At The Money: Optimizing Personal Health in Finance, with Phil Pearlman (December 11, 2024)
Wall Street is always looking for an edge over the competition. But what if there was a giant source of overlooked alpha? We discuss how to obtain “Fitness Alpha.”
Full transcript below.
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About this week’s guest:
Phil Pearlman, is former Chief Behavioral Officer at the Bank of the Ozarks and founder of the Pearl Institute.
For more info, see:
Personal Bio
Professional Site
Prime Cuts Newsletter
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[Musical Intro: Hey, feeling good, like I should, winning, double walk around the neighborhood, Feeling blessed, never stressed, got that sunshine on my Sunday best ]
Barry Ritholtz: Everyone on Wall Street is looking for an edge. We deploy quant models, hire analysts, run various simulations, All to gain the slightest advantage that might be worth a few basis points over a year.
But what if we are overlooking a giant source of alpha?
I’m Barry Ritholtz. And on today’s edition of At the Money, we’re going to discuss how Wall Street has been using personal health to gain a competitive advantage.
7To help us understand all of this and its implications for your portfolio, let’s bring in Phil Pearlman. Previously, he served as Executive Editor at Stocktwits and was Chief Behavioral Officer at the Bank of the Ozarks. Today he runs the Pearl Institute, focusing on personal health and the process of making effective change.
So Phil, let’s just start with a basic question. What is Fitness Alpha?
Phil Pearlman: Fitness alpha is a model of performance, and we can derive alpha in markets from so many different areas. Just as a very brief primer, for those who might not know, Alpha is this idea of how much we outperform. If our benchmark is the S&P 500, we’re a money manager, and we make 25 percent in a year when the market’s up 20%. — that’s 5% Percent of alpha and so forth; if we’re, if we’re up 15%, that’s 5% of negative alpha. If the market’s up 20%.
Where do you get the alpha from? Do you get it from information, do you get it from having a certain model? There’s different sources and there’s one source that is just a very simple source of alpha that nobody. Is talking about, nobody has ever talked about it. And it’s the outperformance we derive from our health! The healthier we get, the better we perform across multiple areas of function.
Barry Ritholtz: ive us a few examples of some of those multiple functions that create an advantage in the financial marketplace.
Phil Pearlman: Markets are a competitive endeavor, and we know from years of research that the more healthy we get, the better we perform across multiple areas of function, including stress tolerance. So the markets are stressful. 2022, anybody who’s involved with markets for years, think of 2022 for one moment, and you know, it was a stressful time. Bear markets occur periodically — every five or six years. So when we have bear markets and we’re able to tolerate stress more adaptively, our performance will improve.
Not only stress tolerance, but emotional regulation and emotional control, how we’re able to control our emotions, how we’re able to cope with our emotions. Do they affect us behaviorally? Do we go on tilt? Or do we remain rational during volatile periods.
Barry Ritholtz: This sounds like you’re referring to fitness alpha helps you make better decisions, especially in times of volatility…
Phil Pearlman: Absolutely. And there are so many different areas, for example, stamina and resilience. Money managers have pressure, Even during bull markets, because everybody’s sort of chasing returns and that is a stressor.
It’s not just during periods of volatility in bear markets, you get it in bull markets alike and our ability to bounce back. So just to go back to your other question, there’s so many different areas and that’s why I’m harping on it. Resilience: We bounce back better, the healthier that we get, we recuperate faster.
We’re able to To stay focused longer, long days — we can put in long days after long days; our charisma, our self confidence and the way we are perceived by others.
Barry Ritholtz: You and I have spoken about this previously, and you have mentioned that this has quietly become a thing on Wall Street, more trading desks, more funds are internally discussing fitness alpha. Explain a little bit about what’s happening on the Street.
Phil Pearlman: There was a moment, you know, and this goes back 30 some odd years, but there was a moment. When Tiger Woods won the masters, he changed the game of golf forever because before Tiger Woods, none of the golfers really thought about their physical health. And all of a sudden here comes a young golfer who’s in better shape than anybody else out there and he’s crushing the ball and he is able to manage his emotional world, his stress and stay ice cold, even with the greatest pressure on him. After Tiger Woods, now you go and you look at the tour, almost everybody is incredible conditioning.
You’re starting to really see something similar to that happen on wall street, especially, um, at the highest tiers and in the hedge fund industry. I’ve had numerous clients who’ve come to me with, metabolic health problems with, uh, alcohol and other substance problems. And they begin to get those under control.
Then all of a sudden they have more energy, they bounce back quicker, their resilience improves. And they’re performing better and feeling like it’s a more sustainable thing than being day-to-day and hour-to-hour.
Barry Ritholtz: Let’s talk about some of the areas of health that you focus on. You touched on drinking, you touched on metabolism, which I assume involves nutrition. What are the areas that you can derive fitness alpha from?
Phil Pearlman: Here’s the thing about that. I’d like to keep things really, really simple. Go out there, there’s a thousand books and there’s 10,000 hours of podcasts focusing on health and wellbeing these days. And they get very, very granular. There’s a lot of debates and arguments and,mitochondria and VO2 Max, and there’s a thousand buzzwords.
I like to keep it very, very simple. And from my point of view, there are four elements of health that we can focus on. And if we can just get a little bit better, we don’t have to get 1% better every day. We could just get 5% percent better a year. And if we do that year after year it adds up.
Those four elements of good health. or nutrition, what we put into the only body that we are ever issued on this earth body movement, which is exercise, which includes cardiovascular, you know, aerobic exercise, and also anaerobic exercise or resistance training. It also includes sleep and rest and how we allow our bodies to heal, over time, whether that’s sleeping or whether that’s taking a day off or two, if we’re injured. And social and family and love, and that’s the fourth one. It’s a very surprising one when I mentioned that, but huge alpha in a relationship and love focus.
Barry Ritholtz: Sleep, nutrition, exercise, social. Those are the four big areas. Within those four areas, someone listening to this, whether they’re a trader or a fund manager or, uh, driving a truck or working in a retail store, what do they need to do to generate that performance boost to generate that fitness alpha in those four areas?
Phil Pearlman: All you have to do is get a little bit better at a time. All you have to do is get incrementally better over time. You don’t have to try. To blow the lights out. Hey, I’m going to start exercising six times a day. I’m going to completely change my diet. I’m going to do all these things. You don’t have to get super duper gung ho.
I would say that for each person, there is a gateway drug — in a good way. (Not a gateway bad drug, but a gateway good drug.) There’s a place to start. There’s individual differences, it’s dependent on the person.
I’ll give you a few examples. If you have somebody who really does not move their bodY and they’re gaining weight over the years, begin to move your body. And that can be as simple as just walking. Walking is an incredible thing. You get outside, you get into the fresh air. Maybe you turn notifications off on your phone and you just begin to get the blood flowing and the body moving.
You might have people who love food, who are good cooks. Maybe their gateway drug is to say, Hey, I’m going to really begin this by focusing on my nutrition and you don’t have to do anything fancy there. You could keep it stupid, simple there too. And just start eating real foods with very few ingredients, and staying away from ultra processed foods and staying away from foods that have a lot of added sugar.
The one other thing that I thought of when you asked me that question was this, that I find that substance abuse and alcohol abuse. It’s very prominent in our culture and extremely prominent among professional market participants. We know, especially as we age that alcohol and other substances affect our performance and affect our brains very, very significantly. If you could get a handle on that, that would be another fantastic gateway.
Barry Ritholtz: Let’s say we all start moving a little more. We start eating better. We cut the cigarettes and that glass of wine with dinner. How does that show up in our portfolios? What sort of advantages accrue to us?
Phil Pearlman: It begins with executive functioning; it begins with decision making. This is a direct relationship to the ideas coming from behavioral economics and this idea that we are not always rational decision maker.
Whenever I hear the word rational, I always substitute the word wise. Right. So we are not always wise decision makers. And we know that the average human suffers from loss aversion. And we know that there’s anxiety related to losses, especially.
When we are even incrementally improving our ability to make decisions, to make wise decisions. That’s really where we experience alpha, where we make better decisions that affect our portfolio, that improve our performance.
Barry Ritholtz: Are there any fringe benefits to this besides just improving our portfolios?
Phil Pearlman: That’s actually a beautiful question because I’m actually flipping the primary use case. When people talk about getting healthier, they’re not talking about improving your portfolio. They’re talking about extending your life and staying healthy for longer and improving your mood and improving your relationships and improving your quality of life. So really the fringe benefits are just incredibly central and some would argue primary.
Let’s say if you were not an investor or market participant, and I was talking to you about this, I would be making the same exact case. We’re only here once — wouldn’t you like to stay healthier longer? And so that you can enjoy life for a longer period of time.
Barry Ritholtz: This sounds like this is not just for wall street traders and fund managers, fitness alpha sounds like it can apply to just about everybody. I built this model from my own experience, Barry. I was not a healthy person and I was kind of faking it. Like I was performing well enough professionally that I was getting by and I was making some money, but I was not thriving.
And I started to get myself healthy and I started to experience this. Wow. I have more energy. Wow. I want to,
Barry Ritholtz: I want to interrupt you because I want people to realize back in the day, You were considerably heavier. You were a big drinker. You were not in any sort of shape other than round round as a shape, but you were were struggling. Tell us a little bit about that aha moment and tell us what you accomplished.
Phil Pearlman: I’m like a hair club for men. Remember that commercial, the hair club for men guy? “I use the product myself, so I bought the company!” I got myself healthy and I was kind of You know, I was kind of faking it. I was an executive within the financial services space and I was miserable traveling too much, drinking too much, not moving my body. When I was 12 years old, 15 years old, I was an athlete, but I had gotten so far away from who I was.
There’s this idea in buddhism of enlightenment This one great author once said that enlightenment is nothing mysterious. It’s really just rediscovering who you always were And so I felt like as I started really getting healthy getting my mind and body in shape That I started really rediscovering who I was getting back to me and lo and behold I started performing better across all aspects of my life.
Barry Ritholtz: To wrap up, fitness alpha is how Wall Street finds yet another edge to enhance their performance — but it’s not just for Wall Street professionals. We sleep better, we eat better, we move, we have better social relationships. Not only does that show up in our portfolios. but it also shows up in extended lifespans and healthier for longer as part of your alpha.
I’m Barry Ritholtz and you are listening to Bloomberg’s At the Money.
[Hey, feeling good, like I should, winning, double walk around the neighborhood, Feeling blessed, never stressed, got that sunshine on my Sunday best ]
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