PODCAST EPISODE 226: Stop Trying to Catch a Falling Knife

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Paul 0:00

Hello and welcome to your business your wealth. My name is Paul Adams, President CEO of sound financial group and I am joined as normally by Corey Shepard. Who is not wearing his pajamas right now. He just loves his cozy U DUB sweater. He has real clothes on underneath. And I’m always happy to have you if your pajamas. I don’t I’m not sure why you’ve got such a problem with pajama wearing. I think the only that the pajama wearing contingency of our audience is going to be very upset.

Cory 0:37

It’s only that folks are watching on video. Never thought that I was and now the folks that are only listening, or just their imaginations running wild. You know,

Paul 0:47

you can see the brilliant design and hired by strategy if

Cory 0:51

they’re driving right now. I don’t want to cause them to be that distracted. Which they could be so any Cory It’s cold here. I’ve got to wear my

Paul 1:00

Korea’s probably wearing pants everybody probably. I am at least 30% of

Cory 1:05

Surely not. I’m at least 70% sure you’re not.

Paul 1:10

It’s, it’s it’s true. I’m not wearing pants, I’m wearing jeans.

Cory 1:16

Paul doesn’t have to go outside anymore. Or at least right now to get to his recording studio. So he’s right.

Paul 1:24

Yeah, and I, I am not wearing shoes, if that makes anybody either more comfortable or less comfortable. But with that, let’s talk about some things that are going to be a little bit uncomfortable today. And that’s going to be us taking a little bit of a look at what it takes to generate wealth, really great opinion article out of Wall Street Journal with some cool truths kind of revealed in it. Then we’re going to talk about people buying on the dip. That’s been a lot of talk lately and an article that tacker tackles from investor Business Daily this idea of buying the dip. And then last but not least, we’re going to talk a little bit about the IRS is new mortality table saying that you will live longer, and it changes some of the calculations for Ira distributions. But more importantly, we’re going to talk about how those distribution rules don’t even align itself with simple economics, or principles of taking retirement income the rest of your life. So Cory, are you ready to jump right in?

Cory 2:32

I’m ready to jump right in. I’m looking at this cartoon picture of an ape with weird futuristic sunglasses that Justin Bieber bought for $1.3 million.

Paul 2:44

Yeah, so I don’t know about you. But I take one look at that. And I say, absolutely worth it.

Cory 2:52

I mean, it’s a pretty cool. It’s a pretty cool picture and the fact that it was algorithmically generated. So this is a it’s a NFT that Justin Bieber bought. And if you’re, you know, not familiar with NF T’s, it’s like Electronic Baseball cards. Basically,

Paul 3:12

I liked the way you put that. Because when I first heard NFT, I thought it was like some kind of version of WTF. Yeah. I just expected it to be like, what the NFT like that, that would make kind of make sense. Right? But no, it turns out, they are built on the Etherion platform. And what they allow somebody to do is to transmit ownership of a digital image, which is new and unique. But what the article talks about is that some of our policies that have allowed so much money to flow into the marketplace, has people putting money, all kinds of places, that literally what has happened is we have such a large money supply that people are willing to invest in all kinds of things they might not otherwise be willing to. Now one curious thing that I throw out and I I’ve seen one article that did a great job of this talking about something like say a Justin Bieber buying an NFT. And what they did is they took the annual income of some of these super wealthy people boiled it down to be more like a person making three to $400,000 a year. And how meaningless that purchase is

Cory 4:25

just thinking it’s like someone, the average investor putting like 500 bucks 1000 bucks in crypto just to see what happens. Yeah, exactly that the article is really not about that. It’s just that’s one example of this question that we’re asking is, you know, how do you create wealth and more importantly, what is

Paul 4:47

wealth? And indeed, and and there is a there there are some very loud voices out there that can give people an inappropriate impression. have the basics of economics. Now there’s one dig on a political figure here. I don’t mean it to be a dig on them. But it is worth the fact that there are lots of people out there that think this way. And so this is to rep Alexandria Ocasio Cortes of New York showing her misunderstanding of economics said in 2020, no one ever makes a billion dollars, you take a billion dollars. And that right there is just an inappropriate assessment of how money is created in society. You take somebody like Bill Gates, who’s gotten a lot of criticism in the last specially a couple of years. But in reality, how many people did he make a difference for by making operating systems and computers work well together such that the computer on my desk can work with a computer on Corys desk, even though they’re not even built by the same manufacturer. Like we can send programs back and forth all that

Cory 6:00

the Zoomer destined him on Tik Tok is only doing able to do that because of the platforms he created and the wealth that he gave to other people know AOC it mean, is there a billionaire that took it rather than give it like there are examples of folks that you know, there might be some for pharmaceutical families that misled doctors and put different drugs in places they should have gone and made a lot of money destructively it happens. But in general, the capitalist system is you have to give that value away. And and really the distinction we’ve got to make is money versus currency, cash, currency, things we trade with and buy digital baseball cards is a result of human transactions but money is inside of us like money is our capacity and potential to create value. And, and that is, we only make more of it by giving it away.

Paul 7:07

Well, and that speaks to this next sentence. So Mister Gilder counters, capitalism is not cheaply, an incentive system where entrepreneurs act in a rote response to rewards and punishments like a Skinner box. Now Skinner box is a like housing unit used for animals during behavioral experiments, like devoid of other outside influences, etc. It’s an information system governed by the unveiling of surprising truths, innovation. Now, by the way, like the way that sense of structure sounds a little weird, but what he’s saying is that innovations are often surprising truths. It’s the creativity of entrepreneurs wasn’t a surprise. So if the creativity of entrepreneurs wasn’t a surprise, socialist planning, would work. And they talked about Karl Marx and Bernie Sanders don’t understand productivity. Some recent surprising truths are mRNA, vaccines, neural networks, CRISPR, and quantum computing. These two paradoxes are related, you can keep your wealth only if you’re willing to give it to others. Now, this is where we’re probably going to wrap our comments on this article, because I think it’s the most powerful piece, all the rest of it was just to set up this line, from my perspective. And that is, let’s say, What you did is you went out and you bought a piece of real estate, and you just own it. You don’t do anything else with it. are you likely to get a very high rate of return course?

Cory 8:41

No, in fact, if it real estate, if it’s not, valuably producing, it’s usually eroding. Like if you just leave it alone, right? There’s some some maintenance. That’s right. You had a big pile of cash and just shoved into your bed. No Return,

Paul 9:00

no return. And to your point about land, like, you know, now we’ve got five acres and all that. And one thing I’m noticing we haven’t even reached springtime yet is all the trails I’ve cut. I have to maintain them. Because the forest will reclaim them, if I don’t. Yeah, and that’s the and I can see evidence where people have done things on the property in years past. And yet the decades of common it’s gotten overgrown, so that kind of speaks to your degradation. But if I instead built a little house and rented it out on that property, or a I buy a house with, sorry, I buy a property with a house on it, and I rent it. I’m adding value to somebody else that produces return for me. So to kind of if you follow along and Corys like evolution of money, it’s under the bed does almost nothing. I can give it to the bank. The bank is gonna lend that money to other customers. Could be that Sharing. That’s yeah, that’s

Cory 10:01

tearing it is putting it in the in the bank because it gets into that lending system and we get to make some money off it other people get to make some money off it. Like that’s kind of crazy, amazing thought about capitalism is $1 goes into a bank, and six different people get to enjoy the use of it at once.

Paul 10:24

Right? Yeah, yep. And that could either be wild good or wild bad depending on your perception. But but it is amazing. And you get a little tiny reward for that. If you said I’m willing to leave it locked up for two years, then a two year CD will give you a little bit better reward than that. If you invest it into, say, the stock market, in what we would refer to as an academically allocated globally diversified portfolio, well, you’re investing in some of the best entrepreneurial minds out there, who have built a company gotten it successful, and now have taken it out to the public markets so that you as an individual investor can invest in it. And it just speaks again to that quote, which I want to go back to, is that you can keep your wealth only if you’re willing to give it to others. Meaning if we aren’t doing things that add some kind of value to society or somebody else’s life, those dollars don’t produce return. And that’s why we talk about this gonna kind of broach us into our next article here in a moment. But I want to give it a clean break. Is that if all we’re doing is gambling with our money, speculating with our money, no thoughtful adding value to others, Allah buying real estate in the southwest United States in 2007, because it just goes up by tremendous factors that you have no control over. That’s speculation. And speculation doesn’t build wealth. In fact, anybody who speculated and generate a lot of wealth almost always had to revert to a strategy of adding value to maintain that wealth. They couldn’t be speculators forever. So alright, let’s let’s get to buying on the I feel like I should have been prepared with some beatboxing that include dip in but I got no

Cory 12:20

this is like, this is good for you know, we’re recording this the week for the Super Bowl. Buying dip, you know, getting ready for the big day. Oh, sorry, buying in the dip. I got excited.

Paul 12:32

There. Second. Cory Cory does love preparing and hosting. If you’ve never had the honor and privilege of having Cory make you a meal. Maybe some will giveaway to listeners, Cory, we’ll just pick one listener, and we’ll fly you to them or them to you put a comment below if you guys would like to see us run some kind of contest on that. I personally love the idea of giving away cores talents, because nobody wants me cooking up a solid beanie weenie forum. Okay. So perfected the recipe when I was eight years old, Cory. I have made a sense, but when I made it when I was eight, it was so good. I was like, there’s no need to repeat that.

Cory 13:14

I would agree. So this, we’ve seen the s&p 500 Dip over the last couple of weeks. And some of the individual stocks that make up the better part of the return of the s&p have also dipped and Facebook, I just got to go straight to this line where the it was Mata had the single biggest one day drop of any individual stock in history. Mm hmm. Punching more than 232 billion in market value in just one day.

Paul 13:51

Wow. And what’s crazy is Amazon in the same like, seven day period had the biggest gain of any individual stock ever. But what happens when people go through this effort of buying on the dip. So for those of you that maybe aren’t reading financial stuff all the time, the just the moniker itself almost makes it make sense. But the idea is that when a stock or cryptocurrency or index goes down in value, you can catch the dip and therefore produce better returns as it rebounds. Now the problem is, you’re still doing individual equity selection, often by speculating that the problem isn’t buying on the dip and the dip went deeper than we thought. The problem is buying individual stocks. Right?

Cory 14:52

Because you can go you can buy on the level or you can see a stock on its way up and say Oh, I think it’s gonna keep going up and by, and that can work for a while. But if you look at Facebook, you know, it is you could have had it for five years, and more than half of your rate of return just went away. Mm hmm.

Paul 15:16

Yeah, the fact why don’t I? Why don’t I show that because I think that could be pretty relevant. So here we are. This is live right now, as we record this on a early Tuesday morning, you guys probably listened to it the following Wednesday. But you can see that your it is very funny that today, Facebook stock is literally right where it was January 2020, before COVID. began to drive that downturn. And so that is how many sets two years of returns are just gone. And it’s not quite, but almost half of where it was, is its peak, which was 378, it’s now 222. Now, that doesn’t necessarily mean like this is no stock recommendation to buy this or not to buy this. What it is, is it’s a unique look at these things called dips, and should I buy on the dip? Now the problem is the second you say what I’m going to do is buy on the dip without realizing it, you’re committing yourself to a strategy. So somebody wanted to really be watching for a dip in, say, an individual stock, maybe a full ETF, but loads are in index. But Cory, what are the things that you could think of off the top of your head that person would need to do?

Cory 16:39

I mean, they’re they got to get deep into an industry they’ve got to read, like, let’s just talk about meta. Are you looking at the quarterly reports? Are you watching for all of their business metrics about profitability and earnings per share and new users and but here’s the problem. All that doesn’t necessarily matter, either, because analysts are wrong all the time about what all those reports mean. So like, here’s the difference between a company like this and and say, a company Oh, like we’re business owners, and Allah, we have a lot of business owner clients. And we we do what we preach, which is monthly finance meetings to check in on all of those metrics. And we can actually do something to pull levers to change the direction of the company, you can review all of those metrics for matter, but you can’t We can’t do anything about pulling those those levers. So it still really doesn’t matter. Yeah.

Paul 17:39

And that’s just it is that if what you were doing was saying, I’m making an educated decision based on buying this stock, whether it’s a dip or not, but we’ll deal with the dip here, then you should probably have been aware of their financials for at least the prior year. Right and and have enough knowledge on how to read through them. If I’m most people individually speculating in stocks don’t know how to read the financial statements. We have, we have clients right now, who are amazing at reading financial statements. And one of them hired us to do their asset management specifically for what he referred to as I need internal controls. Because he pointed to one particular stock, he said, I didn’t have time to read their quarter their report, it had I read their quarterly report, I would have known why their stock dropped three weeks later, was because they were dangerously low on cash. And the other investing public hadn’t figured it out yet. And as a result, he said, That’s why I need you guys to do my asset management because I can’t be responsible for my own internal controls coming from somebody who has a public accounting background, so that so you’d have to be watching it, you’d have to be watching the market there. And you’d have to be watching business metrics, like Corey talked about if New Year’s is etc. Such that when you saw the quote unquote, dip, is it a dip? Or is there something fundamentally wrong with the company? And you would have no way to know that except for maybe listening to somebody else who’s picking stocks and making recommendations that you pick those same stocks, Allah, Jim Cramer, one of the others. And the problem is, you have no way to know if that’s gonna happen. It’s just going to be speculation. And pointing to our last article where wealth is generated is in other people being able to effectively use resources or not producing an effective use of resources necessarily when we’re just speculating on one stock versus another. So it comes down to speculation and gambling, not investing, whether you’re buying on the dip or you’re trying to follow momentum swing, if you don’t know enough about the underlying finances of the company you’re investing in. Similar to if you owned a share in in a privately owned company, you would want to make sure you knew those things you would talk to If you’re an investor in sound financial group, you’d be asking us those things, at least a couple times a year, we don’t ask those things at all of these publicly traded companies that were individually speculating with which the differentiated strategy is, are we spread out enough in the marketplace, that we’re not speculating on individual businesses, but we’re actually betting on and investing in the entrepreneurial creativity and innovation that inevitably occurs in free markets. That’s what we’re investing in not speculating on.

Cory 20:33

And, you know, let’s talk about buying a dip as a strategy. Because if you’re going to say, Oh, I’m going to only buy him a dip, well, you got to say, what, how much of a dip, what’s your percentage, and if I look at Facebook over the last five years, you got to pick a pretty big dip to have even buying in so then you’re waiting in cash losing out on a lot of growth in the meantime, and that, you know, can erode any the additional return you get from buying into the end of the dip. So it’s it’s a tough strategy to actually win on long term. Good. Yep,

Paul 21:11

that’s exactly right. And, and there are times that it can be useful. So let’s say for instance, right, you’ve kept a lot of money in cash, you’re worried about what’s going to happen in the market. People are talking about overvaluation, raising interest rates, and all the things that have to go oh my gosh, well, I thought the stock market was gonna crash the last five years, which is why I didn’t put any money in. But now here I sit with a bunch of money in cash, and what do I do? One way to automate your quote unquote, buying the dip, is, if you’ve left a million dollars in cash sitting on the sidelines, just start dripping in $85,000 a month, It’ll all get invested in a year, you won’t have to watch it, you won’t have to fret about the individual values. You won’t have to be jumping on because along with what Cory talked about, but what you can lose by betting on the dip, what are you losing your life? Meanie if you’re really going to be buying on the dip and learning the appropriate amount about these companies? That’s got to be 10 to 20 hours of invested capital to track just for stocks, let alone broad markets. Yeah. And so if you’re going to do that, then what are you losing out in your career? What are you losing out of your family? What are you losing out in your community, because of all the time you had to take to do that research? And those have cost two? Okay, that’s the end of my rant on it. You ready to talk about our new IRS life expectancy tables.

Cory 22:35

So I’ve just gone on to a new IRS life expectancy tables could change the amount of required withdrawals for retirement plans. Now. First thing I love about this is anything in the world of finance and all the hedging of compliance and an attorney like this word, could the IRS is changing their life expectancy tables. So required minimum distribution amounts will change they are I don’t know why that’s a hard.

Paul 23:08

That’s just well, that’s just

Cory 23:10

what happens in the finance.

Paul 23:12

I was gonna say, going back to a principle we talked about on this podcast quite a bit is the appropriate reporting would not be changed withdrawals for retirement plans, like Yes, true. It could just be mortality tables are updated by the IRS could be the thing. But what they want is, is somebody with next to no retirement account, who’s 67 years old, has no chance of retiring, to think there’s a reason for them to read this article.

Cory 23:42

Right? Right. So we hear from our friend, Ed Slott, who is a CPA and a great resource on all things, IRAs and retirement accounts. And he’s talking about how the, you know, required minimum distributions, in case you haven’t been following. The IRS forces you now at 72, it used to be 70 and a half and now 72, to pull money from any of your pre tax retirement accounts, IRAs, 401, k’s and the like. And they base it on your life expectancy. Now it’s one size fits all for males and females. So it’s not gender specific. It’s just age 72. Here’s the amount of life they expect you to have left, and they’re really designing that factor to force you to empty the account. By the time you hit your your life expectancy. They want us to pay the taxes eventually,

Paul 24:39

and add to me. So one thing we did is we just pulled up this graph for the IRA required minimum distribution, which you don’t think much of like it’s totally sustainable at age 72 divided by 27.4. That’s not quite 4% distribution. But when you start dividing by 20 4.6 starting at age 75, we’re now in validating the widely accepted maximum, not minimum maximum of 4% distribution to have your assets last as long as you do.

Cory 25:15

I mean, I think we’re actually validating it. Right? The IRS is not ignorant of those principles. They want us to spend down into that account to pay those taxes, they don’t want us to be able to defer it forever. That’s why they designed it, like we talked in the recent past about there’s no tax loopholes. There’s only tax incentives. Yeah,

Paul 25:37

yep. And and this is another one where by age 90, you’re taking out 112, so about eight and a half percent of your entire portfolio, and they’re well off into your 90s, you’re now over 10% distributions a year. Now, it’s 10% of the remaining balance, but obviously, it’s an unsustainable distribution rate, when we help clients with these level distributions, we actually have to help them, take some of it, set it aside and put it in another kind of account. Because even though they want you, they when they want to force you to finally pay taxes on this money, what they also want to make sure they they’re not wanting you to fail financially, they’re just not concerned with it. So they force you to take out a higher distribution rate. And then you have to in your 90s, think clearly enough to make that extra contribution over to a side fund. So that you have more to live on if you continue to remain healthy.

Cory 26:38

So the fact that these rates are changing is more of a MacGuffin, versus the real thing we should be looking at which is RMDs, in general, because then Ed slot gives an example, before a 75 year old at the old tables with 500,000. And an account would have had to take out 21,008 34. Now, it’s going to be 20,003 25. So you know, 18 108 1600 difference. It’s it’s not. That’s not the big difference. It’s an you know, two more years on the back end of it spending that like it’s going to get spent down anyway, if you live long enough. It’s really not that different of a situation, it’s that it’s happening to begin with that folks are preparing for it.

Paul 27:26

And this is the part not only that, not preparing for the fact that it’s happening. But the thing that’s good, I think overlooked in this a lot, Cory is that, how good the financial institutions have gotten at getting us to put our money into these pre tax tools 401 K’s IRS did, we’re going to defer the tax and we’re also going to defer the calculation of that tax which could be higher in our later years either because of tax policy changes or just because we became more materially successful. Now the the real problem is, the IRS had to put this draconian rule in place, which they don’t talk about very deeply here. But it’s literally a 55 0% penalty. If you don’t take the required minimum distribution required. And it’s like a sort of Damocles hanging over every investors head, that they’re going to get this 50% penalty if they don’t take out the minimum distribution. And we all point to the IRS is that being the problem, but the real problem is how dang good the financial institutions have gotten people putting their money away these accounts, and literally having no strategy for taking out enjoying it. Not there. It is all a problem that gets deferred. And in this, I’m not just going to convict my community. As you know, Cory, I’m perfectly happy willing to make other communities just as horrible in our listeners site as ours. But, but think about the CPA community that for many, many, many years has told people to max these accounts out, getting them the best result on this year’s 1040 to say, hey, look, we saved you taxes this year, because we put $300,000 into a defined benefit plan. With no conversation about what do we do with that 300,000 hasn’t been taxed yet. It grows to 3 million. And now I’ve got to take it as account, I’m gonna have these RMDs if I don’t take it. Our point being is you got to have orchestrated tax strategy. This article doesn’t mean the only way to go as Roth IRA. This article doesn’t mean the only way to go as a non qualified account or some other financial product. It’s that we have to orchestrate the use of these products because these rules do change. Tax laws change and as they change we can make modifications inside of our own life to adjust to them. If we haven’t put all our eggs in the proverbial one government basket like IRA.

Cory 30:01

And just think about it from human incentives, like, from 30 to 65. In the IRA or the 401k, pre tax has been the first place, everyone’s told to put money, but then from 65, to now 72, it’s the last place we want to take it because it has the most tax incentive. And then at 72, we have to, it’s, it’s, it’s like goes in the opposite end of everything we want, it’s the least amount of control, we get the least use out of the dollars because of this system.

Paul 30:33

Yep. And as I have heard somebody say once over a decade ago, they said some of the effect of if you accept any government subsidy, you need to understand what freedom, you’ve forfeited. I think that’s true of everything from even a traditional Roth IRA, etc. We’re forfeiting some amount of freedom with those funds. We just need to make sure we’re okay with the amount of freedom we forfeited. And that goes with everything from an SBA loan to the way that you invest your retirement plan accounts. We’re going to take a government subsidy of some sort and incentive, if you will, what’s the behavior? They’re trying to incentive? What freedom have I perhaps forfeited along the way it doesn’t make those plans bad, it just means they should be talked about in full disclosure, and not simply covered in an article saying, like we see so often a first thing you should do as a 401k. Maybe, but maybe there’s a lot of other things you should be doing. With that. Corey, anything you want to leave our audience with this? Excellent. Everybody. We’re so glad you could join us. I cannot tell you how much Corey and I enjoy these conversations, how much we love the comments that we get the reviews that we get on the podcast. If you got any particular insight today, just throw comments in there makes a real big difference. Be sure to like and subscribe. And we’ll look forward to seeing you next week with an incredible topic. That’s going to kick off a whole new initiative. It’s just kidding. I just do that to scare Corey. So yeah, you guys have a great rest your week. Thank you for being here while I give Corey a difficult time about everything from his dress to his hair. And I’ve got more wildly inappropriate comm comments coming soon. And we hope as always, that my pithy comments as well as the information we broadcast is a contribution to you, being able to design and build a good life.

 

 

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