Paul Winkler: Welcome to this hour of “The Investor Coaching Show.” Paul Winkler, along with Mr. Jim Wood, Certified Financial Planner, hanging out and talking world of money and investing.
Now I get to see what you got to say. What’s on your mind this week?
So come on, tell me. What is it?
Jim Wood: All kinds of things, really.
PW: Okay. I was going to say, I thought maybe …
JW: I was silent there, for a second.
PW: You were so choked up.
JW: Thought you were soliciting the audience.
PW: No, I’m not soliciting the audience. I was talking to you.
JW: Well, it’s funny, because in times of extreme volatility, even on the upside—sometimes it’s the upside, sometimes it’s downside. So far, right, this year, we’re getting some of that downside volatility that, of course, we don’t like.
But you see all these schemes—
PW: I like it. I’m going to take that back.
I like it because if it weren’t for the upside volatility, you wouldn’t have the greater returns to the stock market.
But I’m just going on the record saying that. The eternal optimist.
JW: Yeah. Well, I think that’s the way to be.
PW: I know you agree with that. I’m just joking around.
JW: Yeah. Preaching to the choir.
PW: Yeah, exactly.
Investment Schemes That Prey on Emotions
JW: But you run across these schemes that are out there of companies thinking, Well, let’s take advantage of people’s emotions and/or ignorance.
And got an advertisement the other day in my mailbox. And what’s striking about getting this advertisement, it’s at the top of a newsletter from a company that supposedly is an evidence-based type of company with their investing.
PW: Really?
JW: So to me, it’s the equivalent of the doctor who has the cigarette machine outside his office.
PW: So if you’re not familiar with the term evidence-based, folks, it just means that it’s based on academic research.
There’s evidence to show its efficacy, that it’s a logical, sensible way of investing, and you can understand where returns come from.
As I always say, you can kind of get this stuff once you start to understand how the research is done, and where returns come from, and the cost of capital story. It just makes sense.
But that’s evidence-based.
JW: Yeah, based on the academic evidence of the last 80 years, not somebody’s supposed ability to predict the future.
PW: Or a marketing scheme, yeah.
JW: Yeah.
PW: Exactly.
JW: So, this thing is, this is an email sponsored by Composer. And Composer—nice name and everything—and they call all their investment schemes “symphonies.”
So doesn’t that sound nice? Wouldn’t you like to go to the symphony to invest?
PW: I’m stuck on “-poser.” Okay, bad pun. Anyway.
JW: So what the ad reads is, “It’s scary out there.” Well, yeah, sometimes it can be a little scary out there, but—
PW: Yeah, yeah. Appeal to fear.
JW: Right.
PW: Because if you can get people afraid, they’re more likely to take action based on fear than they are on the hope for gain.
Rules-Based Strategies
JW: “Over $9 trillion has been erased from U.S. equities, and the Nasdaq-100 is down 23%. That’s why the smartest investors know how to allocate sell-offs strategically, using rules-based strategies.
“But unless you can code, this thing has been out of reach.”
PW: “Rules-based strategies.” So you follow a set of rules, and you will be successful, as long as you follow these sets of rules based on what?
Typically, history, Right? Looking for patterns that have happened in the past.
And that’s the way they do it a lot of times. They’re just looking for patterns that have worked in the past.
Like my example of butter production in Bangladesh. At one time, butter production in Bangladesh was the best predictor of the stock market return, which makes no sense whatsoever.
But that would be an example of something that would be a rule that you would follow going forward, which is very akin—I’m just guessing where you’re going, but go ahead.
JW: Yeah. So these things:
“Think tech is bottomed? Jump into Big Tech Momentum.
“Think inflation is going to get worse? Dive into Inflation Spiral Hedge.
“Want to stay in stocks, but more security? Try—”
PW: Wait a second, what’s the second one? Because momentum, the idea that an object in motion tends to stay in motion, so if a stock is going up, it’s going to continue—
Now, that’s the interesting thing. There is some evidence that that does work, but the problem is that actually trying to capitalize on it costs more than the benefits from it.
What was the second one, though?
JW: The second one: “Dive into Inflation Spiral Hedge.”
PW: Inflation spiral. So basically protecting yourself from an inflation spiral.
Which is interesting because I was actually reading The Economist this morning, and there was one guy that made the comment, and I said to my wife, I said, “Hey, check this out.”
This guy was talking about how there is a tremendous amount of evidence that inflation is not going to continue on indefinitely, and that it is driven, to a great extent, by these supply chain issues.
And I felt like I was alone saying that for quite a while, but it was actually in The Economist this morning.
So anyway, so hedging against an inflation spiral as if it’s going to continue on forever, and that’s another prediction. That’s another bet.
You ‘Can’ Earn Money—But You Can Also Lose It
JW: Yeah. To me—and I’m going to fully say, I didn’t look at every strategy. I don’t know everything that they do.
PW: Good thing. You’ve got better things to do with your time.
JW: Right.
But it’s “the next generation of active investing. No code, no spreadsheets.
“No ‘You Only Live Once.’ Just smart investing for smart investors.”
And of course, you can earn money if you invest there.
PW: “Can,” yeah. The operative word, right?
JW: They give you a bonus for signing up.
PW: You “can.” You “can” lose your shirt too.
JW: Yeah. Everything here to me just seems to be gambling.
Talking about evidence-based, none of this has any evidence behind any of it other than some track records with some of the strategies.
It’ll show you what the track record did for all these, but you can look in hindsight and always pick what was the best thing.
PW: Right, right, right. And if it didn’t have a track record, nobody would be talking about it, and that’s why, hence, they come out and talk about it. Yeah.
JW: And the successful strategies were ones that typically did a lot of leveraged ETFs.
PW: So borrowing to try to magnify the gains—and, of course, people forget about the losses.
Borrowing money. And that’s where people got in trouble in the Great Depression is leveraging.
JW: Yeah. And so they’d get these leveraged ETFs, and at least the ones I looked at were all S&P 500.
PW: Wow.
JW: And so you look at 2021, and you’ll see these stellar: “Oh, this thing just made a ton of money.”
PW: Of course. It works great when the market’s going up.
Sure. Yeah, yeah.
JW: Right. And then you get to 2022.
PW: And then you have to owe money back, and you have to pay it back with assets that have actually depreciated in value. And then you find out just how well these strategies work.
Investment Schemes From Composer
JW: So let’s look at a couple of these that I found. I’ll start out—this one wasn’t leveraged ETF or anything, but I thought it was hilarious.
It was called Electrified Presents. Isn’t that a nice title?
And so what this one does is, well:
“What will Elon tweet next?”
So it involves Tesla.
“We don’t know, but this symphony seeks to buy the dips and harvest gains.”
Okay. Well, what it says:
“When the price rises above the 200-day moving average, the symphony shifts 30% of the portfolio into short-term treasuries.”
PW: Right, okay. So to “harvest” the gains.
JW: Yeah. Jumping in and out of the market and everything.
PW: Okay. So take your money off the table.
If you go win at Vegas, then don’t go and gamble it. And we hear stories about that all the time, where people go and they go to the casino.
And then they hit it, and then they go, “Wow. You know what? This is way easier than I thought it would be.”
And then they start gambling away their gains that they got in a lucky shot at the very beginning of the venture. And all of a sudden, they lose everything that they got.
And it’s heartbreaking when you see that happen. And people do the same thing when it comes to investing.
They think that they got this, and they feel that they’re really on top of this investing thing.
And I always tell people, if you have something—a strategy like that—your best bet is probably, for a lot of people, when they do something that is not evidence-based, for them to fail right off the bat, so they get it out of their system. Right?
Be Wary of Initial Success
JW: Absolutely. I mean, if you have a little success—and I did this.
I got in my 20s, and I lived out in California, so we were close to Vegas. And I’d get to go out there and, hey, I’d win a couple hands of cards.
“Oh, this is easy. I can do this!” and everything.
And then I’d go home a couple hundred dollars, which I didn’t have at the time, in debt. Luckily maybe have enough money to buy a sandwich on the way home, those types of things.
And you can always hit those little runs. It makes you think this is easy.
And it definitely applies to investing. You go out and you buy a couple things and think, Oh, I can do this.
But then if it’s an upmarket, it just seems like it’s the easiest thing in the world. You look back in the late 2000s, and they had the ads with the trucker who had made all his money, and he was just driving the tow truck for free because he just wanted to help people.
And it’s like, everybody can make money, until …
PW: As they always say, everybody’s a genius in a bull market. Right, yeah.
JW: Yeah. Or I think Warren Buffett’s phrase was “You have to wait till the tide goes out to see who’s swimming naked.”
PW: Yeah, that’s right. Yeah, exactly.
Do the Advertised Strategies Work?
JW: But back to this Tesla thing, what happened with this strategy that just sounds, okay, that sounds good on paper. Well, what that would have done is cost you 40% of the return on Tesla.
And now, we don’t recommend anybody go out and buy—
PW: Forty percent of the return. Oh, my good—
Wait a minute. You were going to look at a website that was telling you how to trade, and how did you find out that you would have lost 40% of your return?
JW: Well, the data is right there on their website.
PW: On their website? They actually admitted it?
JW: Yeah. Well, I mean, yeah, you look at it, and they have the data and everything.
PW: That’s not good marketing.
JW: And a lot of it is even probably worse when you put in trading fees and stuff like that that probably aren’t fully accounted.
PW: Well, that’s funny you say that. There’s a huge investment firm, huge asset management firm.
I mean, these guys are advertising that “we align our interest with yours” and all the right stuff. And they actually publish their returns data, and it’s not pretty.
And so it amazes me.
I think it’s good. You know what you’re getting into.
But it’s just fascinating. Oh, anyway, go ahead.
JW: So here’s another one.
And again, they’re telling you don’t have to be a “quant” or sophisticated or able to code, you just have to follow these strategies.
And you see something that: Wow, this thing’s really been doing good. And they have this one that was called Blockchain or Big Tech.
PW: Oh, boy.
JW: And so it “looks how the tech sector is performing to decide what to do. If the Nasdaq-100 is doing well, [the symphony] invests in companies that support the blockchain.”
If it’s trending downwards, it shifts into the five largest tech stocks: Apple, Alphabet, Tesla, Amazon, Microsoft.
And you look at the three-year track record, because crypto was hot, and those tech stocks were hot.
PW: “Was.” Operative word there.
JW: So it looks like, Wow, I can make a bunch of money doing this.
And so you jump in, and it’s January 2022, and what happens?
PW: Not good. Not good at all.
JW: Yeah. You’re down 30%, when the large U.S. stocks, by the S&P, is 17.78.
PW: And you have some international that’s just holding its own just fine. Yeah, wow.
Look for Long-Term Evidence
JW: So again, you have this track record that looks really, really good. But none of it is based on anything that actually has any evidence that’s saying it should work long term, that it makes sense, it’s robust data over decades and different countries and things like that.
It’s just some scheme that somebody put together that they thought they could sell to somebody, which—they must be selling it to somebody.
PW: Well, sure. Yeah.
JW: And here’s another one called Hedgefundie’s Excellent Adventure.
Doesn’t that sound nice? Like we’re going to go investing with Bill and Ted.
PW: I was going to say, wasn’t there a movie about that?
JW: And again, great 2021 track record.
PW: “Dumb and Dumber” or something.
JW: And that one—S&P 500, again, down in 2022: 17.78, as of the data from their website. Well, Hedgefundie’s Excellent Adventure: down 43%.
PW: Oh, my goodness. That reminds me of the Cathie Wood debacle.
I don’t know if you looked at her stuff lately. It was like, you couldn’t go any place, even in financial planning websites written to financial planners, and not see her name or what she thought was going to happen next.
And just an absolute mess getting into this “next tech” type of thing: What’s the technology of the future?
And it does, it sounds very, very logical.
Pay Attention to the Data, Not What Sounds Good
I remember going to broker-dealer conferences and going from booth to booth.
So as an investment advisor, you go to these conferences, and everybody’s trying to vie for your business, and they’re trying to get you to do business with them.
And I would go booth to booth to booth, and everybody’s story sounded good. Everybody sounded like they really had a great management strategy.
And I remember one—because I had become convinced that asset allocation made sense back then. And I remember one guy in particular caught my attention, and I listened to him for quite a while.
Thankfully for my clients, I never did anything. But what it was is he was talking about different funds, and you know how funds drift in style, right?
So you have a fund that’s investing in mid-cap stocks, and then they go to mid-cap value, or maybe they slide to large companies for a while.
And in my book “Confident Investing,” I actually talk about a study, and it was like 75% of mutual funds actually do that. So they drift from one area to another.
Well, if asset allocation is 91–94% of your returns, differences in returns in the Brinson, Hood, and Beebower study, then it makes sense that you really ought to pay attention to that, right?
So this guy goes, “Yeah, absolutely, 91–94% of your returns driven by that, and here’s what we’re going to do: If you have a mid-cap fund in your portfolio, or if you have a fund in your portfolio and they have a lot of mid-caps in it, and you decide that you want to have a certain percentage—”
Now I know that I wouldn’t use mid-caps, but back then, I didn’t.
But he would go, “Here’s what we’re going to do. They got a lot of mid-caps and—”
Well, let me use a different example because it would make more sense to you. Let’s say you have a fund.
You know that you want to have mid-caps. And then they decide to increase the amount of mid-caps in the portfolio, in this fund, and they have more concentration there.
So they add medium-size companies to the portfolio. And you have another fund that is a mid-cap fund, let’s say.
So this one was formerly a large-cap fund. Then they started to add mid-caps, okay?
I’ll get this straight. Because I’m thinking through it as I’m just kind of off the top of my head, thinking through how do I explain this to people?
So yeah, you got this large-cap fund. They decide to add mid-caps, okay?
Now you’ve got a mid-cap fund someplace else that is just staying mid-cap, okay?
He would say, “Here’s what we’re going to do. We monitor this every quarter.
“And if the mid-cap fund—let’s say we don’t need as much of it, because the large-cap fund added mid-caps. We’ll reduce holdings in the mid-cap fund.”
And I was listening to this guy, and I’m going, “So why would the large-cap fund add mid-caps? Wouldn’t they add it because they thought it was going to do better?”
And: “Well, yeah.”
And I said, “So isn’t it like going and cleaning your house, and you hire a person to come in and clean your house, and then you walk behind them and you throw stuff back on the floor? Isn’t that kind of like that?”
And: “Well, no.”
JW: It’s not like that at all.
PW: I’m going, “I don’t get this.” But that’s funny that that kind of stuff, that they’re talking about it as if this is really, really great.
Don’t they see the writing on the wall? I mean, they’re printing their own data on how bad it’s doing.
I don’t know how they don’t see it.
Invest Carefully and See Results Over Time
JW: Yeah. And it’s just shocking to me that enough people—because to me, this kind of goes in line with the whole Robinhood mentality and things like that, that investing is gambling and speculating.
You want to put it in something and hit it big, and you’re going to be instantly rich and all that. And that’s just not how it works, folks.
Investing done properly is kind of “get rich slowly.”
PW: Right. Right, right, right. Exactly.
And you mentioned that on, was it Robinhood? There was that one little thing, that paragraph in one of the publications I was reading this week.
It says, “How’s your Robinhood account looking? Turns out, traders are nursing losses that are worse than the rest of the market this year.
“Retail investors who jumped into the ‘whacked out, Fed-fueled market’ as lockdowns began have given back all their gains.”
JW: Shocking.
PW: “Morgan Stanley said. And now they’re souring on the market.”
Well, who wouldn’t?
And that’s it.
In previous generations we see people that came out of the Depression that soured on the market for their entire lives. And it wasn’t because the market was bad.
Because you take a dollar in 1926, and now it’s $10,000 in large stocks and $30,000 in small stocks. I mean, it’s not bad: $1, growing that.
And then you go, well, but people “soured on it.”
Where a dollar grew to $22 in Treasury bills. Just a comparison.
And you go, “What happened?”
Well, they invested wrong.
Well, probably back then, there wasn’t very good academic research back then or evidence-based. There’s no excuse now.
But back then, people really didn’t know, and they went and invested wrong. And then they got the wrong impression.
They came to the wrong conclusion that the stock market: bad. That was basically what happened.
JW: That was my grandfather. He wouldn’t his whole life: just CDs, whatever.
And so no matter what inflation was, going through 70s, 80s, and stuff like that, he was always a fixed-income saver, which cost him enormous amounts of money over his life.
PW: Oh, sure. Yeah.
Yeah, absolutely.
That’s kind of sad, when people come to the wrong conclusion based on the data. But it’s very common.
You’re listening to “The Investor Coaching Show” right here, SuperTalk 99.7 WTN.
Paul Winkler. Jim Wood. Be back right after this.
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