(audience applauding) Our next speaker is gonna be Adam Grossman. If you don't know who Adam Grossman is, you may not be following along very well on the website started not that long ago by Jonathan Clements, Humble Dollar. But he is a regular on that website. He's also the founder of Mayport, a flat fee wealth management firm.

And he's gonna be talking to us today about an important concept that he calls the center lane. Now we'll be doing the same thing with questions. He's gonna try to save a few minutes for us at the end to ask questions, but if not, catch him afterward and ask your question directly to him.

All right, he'll go out in the hallway and you can step out there and ask question afterward if you don't get it answered. But let's give it up for Adam Grossman. - Great, thank you, Jim, for that kind introduction. And thank you all for being here. I feel like I'm among family, except that one difference is that I don't disagree with anything that anybody else has said.

So I think there will be some overlap in a lot of the topics that Christine and Jonathan talked about, but maybe a little bit of a different perspective. So the title of the session is the center lane. And what do I mean by that? When I first started in the industry on the first day, the boss of the firm sat me down and he talked to me about how the firm worked with the clients.

And what I was expecting was formulas, investment frameworks, growth versus value, irrevocable trust, nuts and bolts, things like that. But instead, the first thing that he talked about was the recency bias. And I was kind of floored. I thought, I've spent all this time in school, all these textbooks, and the first thing that he wants to teach me as a new person is about recency bias, behavioral concept.

And that's when a light bulb went on for me. I think probably everyone in this room appreciates that there are two answers to every financial question. There's what the calculator says, and then there's how you feel about it. But threading the needle is not always so easy. And in a lot of cases, what we're dealing with are situations where we have some data, but not complete data.

And so how do you make a decision in situations like that? And so to get started, what I'd like to talk about is a mistake that I once made. So one year I was on vacation with my family, and this is the scene of the crime here. So we're in Florida, as you can see, and we're heading down the highway.

We're looking for a place for lunch. And I knew which exit it was, and I saw it coming up, so I got in the right lane to get off. But as you can see there, the kind of the yellow part, if you can make it out, the exit was on the left.

So needless to say, I missed the exit. Needless to say, faced recriminations from my family for spending, I don't know how much more time than the sort of sweltering heat and the traffic in Miami. But as I was sitting there hearing those recriminations, I started thinking about, well, if I had been in the center lane, then that actually would have been the better approach, because I would have hedged my bets, and whether the exit had been on the left, which is unusual, but it does happen, or it had been on the right like usual, then I wouldn't have missed my exit.

And so that's when I started thinking first about this idea of the center lane, of hedging your bets. But if you think about it, that doesn't really seem like a rigorous way to make financial decisions, right? I mean, oh, let me hedge my bets, split the difference. That doesn't seem optimal, right?

That doesn't seem like the right way to approach things. But as I thought more about it over the years, it occurred to me that maybe there is a way to use this in a helpful way. So, you know, what is the importance of the center lane? You know, you might think, well, gosh, if there's a way to optimize, isn't the optimal answer the better way, right?

You know, shouldn't I at least try to optimize rather than just, you know, splitting the difference or going with some middle road? So let's look at the importance of the center lane. Does anyone know who this fellow is? Anyone identify him? Okay, not surprising. His name is Ronald Wayne, and he was a co-founder of Apple along with Steve Jobs and Steve Wozniak.

But the reason why no one recognized him, we don't talk about him a lot, he's still alive, is because he sold out after just 12 days. The reasons are a little bit lost to history. Apparently, one explanation is that Steve Jobs just made him nervous. He's like, how can I work with this guy?

And so he sold out, and you can look this up on Wikipedia, I don't think anyone debates it, he was paid $2,300 for his shares. Today, Apple, as you know, worth more than three trillion. So you could look at this and say, well, that's probably one of the biggest financial mistakes anyone has ever made, ever.

But on the other hand, you'd say, well, gosh, that's with the benefit of hindsight. And Wayne himself, in an interview, once said, nobody could have anticipated how big Apple would become. And that's true, hindsight can be unkind. But I would like to argue that even Ronald Wayne, with the information that he had available to him at the time when they were just getting started, he could have made a different decision.

So he started with 10%. If Steve Jobs made him nervous, he could have said, well, I'm gonna go down at 5%, or I'll go down to 1%, or I need to change the working relationship here, or the corporate structure, so that I can still remain a shareholder and potentially benefit, but not have to deal with whatever the dynamics were in the office.

And so that's what I mean by the center lane. So the Wayne case is extreme, but these kinds of things happen all the time. Let's look at another example. This is a map of Fort Lauderdale. And if you can see in the upper right there, there's that area which is just sort of trees and wilderness.

And that's known as Bonnet House. It's a very nice 35-acre parcel in Fort Lauderdale. And it used to be the winter home of the Bartlett family. A woman named Evelyn Bartlett lived there with her husband from the 1930s. And by the 1980s, though, she was widowed, and the property obviously had ballooned in value, and she had a hard time keeping up with the real estate taxes.

So she went to the city, and she said, look, I'm having a hard time with the taxes. I will give you this property in my will, but in exchange, can I live here tax-free for the rest of my life? So the city took one look at the property, and they took one look at Mrs.

Bartlett, who at the time was 95 years old, and they immediately accepted. So what happened? Mrs. Bartlett went on to live until the age of 109. And so apparently, according to accounts, because the property was so valuable, it was enormous, she avoided tens of millions of dollars in property taxes.

And so Mrs. Bartlett got the better end of the deal. And so this is another example, kind of like the Ronald Wayne case. Could this city have done something different? What her proposal was, I don't want to pay any taxes at all, and they accepted it. What they could have done is to say, well, I don't know, you're 95, but maybe you've got some time left here, and so we'll make a deal with you.

We'll cut your taxes by 30% or 50%. In other words, it didn't need to be a binary choice. It didn't need to be all or nothing. So as I said, these examples occur all the time. So we'll look at one more. I have a friend, his name is Danny, and he's authorized me to use his first name and not his last name.

He's a smart guy. He went to Harvard. He has more than one degree from Harvard, and now he's an economics professor. But in the winter of his sophomore year, he made a financial mistake. So a group of his friends were putting money into a startup that another guy in their dorm had just launched.

You may see where I'm going with this. And Danny took one look at it, and that's, he said, this is the dumbest idea in the world. And so he did not invest. The classmate, of course, Mark Zuckerberg. And so Danny and I have talked about this over the years.

And as an economist, he's pretty thoughtful about it. And sure, we have the same problem as with Ronald Wayne. There's the hindsight problem. But I think Danny agrees that he could have made a different decision. I don't know how much savings he had as a college sophomore, but he could have said, well, this seems dumb to me, but I don't know, other people might like it, so maybe I'll put something into it.

So again, doesn't need to be a binary decision. He could have taken a middle path. That's what I call the center lane. And so what exactly does this mean? If you were Ronald Wayne or the city of Fort Lauderdale or my friend Danny, what could you have done? What are the alternatives exactly?

So I keep referring to splitting the difference. And is that the only answer? And so I think there's a distinction to be made when you're making financial decisions, which is that there are some decisions where there really is no data to go on. There is no logical basis on which to make a determination.

So in this example here, you're splitting the last piece of pie. In my house with all boys, it's not always fair how the division goes, but that's the sort of situation where you'd say, well, just split it evenly. But there are lots of other cases, and I think this applies to a lot of financial decisions where you could say, well, it shouldn't just be 50/50.

So splitting the difference really is not the right way to go. And what are some financial decisions that are sort of like splitting the pie? It might be, say you're considering a Roth conversion and you do the math and you say, well, my tax rate today is probably gonna be pretty similar to my tax rate in the future.

And so it doesn't really argue strongly one way or the other. And so in that case, you might just split the difference. But there are other cases where you say, well, there is some data to go on and let's use a different approach. So this book was published last year.

I'm not sure if you're familiar with Cass Sunstein. He's an academic. He's actually co-authored with a number of pretty well-known folks, including Danny Kahneman in behavioral finance. And so in this book, he offers one suggestion. He talks about when you're trying to weigh a decision, he says, weigh the cost of being wrong versus the benefit of being right.

The cost of being wrong against the benefit of being right. And those are both easier to kind of get your arms around than just simply trying to predict the future with nothing else to go on. Because at least you can say, if you think back to whether it was Ronald Wayne or Danny or anyone else, you could say, well, let me try to put some numbers on this.

And so suppose you were Ronald Wayne. He looked at Apple and he said, okay, well, I see the computer error is starting. This could be big. Obviously, a company worth trillions, no one ever could have estimated that. But he could have said, what if the company is worth 500,000 or even a million at some point?

That wouldn't have been an unreasonable guess. And then he could have done the math and said, well, what will my 10% share be worth? And it probably would have come out to way more than the 2,300 that he received. So that's one approach that you can take is to just say, well, let me put some numbers on this.

A similar example, when it comes to Facebook, I remember talking to a pretty well-known venture capitalist was in 2005, so just a year after they got started. But Facebook, if you remember, it got off to a pretty quick start. And he looked at it and he said, yeah, based on other types of deals and IPOs, he said, I think the company would be worth 300 million.

And if I'm doing my math right, I think he was way off. He was off by a factor of 5,000. So Facebook's now worth more than 1 trillion. But if you had done that math, and even though he was way, way off, it would have led you to a decision that was in the right direction.

And so I think that this is an important idea, which is just to say, well, what's the cost of being wrong versus the benefit of being right? And often with investments, especially as the previous speakers were talking about, if you have a diversified portfolio, you're not talking about putting your entire net worth into something which is unproven.

You're talking about making some bet. And hopefully it's a reasonable size bet. But the key is to think about, well, what would be the upside? And not just to dismiss it, like Danny and say, well, that's the dumbest idea in the world. And so therefore it's gotta be worth zero.

Okay, let's look at another framework. Another approach, if you're thinking about a financial decision, is to say, well, how much do I need this to work? So in the prior slide, what we were looking at is to think about the upside. Now we wanna also think about the downside, right?

And risk management. And so if you think about it, in this case, this person here really needs this bridge to hold. And so let's put that in financial terms. Suppose you're trying to make an asset allocation decision. And just as an illustration, let's imagine two people. One is Bill Gates and one is more like an average person.

So when it comes to Bill Gates, he could have it all in socks or he could have it all under his mattress, right? It wouldn't matter either way. There are costs to being at either extreme, but it wouldn't hurt him. But if you look at the sort of more average person, suppose it's somebody who doesn't have a lot of savings and it's a young person.

They just have some cash in the bank and they're looking to put a down payment on a home. Well, in that case, that probably should remain entirely in cash. There's no reason that that person should be investing in the stock market because the risk of loss is too extreme.

And if they need to put the down payment down anytime soon, then that's just an intolerable loss. And so I think that's another filter, which is how much does this decision matter? Okay, that's the theory, but how do we apply this? Let's look in some more detail at some common financial questions.

We'll start with the Boglehead. I don't know if you saw the article that Mike Piper published. I believe it was last year. And he compared asset allocation to making a fruit salad. And if you haven't read this, it's a classic. It's fantastic. And he says, if you put in more blueberries, he says, nothing magical happens, nor is there any disaster.

And it's a great way of describing diversification. And I think that people really beat each other up over a lot of decisions. And we saw it in the prior discussion about should I have 20% in international or should I have 30%? Some people say, well, have the market weight in international, 40 or 50%.

Or how about growth versus value? Should I have a tilt there? Does it matter? Is there gonna be mean reversion? And I think that people, they beat each other up about this and they kind of go round and round. But if you go back to Cass Sunstein, just think about what would be the cost of being wrong?

Or if you wanna go back to my old boss, just think about the importance or I should say the impact of recency bias. It's really powerful. And in recent years, I don't know how many times people have said, why don't I just put it all on the S&P 500?

Why am I messing around with any of this other stuff? It looks like that's just the simple, that's the easy button, just put all on the S&P 500. And so I think it is, I would echo what Christine had said in her discussions with other advisors that it is the hardest thing to convince people to keep putting money into something which has just been practically a perennial loser, whether it's value stocks or international.

But my view and sort of the center lane approach would be to say, well, don't go too far out on a limb in any one direction, right? And I think the recency bias is a good caution for everybody because if you decide, well, you know what, forget everything else, I'll just put it all on the S&P 500.

Well, things can change and it's better to remain balanced. Another perspective on asset allocation comes from Morgan Housel, he described an old coach and he said, 1/3 of your days should feel good, 1/3 should feel okay and 1/3 should feel terrible. He says, if it's always terrible, you're doing it wrong, if it's always great, then also you're not doing it right.

And I think that's also another important perspective on diversification, right? Which is that there's the expression that certainly from the financial advisor's perspective that having a diversified portfolio means that you're always apologizing for something. Every year it's something different that you have to apologize for, but I think whether you're working with an advisor or managing your own portfolio and just maybe apologizing to your own spouse or to yourself the idea is just keep going with the diversification because if you become too convinced in any one direction, that's often when things turn around.

We'll look at a few more cases. So how could you apply the center lane approach to the sort of magnificent seven situation? So actually Christine asked about direct indexing. And so this is something that has grown in popularity. Vanguard, I believe it was Vanguard's first and only acquisition so far in 50 years was to acquire a direct indexing company.

And so I think there are definitely costs and complexity which were discussed, but there are also some benefits. There can be a tax benefit. It can allow you to tilt your portfolio or to have screens in different ways. If you wanted to include the S&P 500 minus the tobacco companies, you could have the S&P 497 or 98 and that might suit your values better.

So there are reasons why direct indexing can matter or it can be valuable, but we shouldn't view it as something that we feel that we shouldn't do right, I mean, we're all indexing diehards, but at the end of the day, it's not a religion. It's not our spouse. We're not cheating if we say, okay, well, we'll do something that's a little bit different in addition to a kind of core portfolio that's built on indexing.

And so I think that's another way in which you can say, well, I can make a balanced decision here. We'll look at just a few more cases. This one of my favorite cartoons is a little hard to read, but it's basically showing, it's the perspective of a New Yorker and their perspective on the rest of the world.

And so you can see beyond the Hudson River to them, it's sort of like, then the next thing is the Pacific Ocean and then China and Japan. And I think what this illustrates is that, and Jonathan said this in the previous session also, that the question of international diversification is often an active decision.

And so many of us feel like, okay, well, let's just have the market wait. And that actually is the Vanguard view. Jack Bogle himself though, personally, always said that his own portfolio was 100% domestic. He said, what do I need the rest of the world for? The S&P 500 is perfectly fine, or the total market is totally sufficient.

And I think this is another area in which it's important to take a balanced view and to say, well, there are reasons to not be home biased, but there are also reasons why maybe because my bills are in dollars, I do wanna have a portfolio which is biased toward domestic stocks.

And so again, there's no one right answer here. And I don't think home bias is a crime. Global market rate waiting is also not necessarily right or wrong. We'll look at just a few more examples. This here is a poll that I did a little while back. And I asked, is the total market bond fund, I said BND specifically, is that sufficient?

Is that sort of the perfect bond portfolio? And here again, this is another area in which I don't disagree with anything anyone else said. What Jonathan described and Christine also added to is to say, well, don't just hold a total bond fund. And you can see that three quarters of people said, don't do that, and I would agree.

You wanna break it up a little bit, right? Because there are different types of bonds, government versus corporate, there's different durations, and they behave differently in 2022, we saw that. You can also buy individual bonds versus bond funds. And so, again, this is an area where people beat each other up, but is anyone the right or wrong answer?

No, I think that each plays a role in a portfolio. And so, we're running short on time, so I will move quickly here. In terms of the Magnificent Seven, this is another area where you don't have to have a sort of left lane, right lane, binary approach to things.

If you have an individual stock, which a lot of people do, even though there's the tendency to talk about winners and not losers, but there are a lot of people walking around who ended up with some Apple shares, some Amazon shares, and say, I have a huge tax problem.

It doesn't need to be just, I'll either sell it or I'll hold it, there are lots of other ways to split the difference. You could donate some to a donor buys fund, you could donate some to family members with lower tax brackets, you could sell some incrementally, there are lots of ways to do it.

And so, that's the message really, is just always try and look for ways to not go too far out on a limb. And here, just a quick thought on portfolio construction. So, the guys on the right, sort of like a diversified portfolio, right? The guys on the upper left, not a lot of diversity there, right?

And not very interesting. And I think this is another key way to think about diversification, is just to say, well, let's not go too far out in any one direction and let's not be too sure. I think people lost some faith in bonds, but there's a value in having bonds.

And so, I'll move to, I'll skip over this and come to a conclusion. So, (audience laughing) sometimes one of the hardest decisions is something where you say, it looks crazy, and maybe it's like my friend, Danny, you say, it looks crazy, or maybe even, it just looks like the most terrible thing.

And I've gone on record criticizing Bitcoin, I think as early as 2017, but probably what I should have done was to buy some, right? But I say that only half jokingly, which is that, what I've developed over the years is what I sometimes call the $1,000 rule. And the number can vary, but the idea is, well, if you think something is crazy, but you also feel like you might kick yourself later, and maybe I'm wrong, and maybe it actually does turn into something which is legitimate, then put something small into it.

Again, going back to the Cass Sunstein theory, right? Is there a way that I can place a small bet here? And maybe if it turns out to be right, then it will really benefit you. And so, I'm glad my wife isn't in the audience, so I can admit that the first time I looked at Bitcoin, it was at $65.

And so now it's, I don't know if it's 50, 60,000 today. So I wish I had followed the $1,000 rule myself at the time. I did not. But I think that's another way in which you can apply the concept of the center lane. And so I'll wrap up there.

I appreciate your questions, and I'm not sure if we'll have time for questions, but I will be around and happy to speak with folks. - Okay, let's give Adam a round of applause. (audience applauds) The good news is, well, the bad news is we don't have time for questions.

The good news is like the first three you answered right at the end. So it was beautiful. Good, nice work talking about Bitcoin there at the end. That was the first question on my docket there. But thank you so much for your preparation and for your time. - Thank you.

(audience applauds) you