Paul Winkler: And welcome. This is “The Investor Coaching Show.” I am Paul Winkler.
That’s what I talk about, for over 20 years. Until we get everybody investing the right way, I’m going to keep doing it.
The likelihood of that is something near slim to none.
Because I figured 20 years ago that what I was teaching would catch on, not because I was teaching it, by any stretch of the imagination, but because it had a ton of academic research behind it, and it was evidence based, and it made sense, and it was logical, and the industry would start to change their ways, but no, they have not.
The Investment Industry Tries to Sell Based on Fear
Investing world is every bit as bad. It’s just marketing-driven garbage.
Sell on past performance. Put people in something that they’re familiar with, and they’ll be more likely to invest.
Or appeal to greed, or appeal to fear, or appeal to whatever emotion happens to be most efficacious to take advantage of at any point in time.
And of course, there is all kinds of fear, and there’s greed at different times, but fear is a big one. That is the biggest motivator of human behavior.
If you think about it, you will search far and wide for information on something if you think it’s going to save you from some kind of pain down the road. So that’s why the media appeals to fear.
Because they know that’s what you’re looking for. You’re wanting to survive.
“I just want to make it. I want to be okay.
“So I will look for anything that is a sign that there is some risk or that there are some problems so I can take action. If I’ve got knowledge, knowledge is power, right?”
Well, that’s the idea. Knowledge is power.
So I will take action based on protecting myself from whatever risk and not realizing a lot of times the actions we take actually put us at more risk.
And it’s funny because this show that I’ve done for 20 years has been to an audience that listens to primarily—and we know our audience really well—it listens to talk radio, listens to how, so often, much of the information we’re getting from the media is just skewed.
It’s not even debatable. It’s so skewed.
Negative Information Is Addictive
And back when I grew up, when I was a kid and I grew up, you had three channels and sometimes a fourth one, if you actually went on the PBS one. But the reality of it is that there is so much information that’s constant that we can’t escape it.
And it is addictive because it’s so negative. It’s just, for some reason, we are drawn like a moth to the flame to negative information.
And that’s why is because we want to protect ourselves from whatever calamity is about to befall us. And the reality of it is there’s always something to be worried about out there.
And we used to, if you go back a few hundred years, your entire life was within 20 square miles tops. It was your entire life.
You didn’t know anything going on outside of that. If you did, it would’ve took days and days and days before the information got to you, and the calamity was already taken care of by the time the information got to you most of the time.
But now we have instant access to information, and it’s addictive. We know that dopamine is triggered.
And then what happens, because that’s an addictive chemical that your brain puts out, it causes you to keep going back and keep going back. And unfortunately, this is what investors do.
And this is why it is so hard to break people of the media and predictions about the future and why the industry plays on that. Because they know that’s what you want is a prediction about the future.
“If you can just tell me what’s going to happen next, I could protect myself from it or I could take advantage of it.”
Most of the time, it’s protect myself from it. So most of the stuff you hear about investing is typically the next crash that’s ready to come, the next big downturn, the earnings reports that are going to come out that are going to be just really terrible.
And how you can’t get anything for Christmas, and how you can’t get what you need, and how you’re not going to be able to find a job. Or the layoffs are going to be all over the place and you won’t be able to find anything to do once you’re laid off because there’s just not anything out there.
It’s just, there is nothing out there typically that attracts people’s attention better than negative information. And we know that.
So what I look at is I try to get away from constant need for new information because markets are really good at taking new information as soon as it’s available and implementing it into pricing.
How Do Events Truly Affect the Market?
So if we have negative information, something bad happens, that doesn’t necessarily make markets go down. It may be bad news, but there may be that factor that we were probably going to get bad news.
And you hear that: “We really thought earnings were going to be down, but we thought they’d be down more than what they were.”
And so they’ll report that the earnings are down. You’ll see stocks go up, and go, “Wait a minute, they went down. What on earth is going on? Why do stocks go up when earnings go down?”
Because we thought they’d go down more, and that was the price that was built into the stocks was the previous number, which was bad news.
And you might have good news. Lord knows you’ve got people who will buy a stock and go, “Oh, this company is really going places. It has such great potential. I need to own this company.”
Well, the problem is, yeah, it may be going places, and it may have great potential, but the question is not if it’s going places. The question is not if it’s going to be a big hit.
The question is, is it going to be a bigger hit than when people are predicting right now?
And that’s the challenge you run into. You don’t know if it’s going to be better than what everybody expected.
And that’s the conundrum. That’s the issue we have.
Really, we’re trying to figure out where the market’s going to go and which stocks are going to be better than others because it’s going to take brand-new information to tell us.
Everyone Wants to Protect Themselves From the Downside
And then of course there are those people that do defy the odds, and they beat the market for a while, and then they get all the press because the press wants to also be the bearer of information about who can help us protect ourselves from any kind of calamity down the road.
And it’s interesting because you would think, Getting rich would be the biggest thing that investors would desire.
But a lot of times it’s not that. It’s just protecting from the downside, and all year long, we’ve talked about the downside of downside risk protection.
You look at fixed-income investments, CDs, you look at these investments that have historically, basically, just kept base with inflation. That was it.
The rate of return in Treasury bills from 1926 till now, 0.4% return after inflation.
Now what happens is you may look at, like, a 4% return. That’s not bad, especially right now.
But you may look at that and go, “Well, that’s not bad.”
And we go, “Well, actually inflation has actually offset any return, and then you take taxes—you’re in the negative.”
So it takes, as I often say, 150 years for money to double after inflation and fixed-income investments.
And you go, “Okay, so wait, this insurance company’s got this thing called an annuity. Can I do that? They promise that I can have market returns without risk.”
And reality of it is they take away most of the returns in the form of pulling the dividends out of the stocks. So the dividend return is not part of the options that they use.
When you buy an option, dividends are not part of the equation. And that’s what basically the insurance company’s doing is investing in some of these options contracts.
And then they’re going to buy bonds too.
Well, what did we just say about bonds? Historically, your rate of return is next to nonexistent.
Now there’s a little bit higher return for long-term bonds, but then you’ve got another risk. You’re locked into long-term bonds.
So if I buy a bond that pays, let’s say, 3%, and then all of a sudden, the inflation is a long-term thing—it’s not a transitory thing, but it becomes a long-term thing—then all of a sudden I’m locked in for 30 years at 3% and that’s a huge problem.
I’ve got to sit there on that. And then what will happen, of course, is the bond price will drop because nobody else wants to buy that thing off of you.
You can’t just sell it. Nobody else wants something that pays such a low interest rate when new interest rates are higher.
So you got that issue.
Insurance Companies Are Taking Risks Due to Low Interest Rates
And then of course the insurance companies themselves are increasingly taking greater risks.
They’re stepping out on taking a walk on the wild side. I talked about that a couple weeks ago.
They’re investing in private equity, companies that—they’re not public companies, so their information isn’t public. So they keep pretty close to the vest with information about the operations and profits and cash flows and all of that.
And that’s the reason they stay private, many times, because they can keep that information secret.
The problem is if you’re a buyer of those companies, you don’t know that information. So you don’t know necessarily what price you ought to be paying, what are the future prospects, because the information’s not public.
And they’re investing in what they call “high-yield” bonds because that sounds better.
“We got high-yield bonds in our portfolio. Ooh, high interest rates.”
Well, why would a company borrow money from you and want to pay a high interest rate?
They don’t want to pay a high interest rate to you. They only do because they have to, because they’re so distressed.
And then you got hedge funds they’re investing in, insurance companies. Hedge funds.
And it is not just a minor part, it’s a third of their portfolio is what this recent article was talking about. A third of their portfolio is in this.
And people are going to this for safety, and it’s being marketed as a safe investment vehicle. And it’s just like anything else.
“Well, historically the companies were fairly risk averse, and they kept the risk down.”
And this is what advisors get sucked in on, because historically it has been something that hasn’t been a big risk, investing in these companies.
Well, that’s because in past years, in past decades, interest rates were high enough that the insurance companies didn’t have to freak out. They didn’t have to concern themselves with trying to meet their expenses and cover expenses and cover commissions and cover operations with an interest rate structure as low as it is right now.
So now the insurance companies are having to go out and take a bit of a walk on the wild side. It reminds me a little bit of bonds.
What Worked in the Past Might Not Work Today
I remember years ago doing a TV show, and I talked about how this person said, “My grandfather invested in bonds for years. He didn’t take the risk of the stock market. He did just fine.”
And I said, “Well, you got to realize the era that your grandfather was investing in. Maybe your grandfather started to amass a decent amount of money in the early 1980s, and then he invested through the 1980s, then he invested through the 1990s, and maybe some into the 2000s.”
OK? So I don’t know, it depends how long grandpa lived. But when you look at that particular period of time, that era, for bonds, you’re looking at interest rates, extremely high interest rates in the early 1980s.
And then they came down some, and then they came down some, and then they came down some more. In the ‘90s, they came down even more.
You had a couple times when they jumped up, but for the most part it has been a downward trend on interest rates until what you got right now.
And during a period of time when interest rates are going down, what do bond prices do? If you said they go up, you got it exactly right.
So what happened is there were a lot of people that felt very complacent about doing the same thing their grandfather did only to end up right now where you got a situation where they’re rock bottom.
And you can go negative, like you do in Europe. You have negative interest rates in Europe, which is where you are paying somebody to borrow your money.
It is just like, “What?” Yeah.
So that is the problem that investors face right now. So often they look at investing and they actually approach it from a standpoint that it is the same thing as what it was in previous generations.
And you may even turn to parents and grandparents and say, “Hey, what do you think? What should I do?”
And they may, well-meaning, give you advice on what you should do and that advice be absolutely awful because it was based on previous decades. So that’s really, it’s in a nutshell where investors find themselves.
You don’t know where to turn, you want safety, you want to protect yourself, but so much of what protected investors in the past is just not there anymore. It’s not going to protect as it did.
And that’s hence, why, when you put an investment portfolio together, you don’t predict the future—number one—but much, much, much broader diversification than you find typically mutual fund companies engage in.
Investment Companies Tend to All Do the Same Thing
I’ve talked about some of the biggest in recent weeks, the very biggest. Think of a name that comes to mind when you think of investing, and you got one of them.
Because we’ve been analyzing portfolios for years, and I always ask—all the different offices that we have, I always ask them, “Okay, so what are you guys seeing? Anything different in portfolios that you’re analyzing?”
And they’re like, “No, same stuff, different day, Paul.”
And that’s the reason, is because of the fund companies just following each other.
If they all do the same thing—this is key—if they all do the same thing, then there’s safety in those numbers. Because even if you mess up, if all your other competitors messed up equally and did the same thing as you did, you’re okay.
It’s like the speeder that I use as an example, going 85 in a 65.
The reality of it is the likelihood, if the person’s doing 85 in a 65, they’re probably going to be pulled over, but if every person is doing 85, it’s like, which one do you pull over? I guess whichever is the last in line.
But when you have all of these different groups doing things—or it’s probably a more reasonable example that I sometimes use is if it’s a 65-mile-per-hour zone and you’re doing 70, yeah, typically you hear, “Eh, I’m probably not going to get pulled over for that.”
Especially if everybody else is driving the same speed, it’s pretty rare.
But that is the same thing with the investing industry. If they’re all screwing up the same way, the likelihood of anybody getting in trouble is pretty slim.
Education Is the Key to Making Wise Investment Choices
But that is why I think investor coaching is so important, and I think that’s why education is so important. And that’s why I think this show and the podcast is so important.
Because if you don’t want to look like everybody else, well, it’s going to take some education to get you there.
Because when you don’t look like everybody else, you feel kind of exposed. You feel like you’re kind of out there.
And you are especially exposed when, let’s say, the one area of the market that mutual fund companies love—which, large U.S. companies in the U.S.
You go to Japan, it’s a different deal; you go to Australia, it’s a different deal; you go to other parts of the world, it’s different what they like because of ethnocentricity.
But if you are comparing yourself to a friend, and the area of the market that most people like, large U.S. stocks, does better than other areas for a while—and it has and that’s why you own it, because sometimes it does do better than everything else, most of the time not, but sometimes it does—that’s when you’re really, really tempted to make a change for the worse, because everybody’s doing better than you.
And it’s just, “Oh man, this person got—”
And people attribute the return, the higher return, to skill.
Now that’s not happening this year by any stretch of the imagination. Late last year, this year, not by any stretch of the imagination.
But remember, most people look at three-, five-year track records. They don’t look at what’s going on in the recent history because longer is better, right?
Yeah, but not three and five. I’d rather see, like, 80- and 90-year.
Give me an idea of what the asset category, what the cost of capital, what do companies have to pay to use your money? Give me the longest period that you possibly can so I can see and then look at different periods out of sample, look at different things out of sample.
In other words, don’t just look at large U.S. companies. Look at large German companies, look at large French companies, look at large Australian companies, and see if it is like that in those areas as well, and you’ll find that it is.
And this is where we start to educate ourselves, understanding: What am I doing? Why am I doing it? How does this whole thing work?
And then at that point you can bear to not look like your friends. You can bear not to look like everybody else.
It is only at that point that you can really get to the point where you’re okay in your own skin, not being like everybody else. But it takes education.
Keep Paying Attention
And that has been my philosophy for 20 years. You can’t just learn the right principles once.
I ran into somebody. I was just out and about, and then “You’re Paul!”
Yeah. I was like, “Wait a minute. I got a face for radio, and you’re recognizing my face. You must have seen something else out there.”
Said, “Yeah, Paul, I need to go back”—and I guess they’re working with one of our other offices—“My husband and I, we need to go and get a checkup. We just need to go back in, and there’s things that we need to learn and things that we need to know because …”
And then another guy, literally same place, same day—three people as a matter of fact, same place, kind of crazy, but you know—he said, “I get nervous, and I hear things. I’m just so glad that I can hear the show every single week.”
That’s the key. If you don’t keep up on this, if you don’t constantly just get reminded of what’s going on and put the current events, the current news, in the context with what you know about investing, it’s really easy to get pulled off.
If you look at the research on investor behavior, investor returns, you see it’s not pretty.
The average investor—and this is just looking at versus asset allocation funds, just asset allocation funds versus markets and the average investor in an asset allocation fund, which is dividing between stocks, bonds, and cash. The rate of return is, like, the inflation rate.
It’s really, really bad with risk that far, far, far exceeds what a Treasury bill—which, as I often point out, has a rate of return that is about the same as the inflation rate.
And the reason is because when things get really kind of dicey or something weird is going on in the market, and investment advisors will go and change the portfolios. Or the mutual fund companies will change the portfolios.
And you don’t even know it because you’re not paying attention, and they’ll change something on you. And then all of a sudden, after 10 years, you go, “Wait, wait, wait, wait, my returns weren’t nearly as good as they should have been.”
Well, you take that 10-year period, and historically that would be a doubling period for markets if just captured market returns. Historically, that’s on average.
Now there’s some periods of time where it doesn’t double in 10 years. There’s some periods of time when it quadruples in that same period of time or quintuples.
Stay Diversified and Continue to Learn
So don’t take that as your portfolio doubles every 10 years if you’re all in stocks. Don’t take it as that.
Yes, historically, that’s the average, but sometimes it’s much higher than that and sometimes it’s a bit lower than that. Now, if we look at a well-diversified portfolio, 10-year time horizon for an aggressive all-stock portfolio is a decent time horizon.
What does that mean? That means you could go 10 years without a return; that can happen with an all-stock portfolio.
So hence, that’s why you apply time horizons to your investing. And if somebody is in retirement that could be terrible.
Because what happened to make it go 10 years without a return? It dropped, and then it came back up to where it was when it started.
So that’s why people want to have bonds in their portfolio. Bonds are the thing that actually stabilize the portfolio and help it maintain some value and shorten that time horizon significantly.
Historically, we go back and you take a portfolio that’s half stocks, half bonds, and that’s a three- to five-year time horizon. You could go three to five years without a return, but it’d be pretty rare.
It’d be rare. But if markets went down, I have enough money in fixed income and bonds to take an income for years without having to sell much or if any of my stocks.
So I can actually pull income from the fixed income. It’s going to be stable.
Now, that stuff, you don’t want to put everything there because of the inflation risk, but you see the point. So I guess another reason to stay engaged and continue to learn when it comes to investing.
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*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.
