Bogleheads University 101 2024 The Language of Investing with Allan Roth

00:00:00.000 | (audience applauding)

00:00:03.160 | Okay, so now we've done a great job budgeting,

00:00:10.040 | we've done a great job saving,

00:00:12.960 | we have money sitting in a retirement account,

00:00:16.120 | what do we do with it?

00:00:17.920 | We're gonna buy something with it later on down the road,

00:00:19.760 | maybe we know what we're gonna buy,

00:00:21.560 | but we're not gonna buy it yet,

00:00:26.040 | so we need to invest our money for the future.

00:00:29.360 | And that's the next segment.

00:00:31.320 | It's gonna be three sessions.

00:00:33.640 | Alan Roth will come up and talk first

00:00:38.360 | about the language of investing,

00:00:41.120 | and then I'll come up for a while

00:00:42.320 | and then Alan will come back.

00:00:43.440 | So Alan is the founder of WealthLogic LLC,

00:00:48.080 | an hourly-based financial planning

00:00:49.760 | and investment advisory firm.

00:00:52.160 | He's also the author of a bestselling book,

00:00:54.520 | "How a Second Grader Beats Wall Street,"

00:00:57.320 | and he writes for several leading publications.

00:00:59.600 | Maybe you've read him in AARP or other places.

00:01:03.760 | Alan has served as a corporate finance officer

00:01:06.240 | at two multi-billion dollar companies

00:01:08.440 | and consulted with many others while at McKinsey & Company.

00:01:13.120 | He holds a Bachelor of Science

00:01:15.520 | from the University of Chicago

00:01:17.200 | and MBA from Northwestern University.

00:01:20.040 | He's a graduate of the executive program

00:01:22.080 | at Stanford University.

00:01:24.160 | He's a licensed CPA and CFA,

00:01:27.120 | oh, excuse me, CFP.

00:01:28.800 | Excuse me, Alan, sorry about that.

00:01:30.720 | And despite his credentials,

00:01:33.040 | he still claims that he can invest simply.

00:01:36.400 | So Alan, come on up.

00:01:39.360 | (audience applauding)

00:01:42.520 | - Rick, that's University of Colorado,

00:01:49.880 | not University of Chicago.

00:01:51.600 | - Oh, is that what I said there?

00:01:53.000 | Did I say that wrong?

00:01:54.160 | - I had to say that.

00:01:55.000 | - Well, I was trying to give you a little bit more, you know.

00:01:57.080 | - But I'll support you in something.

00:01:58.800 | One of the ahas I had in my practice

00:02:01.560 | is clients would come to me.

00:02:02.960 | Some would be really optimistic.

00:02:04.960 | I can retire soon, right?

00:02:06.400 | Others are, I'll never be able to retire.

00:02:09.640 | Which ones do you think had saved far more money?

00:02:13.480 | The pessimists, the ones that were afraid

00:02:16.760 | of living under a bridge.

00:02:19.760 | And SC, I'm older than you.

00:02:22.040 | Guess how much I made in my first job?

00:02:24.240 | $15,100 a year.

00:02:28.080 | And I knew I couldn't spend that amount, and I didn't.

00:02:30.920 | You know, Roth is right.

00:02:34.360 | Investing is simple.

00:02:36.000 | If you want it, just get the market return.

00:02:39.240 | But we here at Infinity Wealth can do much better.

00:02:43.960 | By analyzing fundamental indicators

00:02:45.920 | such as P/E ratios, EBITDA,

00:02:48.040 | dividend yields alongside technical tools

00:02:50.160 | like moving averages and MACD,

00:02:52.040 | we seek to identify undervalued assets and entry points.

00:02:57.040 | I'll use other big words like

00:03:00.720 | understanding the nuances of the market,

00:03:02.680 | economic indicators, GDP growth rate,

00:03:05.240 | interest rate fluctuations,

00:03:07.120 | anticipate macroeconomic shifts

00:03:10.240 | while maximizing alpha and managing beta exposure.

00:03:16.920 | My goal is to teach you what this means.

00:03:19.960 | Anyone know what this means?

00:03:21.360 | - You're about to get a big bill.

00:03:25.440 | - You're about to get a really big bill.

00:03:29.320 | Well, you won't see the bill

00:03:32.240 | because I'll just take it 1% of assets.

00:03:34.560 | You won't actually see it.

00:03:35.560 | It won't cause any pain.

00:03:37.720 | So what I'm trying to do is,

00:03:39.720 | Infinity Wealth impress you with our expertise,

00:03:42.800 | but it's financial jargon that has been proven

00:03:45.240 | not to work for investors.

00:03:46.960 | You'll be impressed and hopefully intimidated.

00:03:49.800 | So you'll hand your money over to me

00:03:52.240 | that you've worked so hard for,

00:03:53.880 | and I can buy a bigger yacht.

00:03:55.880 | (audience applauding)

00:04:00.040 | I chose hourly because yachts aren't really big in Colorado.

00:04:04.840 | We don't even have big lakes.

00:04:06.600 | All right.

00:04:09.680 | A question I ask every prospective client.

00:04:13.080 | They have to fill out a questionnaire

00:04:15.640 | before I'll have the talk with them.

00:04:17.440 | Guess which of the four I'm least likely to take?

00:04:23.200 | The sophisticated.

00:04:26.920 | It takes far too much time to teach them

00:04:31.440 | that they don't know what they think they know.

00:04:34.320 | So if you guys are beginners,

00:04:38.400 | you have a huge advantage of some of the people

00:04:40.920 | in that room.

00:04:42.040 | (audience laughing)

00:04:44.040 | So I'm just gonna cover some basic.

00:04:46.000 | What's a stock?

00:04:47.160 | You're part owner of a corporation.

00:04:50.960 | You've got upside and downside.

00:04:52.760 | You hope to make money from dividends paid,

00:04:57.000 | and the stock goes up.

00:05:00.000 | What's more important, by the way,

00:05:01.200 | dividend return or total return?

00:05:03.280 | Total return.

00:05:06.960 | So you may get lucky.

00:05:09.400 | You may buy Nvidia.

00:05:11.960 | You may get unlucky, Pacific Gas and Electric.

00:05:15.880 | By the way, trick question.

00:05:20.440 | What earns more, stocks or bonds?

00:05:24.080 | 96% of stocks earn the average of bonds.

00:05:31.160 | It's the 4% of stocks,

00:05:33.400 | and lately it's been more like 0.1% of stocks

00:05:37.320 | that drive the entire market return.

00:05:40.880 | So types of stocks, you can slice and dice them

00:05:44.640 | any way you want.

00:05:46.440 | There are US and international stocks.

00:05:48.920 | Now Nvidia does business overseas.

00:05:52.600 | Nestle, based in Switzerland, does business here.

00:05:57.400 | So the definition is where is it headquartered?

00:06:01.560 | You've got value, core, and growth.

00:06:04.520 | Growth are those high-flying companies.

00:06:07.480 | Nvidia, value are those that are struggling, like Ford,

00:06:12.480 | not growing rapidly.

00:06:17.280 | And you've got large, mid, and small.

00:06:21.720 | Market capitalization, are they the most valuable companies?

00:06:26.120 | And by the way, is it the most valuable company

00:06:27.920 | has the highest stock price?

00:06:29.520 | It's the stock price

00:06:33.360 | times the number of shares outstanding.

00:06:35.480 | What's worth more?

00:06:37.120 | $25 bills or $520 bills?

00:06:41.040 | The same.

00:06:43.760 | What's a bond?

00:06:49.680 | A bond is you're merely lending money

00:06:52.160 | to a government, a corporation.

00:06:54.880 | They're gonna pay you back your principal

00:06:58.400 | if they don't go out of business.

00:07:00.200 | And by the way, the Vanguard Total Bond Index Fund

00:07:05.200 | follows the Bloomberg Aggregate Bond Index.

00:07:08.240 | It used to be called

00:07:10.400 | the Lehman Brothers Aggregate Bond Index

00:07:13.760 | until Lehman Brothers went under.

00:07:16.920 | And see, I'm so old that I remember the statement as a kid,

00:07:21.760 | "So goes General Motors, goes America."

00:07:24.480 | Buying GM stock is every bit as safe.

00:07:30.040 | Buying GM bonds wasn't as safe.

00:07:32.600 | Bond holders got back 5 cents on the dollar.

00:07:36.440 | So you have, if the company does incredibly well

00:07:39.560 | like NVIDIA or just does okay,

00:07:42.280 | you've got no upside,

00:07:43.360 | you just get paid back your principal and interest.

00:07:46.880 | Now, one of the few terms

00:07:50.840 | that my industry has gotten right

00:07:53.080 | is something called junk bonds.

00:07:55.680 | Those are bonds from risky corporations.

00:08:02.120 | And my advice is take your risk with stocks

00:08:04.920 | and have your bonds

00:08:05.800 | be the most boring part of your portfolio.

00:08:08.820 | Bulls and bears.

00:08:12.900 | We had the cutest bear that lived behind our house.

00:08:15.760 | But bulls are better.

00:08:17.880 | Bulls mean the market is generally up over 20%.

00:08:22.120 | Bears, not so much.

00:08:24.920 | When's a better time to buy, bull or a bear market?

00:08:28.600 | Bear, I'll show you that in my next presentation.

00:08:32.320 | What's a mutual fund?

00:08:33.860 | A mutual fund is an investment vehicle

00:08:37.640 | that pools money from multiple investors

00:08:40.360 | and buys a diversified portfolio of stocks and bonds.

00:08:44.320 | It's priced only once a day.

00:08:46.680 | What's riskier, one stock or thousands of stocks?

00:08:49.940 | Are thousands of stocks still risky?

00:08:54.440 | Yeah.

00:08:56.280 | An exchange-traded fund, ETF.

00:09:01.280 | Very similar to a mutual fund,

00:09:06.240 | but it trades throughout the day.

00:09:08.040 | It can be far more tax-efficient,

00:09:10.520 | but it's typically more tax-efficient and lower expenses

00:09:17.480 | even for Vanguard.

00:09:18.540 | For Vanguard, however, many ETFs

00:09:21.800 | are just different share classes of their mutual funds.

00:09:25.740 | And the Vanguard index funds,

00:09:27.500 | whether they're mutual funds or ETFs,

00:09:30.060 | are very tax-efficient.

00:09:31.640 | Active management, finding undervalued securities

00:09:42.740 | like infinity wealth claims.

00:09:46.300 | Timing the market.

00:09:47.640 | Passive management,

00:09:50.500 | no attempt to find undervalued securities,

00:09:53.460 | no attempt to time the market.

00:09:55.780 | I'm a market timer.

00:09:56.780 | I'm gonna show you in my next presentation.

00:09:58.940 | And holding an efficient portfolio.

00:10:02.280 | Anyone know the definition of an efficient portfolio?

00:10:05.200 | Owning every stock.

00:10:09.900 | You diversify as much as you can by owning every stock.

00:10:22.700 | So the three passive funds that I taught my son to invest

00:10:25.960 | when he was eight years old,

00:10:27.600 | hence the book "How a Second Grader Beat Wall Street",

00:10:30.580 | total stock index fund owns as close to as possible

00:10:35.580 | over almost 3,700 companies based in the United States.

00:10:41.380 | Very low cost.

00:10:44.700 | Total international owns roughly 8,700 companies.

00:10:50.620 | And total bond tries to replicate.

00:10:53.200 | There are so many bonds out there.

00:10:55.020 | Even though this particular fund

00:10:56.980 | owns almost 18,000 individual bonds,

00:11:00.000 | it's still sampling of all US investment grade,

00:11:04.640 | like Lehman Brothers and GM.

00:11:06.700 | But it's roughly 2/3 backed by the US government,

00:11:10.260 | either treasuries or US government agencies.

00:11:14.060 | And all of these have very low expense ratios.

00:11:19.200 | And all were introduced by someone

00:11:24.200 | I would call my hero, John Bogle.

00:11:29.100 | Power of compounding.

00:11:33.980 | I'm gonna also show you the tyranny of compounding

00:11:38.500 | in my next presentation.

00:11:40.180 | But $1,000 today,

00:11:47.220 | if it grows by 7.2%,

00:11:51.080 | the rule of 72, by the way, is just an easier way.

00:11:54.080 | And it's an approximation that can be wrong.

00:11:56.960 | But if you take 72 divided by a 7.2% return,

00:12:01.500 | which is how I picked it,

00:12:03.020 | it doubles every 10 years.

00:12:06.020 | And you can see how fast it grows.

00:12:10.340 | In my book, I noted that Albert Einstein

00:12:12.700 | called the power of compounding

00:12:14.260 | the most powerful force in the universe.

00:12:16.420 | But that was probably myth, by the way,

00:12:18.260 | Jason Zweig taught me,

00:12:19.860 | that why would a mathematician think

00:12:22.200 | that it was any more than an exponent formula.

00:12:25.540 | But nonetheless, by budgeting,

00:12:29.180 | by putting money away and letting it grow

00:12:33.060 | and not make my industry rich,

00:12:35.860 | and betting on capitalism,

00:12:37.940 | I'm gonna go through a case study

00:12:39.220 | in the next presentation

00:12:40.700 | of one guy that really got it wrong.

00:12:42.880 | So where to find definitions?

00:12:47.880 | Investopedia.com, I found, is very good.

00:12:54.120 | To my surprise, and I haven't tested it

00:12:56.120 | for every term, but ChatGPT is pretty darn good.

00:13:00.840 | And by the way, I've got the title

00:13:02.720 | to Jason Zweig's book wrong.

00:13:04.120 | It's The Devil's Financial Dictionary.

00:13:08.440 | If you go in and look at some of the terms

00:13:12.200 | in my first slide,

00:13:14.320 | and look at his book in that dictionary,

00:13:18.120 | you'll see what baloney it really is.

00:13:21.000 | So I say that investing is simple.

00:13:27.320 | If you can't explain your investments

00:13:32.280 | and your investment strategy,

00:13:33.680 | maybe not the tax part of it,

00:13:35.460 | to any eight-year-old, without jargon,

00:13:39.680 | you're probably doing it wrong.

00:13:42.400 | But if you can't explain your investment strategy,

00:13:45.000 | maybe not the tax part of it,

00:13:46.760 | to any eight-year-old, without jargon,

Bogleheads University 101 2024 The Language of Investing with Allan Roth

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