Paul Winkler: Hey, and welcome to “The Investor Coaching Show.” I’m Paul Winkler along with Jim Wood talking about money and investing. Jim, I thought we’d talk today about a few of the must-answer questions that I think are important for investors.
The Investment Industry
Now, we’re actually engaged in the process of updating our Investor Awareness Guide. We have the bios of the various people who work with us. We’ve got a lot of advisors with 10 offices around Middle Tennessee and one in Texas.
There was a study done that I talked about a little while back, and it was set back in the 1940s where this guy infiltrated a doomsday cult.
Some people freaked out and sold everything. Some people hunkered down in their homes scared to death. Then when that date came and left and the world didn’t end, the people that were in their homes hunkering down felt foolish for believing in it, and they just walked away.
But the people that sold everything doubled down, and they actually went to the media saying, “Well, this is what happened. The world didn’t end, but here’s what’s going to happen next.” And it reminded me of the investing industry.
If you’re making a ton of money in the investing industry and you’re doing all of the things that we’ve preached about not to do forever on this show, you’re going to be hard-pressed to walk away from it.
People don’t know not only what they don’t know as a client, but what the investment advisor doesn’t know.
If you don’t know what the heck you’re doing, and you don’t really know if the investment advisor knows what they’re doing, you could get into trouble. Because what people don’t recognize is becoming an investment advisor does not take a lot of education, unfortunately.
I actually require everybody to be a degree planner, number one. And that’s just where you start. Then you have to have an academic background in investing.
True Purpose for Money
Okay, so the very first question we’re going to start with right here is, have you discovered your true purpose for money, that which is more important than money itself. I’ve heard people say it’s kind of touchy-feely to talk about, but it’s really important.
If you don’t have a purpose for your money, what’s the problem that you run into, Jim?
Jim Wood: Well, you have to have your values aligned with what the money’s doing for you. In terms of your purpose in life, what are the aspects of life that are most important to you? What drives you, what keeps you up at night, gets you up in the morning, those things, and then having your finances drive and align with that.
PW: So the reality of it is, if you don’t really kind of know what money is for, why is it important, what your desire will be as an investor is just more, more, more. Higher returns. Higher returns, higher returns. And that’s why people get sucked in.
So often what the investing community sells to you and how it sucks you in is greed.
They’ll use past performance and pull you in to buy things. Hey, the taxes will be lower here if you do this, the returns are higher. You can get returns with no risk in this investment. So they will pull you in on your base desires and they will play to your emotions and your instincts, and that’s what happens. So that’s why it’s important to know your purpose.
JW: When I did the exercise, True Purpose for Money, I came out with the purpose drilled down to freedom. And so thinking about finances, how do I arrange my finances to give myself the most choices, the most freedom, and then share that freedom with my family and the world.
PW: I was hoping you’d say that, because that’s one of the things that I find for people is, whatever your purpose is, whatever you think is important, that’s what you share with the world as well. You don’t just keep it to yourself.
Biases and Blind Spots
A lot of times what you’re trying to do when buying stuff is trying to connect with people in all the wrong ways. So people will buy a super super nice car to try to impress people, and you’re trying to impress people because maybe I don’t know, for any number of reasons.
What causes people to engage in that type of trading, because those types of investments are sold based on your green, is the hope of being able to get much, much higher returns. You can magnify the returns and you can, but you also magnify the losses too.
The second question is this:
Are you aware of the mental biases and blind spots that you’re likely to face as an investor?
I know that that’s one of your favorite topics.
JW: Oh, it absolutely is. In terms of the different biases that affect our thinking, I think it’s just a phenomenal field of study and there’s so much interesting information, and there’s so much that people are unaware, myself included, in terms of how we process information out in the world with those biases just happening automatic without giving them any conscious thought.
PW: Yeah, sure. For example, hindsight bias. Well, I just knew that was going to do well, if I had just gone with my hunch, this is how much money I would’ve had.
Then there is confirmation bias. I’ll look for things that confirm what I believe. If I believe a certain thing will do well, I will look around and I will see articles talking about how that thing is going to do well. Confirmation bias will cause me to make mistakes.
What Is the Market?
The next one is, are you invested in the market? We’ll spend a little bit of time, what is the market and why do we invest in the market? A lot of people avoid the market because they’re scared of it.
In a big picture, you have the stock market and then you have the bond market. And I guess you could look at short term fixed income like the CD market or something like that. You’d be investing in the gold market. That’s not something that you should invest in because it’s a commodity or cryptocurrencies or something like that.
We fear that which we don’t understand, and if we understand a little bit more about the market, we won’t feel so threatened by it.
There is a difference between equity markets when it comes to private markets and public markets. So you can have private markets and private equity is something that’s really getting big in the investing community.
The problem we run into there is that you have a lack of transparency. What happens with people investing in private companies, they don’t have much information about them as to being able to figure out what the value is.
If I really don’t know what’s going on underneath the hood, how do I determine what the actual value I’m paying is a fair value? So there can be problems there.
When you’re dealing with public markets, trading happens on a regular basis, and that information has to be publicly available so as to create fairness and be able to actually come up with numbers that make sense based on all of the information that has to be made public.
What kind of stocks are there? Well, we can have very, very large companies. You can have very, very small companies. You can have companies that are a $1 billion and you can buy the whole company for a $1 billion.
There are large and small companies. There are growth companies, which are growing rapidly and you think that’s what you want. Well, those are companies that are growing rapidly, but they sell for very high prices compared to their earnings, so therefore their ability to actually deliver higher returns is actually less.
JW: I like to say that doesn’t mean they’re going to grow just because they’re called growth companies. It means they have grown.
PW: There are international companies in established markets like Germany and France and Australia and Sweden and Japan. Then you’ll have emerging markets, which are less established. Now, when we invest in markets, why do we invest in markets? Well, because historically, one of the biggest things that can absolutely destroy your investment portfolio is inflation, because back in the 1930s, you could buy a whole house for $30,000. Now it’s $300,000.
So you look at that and go, wow, I need 10 times as much money. Yeah, you do. Well, how do I protect myself against that? Well, I have to have something that historically protects against inflation and stocks do that. Why? Because companies charge money for things.
When you own companies, you own those companies that are increasing those prices and thereby that’s the protection that we have had from the erosion of the purchasing power of the dollar.
JW: I mean, companies increase the prices with the intent to maintain and even increase corporate earnings. Long-term stock prices and corporate earnings are very, very highly correlated.
PW: Yeah, and look to look at the history of what an acre of land sold for 40 years ago in your community. Now, chances are probably pretty good that an acre of land sells for a higher price than it did 30 or 40 years ago. Well, companies put their operations on what, land, and they own that land, and you own that land as being the company owner.
So thereby all of these things play into it. So why invest in the market? Well, that’s it. If I look at fixed income investments, they just basically move with inflation and not much protection. So when we look at fixed income investments like CDs, like money market accounts, like savings accounts, like annuity products, fixed annuity products like fixed bonds and treasury bills and so on and so forth. These are all things that do that, they protect us from market vicissitudes, right?
JW: I think people forget that sometimes that cash can often be going broke safely because prices are going up. If prices are going up at a rate higher than your cash is going up, your numbers might not change, but the basket of goods that you can buy is constantly shrinking.
PW: You’re losing money and you might be losing money at 1% per year. You go over a long period of time and after a while you’re broke. Right? So it’s important to understand that fixed income investments have never been good at protecting against inflation.
Many investors speculate with their money rather than prudently investing with it.
Do you know the three warning signs that you may be speculating with your money versus prudently investing it? I’m going to say because of the research that I’ve seen, and it is so pervasive, are speculating with their money and they don’t recognize that they’re doing it.
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