Ten Lessons from Two Decades of Managing Money

[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 their long-term goals.

[00:00:05] Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau, as we cover a wide range of investing and 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.

[00:00:15] Justin Carbonneau and Jack Forehand are principals at the Lydia Capital Management.

[00:00:19] Matt Zeigler is managing director at Sunpoint Investments.

[00:00:21] The opinions expressed in this podcast do not necessarily reflect the opinions of the Lydia Capital or Sunpoint Investments.

[00:00:25] No information on this podcast should be construed as investment advice.

[00:00:28] Securities discussed in the podcast may be holdings of clients of Lydia Capital or Sunpoint Investments.

[00:00:58] He did a much better job than anyone I've ever seen doing it.

[00:01:02] It was good. Some of it was stuff that would apply to all investors, some of it was a little bit more in the weeds.

[00:01:08] It was a great balance.

[00:01:10] For me, I operate in a similar systematic world where Corey does, so they all hit home.

[00:01:16] We decided why don't we take two people that are much less smart than Corey and why don't we come up with our own lessons, which seemed to make complete logical sense after hearing Corey do it.

[00:01:26] Yeah, if Corey could do it, we could at least do it poorly.

[00:01:30] Yeah, exactly. We could do a much worse version of it.

[00:01:34] So that's what we're going to do today.

[00:01:36] I had actually written an article like a long time ago where I tried to do a similar thing.

[00:01:40] I only came up with five in the article, but I tried to do something similar, so it was good to go back and revisit that.

[00:01:47] Today we're going to talk about some lessons we've learned throughout our careers and maybe how we think they apply to everyday investors.

[00:01:55] Yeah, I think it'll be cool to run through all that.

[00:01:58] Yeah, and I think it's extra where the B list version of the thing that Corey wrote.

[00:02:04] So by all means go read Corey Hofstein's great 15 list listen to the P&L for purpose cropped out episode where we just talked to Corey about his 15 things and kind of like lightning round through them.

[00:02:15] But just jotting down some ideas to have this conversation with you right now.

[00:02:20] And it's like, this is a worthwhile exercise.

[00:02:23] So listen to ours.

[00:02:24] I encourage you to go write your A plus version of this thing too because this is really fun to think about.

[00:02:30] Yeah, and all of us in the existence investing world where you're never going to figure it out.

[00:02:34] Like I wrote this article at a long time ago called The Lure of the Unsolvable Problem I called it.

[00:02:39] And the idea is like you just can't, no matter how good you get in investing,

[00:02:43] the most elite investor can improve themselves a lot.

[00:02:45] And so this is an important exercise to be constantly going through this because just when you think you've got investing figured out,

[00:02:51] you get humbled and you realize you don't have investing figured out.

[00:02:54] So this constant process of going through like what have I learned in my career?

[00:02:58] You know, if we did this in five years, I would have new things to come in because I'll make mistakes along the way and I'll learn from.

[00:03:04] So this like evolving process I think is so important.

[00:03:07] And not just as a process, but I think one of the best parts in Corey embodies this in his list too.

[00:03:13] You start to see the other lessons here.

[00:03:15] So I know as I was jotting these down, I'm as much thinking about investing lessons as I am about planning lessons as I am about here's the read through into the rest of life.

[00:03:24] And that's part of what was this was a more thought provoking exercise to think through an advance tonight than I planned for.

[00:03:31] Yeah, and I think you're obviously to see if some of some of my are so in the weeds that they may not have too many life implications.

[00:03:36] But you're usually pretty good at this.

[00:03:38] So you may come up with some life implications for some of my crazy quant lessons that I didn't think of.

[00:03:43] I promise at least three existential crises problems from this episode.

[00:03:48] Let's go maybe we start with you because I'll be a little bit more yours will probably be much more profound than mine.

[00:03:53] So what did you come up with for your first one?

[00:03:57] So in no particularly wonderful order, let's see, I'm going to keep these in the order that I jotted them down.

[00:04:04] This is how they came to mind.

[00:04:05] So the first thing I wrote was basically being aware of I wrote ladders platforms and aggregators.

[00:04:12] Oh my flashback like 1012 years ago.

[00:04:15] Were you reading any like the Ben Thompson platform and aggregator stuff like on Stratenary?

[00:04:20] Yeah.

[00:04:21] Yeah, no, I remember that came on the scene like, yeah, no, I was definitely I don't read as much of it now.

[00:04:25] But yeah, I was.

[00:04:26] So I think having these types of like forms and playbooks for a changing world, that's going to be something we're going to hit over and over again.

[00:04:34] But this this was just a metaphor that hit me so strongly because on a market standpoint, he was saying look at these different companies,

[00:04:42] look at the actual strategic businesses that they're building and start to think about which ones are aggregating other things that they're like bundling up

[00:04:50] and which things are platforms that effectively are like unbundling different things to offer in one space in an ecosystem.

[00:04:56] And the more I thought about it, the more I started to think and notice I put ladders on to this thing too, because it's you have companies when you're making investments that have some clear ladder decline.

[00:05:06] There's some clear like stated objective, we're going to go from Angel to venture to, you know, build something that doesn't exist yet in some giant corporate company and that's our path.

[00:05:16] We're going to go with the path is the IPO or the path is to become dominant in some category that we've been winning at for all these years.

[00:05:23] Or we're going to roll up all these other entities are going to diversify up and down or left and right and all this stuff.

[00:05:29] And just understanding you need these metaphors to think about companies that you make investments in, you need to think about them in this broader system

[00:05:37] and what the trends are endlessly, endlessly useful.

[00:05:41] The corollary I would take to that is like on a planning front, a lot of financial planning is basically thinking in terms of ladders.

[00:05:49] It's just get your retirement savings right, get understand the way that taxes work, which is to move up on the ladder where it's like pay less taxes or move down on the ladder.

[00:05:58] Like, why'd you do that? You unnecessarily gave Uncle Sam money.

[00:06:02] And there's lots of these things that we think in one step, what they do in either direction and then over time.

[00:06:08] Am I trying to cobble all these different things together? Am I building all these assets?

[00:06:12] Or am I divesting of all these things when I retire? How do they fit?

[00:06:16] And I think that layers into on the personal side to on the career path.

[00:06:20] And this is something that I felt being part of a bigger firm and then leaving to be part of a smaller firm million times the clients.

[00:06:27] You're in a big firm, you got to understand how to climb the corporate ladder.

[00:06:30] You're at a little firm, you might be figuring out ways you own your own company.

[00:06:34] Have an HVAC company or something.

[00:06:36] You got to think about, well, what do I want to do with my business?

[00:06:40] The same models, the same playbooks that the biggest companies in the world use.

[00:06:46] You can use to map on your own strategies and markets in your financial plan in your career.

[00:06:52] Love that idea.

[00:06:54] Yeah, that's great. And when you're talking about ladders, I was thinking about this idea that like, you know, if the wrongs blow,

[00:06:59] the one you're on are weak, that could always be in anything like investing and planning and life.

[00:07:04] That could always be a problem.

[00:07:06] And I think about that when I construct investment strategies, I have to think about if I'm three levels ahead of where I should be,

[00:07:13] but I've got just collapsing below me, I'm going to have major problems because I've missed something fundamental

[00:07:18] in sort of building up that I need in order to build that third ladder.

[00:07:21] So that would be something I would think I hadn't thought about it until you just said that,

[00:07:24] but like that's something I would take from what I've done as well is, you know, there's been times in the past where I have not maybe got those first ones right before I tried to keep moving up to the next step.

[00:07:33] Yeah, and as not a huge fan of heights, you know, you don't want to find out you're up too high and you're not unstable footing.

[00:07:40] So same thing, you can make something delightfully complex and how many investment strategies that we've seen that are basically not unstable footing,

[00:07:48] but they get way up high and it's like, well, I haven't fallen off yet.

[00:07:51] But the higher you get, the rougher the fall.

[00:07:54] These are worth an understanding.

[00:07:56] And when you're looking to people, strategies other people have built that's important too because you can you can hear a lot of people in our industry talk about all this complex craziness.

[00:08:03] And if like all this complex craziness gets these easy, you know, decisions at the bottom wrong, then none of it matters.

[00:08:10] Like I was thinking about long term capital like that that's an example of like something that just went completely wrong.

[00:08:15] Like they they had all this advanced stuff, but they had sort of missed something at the basic level in terms of what could go wrong.

[00:08:21] And so that blew up all the fancy stuff.

[00:08:24] It makes a huge deal to just have these types of models and metaphors in our mind to wrap around through all these things.

[00:08:32] Actually, I really love that you you hit the ladder thing too.

[00:08:35] I still get modestly confused for five minutes every time I think of platforms and aggregators.

[00:08:40] And just sit back and like re-piece it together.

[00:08:43] But just those three models alone make so much sense to me.

[00:08:46] All right, what about what about you? What's what's number one on your list?

[00:08:49] Yeah, so my first one, which I guess is a little bit in the weeds, but it's this idea of you can't learn what you know.

[00:08:53] And this is really important when you build investment strategies because people always talk about data mining as a big problem.

[00:08:59] And it is like in my world, like if I just keep running strategies until I find something that works, that's very problematic.

[00:09:04] Although in the age of machine learning that people are kind of going the other direction with this.

[00:09:08] But just in general, if I just keep testing, you know, I could eventually have a strategy where, you know, I want all stocks with a PE below 14.2

[00:09:15] and a return on equity between 17.6 and 17.9.

[00:09:19] And you could end up with some crazy strategy that just makes absolutely zero sense.

[00:09:23] You know, if you data mine.

[00:09:24] But the other thing to keep in mind when you're building these strategies is when you start building them, you know what happened in the past.

[00:09:30] And that can be very dangerous.

[00:09:31] So for instance, if I if I go build a strategy based on the last 40 years of data, like I know stocks and bonds was a big problem.

[00:09:37] I know stocks and bonds was the place to be.

[00:09:39] I know commodities was probably not the place to be like does that bias, you know, does does that impact how I start constructing the strategy in the first plate before I've even done any testing.

[00:09:48] Or I know value is struggled for a really long period of time.

[00:09:51] And that's the other thing I think a lot of people miss in our spaces.

[00:09:54] It's not just about avoiding the data mining.

[00:09:56] It's also about avoiding this idea and you can't really avoid it.

[00:09:59] But I know what happened like I know the reality of the way things played out and that can sort of bias the way I build a strategy.

[00:10:06] And maybe develop something like if I did, you know, develop something that just had stocks and bonds in it.

[00:10:11] Maybe you were in for a decade long period where that type of thing not going to work.

[00:10:15] And, you know, I wouldn't have known that it's very hard.

[00:10:18] Like if I'd bias my strategy initially into testing that way, it makes it a more challenging thing, I guess.

[00:10:25] This relates to me directly back to this latter's concept.

[00:10:29] And it relates to this idea of just because a ladder is in place just because you ran the regression.

[00:10:35] And you see this is the clear path to follow.

[00:10:37] This works.

[00:10:38] I get on the ladder at the bottom rung a climate to the top, I get out on the next thing.

[00:10:42] That's not always there.

[00:10:43] And it's not always there when you're building an investment thing because it can be the inherent bias that was in place.

[00:10:48] There's all sorts of obstacles that could keep you from following the exact same path of what worked in the past.

[00:10:54] And sometimes you just have to know that that might not be the ladder you're looking for.

[00:10:58] You might be looking for something totally different.

[00:11:00] You might be building from scratch.

[00:11:03] The bias that these clear pathways represent from the data, especially after you tear them apart as a quant.

[00:11:11] Like that's a fascinating idea to me.

[00:11:13] Yeah, the other thing is like the problems we have as humans are everywhere in investing no matter how you invest.

[00:11:19] And that's something a lot of people get wrong about people like me is that we somehow have this system where like Jack has no impact on this.

[00:11:25] And you know, the system just runs itself like I have to build the system.

[00:11:29] I have to decide when to change the system.

[00:11:30] We'll get into some lessons around that as we move on.

[00:11:32] But this idea is, yeah, certainly by being systematic, you can limit some of that stuff, but you can't get rid of it.

[00:11:38] Obviously, I know what's happened in the past.

[00:11:40] I'm building strategies with that knowledge in my head.

[00:11:42] I can't remove it.

[00:11:43] So I could easily make mistakes because of that.

[00:11:46] I could easily make changes I shouldn't make.

[00:11:48] You have to trust the human behind it and not just the quantitative process.

[00:11:53] I thought I was getting Jack GPT though.

[00:11:55] Maybe eventually you will.

[00:11:57] Maybe Jack GPT will actually be better than, you know, I think about this.

[00:12:01] Like maybe these GPTs eventually will be programmed like based on the best investors without their issues.

[00:12:06] And maybe there'll be some way that that will happen in the future.

[00:12:08] I mean, people smarter than me will figure that out.

[00:12:10] But if that's the case, Jack GPT is not the one you want to be investing with.

[00:12:15] You probably want to come up with somebody like Ward Buffett GPT or something like that.

[00:12:19] So the problem is you my fear is it's like the things I want Jack GPT to be able to do to like solve all of this.

[00:12:26] The problems in the world are great.

[00:12:28] If we can't do better than that, it actually becomes like my version of Matt GPT is basically my dog figuring out like when mobs happen and other things.

[00:12:36] That's a much more solvable problem.

[00:12:38] If you could just give me, you know, the piece of chicken for the refrigerator, take me on the walk.

[00:12:44] Like that's really all I need of you.

[00:12:46] It's a really simple gig.

[00:12:48] So before we get to in the weeds with Jack's lessons, I think it's probably time to throw back to Matt.

[00:12:52] All right, all right, let's let's jump into another one.

[00:12:55] And I think I'm going to switch up my order a tiny bit on this just for just for fun.

[00:13:00] Diversification always protects.

[00:13:04] So this idea on the market side that the cutting of the risk math and this is something that I believe West Gray was the first person to show me this like 15 years ago and one of the things that he wrote.

[00:13:15] And it was basically like, if you have one thing you own it in isolation, you have the full idiosyncratic risk of that say company or stock.

[00:13:23] You add one more stock to the portfolio.

[00:13:25] So you have two and all of a sudden that idiosyncratic risk gets cut in half.

[00:13:29] And then as you go up, it keeps it keeps doubling.

[00:13:32] So now I have four and I've reduced it down to 25%.

[00:13:35] I have eight and I reduced down to like 12%.

[00:13:38] And it keeps going in that order.

[00:13:40] And this idea that you need a group of things to get adequate diversification.

[00:13:44] So one thing is unlikely to blow you up.

[00:13:47] It's such a simple concept and such a powerful concept.

[00:13:51] Now, the other thing that happens is a rising tide can lift all boats.

[00:13:55] That's wonderful.

[00:13:56] But the tide going out, the old proverbial shows you who's swimming naked is.

[00:14:03] It's also true on the way up.

[00:14:05] It might lift all boats.

[00:14:07] It might lower all things down and expose the frauds.

[00:14:10] But a lack of diversification can be the thing that actually gets you ahead over time.

[00:14:16] So in markets, understanding the risk math of when diversification is working

[00:14:21] in the way you want it to work is really important.

[00:14:23] In financial planning, understanding diversification, not just in the investment strategy,

[00:14:28] but in all the scenarios we run when we run a Monte Carlo analysis

[00:14:33] on all the different paths to retirement somebody might have

[00:14:35] or selling the business or whatever it might be.

[00:14:38] That becomes really important in regular life,

[00:14:41] just making the plans for those career path choices

[00:14:45] or cutting out those interests or keeping them in your life.

[00:14:48] Diversification isn't just a blanket term that means anything.

[00:14:53] Diversification is a very specific word that says,

[00:14:56] I'm thinking through how these things pair together

[00:14:59] in a thoughtful and intelligent way to reduce risk on my way to some broader goal.

[00:15:06] Yeah, this is such a, this risk return trade off is so interesting.

[00:15:09] What's also interesting to me is if we look at some of the people that we look up to the most,

[00:15:12] some people that are the most success in this world,

[00:15:15] they didn't diversify.

[00:15:17] They made these huge bets and then we know the outcome of those bets

[00:15:20] and we're like, oh, that was a great decision to put all your money in that whatever stock that was.

[00:15:24] It's such a balance for people.

[00:15:26] Your average person should be diversified across a lot of different things

[00:15:29] and we don't remember the guy that put everything into pets.com

[00:15:33] and it didn't work out.

[00:15:35] We don't remember that person,

[00:15:36] but we do remember the person that put it all into Amazon or whatever

[00:15:39] and it ended up working out.

[00:15:41] So it's an interesting thing because you want to make,

[00:15:44] the people who achieve huge levels of success typically make very concentrated focus bets

[00:15:48] on themselves usually, something they're involved in themselves,

[00:15:51] but that's not for a lot of people that doesn't work out those focus bets,

[00:15:56] especially when the focus bets are something you're not involved yourself

[00:15:59] but you're like, I see this one stock in the stock market

[00:16:01] and I'm pretty convinced this thing is going to drive my retirement.

[00:16:04] So let me put 70% of my portfolio in this one stock.

[00:16:07] I mean, that usually does not work out,

[00:16:09] but it's interesting just to kind of think of that balance.

[00:16:12] Like your average person should certainly be diversified,

[00:16:14] but you also see these people in the media that were not diversified

[00:16:17] that achieved like these massive levels of success.

[00:16:20] The survivorship bias inside of this is massive.

[00:16:23] You got to understand how that works.

[00:16:24] And again, it's the math, the concept, the metaphor,

[00:16:28] the story of diversification is tremendously useful.

[00:16:33] And if you understand it well, you can apply it to your benefit

[00:16:37] because you can say I am choosing not to be diversified in this area.

[00:16:40] I'm choosing to take this bigger bet or I'm choosing to,

[00:16:43] I got to this point now I have to spread out my risks.

[00:16:46] How am I actually spreading them out?

[00:16:48] Because this is the other piece of it too.

[00:16:50] There's lots of faux diversification out there.

[00:16:52] There's lots of people who are like, sure, I have stocks and bonds.

[00:16:55] I got my high tech growth stocks and I have my junk bonds.

[00:16:58] You're like, no, that's not a 60 porty.

[00:17:01] That is not you're missing the point of how this works.

[00:17:04] So important diversification.

[00:17:06] Yeah, so that's a really important point too because it's not just

[00:17:09] a lot of people think diversification is how many things,

[00:17:12] but it's also what things and a lot of people miss that idea.

[00:17:15] Like, you know, obviously, you know, 30 meme stocks or whatever,

[00:17:18] you know, diverse and put together is not really diversification.

[00:17:20] Whereas 30 stocks that are completely like leaders from various industries

[00:17:24] can be a lot of diversification or even 10 stocks from like very,

[00:17:27] you know, leaders from various industries could be a decent level of diversification.

[00:17:30] And that's really, that could be more diversification than say like

[00:17:33] some massive amount of small cap stocks.

[00:17:35] And so it's just really important to keep that in mind is like a lot of people

[00:17:38] get into this well at 30 stocks, I've achieved my maximum diversification

[00:17:41] or whatever the numbers are, people come up with.

[00:17:43] But it's so important to understand like what's in there.

[00:17:46] And that's not just like the stocks you own, but your bets in life,

[00:17:49] all that stuff, like how correlated is this stuff to each other

[00:17:52] because your diversification may not be what you think it is.

[00:17:55] Fascinated by scaling that model over the rest of life.

[00:17:59] All right, enough diversification talk for me.

[00:18:02] What do you got next on your list?

[00:18:03] So I'm going to Jim O'Shaughnessy because you just did a great interview with him,

[00:18:07] which as we're, I just put it up right as we're reporting this.

[00:18:09] So it'll be up.

[00:18:10] People hear this.

[00:18:11] But this idea that underperformance is worse than market losses for clients,

[00:18:15] I think is something that I learned over time.

[00:18:17] And Jim calls it, you know, what does he call it?

[00:18:19] The two points of failure like the first point of failure is

[00:18:22] when your portfolio is down a lot, you're going to sell.

[00:18:24] The second point of failure is when you're underperforming

[00:18:27] whatever it is you judge yourself against, which in most people is like the S&P 500.

[00:18:31] You're going to sell and like this is a lesson over my career.

[00:18:33] I think the second one is way more problematic.

[00:18:36] I mean, we had a lot less client problems in 2008 when we were losing

[00:18:40] whatever we were losing along with the market, you know, something similar to the market.

[00:18:44] Then we did in periods where values struggled and you know,

[00:18:46] we were 10, 15% behind the market in any given year.

[00:18:49] You know, it was that second thing was much more problematic

[00:18:52] because people kind of understand, oh, the market is down.

[00:18:56] You know, if I'm 100% invested in equities and that's appropriate for me,

[00:18:59] I'm going to lose a lot of money.

[00:19:01] People don't understand like why is this working right now?

[00:19:04] Like, you know, I see my friends are in the S&P 500, they're, you know,

[00:19:07] they're just buying an index, they're grading great returns.

[00:19:10] Whenever you do anything that deviates from that and it's not working,

[00:19:12] it's far more challenging, I think than market losses.

[00:19:15] The whole relative comparison thing that nothing is in a vacuum is incredibly important.

[00:19:21] This shows up on career paths.

[00:19:24] Why am I not getting the promotion?

[00:19:26] It shows up in parenting.

[00:19:28] I don't have to tell you about that one.

[00:19:30] It shows up in like just competing on stuff on those ladders

[00:19:33] that we talked about before.

[00:19:35] That relative comparison that we make on our path with all the variables,

[00:19:40] because this is the other thing, people always leave all the variables off.

[00:19:44] When I'm in a focused value strategy and I'm underperforming

[00:19:47] in like a growth bull market and a value bear market,

[00:19:50] it's, is the fundamental like truth at the core of this thing

[00:19:54] that I really just wanted to be smarter than the other people?

[00:19:57] Or is it I really believe in this strategy?

[00:20:00] Those are really going to impact how you feel about these two things.

[00:20:03] You especially have lived this.

[00:20:05] Yeah, absolutely.

[00:20:06] You know, being different is so hard and everything.

[00:20:08] Like this is just not just investing in life.

[00:20:11] You know, if you're taking a very different path

[00:20:13] and you're watching everybody else, you know, like for me,

[00:20:15] I've worked mostly in like startup type, you know, smaller companies my whole life.

[00:20:18] You know, you can if you compare yourself to the person that started

[00:20:21] at Goldman Sachs and is like just working their way up the whole time.

[00:20:24] I mean, it could be there's times where that's great

[00:20:27] and there's times where that looks awful.

[00:20:29] And you know, just that that act of being different is really, really hard.

[00:20:32] And you know, I think about that when, you know, it takes a as we kind of think

[00:20:36] about AI and things that are out there right now.

[00:20:38] There's some people doing some things that seem to make absolutely zero

[00:20:41] sense right now that are going to end up being these massive wins.

[00:20:44] And that's what happens in venture capital too.

[00:20:46] The vast majority of us are not built to do that or not built to like be making

[00:20:50] these major bets on something that doesn't seem to make sense to everyone else

[00:20:53] around us, you know, and then, you know, it's succeeding.

[00:20:56] And by the way, the vast majority of people that do make those bets are going to

[00:20:58] fail and they're never going to hear about them.

[00:21:01] But in a decade we're going to hear about, you know, some of these people

[00:21:04] that made the right bets and were like enormously successful.

[00:21:08] I think all the time about the history of sushi

[00:21:13] and like the California, the California role and basically being the idea that

[00:21:18] sushi is this great beloved dish in these other corners of the world.

[00:21:22] But if you're going to sell it to Americans, like you probably just can't

[00:21:25] jump to, you know, raw tuna, like you probably have to

[00:21:29] easier way in with something and the idea of like the California role

[00:21:32] and everything was like we have to make it just familiar enough

[00:21:37] that people are willing to try something exotic and just different

[00:21:41] enough that it becomes the gateway drug into these other areas.

[00:21:46] As true an investment performance as it is in California roles.

[00:21:50] Yeah, if most people are going to make high risk bets, sushi is probably not the place.

[00:21:54] They're looking to make that bet because that could probably go against you.

[00:21:57] As the Simpsons status of blowfish.

[00:21:59] So what do you got next?

[00:22:00] All right, the next one I have is investing in growth,

[00:22:03] which is not a Morningstar style box argument,

[00:22:06] but it is a kind of a quirky understanding that I think I've learned

[00:22:10] to map over everything kind of over everything.

[00:22:13] Actually, I'll literally say over everything.

[00:22:15] You're always looking for stuff that you have some

[00:22:18] identical identifiable growth trajectory on is really hard.

[00:22:24] If you're a value investor and you want to be smarter

[00:22:27] and you want to find the things that don't necessarily have growth,

[00:22:30] but you're looking for whatever it is.

[00:22:32] The value investor therapy session basically goes you're looking

[00:22:34] for somebody else like you're looking for flows to come through the story

[00:22:37] you want to have to close some gap in what you're doing.

[00:22:39] But brought more broadly speaking, whether it's investing in companies,

[00:22:43] whether it's joining a company, whether it's how you pick your relationships.

[00:22:47] You don't want stuff that's just stagnant and not going anywhere.

[00:22:52] I don't want to own a company where both like revenue and profits

[00:22:56] are just perpetually going down with no sign of a rebound.

[00:23:00] This is different from a relative argument of this is relatively cheap

[00:23:03] and why I want to have it in the portfolio.

[00:23:05] But it is to say if stuff just keeps going down forever internally,

[00:23:09] nothing good is going to come of it.

[00:23:12] On a career path, it's a lot growth solves a lot of problems.

[00:23:16] It's true for companies too.

[00:23:17] Like if I'm part of a company that keeps growing,

[00:23:19] more opportunities are going to be present.

[00:23:21] If in my personal life, if I'm friends with people like Jack Forehand

[00:23:25] or out there trying to do new things,

[00:23:27] we're going to have a lot more fun because growth takes care of those problems.

[00:23:32] So there's almost nothing when I'm thinking about investing time,

[00:23:35] effort, energy, money, you name it that I'm not like,

[00:23:39] what are the pieces that are growing here and how might those offset

[00:23:43] some of the problems I can't even predict as a value investor?

[00:23:48] How does any of this hit you?

[00:23:50] I'm really curious.

[00:23:51] Yeah, well, I kind of operate on both sides of that.

[00:23:53] Like on the public side, I am like a value investor

[00:23:55] and on my own personal side, I try to do what you're saying,

[00:23:58] which is I try to invest in growth.

[00:23:59] And it's interesting.

[00:24:00] I was just thinking about as you were saying,

[00:24:01] like it hides these other problems.

[00:24:03] Like I know a lot of people who have made probably is about as bad decisions

[00:24:07] like about their money and their portfolios and everything in their life,

[00:24:10] but still have been very, very successful because they effectively built

[00:24:13] a business that did so well.

[00:24:15] Like the growth was so good that it hit all the rest of it.

[00:24:19] And I think a lot of people like missed that.

[00:24:21] Like, you know, people want to buy growth stocks

[00:24:23] or you know, the best adventure capital or whatever.

[00:24:25] But the best way to achieve growth is in your own life,

[00:24:28] with your own human capital.

[00:24:30] You know, that's the people that really achieve growth.

[00:24:32] I mean, there's not too many people, you know,

[00:24:34] you probably don't see too many clients where it's like,

[00:24:36] well, you know, they had a so-so career,

[00:24:38] but you know, they bought Amazon at the IPO and like that is,

[00:24:41] I mean, that probably happens somewhere, but it's unlikely.

[00:24:44] I mean, you're much more likely to see people

[00:24:46] who have actually achieved that growth themselves

[00:24:48] by thinking about what they can do,

[00:24:50] thinking about what they can bring to the world

[00:24:52] and you know, trying to use that to leverage to achieve growth.

[00:24:57] There's a fascinating angle of this beyond like public markets

[00:25:01] investing or private markets investing.

[00:25:03] So anytime you have growth,

[00:25:06] you have other stuff that can enter the fray

[00:25:09] that growth helps you paper over or overcome.

[00:25:13] The angry everything is wrong with the world person

[00:25:17] who's huddled up in front of the computer screen

[00:25:19] in the basement and just complaining

[00:25:21] not only is probably not a good hang,

[00:25:24] but isn't very good for like the psychological safety of a team

[00:25:27] or going out and doing anything interesting

[00:25:29] or exciting in the world because they just want to be angry

[00:25:32] and small and whatever else.

[00:25:34] The crazy thing about growth is you can have somebody

[00:25:37] on a higher and in career

[00:25:40] and they can make some disastrously stupid investments

[00:25:43] and within that they might go like, oh well,

[00:25:46] I screwed up, I was an idiot,

[00:25:48] I'm gonna go try something else after this

[00:25:50] or they can get smaller and they can cut off growth in other areas.

[00:25:53] It spills into other parts of your life

[00:25:56] and whether that's a growth mindset

[00:25:59] and awareness of just like feeling abundance in your life

[00:26:02] understanding scale that you could do this.

[00:26:05] The people who look for those things across all the aspects

[00:26:09] not just the portfolio,

[00:26:11] there's so much more you can get beyond

[00:26:13] and maybe it even relates back to the relative performance part

[00:26:16] you were saying earlier too where it's just like

[00:26:19] when you're growing, you're not comparing yourself

[00:26:22] to your peers is in the same way that when they're growing

[00:26:24] and you're not.

[00:26:26] This shows up everywhere I think.

[00:26:28] I think that's true though by the way,

[00:26:30] for me when we were growing this business

[00:26:32] when we were doing very well

[00:26:34] I was probably doing less comparing to my peers

[00:26:36] and when we thought our struggles

[00:26:38] that's when you're looking at all the guy

[00:26:40] that went the corporate route the whole time

[00:26:42] he's having all this success.

[00:26:44] I think that's true and investing too

[00:26:46] clients when you're outperforming

[00:26:48] are less likely to be worrying about

[00:26:50] I mean, I'm sure they like it

[00:26:52] but they're less likely to be comparing you

[00:26:54] to benchmarks and stuff

[00:26:56] and when you're underperforming

[00:26:58] they're probably more likely to be comparing you to benchmarks.

[00:27:00] Yeah absolutely, I mean just putting some numbers

[00:27:02] on the board, you know

[00:27:04] extra sports references, extra push-a-tee references

[00:27:06] that'll probably be the only music reference

[00:27:08] I'll pull out of my butt on this one.

[00:27:10] The idea of

[00:27:12] if you feel like something is good enough

[00:27:14] if there's enough growth

[00:27:16] you're probably not being distracted by other things

[00:27:18] you might still be being distracted

[00:27:20] by other shiny things

[00:27:22] I'm thinking about the draw to the memestunks

[00:27:24] and the crypto stuff

[00:27:26] and some of the chaos in COVID

[00:27:28] that people were chasing

[00:27:30] but growth that you're comfortable with

[00:27:32] and understanding

[00:27:34] the level of growth you're comfortable with

[00:27:36] really does help reduce

[00:27:38] a lot of what you're talking about

[00:27:40] with the two points of failure too

[00:27:42] it really helps you step back away from being

[00:27:44] this is good enough for me

[00:27:46] and that's a huge thing

[00:27:50] So as we move to my next one

[00:27:52] this is one that I've kind of

[00:27:54] learned through a lot of mistakes over the years

[00:27:56] but the lesson is

[00:27:58] with smarter people than you disagree

[00:28:00] you don't have to have an opinion

[00:28:02] and this kind of plays into

[00:28:04] I actually had a similar lesson

[00:28:06] to what Corey had in your interview with him

[00:28:08] and I believe he called it half-sees

[00:28:10] but the idea is if I've got like

[00:28:12] Cliff Assoness out here and like Wes Gray

[00:28:14] differing about how to construct

[00:28:16] quantitative strategies

[00:28:18] am I really the one who's going to be able to figure out

[00:28:20] the right answer to that argument

[00:28:22] or do I just look at it and say

[00:28:24] you know what, I'm not going to be able to have

[00:28:26] a better opinion than either one of them

[00:28:28] maybe I should take aspects

[00:28:30] of what both of them are talking about

[00:28:32] and I should integrate that in

[00:28:34] Corey used the example that I use all the time too

[00:28:36] which is when you combine factor strategies together

[00:28:38] you can do it in two ways

[00:28:40] you can like look for stocks that have

[00:28:42] exposure to value and exposure to momentum

[00:28:44] simultaneously within the same stock

[00:28:46] or you could just build your value portfolio

[00:28:48] on one side and build your momentum portfolio

[00:28:50] on the other side and then you can just put them together at the end

[00:28:52] and so those are, you know they call it

[00:28:54] the integrated whatever there's different ways

[00:28:56] you can name those things in our business

[00:28:58] but the idea is at a simple level

[00:29:00] those are the two options you have

[00:29:02] well how do you do it like you know

[00:29:04] AQR feels one way, Alpha Architect

[00:29:06] feels another way, like how am I going to figure that out

[00:29:08] and so what we've always done is we've always run both

[00:29:10] we've always had one where we do it one way

[00:29:12] and one where we do it the other way or you could just have

[00:29:14] a combined portfolio where you do both of them together

[00:29:16] it really gets at the same thing

[00:29:18] but I just accepted at a certain point

[00:29:20] that I wasn't going to figure out what the right answer was

[00:29:22] to that so I don't need

[00:29:24] to have an opinion where

[00:29:26] maybe smarter people than me

[00:29:28] have thought about this a lot and they

[00:29:30] disagree on that same issue

[00:29:32] not to make this way way too philosophical about this

[00:29:36] but it's, I think about

[00:29:38] I've been thinking about this a lot lately

[00:29:40] cognitive dissonance

[00:29:42] so holding two competing ideas in your

[00:29:44] in your mind at the same time

[00:29:46] and

[00:29:48] the way Corey said it with havesies

[00:29:50] is what really started to dislodge this thought

[00:29:52] in my mind all the way

[00:29:54] and I love by the way this advanced quant researcher

[00:29:56] like Corey used havesies

[00:29:58] oh yeah, that was great

[00:30:00] fantastic

[00:30:02] West Gray was great

[00:30:04] was there a word with like seven syllables he could have used

[00:30:06] six, uh like something that I don't even know what it means

[00:30:08] to exhibit that lesson

[00:30:10] but he just went with havesies

[00:30:12] there's some like heteroscedasticity

[00:30:14] or something that applies

[00:30:16] he could have gone with a

[00:30:18] some word that I was told to learn at one point

[00:30:20] I'm like I, pterodactyl?

[00:30:22] I don't know

[00:30:24] so this idea of like holding two competing ideas in your head

[00:30:26] at one time

[00:30:28] especially when there are two competing ideas

[00:30:30] from people that you respect

[00:30:32] and I love the example you gave

[00:30:34] or even if you don't respect because it applies too

[00:30:36] I'm thinking of presidential candidates

[00:30:38] uh like

[00:30:40] you don't have to pick a team

[00:30:42] you should pick a team

[00:30:44] when something matters to you

[00:30:46] but there's a lot of time in life where you have two

[00:30:48] pretty good ideas with convincing arguments

[00:30:50] and you don't have to pick a team

[00:30:52] in those cases like evaluation argument

[00:30:54] it's okay to do havesies

[00:30:56] it's okay to be like oh

[00:30:58] I'm gonna do a little of each because

[00:31:00] I do not need to pick a team

[00:31:02] I don't want to be on this side and be right

[00:31:04] I don't need to be all left

[00:31:06] I don't need to be alright

[00:31:08] I can be right here in the middle

[00:31:10] and go like those guys are pretty smart

[00:31:12] those both sound like good enough ideas

[00:31:14] to me I have no identity

[00:31:16] wrapped up in either of them being 100%

[00:31:18] right but even if they're both mostly

[00:31:20] right this isn't a bad ride to take

[00:31:22] like do you kind of think of it that way too

[00:31:24] do you see it more broadly than that

[00:31:26] yeah yeah no I agree and this is so important

[00:31:28] like in a polarized world

[00:31:30] you're not gonna have the people that are saying

[00:31:32] like go down the middle take the middle road

[00:31:34] you're gonna see the people

[00:31:36] crazy on both extremes telling you

[00:31:38] this is the only way to think about the world

[00:31:40] you've got to think about it this way and so

[00:31:42] it becomes even more important to look at it this way

[00:31:44] you know whether it be politics

[00:31:46] whether it be investing because you're not gonna

[00:31:48] see people like the people on CNBC they're not

[00:31:50] gonna bring the guy on who's just like oh let's just split the difference

[00:31:52] I don't have a strong opinion when we're the other on this

[00:31:54] they're gonna bring on the people that are screaming

[00:31:56] and yelling on both sides of it

[00:31:58] so that's the idea of because usually what happens

[00:32:00] you have a table pounding argument

[00:32:02] on either side and that's

[00:32:04] that's part of what makes it interesting

[00:32:06] that's what makes for good headlines that's what makes for good media

[00:32:08] that's like the whole reason we

[00:32:10] have the breaking news podcast we do

[00:32:12] at Ben Hunt is because

[00:32:14] the table pounding argument

[00:32:16] is what grabs our attention

[00:32:18] however and it sells ads

[00:32:20] let's be honest

[00:32:22] so if you can say

[00:32:24] these things are able to exist

[00:32:26] without me the individual having to pick that

[00:32:28] team without me having to take

[00:32:30] like every single last dollar I made

[00:32:32] and put it into I don't know like the AQR

[00:32:34] small cap value fund or something

[00:32:36] which even they would tell you not to do

[00:32:38] to go okay multiple things can exist

[00:32:40] it's okay if they do

[00:32:42] and if I don't have a personally invested reason

[00:32:44] to be as right as or only on the team

[00:32:46] of one of these guys

[00:32:48] figure out a way to split it up

[00:32:50] do you feel like does it tie back to the whole

[00:32:52] diversification thing in some way to you

[00:32:54] is there a connection here if you think about it just

[00:32:56] in factor terms on value

[00:32:58] you're diversifying

[00:33:00] between two approaches to the same

[00:33:02] strategy is that

[00:33:04] yeah no that's right

[00:33:06] you know when you're yeah when you

[00:33:08] like when it's when you construct value strategies

[00:33:10] this stuff is really important as well

[00:33:12] because there's all kinds of debate within the space

[00:33:14] I operate in about like well is this

[00:33:16] ratio the right ratio or is that ratio the

[00:33:18] right ratio and you know you really

[00:33:20] don't have to have that argument in the real world

[00:33:22] because you can use some blend

[00:33:24] of these various ratios

[00:33:26] and so it really works everywhere

[00:33:28] I mean there's certain things in life I guess where you can't

[00:33:30] you know where you have to have an opinion one way

[00:33:32] or you have to go one way the other

[00:33:34] there's this middle path

[00:33:36] doesn't exist but it seems like

[00:33:38] in most things I've done in my investing career

[00:33:40] the middle path does exist and like in most

[00:33:42] things in life too I mean obviously

[00:33:44] there's political views on this side and on that

[00:33:46] side but usually there is some

[00:33:48] way to bridge those political

[00:33:50] views to think about there's a compromise that includes

[00:33:52] aspects of both of those things so I think

[00:33:54] this works most of the time it doesn't work all

[00:33:56] the time and you can't get so far down

[00:33:58] there where you're not doing anything

[00:34:00] or you're not making any bets or you're not doing

[00:34:02] because you've just you know diversified everything

[00:34:04] and you know suddenly like they talk about all

[00:34:06] the time like if you you know if you diversify

[00:34:08] everything you end up with an expensive index fund

[00:34:10] um you know you're basically like

[00:34:12] you're you end up with a risk-free rate

[00:34:14] effectively if you really diversify

[00:34:16] everything like all the way across like

[00:34:18] you end up with basically you're getting the risk-free rate

[00:34:20] doing all kinds of complicated stuff that you know

[00:34:22] you don't need to do you have to take risks

[00:34:24] I mean risks have to exist but you could

[00:34:26] also think about if I take risks intelligently

[00:34:28] if I blend things together you know

[00:34:30] that can be a smarter way to do things

[00:34:32] Yeah which I think goes back

[00:34:34] again things that tie back it ties back

[00:34:36] to like investing in growth

[00:34:38] like understanding two people

[00:34:40] to your original point with compelling

[00:34:42] arguments that you look up to, respect,

[00:34:44] admire in some way shape or form

[00:34:46] okay for my family's dollars

[00:34:48] for my client dollars or whatever

[00:34:50] here's a way to go have these to

[00:34:52] split the difference and make sure if

[00:34:54] there's something I don't I missed

[00:34:56] about either of these two people

[00:34:58] growth's gonna solve a lot of those

[00:35:00] problems along the way

[00:35:02] Yeah you know the other the other one thing I would say is

[00:35:04] when you don't you know sometimes going back to our idea

[00:35:06] about like the guys that build the companies that end up being

[00:35:08] like really successful sometimes when you don't go have

[00:35:10] these you pick the right thing

[00:35:12] and you're really successful and judging

[00:35:14] that can be a challenge for people so like

[00:35:16] for instance if I'm you know if I'm doing

[00:35:18] trend following or something and I pick the exact

[00:35:20] right moving average where they talked about

[00:35:22] Corey was talking about their immaculate

[00:35:24] rebalance with the research affiliates

[00:35:26] like the idea that there is in this is not

[00:35:28] anything it's research affiliate they just ended up

[00:35:30] like one of the years they rebalanced their strategy

[00:35:32] the perfect time which is great you know that they

[00:35:34] achieved a great outcome you know for

[00:35:36] their clients by rebalancing at the exact

[00:35:38] right time and so the problem is when

[00:35:40] other people look at that from outside

[00:35:42] and you judge it you say oh you know this person

[00:35:44] you know or this firm you know pick the exact

[00:35:46] right thing and that worked out for them

[00:35:48] you just have to understand there are the other

[00:35:50] sides to that like the blended approach is

[00:35:52] much more boring you know the blended

[00:35:54] approach is never the top the blended approach

[00:35:56] is never the bottom it's much more boring

[00:35:58] so if you judge it against the top

[00:36:00] sometimes you're going to make some bad decisions

[00:36:02] because you're going to think oh you know the top

[00:36:04] works for this you know type you know this type

[00:36:06] of person the tops gonna work for me too

[00:36:08] I'm gonna pick the one in advance I'm gonna

[00:36:10] pick the one that works over there all the other

[00:36:12] ones I'm gonna pick the exact you know moving

[00:36:14] average I want to use in my trend following

[00:36:16] strategy if you use that as a

[00:36:18] lesson that somebody else got that right it

[00:36:20] can be really dangerous which is a really

[00:36:22] really interesting way to remind yourself

[00:36:24] of that and I think it's I want to say Howard

[00:36:26] Marx was one of the first ones who I

[00:36:28] saw the explanation from but it was

[00:36:30] it was basically how

[00:36:32] you don't have to be

[00:36:34] you tell me if you know this study

[00:36:36] yeah no I know I definitely know this

[00:36:38] you're gonna be in the top quartile at any one year

[00:36:40] yeah if you stay out of the bottom then

[00:36:42] you'll be there over the three five ten and whatever

[00:36:44] the idea is if you

[00:36:46] if you basically keep your fund in the top quartile

[00:36:48] over like a decade long

[00:36:50] period you're going to be in the top two three percent

[00:36:52] of all funds something like that

[00:36:54] just by trying to not trying to shoot

[00:36:56] for the stars but just trying to generate

[00:36:58] that consistent above average performance

[00:37:00] eventually everybody else who got it right

[00:37:02] once falls by the wayside

[00:37:04] because they can't get it right over and over again

[00:37:06] and so that plays into the exact idea we're talking about

[00:37:08] which is you know be above average

[00:37:10] over long periods of time

[00:37:12] don't try to make these massive bets you know split

[00:37:14] the difference when you can do have z's

[00:37:16] Corey would say and you're probably going to end up better

[00:37:18] than a lot of people that try to pick the

[00:37:20] you know the exact best thing

[00:37:22] alright so I've kind of a quirky one for you next

[00:37:24] okay alright so this one

[00:37:26] is so this was a

[00:37:28] a Merrill as in Charlie Merrill the guy

[00:37:30] nothing we're not talking about the company but

[00:37:32] this just shows up everywhere I feel like in

[00:37:34] markets and everything else so

[00:37:36] he had this expression that got popularized

[00:37:38] part of taking Wall Street to

[00:37:40] Main Street was a statement

[00:37:42] the interests of the clients must come

[00:37:44] first Merrill was having some type of like

[00:37:46] crazy anniversary they're showing

[00:37:50] some of these old ads and stuff that ran in

[00:37:52] newspapers you know and like the post

[00:37:54] World War era and stuff like that

[00:37:56] he's building this company and there was

[00:37:58] this one thing and it was like

[00:38:00] this woman writes him a letter

[00:38:02] and is like dearest you know Charlie

[00:38:04] Merrill I have

[00:38:06] I'm a widow I have

[00:38:08] a small amount of money left behind

[00:38:10] by my husband and in the

[00:38:12] truest sense of the interests of the clients

[00:38:14] must come first he says I know what you need

[00:38:16] these dividend paying stocks here are

[00:38:18] the railroads and tobacco companies

[00:38:20] and utilities or whatever else to buy

[00:38:22] then you read it you're like okay that seems

[00:38:24] like sound stable advice from

[00:38:26] 2010 or whatever America

[00:38:28] and then you start to go like huh

[00:38:30] I wonder like how do you pick up how do you

[00:38:32] pick that list like where

[00:38:34] where did that come from you to go to like the research department

[00:38:36] I guess it didn't really exist yet

[00:38:38] and then you start to look at it you're like oh well

[00:38:40] they were you know they

[00:38:42] led the offerings on these companies

[00:38:44] oh he's the biggest holding in these companies

[00:38:46] this start to peel through old filings you're like

[00:38:48] oh well he was the biggest holder in these

[00:38:50] companies and then you start to realize

[00:38:52] is he just kind of like unloading his

[00:38:54] book on a widow

[00:38:56] and then using it as a marketing campaign

[00:38:58] to bring this to main street and

[00:39:00] I have no information if the widow did poorly

[00:39:03] these could have been amazing investments for her

[00:39:06] she could have done like

[00:39:08] maybe that's Warren Buffett's mom I don't know

[00:39:10] but all I do know is

[00:39:12] this idea

[00:39:14] of people will say stuff

[00:39:16] in the industry

[00:39:18] and their actions aren't always exactly

[00:39:20] in line with the way they're presenting it to you

[00:39:22] I relate this constantly

[00:39:24] back to this

[00:39:26] commonly referred to as the principal

[00:39:28] agent conflict but it basically

[00:39:30] is the way I remember it which is very

[00:39:32] stupid but maybe helpful to somebody

[00:39:34] else besides me the principal agent

[00:39:36] conflict in a nutshell a principal problem

[00:39:38] is like you're a student and there's a principal

[00:39:40] of the school you are

[00:39:42] in their house it's the Worshack

[00:39:44] and Watchmen thing like it's not that

[00:39:46] like you're locked up in here

[00:39:48] it's that you're locked up in here with me

[00:39:50] the principal gets to deal from their own

[00:39:52] book they get to deal from stuff they

[00:39:54] have it's Charlie Merrill saying you should

[00:39:56] buy this stock and oh by the way

[00:39:58] I'm gonna be the one who sells it to you

[00:40:00] that's a principal transaction

[00:40:02] an agent transaction

[00:40:04] think Jerry Maguire think

[00:40:06] sports agent think somebody representing the

[00:40:08] interest of somebody else

[00:40:10] they are not the principal in the school

[00:40:12] who has you know the kingdom

[00:40:14] lording over you

[00:40:16] this is somebody on the outside this is mom coming

[00:40:18] in and saying like no no no principal

[00:40:20] or whoever your

[00:40:22] person in life is defending you from these things

[00:40:24] someone is gonna put your your

[00:40:26] interest first because they

[00:40:28] have a vested interest or a fiduciary

[00:40:30] obligation or whatever it is to say

[00:40:32] I'm looking out for you on this transaction

[00:40:34] we can buy this but we're not

[00:40:36] going to buy it from the same person who's

[00:40:38] recommending it as who is selling it to us

[00:40:40] when they go to the car dealer that's a

[00:40:42] principal transaction in many cases

[00:40:44] the car the dealer owns the car

[00:40:46] and it's being sold to me of course

[00:40:48] it's the greatest car ever

[00:40:50] when I have a real estate agent

[00:40:52] potentially representing me

[00:40:54] in a transaction to buy a piece of property

[00:40:56] that property exists hopefully

[00:40:58] on the market and there might be other

[00:41:00] agents involved to help represent both sides

[00:41:02] and do this party

[00:41:04] this shows up over and over

[00:41:06] again with everything in life it's all of

[00:41:08] marketing it's all of the other stuff when we talk about the

[00:41:10] psychology unpacking

[00:41:12] who's a principal

[00:41:14] who's an agent who's selling who what

[00:41:16] and why and knowing

[00:41:18] if you're taking care of people

[00:41:20] if you're in the advisor seat or if you're in the

[00:41:22] allocator seat

[00:41:24] what are you doing to just always

[00:41:26] make sure you put those client

[00:41:28] interests first

[00:41:30] easier said than done what do you think

[00:41:32] yeah well a couple things I was thinking

[00:41:34] whenever you see

[00:41:36] large institutions this is not any specific institutions

[00:41:38] you see this all the time with all kinds of companies

[00:41:40] like the ad is always some

[00:41:42] derivation of where the client always

[00:41:44] comes first or something and those are usually

[00:41:46] the ones that are most problematic

[00:41:48] in terms of like the client always

[00:41:50] always the most problematic

[00:41:52] because it was just shareholders come first

[00:41:54] in every publicly traded company

[00:41:56] pretty much definitionally

[00:41:58] we were meeting with one of these more

[00:42:00] it wasn't like a wire house type thing

[00:42:02] one of these types of companies and they were just explaining

[00:42:04] we were meeting with them just for something else

[00:42:06] and they were explaining how their fees work

[00:42:08] and they were just saying to us

[00:42:10] it was a firm that does financial planning

[00:42:12] and they were talking about their 1.5%

[00:42:14] financial planning fee

[00:42:16] that's just our standard financial planning fee

[00:42:18] but they're like we just break even on the asset management

[00:42:20] and so but when you dug into it

[00:42:22] what it turned out was they had a 1.5%

[00:42:24] financial planning fee and they had a 1%

[00:42:26] fee on the asset management and that's what they

[00:42:28] considered breaking even so they were

[00:42:30] effectively charging 2.5%

[00:42:32] to their clients and they had some guy in

[00:42:34] another room was like running the

[00:42:36] asset management strategy and also by the way

[00:42:38] using ETFs and stuff that also had a fee

[00:42:40] associated with it and so it was just

[00:42:42] like that's the kind of stuff you have to be careful about

[00:42:44] to your point I mean you always have to ask in this

[00:42:46] business you always have to ask the questions of the

[00:42:48] people you're dealing with no matter what it is

[00:42:50] if it's me or Matt or if it's anybody like

[00:42:52] how do you make money you know like you said

[00:42:54] are you do you own these things you're like selling

[00:42:56] to me like what is your incentive

[00:42:58] here like all of those questions are so

[00:43:00] important because although the industry has gotten

[00:43:02] way way better than it once was I think

[00:43:04] way way way better like the boiler room stuff

[00:43:06] is uh I mean I think that still exists

[00:43:08] we've seen a little that like and people we've met with

[00:43:10] but it's it's definitely the exception

[00:43:12] the boiler room stuff is definitely the exception now

[00:43:14] but it's still always important to understand

[00:43:16] like how is the person I'm dealing with

[00:43:18] what position are they in how do they make

[00:43:20] money what are they selling to me what

[00:43:22] is their incentive to sell it to me those are also

[00:43:24] important questions to ask I think

[00:43:26] in line with

[00:43:28] people will often

[00:43:30] feel like

[00:43:32] they can ask

[00:43:34] why do you cost what you cost how much do you

[00:43:36] cost and why the

[00:43:38] continuation question to that that I

[00:43:40] personally like to ask others and I love when people

[00:43:42] ask to me and sometimes I'll just answer it

[00:43:44] when he asked me this question it's like no no

[00:43:46] that's not what you want to ask you want

[00:43:48] to be asking how do you

[00:43:50] create more value than you cost

[00:43:52] because that's really

[00:43:54] the reframe you always want to have here

[00:43:56] what is this person doing if they're saying

[00:43:58] there that

[00:44:00] my best interest is coming first

[00:44:02] before their profit margin

[00:44:04] and hey like let's be honest

[00:44:06] like we are not communists if

[00:44:08] we're doing business with people usually

[00:44:10] we want them to stay in business

[00:44:12] which means they have to have a profit margin

[00:44:14] and an incentive to be in that business

[00:44:16] there's lots of places

[00:44:18] where that market truth has been

[00:44:20] lost and that's disastrous

[00:44:22] I want an industry to

[00:44:24] have adequate profits to attract

[00:44:26] the white people to work in that

[00:44:28] to do this work like that's part of

[00:44:30] this equation too but

[00:44:32] how do you create more

[00:44:34] value than you cost if you are an active

[00:44:36] manager

[00:44:38] there's ways you can give me 50,000

[00:44:40] examples I'm sure that we can start to say

[00:44:42] are you a closet indexer

[00:44:44] or are you actually taking some type of risk

[00:44:46] that's different how do you

[00:44:48] wait this and think about it in any terms

[00:44:50] yeah well that closet indexer

[00:44:52] point is so important because you still see a lot

[00:44:54] of that type of stuff going on

[00:44:56] you see a lot of firms that have very

[00:44:58] high fees and look a lot

[00:45:00] like the index and looking a lot like the index

[00:45:02] there's absolutely nothing wrong with that

[00:45:04] most people to be honest should look a lot like the index

[00:45:06] because to our point earlier

[00:45:08] it's hard to look different than the index

[00:45:10] the problem comes in when you put

[00:45:12] that variable together with the fee variable

[00:45:14] so if I'm charging you 1%

[00:45:16] and I look very similar to the S&P 500

[00:45:18] my chances of adding value

[00:45:20] back to your point about like are you adding value

[00:45:22] my chances of adding value relative

[00:45:24] to the S&P 500 are very low

[00:45:26] because I'm not different

[00:45:28] now when you try to add value by being different

[00:45:30] you have to understand like a lot of people

[00:45:32] in the firm what is it 90% of active

[00:45:34] managers underperform the S&P or whatever the numbers are

[00:45:36] most people that attempt to look different

[00:45:38] don't you know don't achieve that

[00:45:40] and some of them don't achieve it because of what I said before

[00:45:42] because of fees because they basically have built

[00:45:44] a similar portfolio and charge higher fees

[00:45:46] and so they've made it so they have no chance

[00:45:48] other people the thing they do that makes

[00:45:50] them look different doesn't work

[00:45:52] and so even though you did the right thing

[00:45:54] in terms of trying to give something

[00:45:56] people value and something different for the money

[00:45:58] sometimes it doesn't work so yeah

[00:46:00] I think that's a great example of what you're talking about

[00:46:02] like it's important to think in those contexts

[00:46:04] and as somebody who is on the other side from us

[00:46:06] who looks at these things it's just

[00:46:08] important to ask like what is the

[00:46:10] value add of this person and not just

[00:46:12] what they're selling me as their value add

[00:46:14] but what is their actual value add

[00:46:16] because going back to my example before with the

[00:46:18] you know the 1.5% planning fee and the 1%

[00:46:20] investment fee like I was actually

[00:46:22] like in the meeting with these people and I'm like oh yeah that makes a lot of sense

[00:46:24] like I was actually thinking like I know

[00:46:26] they're all too well that it makes zero sense what they were

[00:46:28] talking about they're like oh we just try to

[00:46:30] break even on the asset management you know we do

[00:46:32] that for our clients it's something we just do on

[00:46:34] the side you know it's a benefit for the people

[00:46:36] relative to what they could do it all of

[00:46:38] that was completely untrue but like I was

[00:46:40] just I was like buying into it as I was

[00:46:42] hearing it so it's important when you're on the other side of the table

[00:46:44] from us to really get past that

[00:46:46] sales pitch part of it and just think

[00:46:48] about what is the actual situation I'm seeing

[00:46:50] here not what I'm being told

[00:46:52] yeah it's it's there's there's a lot

[00:46:54] of Charlie Merrill's out in the world

[00:46:56] selling that book of real estate and

[00:46:58] railroad stocks to

[00:47:00] to widows and orphans in the name of

[00:47:02] you know good state stable dividends

[00:47:04] that I just have to get off my books and if

[00:47:06] you're willing to take my inventory

[00:47:08] powerful lessons powerful lessons

[00:47:10] abound create more value than you

[00:47:12] cost you can do that you go a long way

[00:47:14] in life what do you got next for us

[00:47:16] what's your next lesson so my next one

[00:47:18] was balancing the long-term with changing

[00:47:20] facts is the most difficult thing in investing and I think

[00:47:22] for me it is at least

[00:47:24] obviously for someone who just buys

[00:47:26] index funds and you know doesn't do anything

[00:47:28] like active relative to the market it's not

[00:47:30] but this whole

[00:47:32] idea of you know this time is different being

[00:47:34] the most dangerous words in investing but then

[00:47:36] this time is never different or also dangerous like

[00:47:38] for someone like me when you bet on

[00:47:40] things that work over really really long

[00:47:42] periods of time deciding

[00:47:44] when those things that worked over really

[00:47:46] long periods of time don't work anymore

[00:47:48] is next to impossible

[00:47:50] and you know the hardest part about

[00:47:52] it in Korea I think alluded a little bit to this

[00:47:54] maybe when you talk to you but he talks about it all the time

[00:47:56] is this idea of you can't do it with data

[00:47:58] so if I want to decide

[00:48:00] whether value investing still works

[00:48:02] I can't do that with data

[00:48:04] because the amount of data I would need

[00:48:06] is longer than my investing lifetime

[00:48:08] so I have to going back to my point before

[00:48:10] that all these all quants have to make decisions and nothing

[00:48:12] is purely systematic I as an investor

[00:48:14] have to decide not just

[00:48:16] I mean I think value investing still works but

[00:48:18] even inside of that type of decision like

[00:48:20] this specific metric the price to book doesn't work anymore

[00:48:22] should that be part of my process

[00:48:24] or should that not be part of my process

[00:48:26] that's a very very hard thing

[00:48:28] to do and you can't do it purely with data

[00:48:30] you have to think as an investor

[00:48:32] like what makes sense to me

[00:48:34] has the world changed in such a way

[00:48:36] that evaluating companies based on the price to book

[00:48:38] doesn't make sense anymore and you can make a very compelling argument for that

[00:48:40] I mean what Google's price to book

[00:48:42] who cares

[00:48:44] how does that

[00:48:46] evaluate Google in any way whatsoever

[00:48:48] it doesn't but then the other side of that argument

[00:48:50] is down at the bottom of the barrel

[00:48:52] where I'm operating as a value investor

[00:48:54] Google's not going to be there

[00:48:56] Google's not going to be in the cheapest basket of price to book stocks

[00:48:58] and the steel companies that are down there

[00:49:00] maybe I can still evaluate them with the price to book

[00:49:02] maybe that makes a little bit more sense

[00:49:04] like I'm not running a long short portfolio

[00:49:06] where I'm shorting Google

[00:49:08] I'm running a long only portfolio

[00:49:10] where maybe having the price to book

[00:49:12] as part of a process makes sense so

[00:49:14] I think that's the hardest thing in investing is like

[00:49:16] there's no answer to these things

[00:49:18] but when you see something that's worked over a really long period of time

[00:49:20] and you have to decide does it still work

[00:49:22] and you can't do it with data it's really really hard

[00:49:26] so I don't think I'm cheating

[00:49:28] but I want to, it's just too clean of a segue

[00:49:30] I want to jump into the next thing I said

[00:49:32] and use it to kind of validate this

[00:49:34] because I have to ask a question back to you on it

[00:49:36] so the last one that I had

[00:49:38] was that everything ends

[00:49:40] and it's this idea that

[00:49:42] I'm going to pick on like price to book for a second

[00:49:46] it's not that price to book has died

[00:49:48] it just might be

[00:49:50] price to book in the way you use it has died

[00:49:52] it might be, again, like you can't really

[00:49:54] use it with Google

[00:49:56] you can Google about why you can't use it with Google

[00:49:58] if you're really interested

[00:50:00] these things and learning to accept

[00:50:02] that on a long enough time horizon

[00:50:04] stuff is going to change

[00:50:06] the perspectives are going to evolve

[00:50:08] and you have to be comfortable

[00:50:10] with putting things to bed

[00:50:12] you need a reason for putting them to bed

[00:50:14] and I think that's one of the points that

[00:50:16] that's why I wanted to bring this up and kind of ask you this too

[00:50:18] but

[00:50:20] you have to, so maybe this is what I'm asking you

[00:50:22] it's like you have to simultaneously

[00:50:24] expect these things

[00:50:26] to die off

[00:50:28] so that you're not so married to them

[00:50:30] that you're just accepting them as like ironclad rules

[00:50:32] how do you balance this

[00:50:34] yeah, no, it's really really hard

[00:50:36] you know, it's, you do

[00:50:38] expect, I mean nothing

[00:50:40] obviously you like the risk-based

[00:50:42] explanations for these factors, not getting in the weeds too much

[00:50:44] but you know I like those types of things

[00:50:46] because it's harder to arbitrage that away

[00:50:48] so if I feel like there's a risk-based explanation

[00:50:50] as to why it works, I'm probably less likely

[00:50:52] to think it's going to die

[00:50:54] I mean you know, I mean it's very easy to explain

[00:50:56] why there's a risk-based explanation for value

[00:50:58] I mean people have endured torture

[00:51:00] to own these value stocks

[00:51:02] so you know I would feel more comfortable with that going forward

[00:51:04] but to your point it's just very very hard

[00:51:06] to figure out like

[00:51:08] this thing has worked for a really really long

[00:51:10] period of time

[00:51:12] I know that a lot of things that work for very long

[00:51:14] periods of time are going to die

[00:51:16] at some point but I also know

[00:51:18] that the majority of things

[00:51:20] that have worked for a very long period of time probably

[00:51:22] will keep working like if I have these

[00:51:24] long-term lessons I have in investing

[00:51:26] in terms of what works, most of that

[00:51:28] because of the behavior of human beings and because

[00:51:30] of a lot of other things, most of that stuff will stay

[00:51:32] the course, you know, stand the test of time

[00:51:34] but then this subset of it won't

[00:51:36] and it's like that balance is so so hard

[00:51:38] to strike in the real world

[00:51:40] and it's also by the way

[00:51:42] interesting on the price-to-book point

[00:51:44] and I think it was Cliff Asnes who made this point

[00:51:46] but the idea is if the price-to-book is dead

[00:51:48] like if I can short

[00:51:50] all the low price-to-book stocks then the price-to-book is not dead

[00:51:52] basically when it tells me nothing

[00:51:54] about what's going to happen in the future

[00:51:56] that's when the price-to-book is dead

[00:51:58] when it has nothing to do with the future of returns of stocks

[00:52:00] so it's interesting like

[00:52:02] to some extent the price-to-book wasn't dead

[00:52:04] it was just working in the other direction

[00:52:06] so yeah, I don't know

[00:52:08] I wish I had like more insightful arguments

[00:52:10] on this like in terms of how you figure this out

[00:52:12] I just think it's the hardest thing

[00:52:14] in investing and some things survive this

[00:52:16] like the idea that you get a risk premium

[00:52:18] for investing in stocks

[00:52:20] probably is something that's going to stay the test of time

[00:52:22] it's probably not something

[00:52:24] that I have to challenge that often

[00:52:26] there's very strong reasons why

[00:52:28] if I invest in these businesses you know

[00:52:30] I should get a risk premium over the risk-free rate

[00:52:32] over time if I provide financing to these businesses

[00:52:34] so like I think

[00:52:36] it's just it's a very... but when you get into

[00:52:38] the weeds and the type of stuff I do it's very very hard

[00:52:40] I mean I wish I had a great answer as to how to do it

[00:52:42] so I'm amending

[00:52:44] my last rule here

[00:52:46] it's everything

[00:52:48] everything dies or everything ends

[00:52:50] but the way

[00:52:52] you think about this is you have to take it to extremes

[00:52:56] so when I'm thinking about

[00:52:58] the end of something so if I'm doing financial planning

[00:53:00] and I'm thinking about end-of-life

[00:53:02] I'm thinking about

[00:53:04] we talk about this a lot like at the end of the day

[00:53:06] every asset you save

[00:53:08] is either going to be consumed or gifted away

[00:53:10] that's a way to take that knob

[00:53:12] turn it up to 11 take it to an extreme

[00:53:14] to understand it

[00:53:16] price to book is dead

[00:53:18] okay price to book is dead means price to book doesn't work at all

[00:53:20] it doesn't mean the point you just made

[00:53:22] or actually price to book worked in the other direction

[00:53:26] so it's not

[00:53:28] so much that underlying

[00:53:30] philosophy has died maybe this is like

[00:53:32] some crazy epistemological answer

[00:53:34] or something that somebody way smarter than us can explain

[00:53:36] it's not so much that

[00:53:38] like risk doesn't go away

[00:53:40] we think there's an equity risk premium in owning

[00:53:42] stocks because

[00:53:44] I use the story all the time

[00:53:46] if you believe that McDonald's

[00:53:48] is going to figure out how to price a chicken nugget

[00:53:50] and a beef patty well enough

[00:53:52] to turn the lights on the next day

[00:53:54] you believe that somebody

[00:53:56] in a business can stay at least on par

[00:53:58] if not a step ahead of inflation

[00:54:00] just long enough to again

[00:54:02] turn the lights on one more day into the future

[00:54:06] there's the underlying truths that are there

[00:54:08] but as we're grappling with how to

[00:54:10] wait them how to diversify them in our portfolio

[00:54:12] of investments

[00:54:14] and in our portfolios of life

[00:54:16] what are the best exercise we can do

[00:54:18] is make extreme arguments with them

[00:54:20] and kind of test out those parameters

[00:54:22] price to book is dead

[00:54:24] okay like long only

[00:54:26] levered up like oh yeah that was a terrible idea

[00:54:28] long only short hey you might

[00:54:30] be on to something all these machine learning

[00:54:32] algorithms and other things that are like

[00:54:34] look at the rain in Costa Rica

[00:54:36] and use that to buy cocoa beans or something

[00:54:38] like weird signals can be there

[00:54:40] that might not just be

[00:54:42] noise so

[00:54:44] everything ends

[00:54:46] but that I think is more about

[00:54:48] being comfortable with the ever shifting

[00:54:50] stories narratives

[00:54:52] and other things that get told

[00:54:54] and just look for the new interpretations

[00:54:56] and figure those out by

[00:54:58] extra spinal tap

[00:55:00] turn the amps up to 11 give it that extra

[00:55:02] mm and see how it feels

[00:55:04] yeah also asking yourself

[00:55:06] the question do I really have to figure this out

[00:55:08] and this sort of ties back to the haves

[00:55:10] in the lessons from the beginning that's great like do I need to

[00:55:12] so you as a financial planner

[00:55:14] you know how you could avoid this question

[00:55:16] just put people in index funds

[00:55:18] they don't need to figure out what the price but the book is dead

[00:55:20] you know I can handle it I can use a composite

[00:55:22] of value factors so if the price

[00:55:24] to book is dead at least it's mixed with a bunch of other stuff

[00:55:26] or I mean I can exclude it all together

[00:55:28] or I could say like you know we had

[00:55:30] Kailu on who's kind of figure out a new way

[00:55:32] to do the price to book where I

[00:55:34] where I use intangible value like I could use

[00:55:36] Kai's approach and the standard price to

[00:55:38] book approach together and so that way

[00:55:40] I'm sort of making a bet in both directions

[00:55:42] and a lot of times we want to get into

[00:55:44] these huge debates and figure out is this dead is

[00:55:46] that this not dead but also knowing

[00:55:48] that that is certainly an uncertain answer

[00:55:50] as much as people will tell you maybe it's 100%

[00:55:52] one way or the other like setting myself up

[00:55:54] where I don't have to figure out the answer a lot

[00:55:56] of times is the better way to go or at least

[00:55:58] setting myself up where if the answer is one way or the other

[00:56:00] I'm not dead I'm not like destroyed I'm not running

[00:56:02] you know the 20 stock pure

[00:56:04] price to book value strategy

[00:56:06] where if the price to book is dead I've got huge

[00:56:08] problems on my hands I'm blending

[00:56:10] I'm adding more stocks I'm adding more factors

[00:56:12] I'm doing things where I don't have to make that choice

[00:56:14] absolutely in most cases

[00:56:16] the

[00:56:18] extreme

[00:56:20] belief is more dangerous

[00:56:22] than the extreme idea

[00:56:24] don't have the belief that you have to hold

[00:56:26] to have the idea that you can bend

[00:56:28] away from

[00:56:30] what do you got what do you got last for us

[00:56:32] Jack so I'll just do one and this one

[00:56:34] actually was a sort of a planning lesson as well

[00:56:36] but it's something I've learned over my career

[00:56:38] is like when you you always try to figure out

[00:56:40] like what is someone's risk tolerance

[00:56:42] like what is the right level of risk for them to take

[00:56:44] and one of the things I've always learned and you know you can

[00:56:46] use numbers you can do all kinds of stuff with that

[00:56:48] but whatever you no matter how you do it

[00:56:50] when you get to the conclusion of here's what

[00:56:52] I think like the right thing for this person

[00:56:54] is based on their risk tolerance always go

[00:56:56] one notch below that

[00:56:58] that's something I've always learned because what

[00:57:00] you think the risk tolerance is is usually

[00:57:02] not totally correct you know the

[00:57:04] true risk tolerance is usually a little bit lower than

[00:57:06] that so it's not something about like you know just

[00:57:08] put someone in T bills or something like that but it's like

[00:57:10] just you know when you think you've got your final

[00:57:12] conclusion always make a little bit of

[00:57:14] a move in in in de-risking

[00:57:16] and it usually works out a lot better over the long

[00:57:18] term I don't know what you think about that

[00:57:20] so I'm a long hater of

[00:57:22] risk tolerance questionnaires

[00:57:24] most of those things for most people

[00:57:26] who don't understand financial math they're

[00:57:28] a veritable disaster

[00:57:30] as far as like actually measuring anything useful

[00:57:32] lived experience is the best way to do it

[00:57:34] to your point

[00:57:36] but we're working with clients like get through

[00:57:38] a couple get through a market cycle with them

[00:57:40] at least to understand what their risk

[00:57:42] tolerance is really and then help them

[00:57:44] find the words for how they felt during

[00:57:46] the thing and what mattered because it

[00:57:48] changes over points in life too

[00:57:50] I can tell you especially with the one click

[00:57:52] it's probably two clicks down when most people

[00:57:54] enter if you enter into this phase

[00:57:56] where you're spending money versus putting

[00:57:58] money in that's like a big psychological

[00:58:00] thing that you go like oh yeah I can take

[00:58:02] this much risk I've been taking it my whole career

[00:58:04] it's like yeah because you haven't been

[00:58:06] spending the money you've been

[00:58:08] sucking it away on those bear markets you're like

[00:58:10] you've worked out well well guess what happens

[00:58:12] when you're distributing through that bear market

[00:58:14] it feels a hell of a lot different

[00:58:18] the other thing inside of it

[00:58:20] so one click down that's a useful

[00:58:22] useful rule of thumb the other thing

[00:58:24] is to ask broader questions my colleague

[00:58:26] Michael pumpkins written a lot about this stuff

[00:58:28] he he basically says

[00:58:30] do the risk tolerance questionnaires

[00:58:32] or whatever you need to do to understand

[00:58:34] how much you can stomach

[00:58:36] it but then the

[00:58:38] second layer is also think about which things

[00:58:40] plague you

[00:58:42] when you're wrong and he differentiates

[00:58:44] a lot between what are the

[00:58:46] mistakes that you actually know you're prone

[00:58:48] to making and it's not a fun conversation

[00:58:50] maybe need to go to therapy over it maybe

[00:58:52] don't but it's this idea of

[00:58:54] like just understand what you're prone to do

[00:58:56] if you know that your personality type is

[00:58:58] always comparing yourself to Joe in the cubicle

[00:59:00] next to you like

[00:59:02] how about owning that a little bit

[00:59:04] and going like this is really gonna bother me

[00:59:06] so he's chasing all this stuff in

[00:59:08] maybe there's some stuff where I have to

[00:59:10] just follow him on this type of stuff

[00:59:12] if you're a set it and forget it and totally

[00:59:14] like off the thing person

[00:59:16] great use stuff to leverage into

[00:59:18] what your known weaknesses are

[00:59:20] so you don't become your own enemy

[00:59:22] and if a person can help you do that like that's

[00:59:24] that's a huge part of it

[00:59:26] what any other rules of thumb you have

[00:59:28] in this area really curious

[00:59:30] no but I was I was just thinking about like this whole map versus terrain thing we've talked about with Ben Hunt

[00:59:34] this is a great example of probably where that could be

[00:59:36] most applicable because going back

[00:59:38] to your idea of these risk scores and these risk questionnaires

[00:59:40] like trying to map

[00:59:42] someone's like true risk tolerance that's out there

[00:59:44] you know floating around the real world with numbers

[00:59:46] is it changes over time

[00:59:48] right so yeah so if you're like oh it's a 92

[00:59:50] you know so I'm gonna take this 92 person

[00:59:52] and I'm gonna put them in this portfolio

[00:59:54] like that there's no chance of that ever working

[00:59:56] like all of us and the idea of mappers

[00:59:58] of terrain is all of us want to quantify all these things

[01:00:00] we want to have numbers to explain some

[01:00:02] true thing that's sitting out here in the world

[01:00:04] you know Ben always use the example of inflation

[01:00:06] you know you've got all these CPI calculations

[01:00:08] but really like what's going on

[01:00:10] the actual terrain and inflation is very very

[01:00:12] hard to capture with these maps which

[01:00:14] is these numbers and I would think this is

[01:00:16] even more extreme example of that like

[01:00:18] trying to capture someone's true risk tolerance

[01:00:20] with a bunch of numbers or some questionnaire

[01:00:22] like you just have no chance of being successful at that

[01:00:24] you have no chance about being

[01:00:26] broad based successful I think the biggest

[01:00:28] problem with to me my interpretation

[01:00:30] well the biggest problem with risk tolerance questionnaires

[01:00:32] is we ask people like market based stuff

[01:00:34] if your market if your portfolio is down

[01:00:36] by 20% over this period of time

[01:00:38] like how would you respond it's like most

[01:00:40] A most people don't think in percentages

[01:00:42] B most people know how to even like run

[01:00:44] through the math in this whole scenario

[01:00:46] like C let's face it

[01:00:48] if the market is if the portfolio is

[01:00:50] down 20% and if that's happening

[01:00:52] there's a huge difference

[01:00:54] and okay that just happened

[01:00:56] but work just paid you a big bonus

[01:00:58] and your career is off to the races and all these other

[01:01:00] positive things are happening that have nothing

[01:01:02] to do with your portfolio but make you

[01:01:04] go like oh I'm not even thinking about that right now

[01:01:06] versus you just lost your job

[01:01:08] there's a global recession

[01:01:10] that every newspaper is telling

[01:01:12] you why humanity is coming to a screeching

[01:01:14] halt and you have no prospects for work

[01:01:16] because you're 60 or you're 52 years

[01:01:18] old and no one wants to hire you

[01:01:20] and now you're down 25% and it's the

[01:01:22] financial crisis and whatever and it's

[01:01:24] like same risk tolerance

[01:01:26] same person all these other

[01:01:28] things that you're never going to put in one of those 10 questions

[01:01:30] that can

[01:01:32] really mess a person up that's the stuff

[01:01:34] those risk tolerance questionnaires are some of the

[01:01:36] people that I met for years after the financial crisis

[01:01:38] who you'd start to talk and they'd be like

[01:01:40] well we went to cash

[01:01:42] at the beginning of

[01:01:44] 09 or at the end of 08

[01:01:46] and we've been sitting here earning zero in a savings account

[01:01:48] for ten years or whatever

[01:01:50] like there's

[01:01:52] a danger in thinking you can just make stuff

[01:01:54] simple so

[01:01:56] the map terrain argument I think is really

[01:01:58] useful again here because it helps you

[01:02:00] understand you've got to be the cartographer

[01:02:02] of your own experience you need other people

[01:02:04] you trust to help you navigate those paths

[01:02:06] yeah you know that question about what do

[01:02:08] you do if the markets down 30% you know pretty much everybody's

[01:02:10] like oh yeah I understand long-term investing I understand

[01:02:12] no one's going to be like what I'm going to do is completely

[01:02:14] panic I'm going to sell everything

[01:02:16] I'm going to melt down

[01:02:18] and I'm going to go in the basement and call you

[01:02:20] I'm going to fire you

[01:02:22] I'm going to find your children

[01:02:24] or tell them what a horrible person you are

[01:02:26] how you lost our money

[01:02:28] like nobody answers that

[01:02:30] it's the whole idea like until you're in that experience

[01:02:32] until you're in 2008

[01:02:34] you know good luck answering a question like what you're going to do

[01:02:36] and some people do stay the course by the way

[01:02:38] so some people actually answer the question correctly

[01:02:40] they do stay the course

[01:02:42] but then there's another subset of people that

[01:02:44] say that on the questionnaire and then

[01:02:46] their actual reaction in the weird world is very very different than that

[01:02:48] imagine you go to the dentist

[01:02:50] and like you know it's just your regular

[01:02:52] standard cleaning and they take your questionnaire

[01:02:54] and you're like I don't like getting a cavity filled

[01:02:56] but like I'm not going to say

[01:02:58] no to getting a cavity filled

[01:03:00] have you told me I have a cavity

[01:03:02] and then it's like in the moment they're like we're just going to skip

[01:03:04] Novocaine this time because you said

[01:03:06] on your risk tolerance questionnaire

[01:03:08] you don't mind getting a cavity filled

[01:03:10] it's not the way the real world works

[01:03:12] it's like rate your pain tolerance from 1 to 10

[01:03:14] and then see that on the questionnaire

[01:03:16] and then go in there and let it start drilling in the middle of your tooth

[01:03:18] and we'll see where your real pain tolerance is

[01:03:20] Yeah, these are cute efforts

[01:03:22] to draw cutesy maps

[01:03:24] but whatever luckily most of the industry

[01:03:26] seems to be aware of these things these days

[01:03:28] and like did we really do it

[01:03:30] did we just cover 10 things?

[01:03:32] We did I think we all have to count them after the fact

[01:03:34] so you know the title might say 9 things

[01:03:36] or something like that I don't know

[01:03:38] and I had way more than we ever got through here

[01:03:40] but yeah I think that's probably a good thing

[01:03:42] to wrap up on and after an hour people have probably had enough of us

[01:03:44] so hopefully people learn something from this

[01:03:46] I know I did from your lessons

[01:03:48] so yeah thanks everybody for joining us

[01:03:50] we'll see you next week

[01:03:52] Thanks Jack

[01:04:16] If you have any ideas for topics you'd like us to cover in the future

[01:04:18] please email us at

[01:04:20] accessreturnspod at gmail.com

[01:04:22] We would like this to be a listener driven podcast

[01:04:24] and would appreciate any suggestions

[01:04:26] Thank you