July 26, 2024 • 30 mins
Want to sharpen your financial acumen and spot the pitfalls of bad investment advice? On this episode of Bullshit on Stilts, we promise to equip you with the essential tools to develop your "bullshit sniffer" for investments. We'll introduce you to the "Fab Five" critical questions that put you in the driver's seat of your financial journey: what you own, why you own it, how you're performing, compared to what, and how much you're paying. This episode will help you manage your investments with the same strategic finesse as a seasoned athlete or an experienced sailor.
Ever wondered if your investment performance stacks up against the market? We break down the importance of benchmarks and indices, using relatable analogies and humor to demystify these financial concepts. Learn how to measure your diversified portfolio's success with clear, practical insights, and understand why the S&P 500 can be a useful benchmark. Discover the nuances of blended returns and the dangers of comparing apples to oranges in the investment world, illustrated with a cautionary tale of a misleading money manager.
Join us as we highlight the significant divide between genuine financial advisors and salespeople, revealing the often-overlooked bias in financial decision-making. We stress the importance of character and true advising over mere compliance. By the end of this episode, you'll be armed with the knowledge to avoid misleading financial sales tactics and select trustworthy professionals. Through the concise framework of the Fab Five questions, gain clarity and confidence in your financial decisions, ensuring your investments truly align with your goals.
We love to hear your thoughts, questions, and ideas. Send us a text!
Developing your financial bullshit sniffer one episode at a time.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to Bullshit on Stilts, a podcast hosted by
two guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice, identifying asdoctors of bullshitology.
(00:21):
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it.
So this segment we're going tobe talking about how you develop
your bullshit sniffer as aconsumer.
(00:43):
I mean, you and I, mark, have alot of time and experience in
pulling stuff apart, putting itback together from investments,
insurance, estate plans you nameit and so it becomes very
familiar to us, and we can glossover lots of big terms because
we're familiar with the languageof the overall financial
planning landscape.
So how does a consumer, though,start to develop?
(01:05):
What are some ideas or thoughtsthat you would give a consumer
to develop your bullshit sniffer?
Speaker 2 (01:10):
Well, let's start by prevention, and the prevention,
at least on the investment side,might be the Fab Five.
So please run through what theFab Five is for us, and then I
might add a little color in hereon how that prevents bullshit.
Speaker 1 (01:24):
Okay, yeah, that's fair enough.
So the Fab Five we developed,which is basically a
five-question self-test for youas a consumer out there when it
comes to your investments.
Speaker 2 (01:34):
Know what I own, why I own it, how I'm doing compared
to what and how much I'm payingby me answering the five
questions I'm good.
Speaker 1 (01:42):
So the first question is what do you own?
And when we're asking thatquestion, we're actually really
wondering what do you own interms of what kind of securities
do you own?
Are they direct stocks or bonds?
Are they mutual funds orexchange-traded funds?
What kind of securities do youown?
More importantly then, in whatmix do you own those securities?
(02:03):
You hear the term assetallocation.
It's simply a recipe.
What's the mix of stocks versusbonds versus cash versus, maybe
, specialty or alternativeinvestments?
So that's the first question.
How does that help a personstart cutting through the
bullshit on stilts out there?
Speaker 2 (02:19):
Well, if I know what I own and perhaps that's being
explained to me by my advisorand I have a statement.
Of course, it means I have alevel of control that I know, if
I have individual stocks, why Ihave those individual stocks.
If I have mutual funds, why doI have five mutual funds?
Why do I have 10 mutual fundsIf you know what you own?
Speaker 1 (02:42):
those have probably been answered, which means I
have a level of understandingand knowledge of what is that
for someone out there that'smeeting an advisor for the first
(03:05):
time, or maybe getting ready toretire and thinking about
taking their 401k money androlling it into a individual
retirement account, and they'regoing to talk to a financial
advisor out there.
Speaker 2 (03:16):
First of all, if you have an outside account and
let's say it's an IRA, why do Iown it?
There's a couple of thingsthere that can be tied to a
short-term, intermediate orlong-term investment strategy,
so that, within that portfolio,why do you own it?
Well, I have this forshort-term, I have this for
intermediate and I have this forlong-term purposes in my
(03:39):
portfolio.
That's probably the moreimportant part of it.
But why do I own it?
It's because I have a certainrisk preference.
I also have an idea of certainsectors that I think might
perform well.
This is my touch, or myadvisor's touch, to perhaps
adding some extra return to myportfolio, because I think a
(03:59):
certain sector might performwell.
I don't want small caps, theseare all large cap companies.
Sector might perform well.
I don't want small caps.
These are all large capcompanies and I have four or
five of them to complement whatI'm doing with my mutual funds.
So, as long as there's anexplanation for knowing what you
own, why you own it, bothindividually as well as an
aggregate, they all have apurpose in the portfolio.
(04:22):
That is, control.
Speaker 1 (04:25):
I often look at why you own something, what you want
to and why you own it, as theposture you take.
So if you're a fighter, youtake a posture just before you
get into fight, your fightingstance.
If you're a golf player, youset your feet a certain way
depending on the type of shotyou have.
So you set your posture.
And so if you're sailing a boatand the weather's going to get
(04:46):
kind of rough, you set the sailsbecause of what's going to come
about.
In knowing those two things, youstart to understand how are you
positioned in your investmentaccount to weather the storm
that is the financial stock andbond market, that storm being
they go up, they go down, theygo sideways, they go left, they
(05:06):
go down, they go right, they'reall over the place.
And yet how are you postured?
And thus, knowing what I ownand why I own it, I can also
start learning to have someexpectation of what is that
roller coaster ride myinvestment account is going to
go on.
How far down will it go, howfar up could it go, and what's
(05:28):
that ride look like after thefact, after the last two years
or three years?
And that indication of knowingwhat you own and why you own.
It helps to set into your brainwhat are you positioned for and
how will the storm treat youwhen and if it hits.
Speaker 2 (05:41):
All right.
So that's, you're coming atthat from a risk standpoint.
So the posturing also and Ilike the analogies that you use
or the similes that you used isalso what are my expectations
out of the portfolio?
And it's not just the rollercoaster and I can take the
roller coaster to get aparticular expectation realized
(06:03):
out of it.
I want growth and I understandthere's going to be some risk to
this.
I'm risk adverse.
So this is why I own primarilyCDs and short-term bonds,
because I don't want a lot ofrisk.
So I know why I own it and Iknow that inherent in me,
looking for maximizing my return, I could have a roller coaster
ride.
So it's positioning not only toa risk preference, in other
(06:27):
words, what my gut can take,it's what my expectation is.
And then the art is in thatblend of modulating the return
potential or my expectation to aparticular risk level.
That's right, yeah, and I thinkin retrospect we don't look at
it as I think it's more on theexpectation, on the return.
(06:49):
If my return expectation isthree, four or 5%, I really
don't care about the volatilitybecause there isn't going to be
any.
But, conversely, if I am in amarket where I want 10, 11%
rates of return and I'mpositioned primarily in an
equity portfolio.
I know it's going to be aroller coaster ride, so what my
(07:13):
expectations are is to hit thatnumber return number, not
quibble about.
My portfolio was a 28% standarddeviation or a 32.
Speaker 3 (07:22):
Yeah, percent standard deviation, or a 32,
yeah, so what you're saying isum, if my returns are low, I
shouldn't be a bumpy ride, andyet, if I want big returns, I'm
gonna have a bumpy ride.
Speaker 1 (07:39):
Is that about it?
Yeah, yeah, no, that's true,that's true.
So so we've talked about whatdo I own?
Number one why do I own it?
Number two?
Third question in this Fab Fiveset is how are you doing in
terms of how are your investmentaccounts performing?
Are they growing?
Are they growing really fast?
Are they not growing?
Have they been set in thedoldrum of flat returns for the
(08:03):
last three or four years?
And you're wondering why, right.
So how are you doing?
Comment a little bit about howdoes a consumer recognize?
How am I doing?
Speaker 2 (08:14):
That is the key critical question right there
how am I doing?
Speaker 1 (08:18):
Yeah.
Speaker 2 (08:18):
The first one know what I own could be as naive and
as simpleton as you can recitethe inventory of your statement.
Speaker 1 (08:29):
That's it.
Speaker 2 (08:29):
Why I own it is the next level.
Sure, because you've put somethought into this and you have
expectations.
The third one is the criticalquestion, and that answer is
critical also how did I do so?
We've assembled an inventory.
We had a purpose for thatinventory.
(08:51):
Did it come to fruition?
Did we do anything?
Did I add value?
Did my broker add value?
My advisor add value?
Did we meet our expectations,either on the return side or
protecting to the downside?
How did I do?
Did any of this work?
Speaker 1 (09:05):
out, yeah, and so we're talking really about
performance return right Year todate.
Last 12 months, three years orwhatever we're also talking
about was the rollercoaster ridewhat I expected.
Was it a little bit better?
Maybe it was worse, as anexample.
So, in that, what my return is,it's performance.
It's also yield or interest ordividend income that's being
(09:27):
paid inside my portfolio.
So there's a number of how do Ido in terms of measuring the
investment performance of youraccount?
Speaker 2 (09:36):
Yeah, I deviate, I think, from standard practice in
this regard.
The thinking is that we can.
The only thing we can controlis the risk you take.
And yeah, I get that.
So I could be all in UStreasuries.
Yeah, there's still a riskthere, but let's say I'm all
just sitting in cash or shortT-bills and so I can control the
(09:56):
risk there.
We all say that we can't controlreturn because return is in the
hands of the gods.
So whatever the market bringsis what the market brings.
But if you say that you'reblanking out on the fact that
returns go both ways, so we saywe can manage to the risk or the
(10:18):
downside, but maybe you can'tbecause returns go both ways and
we know that when the market'scorrect anymore it seems like
they all correct.
So for us to say, well, I canmanage to this risk and we're
going to have a standarddeviation or the purported
roller coaster ride ain't goingto be that bad for you.
And then really, what the topside is?
(10:40):
Well, we can just go by historyon this and it might
approximate this, but that'sreally all in the hands of the
gods.
Well, really both are.
So I'm saying it's more of aseat of the pants correcting as
you go along.
Perhaps there's a lot of art tomoney management and a lot of
parts of it that don't lendthemselves to forecasting
(11:02):
predictions, spreadsheets,graphs and charts.
That's just my opinion, yeah.
Speaker 1 (11:06):
Yeah, so we got the three.
We got.
What do you own?
Why do you own it?
And then, how are you doing?
Number four is are youcomparing that to something
relevant?
I was in China years ago.
I was in Hong Kong at thecorner of an intersection huge,
busy intersection and I'massuming there was about 100 to
200 people at this corner.
(11:28):
I'm five, seven and I was oneof the tallest people in Hong
Kong at this corner gettingready to cross.
So my measuring stick was boy,I'm tall.
All of a sudden, a week later,I'm back in Chicago and I'm on
the corner After getting off ofthe subway.
There was about 50 people thereand I was one of the shortest
people there because I'm inAmerica and the average height
around me was about 5'11", 6foot.
(11:50):
So all of a sudden, mymeasuring stick changed.
And I'm not that tall, was theresponse.
So how do you bring thequestion of number four into
play as a consumer to measureyour performance in number three
that you recognize well, areyou doing good, are you not
doing good?
How do you do that with numberfour?
Speaker 2 (12:08):
Number four is there has to be a standard or a
benchmark, a comparison for you.
It was your height, and so howdo I compare all of this work,
all this rigor that I've gonethrough?
How did I do and should I havedone better?
Or do I get an attaboy or anattagirl Because I did a little
(12:30):
bit better?
So it comes down to what yourbenchmark is.
So if you are in stocks, thenwhat you would want to do is
benchmark that to a market index.
What could I have done withoutall the rigmarole and the
management and the assetallocation decisions, all of
that?
What could I have just donepassively?
(12:53):
That's a good benchmark.
And did I?
Speaker 1 (12:55):
approximate You're referring to passively, like
buying the S&P 500 index fund?
Yeah, like buying an index fund?
Speaker 2 (13:01):
Yeah you can't buy the index, but you can buy it as
an index fund.
Good point, because there arefees involved there which we'll
get to.
Speaker 1 (13:06):
Talk to this.
Let's say someone is on stepfour, they're trying to figure
out how did I do compared towhat?
And they're figuring outthey're compared to what.
Well, most people that areplanning for retirement don't
just have stocks, they havestocks and bond.
So how do you approach that asa consumer?
I mean, we talked about if youhave stocks, s&p 500 index might
(13:29):
be a good index to compare yourperformance.
Maybe, maybe.
But let's just go with that fora second.
Let's not get too detailedaround other indexes.
Speaker 2 (13:34):
Oh, but I have to in one story, I have to in a story.
Speaker 1 (13:38):
Okay, but let me finish.
So then the question is what doyou do for the bond part of
your portfolio?
Let's say you have 60% in stock, 40% in bond.
How do you compare that to onlya stock index?
Do you?
Do you compare your 60% of yourmonies in stocks, large cap US
let's say 40% of your money isin US bonds Do you still compare
(14:00):
that investment plan to justthe S&P 500 index?
Speaker 2 (14:04):
You know what the arm motions that you were just
using?
You looked like the statueoutside the municipal building
in downtown Detroit.
All you were missing were theplanets in your hands, just so
you know, oh boy.
Speaker 1 (14:18):
I could pull that off man.
Yeah, yeah.
So, you're saying I'm sort oflike an Atlas shrug kind of a
physique.
Speaker 2 (14:23):
Yeah, you're kind of like.
So you're saying I'm sort oflike an atlas, shrug kind of a
physique.
Yeah, you're kind of like.
So you're saying I'm hot, yeah,but that's a given.
I was trying to get a littlebit more nuance than just saying
you're hot, thank you.
Well, that statue certainly getshot because it faces west, but
(14:43):
anyway, getting back to this ifyou've got an all-stock
portfolio, and let's say it'slarge company stocks, then maybe
an index like the S&P 500 mightbe a good index to measure it
against, even though the S&P 500, as we know, is not the 500
largest companies.
(15:03):
It's leading companies andleading industries.
So we can get even more refinedwith that.
But good enough with that.
One Large stock portfolio, s&p500, good measurement.
But wait a minute.
I've got 40% in bonds, thebonds that you have, and let's
presume they're a mix ofcorporate and government bonds
and pretty much intermediateterm maturities.
(15:25):
So let's say like five, threeto ten years, something like
that.
Then what you'd want to measurethat against would be an
intermediate bond index.
So let's make the math easy.
Let's say you're 50% in stocksand 50% in bonds.
Stocks did 10% and the bondsdid 5%.
The indexes did, so blended,their return would be 7.5%.
(15:50):
So if your portfolio did 7, 8%,good on you.
Speaker 1 (15:55):
So walk through real quick.
Though how did you arrive at7.5, right?
This math in the air is toughfor people, so if I have 50%-.
Speaker 2 (16:02):
Well, I'm not even sure that was the right number.
Oh shit, oh it was.
You're solid, Okay.
Speaker 1 (16:07):
So if it was 50% in an index that generated a 10%,
well, 50% of 10 is 5% right.
And if I'm 50% in bonds thatgenerated a 5% return on the
year.
50% of 5 is 2.5, and we add 5plus 2.5, we come up with 7.5.
Real simple.
Speaker 2 (16:26):
You know what?
We did?
The same thing, this exercisewith arriving at the tip when we
were out for Mexican food.
Speaker 1 (16:32):
That's right.
Speaker 2 (16:33):
We did.
So my math, it was equalweighted, so I got 5%, I got 10%
over there and I got 5, equalweighted.
I add them together and divideby 2.
Speaker 1 (16:44):
Oh, so you did it that way, I did it that way.
Oh see, you did it that way, Idid it that way.
So you got the wrong answer at7.5?
.
Speaker 2 (16:49):
Yeah, were we right on the tip.
Speaker 3 (16:51):
Well, you know what they say arriving at the answer.
Speaker 2 (16:53):
The wrong way is wrong, even if the answer is
right.
Speaker 1 (16:56):
Is that the case, uh-huh?
That's why I always had to showmy work, probably.
Yeah, because I had all theright answers, but the work was
abysmal it was horrible.
Speaker 2 (17:04):
I got to get back to the sometimes about the stock
and if it's all stocks, you canmeasure it against the S&P 500.
And I know you recall thisstory and this is a gentleman
who is a well-known moneymanager out of Stanford and he
was showing me his portfolio andhe said his portfolio beat the
(17:25):
S&P 500.
Now what was interesting isthat the S&P 500, I believe that
year was up about 15% and hewas up like 23%.
He says I kicked butt on theS&P 500.
I said, dude, these are allsmall cap stocks and that index
was up 30%.
Speaker 1 (17:42):
Right, so he was essentially saying I'm the best
basketball player in the land ofmunchkins because, that's how I
measured it.
I measured it against an indexthe 500, that's large companies,
but I own all these smallcompanies that have a lot more
steam underneath theirperformance when they perform.
I mean double the performanceof large companies, and so yeah,
(18:05):
so you peel back the onion alittle bit and you find the real
story.
Speaker 2 (18:08):
We don't want to peel back the onion.
A little bit and you find thereal story.
We don't want to peel back theonion Because when you peel back
a layer of onion, what'sbeneath that?
Speaker 1 (18:14):
Just another layer of onion, another layer.
It's like a parfait.
Yeah, it's just another layerof onion.
Speaker 2 (18:20):
There's no insight there.
Speaker 1 (18:21):
You're going Shrek on me now, all right, okay.
Speaker 2 (18:24):
But anyway, here's where we can use numbers to
falsify the very truths we'reseeking In that.
He said to me that he beat theS&P 500, where actually he
underperformed and didn't earnhis fee.
Speaker 1 (18:39):
The small cap index yeah, he underperformed it.
So you change the yardstick toan appropriate yardstick and all
of a sudden you get the realreading on.
How did you do when you compareit to the appropriate benchmark
or yardstick.
So you underperformed and Ipaid you, which leads to number
(19:00):
five, which is so number five onthe Fab Five is what are your
total costs of investing?
Speaker 2 (19:08):
Yeah, what did you pay right and how much was that
itemized?
Speaker 1 (19:12):
let me ask you this real quick before you go on how
many individuals when you werepracticing individuals and
institutions because you ranpension monies and so forth as
well but how many of them couldfigure out the total cost of
their investments?
Speaker 2 (19:27):
none seriously, yes, none.
Speaker 3 (19:31):
This just in from the bullshit monitoring room.
Mark has made an absolutestatement, followed absolutely
by an emphatic absoluteness.
Diane, your reaction.
Speaker 1 (19:44):
Bullshit.
And why is that?
Do you think it's that hard?
Don't they disclose everything?
They say, hey, here you go.
This is the industry.
We're transparent.
This is exactly how much you'respending, sure the term
transparency.
Speaker 2 (19:55):
You know it's one of my pet peanut allergies yeah
because I can show you something.
Some hives starting to show somesome complete something that is
completely transparent and youcan look at it.
Uh, it might look like a pieceof modern art, a kandinsky work
of art or even a early picasso,and you look at that and say, oh
, that's totally transparent.
I see all of it and I don'tknow what the hell I'm looking
(20:16):
at.
I don't know a thing I'mlooking at.
So well-intended regulatorshave had what is called pricing
saliency and posted commissions,and then there was we're even
going to show markups andmarkdowns on bonds and advisory
fees and all of that, and peoplestill don't.
They don't know.
They don't know what they'repaying for, and a lot of them
are buried.
(20:37):
You just don't see them unlessyou actively are looking for
them.
And oh, by the way, you bettertake a Sherpa with you when
you're looking for these things,because they just don't show up
.
Speaker 1 (20:47):
Yeah, and what's interesting is on those
structures of the fees, right,so you have your advisor fees
potentially Assumed inside thatadvisor fee if you're working
for a large corporate entitywhatever it is it could be the
investment side, it could be theinsurance side.
But there are all sorts of feespacked into that Platform fees.
Oh, yes, yes so let's say it's a1% advisor fee but inside that
(21:11):
advisor fee that 1% isn't goingto that advisor that works with
a corporate entity.
That 1% is divvied up and thatadvisor is getting a portion of
it and the rest is paying forthe platform.
Quote unquote.
Speaker 2 (21:21):
Yes, the wrap, it's the wrap.
Speaker 3 (21:22):
Yeah yeah, yeah.
Speaker 1 (21:23):
And so, beyond that, you have your fund expenses
right.
Depending on mutual funds orindex funds and so forth, they
have very different price pointsand yet they're all diversified
.
You have your administrationfees.
If you're dealing in bondsespecially, you might have a
markup or markdown of the pricethat ends up being the
(21:45):
commission earned by the brokeror the platform that you traded
through.
Speaker 3 (21:49):
Frankly, one or the other.
Speaker 1 (21:50):
It doesn't always have to be a human being that's
charging those markups.
Is that fair?
That's very fair, okay, so itcould just be the entity that
has it baked into that pricingmechanism, specifically and
almost always for fixed incomeassets.
It might show up nowadays inlimited partnerships.
I'm not sure about if there ismarkups or downs in the limited
partnerships.
(22:10):
So you can get to a point whereall these fees, one on top of
the other, becomes a verymeaningful a small percentage
number, but meaningful in termsof dollar value of that fee or
those fees that is being pulledout or sucked out of your
overall accumulated asset.
Speaker 3 (22:31):
Oh my God, is that fair to say?
Speaker 2 (22:33):
That's very fair to say.
So that number can be 1%, 2%,maybe 3% in the aggregate, which
raises the question if I canbuy instruments that we're
measuring this against at afraction of the cost, a 10th of
the cost, why am I going throughall this rigmarole?
Why am I doing that?
Speaker 1 (22:52):
And that brings up a great subsequent conversation
around the focus on managers andthe number of managers inside
of an investment or retirementaccount.
That's a separate conversation.
But to your point, it'sinteresting when you don't know
and you don't know what to ask,just having fabulous five
questions and not letting thesales professional get out of
(23:16):
dodge scot-free.
Make sure they explain to youin a satisfactory way.
It doesn't have to be thetechno-speaking, jargon-filled
answer.
They should have the chops tobe able to break that down into
plain, everyday Main Street USAconversation.
I don't, it might be anindicator.
They might be the wrong advisorfor you just because you're not
(23:39):
on the same wavelength withcommunication and how they
answer your questions.
Speaker 2 (23:43):
So let's take it to another level and let's use the
S&P 500.
You purchased for me threeactive managers, mutual funds
with a portfolio management teamlet's call it with the
expectation that they are goingto beat the market, that I can
buy at a tenth of their cost.
(24:03):
If not even less than that,what would be your justification
for putting those managers inthere?
Speaker 1 (24:09):
This is the explanation that I've probably
run into more than any otherexplanation.
This is the explanation thatI've probably run into more than
any other explanation.
Actively managed investmentfunds have human beings making
decisions on selling and orpurchasing securities inside the
fund on behalf of the fundshareholders.
There are times in theenvironment of a financial
markets where active managementcan and has historically
(24:33):
outperformed just passive.
Buy an index, nobody's managingit, and once or twice a year
the names in the index getsshuffled a little bit, like
maybe 5% of the names get kickedout and new names are added.
That's very, very different.
It's just you're just taking Iwant to see the ballgame.
I don't care what seat I'm in,just I want to see the ballgame.
That's the passive strategy.
I want to see the ball game.
That's the passive strategy.
(24:53):
I want to see the ball game.
I want to be on the third base.
I want to be right adjacent tothe third baseman.
I want to have two seats upbehind the dugout.
That's active management,metaphorically speaking, very
precise.
And so the reason why peoplesell active is because there may
be an environment coming upwhere actively making decisions
on what to buy and sell mayoutperform those passive
(25:15):
strategies like the indexeswe've been talking about and, as
a result, the question is howmany of those active management
funds actually do outperformtheir index that they use as
their measuring stick.
What is that that percentage is?
It's certainly under 10%, very,very low, and so this brings up
(25:35):
this comment about how this allkind of works out in the world
of investments and in investmentmanagement sales itself, where
advisors will come up withcliche statements, right Jargon,
sort of the bullshit on stilt.
This is why I put people'smoney to work in this way, which
might be 180 degrees differentthan the person down the hallway
(25:58):
that has a very different takeon it, and at the end of the day
they'll put you into the samemix 60 stock, 40 bond, different
funds, different exchanges,different wraps, different this,
different that.
How do you discern what's rightfor you versus what's just the
sales job facilitating thesalesperson's own bottom line,
and or it's just bullshit onstilts because that's what they
(26:20):
practice.
Speaker 2 (26:20):
Kelly, you're making financial advisors sound like
they're pie salesmen.
They just are selling piecharts.
Speaker 1 (26:26):
There are hundreds of thousands of financial service
professionals running around outthere, and there are
undoubtedly a big group of themare really doing great work.
Well, that's no surprise at allbut the vast majority of people
that have biases built inside ofthem when it comes to financial
decision-making.
Working with advisors orprofessionals, those people have
(26:49):
either run into the other sideof the industry not so strong of
advisors right, Really, justshow up, throw up salespeople.
They're practicing overcomingyour objections and so forth,
but not really taking care ofyour best interest.
They don't have the character.
There's a huge part of theindustry that's just like that
and it's because it's asales-oriented industry.
(27:10):
So you get paid, you getperformance bonuses, you get all
these good things when you selland in order to put food on
your table, you have to sell.
So what do you do?
You become really good atselling, which is very different
than advising, and we hold that.
Most of the people we've runinto that we've helped rectify
problems it's because they weresold from a financial sales
(27:31):
professional.
They were never advised by aprofessional advisor that had
their best interest through acharacter of that individual at
their hand all the time, Nevermind laws and rules.
That's BS.
It's what is that person madeof?
And do they really work withyou in your better interest or
not?
Speaker 2 (27:49):
Yeah.
So let's summarize the Fab Fivehere real quick.
So, know what you own.
That gives a sense of control,a sense of knowledge why you own
it.
Well, there's been some thought, some rigor that has gone into
this, and perhaps a planshort-term, long-term or
intermediate or all of those.
So we know what we own, why weown it, how we're doing shows
(28:10):
the efficacy.
Is this even working?
Do we need to make some changeshere?
Shows the efficacy.
Is this even working?
Do we need to make some changeshere?
So it allows us a point to becorrective with what we own and
why we own it, and those canchange also.
So how we did is a way again tomeasure the efficacy of that.
How we're doing, how much we'repaying for it, as long as you
know and if you want to pay foractive management, that's fine,
(28:34):
but at least know what you'repaying for, that's right.
So it's really a preference.
So, for example, how I'mdressed right now, let's say
that's what I own, what I'mwearing, and it's an allocation
of clothes.
yeah the coconut bra looks nice,but yeah, it doesn't you know,
I've been shifting it aroundyeah, but it doesn't too much
knocking sound on the recordinghere, and what are you paying
(28:57):
for and how much is that?
Now, I know you wouldn't paywhat I paid for this outfit here
, but as a consumer, that's mychoice.
So I knew that I wore this,because it didn't make me look
fat yes, and it makes me lookvery distinctive.
Speaker 1 (29:11):
Slimming yeah.
Speaker 2 (29:13):
So at least I'm in control here.
So by me answering the fivequestions, know what I own, why
I own it, how I'm doing comparedto what and how much I'm paying
.
I'm good, I guess I'm goodthere.
Speaker 1 (29:25):
You are probably a step above 90% of the people
I've encountered in 25 years.
Speaker 2 (29:29):
So I've already transcended a lot of bullshit,
potentially me having control.
I am able to verify I have theright answers and I'm asking the
right questions to get theright answers.
That's right.
So this is the preventive partof bullshit.
Yes, before we even get intothe snippet part.
Speaker 1 (29:47):
It's sort of a recipe for you to consider.
I have five questions.
Let me pose these, let me getreal clear on what the answers
are for myself and, in theprocess of doing that, just
confirm for you that if you areworking with a professional, or
even interviewing a professional, that their answers rise to a
level that you deem to betrustworthy.
Whatever that is, your bellywill tell you Come to the table
(30:10):
with an empty cup and then workthrough these questions with
them, help them explain to yousatisfactorily to your level of
understanding, why and what's ofall these questions.
Speaker 2 (30:21):
It's a powerful mix.
Yeah, good Cool, good, goodstuff.
Welcome to Bullshit on Stilts, a podcast hosted by
two guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice, identifying asdoctors of bullshitology.
(00:21):
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it.
So this segment we're going tobe talking about how you develop
your bullshit sniffer as aconsumer.
(00:43):
I mean, you and I, mark, have alot of time and experience in
pulling stuff apart, putting itback together from investments,
insurance, estate plans you nameit and so it becomes very
familiar to us, and we can glossover lots of big terms because
we're familiar with the languageof the overall financial
planning landscape.
So how does a consumer, though,start to develop?
(01:05):
What are some ideas or thoughtsthat you would give a consumer
to develop your bullshit sniffer?
Speaker 2 (01:10):
Well, let's start by prevention, and the prevention,
at least on the investment side,might be the Fab Five.
So please run through what theFab Five is for us, and then I
might add a little color in hereon how that prevents bullshit.
Speaker 1 (01:24):
Okay, yeah, that's fair enough.
So the Fab Five we developed,which is basically a
five-question self-test for youas a consumer out there when it
comes to your investments.
Speaker 2 (01:34):
Know what I own, why I own it, how I'm doing compared
to what and how much I'm payingby me answering the five
questions I'm good.
Speaker 1 (01:42):
So the first question is what do you own?
And when we're asking thatquestion, we're actually really
wondering what do you own interms of what kind of securities
do you own?
Are they direct stocks or bonds?
Are they mutual funds orexchange-traded funds?
What kind of securities do youown?
More importantly then, in whatmix do you own those securities?
(02:03):
You hear the term assetallocation.
It's simply a recipe.
What's the mix of stocks versusbonds versus cash versus, maybe
, specialty or alternativeinvestments?
So that's the first question.
How does that help a personstart cutting through the
bullshit on stilts out there?
Speaker 2 (02:19):
Well, if I know what I own and perhaps that's being
explained to me by my advisorand I have a statement.
Of course, it means I have alevel of control that I know, if
I have individual stocks, why Ihave those individual stocks.
If I have mutual funds, why doI have five mutual funds?
Why do I have 10 mutual fundsIf you know what you own?
Speaker 1 (02:42):
those have probably been answered, which means I
have a level of understandingand knowledge of what is that
for someone out there that'smeeting an advisor for the first
(03:05):
time, or maybe getting ready toretire and thinking about
taking their 401k money androlling it into a individual
retirement account, and they'regoing to talk to a financial
advisor out there.
Speaker 2 (03:16):
First of all, if you have an outside account and
let's say it's an IRA, why do Iown it?
There's a couple of thingsthere that can be tied to a
short-term, intermediate orlong-term investment strategy,
so that, within that portfolio,why do you own it?
Well, I have this forshort-term, I have this for
intermediate and I have this forlong-term purposes in my
(03:39):
portfolio.
That's probably the moreimportant part of it.
But why do I own it?
It's because I have a certainrisk preference.
I also have an idea of certainsectors that I think might
perform well.
This is my touch, or myadvisor's touch, to perhaps
adding some extra return to myportfolio, because I think a
(03:59):
certain sector might performwell.
I don't want small caps, theseare all large cap companies.
Sector might perform well.
I don't want small caps.
These are all large capcompanies and I have four or
five of them to complement whatI'm doing with my mutual funds.
So, as long as there's anexplanation for knowing what you
own, why you own it, bothindividually as well as an
aggregate, they all have apurpose in the portfolio.
(04:22):
That is, control.
Speaker 1 (04:25):
I often look at why you own something, what you want
to and why you own it, as theposture you take.
So if you're a fighter, youtake a posture just before you
get into fight, your fightingstance.
If you're a golf player, youset your feet a certain way
depending on the type of shotyou have.
So you set your posture.
And so if you're sailing a boatand the weather's going to get
(04:46):
kind of rough, you set the sailsbecause of what's going to come
about.
In knowing those two things, youstart to understand how are you
positioned in your investmentaccount to weather the storm
that is the financial stock andbond market, that storm being
they go up, they go down, theygo sideways, they go left, they
(05:06):
go down, they go right, they'reall over the place.
And yet how are you postured?
And thus, knowing what I ownand why I own it, I can also
start learning to have someexpectation of what is that
roller coaster ride myinvestment account is going to
go on.
How far down will it go, howfar up could it go, and what's
(05:28):
that ride look like after thefact, after the last two years
or three years?
And that indication of knowingwhat you own and why you own.
It helps to set into your brainwhat are you positioned for and
how will the storm treat youwhen and if it hits.
Speaker 2 (05:41):
All right.
So that's, you're coming atthat from a risk standpoint.
So the posturing also and Ilike the analogies that you use
or the similes that you used isalso what are my expectations
out of the portfolio?
And it's not just the rollercoaster and I can take the
roller coaster to get aparticular expectation realized
(06:03):
out of it.
I want growth and I understandthere's going to be some risk to
this.
I'm risk adverse.
So this is why I own primarilyCDs and short-term bonds,
because I don't want a lot ofrisk.
So I know why I own it and Iknow that inherent in me,
looking for maximizing my return, I could have a roller coaster
ride.
So it's positioning not only toa risk preference, in other
(06:27):
words, what my gut can take,it's what my expectation is.
And then the art is in thatblend of modulating the return
potential or my expectation to aparticular risk level.
That's right, yeah, and I thinkin retrospect we don't look at
it as I think it's more on theexpectation, on the return.
(06:49):
If my return expectation isthree, four or 5%, I really
don't care about the volatilitybecause there isn't going to be
any.
But, conversely, if I am in amarket where I want 10, 11%
rates of return and I'mpositioned primarily in an
equity portfolio.
I know it's going to be aroller coaster ride, so what my
(07:13):
expectations are is to hit thatnumber return number, not
quibble about.
My portfolio was a 28% standarddeviation or a 32.
Speaker 3 (07:22):
Yeah, percent standard deviation, or a 32,
yeah, so what you're saying isum, if my returns are low, I
shouldn't be a bumpy ride, andyet, if I want big returns, I'm
gonna have a bumpy ride.
Speaker 1 (07:39):
Is that about it?
Yeah, yeah, no, that's true,that's true.
So so we've talked about whatdo I own?
Number one why do I own it?
Number two?
Third question in this Fab Fiveset is how are you doing in
terms of how are your investmentaccounts performing?
Are they growing?
Are they growing really fast?
Are they not growing?
Have they been set in thedoldrum of flat returns for the
(08:03):
last three or four years?
And you're wondering why, right.
So how are you doing?
Comment a little bit about howdoes a consumer recognize?
How am I doing?
Speaker 2 (08:14):
That is the key critical question right there
how am I doing?
Speaker 1 (08:18):
Yeah.
Speaker 2 (08:18):
The first one know what I own could be as naive and
as simpleton as you can recitethe inventory of your statement.
Speaker 1 (08:29):
That's it.
Speaker 2 (08:29):
Why I own it is the next level.
Sure, because you've put somethought into this and you have
expectations.
The third one is the criticalquestion, and that answer is
critical also how did I do so?
We've assembled an inventory.
We had a purpose for thatinventory.
(08:51):
Did it come to fruition?
Did we do anything?
Did I add value?
Did my broker add value?
My advisor add value?
Did we meet our expectations,either on the return side or
protecting to the downside?
How did I do?
Did any of this work?
Speaker 1 (09:05):
out, yeah, and so we're talking really about
performance return right Year todate.
Last 12 months, three years orwhatever we're also talking
about was the rollercoaster ridewhat I expected.
Was it a little bit better?
Maybe it was worse, as anexample.
So, in that, what my return is,it's performance.
It's also yield or interest ordividend income that's being
(09:27):
paid inside my portfolio.
So there's a number of how do Ido in terms of measuring the
investment performance of youraccount?
Speaker 2 (09:36):
Yeah, I deviate, I think, from standard practice in
this regard.
The thinking is that we can.
The only thing we can controlis the risk you take.
And yeah, I get that.
So I could be all in UStreasuries.
Yeah, there's still a riskthere, but let's say I'm all
just sitting in cash or shortT-bills and so I can control the
(09:56):
risk there.
We all say that we can't controlreturn because return is in the
hands of the gods.
So whatever the market bringsis what the market brings.
But if you say that you'reblanking out on the fact that
returns go both ways, so we saywe can manage to the risk or the
(10:18):
downside, but maybe you can'tbecause returns go both ways and
we know that when the market'scorrect anymore it seems like
they all correct.
So for us to say, well, I canmanage to this risk and we're
going to have a standarddeviation or the purported
roller coaster ride ain't goingto be that bad for you.
And then really, what the topside is?
(10:40):
Well, we can just go by historyon this and it might
approximate this, but that'sreally all in the hands of the
gods.
Well, really both are.
So I'm saying it's more of aseat of the pants correcting as
you go along.
Perhaps there's a lot of art tomoney management and a lot of
parts of it that don't lendthemselves to forecasting
(11:02):
predictions, spreadsheets,graphs and charts.
That's just my opinion, yeah.
Speaker 1 (11:06):
Yeah, so we got the three.
We got.
What do you own?
Why do you own it?
And then, how are you doing?
Number four is are youcomparing that to something
relevant?
I was in China years ago.
I was in Hong Kong at thecorner of an intersection huge,
busy intersection and I'massuming there was about 100 to
200 people at this corner.
(11:28):
I'm five, seven and I was oneof the tallest people in Hong
Kong at this corner gettingready to cross.
So my measuring stick was boy,I'm tall.
All of a sudden, a week later,I'm back in Chicago and I'm on
the corner After getting off ofthe subway.
There was about 50 people thereand I was one of the shortest
people there because I'm inAmerica and the average height
around me was about 5'11", 6foot.
(11:50):
So all of a sudden, mymeasuring stick changed.
And I'm not that tall, was theresponse.
So how do you bring thequestion of number four into
play as a consumer to measureyour performance in number three
that you recognize well, areyou doing good, are you not
doing good?
How do you do that with numberfour?
Speaker 2 (12:08):
Number four is there has to be a standard or a
benchmark, a comparison for you.
It was your height, and so howdo I compare all of this work,
all this rigor that I've gonethrough?
How did I do and should I havedone better?
Or do I get an attaboy or anattagirl Because I did a little
(12:30):
bit better?
So it comes down to what yourbenchmark is.
So if you are in stocks, thenwhat you would want to do is
benchmark that to a market index.
What could I have done withoutall the rigmarole and the
management and the assetallocation decisions, all of
that?
What could I have just donepassively?
(12:53):
That's a good benchmark.
And did I?
Speaker 1 (12:55):
approximate You're referring to passively, like
buying the S&P 500 index fund?
Yeah, like buying an index fund?
Speaker 2 (13:01):
Yeah you can't buy the index, but you can buy it as
an index fund.
Good point, because there arefees involved there which we'll
get to.
Speaker 1 (13:06):
Talk to this.
Let's say someone is on stepfour, they're trying to figure
out how did I do compared towhat?
And they're figuring outthey're compared to what.
Well, most people that areplanning for retirement don't
just have stocks, they havestocks and bond.
So how do you approach that asa consumer?
I mean, we talked about if youhave stocks, s&p 500 index might
(13:29):
be a good index to compare yourperformance.
Maybe, maybe.
But let's just go with that fora second.
Let's not get too detailedaround other indexes.
Speaker 2 (13:34):
Oh, but I have to in one story, I have to in a story.
Speaker 1 (13:38):
Okay, but let me finish.
So then the question is what doyou do for the bond part of
your portfolio?
Let's say you have 60% in stock, 40% in bond.
How do you compare that to onlya stock index?
Do you?
Do you compare your 60% of yourmonies in stocks, large cap US
let's say 40% of your money isin US bonds Do you still compare
(14:00):
that investment plan to justthe S&P 500 index?
Speaker 2 (14:04):
You know what the arm motions that you were just
using?
You looked like the statueoutside the municipal building
in downtown Detroit.
All you were missing were theplanets in your hands, just so
you know, oh boy.
Speaker 1 (14:18):
I could pull that off man.
Yeah, yeah.
So, you're saying I'm sort oflike an Atlas shrug kind of a
physique.
Speaker 2 (14:23):
Yeah, you're kind of like.
So you're saying I'm sort oflike an atlas, shrug kind of a
physique.
Yeah, you're kind of like.
So you're saying I'm hot, yeah,but that's a given.
I was trying to get a littlebit more nuance than just saying
you're hot, thank you.
Well, that statue certainly getshot because it faces west, but
(14:43):
anyway, getting back to this ifyou've got an all-stock
portfolio, and let's say it'slarge company stocks, then maybe
an index like the S&P 500 mightbe a good index to measure it
against, even though the S&P 500, as we know, is not the 500
largest companies.
(15:03):
It's leading companies andleading industries.
So we can get even more refinedwith that.
But good enough with that.
One Large stock portfolio, s&p500, good measurement.
But wait a minute.
I've got 40% in bonds, thebonds that you have, and let's
presume they're a mix ofcorporate and government bonds
and pretty much intermediateterm maturities.
(15:25):
So let's say like five, threeto ten years, something like
that.
Then what you'd want to measurethat against would be an
intermediate bond index.
So let's make the math easy.
Let's say you're 50% in stocksand 50% in bonds.
Stocks did 10% and the bondsdid 5%.
The indexes did, so blended,their return would be 7.5%.
(15:50):
So if your portfolio did 7, 8%,good on you.
Speaker 1 (15:55):
So walk through real quick.
Though how did you arrive at7.5, right?
This math in the air is toughfor people, so if I have 50%-.
Speaker 2 (16:02):
Well, I'm not even sure that was the right number.
Oh shit, oh it was.
You're solid, Okay.
Speaker 1 (16:07):
So if it was 50% in an index that generated a 10%,
well, 50% of 10 is 5% right.
And if I'm 50% in bonds thatgenerated a 5% return on the
year.
50% of 5 is 2.5, and we add 5plus 2.5, we come up with 7.5.
Real simple.
Speaker 2 (16:26):
You know what?
We did?
The same thing, this exercisewith arriving at the tip when we
were out for Mexican food.
Speaker 1 (16:32):
That's right.
Speaker 2 (16:33):
We did.
So my math, it was equalweighted, so I got 5%, I got 10%
over there and I got 5, equalweighted.
I add them together and divideby 2.
Speaker 1 (16:44):
Oh, so you did it that way, I did it that way.
Oh see, you did it that way, Idid it that way.
So you got the wrong answer at7.5?
.
Speaker 2 (16:49):
Yeah, were we right on the tip.
Speaker 3 (16:51):
Well, you know what they say arriving at the answer.
Speaker 2 (16:53):
The wrong way is wrong, even if the answer is
right.
Speaker 1 (16:56):
Is that the case, uh-huh?
That's why I always had to showmy work, probably.
Yeah, because I had all theright answers, but the work was
abysmal it was horrible.
Speaker 2 (17:04):
I got to get back to the sometimes about the stock
and if it's all stocks, you canmeasure it against the S&P 500.
And I know you recall thisstory and this is a gentleman
who is a well-known moneymanager out of Stanford and he
was showing me his portfolio andhe said his portfolio beat the
(17:25):
S&P 500.
Now what was interesting isthat the S&P 500, I believe that
year was up about 15% and hewas up like 23%.
He says I kicked butt on theS&P 500.
I said, dude, these are allsmall cap stocks and that index
was up 30%.
Speaker 1 (17:42):
Right, so he was essentially saying I'm the best
basketball player in the land ofmunchkins because, that's how I
measured it.
I measured it against an indexthe 500, that's large companies,
but I own all these smallcompanies that have a lot more
steam underneath theirperformance when they perform.
I mean double the performanceof large companies, and so yeah,
(18:05):
so you peel back the onion alittle bit and you find the real
story.
Speaker 2 (18:08):
We don't want to peel back the onion.
A little bit and you find thereal story.
We don't want to peel back theonion Because when you peel back
a layer of onion, what'sbeneath that?
Speaker 1 (18:14):
Just another layer of onion, another layer.
It's like a parfait.
Yeah, it's just another layerof onion.
Speaker 2 (18:20):
There's no insight there.
Speaker 1 (18:21):
You're going Shrek on me now, all right, okay.
Speaker 2 (18:24):
But anyway, here's where we can use numbers to
falsify the very truths we'reseeking In that.
He said to me that he beat theS&P 500, where actually he
underperformed and didn't earnhis fee.
Speaker 1 (18:39):
The small cap index yeah, he underperformed it.
So you change the yardstick toan appropriate yardstick and all
of a sudden you get the realreading on.
How did you do when you compareit to the appropriate benchmark
or yardstick.
So you underperformed and Ipaid you, which leads to number
(19:00):
five, which is so number five onthe Fab Five is what are your
total costs of investing?
Speaker 2 (19:08):
Yeah, what did you pay right and how much was that
itemized?
Speaker 1 (19:12):
let me ask you this real quick before you go on how
many individuals when you werepracticing individuals and
institutions because you ranpension monies and so forth as
well but how many of them couldfigure out the total cost of
their investments?
Speaker 2 (19:27):
none seriously, yes, none.
Speaker 3 (19:31):
This just in from the bullshit monitoring room.
Mark has made an absolutestatement, followed absolutely
by an emphatic absoluteness.
Diane, your reaction.
Speaker 1 (19:44):
Bullshit.
And why is that?
Do you think it's that hard?
Don't they disclose everything?
They say, hey, here you go.
This is the industry.
We're transparent.
This is exactly how much you'respending, sure the term
transparency.
Speaker 2 (19:55):
You know it's one of my pet peanut allergies yeah
because I can show you something.
Some hives starting to show somesome complete something that is
completely transparent and youcan look at it.
Uh, it might look like a pieceof modern art, a kandinsky work
of art or even a early picasso,and you look at that and say, oh
, that's totally transparent.
I see all of it and I don'tknow what the hell I'm looking
(20:16):
at.
I don't know a thing I'mlooking at.
So well-intended regulatorshave had what is called pricing
saliency and posted commissions,and then there was we're even
going to show markups andmarkdowns on bonds and advisory
fees and all of that, and peoplestill don't.
They don't know.
They don't know what they'repaying for, and a lot of them
are buried.
(20:37):
You just don't see them unlessyou actively are looking for
them.
And oh, by the way, you bettertake a Sherpa with you when
you're looking for these things,because they just don't show up
.
Speaker 1 (20:47):
Yeah, and what's interesting is on those
structures of the fees, right,so you have your advisor fees
potentially Assumed inside thatadvisor fee if you're working
for a large corporate entitywhatever it is it could be the
investment side, it could be theinsurance side.
But there are all sorts of feespacked into that Platform fees.
Oh, yes, yes so let's say it's a1% advisor fee but inside that
(21:11):
advisor fee that 1% isn't goingto that advisor that works with
a corporate entity.
That 1% is divvied up and thatadvisor is getting a portion of
it and the rest is paying forthe platform.
Quote unquote.
Speaker 2 (21:21):
Yes, the wrap, it's the wrap.
Speaker 3 (21:22):
Yeah yeah, yeah.
Speaker 1 (21:23):
And so, beyond that, you have your fund expenses
right.
Depending on mutual funds orindex funds and so forth, they
have very different price pointsand yet they're all diversified
.
You have your administrationfees.
If you're dealing in bondsespecially, you might have a
markup or markdown of the pricethat ends up being the
(21:45):
commission earned by the brokeror the platform that you traded
through.
Speaker 3 (21:49):
Frankly, one or the other.
Speaker 1 (21:50):
It doesn't always have to be a human being that's
charging those markups.
Is that fair?
That's very fair, okay, so itcould just be the entity that
has it baked into that pricingmechanism, specifically and
almost always for fixed incomeassets.
It might show up nowadays inlimited partnerships.
I'm not sure about if there ismarkups or downs in the limited
partnerships.
(22:10):
So you can get to a point whereall these fees, one on top of
the other, becomes a verymeaningful a small percentage
number, but meaningful in termsof dollar value of that fee or
those fees that is being pulledout or sucked out of your
overall accumulated asset.
Speaker 3 (22:31):
Oh my God, is that fair to say?
Speaker 2 (22:33):
That's very fair to say.
So that number can be 1%, 2%,maybe 3% in the aggregate, which
raises the question if I canbuy instruments that we're
measuring this against at afraction of the cost, a 10th of
the cost, why am I going throughall this rigmarole?
Why am I doing that?
Speaker 1 (22:52):
And that brings up a great subsequent conversation
around the focus on managers andthe number of managers inside
of an investment or retirementaccount.
That's a separate conversation.
But to your point, it'sinteresting when you don't know
and you don't know what to ask,just having fabulous five
questions and not letting thesales professional get out of
(23:16):
dodge scot-free.
Make sure they explain to youin a satisfactory way.
It doesn't have to be thetechno-speaking, jargon-filled
answer.
They should have the chops tobe able to break that down into
plain, everyday Main Street USAconversation.
I don't, it might be anindicator.
They might be the wrong advisorfor you just because you're not
(23:39):
on the same wavelength withcommunication and how they
answer your questions.
Speaker 2 (23:43):
So let's take it to another level and let's use the
S&P 500.
You purchased for me threeactive managers, mutual funds
with a portfolio management teamlet's call it with the
expectation that they are goingto beat the market, that I can
buy at a tenth of their cost.
(24:03):
If not even less than that,what would be your justification
for putting those managers inthere?
Speaker 1 (24:09):
This is the explanation that I've probably
run into more than any otherexplanation.
This is the explanation thatI've probably run into more than
any other explanation.
Actively managed investmentfunds have human beings making
decisions on selling and orpurchasing securities inside the
fund on behalf of the fundshareholders.
There are times in theenvironment of a financial
markets where active managementcan and has historically
(24:33):
outperformed just passive.
Buy an index, nobody's managingit, and once or twice a year
the names in the index getsshuffled a little bit, like
maybe 5% of the names get kickedout and new names are added.
That's very, very different.
It's just you're just taking Iwant to see the ballgame.
I don't care what seat I'm in,just I want to see the ballgame.
That's the passive strategy.
I want to see the ball game.
That's the passive strategy.
(24:53):
I want to see the ball game.
I want to be on the third base.
I want to be right adjacent tothe third baseman.
I want to have two seats upbehind the dugout.
That's active management,metaphorically speaking, very
precise.
And so the reason why peoplesell active is because there may
be an environment coming upwhere actively making decisions
on what to buy and sell mayoutperform those passive
(25:15):
strategies like the indexeswe've been talking about and, as
a result, the question is howmany of those active management
funds actually do outperformtheir index that they use as
their measuring stick.
What is that that percentage is?
It's certainly under 10%, very,very low, and so this brings up
(25:35):
this comment about how this allkind of works out in the world
of investments and in investmentmanagement sales itself, where
advisors will come up withcliche statements, right Jargon,
sort of the bullshit on stilt.
This is why I put people'smoney to work in this way, which
might be 180 degrees differentthan the person down the hallway
(25:58):
that has a very different takeon it, and at the end of the day
they'll put you into the samemix 60 stock, 40 bond, different
funds, different exchanges,different wraps, different this,
different that.
How do you discern what's rightfor you versus what's just the
sales job facilitating thesalesperson's own bottom line,
and or it's just bullshit onstilts because that's what they
(26:20):
practice.
Speaker 2 (26:20):
Kelly, you're making financial advisors sound like
they're pie salesmen.
They just are selling piecharts.
Speaker 1 (26:26):
There are hundreds of thousands of financial service
professionals running around outthere, and there are
undoubtedly a big group of themare really doing great work.
Well, that's no surprise at allbut the vast majority of people
that have biases built inside ofthem when it comes to financial
decision-making.
Working with advisors orprofessionals, those people have
(26:49):
either run into the other sideof the industry not so strong of
advisors right, Really, justshow up, throw up salespeople.
They're practicing overcomingyour objections and so forth,
but not really taking care ofyour best interest.
They don't have the character.
There's a huge part of theindustry that's just like that
and it's because it's asales-oriented industry.
(27:10):
So you get paid, you getperformance bonuses, you get all
these good things when you selland in order to put food on
your table, you have to sell.
So what do you do?
You become really good atselling, which is very different
than advising, and we hold that.
Most of the people we've runinto that we've helped rectify
problems it's because they weresold from a financial sales
(27:31):
professional.
They were never advised by aprofessional advisor that had
their best interest through acharacter of that individual at
their hand all the time, Nevermind laws and rules.
That's BS.
It's what is that person madeof?
And do they really work withyou in your better interest or
not?
Speaker 2 (27:49):
Yeah.
So let's summarize the Fab Fivehere real quick.
So, know what you own.
That gives a sense of control,a sense of knowledge why you own
it.
Well, there's been some thought, some rigor that has gone into
this, and perhaps a planshort-term, long-term or
intermediate or all of those.
So we know what we own, why weown it, how we're doing shows
(28:10):
the efficacy.
Is this even working?
Do we need to make some changeshere?
Shows the efficacy.
Is this even working?
Do we need to make some changeshere?
So it allows us a point to becorrective with what we own and
why we own it, and those canchange also.
So how we did is a way again tomeasure the efficacy of that.
How we're doing, how much we'repaying for it, as long as you
know and if you want to pay foractive management, that's fine,
(28:34):
but at least know what you'repaying for, that's right.
So it's really a preference.
So, for example, how I'mdressed right now, let's say
that's what I own, what I'mwearing, and it's an allocation
of clothes.
yeah the coconut bra looks nice,but yeah, it doesn't you know,
I've been shifting it aroundyeah, but it doesn't too much
knocking sound on the recordinghere, and what are you paying
(28:57):
for and how much is that?
Now, I know you wouldn't paywhat I paid for this outfit here
, but as a consumer, that's mychoice.
So I knew that I wore this,because it didn't make me look
fat yes, and it makes me lookvery distinctive.
Speaker 1 (29:11):
Slimming yeah.
Speaker 2 (29:13):
So at least I'm in control here.
So by me answering the fivequestions, know what I own, why
I own it, how I'm doing comparedto what and how much I'm paying
.
I'm good, I guess I'm goodthere.
Speaker 1 (29:25):
You are probably a step above 90% of the people
I've encountered in 25 years.
Speaker 2 (29:29):
So I've already transcended a lot of bullshit,
potentially me having control.
I am able to verify I have theright answers and I'm asking the
right questions to get theright answers.
That's right.
So this is the preventive partof bullshit.
Yes, before we even get intothe snippet part.
Speaker 1 (29:47):
It's sort of a recipe for you to consider.
I have five questions.
Let me pose these, let me getreal clear on what the answers
are for myself and, in theprocess of doing that, just
confirm for you that if you areworking with a professional, or
even interviewing a professional, that their answers rise to a
level that you deem to betrustworthy.
Whatever that is, your bellywill tell you Come to the table
(30:10):
with an empty cup and then workthrough these questions with
them, help them explain to yousatisfactorily to your level of
understanding, why and what's ofall these questions.
Speaker 2 (30:21):
It's a powerful mix.
Yeah, good Cool, good, goodstuff.
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