PODCAST EPISODE 165: HOW DO I KNOW WHEN TO GET OUT?: ILLUSIONS OF INVESTING, PART 3

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Paul 0:00

The reason we invest in equities is that we want their prices to rise. So with every time the market has risen to a level it’s not been at previously, if we begin to fret and worry what would be the objective of investing at all? Welcome to your business your wealth, or your hosts, Paul Adams and Corey Shepard teach founders and entrepreneurs how to build wealth beyond their business balance sheets.

Unknown Speaker 0:45

This is how

Cory 0:49

Hello and welcome to your business your wealth. I’m Corey Shepherd, president of sound Financial Group and co host of this show with my good friend Paul Adams who’s so active in his church that sometimes they asked him to stand in the back so everyone else can focus. Paul, so great to have you here on episode three of the illusions of investing. Now, if you’re just jumping in, this is a series that we’re right smack dab in the middle of up, but have no fear. Keep listening right here, finish this episode, you’ll be just fine. But do make sure and circle back to the beginning because there’s a lot of great content here. In fact, this is a summary and a collection of some of the conversations Paul and I first had when he and I met a series of conversations that resulted in the partnership that we now have today, in large part because he was able to help me see some things I had left undone and unhandled from my family, which had me quickly realized I must not have been handling him all that well for for my clients. So it quickly became a moral imperative for me to not be doing what I was doing, and be pursuing this message of actually Academic and evidence based investing out there in the world. Paul, turn it over to you.

Paul 2:07

Well, everyone, we’ve just spent last two episodes talking about the first two illusions of investing one, that individuals whether they work for a large asset management firm, or they are individuals trying to trade in the stock market that they can’t consistently or predictably pick stocks in a way that would outperform the market. Then, we spend an episode talking about track record investing that even if some asset manager has done well in the past, there’s no correlation to them being able to do well in the future. And next, we’re going to talk about something that is so tempting to so many of us and too many of the asset managers that you might utilize called market timing. And market timing is that ability of trying to move our investments based upon the idea that we think the market is going to go up soon or that it’s going to Drop soon. So it’s any attempt to alter or change the mix of assets based upon a prediction or forecast about the future. Now the illusion is that money managers are able to use this market timing to predict the ups and downs of the market. Now, for you, as you’re thinking about this, you may be thinking to yourself, well, the market seems like it’s an all time high. And we’ve talked about that a little bit on this weekly show, to demonstrate that, indeed, even when the market is a new high, it’s not likely one year later that the market is going to be lower. And you can go back to some of those other episodes. But what we’re going to talk about today is something else that happens in the background. you as an individual may say to yourself, I’m worried about how high the market is, I may want to get out and I first want to lay a bit of a tenant on you. And that is that the reason we invest in equities is that we want their prices to rise. So with every time the market It has risen to a level it’s not been at previously. If we begin to fret and worry, what would be the objective of investing at all, we would instantly with the success of our actual investing, be scared by the success of our investing, because now the market is higher than it’s ever been before. Here’s the thing. We’re going to demonstrate today some of the science behind what happens in markets and investing. We’ve already talked about the asset managers not being able to keep up with their own track record, let alone the indexes to which they volunteered clearly said they wanted to be compared to. But there’s a back a little bit of a backdoor on market timing called tactical asset allocation. Tactical asset allocation is when a fund manager doesn’t necessarily just say, Hey, we’re going to go to cash and then we’re going to go invest in stocks again. Now it does happen and as individuals, we may do that. I’m gonna keep my money on the sidelines. For a little while, see what goes on with this market when in reality, even if you’re in your 50s, you and your spouse have another 40 year investment time horizon.

Literally one of the worst things that could happen to you is that you did a good job of getting quote, unquote, out of the market at the right time you got out of the market right before it fell in 2008. The problem is almost nobody got back into the market in time to actually benefit from having missed the drop. More on that in a minute. The tactical asset allocation is when an asset manager moves or tilts the portfolio and says, I think US markets are going to do better now. So they tilt the portfolio back to us. Or they say I think China is going to do so we’re going to buy more Chinese stocks right now because what’s China’s going to do? So if you’ve heard this term from your asset manager, tactical asset allocation, this falls right into a more complex version of should I be out of the market. We’re just going to share To what part of the market we’re in, it sounds much more sophisticated, but it’s still somebody trying to predict the future. Now, how well does that work out? Well, if we look back in time, at the standards and Poor’s 500 index from 1985 through 2017, it returned 11.35%. Not too bad. And yet, the average individual investor invested in equity based mutual funds only returned 4.28% when inflation was 2.6. Heck, if you’re in a high tax rate you barely got ahead of inflation, while investing from 1985 through 2017. That’s over three decades of languishing returns, primarily because individual investors move in and out of the market when they shouldn’t also predicated upon these asset managers, not having a good track record when compared to the indexes that they’re supposed to be compared to then the mutual fund companies closing down the mutual funds that had poor performance, so they no longer have to keep them in their averages. Those things combined investors making poor decisions trying to market time coupled with the asset managers themselves not having a stellar performance history as related to the index when we correct for survivorship bias, and individual investors end up with languishing returns. Well, let’s take a different look at this. Now what we’re going to do is we’re just going to take January 1998 through December 31 2017. And let’s say you just put $10,000 in and you just let it grow the entire time you just kept it invested didn’t do anything. You just put it in a standard Poor’s 500 index, your 10,000 would have grown to 10 to $40,000. But what if you just missed the best five days of practice? formance now keep this in mind. This is 5040 trading days we’re discussing 5040 total days the US stock market was open. And all you missed because of market timing, getting in and out of the market, you missed the best five days, you went from $40,000 down to a little over 25,000. If you missed the top 10 trading days, you have 20,000 instead of 40,000. And if you missed the top 25 trading days out of 5040 total trading days. You got basically zero return for this entire window of time 30 years

and you got zero return. If you missed the 30 top trading days. 30 days out of 5040 you had negative returns for 30 years. This is why market timing can’t work. What I want you guys to think about is it’s not timing in the market. It’s time in the market that produces returns. Now, most all of you listening are business owners. Think of it this way. What had your business do really well, because when things were tough and you were struggling, that you abandoned it, you lock the doors. You said, I’m not coming back to work tomorrow. In fact, I’m not going to come back to work until the business performance picks up? Of course not. What did you do? You stayed invested in your own company. In fact, when things were rough is probably when you did the greatest amount of reinvestment into your company. And the same thing is true when you’re investing in other people’s companies, which is what the US stock market it is. And the international stock bar, we’re getting a chance to own little pieces of other folks businesses, diversifying our capital work so they’re not so concentrated in a single stock. So why is it that There’s this prevailing message that we can time the market? Well, we know there’s a couple of reasons. One is that the asset actively managed mutual fund complex that’s out there wants you to constantly be wanting more, and therefore, perhaps move your money from where it is to where they are. And you’ve got all these trading platforms that want to convince you that you shouldn’t be using an asset management firm of any kind. You can do it yourself. And it’s because of that temptation to get people to move their money that people continue to push these narratives. For instance, how boring would it be if that radio show that people call into or the guy that pushes all the funny buttons on his board that make noise and rolls up his sleeves on MSNBC and yells at the camera? Well, if the right move was built, an academically allocated globally diversified portfolio that’s appropriate for the amount of volatility that you want to take. That show would be real short every week. And as As a result, they wouldn’t get the kind of viewership that they want. Now, when we come back right after this short message from sound Financial Group, you’re gonna hear how a Playboy bunny can teach you how not to invest in the market. Hey everybody, I had to interrupt our show for just a moment to share with you something new. We’ve designed a new white paper that we think is going to add you value in the way that you think about money. It’s three the biggest mistakes we see people make in six ways to fix them. Now for some of you, you might not want the white paper you might be ready to have a conversation with us. And that is okay, you can email us at info at SFGW a.com that’s info at SF GWA comm find us on the web at your business, your wealth calm. And anytime on any of our social media platforms send us a message and we can get you this white paper. But in the meanwhile, if you want to just skip over the white paper, have a philosophy conversation with us. We’re happy to do that with you. Just let us know, philosophy conversation, the subject line. And if you want this white paper, just put white paper in there, I will immediately get out to you this white paper on the three biggest mistakes that we see people make and the six things that you can do to fix them. And now back to our show. All right, I promised right before that commercial break that what we would do is learn a lesson on how not to invest for Playboy bunny now, on my screen if you’re watching this, you’re gonna see this clip. Now this clip is literally directly from Fox News. This wasn’t somebody who clipped it and put it on YouTube now we’re not going to play this entire this clip at all. We’re just showing you the screenshot but I’m going to read it for those of you just listening, Playboy bunny turned day trader on riding wild market swings. Now if that’s not a tongue in cheek way to talk about investing, I don’t know. And I watched it and I’m kind of listening and she said, Oh, you Yeah, my friends watch me do day trading. And then I just set my trades for the day and I clear out all my positions every day before the market closes. So if I don’t want to trade tomorrow, I don’t have to. Usually I make about this much and she’s talking about it, and she’s being interviewed by Neil Cavuto. If you guys ever get a chance to go look up this clip, you’ll probably agree with me that I think Neil Cavuto is like, I have interviewed world leaders on some of the most critical issues relating to business and finance worldwide. And I’m now interviewing a Playboy bunny was nothing wrong. playboy bunnies can be very, very smart. They can have their really great industrious careers after their modeling experience.

But it’s near the end of the clip when my jaw hit the floor. And she’s giving all this advice about day trading. And near the end of the interview, he asked, Well, how long have you been doing this? And it the clip was made I think in August 8 And she said, Well, I had to speak for an investing conference in July. So I wanted to learn more about investing before speaking at the conference. So I started day trading in April of the same year. Meaning that literally, we’re taking advice from the media about investing from somebody who is engaging, entertaining, well spoken. Except she hasn’t even been doing it that long, and no metrics whatsoever about her actual results, and returns from her doing her investing. Nothing audited. I’m positive Fox did not take the time to say well, let’s make sure before we have her on the show, of course not. They did the same thing and I demonstrated it to you when we went to commercial break by saying right after the commercial break, we’re gonna hear from Playboy bunny about how not to invest except they didn’t say not to invest the same tips on day trading, but because they need to keep you through the commercial break. Keep your attention as I mentioned earlier, the They’re not interested in what gets you the best investment returns. They’re interested in the financial media, what returns they can get from you by you being a viewer and staying through the next commercial break. Now, in just a moment, we’re gonna watch a video clip from one of the most legendary consultants and investors in our industry, in investing overall, this is a guy that has paid untold sums of money to just be able to consult with large financial firms. And he’s being interviewed at a conference next to john Bogle, who is the guy who created Vanguard and their indexing strategies and being able to say, here is the problem when you or anybody else tries to go up against investing Titans. We’re gonna listen to him for just a few minutes. And then we’re gonna come right back and close out this episode with some what can you do about all of this

Unknown Speaker 15:59

extra Smart the market that’s self deception. There. It’s not as though the market is out there doing whatever markets do. There’s a mark son of a bitch on the other side of every trade. And when we were children and just getting started in investment management 50 years ago 9090 to 94 95% was done by individual investors. Now, what’s an individual investor? Well, he makes a trade every year and a half every year and a half one trade. Why does he buy or sell well, he buys because he got a bonus of a couple thousand dollars or he sells because he wants to help his daughter pay for college has nothing to do with the stock market. He doesn’t do any comparison shopping. He buys half of them bought at&t. And then half of the rest but the company they work for, and the rest bought some company they’d heard about that must be a good company because one of their friends told him about it. honest to goodness, it’s not hard. To beat people who have no access to information or research, have no comparison value, aren’t doing it with anything like rigorous analysis. It just kind of got someone to buy something. Today, it’s not 95% done by individuals, it’s 96% done by experts. 48 of the 96 are done by the 50 largest, most active investors. These are people that really care. And they’ve got terrific equipment. They’ve all got at least a couple of Bloomberg usually have one at home, one at the office. They’ve got tremendous access to factual information. Everybody gives them the first call. Everybody wants to do business with them. They are so actively in the market so much of the time and they’ve spent years mastering the company or the industry that they’re working in. And when they get you in the crosshairs You know, it was awfully good when george bush would go out and play against the NFL team. But personally, if I were to go out, that would be the way I would be, I’d be absolute fate for destruction. And same things in the stock market his take on these guys. They’re really good.

Paul 18:15

So following on that clip from Charles Ellis, here’s what I want you to be able to take away despite the fact that he made some very obscure references to comedian back in the 1950s or 40s. Here’s the takeaway, when we’re out in the marketplace attempting to be able to outperform the market or some well intended asset manager who does believe that his coin flipping is effective. What we don’t know is that overwhelmingly, the evidence This is a quote from him in his book from 1993. And this is all the way back in 1993. It has not gotten better since 1993. The evidence on investment managers success with market timing is impressive. But much like my golf game, the evidence is overwhelmingly negative. You see, when we’re trying to invest in the market, what we want to be able to do is be able to participate in market returns. And if what we’re doing between us and the market is adding speculation, either by some asset manager who believes he has a good strategy, or by our own speculation, because we’re getting worried about where the Standard and Poor’s 500 is right now, or what’s going to happen with Apple or Facebook or anything, or who’s going to get elected next, over and over and over again, the evidence shows us that the market timing doesn’t work that the asset managers attempting to do the market timing doesn’t work. In our next upcoming episode. What we’re going to cover is the true cost of investing, that oftentimes people don’t understand the full impact to their balance. And sheets to their future returns or their ability to have definite financial independence to fund their work optional lifestyle is all predicated upon, perhaps less than full disclosure by the mutual fund and investment industry about the real cost. It is to them and their balance sheet to do the investing they’re doing. We’ll look forward to seeing you on our next episode, where we cover part four of the illusions of vesting the cost of investing, and we hope that this episode has been a contribution to you being able to design and build a good life.

Cory 20:45

This is how legends are made.

Transcribed by https://otter.ai

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