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We never seen this before. Max, the one to watch for a good scream with Cricket. Yeah! Phone plan, streams, and standard definition. Programming subject to change. Fees, terms, and restrictions apply. See cricketwireless.com for details. Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.

My guest on today's show is Dr. Daniel Crosby, author of the recent book, The Laws of Wealth, Psychology and the Secret to Investing Success. Now, Daniel, I got a bone to pick with you. Did your publisher make you put the word "secret" in the title saying that a financial book will not sell unless you put the word "secret" to success in the title somehow?

I got to be honest. My publisher totally came up with the title to the book because I think my original title was "Lazy, Stupid, and Rich," and they hated it. They hated it, so I can't take any credit or blame for the title. It's just so funny to me because if you go down to the money section of a bookstore, you just look through titles.

I don't know. I'm making up numbers off the top of my head, but it seems like 30% of them have the word "secret" to success or "secret, secret, secret" in the title. It seems to be the formula to sell a book about money in some way. So, now you got to expose the secret, and then it's not secret anymore.

The more I study finance, the more I realize there is no secret, and the search for secrecy is one of the most elusive and destructive habits in the life of an investor. Yeah, I think my original title, I can't remember the exact, but "Stupid, Lazy, and Rich" speaks to the fact that there is no secret, that by actually doing less, you do more, and all these sorts of things that I think you're alluding to.

Right, right. So, I think we're going to have a great discussion today because the book is excellent. It cuts through a lot of the themes that we talk about on the show. It very much aligns with some of my opinions that I gathered personally from other sources before you wrote your book.

So, I think we're going to have a great interview. Before we get into the meat of "The Laws of Wealth," give us a little bit about your personal background and also the story that has led up to your writing this book, and then we'll dig into the content. Yeah, so I'm a little bit of a strange story.

So, I'm a psychologist by education, a money manager by profession. Started college with an eye to being an investment manager and a financial advisor like my dad. Then, about midway through my bachelor's degree, I went on a mission for my church, spent a couple years in the Philippines, came back with sort of a new look on life, and said, "Hey, you know, I want to do something that helps people.

I want to be more involved in changing the world and helping people find meaning." So, switched from investment management to psychology. Got about three years into a PhD program and said, "This is too heavy." You know, I was coming home every weekend just sad and beat down by talking to people.

I mean, really, like couldn't go out on weekends kind of thing because I was too weighed down by the woes of everyone I had met with. I said, "Hey, I've got to find a way to blend these two great loves of mine." So, I've done just that and it's been a fantastic sort of middle ground that allows me to think about why people do the things they do.

But, no one ever dies from my advice now. So, that's a nice place to be. Well, you started. This isn't your first book. The first book of yours that I read was, what was it? "You're Really Not That Great?" Or something like that? Yeah, "You're Not That Great" was based on a TEDx talk that I gave.

And it was basically, as I summarize it, you tell me if this is accurate. It's been a few years since I read it. But, the whole point was don't give people fake things to try to build their self-esteem but actually give them challenges to allow them to build their self-esteem in a legitimate way.

At least that's the action point that I took away from it. Is that at all what you talked about in the book? Yeah, no, that's totally fair. I sort of refer to it as the behavioral economics of living a meaningful life and it's just that. I mean, one of the things I do from the outset is sort of take on the self-esteem movement that was having sort of its heyday when I was a kid.

So, I'm 36 and I grew up very much in that gold star generation. And all the research finds now that, you know, telling someone they're special does nothing good and in fact quite a few things that are bad. And the only way to legitimate self-esteem is by doing hard things, overcoming obstacles and then getting, you know, praised for doing something that's legitimately tough.

But people have a pretty strong BS meter and they know that if you're – you know, they know if you're giving them a gold star for not having done anything of consequence. Right, right. Same for – I feel this. In the world I kind of dabble my toes in the self-development, self-help world.

It's kind of like the world of affirmations. I've always loved Jim Rohn's statement. He says don't affirm something – don't start your affirmations by telling something that's not true. You know, if you're broke and you tell yourself I'm rich, you're starting off on a shaky foundation of lying to yourself.

A better place to start is I'm broke. I don't want to be broke anymore. I want to be rich. I've always felt that dishonesty – building a platform based on dishonesty is not a good place to start. All right, investing. What led to your writing The Laws of Wealth?

I have been – I've tried to position myself at the forefront of applied behavioral finance. I'm not the smartest guy. I'm not the 10th smartest guy working in behavioral finance. But I think being a guy from Alabama, what I can do is take complicated academic concepts and make them concrete, make them applicable in the lives of everyday investors.

And that's what I've tried to do with The Laws of Wealth because there's all this great stuff out there, but it's pretty ivory tower. And so I wanted to sort of bring behavioral finance to the masses, and that's what I've tried to do here. How old is this – it seems like behavioral finance is kind of the hot topic, and it has been for the last few years in at least the academic financial circles.

How old is the discipline of behavioral finance? Well, it's sort of interesting because people – as a formal discipline, it's probably 40 or 50 years old. It's probably been hot for about 10 years. But if you look at the writings of even like Adam Smith – I mean Adam Smith will talk about – we wouldn't label them behavioral, but he'll talk about psychological components of markets, behavioral components of markets.

So there's plenty of deep thinkers over the years who have touched on these things and, in fact, have sort of predicted what we would only later find in sort of rigorous scientific experiments. But they sort of observed anecdotally, as is so often the case. So it's either really old or really new depending on how you want to qualify it.

And the reason why it's so important, especially to our lives as investors, is although we might think of ourselves as human computers, very rational input ABC, come to a logical programmed output. We know either by personal experience or by a very brief study that there are so many other factors that influence us.

We have dozens if not hundreds of behavioral biases that impact our decisions. And this is very challenging when you try to merge together what's supposed to be a rational, thoughtful approach to finance. From the simplest of, hey, I need transportation, all of a sudden you get into a buying frenzy and you drive out with a $75,000 Suburban.

When all you needed was a car with four wheels and a steering wheel to get you from point A to B. We've all experienced that. And then when you try to apply it to investment markets, it's even worse. Yeah, absolutely. And the thing, as you sort of alluded to when you were ribbing me about the title of my book, I mean, investing is simple but not easy.

I mean, you could teach someone in a weekend what it takes sort of from a functional standpoint to build, to generate decent returns, to have a good investment life. But then it's really hard to do. I mean, just like weight loss. I mean, I'm not fat because I don't know what I should eat.

I'm fat because it's hard to eat the right thing when you're on a trip and you walk by a Cinnabon and you want that more than a salad. So that's sort of what I compare it to. So you build things on the central premise of a paradox. And your paradox is, number one, you must invest in risk assets if you were to survive.

And two, you're psychologically ill-equipped to invest in risk assets. Expand on this concept, please. Yeah, so Carl Richards, another great behavioral finance guy in this space, says something to the effect of, you know, God could not have designed you more imperfectly to be an investor. And I absolutely agree with this.

Like, everything that being a long-term investor requires in terms of taking on risk, dealing with uncertainty, being patient, privileging tomorrow over today, none of that stuff are things that we as a human family do well. I mean, we're very locked into living in the moment, privileging present gain over future gain.

We have a hard time imagining a future self that's going to have all the same wants and wishes and desires that our present self has. We're very sort of psychologically ill-equipped to do this. And yet, you know, again, I present the second half of that paradox as you absolutely have to.

I mean, I just shared a tweet a minute ago that said a Genworth study came out today that said the average cost, the median cost of a nursing home now is $93,000 a year. And also we know now that people are spending $250,000 in retirement on medical costs above and beyond what they pay in insurance.

And so the costs are staggering to living longer. And we're just not very well-equipped to do those things, but we have to or we're going to be eating cat food. So where does an investor start? My audience is filled with people who are interested to – they want to build wealth.

They want to build financial freedom, and they know that a component of that is their investing. Investing is not exclusive. What I teach here on Radical Personal Finance is the three major things that affect your financial picture are increasing income, decreasing expenses, and the third one is investing wisely.

And the fourth is avoiding catastrophe and the fifth is optimized lifestyle. But the third thing is investing wisely. So you can't wisely invest, but it's tough to know where to start. So where would you recommend that the listeners of this show go to build their investment philosophy? So the very first chapter of the book tries to do what I think you've done with your five pillars there, which is to empower investors.

And the first chapter is called "You Control What Matters Most." And there's two sort of facets to this. One is that most people don't realize some of the things that you've just touched on, the power of reducing expenses, living within their means, sort of the basic blocking and tackling of living a prudent financial lifestyle.

So that's one part of you controlling what matters most. And I think most people get that even if they have a tough time doing it. But people don't understand the degree to which they control what matters most in their investment lives as well. They tend to see that as more risky, as more volatile, as more left to chance.

And I talk about the Dow Bar study and a number of other studies in there that show the delta between what investment – what the stock market tends to give us and what we tend to hang on to as investors because of the poor decisions that we make. So you controlling what matters most is an important message to internalize.

And being sure to control the controllable, managing your fees on your investments. I would say working with someone, which is chapter two. But doing the things – this is more in your power than you realize. And that's the very first step. Understanding that is the first step to building a successful investment lifestyle.

What is the Dow Bar study? So the Dow Bar study is sort of the most cited study that talks about what many call the behavior gap. And so, for instance – and I will say as a caveat that the results of the Dow Bar study tend to be more dramatic than some of the other studies.

So I'll talk about that one and then talk about some of the critiques of it. But the Dow Bar study shows that over the past 30 years, the average return of the stock market has been about 8.25%. But that the average investor in the stock market has only kept about half of that.

So that barely keeps up with inflation, which has been about 2.5% over that same 30 years. And the reason that they give – well, one is mutual fund expenses is one big reason why people don't keep up. The second reason, the one that they emphasize, has to do with investor behavior.

Which is that people tend to get in and out at all the wrong times and make poor sort of decisions. I talk about – I talk in the book about the best mutual fund of the past 10 years. And the average investor in that mutual fund lost money. Because what happens is, even though this mutual fund over this 10-year period got 18% annualized returns, those returns were quite lumpy.

And so it would go on a tear and people would pile in. And then it would start to drop and people would jump out and sort of rinse and repeat. So the Dow Bar study speaks to this gap between what the market is prepared to give you and what you're actually going to get.

Because of your tendency to be overactive, to over trade, and to get scared out at just the wrong times. What about the other studies you're referencing? So the other studies put it at more like 2.5% to 3% per year. If you sort of average – if you average the averages of these studies, it puts it at more like 2% to 3% per year.

So again, though, I mean, 3% per year over an investment lifetime is nothing to sneeze at. It's still a very big deal. Some just say that the Dow Bar study overstates what a big deal it is in an effort to try and market their findings to financial advisors and others who have a vested interest in putting these forth to the investing masses.

Sure. And I think this is very important, whether it's as extreme as the Dow Bar study or not. It used to be – the Dow Bar data used to be my primary sales tool when selling my services as a financial advisor. I came to the conclusion as a financial advisor – I came to this conclusion that the primary areas where I brought value were threefold.

Number one, good financial planning, and by that I mean CFP stuff. By that I mean helping put the tools in place so that everything was not dependent upon the rate of return of the portfolio, whether that meant safeguarding cash on the side or putting in place the tools, the risk tools, whatever they were.

Good financial planning. There's a lot to good financial planning. Number two was good service with the details. You could do everything in today's modern financial market. You could do everything that a financial advisor can do on your own. But one aspect of the work that financial advisors bring is good service.

And then number three is behavior management, helping the client to control their behavior, partly through good financial planning, partly just through good advice and proactive adjusting of the psychology. When the markets are up, I'm talking about they're going to drop, they're going to drop, they're going to drop, they're going to drop, and whether I'm right or wrong on the timing, when they do drop, because they always drop, then I've positioned somebody psychologically where they're not surprised by that.

"Oh, Joshua's been telling me this all along." It's the same way that when you're coaching somebody through weight loss and you advise them, "You're going to hit a plateau. When you hit a plateau, here's what you do, here's how you handle that." Then when the client hits a plateau, then you know what to work through it.

And in the same way, the offside of that is when things are down, things are going to go up. Here's the data that indicates. Here's where you look for the sun in the middle of the rainstorm. So I came to the conclusion that those were the primary areas where I would add value in excess of my fees, where I actually deserve to have a job working with clients.

And the Dow Bar study was a key point. To make it more intuitive to people, to take it out of stocks, because many people would find it very difficult to relate to that data. Number one, most people don't own individual stocks. They own mutual funds, which is what the data is pulled from.

But the people who do own mutual funds, we don't actually know what the rates of return are on them because they're usually shielded behind retirement accounts, things like that. And we don't have good, easy data. It's hard for most individual people to punch up a performance or a report of their actual data.

So the only performance numbers that people see are the publicly published performance data of the fund, not their individual performance data. But I compare it to housing and I encourage the audience to think. If you look at what is the average 30-year return on housing, you can run that number, whatever that number is.

Now, does that mean that the average person is profiting on their house? Well, I think most of our personal experience would prove that just because the housing market in general increases in value at, say, 3 or 4% per year, that doesn't mean that my personal investment in housing is increasing at 3 or 4% per year.

Number one, I'm buying and selling and I'm moving on average, what, every five years, something like that. There's friction all along the way to – on the way out and on the way in, I'm paying costs and expenses. And I've got expenses for living in the house. While I'm in the house, I'm fixing the bathroom and replacing the carpets and things like that.

So if most people think about what the housing market data indicates versus what their own experience would indicate, they can see how just because a market increases in value doesn't mean an individual investor in that market is necessarily capturing all of the value. But it should also show how if an individual wants to capture the performance of a market, what are the behaviors that they can take that are going to affect their ability to capture it.

In housing, if you buy a house, buy it right, move in and live there for 50 years, you're going to capture a huge amount of the return of the housing market, but not if you move every five years. Yeah, absolutely. Like you said with your moving example, having just moved about nine months ago, I can attest personally to the churning costs that are kicked up when you move.

So that's a great, great example. So walk us through your rules because these are – and don't feel the need to hurry, but you lay out in part one of your book, you lay out ten rules, the first of which you already spoke to, you control what matters most.

Rule number two is you cannot do this alone. Expand, please. So I think you've begun to touch on that with your ways that you added value above and beyond your fee. So I talk about some of the research in you cannot do this alone, and I say you need a financial advisor but not for the reason that you think.

So there was a great study done by Natixis recently that found that sort of we in the financial services industry are beginning to grasp this. So within the financial services industry, 83% of those that they surveyed said that the greatest value that an advisor adds is just what you said, behavioral coaching, hand-holding, keeping people from making a handful of mistakes over a lifetime.

But when they asked the clients, only 6% of the clients assented. Only 6% of the clients said the same thing. They still see their financial advisor as sort of being a junior Warren Buffett who's going to put them in great stuff and make them a lot of money and don't see their behavior as especially important in that equation.

So we have some work to do to bridge that gap. I also cite studies by A. On Hewitt, Vanguard, and others that show that people who work with a financial advisor do 2% to 3% better per year net of fees than those who do it alone. And again, for surprising reasons, not because those advisors are picking better stocks, not because they even have a whole heck of a lot of an idea of how to do something like that, but because they're keeping folks invested, they're keeping folks in their seats, and when you get these dramatic swings in the market, you're keeping them from making a handful of bad decisions that will ruin their financial future.

So again, you need someone to help you and walk you through it, even though it's very easy, frankly, to go Google what's a good asset allocation. Even though it's simple, it's not easy, and you need that person to hold your hand. If you think that your financial advisor, and here I'm talking about your mainstream retail financial advisor, traditional stockbroker, Merrill Lynch, Morgan Stanley, Northwestern Mutual, New York Life, representatives whether coming from the insurance companies or Edward Jones, whatever, these types of mainstream financial advisors, if you think your mainstream financial advisor is an investment guru, ask that person what education do you have in the area of investments, because none of the education or qualifications to be licensed and to work in the area of financial advice involve investment performance.

Everything, Series 7 is all about some basic terms. It has nothing to do with investment performance. CFP has nothing to do with investment performance. It's about terms. The job of a financial advisor is to translate. Now, your team, they might have hired a director of investments, but that person will not be meeting with you, will not be spending their time with you, because they're not watching the markets.

So I want to help you spread that message far and wide, Daniel, because it's so frustrating when you're judged, and I found it frustrating when I had clients who would judge me based upon performance. I would say again and again, "Listen, I have zero control over your investment performance on any given year." So get that clear, and if you want something different, go find someone else who will lie to you.

I'm not going to lie to you. Yeah, I wish everyone was as upfront about it as you were. Well, I think most financial advisors are kind of wannabe Warren Buffets. That's what attracts us to it. It's the seductive side of the industry, but you find out that it's hard to make a living there, so you move over to the financial advice, and you can't sell drug stocks just because you got some inside tip.

Rule number three, trouble is opportunity. Yeah, so this is sort of the most widely cited and least often implemented piece of advice to buy low and sell high, and basically in this chapter, I just talk about automating that process. So I cite research that talks about the power of simple rules over discretion.

I cite a meta-analysis, which is sort of a study of all the studies, of 200 different studies that compared PhD-level discretion versus just following simple rules, and 96% of the time, just following those simple rules beat or matched the expert-level decision-making. And so what I talk about in this chapter is just a process whereby you can recognize when the market's cheap or expensive and how you can automate the process of making sure that you're taking advantage of that.

Because again, I mean, you look at oil right now, and oil's dipping under $40 now, and everyone has said, you know, when it was $100, I'll buy it when it's $90, and when it's $90, I'll buy it when it's $80, and so on and so forth. So, you know, just helping people to stay invested and take advantage of these opportunities.

How do you do that? What's the simple process? I think one of the ways that you do it is to have a buy list. I mean, I always keep, again, this is, you know, 90% of my money is just asset allocated and, you know, very passively and very conservatively invested.

But one of the things that I do personally, because I do like to trade and I do like to follow the market, to sort of scratch that itch is I keep, you know, 5% to 10% of my investable wealth out for me to play with, so to speak. And one of the things that I do is I have a watch list of stocks that meet my criteria for quality and sort of having an economic moat, having a strong brand, but are perhaps too expensive.

And that helps me get excited, frankly. I mean, that helps put a silver lining on hard times. If I can say, "Hey, you know, stuff's falling. Maybe I'll get to buy Disney or Apple or, you know, one of these brands that I have a lot of respect for but I wouldn't pay the price for in past years." And so that helps me to be more optimistic about what the world sees as a tough time.

So trouble is opportunity. What would be the caveats to that? And as you're thinking about it, here would be what I would say. One simple thing that should be said, although it's often not, is you have to actually own a quality investment in order for it to be worth sticking through in a difficult time.

If you have some really bad investment – I'll skip the examples – that just because it's down doesn't mean it's going to come back. You could have invested into a poorly performing market. So you have to have a quality investment. And number two is if you're going to get excited during down times, you've got to have something on the side to actually take advantage of it.

How do you handle some of those other – what are the caveats to this advice? Yeah, I think those are both excellent caveats. And I mean I talk at some length in the book about how to assess quality. I use some academic measures called Piotrowski F-scores anyway. That's kind of down a rabbit hole a little bit.

But I think your quality advice is right on. And I believe in keeping a little dry powder, like you said, having a little bit on the side so that you're ready to take advantage of an opportunity. That's something I always try and do personally. Rule number four, if you're excited it's a bad idea.

Yeah, so here I talk about what we in the industry call story stocks. And I talk about initial public offerings or IPOs and this part as well. I got a call from my brother-in-law whenever Alibaba IPO-ed. And he called me and he said, "Hey, I work in the tech space.

I know all about this. Do you think I should buy the Alibaba IPO?" And I sort of said, "Hey, I don't feel like you're reading my blog," right? Because one of the things that I talk about in the book and in my other writing is that IPOs tend to do dramatically worse than the broad market because they're exciting.

There's a story associated with them. So on average, IPOs do 21% worse than the benchmark three years on. And there's a couple of reasons for this. Companies don't IPO in bad markets, right? We see initial public offerings come online during times of enthusiasm and exuberance in the market. So already you're sort of buying high.

And then the other thing that's at play is everyone has a story, right? Everyone has a narrative that if you had put $10,000 in XYZ stock, the day they IPO-ed you'd be a gazillionaire now. And those stories tend to obscure the probability. And the probability says that IPO investing is a bad idea.

But everybody has an anecdotal counterpoint to that. And so that's just one example of a type of investing that's exciting, that gives you something to talk about at parties, but tends to be a bad idea. I also talk in that chapter about day trading and sort of short-termism. There was a great study that came out out of Taiwan recently that found that one in 360 Taiwanese day traders are generating alpha, are generating sort of positive returns in excess of just playing the broad market.

And so it's exciting. It's exciting to day trade. I talk in the book about how it activates the same parts of your brain as smoking crack. But it's about as prudent as smoking crack as well. So on the IPO, one data point that's always helped me, I'd encourage listeners to recognize what the fundamental purpose of an IPO is.

And that's to allow the initial investors of the company, the current initial owners of the company, to diversify out of their ownership of that company so that they can cash out and get something else. That's the entire purpose of the IPO. Now, it could have, in theory, a funding purpose as well.

Hey, we want to expand if we take in additional funds. But usually, if an idea is good, a company can work behind the scenes, can bring in financing. There's lots of investors with lots of money that want to invest in. The IPO is the exit for the initial investors.

And an IPO is being sold. It's being marketed. The investment bank that's handling the IPO is intentionally, carefully advertising and marketing an investment. So you're not getting unbiased data. Certainly, you might be getting an analyst's opinion. But you're being carefully sold in a very careful, structured way so that the current owners can diversify out of their ownership of the company.

Question for you on the day trading statistic. Here's the rebuttal. Okay, sure. One in 360 day traders generates alpha. But I bet that if we counted the number of high school students that go and work in professional NFL, the range would be – high school football players that wind up being in the NFL, the range would be much – the ratio would be less than one in 360 make it to the NFL.

But that's not necessarily because it's not possible to get to the NFL. But that's a reflection of the skill. So obviously if I keep working at developing the skill, I could become one of the one in 360 that's making money. What do you say to that? So there's a couple things.

So first of all – and this is a bit of a controversial opinion in my field. I do believe in skill. I mean I really do believe that there are certain investors that have skill. I mean there are some people who I would say cynically would point to a Warren Buffett or someone and say, look, given the number of investors in the universe, every now and again by random chance you're going to get a Warren Buffett or you're going to get a whoever, a Ray Dalio.

And I don't believe that. I mean I believe that there is skill. I believe that there are best practices. And I believe that all of that skill is rooted more in temperament and psychology perhaps than stock picking. So yeah, I do believe in skill. But I believe that the more likely – the more you believe in your own skill, the less likely you are to have it.

I mean it's again sort of a strange paradox that the more sure you are that you are that one in 360, the less likely you are to be that person. So it's a strange paradox that overconfidence is one of the biggest killers of investment returns you'd hope to find.

So that – so the way that I approach it, it's almost a complete disagreement. So I'm interested in your response. The way that I approach it is to say that, "Listen, you're not going to go in the NFL and you're not going to beat the market. So just give it up." And that works for the majority of people because they're not going to beat the market and they're not going to go in the NFL.

But the people who are going to beat the market and the people who are going to go in the NFL are the ones who say, "I don't care what you say. I'm going to do it anyway." They're confident enough that they worked their way through. And now there does need to be some external validation if you weren't able to get off of your JV football squad.

No matter how much you believe it, the data should be indicating to you that you're not going to go into the NFL. But that's kind of how I've approached it. Do you understand what I'm saying in the sense that the people who are going to push through are the people who are confident enough and are willing to do the work to develop the skill?

I don't think going into professional sports is a perfect – is an ideal career aspiration. I think it's a terrible plan. I think it's not something that we should encourage young people to pursue. The data and the statistics are overwhelmingly against you. But I can't deny that some people who have the skill and who put in the work can't surpass those odds and make it.

Do we agree and we're just disagreeing with the application of that or do we actually fundamentally disagree? So if I understand you correctly – so yes, first of all, I mean you are absolutely correct. I mean you have to have at least a smidgen of confidence and even overconfidence or you'll never engage in the undertaking in the first place.

And so then you're never going to be – get through. I think one thing that we agree on is looking at the data points. You know, I'm 5'11", right? So the odds of me playing basketball are low, right? The odds of me playing professional basketball are low. I think people who have an interest in trading or investing would be wise to keep a journal, keep a log of just how they're doing.

Because what happens is that the psychology of this is most people tend to sort of shove their losers under the rug or attribute it to bad luck and then take full credit for any gains, right? So even if you've been participating in a strong bull market, you're going to take credit for all the gains.

You're going to diminish all your losses. And you're going to still think that you are that Warren Buffett Jr. even if the data don't support that. So again, like if you want to try this, do it in a way that's not going to harm your pocketbook unduly and keep a log that says just how well have I done.

Because I talk to people all the time who are very quick to say, "Yeah, I hit a ten-bagger with this or that stock," and aren't telling you the whole story. So again, I think the data does a lot to dissuade the wrong people. Honest data. Honest data that incorporates all the fees, all the costs for all the failed trades that actually outputs.

And that's surprisingly difficult to create. And I think when you look at the lives of those investors who demonstrate exceptional skill – because I agree with you. I can't buy the idea, yeah, if a monkey throws a dart at a dart board a gazillion times, they make it. I don't see that.

I would see that if the returns were unpredictable, then I would see that. But when you look at a long, consistent history, it's very hard for me to buy the randomness account. But what I do see, if you look at Buffett, he's the worst person to take investment advice from.

But if you look at Buffett, you see that before he ever started building funds, he had a long history of business success. He went into – what was the number? I read his Snowball book and it talked in detail about his work as an early child and he was saving money and he's selling this.

He's selling newspapers. I mean he had thousands and thousands of dollars saved by the time he was in that early – transitioning from high school into that early adult phase. It wasn't as though he just stumbled upon stocks one day. It was he had thousands of dollars saved from his business endeavors and his dad was a stockbroker.

So his involvement was from an early age and all of that compounds but we only see the back end of it. There's always a story behind any great investor. Sure. Rule number five, you're not special. So I think this speaks to what we've just been touching on. A lot of – I think a lot of the mistakes that people make in investing, you look at things like people tend to – invest in their own companies, right?

So even outside of – even outside of – excuse me. Excuse me. Even outside of stock that they are gifted as part of a compensation plan, people tend to overinvest in the company that they work for because they think that they have some sort of special insider knowledge or through their own efforts, they're going to be able to make that stock price rise, right?

So I got news for you. If you're accountant number 312 at Coca-Cola here in Atlanta, like you're not doing much to move that stock but people still feel like they have special knowledge of how it's going to do. People feel like the rules like we just talked about don't pertain to them.

Well, most people can't beat the market but I can. All these sorts of things play into this special mentality to say the rules don't apply to me and that's a very, very dangerous way to go about it. So in this chapter, I just talk about being a probabilistic investor.

I don't invest in IPOs because they do poorly on average, right? So I just don't do it. I just set a rule that I'm not special. I don't have special knowledge of Facebook, right? Or whatever the new hot IPO is to say that I'm going to do better than the averages.

So this chapter is all about the power of averages. How do you balance that with the fact that if you are paying attention to a company or a sector, it's possible that you might be able to know the trends? Let me give you a concrete example. You live in Atlanta so you've got Publix, right?

Does your family shop at Publix? We do. Okay. So my wife refuses to basically go to any grocery store other than Publix. And for those of you, Publix is a southern chain. It started in Lakeland – southern regional grocery store. It started in Lakeland, Florida, and it's just a well-run grocery store.

And it is – not everything is more expensive. They have deals and they want to show they're not more expensive. But in general, you don't get the cheapest price on everything in the store. But they do a tremendous job with the fundamentals of the business. They do a tremendous job with the fundamentals of good selection, of pleasant environment, of well-trained employees, courteous service.

They just make – their slogan is "Where shopping is a pleasure." And for my wife, she doesn't want to go to any other store. It doesn't matter that we could save $7 by shopping at Walmart. The experience there is so utterly horrendous that we'd rather spend the $7 and shop at Publix.

And I want a happy wife so I don't jump up and down about we should save the $7. Now, in doing financial planning, I've worked with a number of Publix employees. And Publix employees, they bleed green. That's their corporate company. They have access to a privately owned company but they have access to employer stock.

And the stock has done really, really well over its history. And they have the ability to buy in in their ESOP and they can own corporate stock. Well, as a financial planner, this makes me very nervous because if you compound, if you own a lot of stock in the company that you work in, you're compounding the problem.

If you lose your employment or if your company starts to suffer on going bad times, not only do you lose your job, your primary source of income, but now your investments are significantly affected and the pressures that are causing you to lose your job are also the same pressures that are going to be affecting the stock value.

So I get very nervous about that. But I also recognize that if I were a Publix employee, I can look at the industry. I can look at the marketplace. Publix is growing. Our customers are very loyal and I can say, "Hey, this is not a bad company to own." How do you deal with the paradox of that?

I'm not saying that I have inside knowledge, but I am saying that I'm looking at it saying, "We're doing a pretty good job. This is a pretty solid investment." Yeah. So another chapter is called "Diversification means always having to say you're sorry." And I think that's where this comes in because just as surely as there are positive examples like Publix, I have an example from my roommate in college who got a phone call one night from his dad who worked for Enron, and his dad is screaming and crying and cursing on the phone about how he's lost everything.

So for every great example of concentrated holdings, there's a very bad example. And the tough thing is you talked about Warren Buffett being a bad person to take advice from. One of the things that he has said that's not great advice is something to the effect of "Diversification is only necessary if you don't know what you're doing." And most people don't know what they're doing.

And so they need to diversify away from that beloved position just because it makes sense, just because of the benefits of diversification. Now, I'm the first to say there are expressive benefits to owning stocks. I mean, there are stocks that I own simply because I love the company, I love what they stand for.

I recently bought a bunch of Disney stock with my daughter because I'm teaching her about investing. So I'm overweight Disney, and that's okay because we're going to be fine, right? My financial house is largely in order. So if I want to own a little bit--if I want to be a little more heavily tilted to something I believe in because it has sort of expressive or values-based benefits, then I think that's okay.

But the broader principle is for every good story there's a bad story, and you are not special, and you just need to be boring and well-diversified. What do you mean by rule number six, "Your life is the best benchmark"? So this refers to the trend in the financial services industry of engaging in what's called goals-based investing.

So for forever we've compared our performance and benchmarked largely to the S&P 500 or to the Dow. And what I'm advocating here is aligning your why and your how, aligning your purpose, the things that you want out of life, with your investment life. So I talk in the book--one of the studies that I just loved that I cited in the book was one where they were working with low-income savers.

They're working with these low-income savers who are just squeaking by and understandably having a hard time setting aside money. And so they try carrots, they try sticks, they try everything to get these folks to save money, and it's just--they're just living hand-to-mouth. And so the thing that they do that ultimately works is before they make any large financial decision they show them a picture of their kids, and they have them sort of think about their kids before they make a big financial decision.

And when they do this, people were able to set aside more than 200% more money than they had been in the control condition. And so this is just the very simple act of using your life and your purpose and your meaning to try and guide your financial decisions, and then benchmarking to the returns that you need and the risk level that you need to live the life that you want to live.

So I have a theory that it's good to think about things and compartmentalize sometimes. And I, for lack of better terms--I haven't come up with anything better. I talk about it--personal finance versus investing. We're investing to achieve certain goals in our personal life. We should almost treat them as separate and recognize exactly what you're talking about-- goals-based investing.

But in thinking about our plans and our approaches, we should compartmentalize. So thinking back to the quote--and this is why I wanted to tie it in--quote that you said about diversifications for those who don't know what they're doing. If Warren Buffett buys a railroad company and spends a billion dollars on a railroad company and that railroad company goes bust, number one, just because he's invested in railroads does not mean that his investment is not diversified.

He has a business with a lot of assets. But two, if that investment goes down in value, then it's not going to affect his personal life. It's going to change in his own personal life based upon the outcome of that. And so that's very different than me if I'm an investor and if I'm, say, a widow or widower.

I'm living on this. That's very different than me putting everything in a railroad company, which is funding my entire lifestyle. So we have to recognize why we're investing. And then at different stages of our investment time horizon, we might take different approaches. I might be willing to take a risk on a speculative investment knowing that it's not going to affect my personal life.

Or I might be willing to take a risk on a speculative investment knowing that the downside is minimal because I have a job, I have another business, but the upside is so huge I'm willing to do it. So I like to separate them and then bring them together and say, "How does this investment impact my personal life?" What do you think about that opinion?

I think that's a great way to sort of bucket those two things. And I look at my dad, who is himself a financial advisor, and growing up, it's very hard. My dad got his job the day I was born, and so for the first few years of my life, we didn't have much money.

I mean, that's a hard business starting out as a young advisor. But now he's done quite well, and so his personal needs are met. And so now he will do what I would call more investing. Like he'll do more speculative stuff, and that's okay because he can. It's nothing he did 15 years ago, and it's nothing he does with all of his money.

But once you are able to live the life that you want to live, you can worry about that other stuff a little bit more. But for most people, it's best to think in terms of this personal finance mindset that you talk about and making sure that they're meeting the basics of that life that they want to live.

Right, and it's challenging because so much of the financial world, much of the data that you're referencing, the studies that you're referencing in your book and in your research, it's built upon this retail investing pension approach. So most financial advisors, many financial advisors are engaging with somebody for whom their portfolio is being designed to fund their lifestyle.

I'm 55 years old. I've saved a million dollars. I need to make sure this million dollars provides a comfortable standard of living during my retirement years when supplemented with Social Security and that it continues for the rest of my lifetime. In this situation, our investment constraints are specific. This investment needs to fund this lifestyle.

And so we need to be very, very careful with that. That's very different though than in the early stages of life, how many people build their wealth. Many business owners take a tremendous amount of risk in building a business. They exclude other opportunities that are safer and they focus on a speculative opportunity.

It's also different than perhaps the investment phase that you may get into. After you've funded your lifestyle, you've funded a retirement with a practical, careful approach. Now you have lots of excess money and you're looking to do something different. So I guess the point I'm trying to make is to recognize that we need to understand the importance of – it's all about our life.

But that my plan is going to be different than your plan. There are some fundamental principles we have to acknowledge, but we should be looking to understand what our actual risks are as they affect our personal finances. I got a little muddled there. I hope that came across, Daniel.

No, it did. And again, this is where the value of a financial advisor comes in. Because if you want impersonal investing advice, like you can turn on CNBC and they'll tell you what to buy and what to short. And I mean they're usually wrong, but they'll tell you, right?

But if you want personalized financial advice, this is the kind you get from a personal financial advisor that helps you construct a portfolio that helps you meet your goals at the time you need them met. All right. Let's wrap up the rest of these rules here. Forecasting is for weathermen, rule number seven.

And rule number eight, excess is never permanent. Talk about those two, please. Yeah. So forecasting is for weathermen just briefly talks about how horrific financial forecasts have tended to be. So I cite some specific examples in there, but a couple of the ones that I think are interesting, they found that the more famous a forecaster is, the worse his predictions tend to be.

And the more dramatic, those who have made dramatic correct forecasts in the past tend to have horrible future forecasts. And so, again, this just goes – you see a lot of articles, you know, this guy called 2008, hear what he has to say now. Well, usually what he has to say now is the same thing he's been saying for the past 30 years.

And, you know, he just kind of ran into one. And so I try and dispel some of the – take some of the luster off this financial forecasting industrial complex that we have. Excess is never permanent. I talk about just what you talked about earlier, which is in times of prosperity trying to chase in the mind and say, hey, this is not going to last forever.

And then in times of – in tough times, in bear markets, saying, hey, this doesn't last forever either. You know, the truest – the truest words that can be spoken about any financial market are this too shall pass, right, be it good, bad or indifferent. And we tend to – as fallible human beings, we tend to extrapolate the present into the future indefinitely.

So bad times right now look bad forever and good times look good forever. Neither is true. And one of the best things we can do is manage our expectations around that. One of my favorite new quotes, a listener to the show pointed out to me. I think it came from Daniel Kahneman's book.

Was it Thinking Fast and Slow, I think? He said, "Always certain, often wrong, never in doubt." That's one of my new favorite quotes to think through. OK, how am I applying this? Many of us are always certain, often wrong, but we're never in doubt. I talk in the book about how sort of mediocre American math skills are.

So like American kids are sort of very middle of the pack internationally in terms of math but are miles above the pack in terms of their confidence. So we're very confident that we got it and we're not very good. Risk is not a squiggly line. Rule ten. Yeah, so risk is not a squiggly line.

It just tries to dispel this notion of volatility-based notions of risk. So in the financial media and in the academics, folks equate risk, investment risk, with volatility. And I'm trying to take a more fundamental approach, both as an investor and a planner. For our personal lives, as we've talked about, risk is the likelihood that you're not going to live the life that you want to live, like period.

It doesn't have to do with how volatile the market is at any given point in time. And then even as an investor, I think there are more fundamental things we can look at, things like quality, things like price, when trying to determine what to buy and what to sell that are far more fundamentally sound than just looking at the up and down of an investment.

Because at the end of the day, the reason you get paid for holding stocks is because they are volatile. I mean, that's why they outperform most other asset classes by about 5% a year is because they're scary to hold. And so there's a sort of an equity risk premium there.

So understanding that helps us to see it through a little better. So if you were to summarize – and for sake of time, because I want to come back and bring things current day and talk about some of the concerns and how you can apply this model that you've built.

And you have an entire part two of the book, Behavioral Asset Management, where you talk about the application. I want to summarize how a listener would take the general scope of the advice of this book and apply it to their own life. How would you summarize the points you're trying to make?

So my wife, who's not interested in investing, read the book to humor me. And she said that the two things that she walked away with were you cannot do this alone. So, OK, like I need help. So she gets that. If I got hit by a truck tomorrow, she would go get help.

And there's another part in the book where I talk about ten questions for your financial advisor. And so I think knowing that you need help and then knowing how to look for the right help, if I just had to give like the one sentence, I think that's where I would go.

All right. So bringing it current day. We're recording this on August 2nd, 2016. And one of the challenges is knowing how to stay consistent and stay as rational as possible to recognize the long term, but also to pay attention to what's going on in the world. And there are a lot of people fear is – I see in many circles of society fear is building.

There are some significant economic concerns that I have about the short term and long term future of various sectors of the economy. And so how do I – and I feel – I'm asking a personal selfish question. I feel this tremendous responsibility to my audience to try to balance a rational, calm approach, but also to deal with the facts, deal with data, deal with challenges that actually exist.

And sometimes I don't know how to integrate those. So how do I look at things and recognize? Am I giving into an emotional bias? Am I giving into fear? Am I giving into greed? Or am I looking at facts that are changing and might indicate that I need to adjust my plan a little bit?

So let me – I'll try and answer that and you tell me where I go wrong. So one of the things, sort of going back to the excess is never permanent. We have had a spectacular couple of years. I mean it's been a flat year and a half to two years, but the five years previous to that have just been absolutely blown the roof off.

We've had a very, very good six or seven years. And as a result, the S&P, sort of the broad equity markets in the U.S. are quite expensive by historical measures. Understanding that this too shall pass, I can only assume, mean reversion being what it is, that we're going to have a less extraordinary next five to seven years.

So the tricky part is I could say with almost absolute certainty that you're going to have a crummy six or seven years in the market. What I could say with no degree of certainty is when that crumminess will begin. And so I think at times like this, at times of uncertainty, the you control what matters most piece becomes even more important than ever.

This is the time when it becomes more important than ever that we manage our fees, that we're working with someone appropriate, that we're well diversified. Because there are certain sectors of the international equity market that are quite attractive. It's just not the U.S. Right. So this is when these things become even more important, because every five to seven years, historically, we have had a bear market.

And then every five to seven years, people forget that bear markets exist. And I think that's where we where we are now. Right. I mean, it's been seven years. We are absolutely do. But you also see that, you know, since World War Two, we've had all kinds of calamities and recessions and scandals and every other thing.

And the market has just grown at an incredible clip. So I think it's good to understand that on average, we get a correction every single year. That's a 10 percent or more dip in the market. On average, we get a bear market every five to seven years with with very great predictability.

And in spite of that, I think the optimists win the day. So. I'm just trying to decide what to challenge because I don't have the numbers at my at my at my tip. So I appreciate your bringing in that data, because I think that in terms of and I'm going to try to be very transparent with my own frustrations in terms of the actual challenges of investing over the short term.

I've always I think that data is important to know. OK, 10 percent correction and a dip every few years. Those things don't bother me. What generally bothers me is when I and I'll just speak about for myself, when I look at my personal investing lifetime, open my first Roth IRA when I was 18 years old.

So that would have been I need to run this data. I haven't run it in quite a while. But let's just talk. So I was born in 1985. So it would have been 2000 and 2003 when I graduated from high school, 2003. Summer after my my graduate from high school is 2003, I opened a Roth IRA and I started investing in mutual funds, U.S.

based mutual funds. Now, if you look at the data since that time and I look at my actual returns and my actual staying invested all through that time from about 2003 to a couple of years ago when I actually sold for reasons not necessarily related to returns. I haven't gotten rich and I sat tight through a lot of the ups and downs.

And I know a lot of people who are in similar life stages. You're 36. I mean, now you may have gotten in during a crash if you started investing at an early age and you may have bought better. But it's always challenging to look and to figure out, OK, what are my what's my actual return?

And is this is this investment mechanism actually funding my life and is it actually working or is there an alternative plan that's better? Because the sequence of returns risk is real when it comes down to your actual experience. And I'm cool if I've got a 40 year time horizon to and I've got a 40 year time horizon to plan for a client.

Yes, look, let's look at the lowest possible return and the highest possible return. But when you bring this into an investment life horizon like mine going from 18 to 30 and you start to look and you say, well, how is this plan working? Is there a point in time that you run the actual numbers and you say, I need to look for something else or do you just say, well, 40 years, it's all worked fine?

Because there are economies and that's where we get to international diversification and where we get to things. But there are economies and markets where things just sit and sit and sit and sit. And so I consider myself a very confident person, very confident in the data. But I also look at some of the underlying risk and I get a little uncomfortable right now with the state of affairs, especially as it approaches my life.

How do you advise me in that? Yeah, so I think I think I'll use the example of the lost decade. Right. So until until recently, there had never been a 10 year period where you had not achieved positive nominal returns in the U.S. stock market. Well, and that was all out the door because from 2000 to 2010, you would have gotten a slightly negative return if you had sat tight for 10 years and invested in the S&P 500.

You would have been slightly negative from 2000 to 2010. Now, that's brutal and it's doubly brutal because of the impact of inflation. But what you find is if you were in a truly diversified portfolio, let's just say a portfolio that diversified equally between U.S. stocks, bonds, commodities, REITs and international stocks, you would have gotten a very handsome return from 2000 to 2010.

You would have been right around 9 percent, if I'm remembering that correctly. So very typical, right, of a well diversified portfolio. So right now, the U.S. is extremely expensive. I think it will be very crummy. Europe is way more beat up. And so I expect that 10 years from now, it'll be north of where it is today.

And so that's where I think diversification becomes increasingly important. And then back to, you know, you controlling what matters most. This is where it's extra important that we're setting aside adequate money each month, that we're dollar cost averaging, that we're doing all these things. I just don't know an alternative, even though I share your concerns about the market, I believe.

Right. And that's been the challenge is that when you look at what's the alternative, and I'll just tell you the conviction that I came to. I sold out of stocks for personal moral reasons, not because of the financial return. But I won't say that it wasn't contributed to my looking at my clients.

And simply saying when looking at my clients that I could find very few individual people for whom their traditional mutual fund investing had been a cornerstone of their wealth plan. What I found was that the majority of my clients who were truly wealthy had built that wealth in the form of a business and/or a high income.

Because those clients who did have substantial healthy retirement portfolios, large 401k balances, large IRAs, they were there not because that they had necessarily stuck with it. Although some of the best ones, I'm thinking of one client, and he was an educator and he just knew, "I just put money here and I don't touch it." Well, he was also a very highly compensated educator.

And so when you're fully funding your accounts and you're leaving them alone because you know enough to just do a quick survey of the academic research, "Okay, I just leave it alone," that plan worked out. But most people had built their wealth from other sources, from a business. And that was one of the things that as a financial advisor when I finally broke with the ranks and said, "I'm going to go do media," I've struggled to know how to give the advice.

Because I can't argue with the fact that if you're looking for hands-off wealth creation, owning shares of a well-run company is an incredibly great way to do it. It's very, very low risk. When you think about what the fundamental reality is, when I own a share of stock of a large publicly traded corporation, I have the best business people in the world running a company.

Many of these companies have a tremendous history, tremendous equity, brand equity, tremendous inside knowledge, trade secrets. They have a tremendous marketing organization all around the world. They have a physical plant and equipment that are so valuable. They have intellectual property that's so valuable. In the United States, U.S.-based companies and companies that are subject to U.S.

regulation have a very open, transparent form of governance. You have a board that takes their responsibility seriously to expose what's going on. You have investors on all sides who are professional analysts, amateur investors, activist investors who come in and who are consistently working to pull those things apart. These are great assets.

This is a fantastic asset to own. I would not have any fear personally of owning, say, the shares of eight or ten well-run companies and living off of those dividends and feeling very confident about my future. But when I flip it and apply that to personal finance, I find that the richest people are the people who are sitting on the board.

The richest people is the CEO of the company who's getting paid millions of dollars a year. And I just struggle with knowing how to apply this truth of investing with back to that personal finance and recognizing that when you start to add all these things together, it leaves me a little confused, I guess.

And I don't want to bring confusion to the audience, but I also don't want to participate in the group thing because once I severed my ties with the financial industry, once my income was no longer based on my proficiency of getting people to invest, their money with me, that started to affect my opinions.

And I've been troubled by knowing how do I integrate these things. I recognize there's lots of risk to personal business. Most new businesses fail. But when I dig into that, it seems so much more controllable than the alternative. And the best thing I've come up with is to say, "Okay, let's do both and let's do it sequentially." But that's been the problem I've wrestled with.

So to give you my favorite sort of no-duh finding from psychology is that past behavior is the best predictor of future behavior. Like, wow, thank you, psychology. So my favorite sort of no-duh finding from finance is that the best predictor of your ultimate wealth is how much you set aside every year, right?

And so more so than investment returns. So in that, I think there's no denying the truth of what you're talking about. And just for me personally, I have enormously more money than I would have. I have much more money today than I would have if I had taken my original path of working for a college or a university, right?

I mean as a small business owner, I've done much better than I would have done as an employee. So yeah, there's no doubt I think that most of the richest people in the world are people who create a business. But there's similarly no doubt that most businesses fail. So yeah, there's no denying that there's something very gratifying about building your own business, about having some control of your destiny.

But I think that it's a danger when I talk to some small business owners who I talk to them about their retirement plans. And they'll say, "Well, it's all in the business." I think there's a danger to that too because just as surely as you want to run your business well, you can invest in other well-run businesses like you talked about.

And I think that that's a positive way to diversify. But I wouldn't contest for a minute the enjoyment or the ability to build wealth that comes from starting your own enterprise. 100% agree with you. It's a huge risk if you are getting towards the middle or end of your life and you still have everything in one business.

One thing on yesterday's show, meaning the show that I released on August the 1st. I'm not sure when I'll release this interview. I talked about a law that Britain passed where they added a five-pence tax for every plastic bag that a retailer of above a certain size was going to charge and it just destroyed the plastic bag industry where everybody switched to using their reusable bags in order not to pay the five-pence tax.

So, the environmental coalitions are extremely joyful about it. All I could think about was, man, I hope that the person who makes those plastic bags was paying attention to the winds of change. Because if they were the number one plastic bag manufacturer in Britain, they had a problem. And now, even if they were the number one in the world, when people look at that data and you look at how strong the anti-plastic bag coalitions are and you look at other countries, that business is in for headwinds.

So, we can't predict and diversification applies at all levels. Everything's a buggy whip on a long enough timeline, that's for sure. Indeed, which is so beautiful. I mean, the stock markets, publicly traded stock markets are beautiful self-cleansing operations. When you look at the power of mutual funds and diversification, we live in a remarkable time.

So, I don't want to get too down. But it's been super fun and I appreciate that. I think this is the challenge that we are going to argue about and argue about constantly. And ultimately, the only way I know to solve it is to say it goes back to your principle of how is this going to affect my life.

What did you call it? Your life is the best benchmark, rule six. How is my life going to be affected at this stage? And that will change throughout our lifetimes. Anything that I missed that you think is important for my listeners before I ask you to tell us about your websites and all that stuff?

No, this was fantastic. Thanks for being an interesting and a challenging interview. So, the book is called The Laws of Wealth, Psychology and the Secret to Investing Success. I'll link to it on Amazon in the blog post for today's show. And I'm sure it's widely distributed. And then tell us about your personal blog and other books, other resources, any other ways that you'd like my audience to take action after this interview, Daniel.

Yeah, you can follow me on Twitter @DanielCrosby or you can check out the blog. It's at Nocturne Capital, so Nocturne with an E. Thanks so much for coming on. Thank you. Thank you for listening to this episode of Radical Personal Finance. If you're interested in building financial freedom for yourself and your family, please subscribe to the podcast with our free mobile app so you don't miss a single episode.

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