Paul Winkler: Welcome to “The Investor Coaching Show.” Merry 2025 to all of you. Exciting. We’re going into a new year.
The Academic Perspective
What on earth are we going to expect this year? Probably more of the same as what happened in previous years, when it comes to investing gimmicks, things like that.
So that’s what we talk about. We make sure that you’re not falling prey to the junk that’s being sold out there.
We come from an academic perspective, evidence-based, as I like to call it.
Some people say, “Well, academics can be really messed up,” and they can be. And even in the investing industry, it can be really messed up. How many different professors have I seen get on the annuity bandwagon and come to find out that they’re actually funded by insurance companies? Then you go, “Whoa, wait a minute.”
Now, when I talk about academic evidence-based, there are a lot of pieces of academic information out there that I would just say, “That is just absolute junk. It’s got to be.”
Reminds me of Eugene Fama, the guy that won the Nobel in 2013. I spent a lot of time listening to him talk at various things that he would be at. He would bring in papers that he’d written about investing.
And he said he would go off, and he’d bring it back, and he’d have what’s called “peer-reviewed research,” which is where you have somebody read your paper. He said, “Merton Miller, sit there and look at it.” And it’s another Nobel Prize winner.
And he would look at it and say, “Oh, that’s good. That’s junk, that’s junk, that’s junk. That’s pretty good. That’s junk.”
And he would go through this stuff, and he would say, “This is good. This is bad.”
And a lot of times, what happens is you’ll have this process of reviewing papers written by these academics. There’s no peer review. Nobody looks at it, so it just passes through, and insurance companies and investment advisors actually will implement this stuff.
You’ll have factors of investing and things like that, and you’ll have, like, 400 of them. And most of the vast, vast majority of them, you get down to what really is useful, and there are only, like, six. And three of them are useful for returns, the other three are useful for decreasing expenses. And a lot of this stuff, though, the other 394, if you got 400, are just useless.
So this is what I like to do, is I like to walk through what makes sense and what doesn’t make sense. And the thing is that what does make sense is very logical. And what is shown to be useful in the investing world is very, very logical, when it gets down to it.
Depending on Predictions From Investment Advisors
The companies have to pay to use your money, and they have to pay through a couple different means: earnings, when you own stock, and through interest, when you own bonds. And then you’ll have some things that are convertibles, which are a little bit more confusing, and things like that.
But in general, a lot of the information about investing that is useful is not really that complicated, but the investing industry likes to make it complicated, because the more they can make it complicated, and the more they can get you to depend upon them for a prediction about the future, the more money is to be made. This is a really hard thing. Let me go off on a soapbox for a second here.
This is a really hard thing to combat, and I’ve been thinking about this. When it comes down to marketing, if you run an investment firm, one of the easiest things to market is your ability to figure out what is going to happen next, and what areas of the market you ought to be focusing on, which stocks you ought to be focusing on, which sectors you ought to be looking at. That is really easy to market, because people think that that is the job of the advisor.
So hence when they come out and say, “Hey, here’s what happened in the market.” I hear investment advisors say, “Well, the Dow did this today, and the S&P 500 and the Nasdaq did this,” and they tell you why it happened.
You’re thinking, Oh, that’s brilliant. They’re telling me what happened and why it happened. And they’re just spouting off something that they read someplace else. But the information’s useless.
What the market did is what it did, past tense. It’s not helpful in figuring out what’s going to happen next.
But they’ll say, “Here’s what happened, and here’s why it happened,” because when you hear why something happened in the market, that something happened in Russia, or something happened in China, or there was a new announcement regarding some new technology or something like that, it is the assumption that that is going to continue to drive prices the direction that the market just went.
Read the Fine Print
That is where we really go off the rails as investors. We use this information as some kind of a barometer to tell you what we need to do next, and what is happening, and where things are going to go, when in reality, it’s not helpful at all. And that’s the problem.
Now, if we look at investment firms, we can see that this is the modus operandi. This is the normal way of operating for companies in general, when you read their disclosure documents.
As I’ve been saying, this is going to be the year of the disclosure document. I am going to wear this out because people need to read the fine print.
And as I said one day in here, I said, “We read the fine print.” And somebody said, “Oh, that’s a great slogan.” So we had this pen with a magnifying glass in it. We had that printed on it, “We read the fine print.”
And this is what I think investors really need to focus on.
Read the prospectuses of the mutual funds that you own. That’s why they have that disclosure information.
Now, that may not be necessarily helpful all the time, because you can own an index fund, and the prospectus says all the right stuff. They’re not going to engage in tactical asset allocation. They’re not going to engage in fundamental analysis.
And sometimes, index funds do this kind of stuff, so you got to watch that, too. But they’re not going to do the things that I would look at as objectionable. They’re not going to do that, and it says it in there.
There was that one article from an academic group. They were talking about how “Index funds can be used actively.” That’s what they said in the article.
And they actually did some research on how people are using index funds, and investment advisors are using index funds, which are meant to be buying and holding a certain area of the market, like the S&P 500. That’s going to just hold the general 500 biggest companies in the United States, or the Russell 2000.
And what they did is they looked at the trading volume of mutual funds that were index funds, and ETFs that were index funds. And what they found was that the trading volume was in the top 10 of the highest average trade volume for U.S. listed equity securities for 2024. Well, that’s absurd.
They’re owned so that they buy and hang onto the section of the market that you’re trying to invest in, but the investment advisors are literally moving in and out of them. They’re trading, buying, and selling those areas.
Tactical Asset Allocation
You go, “Well, wait a minute. What are they doing?” Well, that’s tactical asset allocation. That’s what that is by definition.
They’re basically gambling on market direction or on one area of the market doing better than another.
And you go, “What on earth are they doing that for?” It’s because the general public believes that’s their job.
And a lot of times, as Burton Malkiel from Princeton put it, he says, “They genuinely believe they can do it. They genuinely believe they can figure out what they ought to be doing next and moving money around.” And a lot of times, investment advisors are clueless that it’s happening, too.
This is something else I found. When I was working for big insurance companies and big investment companies, we’d have these managed products. And a lot of times, the advisors themselves were out there going, they’re selling this stuff, and they didn’t really know what the funds were doing.
They didn’t even know what the funds were engaging in. They didn’t realize that this was what was happening, because they said, “Well, we’ve got these experts at our home office.”
And it’s a really huge investment firm. Think of commercials you see on TV. And man, with some of these commercials, you’re just like, “Wow. I would love to put my money with them, because they sound wonderful.”
There’s one fun company, as a matter of fact, they have these commercials about the future, and the things you can do, and they have all these people doing really charitable things in the commercials, and it’s family and love and all of that stuff. And I’m like, “Well, that fund company has, like, 1,400 mutual funds, and they’ll have dozens of funds investing in one area of the market. They’ll have a lot of different funds that are investing in small company stocks.”
Well, how many funds do you need investing in that one area if you know which small companies are going to be better than others? How many do you need? Well, one.
I don’t need all those different mutual funds, but these different funds that they have investing in that same area of the market are just a little different from each other. They have just a little bit more of one stock or another stock. Or sometimes what they’ll have is one of the funds is really actively stock picking, market timing managed, and they’ll have another one that’s passive, or it’s just hanging onto the area of the market.
The Year of the Bond
What’ll happen is they’ll say, “Hey, what do you like?” That’s what cracks me up.
“What do you think inflation is going to do this year? Based on what you think inflation is going to do, this is what you ought to do with your portfolio. Whatever you think is going to happen with the government and with the economy this year, this is what you ought to do.”
What does it matter what you or I think inflation is going to be or what the economy’s going to do? What I think has no bearing on it, yet you’ll hear investment people say that, or you hear mutual fund companies say that. And you’ll hear this on TV all the time.
“Well, you ought to be investing in this, if you think this is going to happen.” I’m like, “Well, what does it matter what I think is going to happen?”
It doesn’t matter. It is literally throughout the investment industry, and it’s so intertwined, that people just absolutely miss it.
There was an article. It was about how 2024 is referred to as, “The year of the bond.” This is from Reuters. Why’d they say that?
They said that they had record inflows, up to 600 billion dollars, flocking into bonds. Why? To lock in yields.
The interest rates were fairly high compared to historic norms in bonds, so people started dumping a ton of money into bonds, and global bond funds. They had 600 billion dollars.
And they said that dwindling inflation has allowed central banks to lower interest rates. That lowers the short-term interest rates. So when the Fed reduces interest rates, they’re just dealing with short-term stuff.
Well, when people are buying bonds, they’re buying the longer-term bonds. And what they’re thinking is that that short-term interest rate coming down was going to affect long-term rates, so they want to lock in those rates before they came down in value.
Playing It Safe
Now, two problems here. Number one, people stuck a bunch of money into something they saw as “safe.” Why?
Because they wanted to play it safe, and yet missed out on the market returns, because if they — as they’re talking about here, as they’re implying in this article — pulled money out of stock funds and put it into bond funds, they just basically locked in this interest rate thinking they’re doing something smart. But they also locked in a much, much lower return than stock asset classes in general did throughout the year.
So all of a sudden, now they have basically shot themselves in the foot by hurting their returns through, really, market timing.
And market timing, by definition, is changing the mix of your portfolio based on a prediction about the future. They were predicting A, that interest rates would go down. B, implicitly, they’re also predicting that the returns of the bonds would be higher than the stocks that they sold.
So two on two fronts, you got a problem there. But this is the problem in the investing industry, because who stopped these people from doing this? Well, most of the money is being managed by professional managers, so the professional managers were doing it.
Or the clients that were saying, “Hey, can we lock in a higher yield like this?” And the investment advisor doesn’t want to lose the business, so they want to make sure they do whatever the client wants. And they, in essence, become an order taker. “Whatever you want, I’ll do it.”
Some people come in, and they’ll say, “Hey, Paul. Can you do this?”
I’ll go, “Yeah, yeah, yeah, yeah. Fire me. This is what I can do. If you want me to make that change in your portfolio, fire me, because I will not do something.
“I will not become part of the problem. As much as I like you, I don’t want to just basically do something because you think something’s going to happen in the market, because that makes me part of the problem. That makes me a gambler with a portfolio that I am supposed to be making sure that I’m doing whatever is in your best interest.
“And if I see that you’re engaging in something that we both agreed is a bad idea — market timing, tactical asset allocation — then I can’t do that. I can’t be a party to that.”
Emotion-Based Decisions
It always reminds me of the time I was hearing Jonathan, who runs the Gallatin office, talking to a client. He’s trying to talk, and the client’s saying, “Can we do this? Why don’t we do this? Why don’t we do this?”
And Jonathan’s going, “No, no, no, no. That’s not prudent. It doesn’t make any sense. You’re engaging in something that we know, 91 pension plans engaged in this type of activity, and 100% of them, every one of them, hurt returns and increased risk when they engaged in the activity you’re asking me to do.
“So I don’t think that it’s a good idea. We shouldn’t do this. And that’s why you’re hired me, just to make sure you don’t do something that’s dysfunctional and hurtful to you.”
And the client goes, “How do you maintain this discipline? How do you do it?” And the client’s just asking Jonathan that.
And Jonathan just goes, “Well, it’s easy. It’s not my money.”
I started laughing. I was like, “Oh my goodness,” because I was walking by the office as he was saying this. And I laughed after the client left. I said, “That was hilarious.”
He goes, “Yeah.” He said, “My point being, ‘It’s not my money.’ It’s easy for me to do the right thing because I’m not emotionally involved in it, so as to go and do something that would be hurtful to the client.”
Now, my emotions, I have fear of loss, or hope for great gain, or greed kicks in, or the emotions that we have, fear and greed being two huge ones. Sometimes it’s trust. “It’s a huge company. I trust them.”
“Oh, really? Why?”
“I don’t know. They’re huge. They must be doing the right thing.”
“Oh, if you go and pull up the company’s name, and pull up the word ‘lawsuit,’ you’ll probably find a lot of things, or a lot of reasons, not to trust the company, actually.” Just, what? So blind trust is a huge deal.
We tend to run things on emotions, and we try to justify with logic, and we’ll look for information to back what we’re doing.
And if we’re looking at pulling out of the market, let’s say, we’ll go and read every article we can that tells us we should be pulling out of the market so we feel that we’re justified in our action. As investors, we are complex little creatures, aren’t we? So 2025, we want to make sure that we don’t engage in this kind of stuff.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
