RPF-0018
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00:00:32.400 | Radical Personal Finance, Episode 18.
00:00:52.800 | Welcome to the Radical Personal Finance podcast for today, Friday, July 11, 2014.
00:00:58.800 | Today's show is going to be a question and answer show.
00:01:02.200 | And today we're going to talk about how do you protect yourself in a bear market?
00:01:07.000 | We're going to talk again about what financial advice would you like to have at 18 years old?
00:01:11.600 | What would be the best investment strategy for a young couple looking to buy a house in the next three to five years?
00:01:17.000 | And what's the most complicated thing in my day?
00:01:19.900 | And then my thoughts on the book, The Millionaire Fast Lane.
00:01:23.000 | Stay with us. So I've been looking forward to today's show.
00:01:36.000 | This is fun. I like doing Q&A. And as we start to get some good traction online
00:01:39.700 | and we start to get some more people more and more more of more of you listening,
00:01:42.900 | which I really appreciate and I thank you for those of you who are listening.
00:01:47.600 | I am excited about doing these Q&A shows because to me, you know, I can sit back and I do sit back and try to think,
00:01:53.700 | well, what are the things that I think are the most relevant or the most useful for people to know and understand?
00:01:59.200 | But really, it helps me a lot if you just simply tell me.
00:02:02.900 | Tell me what you want to know and what you want to understand.
00:02:05.500 | And so this past week, we've been engaged, I've been engaging with you guys on Twitter and asking for your questions,
00:02:11.600 | which, by the way, if you'd like to follow us on Twitter, the Twitter handle for the show is Radical PF.
00:02:17.100 | So just go on Twitter and search Radical PF and you will find us.
00:02:22.100 | And I'd love to engage with you there and I'd love to have a conversation, help out any way that I can.
00:02:26.400 | And so we're going to cover these, was that four questions, five questions that I received from the audience.
00:02:31.800 | I'm going to recover, but very briefly this time, one of the questions that I did the whole show on on Wednesday
00:02:37.000 | because I got some additional ideas and I'd like to do a little bit better job with it.
00:02:41.500 | So we're going to be covering those questions and then I hope to make this a regular Friday event
00:02:47.300 | where basically on Fridays I answer your questions and I do my best to be specific and direct
00:02:53.500 | and give you some ways, some things to think about.
00:02:56.000 | And my biggest frustration back when I was a practicing financial advisor is that it always frustrates me
00:03:01.500 | that it seems like people don't go to professionals for financial advice.
00:03:05.500 | Now, I understand there's a lot of distrust of financial advisors.
00:03:08.700 | If you actually look at the statistics and the industry statistics,
00:03:14.500 | it's seen that financial advisors have a lower trust rating than do car dealers, used car dealers.
00:03:22.400 | And, you know, I always feel I always felt bad for car dealers because,
00:03:28.000 | well, actually I could always empathize with car dealers because it seems like, you know,
00:03:32.300 | they're the brunt of a lot of jokes.
00:03:34.300 | But yet, you know, I was a life insurance salesperson and that's the brunt of a lot of jokes.
00:03:39.000 | And a financial advisor, you're the brunt of a lot of jokes there.
00:03:42.500 | So it's good.
00:03:44.000 | Those jokes are probably good though because hopefully they keep us honest
00:03:47.500 | and they keep our industry honest and they keep us getting better each and every day trying to improve our reputation.
00:03:55.000 | Now, obviously there's a lot of people that deserve that bad reputation
00:03:58.400 | and there are a few of us that really try to develop a good reputation.
00:04:03.800 | So what I'd like to do is I'd like to give you access to me.
00:04:07.200 | You know, I'm a certified financial planner.
00:04:09.400 | I've got a bunch of technical knowledge.
00:04:11.300 | Hopefully you start to like some of the ways that I think about things and the ways that I talk about things.
00:04:16.700 | And the reason that I'd like to provide this as a service is because people don't take me up on it.
00:04:20.600 | I always used to joke with my clients and I'd say, listen, anytime, not joke,
00:04:23.700 | I used to tell my clients anytime you ever have a financial decision, call me and just talk to me about it.
00:04:29.400 | I'm here. I'm not going to charge you for the phone call.
00:04:31.400 | Just call me and talk to me about it because what I see over and over,
00:04:34.300 | and this is the joke, is that usually people ask the wrong people for advice.
00:04:39.400 | The example that I always go to is, let's say that you take on a new job and you're sitting there
00:04:44.600 | and human resources comes in with this giant stack of papers and they toss it on the desk and it goes right on the desk.
00:04:53.600 | And there is a big, big stack of papers there and you pick it up and you kind of scratch your head and say,
00:05:00.300 | I don't understand these words. So usually, here's what most people do.
00:05:04.700 | They kind of lean back in the chair and they ask the broke guy next to them and they say,
00:05:09.100 | hey, Joe, you know, listen, what did you put down on these papers?
00:05:12.700 | And I'm saying, why on earth are you asking the broke guy in the cubicle next to you for financial advice?
00:05:17.100 | Pick up the phone and call a financial advisor. And even if that person charges you,
00:05:21.300 | let's say they charge you 50 bucks for a 20 minute conversation.
00:05:25.900 | That would probably be a better idea than asking the broke guy in the cubicle next to you.
00:05:30.900 | But the problem is, people aren't accustomed to calling financial advisors.
00:05:34.700 | They're not accustomed to talking with financial planners.
00:05:37.500 | And so what I'd like to do is give you access to just mainly how a financial planner would think,
00:05:42.900 | which is how I'm going to handle these shows. Now, unfortunately, there's this little problem.
00:05:47.300 | There's a little problem that in the United States, giving financial advice is heavily regulated and probably rightly so.
00:05:53.300 | So what that means is I can never give personal financial advice.
00:05:56.000 | That's a reason for the disclaimers at the end of the show.
00:05:58.100 | I can't tell you what you should do, but I actually don't think that's the most important thing.
00:06:02.100 | Number one, I can't know who you are and what you are looking for in a Twitter comment.
00:06:06.200 | So I can't in 140 characters figure out what what your life story is.
00:06:11.100 | But my hope is that is to send you back to and at cause you and encourage you to go and find somebody that you can trust
00:06:19.300 | and go and find your individual financial planner, your advisor, your most trusted financial person,
00:06:25.900 | whoever that is, whether that's an accountant, an attorney, a trusted friend or business associate,
00:06:31.400 | an insurance agent, a financial advisor, whatever that is.
00:06:35.500 | I want to encourage you to go back to that person because that's the person who can really understand what you are,
00:06:41.100 | what you are, what your situation is.
00:06:43.400 | But what I believe I can do and what I want to do with these questions is tell you how I would think about it.
00:06:49.300 | Is talk to you about some of the different ways that I would approach the problem.
00:06:54.700 | And if I can successfully do that and give you some ideas on how I would approach the problems,
00:07:00.500 | then my hope is it will kind of stir up your creative juices.
00:07:03.500 | And then if you are a do-it-yourselfer, all the information is out there for free.
00:07:07.300 | Go down to the library, go online, be careful online because it's a lot easier for somebody
00:07:11.700 | to write a forum post and you think it's really good.
00:07:15.900 | In reality, it's not.
00:07:17.000 | Generally, you don't have a lot of posers writing in-depth technical financial planning textbooks.
00:07:21.400 | So you might be better off going down to the library and reading some books
00:07:24.400 | where there's a higher investment on behalf of the author than just going based upon a forum post.
00:07:30.300 | But still, if you're a do-it-yourselfer, fine.
00:07:32.000 | Hopefully this information will give you help.
00:07:33.700 | If not, hopefully it will give you some encouragement and motivation to seek out an advisor that you trust
00:07:40.500 | and have a conversation with them and see if they'll be able to help you out.
00:07:44.100 | I really hope they could.
00:07:46.300 | This is one of my, I guess it's not secret, but this is part of my agenda for the show,
00:07:51.400 | is that I always never understood why don't people talk to financial advisors more.
00:07:56.500 | I used to think, "I'm a good guy."
00:07:58.800 | And I understand the distress.
00:08:00.200 | I've talked with lots of people about it.
00:08:01.800 | But hopefully we'll help a little bit and hopefully we'll arm you with information
00:08:05.000 | so that you can smoke the good ones out from the bad ones and you can understand
00:08:07.900 | and you can be a better educated consumer.
00:08:11.300 | I hope this helps you.
00:08:12.700 | So, a couple of quick announcements before we get going.
00:08:15.400 | First of all, I did get some of my technology issues worked out,
00:08:18.300 | so I am able to do some interviews.
00:08:20.100 | So hopefully you enjoyed the interview yesterday on not paying your taxes
00:08:24.300 | because of as a war tax resistance movement.
00:08:28.600 | I certainly did.
00:08:29.300 | It's a subject that I've never heard discussed on a financial show.
00:08:32.700 | And my advice is still going to be to pay your taxes because that's the proper advice.
00:08:38.400 | However, I would encourage you to kind of research and consider what your conscience would say.
00:08:43.100 | And I would admire you if you decided that you needed to follow in the path of David Gross,
00:08:48.000 | who we talked to yesterday.
00:08:49.800 | I have, it's a thought-provoking topic.
00:08:52.900 | And I enjoyed the interview.
00:08:54.300 | I'd love to talk to other people that are in that world as well.
00:08:58.200 | Because again, I often in the past would say, "Well, these people are crazy."
00:09:02.200 | But I tell you, David sure isn't crazy.
00:09:04.400 | Or he sure didn't sound crazy.
00:09:05.700 | And when you read his thoughts and you read,
00:09:07.500 | and especially if you read his book and see the research,
00:09:09.800 | I had no idea about the history of tax resistance
00:09:13.100 | and the impact that it's made in places where it really was needed and had a big impact.
00:09:18.300 | So this next week, I've got two interviews lined up.
00:09:21.300 | I'm going to be interviewing Jake DeSilis from the show,
00:09:25.100 | the podcast and website called The Voluntary Life.
00:09:27.700 | I've enjoyed Jake's podcast for a couple of years.
00:09:30.600 | And he's just a really neat guy.
00:09:32.400 | He's from the UK.
00:09:33.700 | He's an entrepreneur.
00:09:34.500 | He's just written a book on entrepreneurship.
00:09:37.300 | And I haven't read that book yet.
00:09:39.200 | I plan to read it over the weekend here before I speak with him
00:09:43.100 | to try to be able to do a better interview with him.
00:09:45.500 | But I have certainly enjoyed his content.
00:09:48.500 | And he's very soft-spoken.
00:09:49.900 | He's very gentle on his podcast.
00:09:51.900 | And I would commend his podcast to you.
00:09:53.900 | And if you're interested in some of these topics of financial literacy
00:09:57.700 | and financial philosophy as it interacts with things like political philosophy,
00:10:05.400 | then I encourage you to check out his show, The Voluntary Life.
00:10:08.200 | If you have questions, if you've listened to his show
00:10:11.400 | or you have questions for him after maybe reviewing his content over the weekend,
00:10:15.200 | let me know those questions either on Twitter or via email.
00:10:19.200 | And I will be interviewing him next week.
00:10:21.400 | Also going to be interviewing Jacob Lund Fisker from the Early Retirement Extreme.
00:10:25.900 | I reviewed Jacob's book, Early Retirement Extreme, and I love that book.
00:10:30.200 | And I highly commend it to you.
00:10:32.400 | I did a lengthy book review where I wound up just reading more from the book
00:10:36.200 | and saying it's awesome a lot rather than actually any keen and cutting insight.
00:10:41.800 | But I really enjoyed Jacob's book.
00:10:44.500 | And so I would encourage you, if you have questions for Jacob,
00:10:48.900 | he is not so much in the public eye these days,
00:10:51.200 | but I think I've sweet-talked him into doing an interview with me.
00:10:54.900 | I'm pretty excited about it.
00:10:56.200 | So if you have questions that you would like me to ask him,
00:10:58.300 | please ask me those questions as well.
00:11:00.500 | And I'll make sure to include them if I'm able to on Twitter.
00:11:03.200 | Again, ask me on Twitter or send me an email at joshua@radicalpersonalfinance.com.
00:11:07.700 | joshua@radicalpersonalfinance.com or on Twitter @radicalpf.
00:11:11.700 | Also, just a reminder, if you're enjoying the content,
00:11:14.700 | come by the blog and sign up for the email list.
00:11:17.200 | I don't-- just a quick note on the email list,
00:11:20.600 | and I'm sure I'll repeat this throughout the course of the show.
00:11:23.500 | The email list is designed to give you information on what the show is about,
00:11:26.700 | so you can decide whether to listen.
00:11:28.400 | I'm releasing a lot of content.
00:11:29.700 | I'd be surprised if you're able to keep up with it each and every day.
00:11:33.100 | I hope you do. That would be awesome.
00:11:34.900 | But I think selective listening is fine.
00:11:37.900 | So the best way to keep tabs on the content of the show
00:11:40.100 | is sign up for the email list, and with that-- and sign up there.
00:11:43.400 | And each day, I'll send you the full show notes.
00:11:45.100 | It'll pop up right in your email when the show is published,
00:11:47.500 | so you'll be able to look at it and see if it's a topic that you're interested in.
00:11:51.100 | And so please consider doing that.
00:11:54.500 | That'll help you to be able to curate your content a little bit
00:11:56.700 | to see what you're interested in and not.
00:11:58.300 | And then on Wednesday next week,
00:12:00.300 | I'm planning to do an in-depth show
00:12:02.500 | on some of the fundamentals of stocks and bonds,
00:12:04.900 | trying to continue with the teaching shows,
00:12:07.100 | and talk through some of the fundamentals
00:12:09.400 | to give you a way to think about it when you hear the word "stocks,"
00:12:13.500 | to give you a way to think about what that means.
00:12:16.100 | Right now, in today's show, we're going to be talking--
00:12:18.100 | the first question I'm going to look at is,
00:12:19.600 | "What steps would you take to protect your investments in a bear market?"
00:12:22.300 | And I'm going to give a detailed answer to that question,
00:12:24.700 | but I may be throwing terminology at you you're not familiar with.
00:12:27.500 | It's all going to build over time,
00:12:29.300 | and it's going to build starting with a proper understanding
00:12:32.800 | of what are stocks and bonds.
00:12:34.700 | So look for that on Wednesday,
00:12:36.700 | and then look for the Q&A show next Friday.
00:12:38.500 | Hopefully, I'll get these interviews run on Tuesday and Thursday.
00:12:41.200 | And then Monday, I haven't decided the content yet.
00:12:43.200 | I may do another teaching show,
00:12:46.000 | or I may do something else,
00:12:48.100 | talk about current events or something like that.
00:12:49.600 | We'll see. So we'll see how that goes.
00:12:52.600 | So, first question here.
00:12:53.900 | This comes from-- this one came in on Twitter.
00:12:56.700 | And the question is a good one.
00:12:58.400 | The Twitter handle here is @MotoJones.
00:13:01.800 | And so, Moto, thank you for the question.
00:13:05.100 | And the question here is,
00:13:06.900 | "What steps would you take to protect your investments in a bear market,
00:13:10.600 | and when would you put them in place?"
00:13:13.200 | And so, I'm going to answer this specifically,
00:13:17.000 | but it's going to be a big answer.
00:13:19.100 | And there are a few--
00:13:21.200 | there are a few ways to answer the question.
00:13:24.000 | And, Moto, I apologize to you in advance.
00:13:26.100 | It's not a simple answer.
00:13:27.700 | It is one of the most complicated questions that you could possibly answer.
00:13:31.600 | So, my short answer to the question is--
00:13:35.700 | has three parts.
00:13:37.000 | What step would I take to protect my investment in a bear market?
00:13:39.800 | I would-- so the first answer is,
00:13:41.000 | I would take whatever steps my strategy indicated that I should take
00:13:45.700 | to protect my investments in a bear market.
00:13:48.000 | The second answer is, nothing.
00:13:50.400 | I wouldn't take any steps to protect my investments in a bear market.
00:13:53.300 | And the third answer, as far as when I would put them in place,
00:13:55.900 | I would put them in place before investing any money.
00:13:58.500 | And so, let me give you the answer,
00:14:00.100 | and let me expand on those things so they just don't sound like crazy talk.
00:14:03.600 | And I tried to touch on this this last week
00:14:05.800 | when talking about markets and the reaction to--
00:14:09.800 | on Monday's show, when talking about Dow 17,000.
00:14:13.100 | And when I came away from that show,
00:14:14.200 | I realized I really struggled to communicate this clearly.
00:14:18.200 | But the point that I was trying to get across
00:14:20.900 | was that there's no one strategy that works.
00:14:24.200 | And actually figuring out, you know,
00:14:26.100 | what should you do when the bear market comes,
00:14:29.000 | which I understand you're asking it in advance,
00:14:30.600 | but what most people say is, "Well, what should I do?
00:14:32.400 | I think there's a bear market. What should I do?"
00:14:34.700 | And you've got to understand your strategy
00:14:36.800 | long before the bear market ever comes.
00:14:38.800 | It's completely the wrong question to ask.
00:14:40.600 | And you need to incorporate into your strategy,
00:14:43.000 | "What are you going to do in a bear market?"
00:14:44.900 | And, you know, markets are--
00:14:48.300 | seem at times incredibly logical and rational
00:14:51.000 | and seem, the rest of the time, you know, completely schizophrenic.
00:14:54.900 | I can't remember, Ben Graham had a cute saying on it.
00:14:58.100 | It was something about-- I forget his quote,
00:15:00.600 | but, you know, the market is crazy.
00:15:03.000 | One day it's totally sane and the next day it's totally rational.
00:15:05.200 | I should look up that quote and memorize it.
00:15:07.500 | But the only way to survive in a bear market or a bull market
00:15:11.100 | is to understand your strategy and know what you're going to do.
00:15:13.800 | And so there are very few strategies that I know of
00:15:17.700 | that should be changed in a bear market.
00:15:21.100 | Now, you do have to have a strategy for the bear market,
00:15:23.500 | but there are very few strategies that should be changed
00:15:26.200 | when you're in a bear market.
00:15:27.600 | And here's where you've got to understand
00:15:30.100 | what your actual investment strategy is
00:15:32.900 | and all of the research and the history and the planning behind it.
00:15:36.200 | And so, first, when you study markets and you study--
00:15:40.800 | you get a little bit more sophisticated
00:15:42.300 | and you start looking at portfolio management.
00:15:44.400 | And my caveat, I am not a portfolio manager.
00:15:46.400 | I'm not that interested in-- I'm interested in studying it.
00:15:48.700 | I'm not interested in doing it.
00:15:50.100 | I'd love to have some great portfolio managers on it sometime,
00:15:53.400 | but I know enough to really admire it
00:15:56.500 | and to understand kind of the theory behind it.
00:15:58.500 | But the actual practicing of it, it's not my deal.
00:16:02.200 | But the key is you can make tons of money in a bear market.
00:16:06.200 | Tons of money in a bear market.
00:16:07.500 | You can make just as much money in a bear market
00:16:09.700 | as you can in a bull market.
00:16:11.300 | And maybe you can make more.
00:16:13.000 | And you can lose your shirt in a bear market and in a bull market.
00:16:16.200 | It's not these phrases, "What is a bear market?"
00:16:21.300 | or "What is a bull market?"
00:16:22.400 | In general, people think a bear market is a simple thing.
00:16:25.300 | And it is.
00:16:26.000 | So the way it's reported in the press is that,
00:16:27.800 | "Well, we're in a bear market."
00:16:28.800 | So what that means, basically,
00:16:30.700 | is that the prices of stocks measured in aggregate, in general,
00:16:34.500 | are going down in a nominal basis.
00:16:37.100 | So the actual price, not in a relative basis,
00:16:39.200 | but in a nominal basis, is going down over time,
00:16:41.300 | over an extended period of time.
00:16:42.800 | Now, there are more specific definitions,
00:16:44.300 | but that's my working definition for today.
00:16:47.100 | So bear market, stocks going down over time.
00:16:49.500 | But the thing is that you've got to realize
00:16:51.100 | that's only one part of the story.
00:16:52.800 | That is an aggregate observation that goes well
00:16:56.200 | when you're talking about a big picture idea,
00:16:58.400 | stock prices declining.
00:16:59.900 | But it tells nothing about the success of the individual investor.
00:17:05.200 | And so we'll talk about kind of what are some of the different ways
00:17:07.600 | that success could be managed,
00:17:08.800 | and what are the different strategies,
00:17:10.400 | and how would those different strategies adjust in a bear market.
00:17:14.600 | So first of all, let's go with how most people think about portfolio management.
00:17:19.000 | I'll call this just simple, straightforward portfolio management.
00:17:22.800 | And the point I tried to make on Monday, ineffectively,
00:17:25.500 | was that most people are using not individual stocks,
00:17:28.900 | but most people are using some type of managed investment,
00:17:32.500 | be that a mutual fund, be that a set of sub-accounts within a variable annuity,
00:17:39.300 | or a set of sub-accounts within a variable life insurance policy,
00:17:42.100 | or an exchange-traded fund, or something like that.
00:17:45.400 | They're using some kind of managed investment.
00:17:48.000 | So in managed investments, from the simpler versions,
00:17:50.900 | you've got fairly straightforward management styles going on.
00:17:57.400 | So let's talk about stock mutual funds.
00:17:59.300 | So we're going to be specific.
00:18:00.300 | I'm going to ignore the management of bond mutual funds.
00:18:03.700 | Let's just talk specifically about the management of stock mutual funds.
00:18:06.900 | And let's talk about active funds, and let's talk about passive funds.
00:18:10.500 | So if you pay any attention to financial press,
00:18:13.100 | then one of the things that is basically accepted as gospel among the online--
00:18:18.500 | I should come up with a name for this--
00:18:19.700 | the online financial gurus, or financial literati--
00:18:25.400 | oh, I'll coin something one of these days.
00:18:27.100 | But in the online world, it's basically accepted as gospel
00:18:30.300 | that the only approach to investing that works, and that's the best,
00:18:33.500 | and that's the best thing that everyone should do with their money,
00:18:36.300 | is to use passive index funds as the basis for your investments.
00:18:40.000 | And I don't agree.
00:18:41.000 | I don't disagree.
00:18:41.700 | I'm not going to comment on that today.
00:18:43.500 | But let's just start with passive investing.
00:18:45.300 | So passive index investing.
00:18:47.300 | So the fundamental premise behind passive index investing
00:18:51.300 | is this is built on the efficient market hypothesis.
00:18:54.900 | This is built on the idea that markets are absolutely efficient,
00:18:59.300 | and that it's impossible for you to find any way
00:19:02.900 | to do better than another person based upon research.
00:19:06.700 | And even if it is possible to find a little bit,
00:19:09.800 | it's not possible for you to do it for less cost.
00:19:12.500 | So most people who are really involved in passive investing
00:19:16.300 | and in the concept of indexing would say, well, we wouldn't necessarily--
00:19:20.200 | many people.
00:19:20.800 | I should steer away from most, because I have absolutely no statistics
00:19:23.900 | to back this up.
00:19:24.600 | It's just an oppression that I've gotten from research.
00:19:27.200 | So many people would say, well, we wouldn't necessarily
00:19:30.600 | say that an active manager can't outperform a passive portfolio.
00:19:38.500 | But we would say that an active manager can't outperform a passive portfolio
00:19:43.200 | and cover the costs.
00:19:44.400 | So we'll just strip out all the costs of the active manager,
00:19:46.900 | and we'll do good enough.
00:19:47.800 | And we'll just take the average return of the market,
00:19:50.000 | and we'll try to just own the market.
00:19:51.700 | All right.
00:19:52.400 | So this strategy, it works.
00:19:53.600 | I don't see any reason why it can't work, why it won't work,
00:19:56.200 | why it doesn't work.
00:19:57.200 | Most of the academic literature would say that this works.
00:20:01.200 | But the key here is that the premise is that the market is always right.
00:20:05.800 | And so if you have a bull market, the market is right.
00:20:09.800 | And if you have a bear market, the market is right.
00:20:12.700 | And so the key is you've got to stick with the market.
00:20:16.500 | And you've got to be committed under this strategy
00:20:18.900 | to never adjusting based upon the bulls or the bears.
00:20:24.000 | Now, we'll talk in a moment about derivatives.
00:20:26.400 | So you could say, well, I'm going to use something
00:20:29.600 | like an exchange-traded fund.
00:20:31.800 | I'm going to make my own bet on the market.
00:20:34.800 | So if this were your strategy and this were your trading strategy,
00:20:37.800 | then you could say, I'm going to use an ETF, a total market ETF.
00:20:44.200 | And I'm going to short that because I think the market is going to go down.
00:20:47.300 | And that's your trade.
00:20:48.200 | But that's not passive investing.
00:20:50.200 | So we'll get to trading in a moment.
00:20:51.800 | But passive investing, you just simply accept the market is right.
00:20:55.600 | The market is the consensus--
00:20:57.600 | the market price of stocks, of these companies that we're trading,
00:21:01.200 | is the consensus of all of the people involved.
00:21:04.000 | And they are correct.
00:21:05.300 | So therefore, if the market price is down, the market price is down,
00:21:08.200 | that gives me an opportunity to buy more.
00:21:10.100 | The market price is up.
00:21:11.100 | That's great because the money is going up.
00:21:13.200 | But I'm just going to simply go on faith that this is always the correct price.
00:21:16.900 | And I'm going to put my money in over time.
00:21:19.300 | And I'm going to depend on economic growth to drive my returns.
00:21:24.700 | So the economic growth of the companies-- because I know if the managers of the
00:21:28.300 | companies can't produce economic growth, the board of directors will fire them.
00:21:32.100 | And they will hire a new set of managers.
00:21:34.300 | That's the philosophy behind passive investing.
00:21:36.900 | So if that is your philosophy, there's no room in that philosophy or in that
00:21:40.700 | trading strategy for saying, I'm going to get out because there's a bear market.
00:21:46.400 | But yet, many people do.
00:21:48.000 | So they say, well, I know where the bear market is.
00:21:50.200 | Problem is that you probably can't know.
00:21:52.700 | But being right when a bear market is coming requires you to be right twice.
00:21:57.600 | You've got to be right going down.
00:21:59.000 | So you've got to say, OK, the market's going to go down, and I'm going to get out.
00:22:02.000 | And then you've got to be right going in again, as far as when to get in again.
00:22:05.400 | And it is incredibly difficult to be right twice because there's so many factors at play.
00:22:12.200 | Now, at the end of the day, that's your prerogative.
00:22:13.900 | If you want to trade your portfolio like that, that's totally fine.
00:22:16.200 | If you think you can be right-- I've had those ideas myself.
00:22:19.600 | I've had those hunches.
00:22:21.600 | But if you think that you can, that's fine.
00:22:23.500 | But recognize that it requires you to be right twice.
00:22:26.600 | And this is the big one that I've observed in the financial press over the last, what,
00:22:30.800 | five years since 2008, six years since 2008.
00:22:33.600 | Many people would say, well, look, I'm right on getting out.
00:22:35.900 | Look, I see the decline coming.
00:22:37.600 | But when did you tell people to get back in?
00:22:40.700 | Because in one way, it's really easy to see bad news.
00:22:43.400 | In other ways, it's really easy to not know when-- it's really tough to know, OK, the
00:22:47.900 | bad news is over and I'm ready to get back in.
00:22:50.800 | And so I just leave that for you to think about.
00:22:52.900 | You consider what you want to do.
00:22:54.200 | There are various strategies where the people will say, listen, I know this and I can do
00:22:57.900 | this.
00:22:58.900 | But this idea that I'm just going to own an index fund in my 401(k) and every-- in one
00:23:04.060 | month I'm going to get in and 11 months I'm going to get out, I've never seen any proven
00:23:08.260 | research to show that that would be correct.
00:23:11.240 | So that would be passive investing.
00:23:12.600 | And that's how to answer the question is, if you understand the strategy, unless your
00:23:16.700 | strategy incorporates a trading strategy or an insurance strategy, which we're going to
00:23:20.700 | go to in a moment, then in general, you just got to commit to yourself, I'm going to sit
00:23:24.900 | tight and I'm going to enjoy the ride.
00:23:27.140 | And I'm going to do something else, which we'll talk about that something else in a
00:23:30.180 | moment as how to protect yourself because this is where the real key is.
00:23:33.380 | We're going to do something else to make sure that I'm protected in the mutual fund.
00:23:38.420 | And that's something else just to whet your appetite.
00:23:40.600 | That something else is financial planning, not portfolio management, meaning that you're
00:23:45.020 | not going to be relying on these assets in a time of a bear-- in a time of a bear market.
00:23:51.900 | So number two, let's go on to active funds.
00:23:54.500 | So in an active mutual fund strategy, and let's stick for a moment with stock mutual
00:23:58.380 | funds.
00:23:59.380 | In an active mutual fund strategy, here you have a portfolio manager, which is actually
00:24:03.900 | a large team of managers working together, although there is one person who is in charge
00:24:09.740 | and has the full responsibility for the portfolio.
00:24:12.340 | And this team would be a team of researchers, a team of traders, a team of strategists,
00:24:16.340 | and the manager is bringing it all together.
00:24:18.800 | So these funds could work, but if you own these funds, you're not going to be adjusting
00:24:23.780 | in a bear market, or at least you shouldn't be adjusting in a bear market because you
00:24:28.500 | are choosing a philosophy and you're going in and you're buying those funds.
00:24:33.060 | So read your prospectus and understand what is my manager doing for me?
00:24:37.700 | Why am I paying him the $15 million a year that he's earning?
00:24:41.340 | Why am I actually doing this?
00:24:43.020 | And understand it.
00:24:44.420 | And don't-- you don't make the change because of the bear market.
00:24:48.500 | So this is like, if you're telling your manager, "Okay, manager, I want you to be looking for
00:24:54.060 | value stocks."
00:24:56.620 | And let's say that you're using a value fund.
00:25:00.340 | And so on this-- in this type of strategy, you're using a value stock fund.
00:25:04.820 | Your manager has the charge to go out and shop for bargains, looking for companies that
00:25:10.140 | have low-- lower multiples and high dividend yields.
00:25:14.460 | And so they're out trying to find bargains.
00:25:16.300 | And they're trying to say, "I think that this company's stock price is down because of this--
00:25:21.740 | these factors that are going out.
00:25:23.400 | And I think they're going to rebound, either because the economic environment is going
00:25:27.180 | to get better, because we've got new management, or because we've got new products, or things
00:25:31.820 | like that."
00:25:32.820 | And so these managers are going out and trying to find companies that they can buy at a value.
00:25:38.300 | Well, when are they likely-- the most likely to find companies that they can buy at a value?
00:25:43.180 | In a bad market, right?
00:25:44.980 | In a declining price market, which is what a bear market is.
00:25:47.740 | So if all of a sudden you are-- you're pulling your money out of an active mutual fund, and
00:25:51.820 | you're owning value stock mutual funds within that portfolio, and you're pulling your money
00:25:57.380 | out, what does the manager have to do?
00:25:59.700 | They have to sell investments to raise cash so that you can redeem your shares in the
00:26:05.060 | mutual fund.
00:26:06.060 | That's what happens.
00:26:07.060 | That's how it's done.
00:26:08.060 | When you buy an investment in a mutual fund, that cash flows into the mutual fund manager's
00:26:12.260 | portfolio.
00:26:13.480 | The manager then uses that cash to buy investments.
00:26:16.000 | When you redeem shares in a mutual fund, then the mutual fund manager has to sell investments,
00:26:20.900 | raise the cash to pay you your redemption fees.
00:26:23.580 | And this is one of the downsides of mutual funds, is that you have these times of euphoria
00:26:29.260 | and depression in the market swings.
00:26:32.700 | And so this really causes mutual fund portfolio managers a real challenge, because they've
00:26:37.220 | got to keep enough cash on hand to-- they've got to keep enough cash on hand to allow you
00:26:42.420 | to redeem your shares when you sell your investments.
00:26:46.740 | So this is a real challenge if you're managing a portfolio.
00:26:48.780 | You've got to figure out, how much cash do I keep around?
00:26:51.540 | And maybe your best investment ideas aren't going to pay off for a year, because you see
00:26:56.300 | the company, but you've got to all of a sudden, because the prices are going down, you've
00:26:59.780 | got to all of a sudden sell the portfolio out.
00:27:03.660 | So if you're using actively managed mutual funds, you've got to be committed to staying
00:27:07.980 | the course.
00:27:09.060 | When I was managing-- well, technically it's called managing investment portfolios, but
00:27:14.700 | I always called it managing investor behavior.
00:27:17.460 | And that my job was to be the go-between, to talk the investors off the ledge.
00:27:22.340 | Because if we're going to trust this strategy, then that means we've got to trust this strategy,
00:27:26.740 | we've got to trust this manager all the way through, and not respond to panic, and not
00:27:33.020 | respond to euphoric greed.
00:27:35.540 | If we're not going to stay the course in that situation, we should never start.
00:27:39.580 | If we can't handle the ups and downs and the volatility of owning this company, or owning
00:27:43.660 | this portfolio that this manager is managing, we should never start.
00:27:50.040 | And so my job, what I saw as a financial advisor, was largely to help investors manage their
00:27:54.880 | emotions and help them try to help predict a little bit, hey, here's what the emotions
00:28:00.060 | you're going to face.
00:28:01.280 | Because if you're warned about those things, then you know in advance, OK, here's what
00:28:07.120 | I'm going to face.
00:28:09.740 | So that would be a good example.
00:28:14.240 | And so in this world, because this is most investment still currently, or actively managed
00:28:19.560 | mutual funds that people own, don't try to -- my summary statement is don't try to get
00:28:25.040 | in or out based upon the bull market or the bear market.
00:28:27.600 | Know what you own.
00:28:28.600 | And if you're happy with what you own, if you're happy with the job that your manager
00:28:31.440 | is doing, then stick with them.
00:28:34.440 | Because you ham tie -- what's the -- hamstring -- I don't know what the cliche is, but you
00:28:43.000 | screw it all up when you tell your portfolio manager, here, you can have my money when
00:28:47.700 | markets are going up.
00:28:49.280 | But all of a sudden I see that your performance is underperforming, so all of a sudden I'm
00:28:52.000 | going to pull my money out.
00:28:53.000 | No, it's your money.
00:28:54.000 | You've got the prerogative to do it.
00:28:55.440 | But it sure makes your manager's job a lot more difficult.
00:28:59.080 | And if you understand what your manager is doing, because you read your prospectus, and
00:29:03.040 | you understand that your growth manager is out looking for companies that are going to
00:29:07.200 | grow, your value manager is out looking for companies that are bargain priced right now,
00:29:12.240 | maybe you've got a manager that is using a top-down investment approach.
00:29:19.160 | So in this situation, this manager is making their choices based upon the expectation of
00:29:23.720 | the macro economy.
00:29:25.160 | So he's seeing, okay, the economy is going to go down, he's adjusting.
00:29:27.960 | On the other hand -- and so if this manager is saying, I foresee this decline in economic
00:29:32.680 | prices, he's already adjusting the portfolio to that.
00:29:36.160 | On the other hand, if you're using a manager that's using more of a bottom-up approach,
00:29:39.800 | well this person is ignoring the macro economy, or at least not considering that to be the
00:29:43.480 | highest value, and they're focusing on the individual companies.
00:29:46.440 | And he's trying to say, well, yes, we have headwinds coming for the general economy,
00:29:50.920 | but here's a company that's going to sail right through that headwinds.
00:29:53.920 | And so if you're choosing a manager and that's their style that they're doing, then the headwinds
00:29:58.180 | mean nothing because they've already adjusted the portfolio for that.
00:30:02.220 | So hopefully that's clear, but the key is that you've got to understand what you actually
00:30:08.800 | own with your investments.
00:30:10.600 | And even if you're worried about them performing, underperforming, recognize that your managers
00:30:14.680 | are going to be judged based upon their benchmarks.
00:30:17.280 | So the managers are going to be judged based upon their peers and on their benchmark returns,
00:30:21.520 | and so they are accounting for that in their portfolio.
00:30:24.280 | So if they're trying to -- let's say that they have a suspicion that there are headwinds
00:30:28.920 | in the economy, so therefore it's likely that we're going to be entering into a bear market.
00:30:33.120 | They're going to adjust their strategy to try to deal with that, and they're going to
00:30:37.040 | try to outperform the benchmark, which is going to be probably some index such as the
00:30:41.080 | S&P 500 index, and they're going to try to outperform that benchmark because that benchmark
00:30:45.120 | is going to take a tumble.
00:30:46.500 | And so they're going to put some kind of strategy in place to try to limit the returns.
00:30:51.400 | So just simply understand that if you are using these strategies, which these are the
00:30:57.640 | most common strategies to use, the best thing you could do is ignore the bear market and
00:31:03.280 | trust your managers to do it, or if you're not hiring active managers, trust your -- trust
00:31:09.720 | your -- you know, the efficient market hypothesis to bring you through.
00:31:14.840 | And in that time, you should -- I'm going to go on a tangent here for a moment.
00:31:18.760 | The other thing is you've got to reinterpret what a bear market actually means.
00:31:22.000 | In a bear market, if you are in an accumulation phase of your financial life, where you're
00:31:27.880 | accumulating money, you should be rejoicing over a bear market because it gives you opportunities
00:31:32.940 | to invest more money.
00:31:35.080 | And for some reason with stocks and bonds, for some reason with stocks and bonds, people
00:31:39.880 | don't view things rationally.
00:31:42.060 | So if you go down and you -- whether you are -- I don't know what you're into buying, but
00:31:45.440 | let's say you're into buying, you know, electronic gadgets or clothes or something like that,
00:31:49.480 | and if you were going to go down to your favorite store and all of a sudden see a bargain bin
00:31:53.280 | with your favorite electronic gadgets and your favorite clothes, and there's a big sign
00:31:57.480 | above them that says 50% off, you would double up or triple up and buy as many of those things
00:32:02.240 | as you could, right?
00:32:05.720 | In stocks it's the same way.
00:32:06.920 | A good manager to someone who's thinking about investments, buying companies is exactly the
00:32:13.800 | same thing.
00:32:14.800 | And if you wake up and you say, "Look, all of my favorite companies, I've been watching
00:32:17.760 | this company, you know, I want to buy Apple stock."
00:32:21.080 | I think they're still the number one highest market cap, so we'll pick on Apple.
00:32:24.880 | I'm not recommending you buy Apple stock, okay?
00:32:26.720 | If you say, "I want to buy Apple stock," and you love Apple products and you're convinced
00:32:30.320 | that Apple is the way to go, but you've been sitting back looking at the price of Apple
00:32:33.580 | stock and saying, "Ugh, I'm just not so comfortable with this price."
00:32:36.800 | If you woke up the next day and all of a sudden saw on your morning news show that Apple price
00:32:42.400 | had plummeted in value by 50% overnight, and you knew there was nothing necessarily rational
00:32:47.780 | that was driving that, it wasn't that all of a sudden there was a big scandal, it wasn't
00:32:51.280 | that their product blew up and they were going to face a massive lawsuit, you would be rejoicing,
00:32:56.080 | or at least I would.
00:32:57.080 | You would be thrilled, and you'd double up and you'd sell your car, you'd sell your house,
00:33:01.520 | you'd sell anything you could to get your hands on that Apple stock at 50% off.
00:33:05.400 | This is what someone who is comfortable with markets and comfortable with investments,
00:33:09.040 | this is how they think, is that this is an advantage to load up on your favorite companies
00:33:14.360 | at bargain basement prices.
00:33:16.880 | But in general, the general public doesn't think of this.
00:33:19.200 | Now here's the problem.
00:33:20.440 | That only works in your accumulation phase.
00:33:22.560 | So if you're in the accumulation phase, that would be how you would think.
00:33:25.160 | But if you're living on your portfolio and you're sitting back and saying, and you wake
00:33:28.440 | up and all of a sudden your portfolio value is destroyed in value by 50%, you're sweating
00:33:33.720 | bullets, which is why we need good financial planning.
00:33:36.120 | We're going to get to that after I finish my conversation on, and I'm going to answer
00:33:40.040 | your question on how to protect yourself.
00:33:42.040 | But recognize that these situations are very unique.
00:33:45.040 | I'm in the accumulation phase.
00:33:47.000 | My father is in the distribution phase.
00:33:49.680 | So I would be rejoicing if the Dow tomorrow morning, if I woke up tomorrow morning and
00:33:55.320 | the Dow had plummeted from 17,000 points to 7,000 points, I would be dancing in the street
00:34:01.360 | and I would be trying to persuade my wife to sell everything we own and buy stocks.
00:34:06.280 | But my dad, on the other hand, he'd be in a different situation.
00:34:10.620 | Because if he's living on those values, that's going to dramatically affect the value.
00:34:14.440 | So if he's doing some kind of share liquidation strategy to provide for his retirement income,
00:34:19.440 | this would be a problem.
00:34:21.240 | So that's where good financial planning comes in.
00:34:23.400 | So it's not a simple answer.
00:34:25.600 | I want to keep going though because I hope this helps.
00:34:30.920 | In one way, there are no simple answers with financial planning.
00:34:33.800 | In another way, there are tons of simple answers in financial planning.
00:34:36.840 | And that's what you're going to find throughout the show is that there's tons of little maxims
00:34:40.960 | and little things that make sense to people.
00:34:43.320 | But as you start to dig in, you'll find lots of situations where those don't apply.
00:34:47.240 | And you've got to look at your individual self, your individual person, and your individual
00:34:51.080 | situation for the answer.
00:34:52.680 | So let's say you're a trader.
00:34:53.680 | Trader, not trator.
00:34:56.080 | So you're a trader.
00:34:57.080 | You are trading your stocks.
00:35:00.400 | So if you are a trader, you may be doing this yourself or you may be hiring a manager to
00:35:04.640 | trade this for you.
00:35:06.000 | So one of the, some people say advantages, some people say disadvantages, of mutual funds
00:35:11.480 | is that in general, mutual funds are not permitted to use some of the more sophisticated and
00:35:17.200 | riskier strategies.
00:35:19.080 | Again, some people would see this as an advantage, some people as a disadvantage.
00:35:22.640 | I could argue both sides equally well.
00:35:25.000 | I'm not going to share my opinion on it.
00:35:26.880 | My job is to teach you about how the perspective risks and the perspective advantages.
00:35:32.360 | So in general, mutual funds are restricted from using any or using a lot of margin.
00:35:38.960 | So using leverage, buying, borrowing money to buy and sell securities.
00:35:42.660 | They're limited on selling short.
00:35:44.480 | They're limited on using derivatives to trade investments.
00:35:49.200 | So then you go over to the hedge fund world.
00:35:50.760 | Well, in the hedge fund world, you've got a lot more freedom.
00:35:54.040 | Hedge funds are allowed to invest.
00:35:57.320 | They're just simply not restricted like mutual funds are.
00:36:00.320 | Hedge funds can invest in a wider variety of assets.
00:36:03.360 | They can do stuff like take up positions in really illiquid assets that can be really
00:36:08.400 | difficult to sell.
00:36:10.280 | So this would be where you go in and this is not something that's very tradable, whereas
00:36:13.960 | a mutual fund can't take up the position.
00:36:15.960 | Let me explain why.
00:36:17.400 | A mutual fund is usually limited from exposing a large percentage of its portfolio.
00:36:21.040 | There's all kinds of rules as far as the percentages.
00:36:23.240 | But a mutual fund is limited from exposing a large percentage of its portfolio to an
00:36:27.520 | illiquid investment.
00:36:28.840 | So if there's a company that is there on -- if there's a company that a mutual fund manager
00:36:33.880 | is looking at, but this company is going through financial distress and is probably going to
00:36:37.640 | be very difficult to sell, the mutual fund manager probably isn't going to be able to
00:36:41.480 | buy it.
00:36:42.920 | Because if all of a sudden that mutual fund's clients come and redeem their shares, the
00:36:47.840 | manager has to be able to sell that investment out and sell the investment to be able to
00:36:52.400 | allow the investors in the mutual fund to redeem their shares.
00:36:55.720 | Now a hedge fund can invest in the illiquid assets.
00:36:59.400 | And the reason is because the hedge fund can put in rules that lock up the investor's money.
00:37:04.280 | So a hedge fund can require its investors to keep their money in the funds for months
00:37:08.920 | or even years at a time.
00:37:11.040 | This is why, if my memory is correct, I think a few years ago you saw the hedge fund bought
00:37:16.080 | -- what was it?
00:37:17.400 | Chrysler.
00:37:18.400 | Daimler Chrysler.
00:37:19.400 | When Daimler sold Chrysler Corp. -- what was the hedge fund that bought?
00:37:22.280 | I don't remember the name.
00:37:23.280 | But there was a hedge fund that bought Chrysler Corporation.
00:37:25.520 | I can't remember if they still sell it or not.
00:37:26.880 | I had to Google it and research it.
00:37:29.040 | I don't remember.
00:37:30.040 | So you go check that out.
00:37:31.040 | But in that situation, you have a struggling company.
00:37:33.200 | That's a very illiquid investment.
00:37:34.400 | That was different than at the time buying Ford stock.
00:37:37.520 | So if you could buy Ford Corporation stock, that was a very active market.
00:37:40.800 | That was different than Chrysler because Chrysler was facing some issues.
00:37:43.400 | So the hedge fund can come in and the hedge fund investor has a lock-up period where they're
00:37:47.800 | not permitted to pull their money, no matter if they want it or not.
00:37:50.640 | The hedge fund manager can just say, "Sorry, I'm not giving you your money back."
00:37:54.320 | And so now that hedge fund manager has the time to pursue something like that, to pursue
00:37:58.620 | an illiquid investment.
00:38:00.280 | Well what does that mean with regard to a bear market?
00:38:02.520 | Well that's when a hedge fund manager is going to be making all of their major investments
00:38:06.080 | if they have it.
00:38:07.460 | Because they've got the lock-up, they can go ahead and they've got the lock-up period
00:38:11.540 | where they've got the money guaranteed.
00:38:13.160 | And now they can go ahead and do that and they can dispose of the asset over time according
00:38:16.000 | to their plan.
00:38:17.120 | This is why in general, hedge funds are limited to accredited investors.
00:38:21.120 | Basically the idea behind an accredited investor is an accredited investor has to own at least
00:38:25.640 | 5 million bucks of investments, ignoring their primary residence.
00:38:29.960 | And they are the only ones that can invest in-- and there's another thing on income.
00:38:34.720 | I can't remember, it's something like $250,000 of income or something like that.
00:38:39.160 | That's what makes an accredited investor.
00:38:41.400 | And the idea here is that an accredited investor should be smart enough to do their own due
00:38:46.320 | diligence.
00:38:47.320 | So a hedge fund can't go out and if you pick up Money Magazine, you'll see mutual fund
00:38:51.340 | advertisements all over the place.
00:38:53.120 | You'll never see a hedge fund advertisement in Money Magazine because a hedge fund is
00:38:56.560 | not allowed to advertise to the general public.
00:38:59.100 | They can only market themselves to an accredited investor.
00:39:02.000 | Because these strategies are sophisticated and they come with a higher degree of risk
00:39:05.520 | of loss.
00:39:06.680 | And so that's the difference.
00:39:08.680 | So they might make a lot more money.
00:39:10.920 | I don't know.
00:39:11.920 | I have to go and research what ended up happening with Chrysler because it would be an interesting
00:39:15.520 | case study.
00:39:16.520 | I just remember that from a few years ago.
00:39:17.520 | I was paying attention to it.
00:39:19.000 | But I don't know if they made money or not.
00:39:20.000 | I hope they did.
00:39:21.080 | But this would be one of the major differences.
00:39:23.200 | A hedge fund can use extensive amounts of leverage.
00:39:26.200 | So the hedge fund can borrow a lot of money to try to blow up the investment returns.
00:39:31.200 | So that can be awesome if it turns out well.
00:39:34.100 | That can also be really tough if it doesn't work.
00:39:40.000 | Leverage is a two-sided sword.
00:39:41.800 | And so depending on your risk profile as far as how comfortable you are with that, which
00:39:46.280 | would come down to personal financial planning, that would be a major thing to consider.
00:39:51.040 | If you didn't have anything to lose by employing a lot of leverage, it may be smart to employ
00:39:55.840 | it.
00:39:56.840 | If you've got a lot to lose by employing leverage and you don't need it, what's the point of
00:40:00.480 | an extra $20 million if you've already got some?
00:40:02.760 | Don't risk it.
00:40:03.760 | It would be silly to risk it.
00:40:05.080 | And that would be a very individual decision.
00:40:08.440 | A hedge fund can use short sales.
00:40:12.920 | So they can sell stock short.
00:40:14.480 | So in this situation, if a hedge fund manager were saying, I'm going to go ahead and I perceive
00:40:20.120 | economic headwinds, I perceive a bear market coming, well, they can short all over the
00:40:23.920 | place.
00:40:24.920 | They could short individual stocks.
00:40:25.920 | They could short the general market.
00:40:26.920 | They could short specific asset classes.
00:40:29.120 | They could short all kinds of things.
00:40:30.800 | And that would allow them to make gains when the market prices are going down if their
00:40:36.480 | shorting strategy works out well.
00:40:38.640 | So there's a lot of different things that these funds could do.
00:40:43.860 | And just to give you an idea, I don't know if you've ever studied sophisticated portfolio
00:40:49.960 | management.
00:40:50.960 | It's fascinating.
00:40:51.960 | But you would have different strategies.
00:40:53.920 | Here are a few strategies that I just made some notes on that I thought would be fun
00:40:56.960 | to go over.
00:40:57.960 | So a hedge fund manager could use the equity long short.
00:41:03.080 | And so this was the strategy that was used and still is used-- was used, excuse me--
00:41:12.400 | by the oldest hedge fund, which was a fund called the A.W.
00:41:15.800 | Jones and Company.
00:41:17.280 | So under this strategy, what the manager does is the manager will buy some stocks long and
00:41:22.880 | sell some stocks short.
00:41:24.880 | This is still the most popular hedge fund strategy today.
00:41:27.680 | And so I think industry numbers-- I was pulling this from-- well, this is a few years old
00:41:33.720 | now.
00:41:34.720 | But I'm pulling this from Robert Pozen and Teresa Hamacher's book called "The Fund Industry."
00:41:38.560 | And they say about 30% of all hedge fund assets globally are allocated to the equity long
00:41:43.200 | short.
00:41:44.440 | And so here, the hedge fund manager is ignoring the economic headwinds as far as in general.
00:41:51.280 | And they're buying stocks that they consider to be undervalued long.
00:41:55.640 | So they're hoping that those stocks go up.
00:41:57.440 | And they're buying stocks that they consider to be overvalued.
00:41:59.760 | And they're selling them short, hoping that the prices will go down.
00:42:02.680 | So this is not a strategy for the general market.
00:42:05.260 | This is a strategy for the specific companies.
00:42:08.720 | Although, theoretically, you could use this in asset classes or in various parts of the
00:42:13.640 | market.
00:42:14.640 | Number two would be the relative value strategy or arbitrage.
00:42:18.160 | So relative value is a long short strategy.
00:42:21.580 | But it would involve the specific types of securities or assets other than stocks.
00:42:25.840 | So you could use a strategy called a merger arbitrage.
00:42:31.160 | And so under this scenario, a hedge fund would buy shares of a company that is in the process
00:42:35.680 | of being acquired and short the shares of the acquirer and try to take the value of
00:42:41.000 | the arbitrage relationship, the difference in pricing between those two stocks.
00:42:46.120 | A relative value manager would look at the past relationships between different securities
00:42:51.100 | that are issued by the same company and try to profit from where they're different from
00:42:57.120 | historical norms.
00:42:59.200 | One kind of variation of this would be convertible arbitrage, which would mean you would buy
00:43:04.640 | a convertible security and sell short the underlying stock.
00:43:08.040 | So if there were a convertible security that you could get a hands on and then just sell
00:43:12.160 | short the stock and wait on the arbitrage opportunity between the two to make your money.
00:43:18.260 | Intercredit strategy.
00:43:19.260 | So you would look at the relative value between different types of fixed income securities
00:43:22.000 | such as corporate bonds versus government bonds and try to exploit any mispricing that
00:43:26.240 | you could find.
00:43:27.440 | So a hedge fund manager could pursue a distressed strategy.
00:43:32.480 | So this would be buying the securities or other assets of a company that's in or near
00:43:37.120 | bankruptcy.
00:43:38.160 | And so you remember movies back from the 80s of the corporate titans going in and trying
00:43:42.040 | to say, "We're going to buy up this company that's in near bankruptcy and sell off all
00:43:46.080 | the assets."
00:43:47.080 | And if that happens, you just got to find the right opportunity.
00:43:49.820 | Shareholder activism.
00:43:50.820 | So this is where hedge funds get involved a lot.
00:43:52.340 | And they say, "We have this company, but we're going to try to make a major change in the
00:43:57.380 | way this company is managed.
00:43:58.580 | So we're going to try to buy enough of the shares that we can get some voice in it, or
00:44:05.220 | we're going to try to market the changes that we want.
00:44:07.660 | So we're going to market to the shareholders and we're going to say, "Listen, here's how
00:44:10.380 | the company could be better served so that at the next annual meeting we can clear the
00:44:14.180 | board of directors from these three directors who are standing in our way and install our
00:44:18.300 | new board of directors to take the company in the way that we're going to, that we think
00:44:22.860 | is better."
00:44:23.860 | You could use a global macro view strategy.
00:44:26.820 | So you could say, "We have a view on what the macroeconomic events that are coming."
00:44:31.740 | So for example, changes in interest rates, changes in the relative value of currencies,
00:44:36.380 | maybe the global supply and demand for natural resources.
00:44:39.540 | We're going to take a position on this and we're going to make a bet that this happens."
00:44:43.780 | And so probably the most famous example of that is George Soros' short sale of the British
00:44:48.500 | Pound back in 1992.
00:44:50.540 | And so he was known as the man who broke the Bank of England because he sold short the
00:44:54.740 | British Pound, made, I don't know, was it a billion dollars, something like that?
00:44:57.780 | I'd have to go research it again.
00:44:59.280 | But made a huge amount of money because he said, "This is what's going to happen."
00:45:03.660 | There was a guy, I forget his name, but there was a guy back in 2008 that sold short the
00:45:09.340 | housing.
00:45:12.460 | What instrument did he use?
00:45:15.180 | I forget what he actually sold short, whether it was the securities, the package securities
00:45:24.300 | that were being traded.
00:45:25.300 | But basically he was a doctor, a practicing medical physician who enjoyed this and he
00:45:30.900 | sold this.
00:45:31.900 | There's a game on it called, I think it was called, there was a book, I think it was called
00:45:35.340 | The Great Short.
00:45:36.340 | I have to go and check it.
00:45:37.580 | It's on my reading list.
00:45:39.180 | But he sold short the whole housing market and made tons of money because he said, "Look,
00:45:43.180 | the whole housing market is falling apart here."
00:45:45.580 | And he made a ton of money on it.
00:45:47.580 | Managed futures.
00:45:48.580 | So managed futures would be doing some sort of commodity trading where a managed futures
00:45:53.980 | hedge fund would invest in futures contracts on various types of commodities.
00:45:58.820 | So energy, metals, grains, things like that, and on the financial market.
00:46:02.540 | So they would trade the futures market without, based upon their hunch about the direction
00:46:07.500 | of the investment.
00:46:10.540 | You could combine all these together and you could combine all these strategies, pick and
00:46:15.540 | pull from the ones that you want, add in leverage, borrow money to enhance your returns.
00:46:19.940 | I mean there's all kinds of things that you could do if you were running a hedge fund.
00:46:23.900 | But if you were in that kind of fund, and the hedge fund is a good example, you got
00:46:28.460 | your money locked up and you just got to sit back and you got to trust your manager.
00:46:32.620 | So a lot of times people aren't familiar with the concept of trusting their active portfolio
00:46:36.780 | manager or trusting their passive strategy.
00:46:39.860 | They're much more familiar with the idea, however, if you're buying into a hedge fund
00:46:43.500 | and they tell you there's a two-year lockup on your money, well now you've just got to
00:46:47.700 | go with it.
00:46:48.980 | If you're running your own portfolio.
00:46:50.300 | So let's say that you are running your own portfolio and you're trading some individual
00:46:55.420 | stocks.
00:46:56.420 | You could use some very basic techniques.
00:46:57.820 | So if you wanted to protect yourself from a bear market, you might put a collar on your
00:47:04.020 | stock and you say, "Okay, if the price rises from $20 to $30 and then it retreats to $28,
00:47:09.620 | I want to sell that stock out automatically at $28 a share."
00:47:16.300 | You could do it where over time, if you're, let's say you buy the stock at $10 and you
00:47:22.260 | say, "I'm going to sell it out at $12, I'm going to sell 20%.
00:47:26.400 | At $14, I'm going to sell 20%.
00:47:27.980 | At $18, I'm going to sell 20% and I'll keep riding some, but then I'll put a collar on
00:47:33.640 | it that would allow the value to still be held if the market were to decline."
00:47:41.780 | Maybe you're going to trade options.
00:47:43.800 | So one way to protect yourself in a bear market, you may own a stock and you say, "Well, I
00:47:49.260 | own this stock, but I'm concerned about the market going down, so I'm going to go ahead
00:47:54.200 | and buy a put option on the stock.
00:47:55.780 | So a put option would allow me to sell the stock at a guaranteed price."
00:47:59.300 | Now you're going to pay for the option, so you may choose not to exercise the option,
00:48:03.820 | but that would allow you to have a strategy in place if the value of the stock were to
00:48:12.120 | decline.
00:48:13.460 | Or you know what?
00:48:14.460 | You could just simply be confident in the company and just sit tight and buy more when
00:48:18.300 | the price dumps.
00:48:21.260 | The example that I think of here is, can you imagine, let's pick on Walmart.
00:48:26.860 | Walmart stock, Sam Walton distributes the majority of the stock, goes out to his children
00:48:30.420 | and to the Walton Foundation.
00:48:32.180 | So they've got massive amounts of stock and they're vested in the company.
00:48:35.780 | Can you imagine if Walmart stock declines in value by 20% because they get some stupid
00:48:41.420 | lawsuit or they get some union issue or they get some bad press or they have a truck that
00:48:47.300 | blows up on the side of the road.
00:48:49.040 | Can you imagine the Walton Foundation and the Walton family members all of a sudden
00:48:53.260 | saying that's it, we don't have confidence in our company, we don't think we're going
00:48:58.100 | to come back from this, we've got this 20% loss, we've just got to sell our stock.
00:49:01.740 | No, I mean I can't, maybe you can, but I can't even imagine that.
00:49:05.460 | They would say, you know what, we're so confident in our company, we'll buy everything
00:49:08.540 | that we can.
00:49:09.540 | You saw that this last year if you pay attention to this stuff.
00:49:12.300 | And you saw that the Walton family is buying back as much of their own stock as they can.
00:49:17.500 | And so they're looking at the marketplace and they're saying, you know what, the
00:49:19.700 | best investment we can find right now is our stock.
00:49:22.420 | It's undervalued so we're going to buy it back.
00:49:24.540 | And we're going to go ahead and buy our own stock and increase our share price by
00:49:27.660 | lowering the number of shares outstanding on the market.
00:49:30.340 | Can you imagine the Buffett kids or a better example would be the Bill and Melinda Gates
00:49:35.300 | Foundation where Warren Buffett gives most of his stock, his Berkshire Hathaway stock
00:49:39.900 | to the Bill and Melinda Gates Foundation and he's doing it over time.
00:49:43.220 | Can you imagine the Bill and Melinda Gates Foundation portfolio manager waking up one
00:49:47.220 | morning and seeing that Berkshire Hathaway for no external reason that anyone can find,
00:49:52.380 | but all of a sudden there's no major fraud that was discovered.
00:49:55.980 | They didn't pull an Enron or a WorldCom.
00:49:58.140 | But all of a sudden he wakes up and says the Berkshire Hathaway stock price declined by
00:50:03.820 | 15% or 20% or 30%.
00:50:06.500 | So therefore the Bill and Melinda Gates Foundation, we got to dump our, what is it, $40 billion
00:50:10.860 | or something.
00:50:11.860 | I could be off on that number.
00:50:13.300 | But we got to dump our billions of dollars of stock into the market because of this 20%
00:50:19.060 | decline.
00:50:20.220 | I can't imagine it.
00:50:21.780 | And so the problem is that hopefully those examples help to understand a little bit.
00:50:27.260 | But those people are thinking about the great company that we own.
00:50:30.100 | Berkshire Hathaway, this huge, widely diversified company with lines of income and profits across
00:50:35.940 | the entire world, across various industries, this really strong balance sheet, these world
00:50:40.780 | class company managers running it, this incredible culture, this incredible reputation, this
00:50:45.660 | incredibly low basis.
00:50:47.380 | We've got these good companies at these great prices.
00:50:50.220 | We've got a great reputation where basically everyone thinks Warren Buffett's God and if
00:50:53.660 | he says something about investing it must be true.
00:50:56.900 | And that therefore Warren says this is what you should do so this is what you should do
00:51:00.940 | and the whole world jumps to it.
00:51:03.140 | Can you imagine them just really even being concerned about those fluctuations in stock
00:51:07.340 | price?
00:51:08.340 | No, because they know the underlying company.
00:51:10.940 | Same thing with Walmart.
00:51:12.180 | Can you imagine the Walton family saying, well, our price value declined in 10% so therefore
00:51:15.900 | we're just going to throw up our hands and say that's it, we got to leave this business?
00:51:19.500 | No, because they know the company.
00:51:23.340 | They understand that a stock is ownership in a company.
00:51:27.460 | Now are there people trading all around the edges of that?
00:51:30.580 | Absolutely.
00:51:31.580 | I guarantee you there's people trading Berkshire Hathaway.
00:51:33.700 | There's people trading Walmart.
00:51:35.180 | You've got everything from a flash trader owning a stock for a few microseconds on the
00:51:39.580 | way through up in New York where he's got these guys that you pay extra to get your
00:51:43.120 | Bloomberg terminal closer to the Internet connection so that your computer can start
00:51:50.220 | the trade a couple microseconds before your competitor across the street and so you can
00:51:55.260 | profit on the arbitrage between this tiny little fraction of a stock price.
00:51:59.820 | Yes, there's people doing that every day.
00:52:01.860 | Could you be a day trader where you're saying I'm going to go on each and every and I'm
00:52:04.540 | going to hold my stock out in the morning and the evening and really trade it with one
00:52:07.900 | day?
00:52:08.900 | Absolutely.
00:52:09.900 | Can you do some sort of swing trade where you're covering out over a couple of days
00:52:12.200 | or a couple of weeks?
00:52:13.780 | Absolutely.
00:52:14.780 | But in none of those situations are you worrying about the general bear market?
00:52:19.460 | The micro trader, the day trader, he doesn't care about what the market is doing over this
00:52:23.940 | several month period of time.
00:52:25.940 | He or she cares about what's going on within their trading horizon.
00:52:29.580 | Now could you be a momentum trader and kind of over a longer period?
00:52:32.100 | Absolutely.
00:52:33.100 | Could you be looking for some kind of good news that you think is going to happen?
00:52:35.180 | Absolutely.
00:52:36.180 | There's people doing trading on every single aspect of it.
00:52:41.500 | But all of these things together make up the market.
00:52:45.700 | It is not stupid just to sit back and say, "You know what?
00:52:49.320 | My granddaddy started Coca-Cola and my granddaddy left me $10 million of Coca-Cola stock.
00:52:55.060 | And I think Coca-Cola is pretty good.
00:52:56.580 | They're in hundreds of countries around the world.
00:52:58.780 | They've got this incredible moat, as the investment people would say.
00:53:04.220 | It's a great well-run company.
00:53:06.100 | I've got good managers."
00:53:07.420 | I'm going to completely ignore, with the exception of reading my annual report, I'm going to
00:53:13.100 | completely ignore what happens to the Coca-Cola stock on a daily basis.
00:53:16.540 | And I'm going to go play golf every day or whatever their version of that is.
00:53:20.580 | Is that stupid?
00:53:21.860 | I don't think so.
00:53:22.860 | I'd be happy to own $10 million of Coca-Cola stock and I'd feel, "Hey, it's pretty good."
00:53:27.380 | I might go ahead and I might like to own a few other companies in case something happened.
00:53:31.940 | But if my granddaddy started Coca-Cola or whoever the story is, whatever it is, what
00:53:39.900 | do I have to fear?
00:53:40.900 | I mean, again, good financial planning is going to come into that, personal financial
00:53:44.460 | planning, lifestyle, having a margin in your life, not being over-committed, being able
00:53:49.740 | to handle the swings if the dividend has to be cut, those types of things.
00:53:52.540 | But that's called financial planning.
00:53:54.820 | So the point of this is trust your managers if you have them.
00:53:59.380 | And if you don't have managers, understand your philosophy.
00:54:03.820 | And if you don't understand your philosophy, don't invest in stocks.
00:54:07.740 | If you can't handle it, if you don't have a plan in place in advance for the bear market,
00:54:12.100 | then don't ever get in in the first place.
00:54:14.740 | In some ways, one of the best things and one of the worst things that ever happened was
00:54:17.660 | 401(k)s.
00:54:19.180 | And we'll talk -- I always say, "We'll talk about this in the future."
00:54:22.620 | There's so much to talk about.
00:54:23.780 | I think I could do a thousand shows of two hours long talking about things I'm interested
00:54:27.380 | in.
00:54:28.380 | But there's so many 401(k)s.
00:54:29.380 | And if you look at kind of the history of the 401(k), these days, most people have some
00:54:33.740 | version of a 401(k), whether it's that actual 401(k), whether it's the non-profit equivalent,
00:54:39.060 | which would be a 403(b), whether it's the smaller business equivalent, which would be
00:54:42.820 | a SEP IRA or a Simple IRA or something like that.
00:54:46.060 | Most people have, these days, some kind of plan that they can adjust the investments
00:54:50.020 | as far as their pension plan, their individual pension plan.
00:54:53.180 | Originally, in case you're interested, originally a 401(k) is more appropriately designed as
00:55:00.460 | a profit-sharing plan.
00:55:01.860 | It is technically a profit-sharing plan.
00:55:04.780 | And that's what it can be set up.
00:55:07.460 | But what the 401(k) added is it added what's called 401(k) provisions to a profit-sharing
00:55:13.180 | plan.
00:55:14.180 | And the 401(k) allowed people to defer some of their own income into that account.
00:55:19.540 | So to not have to pay taxes on the money currently to be able to defer their income.
00:55:26.420 | And so over the last about 40, 50 years, you've seen a tremendous change in the corporate
00:55:30.780 | world between a traditional defined benefit pension, which is where I work at this company,
00:55:36.260 | I turn 65, they guarantee to pay me 60% of my finishing salary for the rest of my life.
00:55:41.940 | You had a tremendous conversion from a defined benefit pension to a defined contribution
00:55:47.020 | pension.
00:55:48.020 | And in a defined benefit pension, you had an investment manager.
00:55:51.460 | This would be a professional investment manager.
00:55:54.060 | And this is the person who's responsible for making sure that our pension is funded such
00:55:58.320 | that we can support these payments that we've promised.
00:56:02.440 | And now it's on the people.
00:56:03.880 | So now you can pull up on your phone, you can log into your Fidelity 401(k) account,
00:56:09.100 | and you can buy and trade stocks right in there on your phone.
00:56:12.120 | Now is that an advantage for some people?
00:56:14.100 | It's a huge advantage.
00:56:15.740 | It's a huge advantage.
00:56:17.600 | If you're an investment guy, and the fact that you can sit up there and you love to
00:56:20.820 | trade stocks, and you can do this in your 401(k), and you can defer $17,500 in there,
00:56:26.380 | you could throw in another $5,500 if you're over the age of 50.
00:56:30.300 | You can have a profit sharing contribution in there.
00:56:33.220 | You could get $51,000 into that account every year.
00:56:36.300 | I was talking to somebody yesterday about setting up a solo 401(k) and getting $51,000
00:56:41.740 | in there.
00:56:42.740 | So you're telling me that I can -- so if I were a stock trader, I would say, "You're
00:56:45.980 | telling me that I can set up an account.
00:56:47.260 | If I structure it right, I can get $50,000 in this account, and I can do this before
00:56:52.140 | paying any income tax at all, and I can buy and sell.
00:56:55.260 | I can ignore all of the short-term capital gains, long-term capital gains rules.
00:56:58.940 | I can day trade in this account on a 401(k).
00:57:01.700 | You're telling me I can do that?
00:57:02.700 | No.
00:57:03.700 | There's limitations.
00:57:04.700 | Ignore that I'm speaking in broad strokes.
00:57:06.780 | But you're telling me I can do that right on my phone?
00:57:08.500 | That's amazing.
00:57:09.580 | But yet for the average person who has no interest in trading stocks or has no interest
00:57:15.580 | in these funds, all they know to do is every few months they open up their computer and
00:57:19.860 | they say, "Oh, my mutual fund is down," and they switch the money to the mutual fund
00:57:23.180 | that has a green arrow next to it, and it's up 6% instead of the mine, which has a red
00:57:26.900 | arrow and is down 11%.
00:57:28.700 | This is the worst thing that ever happened to people's investment accounts.
00:57:32.620 | And I think we know this intuitively.
00:57:34.340 | This is where if you want to ask somebody kind of intuitively about doing it yourself
00:57:40.500 | versus hiring somebody, and you have the financial world that says, "Well, you're better off
00:57:45.180 | just doing it yourself," but yet you've got all these financial advisors that say, "Hire
00:57:49.180 | me.
00:57:50.180 | Hire me."
00:57:51.180 | I mean, the equivalent is this.
00:57:52.180 | If you could invest your money with the Harvard Endowment Fund and you could have the manager
00:57:56.740 | of the Harvard Endowment Fund investing your money with that fund, would you rather do
00:58:02.060 | that or would you rather invest the money yourself and choose your investments for yourself?
00:58:08.220 | The majority of people in my experience that I've talked to have given that kind of either/or
00:58:12.580 | would say, "I'd rather have my money alongside the Harvard Endowment."
00:58:15.620 | And that's kind of how pensions used to be, 'cause the pension legally had to provide
00:58:18.980 | for the person under this certain formula payout, and now it doesn't have to do so.
00:58:25.020 | So trust your managers.
00:58:26.860 | And then the last thing I have on this, and hopefully this is interesting.
00:58:30.460 | Hopefully this is interesting.
00:58:32.380 | I just looked down.
00:58:33.820 | I've spent 50 minutes answering this question.
00:58:36.860 | But understand the difference between price and value.
00:58:41.460 | The example that I always use is real estate.
00:58:47.060 | Now real estate and stocks, stocks have a dramatic disadvantage from real estate.
00:58:52.980 | In real estate, if I were to tell you every single day how much your house is worth, that
00:58:57.420 | would drive you nuts.
00:59:00.260 | One day I come out and I say, "Hey, listen.
00:59:02.500 | I'll give you today $182,433 for your house."
00:59:05.500 | And then the next day I come out and say, "I'll give you $191,673 for your house."
00:59:09.300 | And the next day I come out and say, "I'll give you $211,932 for your house."
00:59:14.580 | And the next day I come out and say, "Hey, today it's $133,467.67."
00:59:19.860 | That would drive you nuts.
00:59:20.860 | That's what stocks do when you pay attention to them every day.
00:59:23.180 | Every day there's a price, price, price, price, price, price, price.
00:59:26.120 | Does price determine value?
00:59:28.340 | Does the value of your house as a place to shelter your family and a place to have a
00:59:32.580 | home built together, does that change based upon the price?
00:59:38.300 | It doesn't.
00:59:39.300 | Now, the price is important over the long term, but the reason why people will sit and
00:59:44.180 | own a house for a long time and why people who are real estate investors will very rarely
00:59:48.660 | trade their houses is A, because they're not very liquid because it's got a massive dollar
00:59:52.980 | figure next to it, but B, because it's really hard to sell and you don't actually know the
00:59:57.140 | final price until the sale happens.
01:00:00.940 | That's the only time you know it.
01:00:02.260 | And so it's a lot easier when in the reality the actual price of your house is up and down
01:00:06.420 | and up and down and up and down all the time and there's bear markets and bull markets
01:00:10.260 | on your house.
01:00:11.260 | You're not aware of it because you're just simply living in that house and you have the
01:00:14.580 | value of the house.
01:00:15.820 | Well, to me the most rational strategies for investments follow the same exact plan.
01:00:22.860 | The most rational values for investments follow the idea that, excuse me, the most rational
01:00:30.260 | plans for investing follow the same idea, which is I'm going to focus on the value of
01:00:34.580 | my investment if you're investing.
01:00:38.500 | Or if you're trading, you're going to focus on, I'm going to focus on the mechanics of
01:00:42.260 | my trade and here's the trade that I'm going to do and I'm going to put this insurance
01:00:47.140 | in place in case I'm wrong.
01:00:48.140 | I'm going to buy/sell these options.
01:00:50.260 | I'm going to buy/sell these call options, these put options.
01:00:53.900 | I'm going to put this collar.
01:00:54.900 | I'm going to put a straddle.
01:00:56.420 | You can do an option strategy where you make money on the downside and you make money on
01:00:59.820 | the upside and you only lose money if the market is flat.
01:01:03.300 | You can make an option strategy where you only make money if the option is flat, if
01:01:07.060 | the market price of the underlying security is flat and that you lose money if it goes
01:01:12.300 | up or down.
01:01:13.300 | You can bet it both ways.
01:01:14.300 | Now, those are such individual examples, but my point is that all of this stuff together
01:01:19.940 | makes up the market.
01:01:21.500 | So when I said how I would deliver market news is if I were actually doing a daily market
01:01:25.820 | news update, I would say, "Today, millions and millions and millions of market participants
01:01:31.500 | bought and sold things based upon their own personal situation.
01:01:35.700 | And the values and the prices at which things were bought and sold wandered around randomly
01:01:40.380 | based upon the individual person's strategies and philosophies."
01:01:45.220 | Now in general, we saw that the general trend was this, and so therefore these indexes that
01:01:49.820 | we manage is this.
01:01:51.340 | And we think that it's possible that this bad news on the jobs report had this impact,
01:01:57.020 | although we know there were probably some people that made a bunch of money off of that.
01:02:00.140 | And we think it's possible that this negative forecast from this company analyst affected
01:02:04.500 | this company's price.
01:02:05.980 | But the reality is we bet that somebody had that trade and made a bunch of money off of
01:02:09.180 | that, and we can't actually report that because all we're reporting is the current market
01:02:13.820 | price of these basket of stocks.
01:02:16.060 | And we have no idea who actually made how much money because there is a way bigger derivatives
01:02:21.220 | market in place than the value of all the market prices of the companies combined.
01:02:27.540 | That would be how I would report financial news.
01:02:29.880 | So a substantial answer to you, Mr. or Ms. Moto-Jones, I didn't look to see the details.
01:02:36.540 | I don't think there was an actual name there.
01:02:38.900 | And that would be my answer to you.
01:02:40.860 | And so my encouragement to you would be understand your strategy and spend a lot of time learning
01:02:47.540 | before you actually do any investing.
01:02:49.700 | And then figure out what strategies make sense to you.
01:02:51.820 | And if your strategy makes sense to you, don't worry about the bear market.
01:02:57.020 | Unless your strategy has in its buildup, in its philosophy, a strategy for the bear market,
01:03:02.180 | in which case you already know that and you never ask me the question.
01:03:06.340 | I hope that helps.
01:03:07.940 | Okay, next question.
01:03:10.260 | I did not expect that one to take an hour, but hopefully it came across clearly.
01:03:15.060 | And I was thinking a lot about that Monday show, trying to figure out if I did a good
01:03:19.580 | job of talking about why I was -- I didn't feel like I did a good job on Monday.
01:03:25.340 | So hopefully this helped to fill in some of your thoughts and understanding a little bit.
01:03:30.220 | Okay, next question from Steve, Twitter handle @SteveOnomics.
01:03:35.500 | His question, best investment strategy for a young couple looking to buy a house in the
01:03:39.700 | next three to five years.
01:03:41.980 | So Steve, couple answers to this question for you.
01:03:44.940 | Number one is I don't have an investment strategy that's going to work.
01:03:48.660 | And I'll explain why.
01:03:50.180 | And you're probably expecting this answer.
01:03:52.200 | But I don't know of anything that you can do with money that is going to make a dramatic
01:03:57.220 | difference of the return that you get over a three to five year time period for where
01:04:01.660 | you're looking to buy a house that involves a financial instrument.
01:04:05.340 | And there are a couple of reasons for this.
01:04:06.580 | The one that most people are familiar with, which is absolutely accurate, is the matter
01:04:09.740 | of time horizon.
01:04:11.380 | So in general, the price you pay to get high returns on your money is in general volatility.
01:04:19.460 | If there were no volatility, no ups and downs in the prices of things, then in general,
01:04:26.180 | then you get a lowered return.
01:04:28.580 | So this is why if you look at the highest long-term growth rates among asset classes
01:04:34.580 | of stocks is among small cap stocks.
01:04:37.100 | So small cap means smaller companies with a market capitalization under a certain dollar
01:04:40.740 | amount, which we all argue on what that number is.
01:04:42.780 | But let's just ignore it for today, small cap stocks.
01:04:45.460 | So small cap stocks, you have the most ups and downs because these are the companies
01:04:49.860 | that are the most volatile.
01:04:51.380 | There's a major difference between a brand new technology company with a market cap of
01:04:55.300 | $2 billion versus GE as far as their business plan and the stability of it.
01:05:01.220 | So small cap stocks among asset classes have a higher rate of return over the long term,
01:05:07.420 | have a higher rate of return than do large cap stocks, but yet they're way more volatile
01:05:11.060 | over time.
01:05:12.260 | So you say, OK, I get the higher return.
01:05:15.140 | What about bonds versus stocks?
01:05:16.700 | Well, bonds-- and we'll go into this in detail on Wednesday with our stocks versus bond explanation--
01:05:22.660 | bonds are called fixed income investments.
01:05:24.340 | So in general, you know how much of a payment you're going to get on that bond.
01:05:28.060 | Now the bond price is going to wander around a lot based upon the actual current-- based
01:05:33.100 | upon the interest rates and the changes of the interest rates.
01:05:35.400 | But you know what you're going to get.
01:05:36.580 | It's a guaranteed payment.
01:05:38.340 | And so as long as the company doesn't default on the payment, then you know I've got in
01:05:42.140 | place.
01:05:43.140 | I've got this amount of money coming in.
01:05:44.140 | So there's a lot lower return, but there's also less volatility if we ignore temporarily
01:05:49.460 | interest rates.
01:05:50.500 | Over the short term, interest rates of bonds can bring in dramatic volatility.
01:05:54.620 | But just ignore that just for the sake of my simple example.
01:05:57.540 | On the other hand, if you go down to the bank and you buy a CD, they're going to give you
01:06:01.380 | a very low nominal interest rate return.
01:06:07.180 | But that's a guaranteed growth rate.
01:06:10.560 | There's not going to be any fluctuation in the value because it's not traded.
01:06:13.680 | It's not dependent on interest rates.
01:06:15.020 | It's not going to be the kind of thing-- we're not talking about negotiable CDs, which can
01:06:18.420 | be traded on the market.
01:06:19.420 | We're only talking about just a traditional bank CD or even a savings account.
01:06:22.460 | You've just got a very simple value.
01:06:24.500 | Or a money market fund, where it's designed to keep the net asset value at a buck a share.
01:06:29.340 | Then we go in and we've got a very short term investment.
01:06:31.820 | So we've got not much return.
01:06:33.780 | So the first answer as far as why it doesn't really matter-- and there is no investment
01:06:39.180 | strategy for three to five years.
01:06:40.300 | And the reason is because three to five years is not in the world of investing.
01:06:44.620 | Traditionally you'll hear, if you don't have about five years of time, you shouldn't be
01:06:47.540 | investing in stocks and things like that.
01:06:49.780 | That can be a little bit misleading.
01:06:51.100 | But because if you've got six years, in a year you'll be in the five year time.
01:06:55.380 | So what, should you sell out then?
01:06:56.900 | Depends on the situation.
01:06:58.540 | This is very, very individual.
01:07:00.200 | But the problem with house is that you've got a plan that in three to five years, you're
01:07:03.980 | going to need a large lump sum.
01:07:06.060 | So in that world, you can't stomach-- even if you had a six year time horizon, you need
01:07:10.260 | knew that six years from now, I'm going to need this lump sum.
01:07:13.700 | I still probably wouldn't invest it in stocks in general, because you're looking at a situation
01:07:19.700 | where you have a lump sum that's due on six years.
01:07:27.380 | So unless you can put in a strategy-- so maybe you could purchase an individual bond that
01:07:33.580 | had a six year duration, or a specific-- it ended in six years.
01:07:38.540 | So in bond trading, we call this duration.
01:07:40.620 | And so maybe you could put in some kind of immunized bond portfolio in place for six
01:07:45.180 | years.
01:07:46.180 | But this is completely inaccessible.
01:07:47.180 | I mean, that would be great if you had a lot of money.
01:07:49.760 | But this is completely inaccessible to the average person who's trying to fund this portfolio
01:07:53.380 | for $100 a month over time, building it up, and finishes out.
01:07:57.700 | Let me explain real quick what that means.
01:07:59.540 | So if you had a lump sum, you could buy an immunized bond portfolio.
01:08:03.380 | The idea behind an immunized bond portfolio is that you're trying to immunize the bond
01:08:07.340 | against a major change in interest rates.
01:08:10.140 | And you do this by adjusting the duration of the portfolio such that your exact goal--
01:08:15.260 | that you hit your exact goal, and you're going to have the money that you need in the exact
01:08:19.220 | goal.
01:08:20.220 | A very simple explanation.
01:08:21.220 | We'll go into it in detail another time.
01:08:22.960 | But this doesn't work for an accumulation strategy.
01:08:25.920 | Because if you're saving $500 a month towards the down payment on a house, or $1,000 a month,
01:08:30.540 | whatever it is, you can't buy a $500 new immunized bond portfolio every time.
01:08:36.420 | And your whole portfolio falls apart if you're trying to fund it month by month.
01:08:41.300 | Now, you could if you had a huge lump sum now, and you knew I've got a specific expense
01:08:45.100 | that's fully due five years from now.
01:08:47.180 | You could theoretically do it.
01:08:48.780 | But you're not going to find a trader who's going to set it up for you, unless you're
01:08:51.860 | going to do that kind of thing yourself.
01:08:53.300 | And I don't know how to do it.
01:08:55.580 | This is a bond trading-- you need a portfolio manager.
01:08:58.620 | And it's not the kind of thing you go on E-Trade and say, I'm going to do this.
01:09:01.700 | I bet you could.
01:09:02.700 | I'm not smart enough to do it.
01:09:04.540 | And if you are, come and tell me how to do it.
01:09:06.660 | Because it seems completely silly to me.
01:09:09.100 | The numbers are too small.
01:09:10.380 | You can't afford the advice.
01:09:11.380 | And that's the kind of thing that you would do.
01:09:13.460 | That's the kind of thing that would happen on an institutional scale if you had a large
01:09:17.100 | amount of money that you needed for a specific expenditure.
01:09:20.700 | So you're in an accumulation phase, generally, if you're talking about an investment strategy.
01:09:24.520 | And all of the investment strategies that are available to you as a retail investor,
01:09:28.940 | they're not really going to make a big difference.
01:09:31.360 | And they're not going to make a big difference because of the volatility, first of all.
01:09:34.820 | So unless you're willing to risk that five years from now-- in my example, Dow goes from,
01:09:39.380 | I don't know, maybe it's $25,000 five years from now.
01:09:41.860 | And it goes from $25,000 to $12,000.
01:09:44.320 | Or maybe it's at $12,000 five years from now.
01:09:46.640 | And you're going to make it on the gain.
01:09:48.740 | This doesn't work.
01:09:49.920 | You can't invest in that period of time.
01:09:51.760 | Because you can't run the risk of the money not being there when you want to buy the house.
01:09:55.120 | So what do you do?
01:09:56.120 | Well, that's thing one.
01:09:57.120 | But thing two, here's the other problem, is that three to five years, rates of return
01:10:00.680 | are going to make very little difference.
01:10:03.440 | So let's assume that you're going to buy-- I don't know where you live, Steve.
01:10:05.520 | But let's assume that you're going to buy a $200,000 house.
01:10:08.480 | And down here in Islet, where I live, West Palm Beach, that would be basically a starter
01:10:11.960 | house.
01:10:12.960 | I mean, somewhere between $150,000 to $200,000 house.
01:10:15.320 | And so my numbers make sense at $200,000.
01:10:17.700 | So let's say $200,000 house.
01:10:19.720 | So let's assume you're going to put a 20% down payment.
01:10:23.000 | You're going to finance 80% of it under a traditional fixed rate mortgage.
01:10:26.960 | So in that 20%, you need to accumulate $40,000.
01:10:31.160 | So let's assume-- let's use the calculator here real quick.
01:10:34.360 | And let's say, OK, let's assume that $40,000 is our future value.
01:10:40.080 | And let's put in-- let's say three years.
01:10:43.080 | Let's put in 36 months.
01:10:45.320 | And let's start with nothing.
01:10:47.120 | And let's say that we're going to use-- I don't know what CDs are today.
01:10:49.920 | Let's say we're going to use a 2% investment return, 2% annualized.
01:10:54.680 | Well, our monthly payment that we're going to need to save to accumulate that is $1,079.
01:11:00.000 | So we're going to save about $1,000 a month under a 2% investment return to equal the
01:11:05.000 | $36,000 that we want to save.
01:11:08.220 | So let's look at the impact of interest rates over a 36-month period.
01:11:11.120 | So I'm going to change the math here.
01:11:12.900 | And so now we're going to put in $1,000 for our payment.
01:11:15.600 | We're going to put in 36 for our number of periods.
01:11:18.240 | We're going to put in a 2% annualized interest rate.
01:11:20.400 | And we're going to start with nothing.
01:11:21.880 | So if we save at a 2% interest rate over a 36-month period, our total value that we have
01:11:28.840 | at the end of 36 months is $37,070.
01:11:32.580 | And the reason that's not-- we're going to have $37,070.
01:11:37.700 | So we've got $37,070.
01:11:39.940 | Let's put in a 3% interest rate.
01:11:43.040 | Now instead of $37,070, we've got $37,620.
01:11:49.320 | So let's put in a 5% interest rate.
01:11:51.920 | Let's say that you could find something over the next three years that were really going
01:11:55.320 | to make a big difference for you.
01:11:56.880 | Well, in this world now, the difference between at 2% and at 5%, the 5% interest rate is $38,753.
01:12:05.640 | So let's subtract 38,000-- from $38,753, let's subtract $37,070.
01:12:14.480 | And our answer is $1,683 to go from 2% to 5% interest rate.
01:12:22.360 | Now go out and look at the investment and savings options that are available for you
01:12:26.920 | over a 36-month period.
01:12:29.120 | And you tell me how on earth you're going to go from 2% rate of return to 5% rate of
01:12:33.360 | return.
01:12:35.360 | With any kind of guarantees in today's low-rate world.
01:12:38.240 | I don't know of a strategy that's going to do it with any kind of guarantees.
01:12:41.000 | And when you're talking about saving for a house, you need to look at the guarantees.
01:12:45.580 | So over this period of time, the difference of 2% versus 5% is a grand total of $1,683.
01:12:54.380 | Now let's say that you're saving for a house.
01:12:56.560 | Does 36 months versus 37-- what is that-- 37.6 months make a difference?
01:13:01.400 | 36 versus 38 months to buy the house and have your money that you need to make up that extra
01:13:05.880 | $1,600?
01:13:07.360 | That makes no difference at all in your purchase plan.
01:13:10.360 | But it makes all the difference in the world if you have the volatility associated with
01:13:13.800 | the 5% investment.
01:13:15.400 | And all of a sudden now, you were expecting to have $40,000.
01:13:18.600 | And your $40,000 dropped in price-- dropped in price because of some interest rate fluctuation--
01:13:23.960 | down to $28,000.
01:13:26.120 | So over the short term, interest rates are almost irrelevant.
01:13:29.760 | That $1,600 is completely irrelevant.
01:13:32.840 | That's not even the cost-- when you're talking about buying a house, that's not even the
01:13:36.440 | cost of your inspection and your title insurance.
01:13:41.120 | So you're better off just simply ignoring, in general, the interest rates completely
01:13:45.880 | and just ignore them and go about your life and save the money.
01:13:51.960 | Now you do the best you can.
01:13:53.540 | So toss that money in a money market fund.
01:13:56.320 | Money market fund-- great.
01:13:57.760 | That should work.
01:13:59.160 | Now here's what can make the major difference.
01:14:04.280 | What could you do with the money in the meantime that three to five years from now, when you're
01:14:08.440 | ready to buy a house, could make a much bigger difference for you?
01:14:12.000 | So I can't fix the problem of investment returns in three to five years.
01:14:16.120 | I don't know an answer to it.
01:14:17.520 | There's nothing that makes sense other than toss it in a savings account, and it doesn't
01:14:20.120 | make a difference.
01:14:21.120 | Oh, one more piece of math I wanted to do on that.
01:14:22.720 | So let's keep exactly that same $1,000.
01:14:25.280 | Let's go back to 2%.
01:14:26.720 | So now I'm going to change our period from 36 months, and let's go ahead and change it
01:14:30.640 | to 360 months.
01:14:32.880 | So we've got 360 months.
01:14:34.440 | So I'm at 2% interest rate annualized, 360 months.
01:14:39.200 | And let's start with nothing at present value, and let's put the same $1,000 a month into
01:14:43.480 | our account.
01:14:44.760 | And let's say at $1,000 a month at 2%, then at the end of 30 years, investing $1,000 a
01:14:50.880 | month at 2%, we would have $492,725.39.
01:14:57.760 | Now under this scenario, let me raise this to 5%.
01:15:00.360 | So I'm going to raise my interest rate, no other changes to 5%.
01:15:04.400 | Now at the end of-- from 2% to 5%.
01:15:06.840 | Now at the end of 30 years, we've got $832,258.64.
01:15:14.440 | Let's say that we raise this to 8%, just for numbers.
01:15:17.840 | At 8%, $1,000 a month, we've got $1,490,359.45.
01:15:25.400 | So if you want to understand why you hear every financial planner in the world say you
01:15:28.520 | can't keep your money in a bank account when you're investing for a 30-year period, it's
01:15:32.380 | because it costs you a million bucks to do so.
01:15:35.780 | At 8%, it's $1,490,000.
01:15:37.320 | At 2%, it's $492,000.
01:15:41.400 | And think about the difference over a 30-year period of what having an extra million bucks
01:15:44.860 | to spend in your life as far as what you can actually spend that on.
01:15:48.120 | That makes a huge difference as far as your lifestyle.
01:15:52.040 | Whereas the $1,600 difference for your house is only the difference of having to wait another
01:16:01.880 | 1.6 months to buy your house.
01:16:03.520 | You just started shopping at 1.6 months.
01:16:07.200 | So that's the difference as far as that time horizon.
01:16:10.080 | And once you understand that, you don't worry about making a big investment return on your
01:16:13.480 | house except for what I'm going to talk about in a second.
01:16:15.520 | You just don't worry about that.
01:16:17.440 | Now what could you actually do?
01:16:19.840 | I would say rethink the whole house decision.
01:16:23.120 | Not rethinking in the meaning that Joshua recorded this show on buying a house as a
01:16:28.000 | bad investment and so therefore because I'm buying a house as a bad investment, then I
01:16:33.880 | should never buy a house and I should have to rent a house and now my wife's going to
01:16:36.280 | be upset with me.
01:16:37.280 | Not in that way.
01:16:38.280 | Although that is accurate if you want to think about it.
01:16:40.940 | But think about what could I do where I could exercise control over this money such that
01:16:46.600 | I can be in a really good shape to cover this house in three to five years.
01:16:50.880 | So for example, do you have any money now?
01:16:53.080 | If you have some money, what could be the most productive thing to do with that money?
01:16:57.200 | Could you start a small business on the side where instead of saving $1,000 a month, you
01:17:02.400 | save for three months, you've got $3,000, you start a small business or some kind of
01:17:06.160 | side gig or something that you have expertise in.
01:17:09.800 | And then because you control that, you take your $3,000 investment or your $300 investment
01:17:15.160 | and you grow that business to the point where instead of it, you can earn two, three, $4,000
01:17:20.440 | a month.
01:17:21.440 | Well, that would be something that you could control.
01:17:23.880 | And so now you're in the position where instead of saving $1,000 a month for that house, now
01:17:27.520 | you're in the position where you have the $1,000 from your daytime job plus you have
01:17:31.760 | the $3,000 of profit from your nighttime job or the business that you started on the side.
01:17:36.360 | And maybe it's a gamble and you might lose the money, but maybe it could pay off.
01:17:40.120 | And when it pays off in the form of a business or a skill or something that you've done,
01:17:43.960 | then now you've got a situation where you can actually have a return that you can count
01:17:49.440 | on.
01:17:50.440 | And even though it's a gamble, you can predict that return a little bit better.
01:17:53.920 | Maybe you're in a situation where you're in the corporate world and you're working and
01:17:56.600 | you're making $60,000 a year.
01:17:58.920 | And you say, "I've got $1,000 a month to save for a house, but in my job, I know that I
01:18:03.920 | need an MBA."
01:18:04.920 | Now, I don't know if you do your research on this because it varies, but in my job,
01:18:08.040 | I know that I need an MBA.
01:18:09.720 | And if I had an MBA with my experience and if I had a better network, I could leave the
01:18:14.240 | company that I'm at and I could go from making $60,000 a year to making $160,000 a year because
01:18:20.880 | I built up a website, I built up a portfolio, I became a speaker and did these things.
01:18:27.040 | Well, in that situation, I would say do that.
01:18:30.360 | Make that $1,000 a month, go down, join the local Toastmasters Club, become a skilled
01:18:34.860 | public speaker, go start buying a book and reading a book a week off the personal MBA
01:18:39.400 | checklist, and go join an executive MBA program and spend your Saturdays in MBA school so
01:18:44.080 | that 12 months from now, you've got your MBA done.
01:18:46.800 | And then make sure that you're going to steal Brian Tracy's 1,000% formula.
01:18:51.580 | Make sure that you're spending that $1,000 a month going to four conferences in your
01:18:57.680 | industry every year.
01:18:59.920 | And take your wife with you, and you said young couple, so take your wife with you to
01:19:03.480 | those conferences, schedule your vacation around the conference, and go to the Widget
01:19:08.120 | Industry Conference in Denver and spend two days before that up in the mountains and two
01:19:11.840 | days after hanging out in Denver with the Denver people.
01:19:17.340 | Things like that can actually make a difference.
01:19:19.560 | Now fast forward three years, you've done what you needed to do to build your career.
01:19:23.640 | Now in that situation, take yourself and go from $60,000 to $160,000.
01:19:28.920 | And I've got an extra $100,000 of income that I can play with.
01:19:32.680 | Guess what?
01:19:33.680 | If you'll keep your lifestyle and expenses at the $60,000 level, $100,000 of extra income,
01:19:40.480 | let's assume you're bad at tax planning, so you've got to pay $20,000 of that out in taxes.
01:19:45.560 | So let's now say you've got $80,000.
01:19:47.520 | Now you've got an extra $6,667 a month that you can save.
01:19:52.920 | Well $6,667 a month over the next 12 months, that's $80,000.
01:19:58.020 | In another six months, there's your $40,000 we were trying to get to for your house down
01:20:02.880 | payment.
01:20:04.480 | So that's how I would think about it.
01:20:06.020 | There is no good investment strategy over a three to five year period that's going to
01:20:09.880 | work as far as helping you save the money.
01:20:12.600 | But if you could come up with some kind of alternative strategy, maybe another strategy
01:20:15.700 | that comes to me is maybe instead of buying a single family house, you guys could buy
01:20:20.040 | a quadruplex or a duplex or something like this.
01:20:23.960 | Well now you go in, you find a good price, you get involved in real estate investment,
01:20:27.040 | you buy a quad, and you've got to come up with a higher down payment.
01:20:31.280 | So maybe you can build a relationship with a local real estate investor.
01:20:35.240 | Maybe that person can be a hard money lender.
01:20:36.760 | You can build a relationship with a hard money lender or someone that will help you out.
01:20:40.200 | And you can make the numbers work where for the same price that you're paying today in
01:20:43.480 | rent with the fact that you borrowed the money from a hard money lender or from a local real
01:20:46.920 | estate investor who wanted to be available and you split the deal with them and set up
01:20:50.120 | something where you're living in one of these four units.
01:20:53.640 | And then over a five year period, you can live in that unit and then you can manage
01:20:57.040 | the quad, the quadruplex.
01:20:59.480 | And over that five year period, you can build up the cash flow from that to where you buy
01:21:03.920 | out the fellow investor.
01:21:05.280 | He gets his money back with a good rate of return.
01:21:07.600 | You've got a place to live for the next three to five years.
01:21:09.840 | And then in three to five years, maybe you can make the cash flow numbers work where
01:21:13.320 | in excess you've got an amount, in excess of the mortgage payment on the investment
01:21:17.240 | property, in excess of that mortgage payment, you've got the money coming in where you can
01:21:22.000 | then turn it and cover your own mortgage payment and have less money that you need to cover
01:21:27.760 | that.
01:21:28.760 | Now, is that possible?
01:21:29.760 | I bet you it is.
01:21:30.760 | Is it easy?
01:21:31.760 | Probably not.
01:21:32.760 | I don't know if those numbers would work.
01:21:33.760 | I'm making the idea up off the top of my head.
01:21:35.560 | But something like that is where I would spend my time focusing.
01:21:39.720 | Building your skills, building your knowledge, figuring out an alternative angle.
01:21:45.640 | Now, last part to it.
01:21:47.280 | Is there anything wrong if you have a job that you like and you live in a place that
01:21:50.880 | you like and you're saving the money and you're really happy with your lifestyle and you don't
01:21:55.000 | want to work on the side and you don't want to go to four stupid conferences a year and
01:21:58.320 | you don't want to go on Saturday and waste your Saturday on an MBA program and you just
01:22:01.840 | want to save a thousand bucks a month for the next 36 months to have your $38,000, $40,000
01:22:07.960 | down payment?
01:22:08.960 | Is there anything wrong with that?
01:22:09.960 | There's nothing wrong with that.
01:22:11.120 | There's no inherent virtue in having more money.
01:22:13.160 | It's just that people, if you're listening to a finance show, this is how my ideas work
01:22:17.200 | to try to figure out what works and what doesn't work.
01:22:19.800 | So those are my thoughts for you, Steve.
01:22:21.760 | Good question.
01:22:22.760 | Let me know what you think.
01:22:23.760 | I'd love to know if this advice helps you at all.
01:22:25.880 | I want to real quick, Robbie Courtney sent me that tweet and I covered it on Wednesday,
01:22:31.800 | but it was kind of a different kind of show.
01:22:33.640 | What financial advice would you have given your 18-year-old self?
01:22:36.360 | Here's the short and sweet answer.
01:22:38.120 | On Wednesday, I was just thinking through some of the lessons that I've learned that
01:22:41.560 | I think affect more finances than just what financial advice would I do.
01:22:46.600 | But my answer to that question is invest in yourself and in your ideas first and then
01:22:50.760 | look for a strategy that's going to work faster than any kind of specific market thing.
01:22:55.520 | If you're interested in investments, go out and get interested in it and spend all your
01:22:59.240 | time trading stocks or buying and selling investments.
01:23:03.000 | But you can do that, but you're going to be a different kind of person.
01:23:05.760 | You're going to be the kind of person who's obsessed with this stuff and for whom it's
01:23:08.840 | fun to sit and read annual reports.
01:23:10.900 | The best example I give you of that is Joshua Kennan.
01:23:13.440 | I'd love to interview him at some point.
01:23:15.360 | If anybody knows him, please ask him for an interview.
01:23:17.840 | I'm going to send him a note.
01:23:19.320 | I don't know if he does interviews, but he's one of my favorite financial writers.
01:23:22.920 | He writes the About Investing section for the About website.
01:23:27.120 | He does a great job.
01:23:28.120 | He's got a personal website at JoshuaKennan.com.
01:23:32.320 | But the interesting thing you'll find is that you'll see kind of a very open peek into the
01:23:38.280 | mind of how actual investors think.
01:23:45.080 | For him, his favorite thing to do is sit down with a stack of annual reports and a highlighter
01:23:48.480 | and read through annual reports.
01:23:50.040 | That's not the average person.
01:23:51.480 | So he gets above average investment returns and he has an above average lifestyle because
01:23:55.520 | that's his fun.
01:23:56.760 | And so you're likely to find him at 2 a.m. reading investment reports.
01:24:01.040 | But if that's you, go for it.
01:24:03.340 | Number two, invest in yourself and in your ideas first.
01:24:06.200 | So knowledge, skills, focus on that.
01:24:09.960 | Focus on your knowledge and your skills.
01:24:12.180 | We know this intuitively with college.
01:24:14.160 | Everyone says go to college so you can make more money.
01:24:16.080 | But what's the philosophy behind that?
01:24:18.160 | It's not as simple as saying I got a college degree so I make more money.
01:24:21.040 | There's tons of college people out there making minimum wage.
01:24:23.720 | But the idea is skills.
01:24:25.320 | And so traditional people would say, well, a college degree grants you skills.
01:24:28.360 | You need to develop some kind of skills that will create your income.
01:24:31.640 | Because at the beginning of your life, you have unlimited human capital.
01:24:35.720 | Not unlimited.
01:24:36.720 | You have the most human capital you're ever going to have and you have no financial capital.
01:24:40.360 | So you've got to enhance the human capital with the financial capital until the human
01:24:44.440 | capital is so valuable that you can then transform it into financial capital and use the financial
01:24:49.240 | capital to pay for everything else.
01:24:51.300 | But the connection between financial capital and human capital is so important.
01:24:55.400 | So spend the money going to the places, the classes you need to go.
01:24:58.560 | Spend the money gaining the skills that you need to gain.
01:25:01.920 | Look for a way to find money that you don't have to have.
01:25:06.040 | So look for a way to leverage something.
01:25:08.180 | So look for a way to leverage your skills and other people's money.
01:25:13.040 | Whether that's starting a business with investors' money or borrowed money or no money because
01:25:16.720 | you have skills and you can bootstrap the thing.
01:25:19.020 | Look for a way to develop artificial equity.
01:25:22.560 | So for example, maybe you don't have the money to go out and buy a real estate portfolio,
01:25:27.040 | but you're really invested in real estate.
01:25:28.760 | So you would become a property manager and you would then leverage somebody else's investment,
01:25:33.280 | somebody else's money to then allow you to learn the skills that you need to do while
01:25:37.320 | you're then saving money so that you can become your own investor.
01:25:39.640 | So now you're leveraging someone else's money.
01:25:41.800 | This is what financial advisors do.
01:25:43.280 | So a financial advisor who's managing assets.
01:25:45.400 | I wasn't a millionaire.
01:25:46.400 | I'm not a millionaire.
01:25:47.480 | I wasn't a millionaire when I'm managing a million dollar portfolio.
01:25:50.620 | So I'm essentially using the million dollar portfolio to provide for my income.
01:25:55.780 | And so that's what, so I can leverage my love and my skills with financial planning and
01:25:59.760 | portfolios and financial advice.
01:26:01.840 | I could leverage that using other people's money.
01:26:05.600 | And so I can kind of develop an artificial equity.
01:26:08.600 | And that would send my friend Jim Collins crazy because he would say, "Joshua, that's
01:26:11.840 | crazy.
01:26:12.840 | That's unethical."
01:26:13.840 | We'll talk about it sometime, Jim, if you're listening.
01:26:14.840 | I hope you are.
01:26:16.840 | But you could do that in any kind of business and there's a lot of options for that.
01:26:21.480 | Look for a strategy that will work faster.
01:26:24.080 | So don't look at the, "Okay, I'm going to buy a hundred."
01:26:26.920 | I spent years lost in these books of, "Save $100 a month and then at 10% you'll be a millionaire
01:26:31.880 | in the future."
01:26:32.880 | You've got to focus on building a financially valuable skill.
01:26:35.680 | Then you've got to focus on investing that with some kind of extreme option while you
01:26:39.760 | have the time and flexibility.
01:26:41.320 | Follow Money Mustache's strategy of get financially independent by the time you're 30.
01:26:45.600 | Work your tail off, live like a college student from 18 to 30, and then you'll be a millionaire
01:26:49.360 | and then you can live like a millionaire the rest of your life because you've built these
01:26:52.000 | skills up.
01:26:53.120 | Follow that strategy or follow the strategy where you lay it all on the line and build
01:26:56.880 | a business.
01:26:58.240 | There are so many alternative strategies.
01:27:00.040 | Look for a strategy that's going to work faster, that's also going to apply to your goals.
01:27:07.840 | There's nothing wrong with going the traditional route if that's what you're into.
01:27:14.780 | That would be my short, again, answer to Robbie.
01:27:18.960 | Last question.
01:27:19.960 | Sorry, two more quick questions.
01:27:21.640 | Miriam, screen name or Twitter name, Moipmto, so Miriam Ortiz Epino writes a question.
01:27:29.240 | What is the most complicated thing in your day?
01:27:31.840 | Frankly, it was last week.
01:27:33.920 | It was trying to figure out how to get my Skype thing to work with my bad computer connection,
01:27:38.360 | but I think I might have fixed that.
01:27:39.480 | I'm still trying to get another solution that'll work better.
01:27:41.480 | But the most complicated thing in my day is trying to figure out how on earth do you take
01:27:45.200 | this complicated stuff and make it simple.
01:27:47.960 | I struggle with it because I feel it's one of my skills, but it's an underdeveloped skill,
01:27:52.440 | which is why I'm doing the podcast, is I want to try to figure out how do I take these complex
01:27:58.960 | things like investments and portfolio management and complex topics and make them simple.
01:28:04.080 | I think this has probably made one of the biggest differences.
01:28:06.840 | I made fun of Warren Buffett earlier, as people consider him to be the god of investing.
01:28:10.640 | But the thing that he is so good at, which is amazing, is he takes a complex concept
01:28:16.680 | and he boils it down into this very pithy, kind of down-home aphorism.
01:28:22.880 | And so he's viewed as a lovable Uncle Warren.
01:28:25.960 | And the wisdom in this little aphorism is so great.
01:28:28.840 | I would really want to develop that.
01:28:30.400 | So I think a lot about how can I do that.
01:28:32.520 | And I want to develop that with the podcast going forward.
01:28:35.320 | Last thought from Wolfgang.
01:28:37.120 | And his Twitter handle here is @WMThoughts on Twitter.
01:28:44.120 | So Wolfgang says, since you probably read all good finance books, any thoughts on the
01:28:47.920 | ideas in the millionaire fast lane?
01:28:50.600 | And I flipped through the millionaire fast lane a couple of years ago.
01:28:54.240 | And from memory, I think it was basically the idea is avoid the slow lane and get to
01:29:00.040 | the fast lane.
01:29:01.040 | And basically, look for how to become wealthy faster than what you're originally told.
01:29:05.640 | I just went and bought the Kindle version.
01:29:07.800 | And so Wolfgang, I will read it again and do a comment on it.
01:29:12.640 | I'll do a book review on it.
01:29:14.160 | And I'd love to interview him.
01:29:15.920 | I think from my memory, I really liked what he had to say.
01:29:21.240 | And it lines up with my own experience.
01:29:24.000 | If I'm remembering the book correctly, he talked a lot in the book about the idea of
01:29:29.200 | build out a business, build out something that's actually going to make you money a
01:29:32.680 | lot faster than the idea of work a job you hate for 40 years.
01:29:37.960 | And this is kind of the common theme.
01:29:39.240 | And there's lots of ways to solve this nut.
01:29:42.560 | So we'll see.
01:29:43.560 | I will read it again.
01:29:44.560 | I really think I liked it.
01:29:45.680 | And I've seen other people make really positive reviews on it.
01:29:48.820 | So I will check it out.
01:29:50.420 | And I will read it.
01:29:51.420 | And I will report back.
01:29:52.420 | And I will do a comment on it.
01:29:53.420 | And I'll do a comment on it.
01:29:54.420 | And I'll do a comment on it.
01:29:55.420 | And I'll do a comment on it.
01:29:56.420 | And I'll do a comment on it.
01:29:57.420 | And I'll do a comment on it.
01:29:58.420 | And I'll do a comment on it.
01:29:59.420 | And I'll do a comment on it.
01:30:00.420 | And I'll do a comment on it.
01:30:01.420 | And I'll do a comment on it.
01:30:02.420 | And I'll do a comment on it.
01:30:03.420 | And I'll do a comment on it.
01:30:04.420 | And I'll do a comment on it.
01:30:05.420 | And I'll do a comment on it.
01:30:06.420 | And I'll do a comment on it.
01:30:07.420 | And I'll do a comment on it.
01:30:08.420 | And I'll do a comment on it.
01:30:09.420 | And I'll do a comment on it.
01:30:10.420 | And I'll do a comment on it.
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01:30:14.420 | And I'll do a comment on it.
01:30:15.420 | And I'll do a comment on it.
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01:30:18.420 | And I'll do a comment on it.
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01:30:20.420 | And I'll do a comment on it.
01:30:21.420 | And I'll do a comment on it.
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01:30:28.420 | And I'll do a comment on it.
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01:30:30.420 | And I'll do a comment on it.
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01:30:34.420 | And I'll do a comment on it.
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01:30:40.420 | And I'll do a comment on it.
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01:30:42.420 | And I'll do a comment on it.
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01:30:44.420 | And I'll do a comment on it.
01:30:45.420 | And I'll do a comment on it.
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01:30:50.420 | And I'll do a comment on it.
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01:30:55.420 | And I'll do a comment on it.
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01:31:00.420 | And I'll do a comment on it.
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01:31:04.420 | And I'll do a comment on it.
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01:31:25.420 | And I'll do a comment on it.
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01:31:27.420 | And I'll do a comment on it.
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01:31:33.420 | And I'll do a comment on it.
01:31:34.420 | And I'll do a comment on it.
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01:31:37.420 | And I'll do a comment on it.
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01:31:40.420 | And I'll do a comment on it.
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01:31:44.420 | And I'll do a comment on it.
01:31:45.420 | And I'll do a comment on it.
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01:31:50.420 | And I'll do a comment on it.
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01:31:55.420 | And I'll do a comment on it.
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01:32:00.420 | And I'll do a comment on it.
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01:32:07.420 | And I'll do a comment on it.
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01:32:18.420 | And I'll do a comment on it.
01:32:19.420 | And I'll do a comment on it.
01:32:20.420 | And I'll do a comment on it.
01:32:21.420 | And I'll do a comment on it.
01:32:22.420 | And I'll do a comment on it.
01:32:23.420 | And I'll do a comment on it.
01:32:24.420 | And I'll do a comment on it.
01:32:25.420 | And I'll do a comment on it.
01:32:26.420 | And I'll do a comment on it.
01:32:27.420 | And I'll do a comment on it.
01:32:28.420 | And I'll do a comment on it.
01:32:29.420 | And I'll do a comment on it.
01:32:30.420 | And I'll do a comment on it.
01:32:31.420 | And I'll do a comment on it.
01:32:32.420 | And I'll do a comment on it.
01:32:33.420 | And I'll do a comment on it.
01:32:34.420 | And I'll do a comment on it.
01:32:35.420 | And I'll do a comment on it.
01:32:36.420 | And I'll do a comment on it.
01:32:37.420 | And I'll do a comment on it.
01:32:39.420 | And I'll do a comment on it.
01:32:40.420 | And I'll do a comment on it.
01:32:41.420 | And I'll do a comment on it.
01:32:42.420 | And I'll do a comment on it.
01:32:43.420 | And I'll do a comment on it.
01:32:44.420 | And I'll do a comment on it.
01:32:45.420 | And I'll do a comment on it.
01:32:46.420 | And I'll do a comment on it.
01:32:47.420 | And I'll do a comment on it.
01:32:48.420 | And I'll do a comment on it.
01:32:49.420 | And I'll do a comment on it.
01:32:50.420 | And I'll do a comment on it.
01:32:51.420 | And I'll do a comment on it.
01:32:52.420 | And I'll do a comment on it.
01:32:53.420 | And I'll do a comment on it.
01:32:54.420 | And I'll do a comment on it.
01:32:55.420 | And I'll do a comment on it.
01:32:56.420 | And I'll do a comment on it.
01:32:57.420 | And I'll do a comment on it.
01:32:58.420 | And I'll do a comment on it.
01:33:00.420 | And I'll do a comment on it.
01:33:01.420 | And I'll do a comment on it.
01:33:02.420 | And I'll do a comment on it.
01:33:03.420 | And I'll do a comment on it.
01:33:04.420 | And I'll do a comment on it.
01:33:05.420 | And I'll do a comment on it.
01:33:06.420 | And I'll do a comment on it.
01:33:07.420 | And I'll do a comment on it.
01:33:08.420 | And I'll do a comment on it.
01:33:09.420 | And I'll do a comment on it.
01:33:10.420 | And I'll do a comment on it.
01:33:11.420 | And I'll do a comment on it.
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01:33:15.420 | And I'll do a comment on it.
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01:33:34.420 | And I'll do a comment on it.
01:33:35.420 | And I'll do a comment on it.
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01:33:50.420 | And I'll do a comment on it.
01:33:51.420 | And I'll do a comment on it.
01:33:52.420 | And I'll do a comment on it.
01:33:53.420 | And I'll do a comment on it.
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01:33:57.420 | And I'll do a comment on it.
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01:34:01.420 | And I'll do a comment on it.
01:34:02.420 | And I'll do a comment on it.
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01:34:06.420 | And I'll do a comment on it.
01:34:07.420 | And I'll do a comment on it.
01:34:08.420 | And I'll do a comment on it.
01:34:09.420 | And I'll do a comment on it.
01:34:10.420 | And I'll do a comment on it.
01:34:11.420 | And I'll do a comment on it.
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01:34:15.420 | And I'll do a comment on it.
01:34:16.420 | And I'll do a comment on it.
01:34:17.420 | And I'll do a comment on it.
01:34:18.420 | And I'll do a comment on it.
01:34:19.420 | And I'll do a comment on it.
01:34:20.420 | And I'll do a comment on it.
01:34:22.420 | And I'll do a comment on it.
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01:34:26.420 | And I'll do a comment on it.
01:34:27.420 | And I'll do a comment on it.
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01:34:31.420 | And I'll do a comment on it.
01:34:32.420 | And I'll do a comment on it.
01:34:33.420 | And I'll do a comment on it.
01:34:34.420 | And I'll do a comment on it.
01:34:35.420 | And I'll do a comment on it.
01:34:36.420 | And I'll do a comment on it.
01:34:37.420 | And I'll do a comment on it.
01:34:38.420 | And I'll do a comment on it.
01:34:39.420 | And I'll do a comment on it.
01:34:40.420 | And I'll do a comment on it.
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01:34:46.420 | And I'll do a comment on it.
01:34:47.420 | And I'll do a comment on it.
01:34:48.420 | And I'll do a comment on it.
01:34:49.420 | And I'll do a comment on it.
01:34:50.420 | And I'll do a comment on it.
01:34:51.420 | And I'll do a comment on it.
01:34:52.420 | And I'll do a comment on it.
01:34:53.420 | And I'll do a comment on it.
01:34:54.420 | And I'll do a comment on it.
01:34:55.420 | And I'll do a comment on it.
01:34:56.420 | And I'll do a comment on it.
01:34:57.420 | And I'll do a comment on it.
01:34:58.420 | And I'll do a comment on it.
01:34:59.420 | And I'll do a comment on it.
01:35:00.420 | And I'll do a comment on it.
01:35:01.420 | And I'll do a comment on it.
01:35:02.420 | And I'll do a comment on it.
01:35:03.420 | And I'll do a comment on it.
01:35:04.420 | And I'll do a comment on it.
01:35:05.420 | And I'll do a comment on it.
01:35:06.420 | And I'll do a comment on it.
01:35:07.420 | And I'll do a comment on it.
01:35:08.420 | And I'll do a comment on it.
01:35:09.420 | And I'll do a comment on it.
01:35:10.420 | And I'll do a comment on it.
01:35:11.420 | And I'll do a comment on it.
01:35:12.420 | And I'll do a comment on it.
01:35:13.420 | And I'll do a comment on it.
01:35:14.420 | And I'll do a comment on it.
01:35:15.420 | And I'll do a comment on it.
01:35:16.420 | And I'll do a comment on it.
01:35:17.420 | And I'll do a comment on it.
01:35:18.420 | And I'll do a comment on it.
01:35:19.420 | And I'll do a comment on it.
01:35:20.420 | And I'll do a comment on it.
01:35:21.420 | And I'll do a comment on it.
01:35:22.420 | And I'll do a comment on it.
01:35:24.420 | So if you've enjoyed this information and you want to hear your question on the air, let me know.
01:35:28.420 | Have a great weekend.
01:35:29.420 | Enjoy.
01:35:30.420 | And I'll see you in the next video.
01:35:59.420 | Happy weekend, y'all.
01:36:03.420 | The holidays start here at Ralph's with a variety of options to celebrate traditions old and new.
01:36:08.420 | You could do a classic herb roasted turkey or spice it up and make turkey tacos.
01:36:13.420 | Serve up a go-to shrimp cocktail or use Simple Truth wild-caught shrimp for your first Cajun risotto.
01:36:20.420 | Make creamy mac and cheese or a spinach artichoke fondue from our selection of Murray's cheese.
01:36:25.420 | No matter how you shop, Ralph's has all the freshest ingredients to embrace all your holiday traditions.
01:36:30.420 | traditions. Ralph's. Fresh for Everyone.