Transcript
Paul Winkler: Yeah. And welcome to The Investor Coaching Show. Paul Winkler, along with my buddies.
Buying Individual Stocks
Ira Work: You were talking about companies not being here forever. And I want our listeners and clients to know that we will be here forever.
Paul Winkler: Do you know who I was talking about where the CEO basically said that the company was going bankrupt?
Ira Work: Which one?
Paul Winkler: I was just wondering if you knew. I don’t remember. I think it was, I think it might’ve been, it may have been Amazon. I think it was, it was Amazon. I think it was. So for those of you that have no clue what we’re talking about in the last hour.
Evan Barnard: Including me.
Paul Winkler: Thanks, Evan. I appreciate you listening. No, it was just interesting that, you know, people buy individual stocks and they go and say, well, I really love this company. This company is great. Oh my goodness. I’ll use their stuff. And they’re the most wonderful company ever. And, and they go on and on and they buy individual company stock. And, and I just, you know, don’t do that. It’s not a good idea. Companies don’t want to pay any more to use your money than they have to. So hence the expected return is no higher owning individual stocks than it is owning the entire market. And you know, companies come and go much more rapidly than ever before because of international competition because of us competition.
Because, you know, let’s say if you’re the big dog, everybody’s going to be chasing your tail and trying to knock you off your pillar. And, you know, that’s what happens. I often talk about how companies come and go much more rapidly than before now. I didn’t use this statistic, but it was the one where if you look back over like 60 years ago or something like 60, 70 years ago, companies stayed in the S&P 500 for 50 or 60 years. I mean, they would stay in the index for that long. And now it’s down to 18. Last we saw. But what I was talking about, this one CEO of a major US company came out one day and he goes, “Company is going bankrupt.” And we’re like, what do you mean? The company is going bankrupt. He says, yeah, everybody’s company goes bankrupt eventually.
Ira Work: Well, speaking about some other interesting stuff in the news, I don’t know if you’ve heard about this. There’s a rumor floating around that AT&T might be selling CNN, AT&T yeah. It’s part of the Warner network thing. So the rumor is that eight, that CNN, because they’re losing market share, which rightfully so that they might be up for sale. So the question was, well, why don’t we know we can sell it to Amazon, but then there’s an antitrust issue being that they’re so bad.
Paul Winkler: And that’s becoming a bigger deal these days. Yes.
Ira Work: So then basically the people who are reporting, it said, well, Jeff Bezos can just buy it outright and just own it personally.
Asset Categories
Paul Winkler: Yeah. And you know, I was talking about the whole antitrust thing last week, I guess it was something like that. It was in The Economist. Yeah. That whole thing about going in and regulating these companies as utilities and the implications that it’s fascinating. So this is a really interesting week in the stock market. So I think it’s a really good time to talk about it because you’re seeing headlines like, like this headline right here, Wall Street Journal, “S&P 500 finishes week at record on vaccine optimism. Okay. So that gets people excited while the S&P hitting record levels. And, and of course, let’s say that you were an investor and you thought, yes, 500 is going to hit record level this week.
And you invested in the S&P 500. Now, when we diversify the 12 basic asset categories that we would hold right now. So if we’ve got 12, basically asset categories, we’d hold, you know, in the US large, small, large value, small value, microcap and international. And then you’re going to have large, small, you know, value, growth, and then emerging markets, large small value. So out of the 12 asset categories that we would hold in a diversified portfolio, where do you think the S&P 500 fell out of all those asset categories for last week? Yeah. This past week.
I’ll let Ira go first. Go. What do you think Ira? I would say below the small cap. Okay. What do you think out of 12? Do you think it’s ranking? If I know you it’s 12, I know how I’m going to come. I’m going either with US small value or emerging market value. One of those two would be, my guess would be worse or better would be the best category. Oh, okay. Okay. Gotcha. All right. All right. I’m just looking at where S&P 500, because the unfair is about how the S&P 500 did and how great of a week it was, or next to last one of the next to last you win. Yes, it wasn’t last, but it was next to that. That’s true. What do you think this is? The price is right or something.
No, it is interesting significantly below, you know, like small value, significantly below international value stocks for the week, significantly below emerging markets value for the week, you know, large value, small, everything. I mean, literally below everything. See, and here’s the interesting thing about the way, cause say so in on Monday, I think it was after the radio show on Saturday, I was looking around for information, looking around for news.
And when I do, if I gravitate, if I see some news, which the news was, you know, it looked like we’re certifying the election for Biden. And he made a big announcement on Saturday. We’re going to certify it. And then Monday, what happens all day long, all you can hear is, wow. Look at the market on Monday, the Biden certifying him as the winner of the election has made the market really go in this vaccine. Yes. So they did and here’s what’s up. Here’s what’s funny. Think about it, I had looked at the futures markets. So basically what you’re doing is you’re looking at what pre-market trading is looking like. You know, you have people that bet on the market direction now on the weekend for what’s going to happen or likely to happen during the week.
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Stay Disciplined
And of course you have the futures markets looking up right by about 0.2% or something like that. But at least it wasn’t down. It wasn’t, you know, looking like it was going to come crashing down, then people don’t predict all my gosh. You know, if a Democrat gets in, you know, people are saying that the market’s going to crash and I’ve been saying, you know what, markets go up over, you know, doesn’t matter which, which party is in charge and it’s something I’ve been teaching. And, you know, I’ve had clients actually, I don’t know if you guys had this, but I had clients go and send me notes going, thank you. Thank you for keeping us disciplined. I have had that this past week. Yes. And yeah. Thank you for those of you that took the time to do that. That’s really cool, but here’s the thing.
And that’s why coaching is so important as helping people, you know, not go and shoot themselves in the foot, because it is so easy to get emotional. And it is so easy to think that you think that we know where markets are going to go and not realize that a lot of what is likely to happen gets built in the stock price. But, but what happened was this? So you have this 0.2% or something like that. The futures are when I look at them on Saturday, it wasn’t until the vaccine in the media is basically saying it’s because of the, the Biden announcement when it was, no, it was because of the vaccine announcement. Now, if we look at the huge run-up in one day in the value markets and small value and all these other asset categories, the large ones got trampled by these things.
But in reality, what we’ve got to realize is that the things that caused one area of the market, which is what most investors in America are invested in, which is large US growth stocks to do so well in recent years is going to be their undoing in future years. You know, get very well, could be their undoing in future years. Now that doesn’t mean that they’re not going to go up and doesn’t mean, yeah, I don’t know. We don’t want to predict that. But the reality is that a lot of people are going in and they’re, they’re walking away from diversification at what I would say is the absolute worst time to walk away from diversification.
Correct. And chase returns for sure. So let’s kind of put this in a little bit of perspective.
What’s Going to Happen…in the Next 20 Years?
Ira Work: The S&P is reaching a new high. I reached a new high in March of 2000, right? From April of 2000 through March of 2010, the S&P had an annualized negative 0.6, 5%. Yeah. The area of the market that you’re just now speaking about small cap value, annualized at 10.8 international annualized 14.6. So it was like, we always tell our clients, we don’t care what the next 10 minutes is. We don’t care what a couple of days are. Yeah. It’s, what’s going to happen over the next 10 and 20 years, correct?
Paul Winkler: Yeah. It’s, it’s seriously important to not go and look at hindsight and go and invest based on yesterday’s performance. And yet that’s the way people invest, because it just seems so logical to look at past performance. I was actually walking through a good friend of mine. She had a 401(k), and we were looking at the different investment choices and she looked at the choices and I said, “Oh, this, this one’s, this one’s good right here.” And she said, “Wait, that’s like a negative for the year. And that has a negative return for the year. Isn’t that bad?” And I, and I laughed and I said, I said, “Congratulations, you have just fallen into the common trap that investors fall into.”
Right. They look at past performance and I say, “You know what markets do.” And she goes, “They go up and down and up and down.” Right. Yeah. And she goes, well, yeah. And I said, “What follows up?” And she was like, “Well down.” And I said, “Good, what follows down?” And she goes up and I say, “Good. Okay. So you’re getting this, you get that. This is the opposite of everything else you do in life.”
Evan Barnard: It is interesting that clients get the intuitive nature of buy low, sell high. I mean, they understand the concept, but you lose track of that. Well all my friends at church, all my friends at the club, they’re all talking about their, you know, we’re talking about Amazon earlier, or they’re all talking about this, you know, S&P is up and you, you quit factoring in kind of the simple principles of, well, gee, you know, just because that went well, doesn’t mean everything else is bad. And I mean, it is an emotional concept just as much as it is an academic investing principle.
Instincts Plus Emotions
Paul Winkler: Oh yeah. Yeah. Well, and, and, and it’s that desire to stay away from pain and go toward pleasure and the emotions and the instincts, the instincts being this, stay away from pain and go toward pleasure and the emotions, you know, greed fear on the other side, you know, loyalty can be in there where it’s just like this person’s my friend. He wouldn’t ever recommend an investment product that isn’t mine, you know, good for me, not knowingly. You’re probably right. Yeah. You know, but you get that and you have trust. I just trust them. Or, you know, loyalty and loyalty is where I stay with somebody because I want to be in there with them forever. I’ve done this forever. I’ve done it this way forever. And it’s really easy for those emotions to just suck us in. And what we do is a sales profession has always said that we sell on emotion and justify with logic.
Right. And that’s what we tend to do is we tend to do exactly that. Whereas, you know, it’s the cognitive part of our mind. And we can say, I plus E, which is instincts plus emotions tend to outweigh the cognitive part of our minds. And the problem that we have is not only does the media magnify the instincts and emotions, but so does, so does the investing industry at large.
Evan Barnard: Here’s the headline itself, right. Kind of it sets the stage. Well, what I want is the headline two weeks ago that says, yeah, On Monday, Pfizer’s going to be announcing a vaccine and that’s 90% effective. I wanted that story two weeks ago. Well, I used to show me that it’s easy to say, Hey, this is why the market went up. But yeah, well that would have been helpful 10 days ago.
Paul Winkler: Yeah. Good, good point.
Ira Work: I always said that when I was at Shearson Lehman brothers, and that was, you know, they’d come out in the morning and they say, this is what’s going to happen. You know, this is when you know, we’re expecting this report. We’re expecting that report. Then you end the day. And they said, well, the market went down because of this. The market went down because of that. And I would say to my manager, why can’t they come out and tell us, here’s, what’s going to happen today. The market’s going to go up because of this. And this stock is going to go up to this price or this stock is gonna go down. So we actually know how to tell our client what to tell our clients what to do. And their answer is it doesn’t work that way.
Paul Winkler: No, it’s just like that movie Wall Street where he’s walking in and his dad’s on the phone and he says, “Hey, what’s going on?” Well, you know. Yeah, exactly. That’s right. That’s right. You even remember the name of the stock? Good grief, Evan. Yes. So that’s exactly what it was for the airline. Right. So yeah, there you go. So here’s, you know, if you look at it at market segments, right now, there are a lot of areas that are selling for five to six times less than the S&P 500. And you know, why would we go and chase that kind of stuff? Why would we go chase the companies that are selling for so much? But it’s our instincts telling us, you know, by the companies that we’re familiar with, what we know, and it will be, for the investors doing it, it always ends up being their undoing.
That’s just the way it works. You’re listening to The Investor Coaching Show.
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