Lessons From Our Interview with Rick Ferri | The Benefits of Simplicity

[00:00:00] Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing in financial planning to help investors achieve the long-term goals.

[00:00:05] Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau as we cover a wide range of investing in planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial lives.

[00:00:16] Justin Carbonneau and Jack Forehand are principles at the DIA Capital Management. Matt Zeigler is managing director at some point in investments. The opinions expressed in this podcast do not necessarily reflect the opinions of the DIA Capital or some point in investments.

[00:00:25] No information on this podcast should be construed as investment advice. Security is discussed in the podcast, maybe hold clients of a Lidie Capital or some point in investment.

[00:00:33] So Matt, we had Rick Ferri on Excess Returns last week and it's actually been, it's going to be one of our most due episodes of all time, which is very interesting because he, you know, he just basically talks about having a very simple approach to investing.

[00:00:45] You know, we've had all these complicated guests and you know, all the stuff these advanced strategies we've talked about, but his first episode with us before this one is our most viewed episode of all time.

[00:00:54] And this one's on track to be up there too. So obviously, people like to simple.

[00:00:57] Let me just say Rick Ferri stand and I mean that in the true sense of keep it simple stupid, which is basically why I'm a Rick Ferri stand and I'm going to take it there. I've got a challenge for myself on this episode.

[00:01:15] I am doing the Rick Ferri Paul Stanley, not just Paul Stanley, but all around kiss keep it simple stupid playlist as we go. We got some points on him. I'm doing the kiss playlist. I'm coming a little bit.

[00:01:28] Yeah, it's, you know, with me, it's, you know, spouting out all this boring stuff without a factor investing in whatever the whole time. It's going to be a good, it's going to be a good contradiction to that, I think.

[00:01:36] But it's so good Rick Ferri, whatever you think wherever you fall down on this he will force you to think and talk about stuff with a clarity that very few people in the financial, I don't want to put him in the Pundit Tree space.

[00:01:49] But like four advisors, people like Rick Ferri are critical for asset allocators. People like Rick Ferri are critical because they're going to hold a mirror up to your thinking and they're going to say like, What do you really think about this and why defend that position?

[00:02:05] Even if you don't always agree with him, he's going to make you defend that position. I have so much respect for him and his work and the clarity of his thinking. And hey, what better ground to prove this on than if we're going to keep it simple stupid.

[00:02:17] Nobody did it like kiss. Yeah, so I probably should have said this at the beginning, but we're, the theme of the episode today is we're going to talk about some lessons from Rick Ferri because I thought it was interesting.

[00:02:27] Like it's one thing to have these guests explain what they do and their thoughts on all these things and investing. But for you and I, like I come from like the investing side of things. You come from the planning side of things.

[00:02:36] There's so much we can build on on these lessons in terms of how we think about it in the real world. So this is something we're going to try with some of our episodes. And I think Rick when was a great one to start with.

[00:02:44] So we're going to talk about the biggest lessons we took from the episode with Rick.

[00:02:48] I love this idea. And again, you're holding up a mirror. So whether you're a professional investor, you're an allocator, you're a do it yourself or you're an advisor, whatever you are in the mix.

[00:02:58] Listen to the Rick Ferri episode, access returns on the YouTube. I'm sure we'll have links in the comments and after the video or during the video. But let, just let this be the mirror that you're holding up to what you're doing.

[00:03:10] And answer honestly, back it's so good. Jack, you were so kind as to put together. You did the hard work here. Have you helped put together some of these ideas when we went back and forth on this. Take us through them. Start us at the time.

[00:03:22] Yeah, I think the first thing to say is I think some people like including me would watch an episode with Rick Ferri. You know, I am a factor investor. So what we do is something that is different than the market.

[00:03:32] And some people might say, well, you and Rick Ferri have nothing in common. Like why would you want to listen to Rick Ferri? Rick Ferri is indexing. Rick Ferri is low fees.

[00:03:39] You know, but the reality is a lot of what Rick Ferri says is correct. And a lot of it actually is grounded in what we do as well. Like there's such this tendency to say, I do this type of investing.

[00:03:49] So this guy that has a different opinion in me where I'm not going to talk to that guy or I don't want to like learn from that guy. But one of the things we try to do with the podcast is always get people to think differently than us.

[00:03:58] And what you realize is probably if I was to align what I think about investing with Rick Ferri, it's probably like 80 or 90% aligned.

[00:04:05] It's around the edges, maybe around how you use factors or how well they work or why they work. I mean there might be some differences there.

[00:04:11] But the reality is I'm pretty grounded in terms of what Rick Ferri says. And I'm a believer that all else being equal, you want to invest in lower fee stuff.

[00:04:18] I'm a believer that a lot of people should be indexing and not doing active things. Although I think many people can benefit from active things.

[00:04:24] So I think there's so much in common there. And we tend to get trapped in this, you know, well, this person is an active investor and this person is a passive investor.

[00:04:31] You know, so they can't work together. But a lot of the lessons are kind of timeless no matter who you are.

[00:04:35] Can't agree with that more. And I guess I'm just going to keep saying it like let it hold the record, the mirror up to what this is. Let him put it down, let him put the record down of like this is what he thinks and why.

[00:04:48] But then what I think most people would find out is just how much they agree. Then I'm with you too. I'm like 80% in agreement. I'm not 100% in agreement. And there's little implementation things.

[00:04:59] But that's also what it is sub points. Like you have little bits in your implementation that you're going to go and do a different way.

[00:05:05] I don't think he would begrudge a person for doing that. And the basic tenets of what he says of like, hey, if you're going to pay extra for something, know what you're paying for.

[00:05:13] It's hard to quantify. It's messy, but like know what you're doing and why you're doing it. And if you can square back to that over and over again, it makes it have got a lot of sense. And it's easier to stick to.

[00:05:24] So my first lesson was favor simple over complex. Most of the time I had in parentheses. And I think this is a really important lesson no matter what you do.

[00:05:31] Like obviously at a really basic level, simple is indexing and simple is just a few funds. And that's what Rick was talking about. Like he was talking about the evolution of an index investor how where you start with these complex strategies.

[00:05:42] You get to indexing but then you probably own too many indexes. And then eventually you get to you know your three or four fund for fully with their indexes.

[00:05:49] And so that was the evolution of an index investor. But I think it works everywhere. It works with what I do. Like there's a tendency when you're running factor strategies to say, oh look at these advanced tests and I need another thing to try to filter out.

[00:05:59] You know these bad companies and then I need another thing to do this and like a great example of that is a West Ray that we probably respect more than anybody else in the factor space.

[00:06:07] Like when he wrote quantitative value his he had sort of his value strategy, but then his systems to like filter out the bad companies were incredibly advanced.

[00:06:15] Like I remember we tried to program them for Volidia like tried to program that strategy. Like I had like eight pages in a word doc in it of what I had to put in like for all these different you know z-scores and whatever else it was and I'm like this is this is a huge lift.

[00:06:27] But West has evolved over time and he's realized he can accomplish that same thing with a much simpler series of tests.

[00:06:33] So now West is doing the same thing but he's doing it in a much simpler way. And I think that's what this is not just about indexing investing and running the simplest portfolio.

[00:06:41] It's about even if you're in our world we tend to think oh I'm so smart let me over complicate this strategy. But the reality is if you take the take this simple thing and you carry it all the way through it works almost anywhere.

[00:06:51] The beautiful part about keep it simple stupid is not to not to call anybody stupid or not to belittle the idea of simple. You can have and West is a great example for this you can write the code to do this thing.

[00:07:06] But then find out after you've done it for a while that it's hard to implement that it's hard to actually carry out all those things or it's hard to replicate or it's hard to whatever.

[00:07:14] And you have to think about in actionable terms what's the thing that I am going to do and turn it into something actionable that I can actually stick to.

[00:07:23] Then note I made to myself on this one it always makes me think of Joel Greenblatt in the all broccoli diet example.

[00:07:29] It's like if you hate broccoli why would you just suddenly know you need to go on a diet why would you then decide to go on the all broccoli? That's a bad combination.

[00:07:37] They have to be realistic you can't do the all chocolate cake diet because you really love chocolate cake. But the all broccoli diet is one of those things unless you love broccoli there's other ways you can do this.

[00:07:47] Keeping it simple favoring simple over complex is basically you saying how do I reduce this thing down to something that I can actually. Stick to follow through on and understand.

[00:08:01] And the second part is that the most of the time and I think that's important to because you can't always have hard and fast rules in investing.

[00:08:07] So for instance, Matt, I don't think the guys who run the Madalien fun listen to our podcast would be I'm probably going on a limb there but I think they're probably not. You never know you never know the Madalien drop us a compass a comment.

[00:08:19] Okay, send us a message. But if they are they're probably not being like you know what we need a simple fire investing system right now because these guys are saying simple is better over complex.

[00:08:28] Like in their case complex is probably working out pretty well so they'd probably should go ahead and stick with the complex.

[00:08:33] So it's not like there's certain things that have to have some degree of complexity like if you're a if you're a believer in managed futures like and their value to a portfolio especially as they become you know available to ETFs.

[00:08:44] Like there there is some degree of complexity to running a managed futures portfolio.

[00:08:48] You can't just say like I need to simplify this thing and like you know, I should have these index funds there's still a there's a case that managed futures adds a lot of value to a multi asset portfolio.

[00:08:57] And that requires a degree of complexity so it's not always simple over complex but I think if you have that rule in the back of your mind like you were talking about the mirror before. If you're always asking yourself, could I do this in a more simple way?

[00:09:08] I think that's the less the what works most of the time part for you that's the redirect back you can you can go out and do managed futures and all this complicated stuff if that's what works most of the time for you with your personality.

[00:09:23] Dying and maybe broccoli's not your favorite thing but maybe once in a while yes by set up with a little asparagus or something. There's nothing wrong with finding these little variants so long as you keep going back to what works most of the time.

[00:09:37] For you specifically because at the end of the day you're the only one who can do anything with this now.

[00:09:44] As the reminder so my kiss song for this idea is I got to go back to the magic of kiss keeping it so painfully intuitively simple that the metaphor is barely hidden.

[00:09:57] This is the beauty of kiss because there's just no hiding well no place for hiding maybe no place to run you pull the trigger of my love gun. You don't need much more than a middle school education to get what that means.

[00:10:10] Pavor the simple over complex most of the time it can get you places. I like that a lot.

[00:10:17] So the second one is I think this is really interesting because we've been hearing a ton now about the 60 40 portfolio is dead and I think there's a lot of nuance that argument so Rick basically.

[00:10:28] Rick defended the 60 40 portfolio and defended the fact that you probably don't need commodities in this other stuff. And so I think that's a really nuanced argument from this perspective.

[00:10:38] There's two different questions here one question is could you potentially enhance the 60 40 40 portfolio like in as kind of an all weather strategy with something in it that can help you in an inflationary environment.

[00:10:51] The second question is is the 60 40 portfolio dead and this answer to the second question is clearly not Rick is right about this the 60 40 portfolio is not dead.

[00:11:00] If you're somebody who's just going to take your portfolio, you're going to buy and hold it for the long term you're not going to worry about the inflationary periods.

[00:11:07] Stocks are going to probably have a risk premium bonds are going to have a risk premium you're going to probably do fine like you don't need to listen to people like me or like well love done my testing on portfolio visualizer which by the way doesn't exist anymore.

[00:11:17] And I've shown these you know I've shown that this this is a more efficient portfolio. I think those arguments can be correct but it doesn't mean that the 60 40 40 40 is not a perfectly fine portfolio for a lot of people.

[00:11:28] You know if you are of the person who's sitting here during this inflationary environment where it had that bad year in 2022 and you're like all right, you know what that's part of the long term deal.

[00:11:35] I know what I got myself into I'm going to stick with it that's fantastic the 40 40 40 was fine and Rick is right so I think that's what I took from that is that this is there's a new us to these arguments like.

[00:11:45] You can't take the idea that there are some flaws with the 60 40 40 40 even carry it to the 60 40 portfolio is dead and I think a lot of people make that mistake.

[00:11:54] At the end of the day the 60 40 is about two asset classes you can do the 25 25 25 25 of you know stocks long term bonds short term bills and cash and like gold or what you can probably a type of.

[00:12:10] A portfolio type thing you can do a million in these variations back to rule them the first observation rule number one here like keep it simple stupid do something that you can stick to an implement over time if one of those other things makes sense to you.

[00:12:23] Go for it so long as it makes sense.

[00:12:26] Something in this interview he says I don't know how many times he says it but he definitely says it more than probably once or twice and probably more than like three times he talks about how like earnings drive the stock market over time.

[00:12:37] And I think this simple idea in the 60 40 of that you have like earnings driving stocks and where's he doesn't say this but you have like term and rates and maybe credit risk driving like bond returns.

[00:12:47] I just right here is a basic tentative diversification you have two different return drivers that are kind of related but they're not totally correlated and that means there's a complementary asset aspect these assets pair pretty well together and then on top of that.

[00:13:02] The growth of your bias that you get with the 60 40 portfolio because most of your risk ends up on the 60 side I forget what the status what is like 80% of your risk or 90% of your risk comes from your stock allocation.

[00:13:13] Whatever that is it you're still giving yourself away where it's like this some of this is going to zig when some of this stuff tags.

[00:13:20] I have room to be flexibility that isn't just dependent on the cash flows in or out of my portfolio and there's a reason it worked we can shoot a million holes in it all day long.

[00:13:31] But the track records kind of hard argue against through multiple regimes for some pretty cool reasons.

[00:13:37] For the more respectable thing yeah the other argument I would make in favor of the 60 44 fully was the behavior one which is when you pull other things in there you look different and not going to be hard for a lot of people and so you end up in this trap where you're effectively.

[00:13:49] Oh, I you know I've seen inflation let's put the commodities in and then suddenly the commodities don't go don't do well so now the commodities are back out.

[00:13:56] And so like a lot of times even if there are flaws in the 60 40 and even if you look at that quadrant of the different economic outcomes and say inflation is a big weakness.

[00:14:04] You still probably behaviorally it's very tough for someone to stick with these all weather portfolios and air-critn didn't we have on the podcast this week.

[00:14:12] And it's a good job in that he kind of he starts with a base and what he does of the 60 40 and then he kind of overlays this other stuff on top so you still get your 60 40.

[00:14:20] But I think there's a huge behavior argument to be made that even if in theory, do some of these other portfolios might be better on my risk of returns stats like behaviorally the 60 40 might be easier to stick with for people because that is what they judged their neighbors are in the 60 40 they judge themselves against that it might be it might be better just to be in that.

[00:14:39] That basic tenant of. You actually can understand it is just going to come up again and again and again and again this is part of why even when.

[00:14:48] Even when we're dealing with complex arrangements of lots of like private equity or private asset classes things like that private real estate all the other stuff that would.

[00:14:58] Convalute the way we think about a 60 40 we still try to reduce that down to risky and risk mitigation assets and guess what even most of those benchmark models end up in kind of a combination of a 60 40 is mix between things that we would call risky and things that we would call risk mitigation.

[00:15:15] We're still trying to reduce to that basic idea of here's two things with slightly different drivers of returns and ways to think about them and how they lay into your broader portfolio.

[00:15:26] So you have a 60 40 song I got a 60 40 song with some two basic diversification tenants and that's Detroit Rock City because you got get up everybody's going to move their feet get down see diversification we got up and down everybody's going to leave their seat.

[00:15:41] You got to lose your mind into Detroit Rock City don't lose your mind into Detroit Rock City without a 60 40 portfolio at least as your benchmark comparison I think that's a lesson even Paul Stanley would get behind.

[00:15:52] I think you would love this episode probably on the come so number three is assume the efficient market hypothesis mostly right and this is this is an interesting thing so.

[00:16:01] The efficient market hypothesis based we're not going to go through all the details of it but the idea is if I'm a believer in that then the way I'm going to get better returns I'm going to take more risk.

[00:16:10] And so that there's a way to view like what we even what we do factor investing you know there's the two arguments there's the risk based argument that it works that because you get better returns from something value because it takes more risk and then there's behavior argument.

[00:16:21] Which is there's some sort of you know this pricing created by behavior. Rick is a believer in the first so we'll talk about factor investing later, but the idea is factor investing works in the efficient market hypothesis as long as you believe that it's risk.

[00:16:32] This driving it but the bigger idea here is there's a lot of people out there that are pricing assets on a daily basis they're very smart they've got very powerful computers.

[00:16:41] If I'm going to do something different than the markets I probably should have some really really compelling evidence to believe that it's going to work and so I think if you start from the position even if you don't believe the efficient market hypothesis completely.

[00:16:52] If you start in that place and then when you're doing something else you try to figure out all right well if I have a risk based argument I can still believe in the efficient market hypothesis and I can do this.

[00:17:01] And if I'm doing something and I don't have a risk based argument I better have a compelling evidence to suggest why I think it's going to work.

[00:17:07] So I think that's how you can get around even if you don't believe in the efficient market hypothesis I think that's how you can learn from people like Rick who do is that it raises the bar going back to the mirror thing you were talking about before it raises the bar of what I'm doing and makes me make sure that if I'm going to do something different I really have a strong condition in what I'm doing.

[00:17:25] You have to have a reason to disagree that's what the efficient market hypothesis even if you're not going to say this is my one true religion.

[00:17:32] You still have to have a reason to disagree with it and that's inviting the opportunity to say like yeah guess what you kind of should because your portfolio this I've said this a million times like no matter what like you taking money in and out of a portfolio saving money or then living off of stuff.

[00:17:48] Those are active investing decisions you should understand the math of active management because even if you're just buying and selling an index fund over the next hundred years of your life. You have active decisions to make around your passive vehicle that you're selecting.

[00:18:03] So the efficient market hypothesis is really important you can pick your spots where you disagree with it.

[00:18:10] You have to ask the question the mirror in this case is saying like hey fees, frictions other things do you still think and why you can be better than this idea with these insights like you have enough insight that's better than the friction of the cost of putting this trade or putting this idea on that you're not going to eat it in some other way.

[00:18:32] And if you do it's okay to disagree so okay to have that what you think is an informational edge or whatever.

[00:18:39] Again, we don't want to get too deep in the weeds on like how how that's calculated but we are going to say pick your spots to disagree there's real power in picking those spots of differentiation for your strategy.

[00:18:51] Yeah I think so and I think so I think the efficient market hypothesis is something that you know I mean I think most people understand it it's something that should you should always have in the back of your mind I think as you do these things and.

[00:19:02] And just thinking like if I'm going to do something different then let let's have some reason I'm doing it and let's not like people like me tend to get in this trap of thinking like.

[00:19:11] I've got to challenge the efficient market hypothesis and like I have to you know if I'm an active investor I have to attack it is nothing I don't think that's right and I think there's a lot you can learn from the efficient market hypothesis even if you don't believe it's completely true even if you don't believe in the strong form or the semi strong form or whatever various other forms of it exist with the song.

[00:19:30] Kiss playlist song number three calling doctor love because. Calling doctor love they call me doctor love I mean come on is he a doctor you know he's not a doctor this is a.

[00:19:41] This is a grown man in makeup declaring to be the doctor of love there's no PhD dissertation involved in this doctor declaring this thing but you know what it means so you got a you got a pick your spots where you disagree and that goes in both ways.

[00:19:57] A bold claim like declaring yourself the doctor of love or just admitting hey medicines got this some of this stuff figured out I'm going to be okay with things like the efficient markets hypothesis.

[00:20:10] This next one I think might be the most important thing we talk about and we talked to the to Rick about this at the end.

[00:20:16] We had kind of brought it up from the perspective from a different perspective but he thought about it from a perspective of asset allocation.

[00:20:21] But the lesson is the same no matter what and the idea is if you play a role in creating your investment strategy or if for the core areas if you invest in what you personally believe in you're going to do better.

[00:20:34] I think you know where I was thinking about this is where the world we live in factors there's a lot of different types of factor portfolios you can build and there might be let's say the optimal factor portfolio where I've got each you know factor weighted doesn't really exist but I'm just giving us an example like.

[00:20:47] We're about each factor weighted properly and I've really built the portfolio that I think in my testing is the best thing Jack can build.

[00:20:54] But what I learned over my career is that portfolio that's the best thing Jack can build is not right for a lot of people and the reason is not right for a lot of people is because they have personal beliefs in terms of what works.

[00:21:06] And so a good example is like someone we've worked with recently is a big believer in investing in dividend growers.

[00:21:12] And so if you're a big believer and that's a great strategy investing in dividend growers you actually get you end up getting at high quality companies sort of indirectly.

[00:21:19] By buying these dividend growers so that that's a great strategy and even if I go in my test and I run you know my AB test unfortunately visualizer and like well here by multi factor strategy has better sharp ratio than dividend growers.

[00:21:31] And I think that's a very important thing because that person who believes in dividend growers they're going to keep investing in those dividend growers when the dividend growers aren't working they're going to stick with the dividend growers.

[00:21:40] And I think that's such an important thing is what you believe in is so important and if you can play a role in like working with me I've found like if you have gone to me and said I want to invest a dividend growers and you've had a hand in how we construct that strategy for dividend growers.

[00:21:55] And so we're far more likely to stick with it. So I think this might be the most important thing because we tend to get trapped in theory and investing in not in practice and in practice it's all about what can you stick with for the long term even if maybe you give up you know the point five percent of long term return or whatever it is like I think that's such an important point.

[00:22:13] And I think that's the way you just explain that and I love the way that Rick actually put a spin on this idea because it comes at it from a point of agency.

[00:22:22] It comes at a point of realizing you're different but it doesn't just stop at do what you believe in your different your special ignore everybody else.

[00:22:31] And as you just did and I believe in this whole heartedly not only are you different but then the other people you're working with they're different too. Like I have my agency you have your agency if I'm hiring you to do an allocation strategy for me.

[00:22:43] I'm talking with you about the things you can do that I can't do and the things that I can do like save my money or whatever that you can't do you can't say you can't code or work it save my money for you can you if you can do that can we have a conversation.

[00:22:54] Um, how the fifth and work on the kids get lower.

[00:22:58] This sense of agency though becomes really really important because whenever there's a conflict it's always because somebody else is we're not always it's usually because somebody else is overstating or taking away the other person on the other side's agency.

[00:23:11] So it's really easy for me to get upset at you know big firm or big active manager and high fees and all this stuff and if I haven't done anything about it I can just put all that blame on them.

[00:23:22] Now if I didn't know when people do stupid things all the times it might just be one of those things were like I didn't know and I got swindled but once I'm aware once I have agency of choice I can get away from that thing.

[00:23:34] Now likewise you can be in a situation where you have two people in a relationship in a advisory business and a planning business and whatever else or even just me and Vanguard on the other side if you want the extreme passive investing example.

[00:23:47] Where we can say I've preserved my agency they've preserved theirs here's something that's mutually beneficial.

[00:23:52] However, the cost differential is and if that's true to you and it's true to the other people you're working with that that's that's the best we can do is humans that is the best we can do it human just in relationships.

[00:24:05] This is such an important point because one of the things I've learned is when when I build an investment strategy when someone says to me it'll build the right strategy for me and I just build it and give it back to them.

[00:24:13] What happens during the inevitable periods of struggle? Jack is with screwed up. Jack has built the wrong strategy I doubt Jack and his ability to construct this strategy.

[00:24:22] Now if we've worked together and we built this dividend borer strategy and you know what's going into it and you understand that it matches the way you want to invest. Now I have also now this is a I'm going to look at this period of struggle completely different.

[00:24:36] Now I'm going to look at it as I believe in this strategy I came we work together to build it.

[00:24:41] I am going to stay in the course and that's so important because who cares about what Jack has brought right or wrong like you can judge me all day that's fine.

[00:24:47] What I'm trying to accomplish is you stay with your strategy even if you attack me all the way the whole way along as you do it that's great like you got to stick with the strategy and that's where this is so important if you've played a role.

[00:24:58] You were so much more likely to do it. So I think this might be the most important of the lessons we talked about and I assume does a kiss on also that it's definitely a kiss on from this and I'm putting the extra extra highlighter on.

[00:25:08] The great part about that too about especially when you're paying somebody for advice in some form is this is what forces you to extend the time horizon and it forces you to take ownership in some of that decision not just push blame on somebody else.

[00:25:22] That's really important in both directions. Both sides have to be comfortable with that type of stuff so there's this kiss on god of thunder you may or may not be familiar with what's in the slam ring about okay so this is like broadly regarded as jeans him and steam song when my favorite parts about this song it's kind of a creepy song going to be honest.

[00:25:40] But Paul Stanley wrote the song and he was originally supposed to sing it what the producer basically looks at him is like no, no, this is this is a jeans song.

[00:25:48] And it becomes basically his theme song he owns it all the way through but it's a real message like in you do you so when Jean is singing I command the denial before the god of thunder and rock and roll that's conviction.

[00:26:02] I'm not filthy finishing the line there for very deliberate reasons because like I said it gets a little creepy by that level of conviction

[00:26:10] That sense of agency of being in the band of Jean taking the song from Paul, but Paul's yielding to the producer and going now the best service to this song is when Jean sings it.

[00:26:20] That's a really powerful thing that's preserving agency that's playing a role in your creation all the way through to you know making an iconic theme song for ultimately a character.

[00:26:31] So number five is another great one which is match the time frame of strategy works over with the time frame you judge it over and we talk with Rick a lot about this and this really value investing is the greatest example of this right now because we're all seeing it.

[00:26:42] Which is this idea that you know when you when you go to an investor and you say like how will my day when you stay start investing with you and you say like how are you going to judge this strategy?

[00:26:50] They're like well I'm a long-term investor, you know I'm going to stick with this over the long term and then you say them well what is the long term.

[00:26:55] And I'm like yeah, you know three years give or take and the reality is with these types of strategies it's not just a factor investing thing like with active managers they're picking stocks whatever it is like all these great guys both attack huge periods of struggle.

[00:27:07] Like the actual period you can judge these strategies over is very very long.

[00:27:11] I mean Medfabres talked about it being as long as 20 years and if you think about that and then you pair that with how long can someone stick with a strategy that doesn't work you have this massive disconnect.

[00:27:21] And so it's very important for people understand first of all Rick talked about this in the podcast you can deal with this to some degree by how you wait these things how you position sized in.

[00:27:30] So if you take something that can have long periods of struggle and you take a smaller position in it, it's going to be less painful for you.

[00:27:36] But if you're taking the bigger positions, or even if you're taking the smaller positions and you're going to judge it it's really important to think like when I get in this situation with this thing has the three to five year period where it doesn't work or even a longer period in that what am I going to do?

[00:27:49] Because if what I'm going to do is abandon the strategy then I shouldn't be at it in the first place.

[00:27:53] I should whatever that active that was I should make that active bet and I think that's really important and it really relates to my world where people are deciding whether they want to make bets on factors.

[00:28:02] I think bets on factors are great things to me, but I think you've got to be the right person to make that bet. We've talked about this a lot on this podcast.

[00:28:09] I love this analogy of making sure you have your calendar, your cash flow and your balance sheet and everything you do. And the reason you need that calendar cash flow and balance sheet is because it's a forcing exercise.

[00:28:22] So not just have the calendar, this is the whole time frame thing, but then to be matching the cash flows against the calendar and the balance sheet against the cash flows against the calendar.

[00:28:33] If you're going to do something for the long, long haul if you're going to save an stocks if you're going to save into stocks inside of an IRA,

[00:28:41] save to stocks inside of a Roth IRA, save to stocks into a trust, put money into a house, put money into an investment property, put money into some sketchy commodities strategy that your roommate from college started.

[00:28:52] Whatever whatever the circumstance is, you got to match the cash flows against the balance sheet and map it back over the calendar.

[00:29:00] When you start to do that, when you start to have a genuine financial plan that you've built and constructed, now you can start to make sure is this thing on the balance sheet, supporting my cash flow needs over what period of time.

[00:29:13] And it can support it in the saving direction of going in when I have a surplus in my cash flow and my savings and where can go, and it's doubly, triply, quadruply important, especially during downturns that balance sheet supports the cash flows on the way out.

[00:29:28] So I don't run out of money. It's a really basic concept, but it means an investment strategy is giving a time to work, it means in a financial plan,

[00:29:37] making sure you have the right investment strategies, so they have time to work so that it serves you back to agency again. It's your life, it's your money, understand this stuff and understand how it's matched up.

[00:29:48] Yeah, like I worry sometimes, we could seem like professors on this, like saying, oh, this is obviously you should do this. This is really, really freaking hard to do. Like for us, for everybody, this is really hard to do.

[00:29:58] To really think about things over that kind of a long-term period is really hard because not only do you have whatever you're doing,

[00:30:04] can deviate from the market and struggle, but at those times you got all kinds of people talking about the world's different because of this and the world's different because of this. And this is over and you shouldn't do this anymore and you're 60, 40, 40, 40 is never going to work again.

[00:30:16] And so it's like this big emotional thing while this is all going on. And so this is really hard. I mean, I struggle when I construct factor strategies to think about this, to really truly think long-term because I get trapped in.

[00:30:27] Oh, this person who I respect is said, you know, this is going to work anymore and like you have to balance those arguments.

[00:30:32] So this is really, really hard to do. But it is something at least, at least if you think about it, at least if you're aware of this.

[00:30:38] If you don't go in here, if you don't go into the value strategy thinking on the judge this over three years or at least you try your best not to judge it over three years. I think all of this is incremental.

[00:30:48] All of this is trying to get a little bit better here and there. It's not thinking about like even me or anybody who who study all this stuff sits in here and says, I could care less about three year performance.

[00:30:56] I'm not going to do anything. I'm just going to sit here like, I get affected like it and you probably do everybody does. So it's just about trying to do your best and trying to keep this in the back of your mind as you make decisions like that.

[00:31:06] Keep asking yourself, why do I think this is so? Why do I think this is real? Why do I think this, this matters to me? No, it's going to get questioned. But this is the beauty back to keep it simple stupid.

[00:31:18] This is the beauty back to saying if stocks go up because earnings go up and my broadly exposed to a bunch of stocks that earnings on average have been going up.

[00:31:26] So even if I'm in a period where it kind of sucks, do I kind of have something I can look at and go well? Do I still believe that my favorite example? Do I still believe that McDonald's is going to figure out how to price a big Mac?

[00:31:36] Is she going to make no good to turn the lights on tomorrow? And then if I do that next dollar at the beginning of the pandemic or the middle of the fight, his crisis is probably going back into stocks.

[00:31:48] Because I still believe that that's something that enough people depend on being true that it's going to be so. What do you got for us on firehouse off the debut?

[00:32:00] I don't know. This is a deep cut. Well, maybe not too deep of a cut, but it's basically a knockoff the real deep cut. Is there this move fire brigade song that is really great too that's kind of a knockoff of it?

[00:32:10] But it's this idea of like of tempo. So this is kiss figuring out who they are, what they sound like, what they want to feel like and It's just enough like copying what somebody else is doing,

[00:32:24] Just enough making it yourself and making it your own and just enough like operating at a tempo that most bands outside the rolling stones and other Some of these 60s acts and what they're knocking off is not going to do. It's not the fast.

[00:32:36] It's not the fast stuff. It's not playing a metal song. It's way way before like punk is really happening And it just is like in a great groove. Wonderful song firehouse. Matching up those time frames. That's what it's all about.

[00:32:50] So number six is look to history for guidance and I think this is a really important one. We talked, this came up in the conversation with Rick where we were talking about this idea of the fundamental

[00:32:58] Investing is dead now. And we're not going to, you and I, we did a whole episode on whether Fundamental Investing is dead. So we're not going to get into that now and people don't want to listen to us for three hours

[00:33:06] But the general idea is whenever I hear something like that and we just talked about this idea that this time is different It's always good to look back to history and say, are there parallels I can look at and Rick went back to the 90s.

[00:33:18] And a lot of people were talking about fundamental investing is dead then too. And so in that obviously fundamentals had a big run where they came back and that doesn't mean we're going to have a run this time

[00:33:26] Where they're going to come back. But what it means is when I'm putting together all the information In terms of determining my opinion on whether fundamental investing is dead I need to go have that context of history to bring in there

[00:33:38] Because otherwise I can get trapped in all these people that are saying it's 100% dead and I should do this And I should do that like I think it's important to me. And it's not just the history I've seen myself

[00:33:46] But if the history of the entire history and that's another trap people fall into is history Basically for a lot of people starts the day they invested their money in the stock market Because they actually experienced that stuff and there is no other history

[00:33:56] So I just think it's always important to look to history whenever you hear anything about anything Look to history say, can't not is not history is going to repeat itself But can this inform my opinion about what's going on right now?

[00:34:06] Looking at history and look at a sample too. Look at the 1990s. Look at the 1890s. Look at the 1890s. Go I know the data is not that great. Let's look at the 1890s

[00:34:18] A talk about with with the data not that great. Does this inform anything in what I'm doing today? Skip around look at different periods of time And I mean I think I know we're going to touch more on this in a couple of points

[00:34:30] But what you said about The data is bigger than your experience with the data becomes a really really integral and important part of this year We have to be able to step back zoom out see this as just one instance in a way broader context

[00:34:48] And understand how that's going to work. You know hopefully for us It makes sure it's working for us. We got to ask those questions Yeah, what's it? This seems like a tough one to come up with a song but I'm betting you did it I

[00:35:02] I did I did and the song I picked for looking to history for guidance I looking to a time period was I picked I always made for loving you and that's Let's be honest. That's that's a disco kiss. It's a great song But it's a disco song

[00:35:18] And it's basically them saying we're going to take our format the way we do our thing But we're also going to take something else that we know works and we know it works well And we actually understand fundamentally why this thing works

[00:35:30] And we're not so big that we can't Cop this other style to make a friggin hit song. I'll stand by it. This is actually one of my favorite kiss songs I don't know why I've such a soft spot for this one

[00:35:42] But I always made for loving you definitely example of knowing how to cop something from history And apply it to what you're doing. So yeah, our next lesson I think this is an interesting one because I think there's two different ways to look at this

[00:35:54] And obviously Rick talks a ton about fees and reducing fees and I think he's right about that Completely there's two different ways to look at the argument one is basically it's very hard to predict

[00:36:04] What's going to work in the stock market over time? And so even if I've got like the active strategy You know the manager that I think is going to be great in these charging me you know one one percent or something like that I don't know for sure

[00:36:16] If it's going to work out. So my best thing to do is just focus on keeping the fees down and not trying to make that decision. Obviously the other side of that argument is

[00:36:24] If I can invest in the Medallion fund or whatever then I shouldn't give a crap about the fees Because the net of fees they're doing so well So there's really two sides to this and I think it's an interesting argument

[00:36:34] But I think ultimately the idea that you should be paying attention to fees And then it should be an important thing in your process is absolutely 100% true No matter how you think about it You know if you're one of the people to think about well

[00:36:46] I want to think about my return after the fees and I have high confidence in this or if you're Somebody thinks I can't predict this so I just want to focus on the fee like is my primary driver

[00:36:54] I think either way what Rick is really right about is there's so many things out there That are charging very high fees that aren't delivering value for those fees And so that's why I focus on fees. I think it's really really important for investors

[00:37:05] And I think this is a service Rick is done to people is four people is Rick really gets you to focus on this idea Like I should constantly be thinking about these fees Because so many of the things out there are not delivering on their value proposition

[00:37:16] Brises what you pay values what you get Simple as that and simple as stepping back from it and just really asking about that value that you get I think this also maps really interestingly over this agency issue we talked about before

[00:37:32] And it works with any time you have an individual investor and a advisor and allocator or whatever Whenever when you have two people who are trying to do something that is mutually beneficial

[00:37:43] You have to have this fee conversation. You have to understand basically what is the value being provided to me And in many cases it might be something that's actually hard to completely value or perfectly put a number on

[00:37:56] So whether that's mapping it against like the time that this is saving the actual steps of implementation In many cases, I think most of our job for both of us on two different sides of the equation in many cases is just like education

[00:38:10] It's just giving people time and space to talk through something so they can educate themselves So they can understand it and then have a way to think through it These are like finances full of abstract concepts

[00:38:23] So fees being part of that abstraction because as Rick says multiple times in the interview Like advisors and people sell complexity they sell complexity without the education component They jack it full of fees and then you're not getting the value of of anything they have to offer

[00:38:39] You're paying the price for basically them selling you complexity without the explanation Well, we're really trying to get after here is and what you just said in your point is

[00:38:48] Chase that fee down chase that value down and understand the ways that you're going to evaluate it that makes sense for you And always understand why the person across the table from you, why this makes sense not just for them but for your best interest

[00:39:02] Have to ask that question all the time Especially in an industry that mostly prioritizes the scale of the entity on the other side over the experience of the individual consumer

[00:39:13] And some people take Rick's arguments too far even further than Rick takes them in that like when we talk about the idea of like a small cat value fund is okay

[00:39:22] And you're portfolio you want to have the cheapest small cat value fund you can have but guess what a small cat value fund is more expensive than the S&T 500

[00:39:28] So it's not as if I have to invest in the S&T 500 no matter what and anything that has you know 10 basis points more than the S&T 500 is horrible

[00:39:36] That that's not the case he's making like the case he's making is when when you focus on fees you're typically going to do a lot better

[00:39:42] And if you're going to have if you're going to pay even a little bit more make sure you have confidence that there's some value associated with that so

[00:39:49] You know people think like Rick was talking about factor investing like some people think someone like Rick would never endorse factor investing under any circumstances

[00:39:56] Because it's this higher fee thing, but that's not right. I mean Rick will like with a small portion of your portfolios talked about how he's done this

[00:40:02] You know, he's put some money in something like value so it's it's important to not carry it to such an extreme that it's like

[00:40:08] Ornitha that it's like no matter what I'm focusing on fees or it's important to not carry it to such an extreme that you're like well this fund is one basis point cheaper than this other fund

[00:40:16] So therefore I have to invest in this fund like there's a point where the difference in fees is so little

[00:40:22] That it's not it can't be a primary driver what you do so fees are incredibly important everybody should focus on them, but you also have to be careful and you don't carry it too far

[00:40:31] I love that like the basis point and splitting hair space because again, it's like how much time are you going to spend splitting that hair

[00:40:39] And then it's not just about a value in the fund and granted if you're going to do that and then stick with it for 30 years

[00:40:45] Like yeah, the basis point the single basis point even can make a positive difference but your own time and how you think about this stuff has to be a part of the equation

[00:40:55] Two in the reality is most people aren't as excitable about this stuff as we are they're excitable about things like you're ready for the song and this one yeah, let's do it

[00:41:03] Baby if you're feeling good and baby if you're feeling nice you know your man is working hard He's worth a doce Doos is definitely the song for this one. You got to make sure he's working hard You got to know the value you got to know it's again

[00:41:18] So our next one we're only good to left that so we're actually cranking along pretty nicely for us Usually we ramble on for like three hours about this So we're all on the way to you take this to 10

[00:41:26] We're not in the stomach of the song. So I've actually got a little bonus I want to talk about the end of the song. We're going to nine with the bonus We'll drag this on on this one I'm in with hooked what we do

[00:41:34] Yeah, so number eight is history is more than we have each personally experienced And I think this is this gets back to what I sort of alluded to before But I bring bringing the part we were talking about with international investing with Rick

[00:41:46] You know there's a lot of international investing is troubled for a really really long period of time And so you have this balance of I have my academic argument that international investing works

[00:41:54] But then I have my real world experience where it hasn't worked and you know Rick comes down on the side of You should have international exposure in your portfolio Which is what I come on the side of too

[00:42:02] But that's a very you know, that's a very challenging thing You know even bobble for instance was kind of a believer that you know I can get everything I need in the US

[00:42:10] I don't need the international like a lot of people who we think are really really really smart I think Corey Hofstein you know endorsed this to some degree is like the idea that you can get a lot of

[00:42:18] What you need in the US and you might not need the international piece So they're there are very very smart arguments on both sides of this But one of the challenges regardless of which arguments you believe in

[00:42:28] The idea is most of us in our investing careers have mostly experienced the international Does not work with the great tech companies are in the US all you need is the US That's going to work out great for you

[00:42:38] The reality is at some point we're probably going to experience a period Potentially a very long period because this is how this is typically worked in history Where maybe international does a lot better than the US and we're going to have to challenge our beliefs in that

[00:42:51] It's just it's important to kind of say not just what I've experienced but the entire thing I don't think there's a right answer. I mean, I think this is you know we're splitting hairs to some degree

[00:43:00] You know if you're invested in the US total market you're probably going to do fine If you're not judging it behaviorally against the you know the world index or something

[00:43:08] You're probably going to be okay, but I'm still a believer that there is a strong case for international investing And you have to go beyond what I've seen in my career to some degree to get that case

[00:43:18] Everybody remembers their first bear market everybody remembers their first like horrible investment or their third or their Seventeen like I remember multiple of these Very silly for all the good reasons and we remember that and like basic behavioral psychology

[00:43:36] Like we remember the bad stuff more than we remember the good stuff We emphasize the recent over the stuff that's further in the past We emphasize the things we can see over the things that we can't see

[00:43:48] This is why reading condiment to Versky is important. It's also why reading air and T back is important too But that's that's a topic for another podcast episode this idea that we're going to over emphasize things in our experience

[00:44:01] That our personal experience is just one instance in a much broader reference class That's that's the lesson here diversification I love the diversification means you always hate something in your portfolio That's the ultimate diversification test. This is kind of like what we're talking about here

[00:44:19] Think broader in time the new experiences think broader in time than what you're understanding of something is and why and at least Rick Farie again hold the mirror up see if you agree with this or not and if not come up with your reason why

[00:44:35] In my case from personal experience on this thing with clients with myself I know that it's easy to pigeonhole into it's easy to pigeonhole in the comfort and stuff that's worked for us and has worked well for us, especially in the recent past

[00:44:50] It's really hard to zoom back out and say like okay Uh, yeah, I probably just mostly got lucky I was halfway in the right place at the right time but luck took care of the rest

[00:45:00] I'm not actually that smart and all by the way this other thing tends to work over the long run Maybe it doesn't seem like an obvious opportunity right now But I shouldn't overlook it either that's a really really powerful thing to say

[00:45:12] And also on the other side even if the international arguments are very strong This goes back to the investment you believe in thing we talked about before Like if you're an investor who's judging yourself against the S&T 500 on a regular basis

[00:45:22] Like you may very well be better off without the international of the person to teach Because when you have these long periods where international struggles The S&P 500 is your benchmark you're going to be dragged down against the S&T 500

[00:45:34] You may panic and you know, you may sell the international stuff at the wrong time So again like in theory international investing is something you I think people should be doing

[00:45:42] But in practice it really comes down to do you believe in that enough to sit through the periods If you're judging against the S&T 500 where it's dragging you down against the S&T 500

[00:45:51] If you don't then you were better off just being invested in the US and not worrying about the international of the investigation I promise to limit my takes mostly to kiss

[00:46:00] But the thing on this that I keep thinking of all the time is basically the way people like diversify their diets or diversify the places they go out to I think of this because of the area that I grew up in growing up It was predominantly Italian restaurants

[00:46:15] Like we have lots of really really great Italian restaurants in Northeastern Pennsylvania And then there was a smaller subset of Polish food which is very similar and then a very small subset of And basically like a broader palette Since coming back there's all these options

[00:46:29] There's still lots of people who will never go to their local like Italian Irish or Polish bar And it's like we have a freaking amazing like Asian fusion place down the street that does like awesome like sushi and a bunch of other stuff

[00:46:42] Wonderful Indian restaurant downtown in fact there's like two good Indian restaurants I just found a Peruvian place the other day just driving to pick something else up Like diversification happens in all different parts of your life

[00:46:53] And there's some fun in exploring there's some fun in going outside of your comfort zone But if you're my grandmother who probably isn't listening to this but if you are, hi Graham we talked about that text about it You said even the Max or Collapsic Even Collaps

[00:47:08] You got a very limited palette Like she's not gonna get outside of that comfort zone and that works for her and that's served her well And I appreciate her love for McDonald's chicken nugget And I appreciate her loyalty And that's the way McDonald's keeps the lights on

[00:47:22] So steering back into my lane my kiss song for this one Are you familiar with the very polarizing kiss song Beth Oh no actually I'm not and I probably shouldn't even alert that one right I mean

[00:47:37] So I have to say this with respect my my wife Val loves the song Beth very important to her I don't understand why my very dear friend Mike who probably is the person you converted me more than anyone else

[00:47:50] And to being like a whole hearted like you really have to respect kiss on another level in college You gave me this education on really paying attention to kiss not just the stuff that I got from you know

[00:48:01] My dad and my uncles and some of the other people that put me on to him Beth is the ballad Peter Chris He he writes it he sings it It just it feels so out of place. It feels so weird to me

[00:48:13] But you cannot deny it's their highest chance in a single Like it makes no sense in the catalog to me. It's not the song I'm ever gonna put on in a moment But it's it's their best single So take with that what you will

[00:48:29] Your experience your history is not the experience of other things sometimes you just got to be open to this stuff because weird stuff happens like Beth Being apparently one of the greatest kiss songs ever according to the charts

[00:48:42] So our last one number nine before we talk about the bonus thing is if it seems too good to be true it probably is and this is I Freak at hate ESG and this is not like and that probably is that's probably two aggressive of the state

[00:48:53] And but let me explain behind the scenes what's going on. So I don't hate ESG in terms of a concept I don't hate ESG in terms of well if you want to invest in things that are doing group great for the world

[00:49:02] You should do that. I think that's awesome. What what I hate about ESG is like coming from my factor world this idea that you can have your cake and eat it to and so many people

[00:49:10] They're not anymore. It's not working anymore, but when it was working this whole idea that I can invest in these great companies that are doing great for the world

[00:49:17] And I'm gonna get a better return than everybody else by doing it and that's not the way it works in the real world

[00:49:22] Like when if you want to get a better return, you're typically doing something other people don't want to do you're typically buying the tobacco and all this other stuff is doing horrible things

[00:49:29] So the world and I'm not certainly not endorsing that nor would I do that myself but that's the idea is like The idea that it seems to do good to be true it probably isn't your Rick was very anti-HG as well

[00:49:39] But you just want to ask yourself that question because when you're being told this is great on it It is you great things for the world. I'm gonna get great returns and this is all gonna work out in the end

[00:49:48] It usually ends badly for you and so if you want to invest be as based on ESG that's awesome If you're gonna be more likely going back to our behavior point to stick with a portfolio that doesn't have stuff in there

[00:49:58] You don't like that's a great too, but just understand the reality of what you're getting into which is I'm probably not going to get

[00:50:04] You know return 2% better than the market over the long term by only investing in these great companies that are doing good for the world and excluding all this other stuff

[00:50:12] That's probably not going to work out to you. This is when we crop in the video of you know Jack forehand lighting is cigarette off the cool piece of coal that he just stripped mind

[00:50:21] I've never actually smoked this cigarette, but I have maybe for the episode. I'd have to figure out how do I how to do it and make a run out

[00:50:28] But I'll find a piece of strip mine coal from laying in the laying in the ground somewhere outside of my house because I'm sure there's one there unfortunately So I'm with you on this. I hate I hate something that can't be quantified to a point

[00:50:45] Beyond just pure story I do believe so I'm gonna take the softer stance on this. I think there are ways to define ESG socially responsible and more to a group to a degree impact than anything else

[00:50:58] Where you can say like here are some standards. I want to hold for something I can believe in and I think that that's fair to the extent that there are certain things

[00:51:06] It's certain people just want to avoid because the act of owning a company is the act of Helping determine and set some of the cost of capital for that company over the long term

[00:51:16] And if you think the mining company should have a higher cost of capital then one way to potentially have your small tiny incremental vote contribute to them having a higher cost of capital is

[00:51:27] Refused on them. So I believe in that. I just think it's hard to do in practice and I also get personally very upset when I see the way a lot of these things are marketed and positioned because they're praying on people who in many cases

[00:51:42] Aren't gonna do the math about it and that's that's unfortunate. That's upsetting that's you should know better firms selling this crap Yeah, I don't think people shouldn't I don't think people shouldn't invest based on ESG principles if that's something you believe in then

[00:51:57] I think I don't understand you shouldn't invest based on ESG principles, but to your point one thing you have to be careful about is the big asset managers that are defining ESG for you

[00:52:04] Maybe defining in a different way than you think and that's one of the things you see with like direct indexing and what oshaonices doing with canvas is like

[00:52:11] This idea of maybe I should be able to define ESG in my own way. Maybe that's a better way to do it versus like deciding you know

[00:52:18] Exxon mobile is a you know oil company, but they're also investing in these other initiatives like what are they in terms of ESG or what are these other companies like it's a very very difficult thing to figure out

[00:52:28] And also like what's bad and what's not bad is in the eye of each person like some people would carry ESG to a very extreme level some people would carry it to a much more

[00:52:36] You know less extreme level so I think a lot of it is a personal thing, but like you said with anything in investing if anybody can make money off it

[00:52:44] They're going to try to make money off it and so you end up with these products that are not that are ESG more from the perspective of marketing

[00:52:50] Then they are ESG from the perspective of ESG it's more like everybody realize oh people want to invest based on ESG

[00:52:56] So I'm I'm going to create this product for ESG and those are not the greatest things to be investing in and the only other point I'll make before I throw back to you on this is there are ways

[00:53:04] There are a lot of factor people like me who have looked at ESG and maybe thought about ways to use factors in there

[00:53:10] To maybe make the drag you would get from a return perspective because of ESG less so that there's this is not black and white like full ESG and zero ESG

[00:53:19] There's things you can do behind the scenes where you might say like I'm going to couple ESG with these other things Or I'm going to do make some portfolio construction decisions where maybe I can get my ESG if I believe in that

[00:53:29] But I can do it if you're a believe that there will be a performance drag associated with it, which I think there's ways you can minimize that over time by maybe thinking about other things you're doing in your portfolio with it

[00:53:39] And it's also fascinating this is without turning this new breaking news episode This gets into all the layers of this stuff because if you have a bunch of fun managers or saying here are our more qualitative or more quantitative ESG metrics

[00:53:55] Then inevitably you're going to have companies who start to say what are ways I can game those metrics This is where we get a lot into like the dark side of like DEI and the dark side of ESG and the dark side of things like this where it's

[00:54:06] It's stories on stories that are trying to gain metrics to basically market to a specific audience And that's where you have to have See all prior points agency for yourself in your own decisions

[00:54:19] You have to know what matters to you play an act of role in expressing what matters to you and play an act of role in vetting If you're going to have somebody else allocate money for you if you're going to build stuff with somebody else for you

[00:54:32] Make sure you're building it with them if you're going to blindly Never blindly accept something do some research do some due diligence If you find something that rhymes with you your agency or decision making process, that's okay to get behind

[00:54:44] And there's plenty of ESG funds or things in the theme of impact or in the theme of stuff That actually aren't terrible funds. They're good, full-hearted fund managers and people putting this stuff together

[00:54:55] If there's sympathetic values to you in their situation that can be a really good choice I'm a huge believer in thinking of smart ways to implement these strategies

[00:55:06] And just steering around what unfortunately the explosion in ESG over the last call it like almost 15 years now has just produced a lot of like dribble and unfortunate marketing

[00:55:17] And kind of a cash grab for people going like, oh I can sell more product if I say the story just this way So what's the only thing you got for us? hotter than hell because this is just a metaphor that it's all marketing

[00:55:31] It's it's all metaphor all the way down hot hot hotter than hell. You know she's going to leave you well done hot hot hotter than hell Burn you like the midday sun. She's not actually going to burn you like the midday sun

[00:55:42] That ESG fund still might own a bank that's financing the oil and gas industry And just because you've avoided direct fossil fuel companies doesn't mean you're not actually lowering the cost of capital by playing with their finance years

[00:55:54] Look through people hotter than hell. Yeah, there's a dark side to that heat So just one other point before I do my little bonus thing here is the other point recognition I thought was a good one which you could certainly argue if ESG is what you believe in

[00:56:08] Maybe like donating money directly to what you believe and might be a better way than adjusting your investment portfolio for that No, there's we'll get we've done a time to get an all the arguments with that

[00:56:18] But I thought that was a good an interesting point to think about at least not not only a brilliant point or really Impactful point because those can that can be manifested in ways where you have direct impact

[00:56:29] The rule that allows you to make charitable distributions for your RMDs from your retirement account So you can do a required minimum distribution if you're at requirement distribution age that distribution

[00:56:40] If you do it in a very particular way talk to your advisor talked to your accountant about this stuff You can make direct payments to charities a number of clients who are with the years whether it's into a foundation or to direct charities in their community

[00:56:52] They might have ESG beliefs they might have things that they want to support but But now in an IRA don't really have the embedded capital gains issues, but there might be reasons that it's hard to get away from that

[00:57:03] You know what one of the best ways to get away from that is when you take money off the top when you make a donation You take the McDonald shares that you think if you thought McDonald's were the devil

[00:57:11] You can donate them to a church tax frayer. You can donate it to a charity of your choice tax free in many cases As long as they qualify you can take that RMD money and give it to the local women shelter

[00:57:21] You can do a lot of good with money on a more localized level then your teeny teeny tiny fractional ownership in some gigantic

[00:57:30] Conglomerate is going to move the needle on you can also vote your practices to a lot of nuance that I appreciate you highlighting how much nuance is there

[00:57:38] His that's part of the conversation we try to have clients to so we spent ninety percent of episode agreeing with Rick let's do a little disagree Um, because I think this is really important like and we will do these episodes of other

[00:57:49] Access returns podcasts as well, but the idea is all of us. You know need to have our own opinions

[00:57:53] And we need to think differently through these things because that's how we learn and so the one thing I did disagree with him on as this idea of Mike Greens work around the idea of

[00:58:00] Do this passive investing influence the market. I mean, I think Rick largely believes that not true. You know, I'm a believer that as as money is flowing into passive funds

[00:58:09] I do believe that like the liquidity of these largest companies is not scaling with the market cap. I do believe there's an influence to that

[00:58:16] Um, I don't think it's some massive influence. I think it's just this upward this slight upward pressure that sits on there all the time

[00:58:23] But I do think that's something for all of us to think about going forward like as we analyze the markets and and but the interesting thing for me going back the other way with this is

[00:58:31] Regardless of your opinion on that it's interesting like so you could take rich work and you could say you know what I should do I should buy an S&P 500 fund. You know what happens when you take Mike Greens work?

[00:58:39] You also should buy an S&P 500 fund, so it's it's interesting like we could disagree on this but like the practical implications for investors They aren't really there because if you believe that these big companies are getting driven up by the flow to passive

[00:58:53] Well, then you want to own the big companies as they could driven up now. There's other catastrophic stuff Mike talks about how about it

[00:58:58] Mike and then eventually but in the shorter term the medium term like I think Mike's a believer, you know, you should own the S&P 500 fund. So is Rick

[00:59:05] So it's one of those things where you might see like Rick Ferry and Mike Green is like can can clean opposite on this and they are

[00:59:11] But the practical implications are actually the scene so that's why I think it's important to like kind of look at both sides of these things because you might end up

[00:59:18] In a better place where you realize oh I can look at this. It's very interesting to talk about but in terms of the implications for my portfolio I might end up in the same place I started

[00:59:27] I love that you put the connection there and I think it's also important and this is this is one of the great pleasures of participating in conversations like this And you guys recording the podcast and sharing this because you can look at Rick Ferry next to Mike Green

[00:59:39] You can let both of them into your head. You can put both of them. You could have two mirrors people you're not just excluded to one mirror. You can have two mirrors

[00:59:46] You can look at both of these things two dark mirrors even and you can see what they're saying about this The I we will quote the stat that that Rick Ferry used and I'm not capable of quoting the stat that Mike Green is either

[00:59:58] But like passive is a bigger thing than it used to be active is a smaller thing than it used to be in the way we think about it That has interday and daily liquidity things that it's creating that has medium and longer term other things that it's creating

[01:00:13] These are bigger problems. These are market functioning problems

[01:00:17] But the end result is basically there's still a lot of money that needs to get put to work company earnings or still going up and we still kind of need this thing of this is part of investing in our future

[01:00:27] This is how capitalism works hopefully not a capitalism breaks but at least for right now a big part of that takeaway to your point is That's such a bad thing to own an S&P 500 fund for one couple of bips

[01:00:41] Yeah, it's interesting to think about and I love you know that's part of why we do the podcast is to be able to think in real time about these issues and the different

[01:00:48] Sides of them but again like it's also important to break it down to what does it mean for someone's portfolio And I don't think these arguments mean much for someone's portfolio because even if both extremes of it you kind of end up with the same conclusion

[01:01:00] In terms of the investment implementation so it is something I disagree with Rick on but I don't think it really has many practical implications because you end up in the same place Couldn't agree more you end up in the same place whether you think it's a

[01:01:14] Slight falsehood a complete lie a travesty a scam whatever else I got to take you the 10 song on my playlist rock and roll all night because Let's think about it for a second. I want to rock and roll all night and party every day that

[01:01:29] That sounds great in theory but in practice Jack could you rock and roll all night and party every day? Can you can hang at the stage with that one?

[01:01:39] We could do it. It would not be mean that I don't think anybody could do it, but I would not be the guy because you that you would be able to do that way more than I could

[01:01:45] Ah, yeah, maybe meant at a younger age who could still Paul nighters I can definitely not pull me in that story anymore All night and party every day at one point and you've actually seen that I

[01:01:55] Did but even then it had limits and I am here to tell you those limits of dramatically things train themselves I really like going to bed with the sunset and getting up with the sunrise these days

[01:02:05] And I am not farming the rock and roll all night party every day idea of hey keep it simple stupid

[01:02:14] That's not a realistic lifestyle, but it is a really great way to package up music and sell it to teen and pre-tain preaching boys with you know your face make up in your lunchbox It's not your husband's taste so All these guys all the stuff keeping your agency

[01:02:33] Understanding their agency understanding that you can still go see kiss play and have a pretty damn good time Especially if it's in the middle eight seventies that matters that experience with these things matters so much

[01:02:44] And as always fun to have a little fun with this keep it simple stupid Rick Ferry is a brilliant thinker

[01:02:52] And I just I so so love just the mirror that he holds up with such great clarity to allow people like us to reflect on what we do every day with clients for a living He's got a wonderful clarity of thinking that he brings to the table

[01:03:04] So I think that's a great thing to wrap up on the one thing I'll say before we close is we definitely want feedback on these types of things You know we're trying different things we're trying this thing on lessons from some of the access returns episodes

[01:03:13] Like if you have an opinion one way or the other you know you can email us at access returns pod at gmail.com You can make a comment if you think this is a good thing for us to do in the future

[01:03:20] You can like it on YouTube just anything you can do to give us feedback You know, we were interested in obviously going to talk about things we're interested in but we also want to talk about things the audience interested in well

[01:03:29] And so we want as much feedback as we can get what's gonna happen here is I'm gonna have to dig deeper into my very limited kiss knowledge because you know

[01:03:37] I don't know kick Gene Simmons didn't pay his taxes or something like that is gonna be the horrible underection So this is your job dear listener. Please give us emails or comments tell us what we can do with this because this is fun

[01:03:50] And we're trying to broaden this conversation around stuff that like this is part of our actual everyday apparently it's interesting to some of you That's really cool

[01:04:00] Well, thank everybody for joining us and we will see you next time. Hi guys. This is Justin again. Thanks so much for tuning into this episode

[01:04:07] You can follow Jack on Twitter at at practical quiet. You can follow me on Twitter at JJ Carbono and follow Matt on Twitter at at Coltish Creative

[01:04:15] If you found this discussion interesting and valuable please subscribe and either iTunes or on YouTube or leave a review or a comment Also, if you have any ideas for topics you'd like us to cover in the future Please email us at access returns pod at gmail.com

[01:04:30] We would like this to be a listener driven podcast and would appreciate any suggestions. Thank you Thank you