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محتوای ارائه شده توسط Andrew Stotz. تمام محتوای پادکست شامل قسمتها، گرافیکها و توضیحات پادکست مستقیماً توسط Andrew Stotz یا شریک پلتفرم پادکست آنها آپلود و ارائه میشوند. اگر فکر میکنید شخصی بدون اجازه شما از اثر دارای حق نسخهبرداری شما استفاده میکند، میتوانید روندی که در اینجا شرح داده شده است را دنبال کنید.https://fa.player.fm/legal
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We Have The Receipts
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1 Love Is Blind S8: Pods & Sober High Thoughts w/ Courtney Revolution & Meg 1:06:00
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Happy Valentine’s Day! You know what that means: We have a brand new season of Love Is Blind to devour. Courtney Revolution (The Circle) joins host Chris Burns to delight in all of the pod romances and love triangles. Plus, Meg joins the podcast to debrief the Madison-Mason-Meg love triangle. Leave us a voice message at www.speakpipe.com/WeHaveTheReceipts Text us at (929) 487-3621 DM Chris @FatCarrieBradshaw on Instagram Follow We Have The Receipts wherever you listen, so you never miss an episode. Listen to more from Netflix Podcasts.…
My Worst Investment Ever Podcast
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محتوای ارائه شده توسط Andrew Stotz. تمام محتوای پادکست شامل قسمتها، گرافیکها و توضیحات پادکست مستقیماً توسط Andrew Stotz یا شریک پلتفرم پادکست آنها آپلود و ارائه میشوند. اگر فکر میکنید شخصی بدون اجازه شما از اثر دارای حق نسخهبرداری شما استفاده میکند، میتوانید روندی که در اینجا شرح داده شده است را دنبال کنید.https://fa.player.fm/legal
Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it. Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth. To find more stories like this, previous episodes, and resources to help you reduce your risk, visit https://myworstinvestmentever.com/
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859 قسمت
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محتوای ارائه شده توسط Andrew Stotz. تمام محتوای پادکست شامل قسمتها، گرافیکها و توضیحات پادکست مستقیماً توسط Andrew Stotz یا شریک پلتفرم پادکست آنها آپلود و ارائه میشوند. اگر فکر میکنید شخصی بدون اجازه شما از اثر دارای حق نسخهبرداری شما استفاده میکند، میتوانید روندی که در اینجا شرح داده شده است را دنبال کنید.https://fa.player.fm/legal
Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it. Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth. To find more stories like this, previous episodes, and resources to help you reduce your risk, visit https://myworstinvestmentever.com/
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859 قسمت
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×BIO: Fabrizio has always wanted to fly jets and has had a career flying both private jets and for various airlines worldwide. He has shared the cockpit with pilots from over 65 nationalities, giving him a broader perspective on people and life. STORY: Fabrizio invested in a luxury car business in Italy but chose the wrong person to run the show, and because of this, he lost all his money and a very good friend. LEARNING: Do not mix business with friendship. Hire the right people. “Business decisions need to be made to make money. If that money helps people as well, great. But trying to mix charity with business is a very bad idea.” Fabrizio Poli Guest profile Fabrizio Poli has always wanted to fly jets and has had a career flying both private jets and for various airlines worldwide. He has shared the cockpit with pilots from over 65 nationalities, giving him a broader perspective on people and life. For the last 14 years, Fabrizio has been buying, selling, leasing, and chartering private jets for the ultra-wealthy. Fabrizio is the author of “ The Quantum Economy ” and other books . He often shares his aviation expertise in the media and is featured in the Financial Times, Bloomberg, Social Media Examiner, and Chicago Tribune. Worst investment ever Being in the private jet business, Fabrizio decided to venture into the car business a few years ago. He figured people who buy private jets also collect cars. Fabrizio teamed up with a friend of his in Italy. The idea was to buy Vespers, Alfa Romeos, and Ferraris in Italy and sell them internationally. They bought a bunch of cars and opened a showroom in Italy on the road where the first Ferrari was driven. However, Fabrizio was in England at the time. He assumed that his friend was doing things properly. Since the showroom was on a popular road with all these flashy cars parked outside, many people were walking into the showroom, unfortunately not to buy but to look at them. Fabrizio sent over a web designer to help tweak the website and suggested that his partner let people into the showroom by appointment only. This way, he’d avoid spending 90% of his day talking to people who are not there to buy a car. The friend did not heed his advice, and eventually, the business went under. Fabrizio had invested in the right business but in the wrong person, and because of this, he lost all his money and a very good friend. Lessons learned Hire the right people and create a supportive environment for them. Separate business decisions from personal emotions and make independent evaluations. The product and the process can be great, but if you pick the wrong people to run it, they’ll screw the whole thing up. Andrew’s takeaways Find an independent, objective, knowledgeable third party to help pick a business partner. Separate the business idea from the person in charge of bringing it to life. Actionable advice If you are going to invest with your friend, you are emotionally engaged, and that’s dangerous. Bring somebody else to play the bad guy, someone who can make tough decisions and keep emotions in check if you cannot take the emotion out. Fabrizio’s recommendations Fabrizio recommends reading a lot—both fiction and nonfiction—to open up new possibilities and perspectives. He also recommends listening to other business leaders to learn from their experiences. This practice can inspire and inform your business decisions. No.1 goal for the next 12 months Fabrizio’s number one goal for the next 12 months is to start and launch a new business by September. He is also planning on publishing another book this year. Parting words “Fly high. Think high.” Fabrizio Poli [spp-transcript] Connect with Fabrizio Poli LinkedIn Podcast YouTube Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads X YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 24: Why Do Smart People Do Dumb Things? LEARNING: Past performance does not guarantee future results. Change the criteria you use to select managers. “There are only two things that are infinite, the universe and man’s capacity for stupidity.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 24: Why Do Smart People Do Dumb Things? Chapter 24: Why Do Smart People Do Dumb Things? In this chapter, Larry discusses why investors still make mistakes despite multiple SEC warnings. The past performance delusion Larry explains that it’s normal for most investors to make mistakes when investing, often due to behavioral errors like overconfidence. Being overconfident can cause investors to take too much risk, trade too much, and confuse the familiar with the safe . Those are explainable errors. However, there’s one mistake that Larry finds hard to explain. Most investors ignore the SEC’s required warning that accompanies all mutual fund advertising: “Past performance does not guarantee future results.” Despite an overwhelming body of evidence, including the annual S&P’s Active Versus Passive Scorecards, that demonstrates that active managers’ past mutual fund returns are not prologue and the SEC’s warning, investors still flock to funds that have performed well in the past. Today’s underperforming manager may be tomorrow’s outperformer According to Larry, various researchers have found that the common selection methodology is detrimental to performance. The greater benchmark-adjusted return to investing in ‘loser funds’ over ‘winner funds’ is statistically and economically large and robust to reasonable variations in the evaluation and holding periods and standard risk adjustments. Additionally, the standard practice of firing managers who have recently underperformed actually eliminates those managers who are more likely to outperform in the future. Why Are Warnings Worthless? Larry quotes the study “ Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements ,” which provided some interesting results. The authors found that people viewing the advertisement with the current SEC disclaimer were just as likely to invest in a fund and had the exact expectations regarding a fund’s future returns as people viewing the advertisement with no disclaimer whatsoever. The authors concluded that the SEC-mandating disclaimer is completely ineffective. The disclaimer neither reduces investors’ propensity to invest in advertised funds nor diminishes their expectations regarding future returns. The current SEC disclaimer is too weak The authors noted that the current disclaimer fails because it is too weak. It only conveys that high past returns don’t guarantee high future returns and that investors in the fund could lose money, things that almost all investors already know. It fails to convey what investors need to understand: high past returns are a poor predictor of high future returns. In the authors’ opinion, a stronger disclaimer—one that informs investors that high fund returns generally don’t persist (they are often a matter of chance)—would be much more effective. The insane investor In conclusion, Larry observes that many investors do the same thing over and over again and expect a different outcome. Most seem never to stop and ask: If the managers I hired based on their past outperformance have underperformed after being hired, why do I think the new managers I hire to replace them will outperform if I use the same criteria that have repeatedly failed? And, if I am not doing anything different, why should I expect a different outcome? Change the criteria you use to select managers Larry advises investors to change the criteria they use to select managers. Instead of relying mainly, if not solely, on past performance, they should use criteria such as fund expenses and the fund’s degree of exposure to well-documented factors (such as size, value, momentum, profitability, and quality) that have been shown to have provided premiums. These premiums should have evidence that they have been persistent, pervasive, robust to various definitions, implementable (they survive transaction costs) and that they have intuitive explanations for why you should expect the premium to persist. By using criteria that lead to superior results, investors can avoid actively managed funds and significantly increase their chances of achieving better investment outcomes. Further reading Itzhak Ben-David, Jiacui Li, Andrea Rossi, and Yang Son, “ Advice-Driven Demand and Systematic Price Fluctuations ,” February 2021. Bradford Cornell, Jason Hsu and David Nanigian, “ Does Past Performance Matter in Investment Manager Selection? ” Journal of Portfolio Management, Summer 2017. Rob Bauer, Rik Frehen, Hurber Lum and Roger Otten, “ The Performance of U.S. Pension Plans ,” 2008. Amit Goyal and Sunil Wahal, “ The Selection and Termination of Investment Management Firms by Plan Sponsors ,” Journal of Portfolio Management (August 2008). Molly Mercer, Alan R. Palmer and Ahmed E. Taha, “ Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements ,” Journal of Empirical Legal Studies (September 2010). Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe Enrich Your Future 16: The Estimated Return Is Not Inevitable Enrich Your Future 17: Take a Portfolio Approach to Your Investments Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans Enrich Your Future 19: The Gold Illusion: Why Investing in Gold May Not Be Safe Enrich Your Future 20: Passive Investing Is the Key to Prudent Wealth Management Part III: Behavioral Finance: We Have Met the Enemy and He Is Us Enrich Your Future 21: Think You Can Beat the Market? Think Again Enrich Your Future 22: Some Risks Are Not Worth Taking Enrich Your Future 23: Seeing Through the Frame: Making Better Investment Decisions About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn X Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads X YouTube My Worst Investment Ever Podcast…
BIO: James “Jimmy” Milliron is Co-Founder & President of National Brokerage Atlantic, specializing in Wealth Enhancement, Estate Planning, and Asset Protection. STORY: Jimmy wanted to invest $100,000 in Bitcoin, but when he couldn’t find an easy way to do it, he bought a car instead. LEARNING: Research and learn all you can about investment opportunities before investing. “Don’t be afraid to pick up the phone and make a few calls. There’s nothing like picking up the phone and talking to a real person on the other end instead of just texting them.” Jimmy Milliron Guest profile James “Jimmy” Milliron is Co-Founder & President of National Brokerage Atlantic, specializing in Wealth Enhancement, Estate Planning, and Asset Protection. An insurance veteran, he previously served as Executive Vice President at NexTier Bank, building a $400 million premium finance portfolio. He holds a BA from VMI and various securities and insurance licenses. Worst investment ever Jimmy’s worst investment is a mix between marrying a second wife and buying a car in 2016. He invested many resources in his second marriage, but it did not last that long. When Jimmy married his second ex-wife, he wanted to invest about $100,000 in Bitcoin. But he was busy and did not have time to research and learn more about Bitcoin. When Jimmy could not find an easy way to do it, he purchased a car instead with that cash. Lessons learned Go the extra mile in research and learning about investment opportunities before investing. Consider all the investment options available. Actionable advice If you’re young, seek advice from a mentor or your parents about what they would do instead of arbitrarily investing in a make-me-feel-good investment. Their guidance can be invaluable in navigating the complex world of investments. Jimmy’s recommendations Jimmy recommends reading Donald Trump’s Art of the Deal as a valuable resource for negotiation and decision-making. No.1 goal for the next 12 months Jimmy’s number one goal for the next 12 months is losing weight. Parting words “Thank you very much. Andrew and I wish everyone well.” Jimmy Milliron [spp-transcript] Connect with Jimmy Milliron LinkedIn Website Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads X YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 23: Framing the Problem. LEARNING: Understand how each indexed annuity feature works before buying one. “I would never buy an annuity that didn’t give me full inflation protection.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 23: Framing the Problem. Chapter 23: Framing the Problem In this chapter, Larry discusses how we, as human beings, are subject to biases and mistakes that we’re almost certainly not aware of. He introduces the concept of ‘framing’ in the context of behavioral finance, which refers to how a question or a problem is presented and how this presentation can influence our decision-making, often leading us to answer how the questioner wants us to. Examples of framing Larry shares the following examples from Jason Zweig’s book Your Money & Your Brain to support the theory of framing in decision-making. These examples illustrate how the same information, when presented in different ways, can lead to significantly different decisions, highlighting the impact of framing on our perceptions and choices. A group of people was told ground beef was “75% lean.” Another was told the same meat was “25% fat.” The “fat” group estimated the meat would be 31% lower in quality and taste 22% worse than the “lean” group estimated. Pregnant women are more willing to agree to amniocentesis if told they face a 20% chance of having a Down syndrome child than if told there is an 80% chance they will have a “normal” baby. A study asked more than 400 doctors whether they would prefer radiation or surgery if they became cancer patients themselves. Among the physicians who were informed that 10% would die from surgery, 50% said they would prefer radiation. Among those who were told that 90% would survive the surgery, only 16% chose radiation. The evidence from the three examples shows that if a situation is framed from a negative viewpoint, people focus on that. On the other hand, if a problem is framed positively, the results are pretty different. The indexed annuities fallacy Larry Swedroe goes on to connect the concept of framing to investing, particularly in the context of indexed annuities. He explains how annuities are often presented with hidden costs and benefits, leading to misleading conclusions for investors. According to Larry, indexed annuities are products that salesmen describe as providing “the best of both worlds”—the potential rewards of equity investing without the downside risks. Unfortunately, indexed annuities contain many negative features, making them an unfavorable investment option. The SEC’s warning against indexed annuities Larry points out that the typical indexed annuity is so intricate and filled with negative features that it is challenging for most investors to fully comprehend. He highlights a bulletin warning issued by the SEC in July 2020, urging people to be cautious about investing in indexed annuities, fostering a sense of careful consideration. The bulletin advised investors to read the contract before buying an indexed annuity and, if the annuity is a security, to read the prospectus. Investors should understand how each feature works and what impact it and the other features may have on the annuity’s potential return. The SEC also suggested asking an insurance agent, broker, or other financial professional questions to understand how the annuity works. The agency also reminded investors that indexed annuity contracts commonly allow the insurance company to periodically change some of these features, such as the rate cap. Such changes can affect your return. So, read your contract carefully to determine what changes the insurance company may make to your annuity. So why do investors still love indexed annuities? Despite the negatives, why do investors continue to be drawn to this product, purchasing tens of billions year after year? Larry offers a straightforward explanation. The insurance industry presents the investment decision in a way that directs investors’ attention to the potential for significant gains, the principal protection, and the guaranteed minimum return offered by annuities, instilling a sense of hope. Further, all the products sold by the typical insurance company and Wall Street firms are laden with glitzy features. In each case, you’re paying an excessive fee to get that benefit, but they’re framing it, and you’re getting it without being told that the costs far exceed the mathematical odds of your getting it. This makes you lose sight of the costs and the lost upside potential. In other words, “you’ve been framed.” Better alternatives to indexed annuities Larry advises investors and financial advisors to frame problems in a way that allows for analysis from various perspectives. This is the best way to ensure investors consider all the pros and cons. He emphasizes that financial advisors can add value by understanding how human beings make mistakes and helping them avoid them, instilling a sense of responsibility. He also discusses alternative ways to create a similar financial outcome to annuities, such as investing in Treasury Inflation-Protected Securities (TIPS). Further reading Jason Zweig, Your Money & Your Brain (Simon & Schuster 2007), pp. 134–5. Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe Enrich Your Future 16: The Estimated Return Is Not Inevitable Enrich Your Future 17: Take a Portfolio Approach to Your Investments Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans Enrich Your Future 19: The Gold Illusion: Why Investing in Gold May Not Be Safe Enrich Your Future 20: Passive Investing Is the Key to Prudent Wealth Management Part III: Behavioral Finance: We Have Met the Enemy and He Is Us Enrich Your Future 21: Think You Can Beat the Market? Think Again Enrich Your Future 22: Some Risks Are Not Worth Taking About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn X Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads X YouTube My Worst Investment Ever Podcast…
BIO: Mitch Russo is a serial entrepreneur who built and sold his first software company for eight figures, scaled a $25M business with Tony Robbins and Chet Holmes, and was twice nominated for Inc. Entrepreneur of the Year. STORY: Mitch bought several Amazon stores to make passive income, which he did for a while. Unfortunately, the lucky streak ended after Amazon significantly reduced the commissions it paid to its resellers, and Google changed its algorithm. Now, Mitch’s SEO pages were not working, and nobody was finding them. LEARNING: Never start a business without knowing who will buy the product. Try to sell your product/service before you build it. “Please do not create a product until you understand exactly what the client needs. Try and sell it first before you build it.” Mitch Russo Guest profile Mitch Russo is a serial entrepreneur who built and sold his first software company for eight figures, scaled a $25M business with Tony Robbins and Chet Holmes, and was twice nominated for Inc. Entrepreneur of the Year. He’s the author of four books and the creator of ClientFol.io. Worst investment ever Mitch highlighted two particular investments that have left a lasting mark on his life as an investor. The Amazon stores A couple of years ago, Mitch embarked on an exhilarating journey to create recurring revenue by investing in businesses that required minimal participation. The Amazon stores, a hot trend at the time, became his focus. With significant investments, these stores flourished, and Mitch was able to generate a substantial monthly income of $18,000 to $20,000, almost passively. Then the whole thing came crashing down. Two things happened simultaneously: Amazon significantly reduced the commissions it paid to its resellers, and Google changed its algorithm. Now, Mitch’s SEO pages were not working, and nobody was finding them. The peer-to-peer accountability platform Mitch created an earlier version of ClientFol.io called resultsbreakthrough.com, a peer-to-peer accountability platform. Mitch had to invent some technology to do it. At the time, the platform worked fantastic. To succeed with the the peer-to-peer accountability platform, Mitch poured his heart and soul into it. He was deeply passionate about what he had created. However, the platform did not receive the response he had hoped for. Despite his belief in the platform’s potential, it remained unsold, a stark reminder that success is not guaranteed, no matter how brilliant the idea. Lessons learned Never start a business without knowing who will buy the product first. Try to sell your product/service before you build it. It’s never over until you quit. Hire a coach to accelerate business growth and learn valuable lessons quickly. Andrew’s takeaways Solving a problem is not enough; you must ensure your target customer can pay for the product. Is the pain valuable enough that they’ll pay high enough prices? Actionable advice If you are smart and you can see what’s happening around you, you can make almost any mistake, recover from it, learn from it, and grow from it. Mitch’s recommendations Mitch recommends reading Crossing the Chasm , which beautifully encapsulates the power of focus. No.1 goal for the next 12 months Mitch’s number one goal for the next 12 months is to continue building recurring revenue through internet processes and funnels, a path he is deeply passionate about. Additionally, he is on the verge of publishing two fiction books, one of which he believes will be adapted into a movie. He is actively working to lay the groundwork for this promising future. Parting words “Keep on tracking.” Mitch Russo [spp-transcript] Connect with Mitch Russo LinkedIn X Facebook Instagram Website Podcast Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads X YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 22: Some Risks are Not Worth Taking. LEARNING: Don’t put all your eggs in one basket; diversify your portfolio. “Once you have enough to live a high-quality life and enjoy things, taking unwarranted risks becomes unnecessary.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 22: Some Risks are Not Worth Taking. Chapter 22: Some Risks Are Not Worth Taking In this chapter, Larry discusses the importance of investors knowing which risks are worth taking and which are not. The $10 million bet that almost didn’t pay off To kick off this episode, Larry shared a story of an executive who put his entire $10 million portfolio in one stock. Around the late 1999 and early 2000s, Larry was a consultant to a registered investment advisor in Atlanta, and one of their clients was a very senior Intel executive. This executive’s net worth was about $13 million, and $10 million was an Intel stock. To Larry’s shock, the executive would not consider selling even a small%age of his stock to diversify his portfolio. He was confident that this stock was the best company despite acknowledging the risks of this concentrated strategy. It was, in fact, the NVIDIA of its day. It was trading at spectacular levels. The executive had watched it go up and up and up. Learning from the past Larry pointed out that there were similar situations not long ago, from the 60s, for example, when we had the Nifty 50 bubble , and, once great companies like Xerox, Polaroid Kodak, and many others disappeared, and these were among the leading stocks. Like this executive, many had invested all their money in a single company and had seen their net worth suffer greatly when these companies crumbled. This history serves as a powerful lesson, enlightening us about the risks of overconfidence and the importance of diversification. The Intel stock comes tumbling down Since he was a senior executive, he believed he would know if Intel was ever in trouble. Larry went ahead and told him some risks were not worth taking. He advised him to sell most of his stock and build a nice, safe, diversified portfolio, mostly even bonds. The executive could withdraw half a million bucks a year from it pretty safely because interest rates were higher, and that was far more than he needed. Larry’s advice didn’t matter—he couldn’t convince him. Within two and a half years, Intel’s stock was trading at about $10, falling about 75%. It was not until late in 2017 that it once again reached $40. Some risks are just not worth taking Over the period from March 2000 through September 2020, while an investment in Vanguard’s 500 Index Fund (VFINX) returned 6.4% per annum, Intel returned just 1.8% per annum. This stark contrast highlights the consequences of overconfidence and the importance of diversification, making it clear that some risks are simply not worth taking. Overconfidence blurs out the risk Larry advises against such overconfidence, stressing the importance of considering the consequences of being wrong. He points out that investing is about taking risks. However, prudent investors know some risks are worth taking, and some are not. And they know the difference. Thus, Larry adds, when the cost of a negative outcome is greater than you can bear, you should not take the risk, no matter how great the odds appear to be of a favorable outcome. In other words, the consequences of your investment decisions should dominate the probabilities, no matter how favorable you think the odds are. Marginal utility of wealth Larry also discusses the marginal utility of wealth, explaining that once basic needs are met, additional wealth provides little extra value. He argues that taking unwarranted risks becomes unnecessary once you have enough to live comfortably. Larry emphasizes the importance of considering both the ability to take risks and the potential consequences of being wrong. He explains that while youth provides a longer investment horizon, the cost of being wrong is higher when young. He recommends a balanced approach that includes some risk-taking and a stable investment plan, encouraging the audience to think carefully about their investment strategies. Further reading Laurence Gonzalez, Deep Survival (W. W. Norton & Company, October 2003). Wall Street Journal, “Portrait of a Loss: Chicago Art Institute Learns Tough Lesson About Hedge Funds,” (February 1, 2002). Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe Enrich Your Future 16: The Estimated Return Is Not Inevitable Enrich Your Future 17: Take a Portfolio Approach to Your Investments Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans Enrich Your Future 19: The Gold Illusion: Why Investing in Gold May Not Be Safe Enrich Your Future 20: Passive Investing Is the Key to Prudent Wealth Management Part III: Behavioral Finance: We Have Met the Enemy and He Is Us Enrich Your Future 21: Think You Can Beat the Market? Think Again About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn X Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads X YouTube My Worst Investment Ever Podcast…
BIO: Craig Cecilio is a visionary disruptor and CEO of DiversyFund, dedicated to democratizing wealth building. He has broken barriers in private markets, raising over $1 billion and offering investment opportunities once reserved for the elite. STORY: Craig had a potential business partner introduced to him by a friend. The partner had a land deal and convinced Craig to invest $10,000. A couple of other people joined in and deposited about $250,000 into the land development deal in New Mexico. A week went by, and the investors got ghosted by the land deal owner. LEARNING: Don’t mix friendship with business. Do your due diligence on all the parties involved in the transaction. “Assume everybody is a crook and work backward. That’s the key to underwriting and any investment.” Craig Cecilio Guest profile Craig Cecilio is a visionary disruptor and CEO of DiversyFund , dedicated to democratizing wealth-building. He has broken barriers in private markets, raising over $1 billion and offering investment opportunities once reserved for the elite. Craig empowers others to reclaim financial control and make meaningful, lasting impact. DiversyFund offers a unique opportunity to invest in multifamily real estate, making wealth-building accessible to everyone. By investing in DiversyFund, your audience can take part in a diversified real estate portfolio typically reserved for high-net-worth investors—no accreditation needed. Worst investment ever Craig had a potential business partner, and they were doing a land deal. The partner always liked to chase big deals, while Craig is a singles hitter. However, he decided to invest $10,000 in this deal. A couple of other people joined the deal and deposited about $250,000 into the land development deal in New Mexico. A week went by, and the investors got ghosted by the land deal owner. Realizing the gravity of the situation, Craig took it upon himself to investigate the deal. He delved into the intricacies of the financial system, learning about wire transfers and the sequence of events. His thorough examination of the circumstances and the paperwork revealed crucial oversights in basic information and essential due diligence items. While Craig lost $10,000, losing that potential partner and the trust was the biggest loss. Craig had to sever that relationship as well. Lessons learned When underwriting, ensure all the boxes get checked, and ask those questions a little more. Don’t mix friendship with business. Andrew’s takeaways Before you transfer any money, stop and go through a checklist to make sure you know what you are doing. You have to assume that once it’s gone, it’s gone. Actionable advice Do your due diligence on all the parties involved in the transaction, and if it sounds too good to be true, it is not. Assume everybody is the crook and work backward. That’s the key to underwriting and any investment. Craig’s recommendations Craig recommends checking out the online courses he plans to launch next month. He also recommends his upcoming book, You Know What You Got To Do . No.1 goal for the next 12 months Craig’s number one goal for the next 12 months is to launch his online courses. He also plans to put them on the map. Parting words “Just get started. Lean into it and get started. Take the first step. Read about it. You have so many tools in your hand. So just get started.” Craig Cecilio [spp-transcript] Connect with Craig Cecilio LinkedIn Instagram Website Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads X YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 21: You Can’t Handle the Truth. LEARNING: Overconfidence leads to poor investment decisions. Measure your returns against benchmarks. “If you think you can forecast the future better than others, you’re going to ignore risks that you shouldn’t ignore because you’ll treat the unlikely as possible.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 21: You Can’t Handle the Truth. Chapter 21: You Can’t Handle the Truth In this chapter, Larry discusses how investors delude themselves about their skills and performance, leading to persistent and costly investment mistakes. The deluded investor According to Larry, evidence from the field of behavioral finance suggests that investors persist in deluding themselves about their skills and performance. This persistent self-deception leads to costly investment mistakes, emphasizing the need for continuous vigilance in investment decisions. Larry quotes a New York Times article in which professors Richard Thaler and Robert Shiller noted that individual investors and money managers persist in believing that they are endowed with more and better information than others and can profit by picking stocks. This insight helps explain why individual investors think they can: Pick stocks that will outperform the market. Time the market, so they’re in it when it’s rising and out of it when it’s falling. Identify the few active managers who will beat their respective benchmarks. The overconfident investor Larry adds that even when individuals acknowledge the difficulty of beating the market, they are buoyed by the hope of success. He quotes noted economist Peter Bernstein : “Active management is extraordinarily difficult because there are so many knowledgeable investors and information does move so fast. The market is hard to beat. There are a lot of smart people trying to do the same thing. Nobody’s saying that it’s easy. But possible? Yes.” This slim possibility keeps hope alive. Overconfidence, fueled by this hope, leads investors to believe they will be among the few who succeed. Why investors spend so much time and money on actively managed mutual funds Larry also examined another study, Positive Illusions and Forecasting Errors in Mutual Fund Investment Decisions , which sought to find out why investors spend so much time and money on actively managed mutual funds despite passively managed index funds outperforming the vast majority of these funds. The authors concluded that the reason was that investors deluded themselves. They found that most participants had consistently overestimated their investments’ future and past performance. In fact, more than a third who believed they had beaten the market had actually underperformed by at least 5 percent, and at least a fourth lagged by at least 15 percent. Biases such as this contribute to suboptimal investment decisions. You are better off accepting market returns While Larry agrees that it is undoubtedly possible for investors to outperform the market, the evidence demonstrates that the vast majority would be better off aligning their expectations with reality and simply accepting market returns. At the very least, investors should know the odds of outperforming. Unfortunately, most investors delude themselves about those odds, highlighting the necessity of aligning expectations with reality. One reason, Larry says, might be that investors are unaware of the evidence. Another is that they don’t know their own track records. Larry notes that this self-delusion helps explain why investors exhibit the common human trait of overconfidence. Most people want to believe they are above average. Thus, the disconnect investors have between reality and illusion persists. Always measure your investment returns In conclusion, Larry advises investors to measure their investment returns and compare them to appropriate benchmarks. Doing so will force you to confront reality rather than allow an illusion to undermine your ability to achieve your financial objectives. Further reading Jason Zweig, Your Money & Your Brain , (Simon & Schuster 2007). Jonathan Fuerbringer, “ Why Both Bulls and Bears Can Act So Bird-Brained ,” New York Times, March 30, 1997. Jonathan Burton, Investment Titans , (McGraw-Hill, 2000). Money, “ Did You Beat the Market? ” (January 1, 2000). Don A. Moore, Terri R. Kurtzberg, Craig R. Fox, and Max H. Bazerman, “ Positive Illusions and Forecasting Errors in Mutual Fund Investment Decisions ,” Harvard Business School Working Paper. Markus Glaser and Martin Weber, “ Why Inexperienced Investors Do Not Learn: They Don’t Know Their Past Portfolio Performance ,” (July 21, 2007). Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe Enrich Your Future 16: The Estimated Return Is Not Inevitable Enrich Your Future 17: Take a Portfolio Approach to Your Investments Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans Enrich Your Future 19: The Gold Illusion: Why Investing in Gold May Not Be Safe Enrich Your Future 20: Passive Investing Is the Key to Prudent Wealth Management About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn X Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads X YouTube My Worst Investment Ever Podcast…
BIO: Michael Episcope is the co-CEO of Origin Investments. He co-chairs its investment committee and oversees investor relations and capital raising. STORY: Michael invested in a multi-family property in Austin with a friend who had vouched for somebody else. Unbeknownst to Michael, the guy in Austin had taken a loan against his property to save other properties in his portfolio. LEARNING: Do not justify the red flags because an investment opportunity looks great. Investing is about how you behave and not what you know. “When looking at an investment opportunity, do not justify the red flags because the investor investment opportunity looks so great.” Michael Episcope Guest profile Michael Episcope is the co-CEO of Origin Investments . He co-chairs its investment committee and oversees investor relations and capital raising. Prior to Origin, Michael had a prolific derivatives trading career and was twice named one of the top 100 traders in the world. Michael earned his undergraduate and master’s degrees from DePaul University. He has more than 30 years of investment and risk management experience. Worst investment ever In 2004, Michael, a commodities trader, ventured into an investment with a friend’s recommendation. His friend’s assurance and Michael’s financial stability made him believe he was impervious to mistakes. The investment was a multi-family property in Austin, Texas. Michael trusted his friend and thought he did the due diligence, but he did not. The deal was okay, as they had the right city and the right piece of land. But then the communication from the individual in Austin was not going very well, and things just weren’t adding up. But Michael’s friend kept insisting everything was good. Still, something didn’t sit well with Michael, so he went online and Googled his property. He saw his property was sitting on a bridge lender site. The guy in Austin had taken a loan against Michael’s property to save other properties in his portfolio. The whole thing just went sideways. Michael took a lot of time and effort to wrangle away from that investment, wasting a year of his life. He got pennies on the dollar back from that investment. Lessons learned Investing is about people. When looking at an investment opportunity, do not justify the red flags because the investment opportunity seems so great. Investing is about how you behave and not what you know. Andrew’s takeaways Even though you may sometimes have the wrong outcome, it doesn’t mean you didn’t do the right thing. Actionable advice Do as much due diligence as possible. When investing with someone, ask yourself: Do they have something to lose if the investment fails? Do they have their skin in the game? Do they have a balance sheet? Do they have something here at risk more than you do? Michael’s recommendations Michael recommends that anyone wanting to learn about personal finance read Morgan Housel’s books . He also recommends downloading his free Comprehensive Guide to Real Estate Investing . No.1 goal for the next 12 months Michael’s number one goal for the next 12 months is to deliver a great product and service to his investors. On the personal side, Michael has two kids in college and one still at home. He aims to spend as much time as possible with the son still at home and then enjoy life after kids as an empty nester with his wife. Parting words “Thank you so much for having me on today. It’s been great.” Michael Episcope [spp-transcript] Connect with Michael Episcope LinkedIn X YouTube Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads X YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 20: A Higher Intelligence. LEARNING: Choose passive investing over active investing. “Passive investing involves systematic, transparent, and replicable strategies without individual stock selection or market timing. It’s the more ethical way to go.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 20: A Higher Intelligence. Chapter 20: A Higher Intelligence In this chapter, Larry discusses prudent investing. The Uniform Prudent Investor Act The Uniform Prudent Investor Act , a cornerstone of prudent investment management, offers two key benefits. Firstly, it underscores the importance of broad diversification in risk management, empowering trustees and investors to make informed decisions. Secondly, it promotes cost control as a vital aspect of prudent investing, providing a clear roadmap for those who may lack the necessary knowledge, skill, time, or interest to manage a portfolio effectively. Ethical malfeasance and misfeasance in investing In this chapter, Larry sheds light on Michael G. Sher’s insights. Sher extensively discusses ethical malfeasance and misfeasance. He says ethical malfeasance occurs when an investment manager does something deliberately or conceals it (e.g., the manager knows that he’s too drunk to drive but drives anyway). For example, consider the manager who invests intentionally at a higher level of risk than the client chose without informing them and then generates a subsequently higher return. The manager attributes the alpha or the excess return to his superior skill instead of the reality that he was taking more risk, so it was just more exposure to beta, not alpha. On the other hand, ethical misfeasance occurs when an investment manager does something by accident (e.g., the manager really believes that he’s sober enough to drive). Thus, the manager doesn’t know what he’s doing and shouldn’t be managing money. Avoid active investing Larry highly discourages active investing because the evidence shows that active managers who tend to outperform on average outperform by a little bit, and the ones that underperform tend to underperform by a lot. Either they don’t have the skill, and they have higher expenses, and the ones who have enough skills to beat the market, most of that skill is offset by their higher costs. So it’s still really tough to generate alpha. Passive investing is the ethical way to go According to Sher, managing money in an efficient market without investing passively is investment malfeasance. He also notes that not knowing that such a market is efficient is investment misfeasance because you should know it. It’s in the law books. Sher concludes that passive investing is a systematic, transparent, and replicable strategy that is more ethical. Further reading W. Scott Simon, The Prudent Investor Act (Namborn Publishing, 2002) Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe Enrich Your Future 16: The Estimated Return Is Not Inevitable Enrich Your Future 17: Take a Portfolio Approach to Your Investments Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans Enrich Your Future 19: The Gold Illusion: Why Investing in Gold May Not Be Safe About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 19: Is Gold a Safe Haven Asset? LEARNING: Do not allocate more than 5% of gold to your portfolio. “I don’t have a problem with people allocating a very small amount of gold to their portfolio, but they should only do it if they’re prepared to earn lousy returns most of the time.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 19: Is Gold a Safe Haven Asset? Chapter 19: Is Gold a Safe Haven Asset? In this chapter, Larry explains why you should not buy gold because you think it’s a good inflation hedge. While he is fine with people allocating a minimal amount of gold to their portfolio, Larry cautions that they should only do it if they’re prepared to earn lousy returns most of the time. Gold as an investment asset Gold has long been used as a store of value, a unit of exchange, and as jewelry. More recently, many investors have come to believe that gold should be considered an investment asset, playing a potential role in the asset allocation decision by providing a hedge against currency risk, a hedge against inflation, and a haven of safety during severe economic recessions. Larry reviews various research findings to determine if the evidence supports those beliefs. The evidence In their June 2012 study, “ The Golden Dilemma ,” Claude Erb and Campbell Harvey found that in terms of being a currency hedge, changes in the real price of gold were largely independent of the change in currency values—gold is not a good hedge against currency risk. This means that the value of gold does not necessarily increase or decrease in response to changes in currency values, making it a less effective hedge than commonly believed. Erb and Harvey also found gold isn’t quite the safe haven many investors think it is, as 17% of monthly stock returns fell into the category where gold dropped while stocks posted negative returns. If gold acted as a true safe haven, we would expect very few, if any, such observations. Still, 83% of the time, on the right side isn’t a bad record. Gold is not an inflation hedge, no matter the trading horizon The following example provides the answer regarding gold’s value as an inflation hedge. On January 21, 1980, the price of gold reached a then-record high of US$850. On March 19, 2002, gold traded at US$293, well below its price two decades earlier. The inflation rate for the period from 1980 through 2001 was 3.9%. Thus, gold’s loss in real purchasing power, which refers to the amount of goods or services that can be purchased with a unit of gold, was about 85%. This means that the value of gold, in terms of what it can buy, decreased significantly over this period. Gold cannot be considered an inflation hedge over most investors’ horizons when it lost 85% in real terms over 22 years. Gold is not as attractive an asset as many may think Investors are often attracted to gold because they believe it provides hedging benefits—hedging inflation, hedging currency risk, and acting as a haven of safety in bad times. The evidence demonstrates that investors should be wary. While gold might protect against inflation in the long run, 10 or 20 years is not the long run; you need a longer investment horizon to make actual returns. And there is no evidence that gold acts as a hedge against currency risk. As to being a safe haven, gold is a volatile investment capable and likely to overshoot or undershoot any notion of fair value. Evidence of gold’s short-term volatility is that over the 17 years (2006-2022), the annual standard deviation of the iShares Gold Trust ETF (IAU), at 17.2%, was higher than the 15.6% annual standard deviation of Vanguard’s 500 Index Investor Fund (VFINX). In addition, gold experienced a maximum drawdown of almost 43%—safe havens don’t experience losses of that magnitude. Don’t allocate more than 5% gold in your portfolio With this evidence in mind, Larry advises investors never to own more than 5% of gold in their portfolio. Further, investors should remember that gold only acts as a safe haven on occasion, but there are also many times when it doesn’t. Historically, the probability is close to a 50/50 coin toss, slightly favoring gold. Alternative assets to own instead of gold Larry says investors are better off owning real assets than gold because they have expected actual returns. So, for example, real estate prices over the long term go up because part of the cost is land and buildings, making real estate an excellent long-term hedge. Another asset Larry suggests instead of gold is infrastructure ETFs that, for example, own toll roads and water facilities. Such assets raise their prices with the inflation rate and can act as a hedge. Further reading Claude Erb and Campbell Harvey, “ The Golden Dilemma ,” Financial Analysts Journal (July/August 2013). Claude Erb and Campbell Harvey, “ The Golden Constant ,” May 2019. Goldman Sachs, “ Over the Horizon ,” 2013 Investment Outlook. Pim van Vliet and Harald Lohre, “ The Golden Rule of Investing ,” Jun 2023. Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe Enrich Your Future 16: The Estimated Return Is Not Inevitable Enrich Your Future 17: Take a Portfolio Approach to Your Investments Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 18: Black Swans and Fat Tails. LEARNING: Never treat the unlikely as impossible. Diversify your portfolio to withstand black swans. “If you build a portfolio that can withstand the black swans and is highly diversified, then psychological or economic events won’t force you to sell.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 18: Black Swans and Fat Tails. Chapter 18: Black Swans and Fat Tails In this chapter, Larry explains the importance of never treating the unlikely as impossible and ensuring your plan includes the near certainty that black swan events will appear. Thus, your plan should consider their risks and how to address them. Understanding the risk of fat tails In terms of investing, Larry says, fat tails are distributions in which very low and high values are more frequent than a normal distribution predicts. In a normal distribution, the tails to the extreme left and extreme right of the mean become smaller, ultimately reaching zero occurrences. However, the historical evidence on stock returns is that they demonstrate occurrences of low and high values that are far greater than theoretically expected by a normal distribution. Thus, understanding the risk of fat tails is essential to developing an appropriate asset allocation and investment plan. Unfortunately, Larry notes, many investors fail to account for the risks of fat tails. History of the black swans With the publication of Nassim Nicholas Taleb’s 2001 book Fooled by Randomness , the term black swan became part of the investment vernacular—virtually synonymous with the term fat tail. In his second book, The Black Swan , published in 2007, Taleb called a black swan an event with three attributes: It is an outlier, as it lies outside the realm of regular expectations because nothing in the past can convincingly point to its possibility. It carries an extreme impact. Despite its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. Taleb went on further to show that stock returns have big fat tails. Their distribution of returns is not normally distributed, and fat tails mean that what people think are unlikely events are much more likely to occur than people believe will. To illustrate this, Larry uses an example: if you take stock returns, and in the last 100 years, you cut out one best month per year, which is 1% of the distribution, the assumption is that you wouldn’t lose all that much of the returns. But the fact is, you lose most of the returns. So that’s the good fat tails. Similarly, if you avoid the worst months, your returns become spectacular. Do not try to time the market However, Larry cautions investors that trying to time the market because of unpredictable events is the wrong strategy. The fact that you have fat tails in the data doesn’t mean you should try to time the market or engage in an active management strategy because evidence shows that it doesn’t work. What it means, very simply put, is that your investment strategy, investment policy, and asset allocation decisions must take into account that these fat tails exist; they’re unpredictable, and therefore, don’t take more risks than you can stomach. Further, Larry adds, you must be prepared to rebalance the portfolio to take advantage of those drops and buy more when things are down. Active management will not protect you from fat tails The existence of fat tails doesn’t change the prudent strategy of being a passive buy, hold, and rebalance investor. Active managers have demonstrated no ability to protect investors from fat tails. However, the existence of fat tails is significant because of their effect on portfolios. The risks of black swans and the damage they can do to portfolios, especially for those in the withdrawal phase, must be considered when designing your asset allocation. With that in mind, Larry offers the following advice: Make sure your investment plan accounts for the existence of fat tails. Don’t take more risks than you have the ability, willingness, or need to take. Never treat the unlikely as impossible or the likely as certain. Further reading Nassim Nicholas Taleb, Fooled by Randomness , Texere, 2001. Javier Estrada, “ Black Swans and Market Timing: How Not to Generate Alpha ,” November 2007. Nassim Nicholas Taleb, The Black Swan , Random House, 2007. Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe Enrich Your Future 16: The Estimated Return Is Not Inevitable Enrich Your Future 17: Take a Portfolio Approach to Your Investments About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 17: There is Only One Way to See Things Rightly. LEARNING: Consider the overall impact of investments rather than focusing on individual metrics. "There is only one right way to build a portfolio—by recognizing that the risk and return of any asset class by itself should be irrelevant." Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 17: There is Only One Way to See Things Rightly. Chapter 17: There is Only One Way to See Things Rightly In this chapter, Larry enlightens us on the benefits of considering the overall impact of investments rather than focusing on individual metrics. This holistic approach empowers investors and advisors to make more informed decisions. Don’t view an asset class’s returns and risk in isolation A common mistake that investors and even professional advisors often make is viewing an asset class’s returns and risk in isolation. Larry emphasizes this point by giving the example of Vanguard’s popular index funds, the largest index funds in their respective categories, to make us all more cautious and aware of the potential pitfalls of this approach. From 1998 through 2022, the Vanguard 500 Index Fund (VFINX) returned 7.53% per annum, outperforming Vanguard’s Emerging Markets Index Fund (VEIEX), which returned 6.14% per annum. VFINX also experienced lower volatility of 15.7% versus 22.6% for VEIEX. The result was that VFINX produced a much higher Sharpe ratio (risk-adjusted return measure) of 0.43 versus 0.30 for VEIEX. Why more volatile emerging markets have a higher return According to Larry, despite including an allocation to the lower returning and more volatile VEIEX, a portfolio of 90% VFINX/10% VEIEX, rebalanced annually, would have outperformed, returning 7.59%. And it did so while also producing the same Sharpe ratio of 0.43. Perhaps surprisingly, a 20% allocation to VEIEX would have done even better, returning 7.61% with a 0.43 Sharpe ratio. Even a 30% allocation to VEIEX would have returned 7.59%, higher than the 7.53% return of VFINX (though the Sharpe ratio would have fallen slightly to 0.42 from 0.43). The portfolios that included an allocation to the lower-returning and more volatile emerging markets benefited from the imperfect correlation of returns (0.77) between the S&P 500 Index and the MSCI Emerging Markets Index. The right way to build a portfolio Larry says there is only one right way to build a portfolio—by recognizing that the risk and return of any asset class by itself should be irrelevant. The only thing that should matter is considering how adding an asset class impacts the risk and return of the entire portfolio. Further, Larry stresses the importance of global diversification, a strategy that can reassure and instill confidence in investors and advisors. He points out that if markets are efficient, all risky assets should have very similar risk-adjusted returns. This argument for broad global diversification, avoiding the home country bias, is a logical starting point for you to consider in your investment strategies. Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe Enrich Your Future 16: The Estimated Return Is Not Inevitable About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
Listen on Apple | Listen Notes | Spotify | YouTube | Other Quick take In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 16: All Crystal Balls are Cloudy. LEARNING: Estimated return is not always inevitable. “If returns are negative early on, don’t withdraw large amounts because when the market eventually recovers, you won’t have that money to earn your returns.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 16: All Crystal Balls are Cloudy. Chapter 16: All crystal balls are cloudy In this chapter, Larry illustrates why past returns are not crystal balls that predict future returns. According to Larry, the problem with all forecasts that deal with estimations of probabilities is that people tend to think of them in a deterministic way. He says that as an investor, you should think about returns with the idea that distribution and estimate are only the middle points. Your plan has to be prepared for either the good tail to show up, which is easy to deal with and usually will allow you to take chips off the table and reduce your risk because you’ll be well ahead of your goal. But if the bad tail shows up, you may have to either work longer, plan on saving more, or rebalance, which means buying stocks at a tough time. The threat of sequence risk To demonstrate the danger of sequence risk, Larry asks us to imagine it’s 1973, and stocks have returned 8% in real terms and 10% in nominal returns. We’ve had similar results over the next 50 years. Say an investor in that time frame decides to withdraw 7% yearly from their portfolio in real terms because they know with their clear crystal ball that they will get 8% for the next 50 years. This means if they take out, say, $100,000 in the first year, and inflation is 3%, to keep their actual spending the same, they have to take out $103,000. According to Larry, this investor will be bankrupt within 10 years due to the sequence of returns, which is the order in which the returns occur, not the returns themselves. As you can see in the table below, despite providing an 8.7% per annum real return over the 27 years, because the S&P 500 Index declined by more than 37% from January 1973 through December 1974, withdrawing an inflation-adjusted 7% per annum in the portfolio caused it to be depleted by the end of 1982—in just 10 years! (Note that from January 1973 through October 1974, when the bear market ended, the S&P 500 lost 48%.) Sacrificing expected returns Larry says this example shows the danger of sequence risk and illustrates that the order of returns matters significantly in the decumulation phase because systematic withdrawals work like a dollar-cost averaging program in reverse—market declines are accentuated. This can cause principal loss, which the portfolio may never recover from. In this case, the combination of the bear market and relatively high inflation caused the portfolio to shrink by almost 56% in the first two years. For the portfolio to be restored to its original $1 million level, the S&P 500 Index would have had to return 127% in 1975. And because of the inflation experienced, the amount to be withdrawn would have needed to increase from $70,000 to over $90,000. In such cases, the odds of outliving one’s assets significantly increase if you don’t adjust the plan (such as increasing savings, delaying retirement, or reducing the spending goal). The order of returns matters According to Larry, our investor made the mistake of treating the single-point estimate as if it were an inevitable outcome and not a single potential outcome within a broad spectrum of potential outcomes. Another mistake our investor made was failing to consider that his investment experience might be different from the return over the entire period because of the impact of his withdrawals. In other words, the order of returns matters, not just the returns over the entire period. Estimated return is not inevitable Larry insists that since we live in a world with cloudy crystal balls, and all we can do is estimate returns, it is best to avoid treating a portfolio’s estimated return as inevitable. Consider the possible dispersion of likely returns and calculate the odds of successfully achieving the financial goal. The goal is generally, though not always, defined as achieving and maintaining an acceptable lifestyle—not running out of money while still alive. In other words, the goal is not to retire with as much wealth as possible but to ensure you do not retire poor and risk running out of assets while still alive. Using a Monte Carlo simulator to forecast the potential dispersion of returns Larry says that forecasting the potential dispersion of returns is best accomplished through a Monte Carlo simulator—a computer simulation that uses random processes to model the impact of risk and uncertainty in financial and investment forecasting. This tool allows one to see the probabilities of different possible outcomes of an investment strategy. The computer program will produce numerous random iterations (usually at least 1,000 and often many thousands), letting one see the odds of meeting a goal. Since thousands of iterations are run, one must think about probabilities instead of just one outcome. Projecting the likelihood of success Divide the Monte Carlo simulation based on your investment life into an accumulation phase when you’re working and making contributions and a distribution phase that begins when you retire and lasts as long as you live. The inputs into the Monte Carlo simulation are: The investment assumptions (expected returns, standard deviations, and correlations) Future deposits into the investment account The desired annual withdrawal amount The years the account must last The output is summarized by assigning probabilities to the various investment outcomes. The ultimate goal is to ensure you are comfortable with the projected likelihood of success—the odds you can withdraw sufficient funds from the portfolio each year and still achieve your financial goal. Nobody can predict the future when people are involved In conclusion, Larry reminds investors that crystal balls will always be cloudy when forecasting the future, be it the weather or stock market returns. He quotes Alan Greenspan’s advice: “Learn everything you can, collect all the data, crunch all the numbers before making a prediction or a financial forecast. Even then, accept and understand that nobody can predict the future when people are involved.” However, Larry adds that the inability to forecast the future accurately does not render forecasting useless. It just means we must accept this shortcoming and take it into account. Another essential investment advice is to never make the mistake of treating even the highly likely as if it were inevitable. Further reading Didier Sornette, Why Stock Markets Crash (Princeton University Press 2002), p. 322. Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
BIO: Damon Pistulka, co-founder of Exit Your Way, is known for his hands-on, practical approach to helping business owners maximize value and achieve successful exits. STORY: Damon explains his journey into understanding technology and its role in business growth. LEARNING: Stay informed and adapt to changing industry trends. Adapt to changing customer expectations and preferences. “The simple things we can do with technology today make the customer experience so much better.” Damon Pistulka Guest profile Damon Pistulka , co-founder of Exit Your Way, is known for his hands-on, practical approach to helping business owners maximize value and achieve successful exits. With over 20 years of experience, Damon is dedicated to transforming businesses, enhancing profitability, and helping founders create lasting legacies. Technology is your business ally In today’s episode, Damon, who previously appeared on the podcast on episode Ep649: Be Careful of Concentration Risk , discusses the value of technology in running a business. He emphasizes the importance of robotic process automation, CRMs, and AI in modern business operations to accelerate value. In his opinion, technology allows businesses to do simple things that improve customer experience. Damon highlights a couple of threats businesses face today that could be dealt with by adopting technology. Rapid innovation is outpacing businesses. Those lagging behind will be overtaken by competitors who have adopted new technologies. Aging workforce with limited new talent. There’s an aging workforce and limited new talent. As more people retire, businesses increasingly find it hard to replace the retirees with educated and qualified people. Customers now expect top-tier service levels. Buyers are now demanding businesses provide instant feedback and real-time updates. Businesses that don’t meet customer expectations will not stay competitive. Using technology to deal with the threats Damon explains his approach to helping clients develop business growth strategies. He emphasizes the importance of starting with small, manageable changes and gradually scaling up. Damon cautions entrepreneurs from trying to do it all. Instead, he advises starting with simple, practical changes, often referred to as ‘low-hanging fruits’—these are the tasks or opportunities that are the easiest to achieve and provide the quickest benefits. Gradually, as these are implemented, more complex systems can be adopted. Seek out experts who can help you advance Further, Damon advises seeking out experts who can help you advance in the particular area you’re focusing on. Then, work your way up as you get your company, your people, and your supplier base comfortable with these changes. Get educated before adopting new technology Damon also underscores the importance of getting educated before adopting new technology. He advises becoming familiar and comfortable enough with it to try it, enabling you to identify potential areas where the technology could help your business. This approach instills a sense of preparedness and confidence. Then, he suggests hiring an expert to help you implement your new technologies and strategies. Move fast Another way to deal with the business threats is to move fast. Damon says that speed sells, and businesses must adopt a speed and innovation culture. This culture is about encouraging and rewarding quick decision-making, rapid implementation of ideas, and a constant drive for improvement. Technology will help you do things in half the time and stay efficient and competitive in your operations, which is a key aspect of this culture. Just get started Finally, according to Damon, just get started. Business owners wake up knowing what they have to do every day. By cutting the distractions and focusing on your core strengths and capabilities, you can stay reassured and focused. As Damon says, there’s a lot of time in your day if you throw out the junk. [spp-transcript] Connect with Damon Pistulka Linkedin Twitter Facebook YouTube Website Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 15: Individual Stocks Are Riskier Than Investors Believe. LEARNING: Don’t invest in individual stocks. Instead, diversify your portfolio to reduce your risk. “Diversification has been said to be the only free lunch in investing. Unfortunately, most investors fail to use the full buffet available.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 15: Individual Stocks Are Riskier Than Investors Believe. Chapter 15: Individual Stocks Are Riskier Than Investors Believe In this chapter, Larry reveals the stark reality of investing in individual stocks, highlighting the significant risks involved. His aim is to help investors understand the potential pitfalls of this high-stakes game and why they should avoid it. Given the apparent benefits of diversification, it’s baffling why investors don’t hold highly diversified portfolios. According to Larry, one reason is that most investors likely don’t understand how risky individual stocks are compared to owning a broad selection of hundreds or thousands of stocks. Evidence that individual stocks are very risky Larry notes that the stock market has returned roughly 10% per year over the last 100 years, and the standard deviation on an annual basis of a portfolio of a broad market of stocks has been about 20%. He observes that most people don’t understand that the average individual stock has a standard deviation of more than twice that. In another study from 1983 to 2006 that covered the top 3,000 stocks, the stock market returned almost 13% per annum, but the median return was just 5.1%, nearly 8% below the market’s return. The mean annualized return was -1.1%. This means that if you randomly pick one stock, the odds would say you’re more likely to get -1.1%. However, if you own hundreds or thousands of stocks, the odds are in your favor, and you’ll get very close to that mean return. Larry shares another stark example of the riskiness of individual stocks. Despite the 1990s being one of the greatest bull markets of all time, with the Russell 3000 providing an annualized return of 17.7% and a cumulative return of almost 410%, 22% of the 2,397 U.S. stocks in existence throughout the decade had negative absolute returns. This means they underperformed by at least 410%. Over the decade, inflation was a cumulative 33.5%, meaning they lost at least 33.5% in real terms. In another study by Hendrik Bessembinder of all common stocks listed on the NYSE, Amex, and NASDAQ exchanges from 1926 through 2015 and included. He found: Only 47.7% of returns were more significant than the one-month Treasury rate. Even at the decade horizon, a minority of stocks outperformed Treasury bills. From the beginning of the sample or first appearance in the data through the end of the sample or delisting, and including delisting returns when appropriate, just 42.1% of common stocks had a holding period return greater than one-month Treasury bills. While more than 71% of individual stocks had a positive arithmetic average return over their entire life, only a minority (49.2%) of common stocks had a positive lifetime holding period return, and the median lifetime return was -3.7%. This is because of volatility and the difference in arithmetic (annual average) returns versus geometric (compound or annualized) returns. For example, if a stock loses 50% in the first year and then gains 60% in the second, it has a positive arithmetic return but has lost money (20%) and has a negative geometric return. Bessembinder concluded that his results help to understand why active strategies, which tend to be poorly diversified, most often lead to underperformance. At the same time, he wrote that the results potentially justify a focus on less-diversified portfolios by investors who particularly value the possibility of “lottery-like” outcomes despite the knowledge that the poorly diversified portfolio will most likely underperform. A diversified portfolio is the way to go The results from the studies Larry has highlighted underscore the critical role of portfolio diversification. Diversification, often referred to as the only free lunch in investing, provides a sense of security and peace of mind. Unfortunately, many investors fail to fully utilize this powerful tool. They mistakenly believe that by limiting the number of stocks they hold, they can better manage their risks. In reality, a well-diversified portfolio is the key to long-term financial success. Most professionals with PhDs in finance spend 100% of their time engaged in stock picking and have access to the world’s best databases and teams of professionals helping them. These individuals are unlikely to outperform. So why would an average investor think they have enough advantage over them? Larry’s stern advice to investors is not to play the game. His professional guidance is a beacon of reassurance in the complex world of investing, steering investors away from risky individual stocks and towards the safety of a diversified portfolio. Investors make mistakes when they take idiosyncratic (unique), diversifiable, uncompensated risks. They do so because they are overconfident in their skills, overestimate the worth of their information, confuse the familiar with the safe, have the illusion of being in control, don’t understand how many individual stocks are needed to reduce diversifiable risks effectively, and don’t understand the difference between compensated and uncompensated risks (some risks are uncompensated because they are diversifiable). Another likely explanation is that investors prefer skewness. They are willing to accept the high likelihood of underperformance in return for the small likelihood of owning the next Google. In other words, they like to buy lottery tickets. Larry says that if you have made any of these mistakes, you should do what all smart people do: Once they have learned that a behavior is a mistake, they correct it. So, steer away from risky individual stocks and go for the safety of a diversified portfolio. Further reading Longboard Asset Management, “The Capitalism Distribution Observations of Individual Common Stock Returns, 1983 – 2006.” Hendrik Bessembinder, “Do Stocks Outperform Treasury Bills?” Journal of Financial Economics (September 2018). Did you miss out on the previous chapters? Check them out: Part I: How Markets Work: How Security Prices are Determined and Why It’s So Difficult to Outperform Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Part II: Strategic Portfolio Decisions Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
BIO: Ava Benesocky is an author, public speaker, educator, CEO, and Co-Founder of CPI Capital, a uniquely innovative real estate private equity firm that helps investors invest in multifamily assets. STORY: Ava became passionate about real estate when she was young. At 15, she convinced her parents to invest $13,000 in a course by Scott McGillivray on renovating and selling homes. Ava never did anything with the course, which made it the worst investment ever. LEARNING: If you invest in anything, ensure you’re ready to be committed, take action, and focus completely on it. Beware of shiny object syndrome. “If you’re ever going to invest in something, you have to take action, or else it’s a total waste of time and money. And what’s the point?” Ava Benesocky Guest profile Ava Benesocky is an author, public speaker, educator, CEO, and Co-Founder of CPI Capital , a uniquely innovative real estate private equity firm that helps investors invest in multifamily assets. She is the Host of Real Estate Investing Demystified with August Biniaz, who was Ep 784 . Ava has been featured in publications such as Forbes, Yahoo Finance, and numerous PodCasts and YouTube shows. Ava helps busy professionals earn passive income through Multifamily Real Estate investments. Worst investment ever Ava became passionate about real estate when she was young. At 15, she convinced her parents to invest $13,000 in a course by Scott McGillivray on renovating and selling homes. Ava never did anything with the course, which made it the worst investment ever. She tried to get it started, but there were so many moving components, and the process was so convoluted that she got scared. It all fell through the cracks. Ava never ended up taking action on it. Lessons learned If you invest in anything, ensure you’re ready to be committed, take action, and focus completely on it. Beware of shiny object syndrome. Andrew’s takeaways Embrace boring, dull, consistent, and regular assets. Before buying a course, ask yourself if you have the time to commit to it or if it is better to get someone to help you achieve what you could if you took the course. Actionable advice Refrain from being impulsive when buying courses. Take your time and ask yourself if you have time for it. Can you block it off on your calendar? If not, do not get it. Ava’s recommendations Ava recommends listening to her podcast Real Estate Investing Demystified , where she shares her personal experiences, interviews industry experts, and provides advice on real estate investing and other investment opportunities. No.1 goal for the next 12 months Ava’s number one goal for the next 12 months is to continue building a couple of departments in the company and closing on a couple more assets. On a personal level, she will continue taking care of her mind, body, and family. Parting words “Thank you so much for letting me be on your podcast, and good luck to everybody out there in whatever venture they decide to take.” Ava Benesocky [spp-transcript] Connect with Ava Benesocky Linkedin Facebook Podcast YouTube Website Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 14: Stocks Are Risky No Matter How Long the Horizon. LEARNING: Stocks are risky no matter the length of your investment horizon “Investors should never take more risk than is appropriate to their personal situation.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 14: Stocks Are Risky No Matter How Long the Horizon. Chapter 14: Stocks Are Risky No Matter How Long the Horizon In this chapter, Larry illustrates why stocks are risky no matter how long the investment horizon is. According to Larry, the claim that stocks are not risky if one’s horizon is long is based on just one set of data (the U.S.) for one period (albeit a long one). It could be that the results were due to a ‘lucky draw.’ In other words, if stocks are only risky when one’s horizon is short, we should see evidence of this in other markets. Unfortunately, investors in many different markets did not receive the kind of returns U.S. investors did. Historical examples of stock market risks Larry presents evidence from several markets, reinforcing the historical data that stocks are also risky over the long term. First, Larry looks at U.S. equity returns 20 years back from 1949. The S&P 500 Index had returned 3.1 percent per year, underperforming long-term government bonds by 0.8 percent per year—so much for the argument that stocks always beat bonds if the horizon is 20 years or more. In 1900, the Egyptian stock market was the fifth largest in the world, attracting significant capital inflows from global investors. However, those investors are still waiting for the return ON their capital, let alone the return OF their capital. In the 1880s, two promising countries in the Western Hemisphere received capital inflows from Europe for development purposes: the U.S. and Argentina. One group of long-term investors was well rewarded, while the other was not. Finally, in December 1989, the Nikkei index reached an intraday all-time high of 38,957. From 1990 through 2022, Japanese large-cap stocks (MSCI/Nomura) returned just 0.2 percent a year—a total return of just 6 percent. Considering cumulative inflation over the period was about 15 percent, Japanese large-cap stocks lost about 9 percent in real terms over the 33 years. Taking the risk of equity ownership Larry notes that the most crucial lesson investors need to learn from this evidence is that while it is true that the longer your investment horizon, the greater your ability to take the risk of investing in stocks (because you have a greater ability to wait out a bear market without having to sell to raise capital), stocks are risky no matter the length of your investment horizon. In fact, that is precisely why U.S. stocks have generally (but not always) provided such great returns over the long term. Investors know that stocks are always risky, and thus, they price stocks in a manner that provides them with an expected (but not guaranteed) risk premium. In other words, stocks must be priced low enough to attract investors with a risk premium large enough to compensate them for taking the risk of equity ownership. Because the majority of investors are risk-averse, the equity risk premium has historically been large. Things that never happened before do happen Larry warns that investors should never take more risk than is appropriate to their personal situation. It is also important to remember these words of caution from Nassim Nicholas Taleb: “History teaches us that things that never happened before do happen.” With that in mind, you will be well served if you never treat the highly unlikely (a very long or permanent bear market) as impossible. In addition, investors should diversify their portfolios against risks that can show up and not have all of their assets in any one country or asset class. This is because any of them can have very long periods of poor performance. He insists that having long periods of poor performance is not a reason to avoid an asset class. It’s a reason why investors should diversify. Further reading Terry Burnham, Mean Markets and Lizard Brains (Wiley 2005). Nassim Nicholas Taleb, Fooled by Randomness (Random House, 2005). Did you miss out on the previous chapters? Check them out: Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
BIO: Pritesh Ruparel is the CEO of ALT21, a leading tech company in hedging and currency solutions. STORY: Pritesh found a good trade and invested 100% in it. His manager later advised him to liquidate that position because it was too concentrated. A day after Pritesh liquidated, a natural disaster occurred, and the spread went from $10 to $250 in an hour. LEARNING: Put yourself in a position to get lucky. Never decide against your gut. Stay grounded between the highs and the lows. “The worst thing you can do is to trade on something or to make a decision that you don’t 100% agree with.” Pritesh Ruparel Guest profile Pritesh Ruparel is the CEO of ALT21 , a leading tech company in hedging and currency solutions. With two decades of expertise in financial derivatives and structured finance, he leverages technology to make financial products accessible and affordable, aiming to save small and medium-sized enterprises (SMEs) millions annually on international transactions. Worst investment ever Pritesh’s first trading role was as a market maker in commodity relatives. One summer, he put a ton of analysis into a particular commodity spread trade. Pritesh thought the risk-to-reward looked good, but the trade was not doing anything. Nobody was marking the trade. Pritesh thought this was insane, so he went all in. He had the biggest position possible in that trade and it was 100% of his portfolio. A manager advised Pritesh to liquidate the position because it was too concentrated. A day after Pritesh liquidated, a natural disaster occurred. The position benefited from this disaster and went from $10 to $250 in an hour. Unfortunately, Pritesh could have earned so much if only he had not liquidated. Lessons learned Put yourself in a position to get lucky. When you start any role, listen, learn as much as possible, and take advice. Never decide against your gut. Never make a decision that you don’t agree with 100%. Actionable advice Stay grounded between the highs and the lows. Ultimately, you’ll be fine if you make decisions that align with what you believe in. This can give you a sense of confidence and conviction in your decisions. Pritesh’s recommendations Pritesh recommends building systems, processes, or resources that suit your risk appetite, emotional intelligence, and patience. This can enhance your decision-making and risk management, as it aligns with your personal attributes. No.1 goal for the next 12 months Pritesh’s number one goal for the next 12 months is to have repeatable, scalable processes for his go-to-market and use that to make an impact globally. Parting words “Remember, it’s a marathon, not a sprint.” Pritesh Ruparel [spp-transcript] Connect with Pritesh Ruparel LinkedIn Website Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 13: Between a Rock and a Hard Place. LEARNING: Past performance is not a strong predictor of future performance. “If you must invest actively, find active funds that design their strategies more intelligently to take advantage of the problems and at least avoid pitfalls.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 13: Between a Rock and a Hard Place. Chapter 13: Between a Rock and a Hard Place In this chapter, Larry illustrates why past performance is not a strong predictor of future performance. Academic research has found that prominent financial advisors, investment policy committees, and pension and retirement plans engage top academic practitioners to help them identify future managers who will outperform the market. Such entities only hire managers with a track record of outperforming. They analyze their performance to see if it is statistically significant. However, research also shows that, on average, the active managers chosen based on outstanding track records have failed to live up to expectations. The underperformance relative to passive benchmarks invariably leads decision-makers to fire the active manager. And the process begins anew. A new round of due diligence is performed, and a new manager is selected to replace the poorly performing one. And, almost invariably, the process is repeated a few years later. So whenever pension plans interview Larry and he notices this hiring pattern, he always asks them what their hiring process is and what they’re doing differently this time since, you know, the same process failed persistently, causing regular turnover of managers. Nobody has ever answered that question. According to Larry, many individual investors go through the same motions of picking a manager and end up with the same results—a high likelihood of poor performance. Doing the same thing over and over expecting a different result is insanity Larry observes that the conventional wisdom that past performance is a strong predictor of future performance is so firmly ingrained in our culture that it seems almost no one stops to ask if it is correct, even in the face of persistent failure. Larry wonders why investors aren’t asking themselves: “If the process I used to choose a manager that would deliver outperformance failed, and I use the same process the next time, why should I expect anything but failure the next time?” The answer is painfully apparent. If you don’t do anything different, you should expect the same result. Yet, so many investors do not ask this simple question. Larry insists that it is essential to understand that neither the purveyors of active management nor the gatekeepers want you to ask that question. If you did, they would go out of business. You, on the other hand, should ask that question. You must provide the best returns to yourself or to members of the plan for which you are a trustee, not to give the fund managers or consultants a living. Break the cycle of repeating past mistakes Larry urges investors to reconsider their approach. The odds of selecting active managers who will outperform on a risk-adjusted basis over the long term are so poor that it’s not prudent to try. However, it doesn’t have to be that way. Investors would benefit from George Santayana’s advice: “Those who cannot remember the past are condemned to repeat it.” Anyone who insists on hiring active managers should look for a manager with low costs, low turnover, no style drifting, systematic strategies, and broad diversification (i.e., investing in a wide range of assets to spread risk). You are better off trading with a fund that owns hundreds of stocks because that narrows the dispersion of outcomes, which means you’re taking less risk. Further reading Herman Brodie and Klaus Harnack, “ The Trust Mandate ,” (Harriman House, 2018). Howard Jones and Jose Vicente Martinez, “ Institutional Investor Expectations, Manager Performance, and Fund Flows ,” Journal of Financial and Quantitative Analysis (December 2017). Amit Goyal and Sunil Wahal, “ The Selection and Termination of Investment Management Firms by Plan Sponsors ,” Journal of Finance (August 2008). Tim Jenkinson, Howard Jones, and Jose Vicente Martinez, “ Picking Winners? Investment Consultants’ Recommendations of Fund Managers ,” Journal of Finance (October 2016). Did you miss out on the previous chapters? Check them out: Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 12: Outfoxing the Box. LEARNING: You don’t have to engage in active investing; instead, accept market returns by investing passively. “You don’t have to play the game of active investing. You don’t have to try to overcome abysmal odds—odds that make the crap tables at Las Vegas seem appealing. Instead, you can outfox the box and accept market returns by investing passively.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 12: Outfoxing the Box. Chapter 12: Outfoxing the Box In this chapter, Larry aims to guide investors toward a winning investment strategy: accepting market returns. He uses Bill Schultheis’s “Outfoxing the Box.” This is a simple game that you can choose to either play or not play. The box contains nine percentages, each representing a rate of return your financial assets are guaranteed to earn for the rest of your life. As an investor, you have the following choice: Accept the 10 percent rate of return in the center box or be asked to leave the room. The boxes will be shuffled around, and you will have to choose a box, not knowing what return each box holds. You quickly calculate that the average return of the other eight boxes is 10 percent. Thus, if thousands of people played the game and each chose a box, the expected average return would be the same as if they all decided not to play. Of course, some would earn a return of negative 3 percent per annum, while others would earn 23 percent. This is like the world of investing: if you choose an actively managed fund and the market returns 10 percent, you might be lucky and earn as much as 23 percent per annum, or you might be unlucky and lose 3 percent per annum. A rational risk-averse investor should logically decide to “outfox the box” and accept the average (market) return of 10 percent. In all the years Larry has been an investment advisor, whenever he presents this game to an investor, not once has an investor chosen to play. Everyone decides to accept par or 10 percent. While they might be willing to spend a dollar on a lottery ticket, they become more prudent in their choice when it comes to investing their life’s savings. Active investing is a loser’s game Active investing is a game with low odds of success that many would consider a losing battle. It’s a game that, when compared to the ‘outfoxing the box’ game, seems like a futile endeavor. Larry’s advice is to avoid this game altogether. In the “outfoxing the box” game, the average return of all choices was the same 10 percent as the 10 percent that would have been earned by choosing not to play. And 50 percent of those choosing to play would be expected to earn an above-average return and 50 percent a below-average return. In his book The Incredible Shrinking Alpha , Larry shows that the odds are far worse than 50 percent. Today, only about 2 percent of actively managed funds generate statistically significant alphas on a pretax basis. If you would choose not to play a game when you have a 50 percent chance of success, what logic is there in choosing to play a game where the most sophisticated investors have a much higher failure rate? Yet, that is precisely the choice those playing the game of active management are making. Larry adds that research has shown that even the big institutional investors, with all their resources, fail to outperform appropriate risk-adjusted benchmarks such as the S&P 500. In addition to their other advantages, institutional investors have one other significant advantage over individual investors—their returns are not taxable. However, if your equity investments are in a taxable account, the returns you earn are subject to taxes. The incremental tax cost of active funds further reduces your odds of success. You don’t have to play the game of active investing Larry’s advice to investors is to avoid trying to overcome abysmal odds—odds that make the crap tables at Las Vegas seem appealing. Instead, he suggests outfoxing the box and accepting market returns by investing passively. Larry quotes Charles Ellis, author of Investment Policy: How to Win the Loser’s Game : “In investment management, the real opportunity to achieve superior results is not in scrambling to outperform the market, but in establishing and adhering to appropriate investment policies over the long term—policies that position the portfolio to benefit from riding with the main long-term forces in the market.” Further reading Robert D. Arnott, Andrew L. Berkin, and Jia Ye, “How Well Have Taxable Investors Been Served in the 1980s and 1990s? ” Journal of Portfolio Management (Summer 2000). Charles Ellis, Investment Policy: How to Win the Loser’s Game (Irwin, 1993) p. 24. Did you miss out on the previous chapters? Check them out: Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 11: The Demon of Chance. LEARNING: Don’t always attribute skill to success, sometimes it could be just luck. “Just because there is a correlation doesn’t mean causation. You must be careful not to attribute skill and not luck to success.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 11: The Demon of Chance. Chapter 11: The Demon of Chance In this chapter, Larry discusses why investors confuse skill with what he calls “the demon of luck,” a term he uses to describe the random and unpredictable nature of market outcomes. Larry cautions that before concluding that because an investment strategy worked in the past, it will work in the future, investors should be aware of the uncertainty and ask if there is a rational explanation for the correlation between the outcome and strategy. According to Larry, the assumption is that while short-term outperformance might be a matter of luck, long-term outperformance must be evidence of skill. However, a basic knowledge of statistics is crucial in understanding that with thousands of money managers playing the game, the odds are that a few, not just one, will produce a long-term performance record. Today, there are more mutual funds than there are stocks. With so many active managers trying to win, statistical theory shows that it’s expected that some will likely outperform the market. However, beating the market is a zero-sum game before expenses since someone must own all stocks. And, if some group of active managers outperforms the market, there must be another group that underperforms. Therefore, the odds of any specific active manager being successful are, at best, 50/50 (before considering the burden of higher expenses active managers must overcome to outperform a benchmark index fund). Skill or “the demon of luck? From probability, it’s expected that randomly, half the active managers would outperform in any one year, about one in four to outperform two years in a row, and one in eight to do so three years in a row. Fund managers who outperform for even three years in a row are often declared to be gurus by the financial media. But are they gurus, or is it just luck? According to Larry, it is hard to tell the difference between the two. Without this knowledge of statistics investors are likely to confuse skill with “the demon of luck.” Bill Miller, the Legg Mason Value Trust manager, was acclaimed as the next Peter Lynch. He managed to do what no current manager has done—beat the S&P 500 Index 15 years in a row (1991–2005). Indeed, that could be luck. You can’t rely on that performance as a predictor of future greatness. Larry turns to academic research to test if this conclusion is correct. In one example, the Lindner Large-Cap Fund outperformed the S&P 500 Index for 11 years (1974 through 1984). Over the next 18 years, the S&P 500 Index returned 12.6 percent. Believers in past performance as a prologue to future performance were not rewarded for their faith in the Lindner Large-Cap Fund with returns of just 4.1 percent, an underperformance of over 8 percent per annum for 18 years. After outperforming for 11 years in a row, the Lindner Large-Cap Fund beat the S&P 500 in just four of the next 18 years and none of the last nine—quite a price to pay for believing that past performance is a predictor of future performance. In another example, David Baker’s 44 Wall Street was the top-performing diversified U.S. stock fund over the entire decade of the 1970s—even outperforming the legendary Peter Lynch, who ran Fidelity’s Magellan Fund. Faced with deciding which fund to invest in, why would anyone settle for Peter Lynch when they could have David Baker? Unfortunately, 44 Wall Street ranked as the worst-performing fund of the 1980s, losing 73 percent. During the same period, the S&P 500 grew 17.6 percent per annum. Each dollar invested in Baker’s fund fell to just $0.27. On the other hand, each dollar invested in the S&P 500 Index grew to over $5. Belief in past performance as a predictor of future performance can be expensive As evidenced by the Linder Large-Cap Fund and the 44 Wall Street Fund examples, belief in the “hot hand” and past performance as a predictor of the future performance of actively managed funds and their managers can be pretty expensive. Larry points out that, unfortunately, the financial media and the public quickly assume that superior performance results from skill rather than the more likely assumption that it was a random outcome. The reason is that noise sells, and the financial media is in the business of selling. They are not in the business of providing prudent investment advice. Larry concludes that while there will likely be future Peter Lynchs and Bill Millers, investors cannot identify them ahead of time. Also, unfortunately, investors can only buy future performance, not past performance. A perfect example of this apparent truism is that in 2006, Miller’s streak was broken as the Legg Mason Value Trust underperformed the S&P 500 Index by almost 10 percent. The fund’s performance was so poor that its cumulative three-year returns trailed the S&P 500 Index by 2.8 percent annually. This further proves that it is tough to tell whether past performance resulted from skill or the “demon of luck.” Remember that relying on past performance as a guide to the future might lead you to invest with the next Peter Lynch, just as it might lead you to invest with the next David Baker. That is a risk that a prudent, risk-averse investor (probably you) should not be willing to accept. Further reading Karen Damato and Allison Bisbey Colter, “Hedge Funds, Once Utterly Exclusive, Lure Less-Elite Investors,” Wall Street Journal, January 3, 2002. Jonathan Clements, 25 Myths You’ve Got to Avoid (Simon & Schuster, 1998). Did you miss out on the previous chapters? Check them out: Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 10: When Even the Best Aren’t Likely to Win the Game. LEARNING: Refrain from the futile pursuit of trying to beat the market. “Only play the game of active management if you can truly identify an advantage you have, like inside information, but you have to be careful because it’s illegal to trade on it. Also, play only if you place a very high value on the entertainment.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 10: When Even the Best Aren’t Likely to Win the Game. Chapter 10: When Even the Best Aren’t Likely to Win the Game In this chapter, Larry illustrates why individual investors should refrain from the futile pursuit of trying to beat the market. It seems logical to believe that if anyone could beat the market, it would be the pension plans of the largest U.S. companies. Larry lists a few reasons this is a reasonable assumption: These pension plans control large sums of money. They have access to the best and brightest portfolio managers, each clamoring to manage the billions of dollars in these plans (and earn hefty fees). Pension plans can also invest with managers that most individuals don’t have access to because they don’t have sufficient assets to meet the minimums of these superstar managers. Pension plans always hire managers with a track record of outperforming their benchmarks or, at the very least, matching them. Not the ones with a record of underperformance. Additionally, pension plans will always choose the manager who makes an excellent presentation, explaining why they succeeded and would continue to succeed. Many, if not the majority, of these pension plans hire professional consultants such as Frank Russell, SEI, and Goldman Sachs to help them perform due diligence in interviewing, screening, and ultimately selecting the very best of the best. These consultants have considered every conceivable screen to find the best fund managers, such as performance records, management tenure, depth of staff, consistency of performance (to make sure that a long-term record is not the result of one or two lucky years), performance in bear markets, consistency of implementation of strategy, turnover, costs, etc. It is unlikely that there is something that you or your financial advisor would think of that they had not already considered. As individuals, we rarely have the luxury of personally interviewing money managers and performing as thorough a due diligence as these consultants. We generally do not have professionals helping us avoid mistakes in the process. The fees they pay for active management are typically lower than the fees individual investors pay. So, how good are these pension funds at beating the market? So, how have the pension plans done in their quest to find the few managers that will persistently beat their benchmark? The evidence is compelling that they should have “taken par.” For example, Richard Ennis’s 2020 study found that public pension plans underperformed their benchmark return by 0.99%, and the endowments underperformed by 1.59%. He also found that of the 46 public pension plans he studied, just one generated statistically significant alpha, compared to the 17 that generated statistically significant negative alphas. According to the study, the likelihood of underperforming over a decade is 98%. Another researcher, Charles Ellis, declared that active investing is a loser’s game that is possible to win, but the odds of doing so are so poor that it isn’t prudent to try. In Larry’s opinion, it would be imprudent for you to try to succeed if institutional investors, with far greater resources than you (or your broker or financial advisor), fail with great persistence. This should make you feel cautious and less likely to take unnecessary risks. Wall Street needs you to play the game of active investing According to Larry, Wall Street needs and wants you to play the game of active investing. They need you to try to beat par. They know that your odds of success are so low that it is not in your interest to play. But they need you to play so that they (not you) make the most money. They make it by charging high fees for active management that persistently delivers poor performance. Larry insists that the only logical reason to play the game of active investing is that you place a high entertainment value on the effort. For some people, there might be another reason—they enjoy the bragging rights if they win. Of course, you rarely, if ever, hear when they lose. Investing, however, was never meant to be exciting. Wall Street and the media created that myth. Instead, it is intended to provide you with the greatest odds of achieving your financial and life goals with the least risk. That is what differentiates investing from speculating (gambling). Further reading Richard Ennis, Institutional Investment Strategy and Manager Choice: A Critique ,” Journal of Portfolio Management (Fund Manager Selection, 2020, 46 (5). Did you miss out on the previous chapters? Check them out: Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return Enrich Your Future 09: The Fed Model and the Money Illusion About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
BIO: Andrew Pek is a co-founder of Amiko XR Inc., a groundbreaking company that leverages VR and AI technologies to create immersive, personalized learning experiences available 24/7. STORY: Andrew shared his worst investment ever story on episode 376: Build Revenue in Your Startup Before You Build Up Cost. Today, he discusses his new business. LEARNING: Learning can be more immersive, sparking curiosity and excitement. “Thank you so much, Andrew, for having me on your podcast. It’s great to see you. I am excited about the future.” Andrew Pek Guest profile Andrew Pek is a co-founder of Amiko XR Inc ., a groundbreaking company that leverages VR and AI technologies to create immersive, personalized learning experiences available 24/7. He is a recognized C-Suite advisor on innovation and human transformation. Andrew’s insights on leadership and design thinking have been featured in prominent media outlets such as ABC, NBC, Forbes, and Entrepreneur. Andrew shared his worst investment ever story on episode 376: Build Revenue in Your Startup Before You Build Up Cost . Today, he discusses his new business. Worst investment ever Much of Andrew’s work has involved teaching leadership, innovation, product design, and business development skills. He’s always seeking new ways that technology can engage people to absorb learning and become more engaged—not just a boring, traditional training program, but something that would really involve learners in a more immersive way, sparking their curiosity and excitement. Andrew and his team successfully prototyped a solution in which learners get an immersive learning experience through a headset and talk to a coach avatar who can teach just about anything. So, if you’re interested in finance, investing, sales, leadership, career preparation, and just about any topic matter, you’ll find it on the app. This includes job-related skills, general management and leadership courses, and personal development topics. You can obtain information at your fingertips through generative AI and large language models. What sets the application apart is the combination of artificial intelligence and a VR experience. Through simulations, role plays, or evaluation, learners can master any particular topic or get support in any particular challenge. Unlike mobile device applications, VR experiences significantly reduce distractions, leading to more focused and practical engagement. The solution is also unique because it is curated and configured to the expert level. You teach the avatar, and the avatar then teaches others. It ingests your content to become a master in your subject and attain the same level of intelligence as you. Learners who use the solution talk to someone as if they’re talking to you in an interactive, dynamic environment. If something is unclear or learners want to probe further or even get additional guidance or resources, the solution will facilitate that. Learners get videos and information transcripts and don’t have to take notes. Andrew’s solution is a smart choice for mid-to-large-sized corporations or even smaller corporations that can’t afford expensive training or trainers. It’s a cost-effective solution for those looking to provide any training, such as onboarding new employees. Employees can use the application on an ongoing basis to access courses specific to their job or general management leadership courses, just like they’d access a course library, but at the convenience of their homes. Most people nowadays are spending time at home or in the office. With this solution, they don’t have to worry about entering the physical space for an immersive learning experience. Unlike gaming, they can do that sitting on their couch without moving around, so you don’t have to worry about getting dizzy when using VR. It’s a much more stationary experience. If you’re interested in understanding how Andrew’s solution can help your organization, check out amikoxr.com or contact Andrew at Andrewp@amikoxr.com. [spp-transcript] Connect with Andrew Pek LinkedIn Twitter Website Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 09: The Fed Model and the Money Illusion. LEARNING: Just because there is a correlation doesn’t mean that there’s causation. “Just because there is a correlation doesn’t mean that there’s causation. The mere existence of a correlation doesn’t necessarily give it predictive value.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 09: The Fed Model and the Money Illusion. Chapter 09: The Fed Model and the Money Illusion In this chapter, Larry illustrates why the Fed Model should not be used to determine whether the market is at fair value and that the E/P ratio is a much better predictor of future real returns. The FED model The stock and bond markets are filled with wrongheaded data mining. David Leinweber of First Quadrant famously illustrated this point with what he called “stupid data miner tricks.” Leinweber sifted through a United Nations CD-ROM and discovered the single best predictor of the S&P 500 Index had been butter production in Bangladesh. His example perfectly illustrates that a correlation’s mere existence doesn’t necessarily give it predictive value. Some logical reason for the correlation is required for it to have credibility. Without a logical reason, the correlation is just a mere illusion. According to Larry, the “money illusion” has the potential to create investment mistakes. It relates to one of the most popular indicators used by investors to determine whether the market is under or overvalued—what is known as “the Fed Model.” The Federal Reserve was using the Fed model to determine if the market was fairly valued and how attractive stocks were priced relative to bonds. Using the “logic” that bonds and stocks are competing instruments, the model uses the yield on the 10-year Treasury bond to calculate “fair value,” comparing that rate to the earnings-price, or E/P, ratio (the inverse of the popular price-to-earnings, or P/E, ratio). Larry points out two major problems with the Fed Model. The first relates to how the model is used by many investors. Edward Yardeni, at the time a market strategist for Morgan, Grenfell & Co. speculated that the Federal Reserve used the model to compare the valuation of stocks relative to bonds as competing instruments. The model says nothing about absolute expected returns. Thus, stocks, using the Fed Model, might be priced under fair value relative to bonds, and they can have either high or low expected returns. The expected return of stocks is not determined by their relative value to bonds. Instead, the expected real return is determined by the current dividend yield plus the expected real growth in dividends. To get the estimated nominal return, estimated inflation must be added. This is a critical point that seems to be lost on many investors. This leaves a trail of disappointed investors who believe low interest rates justify a high valuation for stocks without the high valuation impacting expected returns. The reality is that when P/Es are high, expected returns are low, and vice versa, regardless of the level of interest rates. The second problem with the Fed Model, leading to a false conclusion, is that it fails to consider that inflation impacts corporate earnings differently than it does the return on fixed-income instruments. Over the long term, the nominal growth rate of corporate earnings has been in line with the nominal growth rate of the economy. Similarly, the real growth rate of corporate earnings has been in line with the real growth of the economy. Thus, in the long term, the real growth rate of earnings is not impacted by inflation. On the other hand, the yield to maturity on a 10-year bond is a nominal return—to get the real return, you must subtract inflation. The error of comparing a number that isn’t impacted by inflation to one that is, leads to the money illusion. Understand how the money illusion is created Understanding how the money illusion is created will prevent you from believing an environment of low interest rates allows for either high valuations or high future stock returns. Instead, if the current level of prices is high (a high P/E ratio), that should lead you to conclude that future returns to equities are likely to be lower than has historically been the case and vice versa. This doesn’t mean investors should avoid equities because they are highly valued or increase their allocations because they have low valuations. Further reading Kiplinger’s Personal Finance , February 1997. Humphrey-Hawkins Report, Section 2: Economic and Financial Developments in 1997 Alan Greenspan, July 22, 1997. William Bernstein, “The Efficient Frontier,” (Summer 2002). Clifford S. Asness, “Fight the Fed Model: The Relationship Between Stock Market Yields, Bond Market Yields, and Future Returns,” (December 2002). Did you miss out on the previous chapters? Check them out: Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
BIO: Pavan Sukhdev’s remarkable journey from scientist to international banker to environmental economist has brought him to the forefront of the sustainability movement. STORY: Pavan ignored his investment rules and invested in a bond, which caused him to lose almost his entire investment. LEARNING: Don’t make exceptions; the rules are the essence. Set up concentration risk limits. Diversify. “A lot of investment mistakes are about not following your own disciplines. Had I followed my own disciplines, I wouldn’t be telling you this story.” Pavan Sukhdev Guest profile Pavan Sukhdev ’s remarkable journey from scientist to international banker to environmental economist has brought him to the forefront of the sustainability movement. As CEO and Founder of GIST Impact , he collaborates with corporations and investors, leveraging impact economics and technology to measure a business’s holistic value contribution to the world. Worst investment ever Pavan is a relatively disciplined investor who always tries to maintain his money’s principal value by investing it wisely. For this reason, Pavan follows a couple of personal investment rules. First, wherever he invests, he either makes friends or has friends. Second, Pavan follows a strict logic when investing in financial assets—he only invests in sovereign bonds. Third, Pavan has set up a concentration risk limit of $100,000 for a single sovereign emerging market. He never invests more than $50,000 on a credit. Fourth, Pavan always reads about the company he wants to invest in to understand what it does and its credit rating. Fifth, Pavan typically invests in sectors where he would be above average in reading and knowledge about that company. Once, a friend came along and asked Pavan if he knew of a particular company with a bond earning 8.75%. Pavan hadn’t heard about it. But he happened to know the family that owned it, and he was interested in it. Pavan decided to invest $100,000 instead of putting his maximum concentration of $50,000. As part of his investment strategy, Pavan reads about companies. A news flash said that the company was involved in a contract in Malaysia. Pavan thought this was great, but that was that. He never followed up on the news. It happens that the company lost the contract. Losing the contract was a big thing that caused the bond price to go down to $75 from $88. At this point, Pavan should have reduced his exposure by bringing the $100,000 down to $50,000, but he didn’t. He continued to sit on the losses and hung on, and the price kept dropping. Finally, at some point, when it was just too low for it to make any difference, the company stopped paying coupons. Lessons learned Don’t make exceptions; the rules are the essence. Set up concentration risk limits and reflect the volatility of that asset. Diversify Don’t sit on losses. Andrew’s takeaways Follow and stick to a stop-loss system. Don’t buy something just because you’ve sold something else. Actionable advice Set your concentration risk limits, put your trading style in place, and diversify. No.1 goal for the next 12 months Pavan’s number one goal for the next 12 months is to get his company profitable because it’s nice to be right, but it’s better to be profitable. Parting words “All the best, guys. Invest wisely and invest well, and when it works, do something useful with that money.” Pavan Sukhdev [spp-transcript] Connect with Pavan Sukhdev Linkedin Website Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 08: Be Careful What You Ask For. LEARNING: High growth rates don’t always mean high stock returns. “Emerging markets are very much like the rest of the world’s capital markets—they do an excellent job of reflecting economic growth prospects into stock prices.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 08: Be Careful What You Ask For. Chapter 08: Be Careful What You Ask For In this chapter, Larry cautions people to be careful what they wish for in investing. He emphasizes the daunting challenge of active management, a path many choose in the belief that they can accurately forecast market trends. However, as Larry points out, the reality is far from this ideal. The unpredictability of the market makes it almost impossible to predict with 100% accuracy, a fact that investors should be acutely aware of. High growth rates don’t always mean high stock returns It’s important to note that high growth rates don’t always translate into high stock returns, underscoring the unpredictability of market outcomes. According to Larry, for today’s investors, the equivalent of the “Midas touch” (the king who turned everything he touched into gold) might be the ability to forecast economic growth rates. If investors could forecast with 100% certainty which countries would have the highest growth rates, they could invest in them and avoid those with low growth rates. This would lead to abnormal profits—or, perhaps not. Nobody can predict with that accuracy. Even if one could make such a prediction, they may still not make the profits they think they will. This is because, as Larry explains, experts have found that there has been a slightly negative correlation between country growth rates and stock returns. A 2006 study on emerging markets by Jim Davis of Dimensional Fund Advisors found that the high-growth countries from 1990 to 2005 returned 16.4%, and the low-growth countries returned the same 16.4%. Such evidence has led Larry to conclude that it doesn’t matter if you can even forecast which countries will have high growth rates; the market will make the same forecast and adjust stock prices accordingly. Therefore, to beat the market, you must be able to forecast better than the market already expects, and to do so, you need to gather information at a cost. In other words, you can’t just be smarter than the market; you have to be smarter than the market enough to overcome all your expenses of gathering information and trading costs. Larry emphasizes that emerging markets are very much like the rest of the world’s capital markets—they do an excellent job of reflecting economic growth prospects into stock prices. The only advantage an investor would have is the ability to forecast surprises in growth rates, which, by definition, are unpredictable. Did you miss out on the previous chapters? Check them out: Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose Enrich Your Future 07: The Value of Security Analysis About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . In this series, they discuss Chapter 07: The Value of Security Analysis. LEARNING: Smart investors, like smart businesspeople, care about results, not efforts. “Smart investors, like smart businesspeople, care about results, not efforts. That is why “smart money” invests in “passively managed,” structured portfolios that invest systematically in a transparent and replicable manner.” Larry Swedroe In this episode of Enrich Your Future , Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing . The book is a collection of stories that Larry has developed over the 30 years to help investors as the head of financial and economic research at Buckingham Wealth Partners . You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks . Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 07: The Value of Security Analysis. Chapter 07: The Value of Security Analysis In this chapter, Larry explains how to test the efficiency of the market by looking at how good security analysts are at predicting the future. If they can outsmart the markets, then the markets are not efficient. Do investors who follow security analysts's recommendations outperform the market? In business, results are what matters— not effort. The same is true in investing because we cannot spend efforts, only results. The basic premise of active management is that, through their efforts, security analysts can identify and recommend undervalued stocks and avoid overvalued ones. As a result, investors who follow their recommendations will outperform the market. Is this premise myth or reality? To answer this question, Larry relies on the robust findings of academic research in the paper Analysts and Anomalies . The authors meticulously examined the recommendations of U.S. security analysts over the period 1994 through 2017. Their findings debunk the myth of analysts' infallibility and shed light on the surprising ways analysts' predictions conflict with well-documented anomalies. They also found that buy recommendations did not predict returns, though sell recommendations did predict lower returns. Another intriguing finding was that among the group of "market" anomalies (such as momentum and idiosyncratic risk), which are based only on stock returns, price, and volume data, analysts produce more favorable recommendations and forecast higher returns among the stocks that are stronger buys according to market anomalies. This is perhaps surprising, as analysts are supposed to be experts in firms' fundamentals. Yet, they performed best with anomalies not based on accounting data. The evidence in this academic paper suggests that analysts even contribute to mispricing, as their recommendations are systematically biased by favoring overvalued stocks according to anomaly-based composite mispricing scores. The authors concluded: "Analysts today are still overlooking a good deal of valuable, anomaly-related information." Results are what matters not effort In conclusion, Larry states that if corporate insiders (e.g., boards of directors), with access to far more information than any security analyst is likely to have, have such great difficulty in determining a "correct" valuation, then it is easy to understand why the results of active management are poor and inconsistent. While security analysts and active portfolio managers make great efforts to beat the market, historical evidence shows that those efforts have proven counterproductive most of the time. And savvy investors, like smart businesspeople, care about results, not efforts. That is why "smart money" invests in "passively managed," structured portfolios that invest systematically in a transparent and replicable manner. Further reading Joseph Engelberg, David McLean and Jeffrey Pontiff, “ Analysts and Anomalies ,” Journal of Accounting and Finance (February 2020). Did you miss out on the previous chapters? Check them out: Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds Enrich Your Future 02: How Markets Set Prices Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? Enrich Your Future 05: Great Companies Do Not Make High-Return Investments Enrich Your Future 06: Market Efficiency and the Case of Pete Rose About Larry Swedroe Larry Swedroe was head of financial and economic research at Buckingham Wealth Partners . Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “ The Only Guide to a Winning Investment Strategy You’ll Ever Need .” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect , Advisor Perspectives , and Wealth Management . [spp-transcript] Connect with Larry Swedroe LinkedIn Twitter Website Books Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
Click here to get the PDF with all charts and graphs Introducing emerging markets Our FVMR framework Fundamentals: Emerging markets are about 20% less profitable Valuation: Emerging markets are about 41% cheaper Asset class and region/country allocations Introducing emerging markets Our FVMR framework Fundamentals: Emerging markets are about 20% less profitable Valuation: Emerging markets are about 41% cheaper UK: Cheap and high profitability Germany and Korea: Cheap and low profitability Australia and US: Expensive but high profitability Asset class and region/country allocations This is not a rec ommendation My next rebalance is in early September Everything could change then This is no t a recommendation My next rebalance is in early September Everything could change then Click here to get the PDF with all charts and graphs Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Twitter YouTube My Worst Investment Ever Podcast…
BIO: Justus Hammer is the Group CEO and Co-founder of Mad Paws. Over the past two years, he has invested in over 45 startups. He has served as an advisor and early investor in Airtasker and a founding investor and advisor to VICE Golf. STORY: Justus developed an idea to make real estate buying easier. He wanted to expand outside of Australia when COVID hit. Justus took a pause, thinking that the market would tank further. Instead, property prices doubled in the next 18 months. LEARNING: What works in one asset class will not necessarily work in another. The real estate market dynamics are very different in each market. Timing matters, but you can never really know whether your timing is right until after. “I don’t think there is a single truth or strategy that works for everyone. Just think about it and ask yourself what you want to achieve and what the most likely scenario is for you to get there.” Justus Hammer Guest profile Justus Hammer is the Group CEO and Co-founder of Mad Paws. He has invested in over 45 startups over the past two years, serving as an advisor and early investor to Airtasker and a founding investor and advisor to VICE Golf. He has not only been involved in starting more than ten companies in the tech space, like Spreets and Mad Paws, but has also developed a growing interest in cash flow businesses over the past ten years. Worst investment ever Justus saw a big opportunity in the real estate space to improve and make purchasing a property easier. There’s a whole lot of angst that goes with that, and many people are very scared about the process and sometimes get it wrong. So, Justus and his company wanted to create a better way to get buyers from property A into property B. They spent time building the idea and even had some of Australia’s biggest real estate companies backing them. In the beginning, the company was working and managed to transact around 40 properties. But it was a tough time in Australia’s real estate market, so Justus ran into many issues. One particular issue was timing. The market was going down, so they had to buy properties, try to improve them, and sell them quickly. They also ran into the problem of not being aggressive enough on the buying side, so they couldn’t get many properties. Still, they made money on about 60 or 70% of their properties. But they also had a couple that really killed them. Justus believed the market would improve, so they sat through it. The market kept dropping, and they started looking for other opportunities. They began to look closer into the numbers, the unit economics, and what had been working. They realized the model was working pretty well outside Australia. His company decided to expand into Europe, but before they did, COVID hit. COVID changed the dynamics completely. Debt facility providers pulled back and refused to give them a loan. Their real estate partners decided to figure out the situation first, believing the market value would go down. The market turned out to be the opposite, and property prices doubled in the next 18 months. Lessons learned What works in one asset class will not necessarily work in another. The real estate market dynamics are very different in the US, Europe, and Australia. You can’t have regrets in investing. You’ve got to take the good and the bad. There isn’t a single truth or strategy that works for everyone. Andrew’s takeaways Timing matters, but you can never really know whether your timing is right until after. Transferring a business model doesn’t always work. Investing is going to be a roller coaster, no matter what. It’s really a matter of holding on through the tough times. Actionable advice Justus underscores the value of pursuing activities that provide non-monetary benefits. He advises finding a balance between doing what you’re good at and what brings you joy. This advice serves as a guiding light, helping the audience navigate the complex terrain of work-life balance and personal fulfillment. Justus’s recommendations Justus recommends reading Atomic Habits to find structure and make your life easier. He also recommends The Subtle Art of Not Giving a F*ck if you want to focus on what matters and reducing suffering. No.1 goal for the next 12 months Justus’s number one goal for the next 12 months is to get Mad Paws to a better position and to invest in cash-flow businesses. Parting words “You’ve got to take some risk, but ensure you measure it as much as possible.” Justus Hammer [spp-transcript] Connect with Justus Hammer LinkedIn Andrew’s books How to Start Building Your Wealth Investing in the Stock Market My Worst Investment Ever 9 Valuation Mistakes and How to Avoid Them Transform Your Business with Dr.Deming’s 14 Points Andrew’s online programs Valuation Master Class The Become a Better Investor Community How to Start Building Your Wealth Investing in the Stock Market Finance Made Ridiculously Simple FVMR Investing: Quantamental Investing Across the World Become a Great Presenter and Increase Your Influence Transform Your Business with Dr. Deming’s 14 Points Achieve Your Goals Connect with Andrew Stotz: astotz.com LinkedIn Facebook Instagram Threads Twitter YouTube My Worst Investment Ever Podcast…
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