The Industry Wants You To Think They Have Market Experts Choosing the Best Companies

Paul Winkler: Welcome, this is “The Investor Coaching Show.” I am Paul Winkler, and I’m here with Evan Barnard, who is a regular kind of guy around here. It’s a regular kind of guy, as opposed to an irregular kind of guy.

Hey, I don’t even hear him. Are you coming through, Evan?

Evan Barnard: Didn’t sound like it to me.

PW: I don’t know. You guys hear Evan? I don’t hear Evan.

Oh, we don’t, look at that. It would be helpful if his mic were plugged in.

EB: There we go.

PW: Yeah. You know what happened? You know what happened? Yeah, yeah, yeah, it wasn’t your fault.

So these guys around my office, they get creative. They’re like, “Oh, we’re going to do a video of you, Paul, but we can’t have those mics in the way. We’re going to take them all apart.”

EB: Oh, gee.

PW: Yeah, that’s what happened. Yeah.

Nik: Can you tell them to put things back where they found them?

PW: There is that. You sound like my father, oh, my gosh, “Put it back where you found it.”

Nik: I sound like my father too.

PW: Oh, that’s where you got it, huh?

Nik: Oh, yeah.

PW: “Leave it better than you found it.”

Nik: “Nik, where’s my Crescent wrench?”

PW: “Neat and nice. Neat and nice,” that was my father’s favorite word. Neat and nice.

EB: That’s a good one. I like that.

PW: Yeah, it was his thing. “Look around the house. You see something that needs to be done, just do it.”

And, yeah, he was right. I mean, look around the house, if you go, it’s kind of like my pastor was. My old pastor was walking up into the youth house one day, and he said, “I’ve been walking back here.” It wasn’t the youth house, it was actually their office, now that I think about it.

But he said, we were walking in there, he said, walking in there every day, he was like, “Somebody needs to water that plant.” And he kept walking. “Somebody needs to water that plant.”

And he was like, one day, “You know what? Probably, I ought to water that plant.”

EB: Yep.

PW: And that’s so true. It’s just the difference.

EB: It is. Yes.

PW: It’s the difference in how we handle life.

Socialism and Active Management

PW: Well, the thing that I think is interesting, I was doing this whole thing, Evan, this week, talking about the idea of socialism, capitalism, socialism. And then I had this thing about active managers, and talking about active managers, stock picking, market timing.

The academics would talk about, “Hey, you know what? Communism, socialism only exists in a couple of places anymore.” And it was North Korea, and it would be Cuba, and Argentina, and I didn’t add that in it, but it was that.

And then, because this is a clip from last week, somebody had put this whole clip together, and I thought, Oh, yeah, we’ve got to put that out. That needs to be a podcast that we put out. That’s the only place that it exists there in active management.

EB: Right.

PW: And the idea being that when we talk about active stock picking, market timing, that is the modus operandi of the investment industry. That’s how they do stuff.

EB: Yeah.

PW: You don’t think about it, you don’t realize it, because most people don’t read the fine print. And there was this whole thing about how people just don’t realize, really, what’s going on underneath the hood on a lot of things in life because they just don’t pay attention.

They think that the industry is going to take care of them, that the government’s going to take care of them, that regulators are going to take care of them. “I don’t want to know about this stuff, it’s too complicated.”

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That which you don’t know anything about, you can get taken down a bad path.

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EB: Even just thinking about that when you were discussing that, there are a lot of similarities in the underlying premises of, quote, unquote, “the message of socialism” and “the message of active management.” Meaning they don’t necessarily say exactly what they’re doing.

And people want to believe it. That’s kind of the other similarity is, “Hey, it’s a great story. May not be true, may not work, but socialism, hey, free stuff sounds good.” It’s just never worked.

PW: I want to believe that somebody can tell me where markets are going to go. And you read these articles on what’s going on now.

Learning from History

PW: You read these articles on what’s going on now; there was an article in either the MarketWatch or something like that, “Last time that this happened,” it was something, it says, “this is where things went. This is what’s going to happen next based on history. This is where things go when this happens.” And my point is always that, yeah, that sounds great, but the problem is history doesn’t repeat.

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It may rhyme in some cases, but it doesn’t repeat when it comes to markets because people learn from history. 

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And if it always happened the same way, when something happens, something, let’s say that there is some kind of an event that takes place, and then the stock market goes down, and then the next time that event happens, the market goes down again. People go, “Oh, wait a minute. Every time this happens, the market goes down.”

And you are going to, the next time that event happens, you’re going to get out, and investors are going to get out. And they’re actually going to get out before, or if it looks like it’s likely to happen. Or any of these things that are typical precursors, don’t tell us anything in the future, because it’s only one of many, many different things that actually drive stock returns too.

You’ll have one thing that happens, let’s say that the government debt number comes in at a certain level that it shouldn’t have. Or let’s say labor statistics come in at a different level than what we expected. Or let’s say the unemployment rate was higher or lower or whatever, and that leads to a certain thing happening in the stock market.

Well, that’s only one of thousands upon thousands of different indicators that drive stock returns. So you’re looking at that thing in isolation and saying, “Well, that’s the thing that drives it all the time.” No, that’s the thing that drove the last move in the market.

EB: Yeah.

PW: But it’s one of so many things that actually drive things that you can’t make that assumption. Well, what happens with active management is the idea is we get people that are really smart and we put them in a room.

And if I can put these people in a room, or if I can take a person that’s really, really smart and really well-informed, really understands markets, understands earnings, understands companies and how they operate, then what I could do is I could say, “Well, let’s just listen to what this person has to say because they’re going to tell us what’s going to happen next.” Which is very, very similar to communism, socialism.

I can put some really smart people in a room that can tell us what the different components of the economy should be doing or how we should handle them. What should we do with interest rates? How do we arrange things? How do we arrange the price of goods and services so that it drives the economy forward at the fastest pace possible?

Well, they have an opinion, but their opinions are just … everybody has an opinion about that. And they’re all really smart people, and nobody can get the leg up on anybody else over any length of time.

Is Sweden Socialist?

PW: So one of the things that I like to look at is how we get these wrong messages on what really drives the economy, what makes markets work, what makes economies work. And I think both sides of the political aisle are a little bit messed up right now, as far as tax policy goes.

EB: Yeah.

PW: You could arguably say that one side has a little bit of a better idea, or a better command over it than the other. But in a way, they’re both a little bit mixed up on what really drives things.

And I thought it was so interesting to listen to John Stossel talking to this guy from Sweden. And I thought I’d share that with you just simply because it is interesting to hear what really made the Swedish economy do so well. Now, you’ll often hear about the Nordic systems, and Sweden, Norway.

EB: Democratic socialism.

PW: Yeah, well, you’ll hear that it’s socialism, it’s socialist in nature. And these guys are like, “No, it’s not. It’s not at all.” But a lot of times, we don’t really hear what’s really going on.

And this guy was laying it out. What is the difference in the tax code over there versus in other places around the world? So just check this out. I thought it would make for some interesting conversation.

EB: Really?

Johan Norberg: This is the dirty little secret about the Swedish tax system. We don’t take from the rich and give to the poor. We squeeze the poor because they are loyal taxpayers, they don’t move to Monaco, and they don’t dodge, they don’t have tax lawyers.

PW: Isn’t that interesting? Interesting way to put it. They’re loyal.

EB: Yeah.

PW: They don’t move. They don’t leave. And it’s like, well, where did they come to that?

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Well, in the ’70s and ’80s, they actually did try to squeeze the wealthy. And what ended up happening? It was the biggest disaster ever. 

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They tried to have government ownership of companies. What ended up happening is they lost all of their private companies; their private companies started to dry up. There was no growth, there was no innovation that was happening. And they learned that it was really bad.

Value-Added Tax

PW: But just check out a couple more things in here. I think it’s interesting. Listen.

JN: So we have most of our income tax come from a flat regional tax at around 30%, even on the poor, even on the middle class. And then we also have a system of VAT, a consumption tax at 25%, where the poor pay exactly the same amount as the rich do.

PW: Twenty-five percent. Now, the reason I play this is because this is one of the things that I’ve talked about forever. People say, “The tax rates are going to keep going up, they’re going to keep going up, they’re going to keep going up.”

What if actually the tax rates come down because a VAT tax — value added tax, is what that stands for — is instituted? What if it is all of a sudden determined that this is a great way of raising revenue, which is more democratic and more people paying?

EB: And harder to not pay what you’re supposed to pay.

PW: Right.

EB: It’s charged at the cash register, basically.

PW: Sure. People come into the country, people are worried about people coming into the country illegally.

Or maybe people that are in the underground economy, they’re doing work for you around your place and saying, “Hey, if you pay me cash, I’ll do it for a hundred dollars less,” or something like that. And you know what’s going on.

EB: Right, right.

PW: They’re not declaring the income. And he goes, “Well, some people are getting away with this type of thing, and a lot of times they don’t get caught.”

But is there a way to actually capture some of the revenue from taxes that should’ve been captured? Yeah, well, you could do that with a VAT tax or something like that.

And there’ve been a lot of people who have talked about it. But this is why I think it’s really dangerous when it comes to investing, financial planning, to go, “Hey, do Roth conversions, convert everything over to Roth.”

And is it a good idea to do that sometimes? Absolutely.

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The idea of tax diversification is every bit as good as the idea, well, it’s pretty doggone as important as investing diversification.

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EB: Yeah.

PW: Because you don’t know what’s going to happen in the future with regards to tax law, and where taxes are going to go, or how creative commerce is going to get to raise revenue in the future. But isn’t it interesting how they actually do this?

The Swedish Tax System

John Stossel: And it’s quite a bit, it’s about 50 to 60% once you’re earning $37,000.

JN: But it’s interesting that the Swedish tax system is less progressive than the American. If you look at the whole situation in the U.S., the 10% of the richest households, they pay around 45% of all the income taxes. In Sweden, they only pay 27%.

And the reason is that Swedish socialists realized, “You can have a big government or you can force the rich to pay for it all. You have to pick one. You can’t do both. Because if the rich and the big businesses leave the country, then we have nothing.”

JS: All these celebrities and politicians say, “Sweden is socialist, a socialist success.”

JN: 

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Well, Sweden is not socialist because the government doesn’t own the means of production. 

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To see that you have to go to Venezuela, or to Cuba, or North Korea.

EB: Or active managers.

PW: So I just thought you’d find that interesting. It’s just how different their system is than what is perceived or what is put out there.

EB: Yes. And frankly, I don’t think they’ve really recovered yet from that experiment in the ’80s of going more socialist and they realized it didn’t work. I think they’re still reeling from that a little bit.

PW: Yeah. To some extent. And the tax rate is still too high, quite frankly.

EB: Forty-five percent.

PW: Yeah, it’s just insane, it’s just too high. And there was somebody talking about healthcare, he was talking about it later on in the video, he was talking about healthcare, and he said, “People don’t wait in lines,” is what one person was saying.

Jim Carrey was actually saying, “That’s just BS. People don’t wait in lines. I grew up under that system.” And he’s going, “Oh, yeah, they do.”

EB: Wow.

PW: It was a really bad system. So anyway, I thought you guys might find that interesting.

Okay, so a lot of stuff to talk about here today. We’re going to be getting into, I want to talk a little bit about housing, the housing issues that are facing us right now.

Younger people are worried about getting into a house, buying their first home. I have some stuff on that. I want to talk a little bit about that.

Talk a little bit about Elon Musk. I think that was so interesting with regards to his new pay package.

And what are the implications of that? Is it just about him? No, it’s a whole lot more, just the possibilities in our economy going forward.

And those of you who didn’t know about all of that, $1 trillion. Oh, my goodness.

EB: Of pay.

PW: Yeah. That’s just insane.

EB: And you picture these conversations, “Yeah, I’ve grown my business to $50 billion. My pay is $1 trillion.”

Okay. Somebody’s always got a bigger boat. Right?

PW: Yeah, exactly. Ain’t that the truth, ain’t that’s the truth.

The Role of Stablecoins

PW: A couple of years ago, I had a text message from a regular listener.

EB: Oh, okay.

PW: Ted, he sent me a message: “Paul, what do you think about this person?” And I was like, “Oh, man,” I didn’t really know.

EB: He wasn’t asking about me, was he?

PW: No, no, no, no, no. “What do you think about this person?”

EB: Do I want to hear this story?

PW: “I could tell you, but I’d have to kill you. Yeah, I can’t. No, I have to be good.”

No, no, no, no. It wasn’t you at all. It was Cathie Wood. So Ark Invest.

EB: Yes.

PW: And it was this hot streak and, oh my goodness, the returns that she had on the Ark Investing. And what people believe is that, “Wow, this person is really, really great. And because they’ve been great in the past, they’re likely to be great investors in the future.”

Because they seem to be really, really sharp. They saw a trend way before anybody else did. And that’s the idea. That’s why active stock picking, market timing works so well because people do perceive that it’s a skill, and they don’t necessarily perceive when it’s just complete luck when they outpace markets and they get high returns.

So anyway, she goes on to not do so well, let’s just put it that way. Well, she was being interviewed, and I thought, This is good, right here. So check out this little segment right here on Cathie Wood regarding Bitcoin, of all things.

Cathie Wood: Stablecoins are usurping part of the role that we thought Bitcoin would play.

PW: “Part of the role that we thought,” which means that they got it wrong. Right? I mean, that’s just basically saying that, “We got it wrong.”

CW: … usurping part of the role that we thought Bitcoin would play.

PW: 

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So what was the role that they thought Bitcoin would play? They thought it would be an alternative currency.

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EB: Yeah. Yeah, a reserve currency almost.

PW: Exactly. A lot of people thought it was a great idea because, “Hey, it’s not regulated by the government. It will be something that could be used as a currency that the government doesn’t have anything to do with it. And now we can actually get away from federal reserves and those types of things.”

So it appealed to a large group of people, this idea. And there was only one problem, as she said, the stablecoin usurped the role that we thought the Bitcoin was going to play.

EB: Yeah.

PW: It didn’t quite work out that way. And there’s a really good reason it didn’t work out that way. I’ve talked about it here on the show.

Are Stablecoins an Investment?

PW: But anyway, she goes on to say …

CW: There’s 1.5 million by 2030. Given what’s happening to stablecoins, which are serving emerging markets in a way that we thought Bitcoin would, I think we could take maybe $300,000.

PW: Okay, now she said it’s serving emerging markets. Go ahead, Evan, you look like you were about to say something.

EB: No.

PW: Your sign language was throwing me.

EB: No, it was 300 down. I watched that same interview earlier this week.

PW: Oh, did you?

EB: And I was, what is it? Talking with Cindy about how horrible this is. I can’t believe she’s still on CNBC.

PW: Oh, I know. I know. It’s like going and interviewing on demographics Harry Dent and saying, “Hey, what do you think is going to happen next?”

Well, the last eight times he was wrong. Why are you asking again? But they do that.

The same people show up over and over again. And I can’t imagine why they would want to keep going on. It would be embarrassing to be wrong that many times in a row and still want to show up on TV.

EB: Yeah.

PW: So anyway, she’s talking about this whole idea that Bitcoin didn’t take off and stablecoin is actually taking its role and it’s really effective in emerging markets. And this is something I’ve talked about.

Actually, I found that there’s, if you go on my website, if you’ll actually go to the search engine, you can look for stablecoin, and I’ll have a whole thing about this that was done, what? A year, two, a couple of years ago, I guess it was, saying that, “There is just no way stablecoin is going to be a much better vehicle for people for other countries around the world.”

And the reason being is that these countries don’t have good currencies. They don’t have currencies that they can actually depend upon in many cases.

So to do transactions, they want something that they can rely on. The U.S. dollar has always been something they’ve been able to rely on. But stablecoin is stable, it’s tied to the dollar. And the idea, it’s not an investment, and that’s another point that I made.

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It’s not an investment; it’s stable. You don’t want something that’s stable. 

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And I actually talked a little bit about how they made money, which is they’ll actually buy treasuries and they create a market for treasuries, is something I’ve talked about. The stablecoin is literally they’re arbitraging to make sure that it stays with the treasury.

And thereby what ends up happening is it stays with it as far as not getting above or below the treasuries or the dollar, but they actually keep the interest on when they’re investing in these treasuries, so there’s a way that they make money doing this kind of transaction. There’s a great way to make money for the people that create the Bitcoin, is the point that I made.

Stablecoins in Emerging Markets

PW: But just listen to where she goes with this.

CW: Off of that bullish case, just for stablecoin. So, watch that space. Stablecoins are scaling here, I think, much faster than anyone would have expected.

Joe Kernen: It was long-time bull, Bitcoin bull, Cathie Wood on Squawk Box yesterday, changing her tune a bit. It says here, “It’s been a volatile week for crypto.” Joining us now, Anthony Pompliano, founder and CEO of Professional Capital Management. I thought the whole exercise was just kind of silly.

PW: I think that’s funny, it’s just silly. All right, this long-time bull all of a sudden, wrong, but coming out and acting like she knows exactly what’s going to happen next after that.

JK: It’s at a hundred thousand. So you got a price target of 1.5 million. Okay, so that’s 15 times.

PW: Price target of 1.5 million, on Bitcoin, he’s talking about.

EB: Yeah, that’s what her forecast was.

PW: I didn’t see the interview. I only saw this part right here. You did see the actual interview?

EB: Yeah. So she was saying their price target, which it’s held I think in the fund, that she has a digital asset fund or something, but it’s held in the fund. So she’s talking about it like a stock.

PW: Like it’s an investment, yeah.

EB: Our price target is one and a half million.

PW: Oh, my gosh.

EB: 

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Because of the proliferation of stablecoins in emerging markets, it’s basically chewing into Bitcoin’s market share, just to paint the picture. 

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And so that lowered her target $300,000 on Bitcoin to where it’s only 1.2 million.

PW: That’s what he said. That is so funny.

EB: Which is 12 times.

JK: You’re starting at 15 times as if you can make a forecast like that with any degree of certainty or accuracy. And then your resolution on the whole idea is so fine, because of what you’re calculating, you can cut 300,000 off, and then it’s only going up 12 times.

The whole thing just seems silly. I don’t know why we really ran it there. But we are at a hundred thousand.

PW: It’s just, the honesty. I love Joe; he just tells it like it is. I don’t even know how he’s still on the show, and I love it that he is.

EB: It’s a big gig, yeah.

PW: I love it that he is, because he is so honest when it comes to these types of things, and he’ll just shake his head at the things that are said on there.

EB: Right.

PW: And when people make predictions, he’ll just come out of it going, “What on earth are they thinking?”

Are Stablecoins a Good Currency?

PW: But that whole idea that it is an investment has been a problem because it’s not an investment, as I’ve talked about many times. You don’t have any cost of capital, there’s nobody paying to use your money, when it comes to Bitcoin, or stablecoin, or any of those types of things.

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But the point being that when we’re looking at it as a currency, it’s not a good currency either, because it fluctuates too much in value.

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EB: Right.

PW: I don’t want to sell you something for $100,000. Let’s say that you take $100,000, turn it into a Bitcoin, you get the Bitcoin for the sale, and you’re not going to love it if Bitcoin drops down to $50,000 and you just sold a $100,000 good to me for $50,000, in essence.

It just doesn’t make any sense at all. And yet that is basically what has been going on. And I’m just glad to see that there’s some sanity that is starting to occur in this marketplace. I’m glad to see it’s happening.

EB: Yeah.

PW: Because it’s been a little bit disconcerting to watch how people get pulled down the wrong track regarding this type of stuff. And this, it’s been something for 25 years that I’ve done in the show, where I’ve pointed out things that I thought were really a bad idea. And I haven’t been wrong yet on things that I said, “This is a really bad idea.”

EB: And kind of like socialism, bad ideas can still persist. It’s hard to give up the myth, the “I want it to be true.”

PW: Yeah, sunk cost fallacy.

EB: And again, not to swerve too much into the political lane, but I don’t think it’s going away anytime soon with the pardon of Changpeng Zhao. And we had actually talked about him on the show a couple of years ago when Binance was going through its issues. And, so, you know, Trump pardoned him last month.

PW: Yes. Which was very controversial.

EB: Yeah.

PW: To say the least.

EB: Not as controversial as the local pardon, but we won’t go there. But it’s still incredibly popular and it’s not going away anytime soon.

Buyer Beware

PW: Well, and I think that the issue, Evan, is that when it comes to financial things, like these types of things that we’re talking about, people think that the regulators are going to protect them from these types of things. And, “If it’s bad, they wouldn’t allow us to invest in it. If it were bad, the mutual fund companies wouldn’t put together mutual funds based on this. If it were bad, my investment advisor wouldn’t be putting me into something like this.”

And I think that quite often it is not necessarily about that at all. It is about, “Hey, how can an investment company make more money? What do you want? I’ll give you what you want.”

The regulator is just, “Hey, you know what? It’s a free country. We ought to let you do what you want to do.”

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It should be buyer beware. People ought to be more aware of what they’re doing, and they ought to read the fine print when they invest in things.

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For the investment advisor, I think a lot of times it’s just ignorance. They hear from the investment companies that this is a good thing, and they go, “Oh, my.” And as I jokingly say, “My boss says this is a good thing, you ought to invest in it.” And they don’t necessarily know because so often the level of education isn’t quite what it ought to be in the investing industry.

And so often, this is why I say, “We’ve got to get you to understand the logic of what are you doing? Why are you doing it? What kind of expenses do you have? And what should you be able to expect from this?

“And does this make any sense? Does it make any logical sense? Does it line up with what you know to be true about investing? And if it doesn’t, don’t do it.”

And that is quite often the real rub that I have is I have to get people to want to understand this stuff better. The more you understand it, the less somebody can take advantage of you.

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.