Introduction: Welcome to the Investor Coaching Show, a podcast to help you get an insider’s view of the financial world and escape common investment traps. We look at the financial news of the day and help you make sense of it so you can relax about money. And here’s your host, Paul Winkler.
Paul Winkler: Welcome to the Investor Coaching Show. Paul Winkler along with Anne Sawasky, hanging out here in the studio with me today because it’s better than hanging out outside. It’s not too bad. It’s just chilly.
Anne Sawasky: Yeah, it’s very cool for me.
Paul Winkler: I dig warm, warm weather, warm. I grew up in cold weather.
Anne Sawasky: So did I.
Paul Winkler: I know. Man, how on earth did we put up with it for so long is what I’m wondering.
Anne Sawasky: Didn’t know any better? I don’t know. Now, I love certain seasons in the North, but yeah, just not that winter thing.
Paul Winkler: Yeah. For like one week and I’m good, so I can take pictures of the leaves.
Anne Sawasky: Oh, I like summer up there. I do.
Paul Winkler: Yeah, summer’s great up there. Oh my goodness. I used to go on the longest bike rides. Oh, man. I will never forget one bike ride. I had a friend, a friend of mine. She and I went on a bike ride. Now we didn’t know where we were going or — you actually have that thing on boating. We’re going to have to talk about that.
Actually, this is really funny, ‘cause it goes along with your boating thing. I’m going to save it for when you talk about your boating thing. I’m going to save this story because it’s actually pretty funny, what ended up happening to us. Yes. You would not believe what I will admit to during your segment.
Anne Sawasky: Ah. Now it’s going to get interesting.
Paul Winkler: Oh yeah. Yeah. It’s going to be true confessions. Nothing to do with the girl, okay? She was a friend.
Anne Sawasky: That was the first thing that came to mind.
Paul Winkler: I know. It’s like, “Oh man, am I stepping in it?” No, it has nothing to do. We’re still good friends. No, I have to tell you what happened on that bike ride though. It was a hoot.
So 10 things. Ten things you shouldn’t care about as an investor. I think it’s a good little topic. Unbelievably good stuff. This article was shared from a … there was a financial advisor friend that actually shared this — and man, this is really, really good stuff — from a different part of the country had sent this in and said, “You gotta check this out.”
Don’t Worry About What Everyone Else Is Doing
Okay. So Ben Carlson writes this. A Wealth of Common Sense had these 10 things that you shouldn’t be caring about as an investor. First one on the list: “How rich other people are getting.” And I love this line from John Pierpont Morgan. He’s attributed with this quote: “Nothing so undermines your financial judgment as the sight of your neighbor getting rich.”
It reminds me of that commercial. There’s a commercial where the guy’s waiting on some people, and there’s the dogs in the boat, on the sailboat behind him, drifting by. And it’s a bunch of poodles that all, you know, they’re all dressed to the nines. They’re all, you know, they’re all hair quaffed. Their doggy hair is just perfect. And they’re kind of drifting by in the sailboat, and he’s looking back at them going, “Oh man, have they got it made.”
And it was like one of the big brokerage firms, a commercial for them. And, you know, “Look, here’s how the rich are getting richer. And you poor bum, you’re sitting there and waiting on tables.”
But yeah, your financial judgment can be really messed up, because people say, “Hey, look at my returns. Hey, look at this fund. Look at this thing I got. Oh wow. I’m really knocking it out of the park.”
And people are well meaning. “You should be making this rate of return, look at the rate of return.” And you don’t know whether it was luck or what was really going on.
Anne Sawasky: Well, and that’s sorta like fishing. They don’t talk about the one that got away. They talk about the big fish that they caught.
Paul Winkler: Well, sure. And in recent years, what is that big fish that really knocked it out of the park for them? Which was large U.S. stocks, the S&P 500. And a lot of people, they have portfolios that did really well compared to even diversified portfolios.
You know, if you’re more diversified in recent years — now, not so far this year, by any stretch of the imagination, or even since the election, it’s not even close right now — but an undiversified investor in the S&P 500 did much, much, much, much better.
But you know, you don’t know when that sea change is going to take place. And it was literally in a couple of weeks, in a couple of weeks, it was literally changed from one thing to a complete other, so that even the five-year averages were skewed the other direction, just by just a couple of weeks of activity. So it shows you how important it is to be there when the market movement happens.
How Are We Affected By the Habits of Friends and Family?
Now it says: “And JP didn’t have to deal with friends, influencers, celebrities constantly bragging about their lifestyle and wealth on social media all day long.”
That’s it. I mean, you got Facebook depression. Facebook depression. You’re looking around at how good your friends are doing because they only show you the good stuff. Like you said, Anne.
Anne Sawasky: Right, it’s not real. Yeah.
Paul Winkler: Yeah. It isn’t, it isn’t. It’s like, you know, we had this workshop that I taught years ago. It was pretty mean, I am going to confess. It was not a very nice workshop, because what we did is we had pictures of celebrities with makeup and without makeup.
Anne Sawasky: Yeah, that would be a big difference.
Paul Winkler: Airbrushed and not airbrushed. And it was a big deal. Yeah, it was something. But I was making a point, man. Your friends do this to you. They do this to you and it’s not nice, but they do it to you because everybody wants you to think that they’ve got their life together. So they’re gonna do that.
Anne Sawasky: And the apps do that, you know. These investing apps and all of these things on TV, they make you believe it’s so easy, anybody can do it, it’s fun.
Paul Winkler: You got this. Yeah, exactly. So J.P. didn’t have that problem. He didn’t have that issue with people going and doing that to him. ‘Cause they didn’t have, you know, your iPhone back then.
And there are going to be people, there are always going to be people with greater success and prestige and money and accolades than you. I remember early in my career. I used to have clients — obviously, because I was broke. I was really broke — and everybody I worked with had more money than me. Everybody, all my clients and all my friends did too.
And I just didn’t hang out. I didn’t go to their houses. I didn’t go hang out with them. I would meet them someplace else. But I didn’t want what they had. I didn’t want to have that desire to want what they had.
I didn’t want to feel that, you know, I’m a loser and I need to have what you’ve got or, you know, get that temptation. So I would actually stay away from things. That was very conscious that I would do that. I don’t know where I got that from, but that’s just the way I was.
It says, “Easier said than done, but not worrying about how much money other people are making can save you a lot of unnecessary stress and angst.” Absolutely.
Don’t Worry About What You Paid
Number two: “What you paid for an investment.”
“Morningstar’s John Rekenthaler recently update[d] on … Hendrik Bessembinder to show how many stocks outperformed the market.”
This was really, really interesting. What they did is they looked at the market, and they looked over a period of a couple — like, a decade, I think it was.
It says, “Although the stock market itself has been strong, the results for individual companies as a whole are not as good as you might expect as you would expect in a bull market: ‘Although the Morningstar U.S. Stock Index enjoyed a 13.9% annualized gain for a decade, only 42% of individual equities even finished in the black.’” Even had a positive return at all.
Anne Sawasky: That’s amazing.
Paul Winkler: Is that not crazy? 42%. They found that nearly as many as 36% posted 10-year losses, and 22% of them vanished. Went away. Gone. So you look at that and you go, “Whoa, buying individual stocks can be a whole lot more risky.”
Anne Sawasky: Very risky. Yeah.
Paul Winkler: Oh yeah. And you know, the reality of it is when somebody shows you how well they’ve done: “Oh, look at this stock I’ve got, blah, blah, blah.” You know, the reality of it is they’ve got only a dozen that didn’t do nearly as well. And they’re just showing you the one that did well.
Amount of time and effort. And you have such a huge risk of either getting something that doesn’t go off at all or disappears. I mean, think about that. Think about those numbers.
Anne Sawasky: I think I heard that individual stock investing, as opposed to the asset, is three times as risky.
Paul Winkler: Yeah. You know, that doesn’t surprise me, Anne. Because I remember years ago I did a thing, and I was looking at standard deviation, and that’s how you measure risk. And I remember a standard deviation of individual stocks, when I did the research, was over 63, which is three times the market. So that makes a lot of sense. That’s interesting that you heard that.
“Although the stock market itself has been strong, the results for individual companies as a whole are not as good or what you’d expect in a bull market.” So just really the bottom line.
Don’t Worry About Spending Extensive Time and Effort
Number three: “The amount of time and effort you put into your investments.” That was another thing that you shouldn’t be paying a whole lot of attention to.
Now I can’t tell you how many times I have heard from people who say, “You know, Paul, the reason I’m hiring — I just don’t have all the time to do the research, Paul. That’s why I want to talk to you about my investments.”
And I’m going, “You know what? If you were spending all that time in research, you’re wasting your time because my job is not that either.” You think my job is to go research companies and check out their balance sheets and look at cash flows and look at their sales projections. And no. If your advisor is doing that, and they’re telling you that’s their job, change advisors. That is not what they’re supposed to be doing.
You know, access to the institutional investment world — you know, you’ll have institutional funds where it’s two to 10 million, sometimes $100 million to get in to actually utilize them. And that’s one thing that an advisor can be helping with is giving you access to those types of things to keep expenses down.
But the other thing is they ought to be making sure that, you know, like for daily rebalancing of the portfolios and rebalancing across asset categories, reoptimizing the portfolio, making sure you have an investment policy statement and you’re sticking with it. Making sure that you don’t go off the deep end, as far as what you’re — you know, making sure the tax laws, that you’re abiding by the best practices, as far as dealing with your investment portfolio.
And making sure that, you know, when the tax laws changed, that you’re actually keeping up with them. Making sure that when, let’s say, that there are changes in your personal financial situation, that they can help you make the right decisions there. That’s what they ought to be doing.
But putting forth effort and time into studying companies: nah, I don’t think that’s a good idea. And neither does the writer of this article, thankfully, because it’s a well-written article.
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Don’t Worry About Short-Term Performance Numbers
Next one: “One-year performance numbers.” You shouldn’t be worrying about one-year performance numbers. Or three. Or five. You might have an entire decade — you had an entire decade of the ‘90s, tech stocks were killing everything. And the mutual funds that everybody wanted to own were the ones that had the best 10-year track records.
So it’s not — and he says in this article, literally what I just said a second ago when I said that large U.S. stocks did better than everything else, so a diversified portfolio didn’t do as well, right?
And he says it in this article: “Diversification often looks silly over the short term.” That is so true because when you’re diversified, you own a lot of different things. And some of the things are going to be winners. And some of them aren’t going to do as well.
Now over the last 10 years, it wasn’t that small companies didn’t go up. They did. They just didn’t go up as much as large. But when that changed, baby, whoa. Watch out. It changed fast. And you know, a lot of times risk management seems useless.
At the end of the ‘90s, it seemed like a waste of time to diversify. You know, it seemed like it was a crazy thing to do. And yet when that market turned in 2000, 2001, 2002, you better have done good risk management. Great point number four, right there. Fantastic.
And how much data do you need? When I said three-, five-, 10-year track record, how much data do you think you really need to make good investing decisions? In my mind, about 95 years would be good. ‘Cause that’s what we look at. Ninety-five years of data. And we really only have good data on 50, for international for about 50 years and for 45 for international value.
But we take as much data as we can possibly get. And you know, the good news about the data, even though I’m complaining that it’s only 45 years and 50 years, is that it’s really robust. And it worked out of sample.
In English, what does that mean? If we look at small international companies and we look at large international companies, we would expect because of the data on U.S stocks that large companies were outperformed by small companies here in the U.S., right?
Well, if the data is actually robust and it’s helpful out of sample, what that means is that I could look at international markets and go, “Do I see the same thing over there that I see over here in the U.S.?” If the answer is yes, then we can surmise that there is a small-cap effect.
And there was an academic, a statistician, that actually did research on what are the odds that the small-cap effect was random, or that value was random. And you’ve seen this. It’s like .00000001. I mean, it’s ridiculously low that it was random. So that’s really, really important, to make sure that you have that robust data.
Don’t Worry About How Smart You Are
Next one: your IQ. You know, people would think, “It’s my IQ. I’m really, really smart. I’m going to make good investing decisions.” No, your EQ is probably more important.
I thought that this was good. This is good: “Yes, some level of intelligence is required, but as Warren Buffet once said, ‘Investing is not a game where the guy with 160 IQ beats the guy with 130 IQ.’” Or lady. They didn’t say that in the article.
“Once you have an ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Anne Sawasky: That’s true. Yeah.
Paul Winkler: Yeah. I mean, that’s really what it gets down to. Because, you know what? You’re competing against other people whose IQ is every bit as high as yours and maybe even higher. And they may have information that you don’t have. It has nothing to do with IQ. Or your retention of the information, being able to take that information and apply it and use it.
Anne Sawasky: I’d almost make an argument that the higher IQ might be detrimental to some extent, because you would have a tendency to think, “I’m really smart. So therefore, I am going to be good at this too.”
Paul Winkler: Right. Exactly. Very good, Anne. Yeah, your ego kicks in: “I’m smart and I’m smarter than everybody. So I got this.” It really appeals to people. It’s so emotional; it’s like food. Food is a really emotional thing.
We try to tell ourselves, “I’ve got control over this.” No, you don’t have it. I and very few of us really have it down because we get caught in the heat of the moment, even when we’re just having a conversation with somebody.
If I’m just talking to a friend, I may say something that I didn’t intend to say, if I get passionate or I get upset or something like that. We’re really emotional beings. We really are. I mean, it gets down to it.
It’s like an alien takes over our body. And that’s why I teach first. What happens is you teach first so that when we do things in the management of portfolio, you get the gist of why we’re doing these things. But the reality of it is your EQ, your emotional intelligence, is really, really important. So big thing right there.
Don’t Worry About Advice from the Wealthy
“Financial advice from billionaires” is another thing that isn’t so terribly important: “Ultra successful people typically offer some of the worst financial advice.” I find that so true.
Anne Sawasky: A lot of them invested with Bernie Madoff.
Paul Winkler: Good point. That’s a really good point, Anne. You know, it’s important to remember they say stuff all the time, and they don’t necessarily act on the things that they say. You may hear people, wealthy people, talk about investing, and they’re not really doing it.
Now, even guys like Warren Buffett. I mean, Warren Buffett, sharp guy, you know, really, really sharp guy. What did he do? He said in his estate plan that he was going to put all his wife’s money in an S&P 500 index fund.
Well, that’s some of the best bad advice going. I mean, it’s better than putting it all in a stock or a cryptocurrency or something like that. But in reality, you can take some really long periods of time and have no returns.
Now, if you’re wealthy — and that’s another point he makes in this article — if you’re super, super wealthy, yeah, you can afford to make big mistakes. If Warren Buffett’s wife gets all of his estate in an S&P 500 index fund, I don’t care what happens — she’s probably going to be okay.
But the reality of it is you have a couple 20-year periods, in the last century alone, where there was no return after inflation, having in large U.S. stocks. We already have literally a 13-year period — and we’re only 21 years into the century — and you already have a 13-year period where there was no return in the S&P 500.
And look at the S&P 500 right now. Good grief. You have 10 stocks, the top 10 holdings, the S&P 500. I looked at it this morning. Do you know what percentage of an S&P 500 — a 500-stock index fund — what percentage is in just the top 10 holdings? 27.4% of the money. 27.4% of the money is in just 10 stocks. 11% is in just two companies. 11% of the index is just two companies.
Don’t Worry About “What-If” — Or Your Own Successes
Another thing that matters less than you think: “How much you could have made” if you put $10,000 into blah, blah, blah, whatever, right? You hear that all the time. But this is how the industry sells. They sell based on past performance over and over again.
Point number eight: “Success in other areas of your life.” This is the point you just made, Anne. “I’m really good at this. Therefore, I’m going to be really good at investing. I’m a really, really smart doctor, and I should be really, really good at investing.”
And there’s actually a name for that. It’s called the halo effect. A halo effect is actually, if you’re really good at something, if you maybe have one area that you’re really, really accomplished in, you’re going to be good in other areas. Not necessarily, not necessarily when it gets down to it.
People that are great investors … great doctors don’t necessarily make great investors. If you’re a great attorney, it doesn’t mean you’re going to be a great investor. If you’re a great CPA, it doesn’t mean you’re going to be a great investor.
I’ve seen accountants do this, making mistakes over and over again. I’ve got a lot of clients that are accountants. I’ve seen people that go, “My accountant told me to do this.” Listen to the tax advice. Don’t listen to the investing advice.
Don’t Worry About Perfect Timing
Timing the market perfectly. Even imperfectly. “Investors waste far too much time trying to find the perfect entry point for their investments. The perfect entry point is only known with the benefit of hindsight.”
Saw an interesting statistic. You ready for this one? “If you invested” — this is a J.P. Morgan study — “If you invested in the S&P 500 on any random day since the start of 1988, and you reinvested all your dividends, your investment made money over the course of the next year 83% of the time.” Any random day, 83% of the time you made money.
And on average, the total return was 11.7%, okay? So number one, 83% of time made money. “Now, what” — this is really interesting — “Now what do those figures look like if we only consider investments on days when the S&P 500 closed at an all-time high?” You would think, “Oh, wait a minute. That’s a really bad time to invest. After it hits an all time high? This can’t be good.”
Actually, they’re better. Is that not insane? The numbers were better if you invested.
So this ought to free you. Those of you that are out there going, “Man, is this a good time to get in? Is this — oh, Paul, should I, oh the markets — should I hang on? Should I not invest right now?” Actually, if you just invested at all time highs, 88%, instead of 83% of the time, it was up 10 years later.
Anne Sawasky: That’s really interesting.
Paul WInkler: Isn’t that something? 14 — What was your average return? 14.6%. And the source from that, if you want to read the article on it — “Is It Too Late to Get Invested?” was the title of the article.
And actually what’s really funny about the article when it was written? You know when that article was written? August of 2020, just before the election, when people were asking, “Is it too high?” And what ended up happening from the time the article was written? The market went up.
Don’t Worry About Skill
And last point, point number 10 in this article was “producing alpha,” which is getting returns based on skill or increasing your returns based on your skill.
“Jason Zweig once told a story about interviewing dozens of residents in Boca, Raton, FL, one of the wealthiest retirement communities in the country:
Amid the elegant stucco homes, the manicured lawns, the swaying palm trees, the sun, and the sea breeze, I asked these folks — mostly in their seventies — if they’d beated the market over the course of their investing lifetimes. Some said yes, some said no. One man said —
I love this:
‘Who cares? All I know is my investments earned enough for me to end up in Boca.’
Anne Sawasky: He’s got a point.
Paul Winkler: He does. “No one on their deathbed has ever regretted the fact that they didn’t have a better Sharpe ratio. The whole point of investing in the first place is achieving your financial goals, not beating the market.” And not beating your friends.
Paul Winkler, Investor Coaching Show, along with Anne Sawasky. I want to tell you about a new Q&A feature I have for the show. There’s now a form on my website where you can submit questions for me to answer on the show. You can ask any question you want related to finance, money, and investing.
You can even ask some fun, random questions too. Then we’ll review each question that comes in and choose some to answer. We’ll even let you know how to hear the answer to your question. Submit your questions by going to PaulWinkler.com/question. That’s PaulWinkler.com/question.
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