Are You Diversified?

Transcription: Segment 4

Paul Winkler: Welcome to the Investor Coaching Show. Paul Winkler talking about the world of money and investing, along with Mr. Work and Mr. Jim Wood, joining me on this lovely Saturday afternoon. We’ve got a lot to talk about, not the least of which is that workshop. I just want to make sure that I keep mentioning it. It’s going to be this Thursday. It’s going to be, everybody keeps asking about the election. Paul, what about the election? What’s going on? What’s happening there? What do you think about it? Do you think we’re heading towards socialism?

You think it’s going to send, it’s going to flip. I’m not giving you predictions on the election, but I will talk about in that workshop, some serious history on presidents, different administrations, different asset categories, not just the S&P 500. It’s all Wall Street wants to talk about is the S&P 500. I’m going to be talking about small companies, large companies, value companies, small value international, and just walking through some history, not just here in the United States, all around the world.

So you can sign up for that at paulwinkler.com/webinar. Sign up for that. It’s this Thursday at noon to about one that we’ll be doing that. Okay. So guys, I think one of the things I want to talk about, there’s some really interesting stuff going on in the world of investing in terms of we talk about diversification and I talk about how Wall Street, the media, the financial talking heads, the mutual fund companies, certainly the 401(k) providers, certainly investment providers in general, big brokerage firms in general, all over the place.

Which Stock Market?

When you hear people talk about the stock market, typically, all they’ll talk about is large US stocks, S&P 500, Dow. Right now, one of the things that I have been discussing is that there could be some issues going forward for some of these larger companies. Now, if you look at the past five years and a lot of people,for a lot of people, five years is eternity. That is forever. If you have one area of the market that has outperformed over five years, it’s just forever.

And it becomes, you know, like in the late nineties, like you talk about IRA late nineties, it was tech stocks. It was just like, it’s a foregone conclusion. The future of the world is technology. And it is, I mean, it always has been. And because technology stocks had been outperforming in the late nineties, people just thought it was going to continue. Right? Yep. The rock and roll forever until it didn’t until technology stocks dropped by 70, 80%, something like that.

Yeah. You had, you had a huge decline, 70 to 80%. That means that you need like a 400% return just to get back where you were. If you go through a decline like that, that’s a big deal. That’s a really big deal. Well, one of the things that I’ve been talking about a lot lately is the domination of just a few companies in the big indexes, like the S&P 500 and the Dow’s only 30 companies. So it’s not even worth mentioning, but the S&P 500 is 500 companies.

And these total market indexes, like in these target date funds, you’ll see a lot of times you’ll see these total market indexes. And you think you got the whole market when you got that? Well, no, because of the way those portfolios are put together, most of your money is in just the same companies and the movement of those total market indexes, which typically own route 3,300, the 3,600 stocks. The movement is pretty much in line with the lock step where the S&P 500. So if you look at it and go, It’s not really that diversified, right?

The Skewing of the S&P 500

Well, what could win what’s going on is you’ve got six companies as is. We often point out recently, six companies are like 25% of the S&P 500. I mean, it’s just dominating. It’s just a few companies. And it tends to be those companies that have benefited the most from what’s been going on with COVID. Right. So that’s been the issue. Well, I don’t know if you guys saw this news, but I thought this was fascinating. And I don’t know if angry played video games or anything like that, or like, you know, the apps that the game apps or anything like that.

Epic CEO, Epic games, accusing Apple of crippling the ecosystem for these games. They have basically come out and said that they have a monopoly on distribution of software and the monetization of software. And they’ve been excluding competitors is what they came out and made a comment about this. He says, you know, Apple’s doing all this stuff.

Jim Wood: No, we’re just going to throw in just a little clarification too. If anybody’s familiar with the game Fortnight. Hey, just going to say Fortnite maker sues Apple. Yeah. Google, after removal of game from app stores. Yeah. That’s how we just wanted to tie those two together. Cause if they don’t know Epic, if you have kids, they probably know Fortnite.

Paul Winkler: Apple and Alphabet, inc., Google on Thursday removed popular video. Well, you don’t like us competing with you. We’ll remove you. So they removed them. Yeah, they did. Yeah. Our store, our rules. that’s right from their app stores for violating in-app payment guidelines, prompting developer, Epic games to file federal antitrust lawsuits, challenging their rules. Now this is something that I have talked about as a possibility, because people say this is going to, Oh, this is great.

These companies have been doing phenomenal. I’m like, well, what happens if somebody comes in and says, we don’t like how you’re playing and we want to challenge, and we want to call you antitrust. And I actually gave some examples from history of telephone companies that were considered to be antitrust, the bell, the baby bells. Remember I did that show, Jim and I talked about how that actually ended up coming down. And it was interesting.

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Monopoly and Monetization

Cause you know, I don’t know how it’s going to happen. I don’t want to make predictions on any of that kind of thing. But I think it’s just interesting so that they’re coming back and they’re saying, well, you’ve got a monopoly on distribution of the software. You’re on the monetization of it. Cause you’re, they’re charging a 30% commission on the apps. Every time somebody buys this app, they’ve paid 30% commission to the store and they’re saying, well, there’s no other game in town. How else do you buy this thing? So, you know how St. Louis you’re going to pay, you don’t pay us or you’re not gonna sell your app.

That’s all there is to it. Well, you know, your app has actually been scrutinizing this for awhile and you know, the reality of it is politically it may be hard to ignore after a while. And it may happen to be that all of a sudden, some of these things start to get scrutinized a little bit more here in the United States and Epic games, they’re trying to make lots of noise to get the attention of regulators. And they have come out with a commercial, which I thought was really interesting.

If you have seen this commercial, you may recognize it from my past Superbowl guys. Remember when they did the Superbowl commercial and it was a 1984 theme, Apple did the commercial and it was a 1984 theme. And a bunch of people are in a theater, in a dark theater. And there’s a person on the leader as on the screen. And you know, somebody will have picked in the same commercial, literally did the same thing, walking into a crowded theater and a bunch of minions are in there watching their leader on a screen, you know, their eyes bugged out watching the screen.

And this superhero that’s probably from this Fortnite game, comes in with a hammer and everything else is in black and white. So it’s like very 1984 type of look. Right. So 1984 was Big Brother was going to take over everything. And, and you may remember the very popular book, but a guy walks in with this hammer and throws it. We’re going to prevail, smash. And of course, you know, the hammer gets thrown at the screen and the screen comes crumbling down.

So that they’re basically saying, that’s it, we’re coming up against you and we’re gonna fight this whole thing. And you know, so you look at that and then say, what if this catches on you will be really happy if you were diversified And did what I’ve taught on this show for 20 years, you can be really sorry if in my humble opinion, if you do what Wall Street has been teaching forever, which is chase yesterday’s winners.

The Danger of Concentration

That is the danger that we see in the investing world right now. And always there is a significant, it’s unbelievable, concentration right now. And I don’t know. What do you guys see? Do you see that when people bring in their investment portfolios, when they walk in predominantly what you, what do you see?

Ira Work: I see exactly what you’re saying. I mean, as I had shared with you earlier, you know, I had an appointment earlier this week, a guy came in with a brand new recommended portfolio, five different funds, Oh, this is a credit union portfolio, right? Five different funds were the American funds, three of them were basically balanced funds between stocks and bonds. One was a US government security fund. And then there was another corporate bond fund or something, but the three blended funds of stocks and bonds or all S&P 500 companies.

So it was all weighted very heavily in the top five that you’re talking about. Well, what’s interesting to me is one of the things you said when you were telling about during a break, you made this comment. What was interesting to me is that the advisor had done some of the analysis work that normally we would use to look for problems. Literally, you didn’t even have to run the report. No, actually your report is showing all the problems right in front of you. And when I pointed out, when I pointed out what was actually in the investments recommended, he’s like, you’ve told us more about client recommended. The clients says, you’ve told us more about what he’s recommending.

And then he told us, wow, that’s just, but it’s amazing to me that the advisor didn’t see the problems. I know it, and it was plain as day. I mean, it’s all you have to do is know what to look for. And it was an issue with the same stocks being held, the same areas of the market, the same asset classes, the same price to book data, same price to earning ratios. And, you know, as far as the segments of the market and the sectors, and even the Morningstar graph on these reports, they were all concentrated more towards very large, kind of in a blended area between growth and value.

It was just, it was frightening. Yeah, it really is. And I get the attraction because I share this with people and I did just during the workshop that I had taught on Thursday night when I showed track record investing. And I said, “So let’s say you go next door. And he shows you these top 30 managers and says, we’re not really sure which one. So we’re going to use these top 30 managers and they got a 10% return over the last five years. And you come in here and I say, okay, we’re going to use something like the index, the S&P 500 index.

And it got a 7% return where you’re going to want to invest your money.” And they say, well, next door. And I’m like, okay, here’s how that would have turned out. And then I show those five, those 30 managers actually had a 5% return and S&P had a 16% return. So I said, even though you made 5% relative to the market, you actually lost 11%. And this is why investors typically underperformed the market. As we, you know, we get from the research from Dalbar.

Diversification

Jim Wood: And we look at so many of these funds too. And we talked earlier about how concentrated some of these indexes are in those six stocks. And you look at some of these funds and they’re even more concentrated, literally having positions of 8, 9% of some of these stocks.

Paul Winkler: A really good point, Jim, and the top 10 holdings, it’ll list it out. Or, you know, just, or 35% of the whole portfolio, it’s supposed to be a mutual fund. You think, Hey, it’s a mutual fund. I’m diversified. But you look and every, well, most of what’s in there is actually about 10 stocks.

Yeah. It’s people that could be in for a rude awakening. If any of this antitrust stuff goes through because they’re so concentrated, unknowingly. And some of these really big companies, and they’ve been the winners recently, but, you know, realize it has been a different world recently. You know, you don’t have a Corona viruses coming along every day that really help out a technology industry that helps people work from a distance. So one of the things that I point out when I see like the list of mutual funds, and then I do that overlap analysis, and I see you got four or five, six funds all owning the same thing.

Ira Work: And I asked, well, are you diversified? And I’m like, yeah, sure. And you know, they think that diversified because they see four or five, six mutual funds. And then when I showed them the same stocks in the fund and all the funds, and I’ll just use an analogy. If you had a $100,000 and you went to four different banks and put $25,000 each and bought a one year CD in all four, did you diversify your investments? And like, no. I’m like, no, what you’ve done is you’ve diversified the name of the company holding some of your money, but you didn’t diversify your investments.

Rethinking Working Remotely

Paul Winkler: Yeah. The only reasonable thing that you could say that you did, right. Was if maybe you didn’t, you were bumping up against the FTAC limits going home. So it’d be a good reason to have several banks. But yeah, I know you haven’t helped yourself in the least bit. And you know, the reality of it is the Coronavirus isn’t going to be around forever. It’s not going to be something that we’re going to be dealing with with all of the different research. If you didn’t hear the previous segment, make sure you check out the podcast because in the podcast, I actually go through some of the recent research regarding that on a previous segment, but isn’t something we’re going to be dealing with forever. And literally right now, what’s happening. There was an article in the wall street journal saying the companies start to rethink remote work.

It isn’t so great after all. And it’s fascinating because some of these companies that have benefited have been because they’ve helped other corporations dealing with remote work, you know, computers and technology and those types of things. But companies in general are starting to find that it’s not so great having people work from their home anymore. Now, why did it work out so well in the beginning, it’s fascinating. The reason it worked out so well in the beginning was when people were initially, according to the Wall Street journal, when they were initially sent home and said, Hey, go work from home.

They worked their butts off because they were worried sick that they were going to lose their job altogether. So they work super hard from home, but as time went on and they realized they weren’t necessarily going to lose their job, their work ethic has slipped actually, according to this article and it’s not working out so well, number one. Number two, another thing is that camaraderie between employees, they found is a huge deal. People will have casual, constant conversations with coworkers passing in the hallway, which are helpful to the business and that has not been happening.

So that’s another thing that has happened. And other things that have been happening is like for example, you have new employees coming in and it’s a lot harder to train somebody remotely than it is to train them in person. So that’s been a problem. They’re finding all kinds of problems with remote work that didn’t show up in the very, very beginning.

Ira Work: It makes me wonder if company loyalty would actually begin to falter because all of a sudden, you know, I mean, you’re going into the business every single day. And it’s like, this is where I go to work. This is where it goes to my friends. And now all of a sudden, you know, you’re not showing up at the building, so you don’t really feel a connection to the company. Sure. And then it’s like, well, I can do this for anybody. I can work from home for anybody.

Paul Winkler: Yeah. That’s a really good point. And you can work anywhere, right. Because that’s exactly what’s happening in San Francisco right now, big moving trucks are coming into San Francisco and they’re moving. People are moving out in droves, out of San Francisco, according to another article in the Wall Street journal. And what they were doing is they were finding that these are people are moving out because San Francisco’s really, really expensive. The cost of living, the tax rate in California is like 12%. And then you have on top of that, you have, you’ve got taxes for sales, which are equivalent to what we have here in Tennessee.

And you got property, you got all of these taxes and a high cost of goods. And you know, it’s, it’s just ridiculous living there. And what people are doing is they’re actually going, I’m going to Phoenix, I’m leaving. So they’re leaving and going to Phoenix. And I can imagine, as you’re saying, I read that they get to Phoenix and they go working out of this for this company out of San Francisco. But why the heck couldn’t I work for a company out of New York from Phoenix. I mean, what’s the difference? So you’re right. Loyalty may go down as well.

Ira Work: Well, there is. And if you’ve been following the news, there’s a big flight from the big cities, whether it’s New York or California into the suburbs, a lot of people are relocating from Philly, from New York to Florida. Yeah. I was listening to an interview of a guy that owns a moving company. And he said the same house from California to Arizona. It’s now costing $4,000 to move the family. But to go from Arizona to California is $400 because.

Paul Winkler: Right, right. Not leaving. Yeah. Cause you’ve got to return the vehicle. Yeah. Yeah. Oh man. Yeah. That’s that’s right. I’ve seen that before. All right. That’s it for the Investor Coaching Show today. Hope you enjoyed it, with my friends Ira Work and Jim Wood. I am Paul Winkler.

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