Paul Winkler: Yeah, I’m here. Do you hear me? Can you hear me now?
All right, beautiful. I was turning up the wrong pod. That’s what happens when I’m off doing my own equipment. Nick wasn’t here.
Jeff Malinoff: You scared me to death.
PW: Well, buddy, we did a pretest. It’s all right.
JM: I know. I knew you were there. Just, where’d you go?
PW: Those of you who are wondering, What on earth is going on? This is “The Investor Coaching Show,” of course. I am Paul Winkler.
How the Brain Fools Us
I’ve been off at a financial conference, and the financial conference was — oh man — so good. Some of it was investing-related stuff, some of that kind of stuff. Some of it was a little bit of the psychology, and I talk a little bit about that — a lot about it — just simply because so much of what we do wrong with investing is psychologically driven. Mistakes we make.
And I was sharing something with my family earlier. It was this picture, and it’s just an optical illusion, and your brain fools you into seeing something that just … it’s not there. And my wife’s like, “Well, okay, what’s the point of that?”
I said, “Well, the point is we do this all the time in our workshops and talk about the brain and how it just fools us.” And we just get these results around investing or in investment advisors, and the same thing happens.
When I worked for the big investment companies, we were often driven to do things — “Hey, do this, do that” — and some of it was a conflict of interest as far as getting paid more to sell one product over another. But a lot of it, I’m telling you, is just psychological in nature. Hence the reason I’m putting together coursework regarding that.
So we got a little bit into that this week and it was really good, and I thought I’d share some things with you in relationship to that.
Because I think if you start to understand, and you get a little insight as to how your mind works, you can help prevent those things from happening.
Just as an example, let me just give you an example. There was something in The Economist. And The Economist I talk about as being a British publication that deals with economics issues, and they are often commenting … man, they comment a lot on American politics. They just are obsessed with it.
But it was one of these magazines that I had to read when I was doing my work in economics, and we had to do this reading of The Economist to bring it back to the classroom and talk a little bit about what we’d seen and what we had been reading about. And it was really, really good.
And over the years I’ve just kept it up. I keep getting the publication because I’m really enamored with the idea of how economics work and the different things that we can do from tax policy, for example.
America’s Gambling Boom
Another really interesting thing about that as well — because I had actually something else that I had talked to a guy about tax policy-wise, and I’ll share that later in the show — but I was perusing through The Economist this week, and there was a headline that caught my attention. The headline was from the editor-in-chief Zanny Minton Beddoes, I guess is the way you pronounce her name, but it was talking about the cover story, and it was talking about how America’s gambling boom should be celebrated and not feared.
And it says this year, Americans are on track to wager nearly $150 billion on sports. Surprised it’s not even higher than that. That’s a lot of money, I’ll take that back.
“As our briefing explains, the revolution has been unleashed by the overturning of bans, the rise of always-available betting apps, and a booming economy. … Considering gambling’s seedy, unsavoury reputation, it is tempting to write all of this off as unhealthy and dangerous,” they say in The Economist.
Well, they’re taking the other tack. They said, “It is true that, for some, gambling is a ruinous addiction. However, whereas state lotteries are disproportionately played by the poor,” this is The Economist speaking, this is not me, “the new forms of gambling are less regressive. … The lesson from other countries is not to ban gambling altogether, but to regulate its harms.”
Freedom of speech and political liberty are not the only important freedoms. The ability to spend your money as you wish matters too.
And you can see that, to some point. There are a lot of people out there who are just like, “Get the government out of everything, I don’t want them near anything.” I’m just going to kind of back off and go, “I’m not going to take a position on that because I get to choose whether I’m going to do that or not.”
The Government’s Role in Gambling
But there is an interesting study that looked at people who lived near casinos, as a matter of fact, and they found that they didn’t gamble more just because they lived in proximity of a casino. So there are people that say, “Hey, you know what? It’s a choice. You get to make your choice and the government should stay out of it.”
But a lot of times you look at the advertising and it is playing to emotions, and we just don’t really have great control over our emotions.
We know from research. We have a tendency to get pulled into things pretty easily and we have a tendency to go down.
And you think about it, if advertising doesn’t affect anything, why do people spend just untold sums of money on advertising the Super Bowl every year, if it doesn’t affect our behavior? And it does. We just a lot of times are not as in control as we think we are.
And you go, “Well, what’s the role of government? We protect ourselves from seat belts. Do we do the same thing there?”
And again, I’m not going to take that point of view, but I want to make a point from an investing standpoint regarding this because there are a lot of my friends who are just absolutely, “Get the government out of everything,” and that’s the way they are. And I’m just like, I’ve got a lot of other things I want to worry about.
I don’t want to worry about that as much. That’s not going to be the main thing that I focus my life on. My focus is making people more successful investors and getting them more successful financially.
Not how the role of government plays in every area. Yeah, I know. No guts, no glory.
Sports Betting Linked to Financial Woes
Anyway. The growth of sports betting may be linked to financial woes, the studies are showing. And this is just the other side of the coin.
And it says, “While states have cheered the new tax revenue from sports gambling, some new studies have linked the burgeoning industry to lower consumer credit scores, higher credit card debt, and less household savings.” I’ve talked about this recently. This is something that is an issue.
There are people out there doing desperate things to try to get rich quick because they’re looking around and going, “I’m not doing well enough. I’m not good enough. There’s something wrong with me.”
“If I can just get rich, I would be more better adjusted. I’d be happier with myself.” I think there’s a lot to that. The bankruptcies.
They have much, much higher bankruptcies, people that are engaged in sports gambling.
And you may be one of these people that can handle it just fine, but this is just the research. Americans spent more than 121 billion on sports according to the American Gaming Association, and they said that state regulation is fainthearted and half-baked. So they’re saying, “Hey, we need to regulate it more,” other people are saying, “No, get out of the way. Let’s not regulate it at all.”
And there’s this guy, he was the senior vice president of strategic communications for the American Gaming Association, and he stepped in, and he pointed out the longstanding research. “There’s no correlation between financial hardship and proximity to casinos,” like I was talking about earlier.
But he’s skeptical of the idea that sports gambling harms households financially. He noted that Americans last year had a record 401(k) holdings. And it’s like saying the stock market’s at a record high.
It is really kind of meaningless, if you think about it, because markets go up all the time and they go down and they go up and they go down, but they tend to go up more than they go down. So the market’s always hitting record highs. People say, “Oh, the stock market’s at a record high!”
The Dow was at 1000 and that was a record high back in the 1960s, and then it was 2000 and that was a record high, and then it hit 3000 and that was a record high, and 10,000 and 15,000 and 20,000. So it’s always hitting record highs.
People’s savings are typically going up, they’re not going down because they’re adding to them. So that’s kind of a silly statement really, in my humble opinion. To say that they’re record 401(k) holdings and record mutual fund ownership. Well, that’s what you own in 401(k)s typically. So that’s kind of silly as well.
But they had this guy, he’s an assistant finance professor. He says, “Does it displace other forms of entertainment spending?” And he says, “Maybe someone would forego a night out, for instance, instead put a few bucks on Sunday’s game.” So maybe not a big deal there.
But he says that in “Gambling Away Stability,” the book that he wrote, he said that legalized betting led households to spend more on both entertainment and betting, so they’re spending more on it and putting less in savings in retirement accounts and investment accounts. And they found that sports betting disproportionately hurt lower-income households. So that’s just the direct opposite of what they were saying in The Economist. It actually does.
Investing for Higher Expected Return
That’s where I want to settle for just a second: talking about these people running up credit card debt and overdraft banking accounts and checking accounts. I think the same thing happens with investing, just in my experience.
A lot of times when I look at people and the way they invest, they have a tendency to buy individual stocks as if buying individual companies or small groups of companies should give them a higher expected return. And what you’re doing is you’re buying companies that you like, right?
I’m going to go out there and go, “Who do I like? Whose products do I like? Who do I think is going to do well going forward?”
And there are a lot of companies that we may look at and say, “Man, I think that they’ve got a good future with AI, I think that they make good products. I think politically they’re in the right place from a politics standpoint based on the regime change that’s going to be taking place. I think they’re well positioned,” or whatever.
Well, what you’re doing is you’re saying, “I think that that company wants to pay more to use my money than anybody else.”
And when you look at it that way, you go, “That doesn’t make sense that they would want to pay any more.” This is something I shared at the financial conference with all the other advisors there, I said, “I find quite often the companies that people think very highly of are typically selling for a much higher multiple compared to their earnings and compared to their assets.”
So typically they’ll say, “Hey, I like this company,” and I’ll go, “Why do you like that company?” and they’ll say, “Well, I think it’s going to do this, this, and that and the other thing.” And I’ll say, “Well, did you recognize that we can look at whether that is likely built into the price right now?”
And often they don’t know what I’m talking about, so I will walk them through price to price-to-earnings ratio, what price they’re selling for every dollar of current earnings, or forward earnings, which is a better measure. I’ll look at what they’re selling for based on the assets that they have, what the multiple is.
And quite often what you’ll see is these companies are selling for huge multiples because it is expected that they are going to be successful in the future. That’s why they’re selling for such a high price. That’s the way markets work.
Younger People and Investing Risks
Now, so what happens is people will go out there and they’re going, “Hey man, I’m behind. I haven’t saved enough money for retirement. I’m going to probably need to hang it up in 10 years and I haven’t saved as much as I should have.”
“I don’t feel as good as I used to. I want to go do things that I haven’t done before because I’m not going to live forever.”
People will then get into desperation mode and they will start to do things hoping that they can really increase their returns rapidly. And usually what happens is just the opposite.
We play to try to get rich and we end up becoming poor because we don’t recognize that we’re breaking basic rules of investing when we do that. We’re not diversifying. We’re buying things high, we’re buying things after they’ve done well or after the information that they’re going to have some possible good future is already built into the price.
And what happens for investors is then they get hit and then they’re five years from retirement and it’s even more desperate. So then they get into some things. They hear people getting rich doing whatever, and then they follow.
The horse is already out of the barn and then they go and do what somebody else did to actually make a bunch of money. And we only hear about those stories about the people that have done well, so hence what we end up doing is we end up thinking that that’s the norm when it’s really the exception and the media likes to focus on exceptions.
And the other thing that we find is this: A lot of times people do that, and I find that younger people quite often are subject to a lot of these risks that I’m talking about right here. I’m talking about gambling, sports gambling and those types of things, and just gambling with my investment portfolios. They tend to be, the people that are out on the Robin Hoods and they’re out on the trading platforms that have bells and whistles and graffiti when you buy a stock, and they play to your emotional need for excitement, and your dopamine rushes and things like that.
Well, what happens is this: Quite often these people have not been burnt enough times to recognize that what they’re doing is dysfunctional.
That’s what I find. People ask me all the time, “Hey, who do you love working with?”
I say, “I love working with people in their 50s and 60s because they’ve been there, done that, they got the T-shirt. They screwed up everything, and they can’t mess it up. Now they’ve got to make sure that they get it right going forward.”
So that’s a big thing for me is to focus on that group of people. But that’s the reason is because I know that they’ve gotten it out of their system.
Why Do We Try To Get Rich Quick?
But there’s another thing that plays along with this. There was a guy I was talking about that I’m at this financial conference and there was a guy that actually helped set up the American Dream experience that we talked about.
He’ll put it together, Steve Zaffron, and he recently passed away. And what a neat guy. What an interesting, interesting guy. He had written book, I think it’s called, “The Three Laws of Performance,” as I recall, is the name of the book.
And in it, he talks a little bit about why we do the things that we do. And so why do we try to get rich quick?
Why do we try to do things that maybe we don’t have the expertise to do? We try to be self-sufficient in that way.
And I use the example about self-sufficiency. It’s kind of a bad idea because we can’t be great at everything.
Now I think about Andrew Carnegie. Napoleon Hill interviewed Andrew Carnegie, who was at the time, like, the richest guy in the world. Steel magnet.
And Napoleon Hill says to him, he says, “So you’re like this steel magnet. You know everything about the making and manufacturing steel and blah, blah, blah.”
And Andrew Carnegie is going, “No, I know nothing about the making and manufacturing of steel.” And he’s like, “Wait a minute. You made your entire fortune doing that.”
He says, “No,” this is Andrew Carnegie speaking again, “I surround myself with those people that know everything about the making and manufacturing of steel. I surround myself with experts in everything.”
And he says, “Well, what’s your job?” And he says, “It’s keeping these people working together.”
Imposter Syndrome
That was his job. Making sure that he was quarterbacking the thing and making sure that he had great people around him.
Well, a lot of people, they’ll take action in life and they’re trying to make up for maybe some sense of lack that they have about themselves.
And Steve Zaffron is telling this story in this book about when he was a kid. And I’ll butcher the story, go read it for yourself at some point. Like I said, it’s called “The Three Laws of Performance.”
But he has this great thing in there where he’s talking about being a young boy and he’s in school and they broke the classroom up into three groups. They were going along and they had group one, group two, group three.
And I think as I recall he was put into group three. His friends and his peers, his good buddies were put into groups one and two, I think it was.
And he said, “I went to the principal’s office. I was like, ‘Wait, wait, wait, wait. All my friends are in groups one and two.’ I’m going to the principal office to find out what the mistake was.”
And he gets there, and the principal, he says, “I just remember looking up at him. He was a huge guy.” And he said, he looks down and he says, “Yeah, can I help you?”
And he says, “There’s a mistake. I was put into the wrong group. All my friends are in groups one and two, and I’ve been put in group three.”
And he goes, “No, there’s no mistake.” And he goes, “Do you remember that test you took a while back?”
And he says, “No.” And he says, “Well you didn’t do so well on it, and now you’re in group three.” And he goes, “Ugh.”
He’s just like, “There’s nothing I could do. Basically I was shut out. I was not going to be in the group with my friends because the thing that was more important to me was my time in my social areas. I wasn’t really focused on tests, I wasn’t focused on academic work, I wasn’t focused on any of that stuff.”
He said, “I was focused on the fun that I was having with my friends. And all of a sudden, bam, it hit me: Here I am. I not going to be hanging out with them. I’m off in group three.”
So he says he goes on in his life and he just does unbelievable things. Goes and gets a master’s degree at a prestigious university. He goes on to get all kinds of academic accolades.
Now, not only that, but even when he was in high school he moved up into the high 90s, as I recall the story goes, and he was moved back into the group with his friends. But here’s what happened. He never saw himself as being a smart kid. He always saw himself as dumb and that he was really an imposter.
Dysfunctional Investing
What happens, I think with people is so often they don’t think that greatly of themselves and they just think, If I could get more money. If I could get higher returns than everybody else. If I could be just really seen as being a really smart investor, somehow it would fill that hole, that I would feel okay with myself. And I think that to me is just, as I think about that, that is a hard, hard thing for people to get over.
A lot of people want to feel that sense of being affirmed and that they’re okay. And quite often the way they go about it when it comes to investing is really dysfunctional.
You’ve heard me say on the show before, if I just captured returns with like $100,000, and I had money spread between large companies, small companies, value companies, growth companies, U.S. and international, and so on, so forth, if I just went and captured market returns, going back to that point in time — I don’t remember the exact number — but I want to tell you that $100,000 grew to like 50 million or something like that.
Markets have this way, historically, of providing significant returns without trying to pick stocks and without trying to time the market.
And what we end up doing is somehow thinking that we can do better, and why do we do that? Heaven only knows.
But I’m here to say that maybe there’s a little bit of that imposter syndrome, maybe feeling that I’m not good enough, and maybe thinking a little bit more highly of myself than I ought to. I remember being around a lot of people in the investing industry and it was this idea of, “I can do this, man, I can do this. I can knock this out.”
And even the most intelligent investors can only know a fraction of what’s knowable and predictable, and this comes from academic research. So what they’re doing is they’re acting as if they know more than the general consensus of all informed investors, and we just can’t.
And I’m here to say that you do not have to have predictions about the future. You don’t have to be able to do that to be a tremendously successful investor.
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.
