Paul Winkler: And welcome. This is “The Investor Coaching Show,” Paul Winkler, talking money and investing. Educating one investor at a time.
Well, many investors at a time, I like to be efficient.
So if you do it on here, you’re talking to a lot of people at one time. Not a bad idea.
Don’t Be Afraid to Fail
So I saw something on Morningstar.com. It was an article, “How Rich Was Babe Ruth?” I like to use this guy as an example for people that are afraid of failing.
“I don’t want to take a risk. I don’t want to step out. I could fail. Things could go bad, and I could actually end up not doing well at whatever I set out to do. And people will laugh at me, or people will think I’m a loser or…”
I was actually talking to a friend the other day. We were just kind of blabbing about just life and things that we try to do.
And I said, “Hey, you know what PAW is?”
He’s like, “No. What’s that?”
I said, “Ah, it’s an acronym, PAW. Performance is the P, and then ability is the A, and then W is worth.”
And a lot of times what we have in our minds is that our performance tells us whether we have ability or not. And if I don’t perform well, I’m just maybe not any good.
I have no ability, and that may or may not be the case. You might just be having a bad day.
It’s not necessarily the case that it equals that, but a lot of times, our minds will put it in there that, “I’m just terrible. I’m not worth much. I’m not very good or whatever.”
And then that equals my worth, right? And that’s W. PAW.
And the reality of it is, it’s not the case. You have worth. You have abilities that you may not have ever tapped into.
And a lot of times people go through their lives, never really knowing what they’re great at, and really never knowing what they were here for. And that’s a huge deal.
Well, Babe Ruth was one of those guys that would step out, and he would take risks that other people wouldn’t take. And as a result, he failed a lot. A lot.
He was like the strikeout king, but that’s not what we remember him for. Right? We remember him as the home run king for many, many years until Hank Aaron broke his record. But that record stood for quite a long time.
Why We Invest
So when I saw this article, I thought, “Oh, I got to share this with the audience: “How Rich Was Babe Ruth?” And we look back, and we go, it’s hard to really judge based on today what dollars purchase versus in the past.
And I often talk about how investing … one of the reasons we invest in the stock market is to protect us from inflation.
And really, when you think about it, when we invest, I am not investing to try to get … so you may misconstrue some of what I say and think, Whoa, you can get really, really rich in the stock market.
And I’ve gone really long periods of time, yeah. When you look at compound interest and what an amazing job it does. I’ve often talked about how younger people, if you wait seven years, every seven years you wait, historically, you cut your retirement in half.
And that’s because of the rule of 72.
72 divided by interest rate, or the rate of return, tells you how long it takes for money to double.
Well, if it takes … let’s say that we look at large US stocks, historically, return about 10, right? Small companies, it’s a little bit higher. Small value, even higher.
But everybody talks about large US stocks. So I’m just going to talk about that for right now and say, well, if I take that 72 and divide it by 10, that’s 7.2. That tells you how long it takes for money to double.
So we look at that and we say, “Okay, well if money historically doubles at that rate of return every seven years, then I can turn it around and say, well, I cut my retirement in half every seven years I wait to start planning for the future.”
So it’s a real big deal.
Now, if we look at the real reason for investing, though, I like to point out that the reason that we do it is to preserve the purchasing power of our wealth.
And a lot of times what people do is they put a little money aside and they expect that it’s going to grow these huge sums. And because of those expectations, and because markets go in fluctuation when they go down, it’s all of a sudden, “Oh my goodness, it’s not going to do what I need it to.”
And I have to remind people that it’s there; it’s a preservation of wealth. It is something to preserve what you’ve put aside. But it’s going to fluctuate like crazy in value.
You’ll have a period of time … good grief. I mean, look at the last six months, six, eight months, something like that. And I guess it would be eight months now.
And you look at the growth of small value stocks over that period of time.
I mean, literally, we got like five years of historic return in a five-month period.
I’ll probably, I guess it’s eight months. I guess it is.
We literally got five years’ worth of growth and you’d go, “Huh?” Would anybody have thought that would have happened? No way.
Now, are they way overpriced or anything like that? That might be going through somebody’s head right now, Oh man, I’m … Paul said that there was five years’ worth of growth that happened in this really short period of time.
Now the stock prices are still very, very low compared to historic norms for that area of the market. Not necessarily so for large US stocks, but that area of the market that I just named that literally had all of that growth.
Well, that’s how far it had fallen. And then with the virus and a lot of those types of things that actually caused that to happen.
So if I look at this, and you just don’t know when those big jumps are going to happen. You really don’t know when it’s going to occur. I’ve been trying to figure that out in time. It is literally impossible.
But that’s why we invest in the stock market. Simply because I own companies, and companies charge for their goods and services in the currency that we use in our country. And in dollars, If I own Japanese stocks and it’s in yen, they charge.
And if the devaluation occurs in that currency where the currency goes to heck in a handbasket, then A, either the company is going to charge more for their services in the same currency, or they’re going to go, “I’m not going to accept that currency anymore if it’s not worth anything.”
So they’re going to protect themselves one way or another. And then, hence, why I like to own stocks.
How Rich Was the Babe?
But back to this, the article is talking about how Babe, he went big. He had 54 home runs in a season before anybody else even hit 30. And this guy would eat two steaks at a time.
And his paycheck was really big compared to other people. He literally took home, it was $52,000 in 1922, I think it was. And in 1930, 1931, his income went up to $80,000.
And you look at that today and go, “Oh that sounds like an average income today. No big deal, right?” A little bit above average for a family.
But what happened was he was criticized for making more than President Hoover.
And there was the joke that’s forever been running out there. (Who knows who actually came up with it?) But he replied, saying, “Well, I had a better year.” Because Hoover didn’t have a really good year in 1931.
And he had a rough time of it during the depression. A lot of things that happened were actually blamed on him. Right? And for good reason. There were a lot of things that went wrong.
But what happened was you had unemployment really, really skyrocketing, and you had deflation back then, so you had prices actually going down.
So with prices going down, the purchasing power of his salary was even higher for that reason.
So a lot of times what you might do, and this is how they approached it in this particular article, is you could take that salary and you could say, “Well, in today’s dollars, what does that purchase?”
Let’s use the CPI, consumer price index, which is just basically a basket of goods and services, and calculate what the difference in cost back then for that basket of goods and services is versus now.
When you think about it, there are a lot of services that exist today that didn’t exist back then. There are a lot of goods that exist today that didn’t exist back then. So it’s kind of a challenge to actually figure out what the CPI or what the cost of living increases have been over that time.
So if you just look at the CPI in today’s dollars, his income would be about $1.3, $1.4 million.
You say, “Well, compared to a lot of baseball players, that’s not a real big deal. It’s going to buy a lot of hot dogs and steaks, I suppose.”
But if you look at it compared to other people that are professional athletes, it’s not a whole heck of a lot comparatively. And what happens is there are better valuations or evaluations of purchasing power than the CPI that you might look at.
And you look at the shopping list that he might’ve had back then and compare it until now. And if you look at, for example, consumer goods. It might be underwhelming, but prices have certainly increased.
They haven’t grown enough to make Babe’s salary seem extraordinary. For example, back in 1931, you get a can of Campbell’s soup and, yes, it didn’t exist back then. And it became really popular last year.
Right? Campbell’s soup kind of made it back in vogue.
But I always loved that when I was a kid, I don’t know about you, but I always loved Campbell’s tomato soup. But it came back in vogue.
But back then it was like six cents. And gasoline was 17 cents a gallon, and you could buy a new Chevy for about $600.
Now with his salary back then, you could look at his salary, and it could have acquired 1.3 million soup cans and 470,000 gallons of gas and 103 new Chevys.
So his salary was pretty stout when you look at it that way.
Now Campbell’s soup is a buck today, or something like that. A gallon of gas $3 or whatever, something, $3, $4. A Chevy Malibu is like $25,000 and you’ve got different levels of vehicles out there, so it’s going to be all over the place.
So if you actually look at it right now, his purchases would require $1.3 million, $1.5 million, and $3.3 million, respectively. So if you look at it in terms of the car, $3.3 million.
So actually it looks a little bit higher. So it shows you that the cost of living, trying to measure, it really depends a lot on your purchasing patterns. What types of things do you purchase? That’s what drives the inflation.
And so you can have different families that have different inflation rates because their purchasing patterns differ. Now that you have the CPIE, which is looking at elderly people, they purchase different things.
And you have CPIU, and you have different types of consumer price indexes based on what people actually do.You got one based on the labor rates, and that’s what Social Security is actually based on. And so the urban consumers is the other one.
Now, by and large, the growth and the prices of services have outstripped that of goods. So if you look at it, we’re more of a service-based economy now.
And the cost of living is actually growing faster because the cost of buying services has actually been increasing more than that of goods. And this is because a lot of it has production.
We’re able to produce things a lot faster, a lot easier now.
Automation, those types of things, where it used to take a lot of factory workers to produce something, you might have, let’s say computers and robots actually putting things together and doing it more cheaply. And being able to go and get raw materials and things like that less expensively helps out a lot as well.
So, look at tuition. Harvard back in the 1930s, four hundred bucks. Hospitals if you have a baby, it was a hundred bucks to deliver a child.
And now you start to look at his salary and go, “Wow, that’s a pretty big deal.”
Now, you might be thinking well, and he asked this in this article, Why every item seems to have matched or beaten the CPI’s rate of increase? And the answer is twofold.
Costs have become lower, eggs, refrigerators, long-distance travel, for the reasons that I explained. And then, second, you’ve got CPI’s market basket changes over time, what people buy.
You generally don’t buy the same stuff that people did in the 1930s. We don’t live the same way. We don’t actually entertain ourselves in the same way. There are a lot of things that are very, very different.
So that market basket changes. Now, if you look at investment assets, and this is one of the things they brought up, and they said, “Well, gold was $17 per ounce in 1931, as opposed to $1,800 today.”
And you look at that and go, “Whoa, that’s a pretty big increase.” Right? 17 bucks.
And I was reading this, I was going, “Well, that’s nothing compared to, if you actually look at stocks.”
Because not $1,800, but well over $100,000, $110,000 for large US stocks is what that difference would be. $110,000. Now you go, “Whoa, wow, that’s large US stocks.”
And remember most 401(k)s, most retirement plans, most investment plans, focus really just on that. And that’s mainly where people put their money, American investors overwhelmingly.
But what if you had large value stocks, which are larger companies that are out of favor, whose price is lower compared to book value. That’s how we measure value.
Try almost $400,000. Take small companies. How about that? Small companies, it’s over $1 million.
You take that same amount of money, and this is versus $1,800 in gold. Right? Take small value, it’s almost $4 million.
Should I Invest in Commodities?
And so you look at that, and people ask me all the time, “Well, Paul, what about gold? Investing in gold? What about investing in currencies? What about investing in copper? What about …?”
Any commodity. Silver, those types. You see those commercials.
And I go, “No. I really don’t have any interest in those types of things.”
Because they don’t produce anything. There’s no cost of capital. There’s no earnings that I get. I have nobody running a company or operating a business. And, therefore, those are not investments from an academic standpoint.
And like one of my professors actually pointed out, and I said, “Well, what about gold? Somebody asked me.”
He said, “That’s not an investment.”
And they were like, “Why?”
“Well, there is no payment for the use of your money.”
That is, literally, bottom line … it. And yet a lot of people, that’s what they think of when they think of investing.
And I look at that, and I’m hearing financial … “Just make sure that you have … you can have up to 10% of your portfolio in those hard assets or commodities.”
And I see huge mutual fund companies, and you’d think they know better. The very, very, very biggest mutual fund companies out there. They virtually all have investments that do exactly that: invest in commodities.
Why? Is it because of academic reasons? Is it because it’s good for their investors? Is it because they’re good for their clients?
No. Because it’s demand.
And one academic was asked one time, “Why do these companies do this?”
And he just looks down in kind of disgust. And he goes, “Demand.”
It is because the investors want it. And whatever you want, all of the mutual fund companies, they will be more than happy to provide it for you because that’s how they make money: give the people what they want, not necessarily what they need.
So you kind of look back at something like this, and it’s just interesting to look at a story of an old baseball player, and say, “How rich was the guy really? Well, not too bad.”
But there’s a big difference today as far as what athletes are paid, and the reasons for it has to do with that. You look at it and go, “Why is there such a difference today?”
Well, because you can actually use baseball. Back then people locally went to baseball games and you didn’t have televisions televising all the games, and you didn’t have the money that was able to be made in selling advertising on those channels or selling endorsements—endorsing products—and things like that.
So of course athletes get paid more. Why? Because they’re actually helping other companies make more money. Everybody benefits from it.
So for those that say, “They get paid too much now.”
And I go, “Actually, they’re getting paid commensurate with how much revenue they’re generating for the various operations companies in the league and for the companies that they endorse.” I don’t begrudge that at all.
So anyway, little economics lesson. Paul Winkler, listening to “The Investor Coaching Show” right here on SuperTalk 99.7, WTN.
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