RPF-0057-Interview_with_David

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00:00:30.100 | Would you have any interest in having a chat with somebody who built their career as a portfolio manager

00:00:37.300 | of professional portfolios for endowments, the endowments of universities and nonprofit organizations,

00:00:45.900 | large portfolios, who's had the opportunity to interview hundreds of individual managers,

00:00:52.000 | and then went on to sell a stake in a business and retire at about 45-ish?

00:00:57.700 | I sure would. Today we talk with David Stein. Today is episode 57.

00:01:02.700 | ♪

00:01:19.000 | I guess it's a little bit silly to say I sure would be interested when in fact I already have and I was interested

00:01:24.000 | and I'm still interested. Welcome to the Radical Personal Finance Podcast. I thank you for being here.

00:01:28.800 | My name is Joshua Sheets and I'm your host. Today is Tuesday, September the 9th, 2014.

00:01:35.600 | And today's show is an interview with Jay David Stein, host of the Money for the Rest of Us podcast

00:01:41.800 | and a former professional portfolio manager, or at least portfolio manager consultant.

00:01:47.200 | ♪

00:01:51.000 | It's always a little bit difficult when you're talking in the financial business to try to figure out

00:01:54.200 | exactly what title works for everybody. I think you're really going to like today's show.

00:01:58.200 | I was really thrilled when I had the chance to talk with David. We had a very interesting conversation.

00:02:03.800 | We talked about his personal journey and then we also talked about portfolio management,

00:02:07.600 | the science of portfolio management. This is one of those subjects that I'm incredibly interested in

00:02:13.000 | and I have a feeling that there's going to be a lot of information that you're going to take away. Enjoy.

00:02:18.400 | ♪

00:02:20.600 | So David, welcome to the Radical Personal Finance Podcast. I appreciate you being with us this morning.

00:02:25.600 | Thank you.

00:02:26.800 | I've been excited about this conversation. I had an opportunity when I was at Podcast Movement Conference.

00:02:35.000 | I was in Dallas a couple of weeks ago. I was talking with people about some of the different financial shows

00:02:41.400 | and a couple of people had mentioned your show as being an excellent finance show.

00:02:45.800 | So then I know we connected and I had a chance to go and listen to some of the shows

00:02:49.400 | and I really admire the work that you're doing. I like the approach that you're taking with your show.

00:02:55.200 | So thank you for the work that you're doing in creating it.

00:02:58.200 | Great. Thanks.

00:02:59.200 | What I'd like to do is I know you come from a background of portfolio management.

00:03:02.600 | So there are two primary things that I was hoping we would cover in our chat today.

00:03:05.800 | First is talk a little bit about your story and what you've learned in your own personal financial world

00:03:13.400 | and the lessons that you've learned, the things that you've done well,

00:03:16.000 | maybe some of the mistakes that you've made and how you've grown over the years.

00:03:19.400 | Because my impression, and please confirm or deny this, my impression is that you've been able to follow the early retirement path.

00:03:27.000 | And then in the second half of the conversation,

00:03:29.200 | I thought it'd be fun to talk about your experience as a professional portfolio manager.

00:03:32.800 | So maybe start with what's your background? What's your story?

00:03:36.400 | Well, sure. I have a traditional background. I always enjoyed finance.

00:03:41.800 | I have an undergrad in finance, got an MBA in finance,

00:03:45.400 | worked for a couple years in corporate finance versus a credit analyst.

00:03:50.400 | And I was a planning manager doing budgeting and just sort of traditional corporate financial.

00:03:56.000 | And what I found in corporate finance was you always had to be looking for your next position and your next job.

00:04:03.400 | And I just didn't want to do that with a family.

00:04:05.700 | And so I was attracted to the financial space and investment advisory space

00:04:11.200 | because I could have everything move around me in terms of the world of finance and not get bored,

00:04:18.000 | but I could stay in one place. And so I was probably one of the few people, this is back in the mid 90s,

00:04:25.000 | there was some company that I'd never heard of, ran an ad in the newspaper classified,

00:04:30.200 | wanted an analyst that could read bank statements.

00:04:33.400 | And I had never seen a corporate bank statement in my life,

00:04:36.800 | but I had personal checking accounts so I could read that.

00:04:40.300 | So I applied to the ad. It's a small 28 firm, person, consulting firm, and they were investment consultant.

00:04:47.600 | And I had no idea what an investment consultant did because they worked with institutional clients,

00:04:55.800 | mostly endowments and foundations. And what I found in the institutional investment management world is

00:05:01.600 | there's really, some call them a gatekeeper, but really most not-for-profits that are large enough,

00:05:08.400 | that have $50 million, $100 million or more, hire a consultant to work with their staff,

00:05:14.900 | but also to work with their board because most not-for-profits have a board that,

00:05:20.400 | or investment committee that makes the decisions in terms of the institution's endowment,

00:05:26.200 | what the portfolio strategy should be, what the asset allocation, what are the policies.

00:05:31.200 | And that's what this firm did. And it was a 28 person firm.

00:05:34.100 | And at the time, I thought that was a lot of risk for me going to such a small firm.

00:05:39.100 | Turned out to be an incredibly good decision. I read an article once by Peter Drucker in Harvard Business Review,

00:05:46.000 | and he talked about companies that are gazelles and companies that, and I forget the animal you use,

00:05:51.300 | let's say an elephant, but gazelle companies, companies that are smaller,

00:05:55.800 | you find there's a lot more opportunity to have an impact. And that's what I found, very much so.

00:06:01.300 | So I started as an analyst. Within a year or two, really within first year,

00:06:08.300 | I was meeting with clients. So there I was, a 20, 30 year old, 29 year old,

00:06:12.400 | meeting with $300 million endowments and absolutely shocked that they believed me.

00:06:20.200 | Driving home once, meeting with this college, and it's like, you know, here's this is room of 50, 60 year old,

00:06:26.500 | 60 year olds think I know what I'm talking about. And I mean, I sort of did, but it was still sort of earth shattering.

00:06:36.000 | And so I've always been a student. I better make sure I know what I'm talking about.

00:06:40.900 | And, you know, as part of that position, one of our responsibilities was to research money managers.

00:06:47.900 | And so I was always involved in starting a dedicated research group and researching money managers,

00:06:55.500 | researching asset classes. And within three or four years, I was a partner at the firm.

00:07:01.300 | And it's advantage to having a small firm because the founders wanted to leave.

00:07:05.500 | And so I was there 16 years. We went through a couple of different organizational restructurings.

00:07:13.000 | We had done an LBO, which worked out incredibly well.

00:07:16.200 | Leveraged buyout? Yeah, in terms of buying out the company.

00:07:19.700 | And I grew up with these, you know, we were all kind of 29, 30s when we started.

00:07:25.400 | And I got sort of into my mid 40s and all my partners were all kind of the same age.

00:07:31.300 | We brought on some younger partners. We had had a very good, successful LBO.

00:07:36.800 | The company was profitable. And I just found I was at the position where I could just wait out the clock

00:07:44.300 | for the next 15 years, 10 years and retire, or I could go try something else.

00:07:49.100 | And that's what I did. And so I left when I was 46, when they bought me out.

00:07:57.400 | And I mean, whenever you leave a company like that, there's always reasons for doing so.

00:08:02.300 | And let me backtrack a little bit. You know, as a consulting firm, we did not have discretion.

00:08:07.700 | And so we would make recommendations to clients as to what they should do with their portfolio

00:08:14.400 | and which manager they should use. But they would always have the ultimate decision.

00:08:18.900 | And I found that I actually wanted to manage the money myself.

00:08:22.800 | I felt like I knew enough about managing money. So I created in 2002 what's called an outsourced CIO model.

00:08:33.000 | So where effectively a client will outsource to our firm to actually manage the money themselves,

00:08:40.100 | choose which managers, which asset types, all within a policy.

00:08:44.300 | And CIO is Chief Investment Officer.

00:08:46.200 | Chief Investment Officer, correct. And maybe later in the conversation,

00:08:51.500 | I'll tell you sort of the genesis of that particular product.

00:08:54.100 | But it went extremely well. Performance was good over time and it grew very, very quickly.

00:09:03.300 | But I found one frustration with the institutional world was, first, it's very, very competitive,

00:09:11.500 | but they're always comparing themselves to a market benchmark.

00:09:16.100 | It's a very much a relative performance gain. It doesn't matter.

00:09:21.100 | Well, it matters a little bit if you lose 10 percent,

00:09:24.500 | but it's much better to lose 10 percent in the market loss 12 or your benchmark versus gaining 10 percent in the market gain 12.

00:09:32.900 | Right. And ultimately that got frustrating for me.

00:09:38.000 | And that was just one of the reasons I left, just tired of the constant competition.

00:09:45.800 | And we had outperformed the benchmark.

00:09:49.400 | But part of the challenge is we sort of this was in 2012, 2011 time frame.

00:09:57.400 | We had created a portfolio as we added different asset types,

00:10:02.200 | hedge funds, where the only way it could really outperform is if the market fell.

00:10:05.600 | And I literally found myself hoping for the market to fall.

00:10:10.900 | And I thought, this is not good. I'm hoping for bad things to happen so that my professional life is more placid.

00:10:18.900 | And at that point, I left. And it's been, you know,

00:10:24.100 | it's been interesting because I've spent a couple of years, two and a half years since I left and been out on my own.

00:10:30.300 | Retired is sort of a loaded word. Sometimes I use it just to see reactions.

00:10:36.000 | Sometimes I don't. I say I write, but effectively I can get up every morning and choose to do what I want.

00:10:41.700 | And as part of that, I've always enjoyed teaching and teaching about finance, teaching about the economy.

00:10:48.800 | And that's one reason I started the podcast Money for the Rest of Us, just as an opportunity to teach,

00:10:55.300 | because it's been enlightening because you really, when you start a podcast, as you know,

00:11:00.400 | you build a community and people email you and ask questions.

00:11:03.500 | And it's fun just to be able to have a personal impact like that.

00:11:08.200 | It's so exciting. And I mean, I love that you're doing it.

00:11:11.600 | I wish I was thinking this morning, I just came from a meeting early this morning and on my way home for this interview.

00:11:19.400 | And I was thinking if the podcasting world had existed when I was in high school,

00:11:25.600 | I can't even imagine where I would be in my own personal knowledge and career today,

00:11:33.000 | because it gives you such amazing access to people from a diverse range of experiences.

00:11:38.700 | And I spent thousands of dollars on educational products all through high school and college.

00:11:45.800 | And when I look at the ability now to listen to a podcast, listen to someone like you,

00:11:49.700 | who's had 15 or 20 years of experience in a specific business,

00:11:54.200 | or go and listen to people from all different backgrounds, what an amazing resource.

00:12:00.200 | And I love that. I mean, I feel the same thing like you do,

00:12:03.300 | that it's just it's fun to be able to teach somebody something and then get that email.

00:12:09.300 | I mean, it just it's so heartwarming to get that email of someone saying,

00:12:12.600 | "I never knew this until you explained it," and it makes it all feel worth it.

00:12:16.700 | Absolutely. You mentioned you didn't feel like you knew what you were doing.

00:12:20.200 | Do you ever still feel that way? Probably more so in the sense that the investment management industry,

00:12:30.300 | ultimately what's sold is the ability to predict the future.

00:12:34.300 | That is why hedge funds can charge 2 and 20 percent, 20 percent of profits.

00:12:41.800 | That's why people often hire advisors.

00:12:44.700 | I mean, sometimes they won't admit it,

00:12:46.500 | but they expect you to be able to know what's going on and to predict what's going on.

00:12:53.600 | And that was one of my other frustrations.

00:12:56.300 | I mean, I certainly had my best guess, but it's been so refreshing to admit,

00:13:03.300 | "Yeah, I don't know what's going to happen."

00:13:05.500 | And so when you do that, you realize, well, there's certainly still a lot you don't know.

00:13:11.700 | But I don't feel I'm more of a, that's why I like the name of your show,

00:13:15.900 | Radical Personal Finance, because I've always been somewhat a radical in terms of unconventional wisdom,

00:13:23.600 | in terms of how, just trying to figure out the business and realizing that a lot of what serves as conventional advice

00:13:35.100 | and practices just doesn't work.

00:13:38.800 | And even something like modern portfolio theory, which I did an episode yesterday on.

00:13:46.300 | I listened to it. It was excellent. I was glad that you did it.

00:13:49.700 | But that's conventional advice, right?

00:13:51.300 | But you realize it doesn't necessarily apply to everyone, and there's some challenges with it.

00:13:55.100 | But you're taught in school, it's what everybody does.

00:13:58.300 | But then once you get into the industry, you realize, yeah, well, people sort of have that and might use it,

00:14:04.000 | but oftentimes they do something completely different.

00:14:07.500 | I struggle with the psychological concept that as humans, it seems like we desire a sense of certainty.

00:14:14.400 | And there are some things over which we can gain a sense of certainty,

00:14:17.400 | but there are many things that are just uncertain.

00:14:19.400 | But we're uncomfortable with a sense of uncertainty.

00:14:23.900 | And modern portfolio theory is an excellent example.

00:14:28.600 | And I'm glad that guys like you are talking about it.

00:14:33.900 | And hopefully, I'm going to try to teach my way through it from the academic perspective.

00:14:39.000 | But once you understand it, then you can understand the flaws.

00:14:43.300 | But the problem is that many people try to glom onto an idea and say, "Well, this is how things are."

00:14:49.400 | And then everything gets translated in light of that.

00:14:52.200 | Theories are helpful, but you can't place too much...

00:14:57.200 | It's like trying to drive looking in the rearview mirror.

00:14:59.300 | That's what inherently everything is about.

00:15:01.700 | And the theories are helpful, maybe as a way to guide thinking, just like economic theory is helpful.

00:15:07.100 | But you can't take them to the extreme to say, "This gives me certainty."

00:15:11.800 | And I feel like with advisors, the challenge with advisors is that when you are an advisor to somebody,

00:15:17.500 | when you are a fiduciary, you feel that...

00:15:21.500 | I mean, at least I did, and I'm sure you did.

00:15:23.500 | I mean, tell me if you did or not, but I always felt that responsibility so keenly.

00:15:29.900 | And it affects how you provide advice.

00:15:32.700 | And you have to work hard to find the clients that value your ability to say,

00:15:37.900 | "This is the best guess that I can make, but I don't know if this is going to work or not."

00:15:43.100 | But it's one thing to feel comfortable with your knowledge background and what you do know,

00:15:47.700 | and look at your own personal financial situation and say, "I'm comfortable with this risk."

00:15:52.000 | It's another thing when you're managing somebody's life savings,

00:15:54.800 | and you realize what a major impact you can have.

00:15:59.700 | And it's a heavy...

00:16:02.900 | At least I always found it to be a heavy responsibility and even a burden.

00:16:07.800 | I agree with you.

00:16:09.400 | And one reason I like the institutional space in working with a university is it really...

00:16:18.500 | It was the institution's money, but it wasn't anyone's money on the board.

00:16:23.400 | And so there was a degree of separation.

00:16:26.300 | But one of the most eye-opening moments for me is we used to also manage money for financial planners.

00:16:31.800 | And so the financial planner would always interact with the client,

00:16:33.900 | and I would never really see the client.

00:16:35.600 | We would manage pools of money.

00:16:37.500 | But during the fall of 2008, when after Lehman had gone bankrupt, the markets were collapsing,

00:16:44.000 | this financial planner asked me to come out and speak to their clients.

00:16:49.400 | And literally, their clients were mostly 55- and 60-year-olds,

00:16:54.000 | with just deer-in-the-headlight look in their eyes, absolutely terrified.

00:16:59.800 | And I'm up there by myself, trying to...

00:17:05.300 | You know, October 2008, trying to give them a sense of confidence that the world was not going to end.

00:17:13.300 | And I felt that weight, and they left somewhat pacified, but that feeling never left me.

00:17:21.900 | And after I left my prior firm, I did start a registered investment advisor for a while,

00:17:28.600 | and thought about taking on clients, and quickly realized that I can never manage money for somebody else again.

00:17:35.600 | I oversee my mother-in-laws, I oversee my parents, but you ask,

00:17:42.800 | "Do I ever feel like I don't know what I'm doing?"

00:17:44.600 | I'm sort of at that point, in the sense that I don't feel comfortable telling people what to do with their money.

00:17:51.700 | I feel comfortable teaching, providing education, but I don't want the stress of making a bad decision,

00:18:00.500 | and potentially impacting them.

00:18:02.500 | And I feel for investment advisors that do that, because it's very, very hard.

00:18:07.800 | It's a tremendous weight.

00:18:09.600 | And the reason I was joking about, you know, if you don't feel like you know what you're doing,

00:18:13.500 | the more I learn, the more I feel like I don't know what I'm doing.

00:18:16.700 | Because I'm always learning something new, and all of a sudden recognizing,

00:18:20.900 | "Wow, that's an entirely new concept."

00:18:23.700 | And then, the more you know, it seems like the more you recognize you don't know.

00:18:28.100 | And there are so many little...

00:18:31.300 | There are so many different strategies that can be used,

00:18:36.100 | there are so many little tricks, there are so many little...

00:18:39.100 | There's just so much specialization that the world, especially the world of finance, is huge.

00:18:44.500 | That it is...

00:18:46.500 | It's not possible for someone to be...

00:18:49.100 | I mean, you can be a generalist.

00:18:50.300 | I think I feel pretty competent at this point that I'm able to be a generalized financial planner.

00:18:56.300 | And I have some pretty deep knowledge in a few different aspects.

00:19:00.100 | But I was listening to your show on currency trading,

00:19:03.700 | and it's like, I don't have a clue how that works beyond just maybe the big picture.

00:19:08.100 | I've never traded a currency in my life.

00:19:09.900 | I've never traded options.

00:19:10.900 | I've enjoyed having a couple of people on that are options traders.

00:19:14.800 | I've never traded an option in my life.

00:19:17.100 | But so, it's humbling.

00:19:20.900 | But in our society, like, you're not supposed to admit that.

00:19:23.300 | But yet, I think that's kind of the starting point, is recognize what you don't know and admit it.

00:19:28.100 | And that gives you the ability to go on and learn.

00:19:31.100 | Well, and here's an advantage that people need to realize.

00:19:36.100 | Most investment professionals, if not all, have no idea what they're doing either.

00:19:40.500 | In the sense that...

00:19:41.300 | I mean, I've spent a lot of time researching some of the smartest hedge funds in the world.

00:19:46.700 | And they're like anyone else.

00:19:49.900 | They get up and they try their best to figure out what's going on.

00:19:53.100 | Sometimes they make good decisions.

00:19:54.500 | Sometimes they don't.

00:19:55.900 | They don't.

00:19:57.100 | And at the end of the day, a lot of them are very, very good.

00:20:00.900 | But they still face the same wall that we all face.

00:20:06.500 | And that's that wall that separates the present from the future.

00:20:10.300 | They don't know what's going to happen.

00:20:12.300 | And you just try to do the best you can.

00:20:15.700 | And because I'm aware of that, I want to make sure I don't make any financial decisions that if I'm wrong, can be catastrophic.

00:20:25.900 | And that's... people give the hedge fund model a lot of grief, and perhaps because their fees are so high that it's rightly deserved.

00:20:34.500 | But at the end of the day, their model is their business is gone if they lose too much money.

00:20:41.300 | Right.

00:20:41.900 | And so they're very, very cognizant of not making any decisions that could cause a 5% down year or a 10% down year.

00:20:53.700 | And that's called risk management.

00:20:56.500 | Right.

00:20:57.300 | And that ties into one thing you said earlier about your benchmarks, is that you see this so much in the...

00:21:03.300 | whether it's in the managed fund space and the mutual fund space.

00:21:07.900 | If you're a mutual fund portfolio manager, I mean, you've got to have your eye on the benchmark.

00:21:13.100 | And what happens is that, you know, if you... to repeat what you said earlier, if you're down 10% and the market is down 8 to 12, you're not getting fired.

00:21:24.700 | But if you're down 10% and the benchmark is up 10, you're done.

00:21:28.900 | And so everything is against this benchmark.

00:21:31.100 | And so that can lead to people taking too much risk and too much swings to beat the benchmark like crazy.

00:21:37.700 | And it can lead to portfolio managers saying, "I can't underperform the benchmark too significantly."

00:21:43.100 | And the disconnect that I see and the way that I've, at least so far, in trying to learn about these things that we're talking about and trying to rationalize it,

00:21:50.900 | the only path through it that I can see is the path of financial planning.

00:21:55.100 | And I think that's a generic term that most people don't understand.

00:21:57.900 | But the way that I use it is by saying, "Look at somebody's individual situation."

00:22:02.700 | And, you know, a simple example would be, let's assume that the S&P 500 index averages... I'm going to make up 10%, okay?

00:22:12.700 | For every... depends on the year that it flies around.

00:22:15.900 | But it does that with a lot of volatility.

00:22:18.100 | But if you've got, I'll use an extreme example, $10 million and you need $100,000 a year to live on, you don't need the benchmark returns.

00:22:27.100 | You just need enough returns to hit your financial goals.

00:22:29.700 | Now, on the flip side, if you've got $100,000 of investment assets and for some reason you need $100,000 of income and you're going to try to do that off your portfolio, there's no way to do it.

00:22:41.900 | It's not possible.

00:22:43.300 | So you're going to be doing something different because if the benchmark of 10%, if the benchmark, if the S&P is returning 10%, that's not going to hit your financial goals.

00:22:53.900 | So the path through it, I see, is by applying some of this good financial planning science.

00:22:58.700 | And I think of that in things like flexibility.

00:23:01.700 | Just the reason why it's so important to be out of debt or the reason why it's so important to have cash reserves and to be able to live on a low-cost lifestyle is because it keeps you from having to make the big mistake.

00:23:13.100 | I remember a friend of mine was laid off from a sales job and this person was living a high lifestyle in Wellington, Florida, kids in private schools, nice house.

00:23:23.500 | He was laid off from a job unexpectedly and he had a little bit of reserves but after he went through the next few months, he was so over leveraged.

00:23:30.900 | And by over leveraged, we often go to the extreme and say, "Well, he just had tons of – no, he was just living a normal lifestyle but he had to make such major costs to his lifestyle because he hadn't built in any reserves."

00:23:42.500 | So the same thing in financial planning.

00:23:43.900 | When you're a financial planner and you're sitting there with a 65-year-old retiree and they're telling me – they're saying, "I need a 7% off my portfolio to maintain your lifestyle, my lifestyle every year and I need it for the next 30 years."

00:23:56.300 | That's a very uncomfortable place to be versus with the client saying, "I'd like – it'd be nice if I could spend 7% but I could be fine on 2% and I've got a lot of flexibility in my expenses.

00:24:10.700 | I'm okay with changing my lifestyle from year to year if I need to."

00:24:13.700 | So I can respond to the market conditions.

00:24:15.700 | And that's the message that I'm trying to develop is the connection with good financial planning techniques to acknowledge the realities of the investment world because people are often looking for a solution from the investment world that is often unachievable, a sense of certainty that you can't quite get.

00:24:30.700 | Right.

00:24:31.700 | Yeah, I agree.

00:24:32.700 | And I do think flexibility is key and that's one reason – because you can make a really good financial case for why having a mortgage makes sense.

00:24:44.700 | Right.

00:24:45.700 | With mortgage rates so low, with the after-tax cost of borrowing and what you could do with the money.

00:24:53.700 | Why should I pay off my mortgage when I can invest it and make more?

00:24:57.700 | Well, we paid off our mortgage – it's been a number of years but – and my spouse, LaPrel, was always – we should get out of debt.

00:25:07.700 | We should get out of debt.

00:25:08.700 | And I can make all the great financial reasons why that's a crummy financial decision and one day it just finally hit me just feeling unencumbered and not having to worry about it.

00:25:22.700 | Because I really like one-time decisions where I can make a decision and not worry about it ever again.

00:25:28.700 | And one reason I hate being in debt – I just hate making payments because then I got to remember to make the stupid payment.

00:25:35.700 | You and me both.

00:25:36.700 | It's that peace of mind but it's the flexibility and the ability to adapt as markets change.

00:25:43.700 | The term I use is living on the leading edge of the present.

00:25:47.700 | Yes, I can't predict the future but I can be right on the edge and adapt as things change, be it the market, be it the economy, etc.

00:25:57.700 | That's an interesting – I was just writing your quote down – living on the leading edge of the present.

00:26:02.700 | I like that.

00:26:03.700 | You're right about the mortgage.

00:26:06.700 | My wife and I have the same exact conversation and we have a mortgage and I look at it and I say, "Argh, should I pay extra, should I not?"

00:26:16.700 | And I think – and that's where it comes down to – I bring financial planning back into it because even just the mistakes I've made with my mortgage.

00:26:26.700 | When I got the house, I was like, "OK, I want to make sure I have a low mortgage.

00:26:29.700 | I'm not willing to pay PMI."

00:26:31.700 | Put a bunch of money down on the house and then that left me cash poor due to some other decisions I made too.

00:26:37.700 | And it left me cash poor at exactly the wrong time.

00:26:40.700 | And I've learned this work with clients as well.

00:26:43.700 | In some ways, going into retirement with a paid-off house is great if you have a lot of other assets.

00:26:50.700 | Going into retirement with a paid-off house and minimal other assets doesn't work.

00:26:57.700 | So you have to kind of adjust the plan.

00:27:00.700 | And people are often looking for that strong numbers-related thing and you're right.

00:27:05.700 | The conclusion that I've come to with me and my wife is that it probably will buy us a much happier life and a much happier marriage just to have the risk and the peace of being debt-free as compared to the potential financial return that I could make by going with the aggressive route.

00:27:28.700 | It's hard to quantify.

00:27:30.700 | I agree not everyone should pay off their mortgage, but if somebody's in that--I have a friend that we just had this discussion because he had enough assets that he could pay off his mortgage.

00:27:42.700 | And perhaps still might be a little cash poor, but the solution is pay off the mortgage, take out an equity line.

00:27:49.700 | So you got that spare reserve just in case, but you also have the peace of mind that you don't have a mortgage.

00:27:59.700 | Right. Absolutely.

00:28:01.700 | Let's switch gears and talk about portfolio management.

00:28:05.700 | What was the path that you learned once you joined the firm that you joined with little background?

00:28:10.700 | What was the path that you followed, whether it was prescribed for you or that you set out for yourself to learn about the skills of portfolio management?

00:28:19.700 | Well, at our firm, we had hundreds and hundreds of managers come through our office every year.

00:28:26.700 | And I learned by taking my notebook and sitting down with a manager, a stock manager, somebody that we were based in Ohio at the time that flew in from New York.

00:28:37.700 | And I would just ask questions.

00:28:39.700 | And that was my way to learn as much as I could about, all right, how do you pick a stock?

00:28:49.700 | And I would occasionally buy companies that these managers would recommend.

00:28:56.700 | And it didn't take me too long to realize that most professional money managers don't outperform their benchmark.

00:29:04.700 | It's very, very hard to come up with 40 great stock ideas.

00:29:09.700 | I come up with five and they might do well, but coming up with 40 or 30 and 30 stocks for an institutional portfolio, that's considered concentrated.

00:29:18.700 | Most of them have 40 or 50.

00:29:20.700 | And so you sort of learn that, but I thought, well, here's what was eye opening for me.

00:29:26.700 | This was in 2001.

00:29:28.700 | So I'd been at it six years just trying to figure out and thinking, well, I really want to manage money as opposed to make recommendations.

00:29:35.700 | And so I came up with the brilliant idea.

00:29:37.700 | At least I thought it was brilliant at the time.

00:29:39.700 | I'm going to take the best stocks, you know, each managers, our top managers, I'm going to take their top 10 holdings and I'm going to create a portfolio.

00:29:49.700 | So our best managers, their best ideas, where they have the highest conviction, and I'm going to create this portfolio.

00:29:56.700 | And by then I'd moved to Idaho and I used this software program that's called Borrow, which is about a six figure software program that money managers will use to sort of optimize their portfolios to make sure they're not taking any type of risk.

00:30:08.700 | Any type of unintended bets.

00:30:10.700 | It's a risk program.

00:30:12.700 | It's factor based.

00:30:13.700 | It's very, very complicated.

00:30:14.700 | But I thought, all right, I'm going to take these holdings from these managers and I'm going to create a portfolio.

00:30:21.700 | And it had maybe 60 to 70 stocks, but their best idea.

00:30:25.700 | So they weren't diluted.

00:30:26.700 | It was the best ones.

00:30:27.700 | So I started back testing it, calculating the performance relative to the benchmark.

00:30:33.700 | And lo and behold, there was no excess return.

00:30:38.700 | I could not outperform the benchmark with their best ideas.

00:30:42.700 | And I remember leaving for lunch and sitting by the river, just really bummed because I mean, I was already dreaming of a new house and a car because this was going to make us rich.

00:30:53.700 | You found the next dogs of the Dow.

00:30:55.700 | That's right.

00:30:56.700 | This is either the two things that can mean either we were lousy at researching managers, which was our business to pick the best managers.

00:31:05.700 | So that that was a hard pill to swallow or there was something else going on.

00:31:11.700 | And and I realized that most of what passes for excess return for managers relative to the benchmark is not security selection.

00:31:22.700 | It is factor exposures that are built into the portfolio.

00:31:26.700 | It's just their plain value till or or our yield advantage.

00:31:30.700 | Mostly it's value.

00:31:31.700 | It just happened to be buying cheaper stocks.

00:31:34.700 | And so I thought, well, I can replicate my own factor exposures just using exchange traded funds.

00:31:42.700 | In other words, if I see some area of the market that's an expense such as emerging markets, I can overweight that or I can overweight growth or overweight value.

00:31:51.700 | And so I created a portfolio that way and put it started back testing it.

00:31:58.700 | And lo and behold, it worked. And that's why this was started marketing that.

00:32:02.700 | Well, we ran it for a year.

00:32:04.700 | A partner and I put up the money to to get the track record in place.

00:32:09.700 | We started marketing in 2004 as this outsourced CIO solution.

00:32:13.700 | And initially it was all passive.

00:32:15.700 | And then we started adding some managers, but not adding managers for their security selection skills, simply adding them because they had the factor exposures we want.

00:32:26.700 | And and that's that's how I manage money, continue to manage money.

00:32:30.700 | It's less about picking individual securities.

00:32:34.700 | It's more about just getting exposure to segments of the market that are cheap.

00:32:40.700 | And and I find that that's what many of the best managers actually do, particularly hedge fund managers, those that are good.

00:32:49.700 | It's not because they're necessarily brilliant at choosing securities.

00:32:55.700 | Most of them just go into a market that they find attractive.

00:33:00.700 | And an example, I had a client that for many years invested with Seth Klarman at the Bell Post Group, and he is probably one of the premier value managers in the country.

00:33:12.700 | And I would go and meet with him once a year and just ask questions.

00:33:15.700 | I mean, it was it was really fortunate to be able to do that.

00:33:18.700 | And here's a shop that they they're very, very diversified.

00:33:21.700 | So they're not concentrated.

00:33:23.700 | He'll hold up to 40 to 50 percent cash, but he's waiting for panic to set in to a certain segment of the market.

00:33:31.700 | And and if he doesn't understand what that segment is, then he'll hire people and learn about and learn everything he can about that and eventually invest.

00:33:39.700 | But it's very much contrarian and being willing to buy what people are running away from once you understand it.

00:33:49.700 | What would be defined when you use the term factor, factor selection, define some of the factors that you were using in that strategy, industry factors, again, growth value, small, mid cap.

00:34:03.700 | Like what would be some of the factors in your.

00:34:05.700 | It was mainly price, price earnings ratio, price to buy just value.

00:34:09.700 | What was cheap relative to its historical average?

00:34:12.700 | OK, so it wasn't even we didn't do it wasn't even as complicated, complicated as doing sectors.

00:34:18.700 | It was simply. Going into emerging markets are going into REITs are going into and, you know, one of the genesis of this strategy is back in the late 90s, if you recall, maybe you recall, everybody wanted to index their portfolio.

00:34:38.700 | And and managers were having they all wanted to go into the S&P 500 because it done extremely well and no manager could outperform. And I and I looked at in the institutional world, you're always comparing a manager to their universe.

00:34:52.700 | So if you're a large cap or large company value manager, you're compared to other value managers.

00:34:58.700 | And whether you're above the median or in the top quartile, sort of the sort of the top 25 percent. And what I found very interesting is the reason why most managers trail the S&P 500 is their average market capitalization or the average size of the company that they hold is smaller than the S&P.

00:35:20.700 | And in the late 1990s, it was the it was a GEs of the world. It was the big big caps that that were leading the market. And so I thought, well, hey, I'm just if we're going to index, let's just put 80 percent in the S&P, 20 percent in mid cap index and we'll run it that way.

00:35:38.700 | And and that strategy outperforms active managers all the time, because that's what an active manager is. But you have the fee advantage and that's that's where I thought, well, you can structure your portfolio without worrying about which security to pick as long as you just sort of overweight areas that tend to be cheap.

00:36:00.700 | And it doesn't really matter what measure you use. It's not it's not magic. It's not rocket science. It's just simply going to where areas that are attractive. Now, it's harder today because there's not a whole lot of stuff that's attractive. And that's one of the challenges.

00:36:16.700 | Is that a strategy you were talking in your asset allocation show? And I know that you're planning another show on what you're doing today. Is that what you're continuing today for your own personal account?

00:36:27.700 | It is. That's that's that's exactly what I do. And I just I move in. But I'm. I'm much more fearful than I used to be, because I don't have I don't want to work in the sense of having to go out and get a job, and so I cannot afford to lose 10 percent.

00:36:44.700 | Sure. And and I try to make that point in the show is for a lot for most people, modern portfolio theory is fine. Have a fair amount of stock exposure because if the market falls 30 to 40 percent, they're not ruined.

00:36:58.700 | They can continue. They're continuing to add to their nest egg. I'm not in that position. And so I I move around. And most of investing is just waiting. Even even when we as an institutional money manager, we would only make two to three trades a year.

00:37:14.700 | And which would drive some of our fellow my partners or even clients, because the bias in portfolio management is you got to make changes, right? If you're not making changes, what are we paying you for? Right.

00:37:27.700 | But most of a lot of portfolio management is just just waiting around for something to happen. Right. And for people to panic and it it happens. I mean, and so I that's what I do now.

00:37:42.700 | Do you buy the efficient market hypothesis?

00:37:47.700 | Yes and no. I I think at a macro level markets, you can't have a bubble like you had in the Internet bubble and say markets are efficient.

00:38:01.700 | Mark people investors can get greedy. They can. They're irrational and they get fearful. And so on a macro basis, I find that no markets aren't efficient. You can find ways to take advantage of that.

00:38:16.700 | And one of the analogies I use is. I call it catching popping corn, if you have a basket of popcorn or in a popcorn popper and you put it under a heat source, you don't have to sit there picking a stock is like picking which piece of popcorn is going to pop first.

00:38:36.700 | Very, very challenging. But if your basket or your popcorn is filled with kernels that are cheap, that are undervalued, then it's embedded with positive surprises and you can capture that.

00:38:48.700 | And that's where there's inefficiency in the market, being able to capture these baskets of undervalued securities using an ETF and just collecting it as they pop. But most investment managers are focusing on picking out which kernel is going to pop.

00:39:06.700 | And that's what's very, very difficult, because what I have found is the more specific your prediction in terms of what you think is going to happen with the company, the more likely it's going to be wrong. Something happens that you just didn't anticipate because the world is way too complex to figure it out.

00:39:27.700 | And so maybe, I mean, there are a few that are very, very good at it, that are good at security selection, just have a knack. But it is very, very much the minority, because it's just so much more complex than it used to be.

00:39:46.700 | And it's so much more competitive. I mean, back when, in one of your episodes, you had mentioned a book by Benjamin Graham, or even the early days of Warren Buffett. It was so much easier, because 80% of the trades were done by retail investors, individuals.

00:40:01.700 | Now, 80%, 90% are institutions, many of which are computers going about doing it. And so you get that whole complexity. So whenever you buy a stock, somebody is selling it to you.

00:40:14.700 | And in today's market, more likely it's somebody that knows way more than you'll ever know about it. I mean, this whole concept of Peter Lynch will go buy what you know, you know, go to the mall and see something interesting and buy it.

00:40:27.700 | And then you go out and buy it and you find, well, there's 50 Wall Street analysts that cover it. And are also at the mall, but also have data in terms of inventory and everything else. It's just really challenging.

00:40:37.700 | Now, it can work out. And I don't say people shouldn't buy stocks, because it's fun. Investing can be fun. Just never invest in a way where you always, if you're going to put money in a stock, one stock, be prepared to lose it all.

00:40:52.700 | And that's not the most likely scenario, but it's the most extreme case. And if you go in with that mindset, well, what if I lost all that money? Then scale your position based on that.

00:41:07.700 | I kind of have a personal challenge myself right now. And I'm having to, I'm considering adjusting what I'm doing with my own portfolio and my own holdings. Up till now, I have simply used a mutual fund approach.

00:41:23.700 | But the trouble is that I've developed some increasing disgust and reservations about many of the larger corporations.

00:41:40.700 | And I really struggle with the fact that I really don't want to own their stock. And I don't want to support what they do. I look at some of the actions of some of the largest corporations listed in Wall Street, and they're making up, just due to the market cap, a good percentage of the money that I have invested in them.

00:42:03.700 | And though it's not under my control, the manager is doing that. And I really struggle with a personal desire to not support their business any longer.

00:42:15.700 | And it's pushing me into a direction I've never gone, because I've never had those reservations in the past. I've always simply gone, "Oh, it's no big deal. I'll profit off of whatever and do my own thing."

00:42:28.700 | But now, my conscience bothers me more and more and more. And the trouble is that it's not the kind of thing that would bother most people.

00:42:39.700 | As far as, "Okay, go buy some socially conscious fund." The things that bother most people don't bother me. I won't give any examples, but many of the things that run those.

00:42:51.700 | So the problem is I'm tending towards the idea that I need to take back control of my portfolio. And so it's going to require skills that I've never developed.

00:43:02.700 | But then how to develop that skill set for myself is challenging. Do you have any comments on that?

00:43:11.700 | Yeah, I think you're essentially building a customized, socially responsible portfolio. And there's actually a company that just came out recently.

00:43:24.700 | I'll have to email you because I don't remember the name, but it's a new way where you can actually choose your own baskets.

00:43:31.700 | In other words, you can build your own ETF based on the securities that you want. And you can create your own index fund.

00:43:41.700 | Interesting.

00:43:42.700 | The idea is as long as there's enough holdings in it that anyone holding isn't going to ruin performance, you could theoretically create your own index fund and replicate what it is that you want.

00:43:59.700 | The technology didn't used to be there, but now with the technology they can combine trades, etc.

00:44:06.700 | The company just came out in the last month or so, and I just don't remember the name and I don't know what it did, but it sounds like a fairly robust platform.

00:44:15.700 | I'd be interested in that.

00:44:16.700 | That would be one way to do it.

00:44:17.700 | Right, because about six months ago I was talking with some of my buddies and I said, "Listen, here's my idea. Let's take what the RoboAdvisors is doing. Let's take what Betterment is doing, or Wealthfront, or some of these RoboAdvisors where they're basically creating, and sometimes customized portfolios.

00:44:35.700 | Why doesn't somebody use exactly the same technology and let's stick with S&P 500?"

00:44:54.700 | For example, I don't want to own Monsanto stock. I'm not a fan of what they've done. I have a serious ethical issue. So if I can go in and I can delete Monsanto stock, or if I don't want to own GE, I can go in and I can just get rid of that, and then have some parameters in place that could warn you, "Okay, now we're getting too concentrated, so therefore the performance of the index."

00:45:14.700 | So I had that idea some months ago, but if somebody's doing it, that would be awesome to know about.

00:45:18.700 | Yeah. Well, how you describe it is actually a great idea, and I don't know if they're doing it exactly like that, but you can create your own--I think they call them sleeves is what they were--and do it the way you want.

00:45:33.700 | But you're right. It's interesting with some of these--you used the term robo-advisors, these online platforms, and you go back to modern portfolio theory, and I think a lot of them have changed their sights, but it's sort of like they built the technology, which is really slick and really cool interface, and then it's sort of like, "Well, how are we going to manage the money now?"

00:45:55.700 | Right.

00:45:56.700 | And then they came up across this new thing that they had never heard of called modern portfolio theory.

00:46:01.700 | And tax loss harvesting.

00:46:04.700 | Well, right. And it's a great--they're great companies for individuals with small balances because it allows them to effectively--a lot of the behavioral stuff to invest.

00:46:16.700 | But I mean, I talk to my old partners all the time and say, "Why aren't you doing this?" Because we already have model portfolios. Team up because we--I don't know. But it's a hard business, though.

00:46:31.700 | Oh, yeah.

00:46:32.700 | As I mentioned, we work with financial planners. And when you're--so we had our institutional--so we started--my partner and I put up the money. So we had less than $100,000. We did a track record. We grew it to $2 billion when I left.

00:46:49.700 | And it's a lot easier to grow to $2 billion when you're getting 50 million chunks at a time.

00:46:54.700 | Absolutely.

00:46:55.700 | But when our financial planner business, where it's coming in at $50,000, $5,000, you have to have thousands and thousands of clients.

00:47:04.700 | And when I think one--I think it was Betterment mentioned that they had reached the $500 million milestone, which seems like a lot, until you multiply that by the 0.2 or 0.3 percent, they're not making a lot of money and they have a lot of people.

00:47:20.700 | They're losing money.

00:47:21.700 | Yeah.

00:47:22.700 | And it takes a long, long time to grow your assets when you're growing it in such small chunks.

00:47:29.700 | Yeah.

00:47:30.700 | It's an interesting model. It certainly is.

00:47:32.700 | I've gone on and I've read their ADVs and it's--they're far from profitable.

00:47:37.700 | Right.

00:47:38.700 | But the thing is, it's a much-needed evolution.

00:47:42.700 | And I'll steal the idea from my friend Michael Kitsis.

00:47:46.700 | He is probably the most clear--I think he's probably got the most accurate analysis of the future for that side of the business, is that the future is to use that technology as the back office technology for the financial planners.

00:48:01.700 | Because that's the technology--it should be automated like they're doing it.

00:48:08.700 | Now, the trouble--and here's my issue with much of the industry--is that portfolio management is not financial planning.

00:48:16.700 | And so what happens is that this word "financial advisor," which is a leftover word from the last few decades, which can describe anything from a mortgage broker to a budget consultant to a hedge fund manager, really.

00:48:30.700 | It's just this catch-all word that doesn't mean anything.

00:48:33.700 | And so I chuckle and I wish them the best.

00:48:37.700 | I'm glad for the competition because the competition is inherently good because it keeps the rest of the industry adjusting on their toes and keeps all of us working hard to serve our clients.

00:48:47.700 | Instead of that famous quote--I don't remember who it was--but "Here's all the broker's yachts, but where are the client's yachts?"

00:48:53.700 | I like that.

00:48:54.700 | I like that it puts the pressure on us.

00:48:56.700 | But trading your portfolio more efficiently for 20 basis points is not what's going to result in your wealth.

00:49:05.700 | That's just one aspect of what may result in your wealth.

00:49:08.700 | But if you're putting $100 a month in, you're not going to get wealthy no matter whether your fees are 5 basis points or 100 basis points.

00:49:17.700 | It doesn't matter.

00:49:18.700 | At least, that's my opinion.

00:49:20.700 | It matters, but that's not the key driver.

00:49:23.700 | No, it's not.

00:49:25.700 | It's the behavioral issues.

00:49:27.700 | And the reality is most people are not going to be wealthy.

00:49:33.700 | You look at the demographic data, and most people are not going to be able to retire in the traditional sense.

00:49:41.700 | And it's starting to come through in the surveys that people are realizing that.

00:49:44.700 | I looked at a survey the other day where it showed--I was done by the Federal Reserve, and they had asked all different age cohorts, basically, your vision of a retirement.

00:49:57.700 | And I think it's sort of that 60-year-old, only 15% felt like their retirement was they're going to quit their job and live off their investing.

00:50:07.700 | If you go to the 20-year-olds, 35% said that.

00:50:10.700 | So the closer people get to retiring, they realize that, well, they can't afford it.

00:50:15.700 | And one of my mantras is live like you're already retired.

00:50:19.700 | Amen.

00:50:20.700 | What do you mean by that?

00:50:21.700 | Expand that.

00:50:22.700 | Well, what I mean by that is choose something to do in your life that you enjoy.

00:50:29.700 | And learn to maximize your well-being with the minimum of consumption.

00:50:35.700 | So reduce your expenses, not so you're feeling impoverished, but that you're having a quality life with as little consumption as possible.

00:50:45.700 | And make sure the income you're earning is you're doing it by maximizing your well-being in terms of finding satisfaction, finding joy in what you're doing.

00:50:55.700 | And if you get those two pieces right, you can continue that for decades.

00:51:00.700 | I mean, you mentioned it, I think, in one of your podcasts.

00:51:03.700 | You like what you're doing.

00:51:04.700 | You could see yourself doing that to your 90s.

00:51:06.700 | Right.

00:51:07.700 | And maybe after you do it 30 years, you won't feel that way.

00:51:09.700 | I assume that going in.

00:51:11.700 | And so this concept of, why wait until you're in your 60s to start living your dreams?

00:51:19.700 | Figure out how to structure your life now so you could do that.

00:51:23.700 | And I have these conversations with my kids, because two of them are college-age, one's in high school.

00:51:29.700 | And I'll be severely disappointed if they are working, if they're in a job and they dread getting up Monday morning and going to work.

00:51:40.700 | Because that's just a miserable way to live.

00:51:44.700 | And that doesn't mean everybody's got to start their own business.

00:51:46.700 | But find it.

00:51:48.700 | And it takes experiment to figure out what that is.

00:51:50.700 | What is the best work environment for you?

00:51:53.700 | But find it.

00:51:54.700 | Minimize your consumption.

00:51:55.700 | And don't worry -- I mean, obviously continue to save, but live like you're retired is the idea, it's just the freedom.

00:52:02.700 | Because that's what retirement -- when people think of retirement, they think of freedom.

00:52:05.700 | Right.

00:52:06.700 | Find the freedom today and live that way today.

00:52:09.700 | My wife and I talk about this.

00:52:11.700 | And one of the things that I learned years ago, and I was trying to figure out what retirement meant to me.

00:52:15.700 | And I recognized that the key thing for me is I don't like having to set an alarm clock in the morning.

00:52:21.700 | And I recognize that when I have to set an alarm clock to be at an office or something at a certain time, that makes me feel anxious.

00:52:31.700 | And I just don't like that.

00:52:32.700 | And just through making some simple changes by adjusting my schedule and by working from home, now at the age -- I'm not yet 30.

00:52:42.700 | And at this age, I've gotten to the point where I don't have to set an alarm clock.

00:52:45.700 | And I'm constantly -- now, the interesting thing about it is I find myself getting up far earlier than I've ever gotten up, waking up excited to go and work on something, excited to go and research.

00:52:56.700 | It's primarily for this show.

00:52:58.700 | I love doing this show because I can go and research something that I'm interested in, and I get excited that I can share what I'm interested in with someone else.

00:53:06.700 | And I'll get a great email from a listener saying, "Man, I really appreciated that."

00:53:09.700 | But it's like I hit that -- I was able to hit that goal of not having to set an alarm clock to wake up, and it had nothing to do with having $2 million in the bank.

00:53:24.700 | It's better design.

00:53:26.700 | Oh, I agree. Yeah.

00:53:27.700 | It's a great feeling, isn't it?

00:53:28.700 | It's awesome.

00:53:29.700 | It's fun.

00:53:30.700 | Now, you're probably a morning person like me, so you don't set the alarm clock.

00:53:34.700 | You're probably up at 630 anyway.

00:53:35.700 | Right.

00:53:36.700 | But it -- yeah, I hate -- because I used to hate having to set -- because I worked at home.

00:53:42.700 | I telecommuted for 10 years in Idaho, so I never set an alarm clock unless I had to go fly somewhere, and I absolutely hate it.

00:53:49.700 | So I would -- having to get up, I hated that.

00:53:52.700 | And the other thing was flying out anywhere on Sunday to a business meeting on Monday.

00:53:58.700 | I considered it -- if I couldn't control my schedule better than that, that I had to leave my family on a weekend, then I was failing.

00:54:05.700 | And getting rid of those two things has been very, very helpful.

00:54:08.700 | Right.

00:54:09.700 | Did you set out in your financial planning at the age of -- in your 30s when you made the switch to that company, did you set out with a goal of early retirement?

00:54:19.700 | No.

00:54:21.700 | No.

00:54:22.700 | I'll be the first to admit that I got lucky, and in the sense that two things worked out.

00:54:29.700 | One -- well, no, there was some luck involved.

00:54:35.700 | Luck is partially recognizing opportunities and taking advantage of them, but sometimes things just work out.

00:54:40.700 | And here's -- I started that investment product where we were using these factor exposures.

00:54:44.700 | It was the first year of the track record was 2003, and we had over-weighted small company in emerging markets, and small cap stocks were up 37%.

00:54:54.700 | Now, we got great performance that first four or five years, and that's what clients look at when they choose investment managers.

00:55:03.700 | So that helped build a business.

00:55:05.700 | I knew a hedge fund, a small cap hedge fund manager that started their business that same year.

00:55:10.700 | Small cap stocks were up 37%.

00:55:13.700 | The hedge fund manager up 20%.

00:55:16.700 | They made millions.

00:55:17.700 | They were set for life.

00:55:18.700 | I wasn't anywhere near that, but I had a good track record.

00:55:21.700 | The second thing we did is in 2002, we had sold our company to a bank to get the founders so they could exit.

00:55:33.700 | And so here we're owned by this bank in Evansville, Indiana, and we had spent years trying to sell this company.

00:55:41.700 | I mean, we were very close to selling to three major banks, and their stocks crashed all at the same time, so we didn't sell.

00:55:47.700 | So here comes this bank in Evansville, buys us.

00:55:49.700 | They're paying what we want.

00:55:50.700 | They paid a great fee.

00:55:51.700 | And then three years later, they're sort of like, "Why did we buy this company?

00:55:55.700 | We haven't integrated them."

00:55:56.700 | So they let us buy it back for half the price that they sold it to, and then we went out and we borrowed 80% of the money to buy it.

00:56:03.700 | And so the combination of that product doing well, which really helped their revenue, and buying cheap, we were able to basically--well, it turned out very well.

00:56:16.700 | I mean, I'm not by any means fabulously wealthy.

00:56:20.700 | I have a nest egg that if I can earn 5% to 6% and don't do anything stupid, then I should be able to hopefully live the rest of my life.

00:56:31.700 | But that's 30 to 40 years.

00:56:33.700 | So I mean, there's part of me that says, "I can't even imagine that."

00:56:37.700 | And that is back to live like you're retired today.

00:56:39.700 | People cannot even fathom what it's like to live for the next 30 to 40 years and how to make their money last.

00:56:46.700 | And I finally just stopped thinking about it.

00:56:50.700 | All I can focus on is this year.

00:56:52.700 | Did I earn my inflation plus 3% this year?

00:56:57.700 | And if I did, then I'm fine.

00:57:00.700 | But then we try some other stuff, like sell stuff on eBay and do Airbnb or things like that.

00:57:08.700 | So yeah, I didn't start out--ultimately, to answer your question, I sold my stake back to my company.

00:57:18.700 | I mean, they still pay me every year for the next four or five years.

00:57:21.700 | So hopefully they don't go under.

00:57:23.700 | Keep those tabs on that.

00:57:25.700 | And that's what it was.

00:57:27.700 | So there was taking advantage of opportunity and taking advantage of luck.

00:57:32.700 | Most of my ability or wealth, I guess, or my nest egg was from that one decision and taking--it was leverage.

00:57:45.700 | Which is why a lot of people, the way to earn wealth is owning a business.

00:57:49.700 | I mean, that continues to be the case, but most people don't have that opportunity.

00:57:53.700 | That doesn't mean--being wealthy is not the end-all and be-all.

00:57:58.700 | It's structuring your life like you are, where you don't have to set your alarm if you don't want it.

00:58:03.700 | And having the freedom to pursue what you want.

00:58:05.700 | And much of that comes from minimizing your consumption.

00:58:09.700 | Right.

00:58:12.700 | I've read so many stories of people figuring out ways to do things in what seem like impossible circumstances on the surface.

00:58:25.700 | And whether it's the people who--I read one book a few months ago, and this guy, he described the situation where--he wrote a book on van dwelling.

00:58:36.700 | And he described the situation.

00:58:37.700 | He got divorced.

00:58:38.700 | He lost all of his money in the divorce.

00:58:40.700 | And he was so broke, he bought a box truck and started living in it.

00:58:45.700 | Lived in it for eight years, grew to like it, got married again, wound up some years later getting divorced again, lost all his money again.

00:58:54.700 | So then he just decided, "You know what? I'm going to go back to this lifestyle."

00:58:58.700 | And he lives all over BLM, Bureau of Land Management land, all out in the West.

00:59:02.700 | And he lives in a van.

00:59:04.700 | But reading his book was interesting.

00:59:06.700 | I don't want to do that.

00:59:07.700 | But reading his book was interesting because for him, he felt like he was happy, like for the first time in his life.

00:59:13.700 | And he loved the lifestyle, but he's living on a small amount of money.

00:59:16.700 | I've experienced that with a client.

00:59:18.700 | I had a client down here in West Palm Beach.

00:59:20.700 | And he asked me to talk to his brother.

00:59:22.700 | His brother was living on Social Security disability, just over $1,000 a month of income.

00:59:29.700 | But he's living on a sailboat.

00:59:30.700 | And he's figured out a way with nothing, with no money, to be able to live a lifestyle that he liked.

00:59:38.700 | And one of the things that I observe is that if you have that resilience and if you've made your choices consciously,

00:59:44.700 | that resilience and that mental switch is the deal.

00:59:48.700 | That's the most important thing, not necessarily just the portfolio returns.

00:59:52.700 | Because once you've felt with, "Okay, I'm willing to change something.

00:59:55.700 | I'm willing to go back to work if I need to or do something," then you can more rationally approach the rest of it and say,

01:00:01.700 | "Now let me work hard to make sure that I don't wind up living on $1,000 a month."

01:00:06.700 | And that's what I--I mean, I hear the theme everywhere.

01:00:08.700 | And I'll tell you, you've been--how long ago was that that you sold the company and "retired"?

01:00:16.700 | Two and a half years.

01:00:17.700 | Right.

01:00:18.700 | I'll bet you within a decade you'll be doing something, making a ton of money just for fun,

01:00:22.700 | whether it's your writing or the podcast or something, just because every story I've searched out and researched,

01:00:27.700 | I found the person doing something like that, where the opportunity just comes to them and someone says,

01:00:32.700 | "Hey, would you consult with me on this project?" or "This is an interesting project, and you can do it on your terms."

01:00:39.700 | I bet it'll happen.

01:00:41.700 | Well, perhaps, and that would make it easier to fathom living 30 to 40 years, because you sometimes worry about that.

01:00:50.700 | That's a long time to--so maybe--we'll see.

01:00:54.700 | I mean, I've tried other businesses.

01:00:56.700 | When I first left FEG, or my prior company, I was going to effectively be like one of these robo-advisors.

01:01:05.700 | I had built a platform, and I had got my performance track record audited, which basically was my 401(k) or my self-directed 401(k).

01:01:18.700 | That was my track record, and I started blogging.

01:01:22.700 | I literally started this company the day after I quit.

01:01:26.700 | I launched this site the day after, and I did it for a month, and I absolutely hated it.

01:01:32.700 | Why? Because what I found was I was still managing money, even though it was my own, but I was doing it competitively.

01:01:40.700 | Because every time I had to make a decision, I'd have to describe it to my "clients," and I shut it down before, fortunately, anyone hired me.

01:01:51.700 | Because here I was doing the exact same thing, and it's taken me a couple years to decompress.

01:01:58.700 | Because one challenge of being in the financial industry is it's all about money, and you sort of look at everything through the eyes of money.

01:02:10.700 | Not in a greedy way, but you're just always, "How do you look at stuff? How does it work?"

01:02:15.700 | It's taken a couple years to sort of sit back and decompress.

01:02:20.700 | There was a time that I finally just completely didn't do anything with investing or writing about finance.

01:02:27.700 | I only got back into it earlier this year because the local paper said, "Would you write a weekly column?"

01:02:32.700 | I thought, "Well, okay, I could write a weekly column."

01:02:35.700 | So I started reading it, writing it, and I thought, "Well, I'll just build websites."

01:02:39.700 | I learned to build websites, so I'll go ahead and put it on my website.

01:02:42.700 | Then I remembered I've always missed public speaking.

01:02:46.700 | I like getting out and speaking to clients and speaking at conferences.

01:02:50.700 | So I thought, "Well, I could do that with a podcast."

01:02:52.700 | I'd done webcasts before, and that's why I sort of did the podcast.

01:02:57.700 | So we'll see. You never know how it's going to turn out.

01:03:00.700 | But you just keep experimenting. You keep trying things.

01:03:04.700 | See if you like it. That's what I tell my kids.

01:03:06.700 | You just keep trying stuff, and eventually you'll create the lifestyle that you want.

01:03:13.700 | Life is an adventure, and I'm convinced one of the notions that hasn't served me well so far is this idea that there's a right way to live.

01:03:25.700 | It took me a few years, and again, I'm still young. I'm still figuring it out.

01:03:30.700 | But I had to make a mental shift from trying to do things the right way, follow the right path, and just simply try to live in the--

01:03:38.700 | this sounds so hairy-fairy--try to live in the now and enjoy the adventure and enjoy it.

01:03:46.700 | Over the last few years, I've been working hard at it.

01:03:48.700 | My wife has helped me so much. She's really good at kind of just being present.

01:03:52.700 | I'm always thinking, "What's up? We're 10 years down the road. We've got to plan. We've got to make this happen."

01:03:56.700 | She's good at saying, "Relax." I'm getting better at it, and I'm telling you, I'm happier for it.

01:04:02.700 | I'm happier with having the risk and just saying, "I don't know where the future is going to take me, and I'm okay with that."

01:04:11.700 | Life's not a competition. I don't have to have a bigger 401(k) balance than someone else.

01:04:15.700 | I don't have to have a fancier car. I don't have to be more successful than all of my friends when I go back to my high school reunion.

01:04:22.700 | I don't have to have life figured out, and I don't have to have all the answers.

01:04:26.700 | The last few years of my life, as I've been working hard on that, they've been exciting.

01:04:32.700 | It's fun. It's the adventure.

01:04:34.700 | It's almost like I feel like the explorers of the U.S. or other continents must have felt, whether it was 100 years ago or 200 years ago or wherever,

01:04:44.700 | when you're heading out for something unknown.

01:04:46.700 | I always tried so much to have my life charted out perfectly, and now I'm getting a little bit of taste of that unknown.

01:04:54.700 | It's fun. It's an adventure.

01:04:56.700 | I'm learning that, and just that simple mind shift is helping me.

01:05:02.700 | I agree.

01:05:04.700 | Go back to your friend that lives in a van.

01:05:08.700 | One of the things I try to share with people is you can live like you're already rich.

01:05:13.700 | I've met with and I've known a lot of rich people.

01:05:16.700 | I've been in their houses, and when it comes down to it,

01:05:20.700 | all it takes to be rich is to have the freedom, which your friend has.

01:05:25.700 | It takes lots of daylight.

01:05:27.700 | You can live in a four-room house if you have good lighting.

01:05:32.700 | You can have as much fun driving a 15-year-old sports car as you can going out and leasing a new Tesla.

01:05:41.700 | Whatever it is that gives you a thrill, it can be done cheaper, particularly in today's interconnected world.

01:05:49.700 | It could be as simply as living on BLM land and driving a van.

01:05:55.700 | That guy's rich, and he's happy.

01:05:58.700 | He does what he wants with his time.

01:06:00.700 | When you have control over your time, as long as you're willing and you're content with it,

01:06:05.700 | because some people would say that's nuts, but if you're content with it--

01:06:08.700 | I mean, I love to go camping, and you go camping, you sleep on the ground in a tent, it's uncomfortable.

01:06:13.700 | Comfort is not the point. The point is that sense of freedom, exactly.

01:06:17.700 | I was trying to wrap up, but I listened to something you said on one of your recent shows,

01:06:23.700 | and I went back and told my wife I had never considered what you pointed out with the amount of light on perpendicular windows.

01:06:29.700 | Talk real quick--I know you have a whole show on it, but mention real quick your theory on how you live rich,

01:06:35.700 | what you were just describing, because I think that's so interesting to me.

01:06:39.700 | Well, in terms of--

01:06:42.700 | Housing, how to live rich with housing.

01:06:44.700 | There's a book called "The Pattern Language" by Christopher Alexander, and I think it's still in print,

01:06:49.700 | but it was a book on urban design, and he just had different--it's very easy to read--

01:06:55.700 | different rules for how to create a house.

01:06:58.700 | We've built houses before, and we've modeled houses before,

01:07:02.700 | and I've stayed in enough places to realize, hey, what really makes a difference in a house

01:07:07.700 | is having light on perpendicular walls.

01:07:12.700 | I'm in my basement right now, and we have one window on one wall and on a perpendicular wall,

01:07:18.700 | and because the light rays pass together--and if you just think about that,

01:07:21.700 | as you go to whatever room you're living in, where do you spend the most time?

01:07:26.700 | Most people gravitate to the room with the best light,

01:07:29.700 | and invariably it's the room that has windows on two sides.

01:07:34.700 | And so we sold our house.

01:07:36.700 | We went and bought it a couple years ago, so I knocked on the door and wanted to buy a house.

01:07:40.700 | And so we found this really cool house, but it had no windows on the south side.

01:07:45.700 | And the first thing we do before we moved in is head to a contractor,

01:07:48.700 | knock a hole in the brick, and put a window in it.

01:07:51.700 | And it just makes a huge difference.

01:07:54.700 | So one of my dreams is to figure out how small a house can I live in,

01:07:59.700 | and I'm down to four bedrooms.

01:08:01.700 | If I could make--or not four bedrooms--four rooms.

01:08:03.700 | If I could do a house with just four rooms, with great light, I could be as happy as can be.

01:08:09.700 | I've been--I've spent a lot of time in Mexico, and some of those houses are very, very small.

01:08:14.700 | A lot of the Mayans lived in one-room casetas.

01:08:18.700 | They needed to put more windows in them, but it can be done.

01:08:22.700 | So that's kind of my concept.

01:08:24.700 | One of the things I'm fascinated about is how to live as rich as possible on as little as possible

01:08:31.700 | but still have all the tangible benefits.

01:08:34.700 | And you don't need a huge mansion.

01:08:36.700 | You can do it in one room if it's got great light and a nice view.

01:08:42.700 | And there's different--you can do the same thing with travel.

01:08:45.700 | You can hack travel.

01:08:46.700 | My son spent the entire summer living in Japan and Korea on about $1,500.

01:08:52.700 | Wow. That's awesome.

01:08:54.700 | Doing hostels and stuff and living with people.

01:08:57.700 | He chopped wood for a Buddhist monk for three weeks in Japan,

01:09:02.700 | got room and board out of it and things like that.

01:09:04.700 | So it can be done, and it's more challenging that way.

01:09:06.700 | To replicate the experience of being rich without the money, I find that fun.

01:09:12.700 | I find it more fun than working a job I don't like.

01:09:16.700 | Working a job I don't like just so I can support what someone else's idea is.

01:09:19.700 | I'd rather have the adventure of figuring it out.

01:09:23.700 | You better hurry up and do your show because I've got a show planned on how to live rich.

01:09:26.700 | So I'm going to not look at your feed until I get my show out, and we'll see who beats one another.

01:09:30.700 | That's fine. We need lots of people sharing that message.

01:09:34.700 | I remember Mark Ford was always so insistent.

01:09:36.700 | I've heard it from others, too.

01:09:38.700 | Buy the best mattress you can.

01:09:40.700 | You spend, let's call it eight hours a day, in bed.

01:09:45.700 | For a couple thousand bucks, let's say, maybe as much as $10,000,

01:09:50.700 | if you buy the fanciest bed you can and put the best linens on,

01:09:53.700 | you can live like a billionaire for $10,000 at the absolute extravagant level.

01:09:58.700 | And it's something we usually don't think about.

01:10:00.700 | What do you see? Cheap mattress, big house.

01:10:02.700 | Why don't you have a small room with light, with big windows, and have an expensive mattress?

01:10:08.700 | That's how you live rich.

01:10:10.700 | Well, I agree. And one of the interesting challenges is to figure out exactly what's the price point

01:10:14.700 | where you're no longer paying for quality, and suddenly you're paying for advertising.

01:10:18.700 | And that's the other thing I'm always trying to figure out.

01:10:21.700 | What exactly--what does a good shirt cost?

01:10:25.700 | I've done some podcasts on it. It's not $15, but it's not $500 either.

01:10:30.700 | Somewhere between $500 and $15, there's the perfect price for a shirt.

01:10:35.700 | So the designer's getting a good amount of money or a decent profit.

01:10:40.700 | The quality is perfect. It feels great.

01:10:43.700 | But you don't have a ton of money going to advertising.

01:10:45.700 | You can do that with any product.

01:10:47.700 | I found some good ones at Costco the other day,

01:10:49.700 | and I tried a couple of their dress shirts with their Kirkland brand.

01:10:52.700 | I always bought the Brooks Brothers No Iron.

01:10:55.700 | I despise ironing. I view ironing as a waste of life.

01:10:58.700 | But I was really pleased with that.

01:11:01.700 | What's your shirt brand? And then we're done.

01:11:04.700 | I buy--

01:11:06.700 | Because I'm interested. What's the secret?

01:11:08.700 | I buy mine off eBay.

01:11:11.700 | And I'm not going to give you the brand because nobody in the U.S. knows about it.

01:11:16.700 | But then I'm going to have your thousands of listeners competing against me for this brand of shirt.

01:11:22.700 | It's a designer out of the U.K.

01:11:24.700 | Awesome.

01:11:25.700 | And they're very well done.

01:11:28.700 | But I can pick them up off eBay for $50, and they sell new for about $350.

01:11:35.700 | And that's kind of that--which seems like, who in the heck would pay that much for a shirt new?

01:11:40.700 | But if you wear it once, you realize, hey, this shirt wears different.

01:11:46.700 | It will last forever.

01:11:49.700 | But I buy most of my clothes off eBay.

01:11:53.700 | I'd rather have five shirts that I loved. That's rich.

01:11:56.700 | Have five shirts that you love to wear and that you feel confident in

01:12:01.700 | versus a closet full of stuff to the gills of clothes you don't like.

01:12:05.700 | Oh, right. Absolutely.

01:12:07.700 | David, thank you so much for coming on.

01:12:09.700 | You have two sites, right? Moneyfortherestofus.net and .com.

01:12:12.700 | Explain where people can find you and mention--plug your show for the audience.

01:12:18.700 | The podcast is at Moneyfortherestofus.net.

01:12:22.700 | Somebody else got the .com, but hopefully someday they don't update it.

01:12:26.700 | Okay, so the .com is not your site.

01:12:28.700 | The Moneyfortherestofus.net.

01:12:30.700 | And then I also can be found at jdavidstein.com.

01:12:34.700 | Those two sites are linked, but they both have similar content.

01:12:38.700 | But go to Moneyfortherestofus.net, and that's where the podcast is and my most recent articles.

01:12:43.700 | Keep up the good work. I really like what you're doing, and we need more and more of it.

01:12:47.700 | So I appreciate you coming on. Thank you so much.

01:12:49.700 | Thanks, Joshua.

01:12:52.700 | I told you you'd like that one.

01:12:56.700 | I enjoyed it. David, thanks again so much for coming on.

01:12:59.700 | I appreciate your making the time. I learned a lot.

01:13:01.700 | Point out a couple of the themes with David.

01:13:03.700 | Notice, first of all, David--just notice how people achieve financial independence.

01:13:10.700 | There are a variety of ways, and David's story brings out some new and unique aspects to the financial independence journey.

01:13:18.700 | But notice, first of all, he's highly educated, worked hard, studied hard, had some experiences and some jobs,

01:13:24.700 | and then made a shift to a business and a career that he was more interested in.

01:13:28.700 | Sounds like he started on the ground floor without any idea of really what he was getting into,

01:13:33.700 | and then caught an interest and really got into a lot more.

01:13:37.700 | So just getting your foot in the door sometimes is really what's needed.

01:13:40.700 | But then, once you get your foot in the door, you have to apply yourself to really learn a whole new set of skills.

01:13:44.700 | That's the secret.

01:13:46.700 | You know, it's amazing.

01:13:48.700 | One of the strategies I've thought of--I've never done this, but I have thought about this--

01:13:51.700 | that I certainly would be interested in doing is if I needed a job,

01:13:55.700 | I would go and I would offer to work somewhere for free.

01:13:58.700 | Just go and offer to work for someone for free and do it for a period of time

01:14:02.700 | and then just be so incredibly valuable that they can't offer you enough money.

01:14:07.700 | I mean, really, that's really what it would be.

01:14:09.700 | So David didn't necessarily go and work for free, but it's certainly something that I think would be--

01:14:14.700 | it's something that is worth noticing that he started on the ground floor.

01:14:20.700 | Notice that, according to him, he says, "Oh, I didn't really do much of anything special.

01:14:24.700 | I kind of lucked into it."

01:14:27.700 | It's interesting if you listen and read books that are written about the wealthy.

01:14:30.700 | Oftentimes, you will find people talking about luck,

01:14:33.700 | and I personally do believe that there is such a thing as chance.

01:14:37.700 | I don't like the word "luck" because luck can mean many different things, but let's call it chance.

01:14:41.700 | Things can happen by chance, but you can do things to enhance yourself.

01:14:47.700 | For example, let's assume David had never invested any capital along the way.

01:14:50.700 | He'd never accumulated any savings.

01:14:52.700 | Is it so reasonable to think that he would have had a portfolio of his own to manage?

01:14:55.700 | Not so reasonable.

01:14:57.700 | Notice that he did work to get himself into a partnership position.

01:15:00.700 | You don't get to a partnership position, the opportunity to buy out a partnership share,

01:15:04.700 | if you're not ready for it, so you have to do a lot of work along the way.

01:15:08.700 | Now, it sounds like he had some awesome good timing with certain things.

01:15:11.700 | Notice he even attributed the rise in some of his portfolio value.

01:15:15.700 | Some of it's just the nature of the market, how things happen to be swinging at that point in time.

01:15:20.700 | But you've got to be in a position to capitalize.

01:15:22.700 | He had set up the business, he had taken the risk of the entrepreneurship,

01:15:25.700 | and set himself up through the work.

01:15:29.700 | He had done the work, and he was ready, and he developed his skills,

01:15:32.700 | and he's figured out how to manage his investments in a way that makes sense to him.

01:15:37.700 | And that's the key, to understand what you own and why you own it and how to manage it.

01:15:42.700 | So I hope that that provided a little bit of an insight to you into the investment business.

01:15:48.700 | I could have talked with him for hours, and who knows, maybe we'll talk again at some point in the future.

01:15:53.700 | The world of institutional money management is a world I enjoy.

01:15:56.700 | I enjoy talking with guys from that world.

01:15:58.700 | It's a very different world than the world of a personal-facing financial advisor,

01:16:02.700 | with a lot of advantages and a lot of disadvantages.

01:16:05.700 | Sometimes I think that professional level of management really makes things a lot easier in some ways.

01:16:12.700 | So I hope you enjoyed that interview.

01:16:14.700 | Thanks so much for listening.

01:16:16.700 | Come back tomorrow for a rockin' conversation.

01:16:21.700 | I don't know why I say the word "rockin'."

01:16:23.700 | Come back for a very interesting educational presentation on financial planning.

01:16:28.700 | What's it going to be about? I don't know.

01:16:30.700 | You'll know tomorrow. I've got a bunch of topics.

01:16:32.700 | I've got like five open series running right now.

01:16:35.700 | So come on back tomorrow for a great show.

01:16:37.700 | Thanks so much for those of you who are leaving ratings and reviews.

01:16:40.700 | I appreciate that.

01:16:41.700 | Do it all the more.

01:16:42.700 | It makes my world happy.

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01:18:06.700 | Thank you for listening to today's show.

01:18:08.700 | This show is intended to provide entertainment, education, and financial enlightenment.

01:18:14.700 | Your situation is unique, and I cannot deliver any actionable advice

01:18:20.700 | without knowing anything about your situation.

01:18:24.700 | Please, develop a team of professional advisors and consult them,

01:18:28.700 | because they are the ones who can understand your specific needs,

01:18:33.700 | your specific goals, and provide specific answers to your questions.

01:18:39.700 | I've done my absolute best to be clear and accurate in today's show,

01:18:43.700 | but I'm one person and I make mistakes.

01:18:46.700 | If you spot a mistake in something I've said, please come by the show page

01:18:50.700 | and comment so that we can all learn together.

01:18:53.700 | Until tomorrow, thanks for being here.

01:18:56.700 | Trying to find your happiness this winter?

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01:19:11.700 | Unplug, unwind, and relax in your happy place, Fiji.

01:19:15.700 | Get great deals on direct flights to happiness at FijiAirways.com.

01:19:19.700 | That's FijiAirways.com. You deserve this.

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RPF-0057-Interview_with_David_Stein