey, DeFi baby, we’re talking about a world where we’re not dependent on sovereign governments, on the man, in many cases. The Internet has given a lot of us agency and areas of life and commerce that we never dreamed up. Why couldn’t we become freer of the shackles of whatever country or a strange, sometimes bad place we’re living in or were born in and decentralize finance? What is your take now on where the world is with regard to what we’ll call buzzword, DeFi?
James Surowiecki: Well, to me the thing that’s really fascinating and it’s not exactly surprising, but yeah, the promise of Bitcoin and crypto generally was that they were what are called trust list currencies, and by that, meaning you did not need to trust anybody else in order to make the transaction, because all the transactions are recorded on the blockchain, you can’t mess with them, etc. I don’t need to know who you are, we can do the transaction, there’s no way for you to rip me off on it or whatever. One important consequence of that in theory was that you did not need intermediaries. We didn’t need banks, we didn’t need exchanges, we didn’t need any of that. You and I could just do a transaction, we didn’t need to go through anybody. If we’re just doing the transaction, then that means the government can’t pay attention to it or whatever, other actors can’t interfere and we don’t need to worry about do we trust the intermediary, so we don’t need to worry about anymore. That’s an interesting idea and you can understand why it’s very appealing to libertarians or people who live, as you said in countries with bad or corrupt governments. But I think the thing that’s most striking over the last two or three years is that as crypto has become more popular, it’s become much more centralized. So that many more crypto transactions now happen through centralized exchanges, Coinbase, Binance, unlamented FTX, than do just on the blockchain between individuals. There are obvious reasons for that. Doing a Bitcoin transaction or a crypto transaction without an intermediary is complicated, requires not a lot, but it requires a little bit of technical knowledge and it’s not as easy as harder to get Bitcoin back into the currency that you maybe want to use or whatever. What you’ve seen is this gravitation toward these centralized institutions. The real irony [laughs] is that those institutions are more centralized than Wall Street, not less centralized. Binance is an exchange, it’s a broker and it’s sometimes, well, depending on who you believe taking the other side of the trade that you’re making. In our current financial system, you have a broker, then you have an exchange, and then you have traders who are taking the other side of your trades when you make them. The irony is that in some ways, a lot of the crypto world has actually become more centralized than the Wall Street world it was promising to basically dis-intermediate.
David Gardner: Do you have any thoughts playing it forward? Obviously, if these things are going to be big and global and trustworthy, they’re probably going to need to be regulated, they’re probably going to be regulated entities. They’re scaling into transparency, they’re scaling into scrutiny. They seem a number of them to have gotten in trouble. In the case of FTX, maybe you could just give a little bit more of your perspective on the late unlamented FTX. But rather than look backwards at somebody who did something badly, what about looking forwards and asking, what can we learn about where we are now and what prediction would you have about the financial system in 10 or 25 years?
James Surowiecki: I think in so far is crypto is not going away and I don’t think it’s going away. I think there will remain a demand for it. I think the only logical outcome is that you have bigger exchanges that are in fact regulated. I think you’re exactly right. My theory, I’m actually writing a piece about this right now is that if you look at what these big crypto players have done, so Binance, FTX, Celsius, which was basically a crypto lender that went out of business last year and that provoked a lot of the crypto winter as it was called or at least it got going. I think that when you look at all of them, I think what they were doing was something similar to what they saw Uber and maybe Airbnb having done, which was going into regulated industries and basically just saying, you know what? We’re just going to go ahead and do what we’re doing, and then if we get popular enough or successful enough, the regulators will have to make some accommodation to us. That worked for Uber and Airbnb. Obviously, different cities have had different responses, but it worked. The problem is in finance, the regulations are a lot more serious and it’s a lot easier to get thrown in jail for what you’re doing and I think that that’s what you’re seeing now. Celsius, the CEO of Celsius, was indicted last week. Obviously, Binance and Coinbase are facing a divvy of charges.
The Binance complaint from the SEC or maybe it was the CFTC had these amazing emails where internal executives were saying things like, We’re running an unregulated financial exchange. They knew what they were doing. Then FTX being the extreme example where essentially we don’t know entirely, but it seems pretty clear at this point, that they had set up a way for client funds, customer funds to be basically borrowed by the hedge fund that the CEO, Sam Bankman-Fried, who was the CEO of FTX, he also had a hedge fund that he owned, and they were able to borrow it and they were able to borrow customer funds. That’s the kind of thing you can do when you’re not regulated. It’s not the kind of thing you can do if you are regulated. They didn’t really have capital requirements, so they had no capital on hand other than the customer funds, which is not capital. I really think if this goes forward, I would be very surprised if these exchanges are not brought under the regulatory umbrella. Let me mention one concern I have about that which is, [laughs] my main concern about them being brought under the regulatory umbrella, is that it will create the illusion in people’s minds that these assets are as safe as stocks or bonds basically. I just want it somehow to be clear to people like, this is still basically a casino. You are still going to be gambling is just going to be regulated the way casinos are.
David Gardner: Well, Jim, I want to give you a chance to make a final statement, whatever you’d like to on the topic of Bitcoin and cryptocurrency. When I did this a couple of years ago, you probably don’t remember, but I check the transcript, here’s what you said. In so many words you said, My final statement is that you can understand something and be right about it in some ways and still be completely wrong. That has really been my [laughs] experience about Bitcoin. You said I’ve been writing about it for nine years back at that point off and on. I think I would go back to 2011 and say, yeah, that was accurate, but it was completely wrong about Bitcoin as an investment, and you said a little bit more there. That was your reflection a couple of years ago, whether it’s a personal one or an economic or global one. What is your final statement 2023 on Bitcoin?
James Surowiecki: Maybe I’ll make a slightly more dramatic prediction. I don’t think Bitcoin over the next 10 years will outperform the S&P 500 as an asset. I think Bitcoin will stick around as a version of digital gold. What I think we will see or maybe in this case maybe it’s just what I hope we will see, is that a lot of the essentially pointless cryptocurrencies and crypto coins that are out there will just vanish by the wayside and basically people will no longer feel this need to use them as just gambling tools. But that I think would be the best thing for crypto. It ideally might get rid of at least some of the scams and grifters that dominate this site.
David Gardner: Thank you, Jim Surowiecki. We’re going to cover two topics on the backend of this week’s podcast, both of which I find fascinating personally and both of which I’ve got Jim Surowiecki here, I want to know what he thinks[laughs]. They are respectively, let’s call it collective and artificial intelligence. I’m thinking about AI, talking to the author of the wonderful book, Wisdom of the Crowds, thinking about collective intelligence. Let’s talk about intelligence next. But then we’re going to go to journalism in the future. I’m talking to a world-class journalist. I have other friends who are those. I admire them deeply, the ones who do it really well and really right and yet I’m wondering. Part of this interview is involved you having a young child, your son on your lap, which is, by the way, been delightful. If anybody ever wonders, can Jim Surowiecki multitask? The answer is absolutely. Jim Surowiecki, we can parent and appear on a podcast. But Jim, talking to the kids who want to be journalists, I’m trying to picture the world of, let’s say 2050, one generation, and hence what does journalism look like and how might it change? That’s where we’re headed in brief. Let’s start with collective and artificial intelligence. A recent guest on my podcast, Mahan Tavakoli, who talked on this topic, was quoting the academic A. J. Agarwal, who wrote a book called Prediction Machines among others, don’t know if you’ve read it.
But basically, Agarwal was saying, what AI is really doing economically is, it’s reducing the cost of knowing what comes next of predictions, in a sense, ChatGPT effectively is built on predicting one token at a time, in this case words. Like if this word appears, then there’s a percentage chance, high likelihood that these following words will appear and there’s some randomization going on there too, the special sauce, but that’s predicting what’s next and it’s free. It’s not free to produce, it’s being provided for free at present, but that’s an example. But as AI continues to infiltrate various aspects of our cultural life today, we’re going to see more and more if it is smarter. If it is smarter then knowing what comes next becomes a little bit cheaper and a little bit easier. I’m curious, your thoughts, especially in light of another way that we obtained intelligence in a surprisingly cheapening manner. Jim, you’ve written a lot about at stake part of your career and that is the idea that we would sometimes individually act, but collectively reach better conclusions as a consequence of the collective. I’m opening the gates wide, Jim Surowiecki. I would love to hear your take on AI today and how you think about the future here.
James Surowiecki: I’m a little bit of AI skeptic. It’s actually connected to the second topic we’ll talk about, journalism. But I’m an AI skeptic in the sense that I think that precisely because ChatGPT is essentially predicting what word it thinks will come next or what word is most likely to come next. It’s not intelligent in the sense of really rationally thinking through what’s my right, it’s essentially a prediction machine. When I read a lot of these things about how it’s going to be replacing humans soon and the rest, to me, the big problem with it in terms of just relying only on it is that precisely because it is only a prediction machine it doesn’t know when it’s wrong. You can’t recognize really when it’s wrong, you have to inform it as such or whatever. It doesn’t even know when it’s lying. We know that AI has this tendency to confabulate or to make stuff up. The most famous example is the lawyer who filed a brief that had been written with artificial intelligence and AI had invented a whole series of cases. Not just that, but also had invented quotes from those cases that the lawyer had included in the brief and the fascinating thing is the AI didn’t know what he had done this or essentially you didn’t know it had done this and certainly wasn’t in a position to confess it.
That’s why I’m a little bit of a skeptic. Having said that, I do think the way I, and this may be my Pollyanna-ish view of the world which we know I’m a little bit of a sap in that regard, but I do see it as a useful tool potentially going forward and that you could imagine something similar to they sometimes call the future like the future is going to belong to centaurs or human-machine blends essentially. So I can definitely imagine people using AI and I have friends who use it this way now as a way of quickly aggregating information of basically kind of essentially searching the web or whatever the database is that it has access to. Providing really useful summaries you hope that they have made [laughs]. Then I can easily imagine, I’m sure Wall Street firms are already using it to make forecasts about trends and things like that. I can definitely see a model in which you have essentially human judgment and machine judgment allied to each other. I think the big challenge going forward, the big challenge in all this is that there’s a lot of knowledge that humans have that is tacit knowledge.
It’s not necessarily knowledge that is easy to express or to write down. I still think, I wrote The Wisdom of Crowds, the book came out in 2004. I would still say that the concept of using the collective intelligence of groups is still, I think, woefully underutilized in particularly inside organizations. That there’s just a lot of knowledge that people have that still goes untapped and that there are very simple mechanisms you can use to get at that knowledge. We see it. We talked about the stock market. The stock market has many flaws, including the existence of things like meme stocks [laughs]. But collectively, the market does a reasonable job of forecasting the future performance of companies. That’s an incredibly difficult task. I will be very interested, what if instead of humans, you aggregated 10 different AIs and basically asked them? Even then, I guess I can almost guarantee that the collective judgment of the 10 AIs would outperform the judgment of any one AI. I think that it may be that aggregating the judgment of AIs and humans is maybe that’s the future you can rely on. But I think that simple phenomenon of essentially averaging across rather than trying to find the one source of truth is really the right approach. I think that it’ll be interesting to see. The one complicated question we get into, not now, but say 10, 15 years down the road is, if we rely more and more on AI to generate text, to produce predictions, forecasts. Then the AI is essentially learning off of that stuff, is there just some kind of weird loop, basically where essentially the AI is just listening to other AI-produced things. Whatever, I’m sure there are solutions to this, but I do think that that centaur model is in my head where we’re probably going to end up.
David Gardner: In a lot of ways, ChatGPT and its ilk are the ultimate present demonstration of collective intelligence in the sense that we’ve run, I didn’t do it, but OpenAI, among others, has run any number of books, articles, pieces of art, experiences, cultural things, historic, all fed into a machine or the machines or the Cloud. How do you contrast that collective with a 2004 wisdom of crowds, I would say pulling human beings for just their own individual take without them even paying attention to what each other things necessarily in coming up with better answers. Is it the same thing?
James Surowiecki: It’s a great question. I don’t know if it’s exactly the same thing, but having said that, I realized to the extent that I’ve used ChatGPT or these others, I’ve never actually asked it to predict anything, or asked it to evaluate some situation. It’s really mostly been writing stuff, it’s been what I’ve been most interested in because I’m a writer, I assume that’s probably why. Some like knowledge stuff that I’ve just been interested to see well, what do you think of this text or wherever it is? But yeah, there is a logic to what you’re saying because the thing about the wisdom of crowds is that, well, in a lot of ways I think it works best when each individual is just trying to solve the problem, then you aggregate the collective judgment of all the people involved. In a way that is kind of what AI is doing. No one person who produce the text is aware that this is how it’s going to be used and yet it’s this collective judgment that is now being used to produce sentences and the like. I’ve always thought Wikipedia was a human version of The Wisdom of Crowds to some degree not perfect, some element of it. Then you could certainly see a ChatGPT as a kind of machine-driven version of Wikipedia basically. I like it, that’s a good take.
David Gardner: Well, let’s shift to our final topic then, I’m talking to one of the best journalists I know, recognized for his work both in print, in the form of a wonderful best-selling book, but then any number of columns for any number of publications, Jim, today I see you’re running some for the Atlantic Fast Company. You’re tied right in with the Yale review for personal and professional reasons. I’m talking to somebody who’s made his life and journalism and has been an exemplar to the kids. Let’s shift to the year 2050 or you don’t have to go out that far. But how about today, next 10 years, you have a young friend, your mentoring, and this person is passionate about journalism. What advice would you give him or her thinking forward about how the world is changing, recognizing by the way, that nobody really understands where we’re all going together, but what thoughts do you have in the nearer term and then maybe the 25 years out-term?
James Surowiecki: In the near term, and actually, I think that the advice would not necessarily be that different. There are reasons to be very cautious about journalism, just simple economic reasons. There’s a huge amount of supply. Just in a sense of the internet has made it possible for everybody to publish and everybody that’s extend the rest of it. The economics of the business are complicated because there’s an argument to be made that a lot of the glory days of magazines were really built on an illusion on the part of advertisers. That may not be quite the right word, but there’s an argument to be made that those big brand ads that essentially would fill the pages of magazines, that they maybe were not the most rational ad spending possible and they fueled a lot of the magazine business. Obviously, newspapers have had the problem of Craigslist demolishing classifieds. Then nowadays, classifieds being just essentially outmoded. So there are a lot of real concerns basically. There are a lot of things that are worth worrying about. Having said that the fascinating thing to me about journalism is that there’s no evidence to me that the demand for it has dropped.
There’s this subscriber basis for magazines like the New York or in the Atlantic has actually not really shrunk very much. In fact, that’s even though they’re more expensive than they used to be. So one of the things magazines have done in response to the decline in ads is quite sensibly to raise their subscription prices. I think there still is the New York Times has never been more influential. The New York Times is incredibly popular in terms of its digital subscriber base, I think is now like 9 million, something like that. So I think there’s still an incredible appetite for it, and that’s a good thing. People want it. I think the job, if you’re in the right situation, is still incredibly fun, incredibly interesting. It gives you just a great opportunity to try to think hard and then to write well for people. I think the three things I would say are, and I think AI is a big part of this because I do think AI is going to put a dent. I think people are going to try to outsource some of this work or a lot of this work depending to AI.
There are reasons to be worried about that. I think the three things I would say are, just from my experience with ChatGPT, that maybe you’ll get a lot better. I don’t think it’s a good writer. I think it’s a fine writer, but quite ordinary. I think readers casualty tell the difference. I think that, readers will certainly happily read a BSA, but I think that, they want better stuff. I think that the premium is going to be on good writing. By that I mean like using words in interesting ways, like it sounds banal, but that actually really matters. I really believe that. Thinking hard about how to write sentences, thinking hard about your leads. Thinking hard about having punchy endings and alike. So I think that that is it. I still think there is going to be an appetite and they’re still going to be room for original thinking. ChatGPT will occasionally come up with stuff that surprises you. We were like, that’s interesting and thought about that. But for the most part, and this makes sense given how it’s set up, what it gives you is like here’s what you would think. So I still think there is room for our original thinking, for just spending more time thinking about this stuff and trying to figure out what has not been said or what might be an interesting and original take on this.
Then the last thing, and this is something that I don’t do that much, but which I think is probably going to become even more valuable, is simply reporting, actually literally going out and talking to people and spending time in the field or whatever it is, because ChatGPT is not going to be able to do that. I think that, that will remain a real competitive advantage. I can’t believe we’re talking about competitive advantage versus machines, but I guess we are. I think that will remain a competitive advantage, and I think that, that’s something that readers remain interested in and the like. I actually have students who I’ve taught at Yale who are very into journalism or thinking about this and alike. I don’t say to them, don’t do it, stay away from it the like. But I just say I think you really need to want to do it. Then I think you really need to work on these skills because I think these are the things that are going to differentiate you from the robot and you from everybody else.
David Gardner: Thank you very much Jim and I did ask ChatGPT this question because i figured we should hear what ChatGPT thinks of journalism in 2015. What won’t be changing according to today’s version of ChatGPT, or ethics and objectivity, the fundamental principles of journalism that there would be accuracy, fairness, objectivity, and public accountability. I’ve had my own questions about some of the objectivity I witnessed from journalism over the years and that’s the side that I don’t like, but I certainly acknowledged the great importance of that, especially in a world that includes China, Russia, and other cultures that really are trying specifically not to allow the truth out. So I love that one. They’re four. A second, but it won’t be changing investigative journalism that deep dive that what you said, actually going out there and experiencing things. Number 3, storytelling, that’s not going to change. The heart of journalism is storytelling. So despite all the technological changes, the importance of just telling a compelling human-centric story. I know that you lightly referenced this in your five different jobs. One of them is teaching Yale students had to write. I think that that is timelessly important. Then finally, ChatGPT feels that the role of journalism to inform the public to act as a check on power that will also remain critical in 2050. So according to the AI itself, those are some thoughts as well and I see you most likely mostly nodding your head here.
James Surowiecki: Well, I liked that. I mean, those all seem fine. They’re what I think. It’s interesting and storytelling, I think obviously gets into these questions of style and writing and the like. I do think style in this deck goes beyond storytelling. It actually goes really on the level of the sentence and alike. I think style actually is a real differentiator. It’s sometimes hard to talk about and it’s easy to talk about if you’re talking about [inaudible] or somebody like that who’s very obviously stylized.
David Gardner: Tom.
James Surowiecki: Tom Wolfe exactly. When you’re talking about then it’s very easy to see how a differentiates. But I’ll just give you a simple example, is Michael Lewis who actually is writing a book about FTS. Michael is able to write these books about topics that people are talking about and thinking about and the like. He has this amazing natural being in the right place at the right time and hooking himself up with these really interesting characters. But I also think people underestimate just what an adept writer he is on the level of the sentence and on the level of the paragraph as well as obviously the story. In some ways, I think because his books are pretty easy to read. They’re very enjoyable to read. You never feel like you’re working. I think in a strange way, people underestimate just how brilliant a writer he is. I think that thing, that ability to write in a very clear sharp way with very, in his case, quite funny sentences and the like is something that’s not going away. People are going to want to continue to read that. I’m just skeptical that ChatGPT is going to be able to do that. I actually love the idea of ChatGPT getting this question in saying, well, I can’t say that I’m going to replace everyone. Let’s see, [laughs] let me try to come up with a semi-plausible explanation for how journalism will still matter and I won’t have abdominal wreck the entire business.
David Gardner: Jim, let’s close with the classic Motley Fool game of buy, sell, or hold. These are of course not stocks themselves. These are things happening in the world at large. I’m asking you, James, you’ve played this before with us. If they were stocks, would you be buying right now, selling, or holding? However you answer maybe a sentence or two as to why. Are you willing to play again?
James Surowiecki: Yes. Let’s do it.
David Gardner: Excellent. Here we go. James Surowiecki, buy, sell, or hold. If it were a stock, legalized sports betting the industry today, are you a buyer or seller or are you holding?
James Surowiecki: I would buy in the sense that I think the industry is going to continue to grow. I don’t think it’s shrinking at all. Having said that, I think that the economics of the business, I probably would hold on it. I think the economics of the business still remain a little opaque to me because they’ve had to spend so much money on customer acquisition, that it’s not clear to me if at some point that’s going to stop and then everything will just drop to the bottom line. If that happens and I think they’re set, if it doesn’t, then obviously I think I would sell. The advantage they have is that I think that states are going to continue to pretty tightly regulated businesses. Maybe I’m wrong, but I don’t think you’re going to have seven or eight different online sports books in a lot of states. I’m a sports better, I like it. I’ve always liked sports betting. I think it’s the best betting you can do because your odds are better than in any casino game as long as you don’t do crazy parlays.
David Gardner: Sure.
James Surowiecki: I would buy the concept but probably hold the business.
David Gardner: Well said buy, sell, or hold electric cars going forward.
James Surowiecki: Tough one. Very tough. I got to say buy because I think we’re going to go there. But having said that, I would only buy if you are really committed to a long-term. I actually think in the short term, hybrids are going to have a little renaissance here. I think hybrids have actually been underrated. My mom has a Prius. It’s awesome, seems totally gray, not as expensive, not as easier to maintain, etc. But I’ll tell you the two electric vehicles specifically that I’m high on. One is Rivian, which is getting just a ton of traction here in Connecticut, Fairfield County in particular. Then the other one weirdly is the Hyundai ionic. Just my brother has one and for some strange reason, I’ve started to see a bunch of them here. That’s my little Peter Lynch like wait, maybe something’s happening.
David Gardner: Buy, sell, or hold space exploration.
James Surowiecki: I guess I got to buy it. It feels to me [laughs] I’m not really convinced that it’s one thing that is ever going to be as big as people think it is, but it’s impossible to imagine that in the next 100 years, we’re not going to do a lot more space exploration. If the question is man’s fleece exploration, I think I would sell it. I don’t really think we’re going to do much on that front.
David Gardner: Last one for you. I can play this game all day long, James. So much fun. Thank you so much for joining us again this week. Let’s go with buy, sell, or hold two hour movies going forward. There’s a lot we could talk about streaming, but I’m specifically thinking of this longer form storytelling that we all got used to through the first 50-plus years of our lives, those of us in our late 50s but then I have my kids and they’re like, I don’t want to watch a two-hour movie streaming with the dad, it’s way too long, but then we watched 12 one-hour episodes of the same thing that could have been done in two hours.
James Surowiecki: I’m going to say buy. But there’s actually something specific that you said the two-hour movie. My big [laughs] problem right now is if you go to the movies, you don’t get two-hour movies. You get two-hour and 40-minute movies, which is way too long in most cases, Oppenheimer is three hours. Maybe that’s justified given the scope of the story and all this life. Mission Impossible is 240, Avatar was obviously through. I actually would love to see, and I can imagine a renaissance of the hour, 40-2 hour movie. I think actually the context in which you mentioned it is really smart one, which is that I actually think there are a lot of TV shows that are six or eight or 10 hours whatever that would probably have been better as two -our movies and I think that there is something about that length, that story form that feels, obviously we grew up watching it, but it feels to me quite satisfying, quite organic. Baseball game is two-and-a-half hours. A soccer game is two hours. Well, baseball game is now two-and-a-half hours.
David Gardner: Yeah.
James Surowiecki: Soccer game is two hours. The basketball game is a little bit longer than two hours. Football is three hours. But nonetheless, I think there’s something in there. I will say my kids who are quite younger than your kids, it’s funny they love it when they get to watch a movie as opposed to just an episode. They’re like, we get to watch the blonde movie. [laughs] That actually has been quite interesting. They just watched Star Wars and Empire Strikes Back for the first time and they just stayed with it. The little one fell asleep a little bit, [laughs] but they were very happy. This product just reflects my hope, but I’ll say buy.
David Gardner: Well, that was a lot of fun and I’m reminded here at the end of how much I enjoy buy, sell, or hold a game., we played from our earliest radio days on AM radio and NPR. I clearly need to play more often on this podcast too, because what fun? Well, thank you again to James Surowiecki for freely sharing thoughts on meme stocks, Bitcoin, journalism, AI, and the benefits of a true two-hour movie, maybe even one’s a bit less than two hours. Next week, it is your mailbag, thoughts, ideas, reactions occasioned by this week’s podcast. Well, excellent. Do share our email address is [email protected]. You can tweet us as always at RBI podcast on the Twitter, [email protected] is our email address. Have a lovely summer week. Fool-on.