What’s the State of the U.S. Economy?

00:00:00.000 | (beeping)

00:00:02.180 | - Welcome back to Ask the Compound,

00:00:14.100 | where every week I'm unpleasantly surprised

00:00:15.940 | because we get new questions

00:00:17.580 | that we haven't thought of before.

00:00:18.700 | Got a few this week.

00:00:20.260 | Our email here is askthecompoundshow@gmail.com.

00:00:23.620 | Today's show is sponsored by Bird Dogs.

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00:00:36.540 | I said, "Yes, I was active."

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00:00:52.580 | Ask the Compound, of course,

00:00:54.780 | you get a free white tech dad hat,

00:00:58.180 | which I think I wore on the show a couple weeks ago.

00:00:59.940 | - You did.

00:01:00.780 | You looked like a tennis player.

00:01:01.820 | - Yeah, I wore a promo coat.

00:01:02.900 | Yeah, I look like I'd be in the U.S. Open.

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00:01:08.980 | Duncan, I still got one for you.

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00:01:11.460 | - Oh, awesome, cool.

00:01:12.780 | Yeah, I'm expecting to see a ton

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00:01:18.700 | All right, let's do first question.

00:01:20.460 | - Okay.

00:01:22.860 | Up first today, we have,

00:01:25.180 | "My job is to run a concentrated 20-company portfolio,

00:01:28.180 | "all listed companies, buy and hold,

00:01:30.260 | "long-term horizon, et cetera.

00:01:32.240 | "I get a base salary and a bonus for performance,

00:01:34.900 | "so a good amount of my annual earnings

00:01:36.820 | "are tied to the performance of the companies I pick.

00:01:39.580 | "I also have a small personal investment account.

00:01:42.460 | "My question is about how I should think

00:01:44.200 | "about investing this.

00:01:46.040 | "Should I use the fact that I spend all day

00:01:47.900 | "or all my time researching companies

00:01:49.960 | "and invest in those companies for myself,

00:01:51.720 | "or should I avoid the concentration risk

00:01:53.700 | "and go for a passive strategy?"

00:01:56.340 | - I love questions like this because--

00:01:58.460 | - This is cool, I like this, yeah.

00:02:00.580 | - There's a compelling argument either way.

00:02:02.380 | So on the one hand, yes, it makes sense

00:02:04.400 | for you to practice what you preach

00:02:05.620 | or have skin in the game or you cook or whatever.

00:02:08.220 | Like, why should your clients have faith in your strategy

00:02:11.160 | if you don't have some money invested alongside of them?

00:02:13.460 | On the other hand, if you do have all of your money invested

00:02:15.860 | in this one strategy,

00:02:16.820 | you're doubling down on concentration risk.

00:02:18.380 | It's where you get your paycheck from,

00:02:19.460 | your bonus, all this stuff.

00:02:22.020 | So it's like not only a career

00:02:23.220 | and earning potential tied up in it,

00:02:24.340 | but if the strategy does bad, then it's double whammy.

00:02:27.020 | So I actually decided to look at what this was like.

00:02:30.080 | So I talked to Morningstar's Jeff Patak,

00:02:32.040 | who ran the numbers for me.

00:02:33.300 | And he says there's 10,300-ish mutual funds and ETFs

00:02:37.540 | in the United States that are listed.

00:02:39.780 | More than 5,900 have portfolio managers

00:02:44.420 | that have no shares in the funds that they manage, okay?

00:02:47.640 | So that's the other 4,300 have at least

00:02:49.200 | one portfolio manager who's listed,

00:02:50.940 | has some shares that they own.

00:02:52.080 | What this means is that close to 60% of all funds,

00:02:54.780 | the portfolio managers who are managing the funds

00:02:56.680 | have not one cent invested in their own fund.

00:02:59.480 | Now, I guess you could make an argument,

00:03:00.880 | well, they could be money market funds or bond funds

00:03:03.640 | or other kinds of funds that they just don't.

00:03:05.480 | But I mean, I'm not saying you have to have

00:03:07.880 | your entire net worth invested in your own strategy,

00:03:10.760 | but I mean, it'd be nice if you had some skin in the game.

00:03:13.920 | Right?

00:03:14.840 | I heard this story about a quant manager one time

00:03:17.340 | who runs a well-known quant hedge fund.

00:03:20.440 | And he keeps his entire portfolio

00:03:22.600 | in like the Jack Bogle Total Stock Market Index Fund.

00:03:26.640 | And the reasoning was his whole livelihood

00:03:28.480 | is tied up in quantitative funds,

00:03:29.820 | and he has an ownership stake

00:03:31.460 | in the investment firm he's part of, so he was diversifying.

00:03:34.780 | And I think that makes sense from a careerist perspective,

00:03:36.800 | but I think it's also a little hypocritical

00:03:38.360 | if you're not investing right alongside your clients.

00:03:41.000 | There are ways that this could go wrong, of course.

00:03:43.020 | There was a long, short hedge fund manager

00:03:46.040 | that my old endowment fund was invested in

00:03:48.120 | during the 2008 crisis, and I think they did okay.

00:03:51.120 | Okay at that time was like,

00:03:52.360 | you basically matched a 60/40 portfolio in the downturn.

00:03:55.400 | But he was talking about how he's seeing

00:03:57.140 | like generational opportunities to buy stocks

00:03:59.800 | based on his discounted whatever models.

00:04:02.900 | And, but he couldn't really get himself to go all in

00:04:06.560 | and just go crazy with these stocks

00:04:09.400 | because he wanted to be more defensive

00:04:11.400 | in case the financial system really did implode.

00:04:14.300 | And one of the reasons he gave for this

00:04:16.320 | is because he said he had his entire liquid net worth

00:04:18.240 | invested right alongside his clients.

00:04:20.180 | So it was almost like he was more preserving

00:04:22.580 | his own personal capital than worrying about

00:04:24.280 | how to invest on behalf of the clients.

00:04:26.460 | And so I think this can also go wrong

00:04:30.140 | as a careerist on steroids there.

00:04:31.540 | So do I think you have to have all your money invested

00:04:34.200 | in this concentrated portfolio of stocks

00:04:35.760 | that also pays your salary and bonus?

00:04:36.980 | No, but do I think you should have some of your money

00:04:39.020 | invested in this strategy?

00:04:39.980 | Definitely, right?

00:04:41.340 | And I think if you're recommending clients

00:04:43.100 | put most of their net worth in it,

00:04:44.140 | then you probably should have a lot of money too.

00:04:45.940 | But if you're recommending, listen,

00:04:47.260 | this is a nice sleeve of a portfolio

00:04:49.100 | that can diversify you,

00:04:50.420 | then why don't you have the same stance, obviously, right?

00:04:52.900 | So obviously everyone has different risk profile

00:04:55.300 | and time horizon,

00:04:56.120 | but I like the idea of practicing what you preach.

00:04:58.220 | Personally, I invest the majority of my liquid net worth

00:05:01.380 | in the same funds and strategies

00:05:02.740 | that our clients invest in.

00:05:04.400 | I do have some other investments for justification purposes,

00:05:06.540 | but the majority of that money is invested

00:05:08.820 | right alongside how clients would invest it

00:05:10.800 | if I was in their shoes.

00:05:13.020 | Obviously, we have a bigger focus on financial planning

00:05:14.820 | and asset allocation here

00:05:15.860 | than a concentrated stock portfolio,

00:05:17.480 | but yeah, if I was one of your clients,

00:05:19.420 | I would want you to have some money in the strategy.

00:05:22.100 | You can diversify, of course,

00:05:23.460 | but I want some of that money invested in there

00:05:25.780 | right alongside me.

00:05:26.740 | - Yeah, it kind of reminds me of seeing insider ownership

00:05:30.460 | in public companies.

00:05:32.580 | It's kind of nice, yeah.

00:05:33.620 | Nice to see that there's some alignment there.

00:05:35.940 | - Yeah, you want some, put some skin in the game.

00:05:38.140 | And I just want to,

00:05:39.340 | if we hear some banging in the background,

00:05:41.740 | there was a huge flood in my building.

00:05:42.780 | - I was going to ask you to explain, yeah.

00:05:44.260 | - Like a week ago.

00:05:45.180 | I was Forrest Gump and Bubba with the shrimp boat.

00:05:49.900 | All the other shrimp boats around me got destroyed.

00:05:52.360 | My office was like the only one that was untouched.

00:05:54.260 | So they're demolishing the whole rest of the floor around me

00:05:57.900 | and fixing it and tearing out stuff.

00:05:59.980 | And I'm sitting here just in my office,

00:06:01.940 | just pretending like nothing's going on.

00:06:03.940 | - Do people in the building resent you?

00:06:07.180 | - Probably.

00:06:08.100 | I mean, there's no one else.

00:06:09.260 | On this wing, I'm the only one left.

00:06:11.260 | So I made it.

00:06:13.060 | All right, next question.

00:06:14.420 | Yep.

00:06:15.260 | - Okay, up next, we have a question from Timothy.

00:06:18.060 | With the rise in bond yields,

00:06:19.620 | when does it make sense to sell out of long-term,

00:06:22.200 | at a long-term, out of a long-term bond fund at a loss

00:06:26.620 | and buy short bonds?

00:06:27.860 | For example, something like a short-term treasury fund.

00:06:30.940 | - All right, we've been talking for a while now

00:06:32.300 | about losses in bond funds,

00:06:33.260 | especially at the long end of the curve.

00:06:34.340 | TLT is the 20 plus year treasury fund.

00:06:36.980 | That's 40% off the highs.

00:06:38.660 | Even if you weren't that long,

00:06:39.820 | they don't really specify here how long they are.

00:06:41.820 | IEF is like the seven to 10 year treasury fund.

00:06:43.980 | That's down 20%.

00:06:45.740 | We're still in a bear market in bonds,

00:06:47.080 | which not a lot of people talk about.

00:06:48.300 | If there's a bear market in stocks,

00:06:49.440 | people are talking about it.

00:06:51.140 | The bond market doesn't get as much attention.

00:06:52.580 | So I don't know how long-term you went,

00:06:54.780 | but let's say you were in like a very long-term bond fund.

00:06:58.220 | TLT, the average yield of maturity now is 4.5%.

00:07:03.060 | So if we're doing a back of the envelope,

00:07:05.260 | how long is it gonna take you to make up for that 40% loss?

00:07:08.260 | We're talking, I don't know, nine years or so

00:07:10.060 | based on current interest rate levels.

00:07:11.960 | IEF has an average yield of maturity of 4.3%.

00:07:15.420 | So we're talking at least four to five years

00:07:17.140 | to break even on that 20% loss.

00:07:19.360 | The good news is at least you can sell

00:07:20.640 | for tax purposes right now, right?

00:07:21.880 | You can tax loss harvest any of those losses

00:07:25.060 | if it's in a taxable account.

00:07:26.760 | Start with a clean slate.

00:07:28.420 | But I do think that there's a huge conundrum

00:07:30.380 | if you are sitting in these massive losses

00:07:32.500 | in long-term bonds,

00:07:33.340 | because what if we go into recession

00:07:36.260 | or the Fed pulls off a soft landing and rates fall

00:07:40.140 | and the Fed cuts rates, right?

00:07:42.460 | So the effective duration on TLT is 17 years.

00:07:44.940 | That's one of the reasons it got killed so bad.

00:07:46.300 | So what this means is that a 1% move in interest rates

00:07:50.740 | would effectively mean a 17% move in prices.

00:07:53.840 | So rates rise 1%, TLT falls 17% in price.

00:07:58.500 | You could net that out a little bit

00:07:59.740 | with the yield if you wanted to.

00:08:00.580 | - Like a meme stock.

00:08:01.920 | - It is, that's why it's down 40%, right?

00:08:04.140 | But if rates fall 1%, guess what?

00:08:06.320 | You're missing out on a 17% gain.

00:08:08.060 | So I think this is one of the reasons,

00:08:09.380 | and this is of course one of the reasons

00:08:11.020 | that a lot of investors have loved long-term bonds

00:08:13.300 | for so long, is because anytime the stock market fell

00:08:17.000 | and the Fed cut rates,

00:08:18.100 | these things were a wonderful hedge against the stock market,

00:08:21.080 | but they are very volatile.

00:08:22.540 | Like coming out of 2009, they lost a ton of money.

00:08:25.040 | So I think you're in a tough position.

00:08:28.100 | I did write a piece this week about what would happen

00:08:30.200 | if you simply swapped out bonds,

00:08:32.100 | intermediate term or long-term for just T-bills

00:08:33.720 | and held cash.

00:08:34.560 | So John pulled the first chart.

00:08:35.920 | The results were actually closer than I expected.

00:08:37.460 | So this is an 80/20 portfolio,

00:08:39.540 | one with a 10-year treasury

00:08:40.700 | and one with a three-month T-bill.

00:08:42.420 | So it's 80/20 in bonds versus 80/20 in cash.

00:08:45.020 | And these are rolling 10-year returns since 1928.

00:08:47.380 | You can see they're pretty close.

00:08:48.260 | John, do the next one.

00:08:49.420 | This is 60/40 portfolio using five-year treasuries

00:08:52.560 | or one-month T-bills.

00:08:54.140 | And the bond portfolios do better,

00:08:56.400 | but it's closer than you would think.

00:08:58.260 | So if you wanna make that switch,

00:09:01.380 | now is the time to do it with a clean slate.

00:09:02.940 | Especially in a taxable account, you can harvest some losses.

00:09:04.940 | But my biggest worry here would be psychological.

00:09:07.540 | If like, I think you have to ask yourself,

00:09:10.060 | if rates rose 1% and long-term bonds got killed again,

00:09:13.780 | man, I'd be kicking myself.

00:09:14.840 | But if rates fell and long-term bonds took off

00:09:18.740 | and they were up 15 or 20%,

00:09:20.500 | how mad would you be at yourself?

00:09:22.380 | So I think this is kind of a tricky situation.

00:09:26.340 | And so I think, yes, harvesting some of those losses

00:09:28.540 | is like the easy thing to do,

00:09:29.600 | but I don't know about locking in the losses.

00:09:32.580 | So I'm almost gonna punt in this question and say,

00:09:35.460 | it's really difficult to know what to do

00:09:38.620 | because the long-term bond thing

00:09:40.660 | is you're locking in some huge losses here.

00:09:42.960 | Any thoughts, Duncan?

00:09:46.280 | - No, I mean, you know,

00:09:48.460 | I don't mess around with bonds very much.

00:09:50.220 | - I guess the question you have to ask yourself is this.

00:09:53.620 | I've personally never liked investing in long-term bonds

00:09:56.400 | because of that duration.

00:09:57.900 | They're so volatile that I would rather accept my volatility

00:10:01.560 | in the stock market

00:10:02.560 | because you're actually getting paid to accept it there.

00:10:04.860 | Whereas in long-term bonds with these high duration levels

00:10:07.540 | and high maturity levels, it just never made sense to me.

00:10:10.120 | Why would I wanna take that much risk in the bond fund?

00:10:12.440 | I prefer the barbell approach

00:10:14.020 | where you're taking way less risk in bonds

00:10:15.960 | and taking the volatility out of there as much as you can

00:10:18.620 | and accepting the volatility in stock.

00:10:20.620 | So I think you have to ask yourself,

00:10:22.420 | you know, am I really okay accepting this much volatility?

00:10:26.100 | That's the question you have to ask

00:10:27.600 | because you could be giving up in some gains,

00:10:30.560 | but you just have to be prepared for more losses as well.

00:10:34.080 | - I know a lot of young and new investors

00:10:36.860 | were as confused as me back when the market

00:10:39.280 | started getting super volatile and dropping and gapping down

00:10:42.920 | and bonds were also going down.

00:10:44.940 | 'Cause yeah, like everything you always read historically,

00:10:47.480 | or at least what I had always heard was,

00:10:49.560 | oh, it's a hedge basically.

00:10:50.800 | So when stocks go down,

00:10:51.960 | bonds at least maintain or don't go down as much.

00:10:54.160 | - Yeah, this time bonds caused it.

00:10:55.760 | - Yeah, yeah, it was different.

00:10:57.480 | All right, let's do another one.

00:10:59.240 | - Okay, up next we have a question from Steve.

00:11:01.640 | The state of the US economy

00:11:02.920 | seems very unclear at the moment.

00:11:04.760 | It seems like you could twist the data

00:11:06.180 | to show anything from a hard landing to a soft landing

00:11:08.800 | to overheating or some other narrative.

00:11:11.280 | I know these things are impossible to predict,

00:11:12.960 | but what kind of framework do you use

00:11:14.880 | to think through the probabilities here?

00:11:16.960 | - This is like the Charlie Munger quote

00:11:18.420 | where if you're not confused, you're not paying attention.

00:11:20.280 | I'm confused as well about the potential path forward.

00:11:22.560 | So let's bring on one of the people

00:11:24.560 | who actually taught me to think in terms of probabilities,

00:11:26.680 | Mr. Barry Ritholtz.

00:11:28.320 | - Hey, Barry.

00:11:29.160 | - Hey, guys.

00:11:30.000 | - Barry, I've heard you kind of go through

00:11:32.720 | the different potential paths here

00:11:34.520 | where a soft landing or a hard landing

00:11:36.300 | or a no landing, whatever it is.

00:11:38.520 | It does seem like every couple of weeks

00:11:40.620 | the narrative changes between like,

00:11:42.160 | oh, the economy's too hot

00:11:43.440 | or the job market is slowing down now

00:11:45.400 | or rates are going too high or rates are falling again.

00:11:48.560 | How do you try to think through this

00:11:50.600 | in terms of where we are and what the trends are showing?

00:11:53.360 | - So first, I love this question.

00:11:56.880 | And I want to just tilt it slightly.

00:11:58.880 | I want to just change the framing ever so slightly.

00:12:02.500 | The economy seems uncertain now, unclear,

00:12:07.560 | but when is it ever crystal clear?

00:12:10.440 | Most of the time, someone's on the other side of your trade.

00:12:14.160 | If you're a seller, someone's a buyer.

00:12:16.080 | So there's always two sides to the conversation.

00:12:20.280 | Think back to these like major turning points

00:12:24.560 | where there was no uncertainty.

00:12:27.840 | There was a consensus.

00:12:29.320 | I remember, I'm a little older than you guys.

00:12:31.620 | I remember late 1999, trees grew to the sky.

00:12:36.480 | Everything is great.

00:12:37.480 | We're all going to make a ton of money.

00:12:39.280 | And that was just before the next quarter

00:12:41.840 | when we started an 81% crash in the NASDAQ stocks.

00:12:46.520 | Even when things should be obvious, it's still missed.

00:12:51.600 | I remember the debate in the middle of 2008, right?

00:12:56.560 | History tells us we're in the middle of the worst recession

00:12:59.440 | since the Great Depression.

00:13:01.240 | People still didn't think we were in a recession.

00:13:03.800 | They were arguing it is a recession and isn't a recession.

00:13:06.960 | So if you can't see the worst recession in real time,

00:13:11.680 | how can you see like this sort of,

00:13:14.900 | well, the Fed's tightened a lot,

00:13:17.000 | but the job market is good

00:13:18.840 | and people still have some cash left

00:13:21.480 | in their savings account.

00:13:22.800 | Well, the funny thing is that last year,

00:13:23.760 | people thought it was clear.

00:13:24.880 | And the clarity then was,

00:13:26.320 | well, sure, 2023 is going to be a recession.

00:13:28.760 | It's almost a lock.

00:13:29.920 | And of course it didn't happen.

00:13:31.560 | So even when you think things are,

00:13:32.840 | you know it's going to happen, we really, we don't.

00:13:36.480 | That's right.

00:13:37.440 | And here's the,

00:13:38.560 | I like to say economists suffer from physics envy.

00:13:42.400 | You know, astronomers can land a craft

00:13:47.080 | on an asteroid going 50,000 miles an hour,

00:13:51.780 | a hundred million miles away,

00:13:53.880 | but economists can't predict a recession six months out.

00:13:57.780 | In fact, it was next month, next month,

00:13:59.680 | next quarter, next quarter.

00:14:01.160 | It was going on for three years.

00:14:02.480 | So the first question is,

00:14:04.440 | the first part of the answer is simply,

00:14:06.280 | we don't know, we almost never know in real time.

00:14:09.520 | It was obvious during the pandemic

00:14:11.280 | when we shut everything down that it was a recession.

00:14:14.200 | Other than that, you don't know.

00:14:16.200 | That may be the only obvious recession

00:14:17.640 | that we've ever lived through really.

00:14:18.640 | Right.

00:14:19.480 | But more importantly, and I know Ben,

00:14:20.960 | you've done a bunch of really interesting blog posts

00:14:23.680 | on this, even if you knew it was a recession, so what?

00:14:27.960 | The market tends to roll over before the recession starts.

00:14:32.240 | It starts to recover before we declare

00:14:34.960 | the end of the recession.

00:14:36.320 | You've talked about the lead and lag.

00:14:38.380 | Even if someone could whisper in your ear,

00:14:40.880 | here's the date the recession begins.

00:14:42.760 | Here's the date it ends.

00:14:44.160 | Would that even help you as a trader?

00:14:46.480 | Right, yeah, you could get those news headlines

00:14:47.840 | and you wouldn't know.

00:14:48.680 | John, throw my next table up here.

00:14:50.240 | One of my favorite things is,

00:14:51.160 | so this is every US recession going back

00:14:53.680 | to the Great Depression.

00:14:55.000 | And what I found was that like 84% of the time

00:14:58.520 | we are not in a recession, meaning 16% of the time

00:15:01.360 | we have been over this past 100 years-ish.

00:15:05.120 | And so I think your baseline is, guess what?

00:15:07.520 | Most of the time we're not going to be in a contraction.

00:15:09.960 | So if you're predicting one every year,

00:15:11.240 | it's not going to happen.

00:15:12.680 | It's kind of like the stock market

00:15:14.240 | is that most of the time it goes up,

00:15:15.680 | but sometimes it stuff hits the fan.

00:15:17.760 | Think about that sweet reward when you get it right,

00:15:19.280 | when you get that call right, Ben.

00:15:21.760 | But to Barry's point, the timing is really the key here.

00:15:24.800 | Like we could be in a recession and if it's a mild one,

00:15:28.960 | you might not know it until six months after the fact

00:15:31.800 | when they actually say, hey, by the way,

00:15:33.200 | we looked at all these indicators

00:15:34.240 | and we actually were in a recession.

00:15:35.840 | Sometimes you just don't know.

00:15:37.160 | And for most people, the only time it really matters

00:15:39.800 | is are you losing your job or is your income impacted?

00:15:43.080 | And Ben, you've shown some charts

00:15:44.760 | that markets have gone up through mild recessions.

00:15:48.200 | They never even slowed down.

00:15:49.440 | They haven't gone down.

00:15:50.800 | You're probably the guy that does the most

00:15:53.960 | with taking the data around recessions

00:15:56.600 | and market performance

00:15:57.720 | and putting it into really good context.

00:16:00.080 | Yeah, so the answer here probably is

00:16:03.080 | you're probably not going to be able to use

00:16:04.560 | the economic indicators to predict the market

00:16:07.280 | unless it's a really bad situation.

00:16:09.840 | It's one of these 2008-type calamities.

00:16:12.040 | That's probably the only time that can actually help you.

00:16:14.560 | And Barry, to your credit,

00:16:16.280 | you were one of the people

00:16:17.120 | who were kind of pounding the table on that one,

00:16:19.040 | but most people at the time missed that one,

00:16:20.560 | which is, I think, one of the reasons

00:16:22.040 | so many people have been predicting a recession

00:16:23.680 | every year since then, 'cause they missed it the first time.

00:16:26.120 | You know, the thing that was so fascinating

00:16:28.360 | about the run-up to '08, '09

00:16:31.240 | is that if you looked at all the traditional indicators

00:16:34.240 | of recession, things like the yield curve

00:16:36.880 | or job creation or what have you, it wasn't there.

00:16:39.920 | You had to take a 30,000-foot view,

00:16:42.880 | look at what was going on in the post-dot-com collapse

00:16:46.640 | and say what normally follows the end

00:16:49.480 | of that sort of recession,

00:16:51.240 | and recognize it wasn't the traditional recovery.

00:16:54.560 | It was free money, it was low rates,

00:16:56.480 | and it was a backwards housing-driven recovery.

00:17:00.400 | And if you looked in the right place,

00:17:02.740 | it was like those 3D posters.

00:17:05.560 | If you looked in the right place,

00:17:06.720 | you could see the dolphin jumping out of the water.

00:17:08.200 | - I can never see those.

00:17:09.200 | I've never been able to see that.

00:17:10.540 | - Same, I could never do the magic.

00:17:12.240 | - Cross your eyes or back up, I can never do it.

00:17:14.080 | - That's why you missed the '08, '09 recession,

00:17:16.840 | if you had that ability and you could look at housing.

00:17:19.680 | But by the way, I love when you see these long charts

00:17:22.760 | of here's a relationship between cost of ownership

00:17:26.000 | and cost of renting, and then suddenly it spikes,

00:17:28.960 | or median income to median home price.

00:17:31.280 | And when you see these two and three sigma events

00:17:36.040 | where things are just orders of magnitude

00:17:38.760 | out of the ordinary, that's when you have to say,

00:17:40.800 | "Hey, something unusual is going on here."

00:17:43.760 | - Right, all right, Duncan, next question.

00:17:45.600 | - One other thought, just from my perspective on that,

00:17:48.240 | being a non-financial professional,

00:17:50.200 | I thought that there was a potential

00:17:51.680 | that everyone just saying, "Oh, recession's imminent,"

00:17:54.360 | was gonna actually kind of cause a recession, right?

00:17:56.800 | Because everyone was gonna cut back and get scared,

00:17:59.280 | and it didn't really seem like it worked out that way.

00:18:01.440 | - It's like a watch what they do,

00:18:02.260 | not what they say kind of thing.

00:18:03.100 | People were saying that, but no one was acting like it.

00:18:05.520 | - You can't jawbone the American consumer down.

00:18:10.040 | If they wanna go out and spend, they don't care,

00:18:12.200 | they're gonna go out and spend.

00:18:13.200 | - Everyone says, "My neighbor's broke, but I'm fine."

00:18:15.520 | - Right. - And they keep spending.

00:18:16.820 | - That's the difference

00:18:17.660 | between a recession and a depression.

00:18:19.400 | A recession is when your neighbor loses a job,

00:18:21.280 | a depression is when you lose your job.

00:18:22.920 | - There you go. - Sounds right.

00:18:25.080 | Okay, up next we have a question from Elliot.

00:18:28.040 | - Hi, I'm a younger listener who loves following the channel

00:18:32.420 | and wanted to ask a common man question

00:18:34.200 | on behalf of those in their 20s and 30s.

00:18:36.780 | Outside of regular 401(k) contributions,

00:18:40.900 | what if I can only afford to add 25 to $100

00:18:43.780 | to my Roth IRA every paycheck via direct deposit,

00:18:48.780 | and I want to go super long with my buys?

00:18:51.000 | Can you share some advice around long-term investing

00:18:53.320 | for those who can barely contribute,

00:18:55.800 | but still want to maintain regular contribution behavior?

00:18:58.920 | Is this where invest-in-what-you-know/see-around-you

00:19:01.640 | comes into play?

00:19:02.960 | I'll just say, I've been burned on investing

00:19:04.520 | in what I know with my early.

00:19:05.800 | - Well, I think the idea here is that like,

00:19:08.040 | I don't have a lot of money yet, I'm still young,

00:19:10.000 | I'm building up my savings.

00:19:11.400 | Should I do this super long thing where I take more risk

00:19:13.840 | to try to get to that point?

00:19:15.360 | And I think the idea of trying to get rich overnight,

00:19:19.560 | especially when you're young and you,

00:19:21.560 | you know, if you're saving a couple hundred bucks a month

00:19:23.700 | or something, it takes a while for that compounding

00:19:26.840 | to build up and show a big, you know,

00:19:29.720 | show a huge change in your balance.

00:19:32.340 | And so you think, well, I have to get there much faster.

00:19:34.440 | And I think that's probably the problem

00:19:36.240 | that most people come to where,

00:19:37.600 | and that's where you get some mistakes, I think.

00:19:39.120 | I think you have to, I would take the super

00:19:41.760 | out of the equation.

00:19:42.720 | Sure, go long, but I don't think you need to do something

00:19:45.320 | out of the ordinary and try to hit the cover off the ball

00:19:47.680 | just because you're not where you want to be yet.

00:19:50.560 | And I would add, I love the idea of developing

00:19:54.020 | very good investment behaviors early.

00:19:57.180 | It's like eating healthy food,

00:19:59.300 | going to the gym, running every day.

00:20:01.120 | It doesn't matter how far you go

00:20:02.780 | or how much money you put into the market,

00:20:05.020 | but the habit of thinking long-term and saying,

00:20:07.660 | I'm gonna pull just even a little bit of cash

00:20:10.220 | and put it to work every paycheck,

00:20:12.740 | that'll compound over time, not so much $25 at a time,

00:20:17.740 | but when you're in your 30s and 40s,

00:20:20.220 | and it's so habitual, and you are making 500

00:20:23.880 | or $5,000 contributions,

00:20:25.960 | that's when it really begins to add up.

00:20:27.920 | But the behavior, the good habits,

00:20:30.540 | that's really a sharp insight from a young investor.

00:20:34.660 | - Well, and that's the thing, at that age,

00:20:36.480 | in your 20s and 30s, the biggest thing

00:20:37.920 | is your saving behavior, not your investing behavior.

00:20:40.960 | Right, the percentage gain on $10,000

00:20:43.960 | is obviously a lot different dollar value

00:20:45.760 | than percentage gain in a million.

00:20:47.280 | My favorite one, there was a interview with Bezos one time,

00:20:50.900 | and he said, he actually got some investing advice

00:20:52.940 | from Warren Buffett, and Bezos effectively said,

00:20:56.420 | "You've been so successful in your career

00:20:57.700 | "being a long-term investor, what's the secret?

00:21:00.220 | "How come people just don't copy what you do?"

00:21:01.920 | And he said, "No one wants to get rich slow."

00:21:03.700 | And that's the idea, is when you're young, especially,

00:21:06.340 | just keep saving and investing and slowly work up

00:21:08.840 | and save more as your career progresses

00:21:10.740 | and you make more money,

00:21:11.820 | but don't try to get there in a hurry

00:21:13.260 | because that's probably when you're gonna make mistakes

00:21:15.100 | and you're gonna get in your own way.

00:21:16.540 | And the flip side of that is,

00:21:18.420 | if you're engaging in that saving behavior,

00:21:21.460 | it also means you're living within your means.

00:21:24.500 | You're not overspending, you're not buying flashy whatever

00:21:28.140 | just to show off, whatever you're doing,

00:21:31.340 | if you're putting money into a savings

00:21:33.700 | or an investing account,

00:21:35.100 | it means that you have a pretty well-balanced budget

00:21:37.780 | and you're managing your money well.

00:21:39.760 | Right, and if you wanna have a speculative account

00:21:41.460 | that's 5% or 10% of your portfolio,

00:21:43.820 | knock yourself out and go after penny stocks

00:21:45.740 | or whatever you wanna speculate on,

00:21:48.020 | but then leave the other stuff alone

00:21:49.360 | and keep putting money in on a regular basis.

00:21:51.980 | - Do you think people typically get more risk-averse

00:21:54.660 | as they grow their wealth?

00:21:56.100 | Is that like a thing that they switch more to preserving

00:21:59.060 | what they have instead of trying to grow it?

00:22:01.260 | - Most people.

00:22:03.700 | - I'm gonna give you a weird answer to this,

00:22:05.900 | which was a blog post I did a couple of months ago.

00:22:09.260 | In the early part of my career, when my 401k was tiny

00:22:14.180 | and I had very little money at risk,

00:22:17.540 | every market crash was like the every pullback,

00:22:20.700 | every 20% was a freakout.

00:22:23.420 | And it seemed like it mattered a lot

00:22:26.220 | when the impact on my assets didn't make much of a difference

00:22:31.220 | because there was too little money for 20% of very little

00:22:34.660 | is still very little.

00:22:36.340 | Later in life, as my 401k grew and my assets grew

00:22:39.700 | and my portfolios grew,

00:22:41.140 | hey, I've now lived through the dot-com implosion,

00:22:43.800 | the financial crisis, COVID,

00:22:47.500 | and where it actually has a genuine impact on your assets,

00:22:52.500 | it matters much less because after you've seen this movie

00:22:56.900 | enough times, it's like, yeah, this too shall pass.

00:22:59.540 | It's cyclical, it's a buying opportunity

00:23:02.300 | when you're down 20, 30, 40%,

00:23:04.700 | and it'll come back, it always does.

00:23:06.660 | So it's kind of odd when it matters so little,

00:23:10.220 | it really feels like it's the end of the world.

00:23:13.660 | And when it's real money at work,

00:23:15.580 | it's kind of like, eh, it's not that you're not risk averse,

00:23:18.340 | it's just, hey, I know how this movie ends.

00:23:20.780 | - Well, Barry, you've posted a lot

00:23:21.880 | about the death of equity story in 1979.

00:23:25.020 | If you read the actual story,

00:23:27.180 | it says, and they're kind of making fun of them,

00:23:29.220 | it says the only people who are still investing in stocks

00:23:31.540 | and putting money in are people who are like 60 and over.

00:23:33.860 | And it was like everyone under 60

00:23:35.420 | is giving up on stocks except for them.

00:23:37.020 | And it was kind of poking fun at them.

00:23:38.780 | But guess what?

00:23:39.660 | It's because they'd been through a number of cycles

00:23:41.340 | and they realized like, okay,

00:23:42.240 | this is a good thing to be putting money in

00:23:44.280 | when the markets are bad

00:23:45.740 | and everyone else has given up that's younger.

00:23:48.020 | And that was the problem.

00:23:49.220 | - Who has the last laugh?

00:23:51.640 | You know, you've mentioned the book "The Money Game"

00:23:54.900 | by Adam Smith in the past.

00:23:56.740 | And he tells a story in that book

00:23:59.100 | about a fund manager who hires all these young hotshots

00:24:02.620 | to run, run and gun.

00:24:04.940 | And Smith asked the guy,

00:24:07.100 | why are you hiring these young guys?

00:24:09.880 | He goes, 'cause they have the nerve

00:24:11.580 | to buy all the crap that I won't touch,

00:24:14.420 | but then I'll fire them after it crashes

00:24:17.120 | and then I'll go in and buy it cheap.

00:24:19.340 | 'Cause he's seen the cycle.

00:24:21.340 | Listen, it never changes.

00:24:23.740 | The names change, but you go back and you read

00:24:26.600 | about telegraphs and railroad and steel

00:24:30.020 | and cars and televisions and radio.

00:24:33.700 | It's the same story as crypto and fiber and AI.

00:24:38.700 | Human nature doesn't change.

00:24:40.580 | So the cycles are always the same.

00:24:43.300 | It's just what the specific object of desire is.

00:24:47.660 | Maybe it's ETH or maybe it's radio.

00:24:50.460 | It doesn't matter.

00:24:51.380 | It's the people around it, that's the same.

00:24:54.340 | - Yep, I'll do another one.

00:24:55.580 | I'll do another one that's kind of similar actually.

00:24:57.260 | - Yeah, okay.

00:24:58.380 | Up next, we have a question from Kevin.

00:25:01.100 | Aside from my retirement accounts,

00:25:02.580 | the vast majority of which is in index funds,

00:25:04.700 | I have a brokerage account

00:25:05.820 | that's invested in individual stocks.

00:25:07.660 | Not to brag, but what began as a garden variety

00:25:10.540 | percentage of my portfolio, about 5%,

00:25:13.140 | has now grown to 16%.

00:25:15.100 | As a little aside here, I'm just gonna say,

00:25:16.460 | I really appreciate all these inside jokes

00:25:18.500 | that we have a huge viewership and listenership

00:25:22.220 | that gets these and makes this a lot more fun.

00:25:24.720 | Two stocks account for almost 45% of this account,

00:25:28.340 | Spotify and Nvidia.

00:25:30.220 | I've heard differing opinions about what I should do.

00:25:32.780 | Cut the weeds and water the grass or trim profits

00:25:35.640 | so I'm not so overly concentrated.

00:25:37.860 | In the first case, I'd only be getting more overweight

00:25:40.220 | in these two positions.

00:25:41.140 | And in the second, I might lower my exposure

00:25:43.180 | to these winners in order to buy under performers.

00:25:45.620 | I won't need this money anytime soon

00:25:47.180 | and plan to keep it invested.

00:25:48.500 | Should I trim the large positions

00:25:49.860 | and buy a broad market index fund to bring the 16%

00:25:52.980 | down to a more manageable number?

00:25:54.580 | What would you do?

00:25:55.480 | - The psychology going on here is like,

00:25:59.380 | we know gains can be fleeting in individual stocks,

00:26:01.700 | but I also don't wanna sell the next Amazon or Apple

00:26:03.780 | too early and miss out on further gains.

00:26:05.300 | So John, throw up a chart here I got of Nvidia.

00:26:09.460 | This is Nvidia, so I'm guessing this is part of the reason

00:26:11.680 | that it's growing to be such a big part of your portfolio

00:26:13.480 | 'cause Nvidia has just knocked the cover off the ball.

00:26:16.020 | But Nvidia has experienced in the last five years alone,

00:26:19.660 | a 36% correction in 2020, it was down 56% in 2018,

00:26:24.260 | which a lot of people forget about.

00:26:25.240 | Last year alone, it was in a 66% drawdown.

00:26:28.700 | So same with Spotify, in the last three years

00:26:30.680 | have been drawdowns of 40%, 36% and 80%.

00:26:35.000 | So I think the simplest thing to, I can't tell you like,

00:26:37.780 | you should sell this stock or buy this stock

00:26:39.460 | because who knows with these things.

00:26:41.480 | But I think you basically create a threshold on this account

00:26:45.540 | where this is what we told the last person is like,

00:26:47.820 | you want a speculative account, that's fine.

00:26:49.660 | Figure out a number that you want because these stocks

00:26:52.540 | are gonna go way above and way below.

00:26:54.080 | So if it's 10% or 15% or whatever, figure out, let's see,

00:26:57.480 | when it gets to 12 and a half percent,

00:26:58.700 | I'm gonna trim a little bit.

00:26:59.540 | When it gets to seven and a half percent,

00:27:00.740 | I'm gonna buy some more.

00:27:01.580 | So I would just put some sort of bands around it.

00:27:04.160 | So you give yourself some rebalancing

00:27:06.140 | and occasionally you take those gains

00:27:08.880 | off the table yourself and you balance,

00:27:10.700 | pre-balance back into the pain as well.

00:27:13.140 | - I had a buddy from grad school,

00:27:14.940 | I may have told this story before on the show,

00:27:17.120 | but it's perfectly fits the scenario.

00:27:20.800 | He started at a new firm, they eventually get bought

00:27:24.340 | by Yahoo in the mid 90s and by the time his stock vests,

00:27:28.920 | it's just immense and oversized,

00:27:31.940 | way over 45% of his portfolio.

00:27:34.640 | And when he asked me, what the hell do I do,

00:27:37.480 | rather than talk about performance or alpha

00:27:40.640 | or how much gains there were to be had,

00:27:43.640 | I gave him the regret minimization framework,

00:27:47.240 | which is simply, hey, if you sell this here

00:27:51.120 | and it keeps going, how do you feel?

00:27:53.440 | And then the flip side is if you don't sell

00:27:55.700 | either of those here and they collapse, how do you feel?

00:28:00.200 | Sometimes it's really clear, with Yahoo it was clear,

00:28:04.420 | he 35% of his stock vested.

00:28:06.500 | If he sold and it kept going, he didn't care,

00:28:08.980 | so he still had 65% of his options.

00:28:11.620 | So he had the easy decision.

00:28:13.860 | Sometimes it's a toss-up and when you have

00:28:16.820 | a toss-up situation, occasionally the right answer

00:28:19.740 | is split the baby, sell half.

00:28:22.660 | If it keeps going, hey, you still participate,

00:28:25.340 | but you've locked in some real gains,

00:28:27.180 | especially, we're talking percentages,

00:28:29.640 | but we don't know if this is a $100,000 account

00:28:32.660 | or a $10 million account.

00:28:34.620 | There have been occasions where you see

00:28:36.180 | these one or two stocks.

00:28:38.420 | We just met with a prospect the other night

00:28:40.260 | where their Apple and Amazon from 2000

00:28:44.300 | is 98% of their individual stock portfolio.

00:28:48.980 | That's a lot of individual stock risk.

00:28:51.100 | So if you're not sure which way to go,

00:28:53.220 | if either way the stocks go don't give you a decision,

00:28:58.460 | sell half, take a little off the table.

00:29:00.520 | If it collapses, hey, thank goodness,

00:29:02.320 | you took something off the table.

00:29:03.780 | If it keeps going, you still participate.

00:29:06.440 | Remember, as an investor, your goal is never to,

00:29:08.840 | you're not generating alpha,

00:29:10.040 | you're not writing a shareholder letter

00:29:12.160 | explaining why you sold the big winner.

00:29:14.340 | You wanna be able to sleep at night

00:29:16.080 | and own stocks towards a goal,

00:29:18.320 | which is a comfortable retirement

00:29:20.760 | or whatever it happens to be.

00:29:21.600 | - That's the point, no one's gonna dock you any points

00:29:23.640 | if you sold 50% too early, right?

00:29:26.160 | There's no points for complexity

00:29:28.500 | or degree of difficulty or whatever it is.

00:29:31.460 | If you locked in some profits on a huge winner,

00:29:33.940 | like you won the game kind of, that's good for you.

00:29:36.340 | You should pat yourself on the back.

00:29:37.940 | No one times these things perfectly

00:29:39.540 | and sells right at the top.

00:29:40.940 | - Especially if it's enough money

00:29:43.300 | that it can change your standard of living.

00:29:46.180 | If it pays off your student loans,

00:29:48.660 | if it pays for your house,

00:29:50.100 | if it pays for your kid's college,

00:29:52.340 | hey, that's a huge win.

00:29:53.860 | The idea is not to die with the most money.

00:29:57.400 | The idea is to enjoy life

00:29:59.640 | and not be stressing constantly

00:30:01.520 | about what's going on with Nvidia or Apple

00:30:05.840 | or whatever the stock of the day happens to be.

00:30:08.880 | - That's the other thing.

00:30:09.720 | These stocks, if they get to a big enough piece

00:30:11.880 | of your portfolio, that's great, you won,

00:30:15.280 | but the stress level it could have on you,

00:30:17.600 | we're watching on a tick-by-tick basis

00:30:19.280 | and living or dying by it, that's no way to live either.

00:30:22.200 | - Yeah, it goes back to the guy

00:30:23.740 | who's an investment professional.

00:30:25.820 | I've heard this from so many people,

00:30:28.660 | people who manage billions and billions of dollars

00:30:31.900 | and their personal account is $100,000 of play money

00:30:35.140 | and they check the personal account three times a day

00:30:37.980 | and they check in on their portfolio,

00:30:40.160 | the billion dollar portfolio once a week

00:30:43.100 | 'cause they're not gonna make changes every day

00:30:44.940 | in the billion dollar portfolio

00:30:46.700 | and the tick-by-tick $100,000 account,

00:30:49.340 | it's just fun for them.

00:30:50.580 | And sometimes we kinda forget what's what.

00:30:53.620 | - Yeah, well said.

00:30:56.080 | Okay, I think that's it for today.

00:30:58.440 | Thanks to Barry.

00:31:00.080 | Thanks to everyone who hopped on the live chat,

00:31:01.760 | we always appreciate it.

00:31:03.240 | I don't know if you have a comment or a question,

00:31:04.440 | email us, askthecompoundshow@gmail.com.

00:31:06.560 | If you're at Future Proof next week,

00:31:08.480 | come say hi to us, we'll all be there, can't wait.

00:31:11.280 | - Gonna be fun.

00:31:12.200 | - Leave us a comment on YouTube, be sure to subscribe,

00:31:14.640 | hit the like button, all that good stuff

00:31:16.080 | and we will see you next week.

00:31:17.680 | - See you, everyone.

00:31:18.740 | (upbeat music)

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