Paul and Jim talk about some recent grumblings from users about Google’s ads and privacy policies that remind them of how other household companies like Sears or Walmart have also struggled or have been usurped by other companies. They take the opportunity to give investors a larger perspective on what successful investing looks like and why buying single stocks is always dangerous.
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Paul Winkler: All right. Welcome. This is “The Investor Coaching Show.” Paul Winkler. And Mr. Jim Wood is hanging out with me now. He decided to slide in here and help me out.
Jim Wood: I was trying to think of something funny with “slide,” but …
PW: No, don’t. It’s not a comedy show, man. Come on. So have you used Google lately? Like searching? Do you use it typically to search for stuff?
JW: Actually, I’ve moved away from Google and use DuckDuckGo and some other stuff.
PW: You are not alone. You are not alone. There was actually something … “Is Google Search Getting Worse? A Viral Post Points to Cracks in Alphabet’s Search Supremacy.”
Why is this article interesting to me? Just because I look at how things change as time goes on and you get this idea that something is always going to be best, the biggest.
And don’t get me wrong, it’s still pretty doggone big, but there’s a lot of talk out there that people are a little bit upset about being tracked—one of the things that people talk about. But ads. I don’t know if you notice it, I’ve noticed it.
If you go and do a search … well, you don’t use it, so you wouldn’t notice it.
But the number of ads are just unreal that I’m seeing these days when you go do a search and you’re like, “Okay, the first 18 responses are all ads.”
And I quickly scroll down past it to get what I really want to see. I don’t want to see somebody’s ad to me about what I’m searching for, because it’s typically not nearly as relevant as what I’m looking for.
But I thought that was just interesting. And it just reminded me of the Sears thing. I talked about for years and years how Sears was that. It was the bomb.
You had the Sears catalog, and everybody waited with bated breath until the Sears catalog came in. And you could build a house. They had houses for sale in the Sears catalog. I’ve got one. Have you ever seen an old Sears catalog?
JW: These things were thick.
PW: Not only that, but they had everything that you could possibly think of inside of them. So it was crazy.
And you know, of course, as time goes on, Walmart took over the world. And as time goes on, people are getting upset at Walmart because everything’s made in China and people may move on to …
Well they’re moving on to Target, a lot of people. And then they may get upset with Target and go … It is just funny how things change.
But people buy individual stocks and they’re thinking this is going to be it forever. Did you know?
I think I saw a stat this week. The average holding time for stocks—I forgot how long ago it was, it was several years ago, maybe a couple decades, two, three decades ago—the average holding time for a stock was seven years. It’s like six months now.
JW: I’m really surprised because of the day trading mindset of a large part of the population that it’s even six months for stocks, because there’s still so much actively managed trading.
Buying and selling frenetic: “We want to own it today. We want to sell it tomorrow.”
PW: So when you manage a portfolio and this is … man. You know what? It’s funny.
Was going to talk to you about something and just get your input on something, and it literally turns out that I started just … you know me, I tend to be a bit random.
And it just turns out that’s exactly what I was going to ask your input on. I just thought it’d be kind of fun to hear what you had to say about this.
Got into a conversation with somebody during the course of the week, and it’s a person who listens to the show on a regular basis. So I figured, “Hey, this person would know an awful lot about the content.”
And asked me a question, and the question was about talking about his portfolio. I guess he had a portfolio at work or something like that.
And he said, “Yeah, Paul, I don’t touch my stuff. I don’t move things around at all.”
And I said, “Oh, that’s good.”
Because we were talking about market activity, and he says, “I don’t tend to change anything.”
And I just started to ask a few pointed questions to find out what he was invested in.
Well, it turns out he was invested with a large mutual fund company that I was very familiar with.
And I said, “Well, it’s good because you’re doing the right thing. Is your fund manager doing the right thing? Is your investment manager doing the right thing?”
And in this particular case, the person happened to own one of these portfolios where they pay an extra fee at work to have them manage the portfolio.
And I was just curious, Jim, do you run into that where people are paying an extra fee at work where they have one of these … well, I won’t name the company, but they’re well known for saying, “Hey, you can do this on your own, or we can help you for a small management fee, and we will manage your workplace 401(k).”
Have you run into that much? And what has been your experience with it?
JW: It’s certainly not uncommon. I would think it’s a smaller part of plans out there that have that available, but it’s definitely not uncommon.
And people will bring those portfolios to us and inevitably I’m like, “No, it kind of looks like everything else. It’s overweight in large U.S. stocks. It doesn’t have much small. It leans toward growth rather than value.”
I mean kind of the day-in-and-day out problems that we tend to see in portfolios that are brought into us anyway, and these people are paying for that advice.
PW: They’re paying for bad advice. And typically the way people are sold on this is, you don’t have time to watch the market day in and day out. So we’re going to watch it for you.
And one of the things that you want to look for … I’m going to just tell you some of the warning signs that you want to look for that there is a problem. A) They’re doing this. Pull out one of their statements and please look at what they are doing.
If you look at the average investor, and I’m just going to give you a motivational speech here. You ready for your motivational speech?
Take it or leave it for what it’s worth. But these are based on numbers.
Let’s say that you have $100,000 saved for retirement and you’re putting away, let’s say $10,000 a year. And let’s say that you have 30 years before you’re going to retire.
If you look at what the average investor has turned that into—and this is based on Delbar Research out of Boston; they actually do research on investor returns and how much money that they have.
If you look at the average return, 30 years, $100,000 that you’ve got right now, $10,000 you’re popping in there per year, so you’re putting in another what? Another $300,000, right?
So what is the account value at the end? About $732,000. Now that’s the average investor.
But what if we go and say, “Well, we got to take inflation out of that equation.” Right? So we’re going to have to remove inflation.
So let’s say that inflation was 2.5%. So now we’ve removed that and say, “Well, what’s that in purchasing power today?” About $440,000.
What is the income that you can draw from that? $16,,000 $17,000 somewhere in that neighborhood. About $17,000, right?
Now we take that and we say, “Okay, that’s what it was.” What should it have been in had somebody actually just captured market returns? If they didn’t play around? About $3.5 million.
JW: That’s more.
PW: That is more. But of course, we have inflation. So let’s back inflation out of that and look at it at that point. It’s about $2 million dollars. $1.9 million dollars.
But here is the reality. If you look at stock prices compared to earnings, and that’s where returns come from, stock prices are not, right now, outside of the norms. When you look at what they’re actually costing for every dollar of earnings that you get.
So you look at that and say, “So how much income is that?” About $80,000. Which is more than … what’d I say? $17,000?
JW: Yeah.
PW: Okay.
JW: I know which one I would prefer.
PW: Yeah. So you look at that and go, “Okay, there’s a difference here.” Maybe listening to what I’m about to tell you—and what we’re about to tell you—makes some sense.
So, number one, pull out a statement. Look at what they are investing you in. Please do this.
Take the names of the mutual funds or the ETFs, pull out a sheet of paper, and put them on a sheet of paper. Every investment that they have you in.
Now take the names of those funds. If you don’t want to use Google, you don’t have to use Google. DuckDuckGo is going to work just fine, or whatever you use, either one.
And then type in the word “Morningstar.” Now, do not use this for rating your funds or anything like that, just the information that I want you to look at.
Look at the style box. It looks like a tic-tac-toe box.
There is going to be one of those boxes in those nine, that is darker than the rest of them. That tells you primarily what that fund is investing in.
Look to see if it’s U.S. or international. Look at which one is darkened. Note it.
If you got 15 funds, draw 15 of those tic-tac-toe boxes.
Draw those boxes next to the name of the fund. Fill in the one that’s darkened.
You see a lot of that.
If you see 15 funds, and 10 of them are in the same box, you definitely have a problem there. There’s just no two ways about it.
And the reason I started to hem and haw is well you might have one fund that’s a Canada fund and another one’s a U.K. fund. But you never see that so forget it.
I’m just going to back out. Because that’s one thing.
What else might you look for, Jim?
JW: Well, one thing, sometimes they list individual companies that they’re investing in and you notice you see a lot of the same names.
PW: That’s a good thought. Top 10 holdings. That’s a great point.
JW: And what you’re talking about, putting those numbers ending up in the same box, and so what you end up looking like, if you’re familiar with a Venn diagram, is a bunch of overlapping circles.
PW: Right.
JW: I was literally, before we walked in here, looking at a portfolio, just had a couple of funds, but two of them had Microsoft as the number one holding. One of them was 8.5% and the other one was almost 5%. So you think …
PW: Whoa.
JW: I have two funds and they have all these holdings. Well, they’re not really that diversified.
PW: And that’s exactly …. I was laughing because you said Venn diagram. I have that calendar: “How to Look Smart in Meetings,” and one of the calendar items was to draw a Venn diagram.
JW: Oh, there you go.
PW: So you know what one is. There you go. I’m impressed.
So that is what you can do is look at that. Look at the top holdings and you can find that in your prospectus if you’re not into going on the internet, look at the prospectus because they have to send you one and you can look at that.
The next thing I want you to do is this. When you look up the Morningstar fund, now, this is not necessarily all that important when it comes to bond funds, but it is important with stock funds.
Now, that is not necessarily something that’s going to be greatly helpful if it is a fund of funds, if it’s a mutual fund that holds other mutual funds. So that won’t be tremendously helpful.
Another thing you can look at is whomever you’ve hired, look at, for example, their ADV. An ADV is a form that if you have a registered investment advisor, that they have to file.
Look at what they say their job is. So if you see terminology like, “Well, we look for undervalued markets. We look for opportunities. We watch for market conditions. We look at what’s going on in geopolitical circles and we look at what’s going on economically and in the macroeconomic cycles, or we look at microeconomic cycles.”
If you see that kind of language as that is what they perceive their job to be, then you could have a serious problem. Well, you probably do have a serious problem.
I’m trying to be kind. But you’ve got a problem on your hands because basically what they see their job as being is beating the market.
When I gave you those numbers a second ago, that was the biggest problem. That was the biggest problem that investment managers really caused: under performance due to their desire to try to outperform markets through these types of activities.
JW: Most people believe that you shouldn’t gamble and speculate with your money. I mean, that seems pretty normal.
Some people like to gamble, have a little fun, but in terms of your long- term savings, you shouldn’t gamble and speculate. And I think most people think that’s how it should work.
PW: Right.
JW: Problem is, what you’re doing in that instance, is you’re paying somebody to gamble and speculate with your money.
PW: With your money. And have way more fun than you’re having. And you’re paying for it, so that’s dragging down the returns even more than what I was just talking about.
So if we’re looking at the difference in accumulation in those two examples, that’s pretty stark.
Now, if we break it down and say, “Okay, what else might be happening inside of these portfolios where they’re choosing things for you?”
They are often driven by the events of the day, so they don’t want to look like they’re out of touch.
So they may actually do something that you’d go, “Really?”
But there’s a tendency with investment managers to do what’s called window dressing.
Now, window dressing is they will wait until toward the end of the quarter and they will look for particular stocks that have done well. And what they’ll do is, they’ll add those companies to the portfolio, thinking there’s a possibility that some of you will be watching them and will have heard about these companies that had good returns in the news.
So your natural tendency as an investor is to, at the end of the quarter, when they report on holdings or report what they’re doing, “Well, I want to know if I own that fund. I heard about this. Oh look, my fund manager does have the fund. And aren’t they smart?”
And it gives you this warm, fuzzy feeling.
And that is called window dressing.
JW: Great example of that was back in 2008, when stocks were just crashing from actually November the previous year, and they had been going down for about eight months, but about the first six months of 2008 commodities—
PW: Good example.
JW: On fire. They were just doing phenomenal. So all of a sudden, all these managed funds that are—
PW: Yeah, Fidelity.
JW: Funds and everything.
PW: Fidelity I like to pick on, because it went to their number one holding.
JW: Yeah. And just all of a sudden everybody has commodities and everything, but you can’t invest in the rearview mirror.
But it’s exactly like, “Well, we want to look smart even if we weren’t smart.”
PW: Or they add private equity or whatever the latest trend is, and they’ll do that all the time.
So this is something that you look out for, because let’s just face it, many times these investment managers, and it’s not that they’re trying to necessarily lead you down the wrong path, but they think they have an ability that they don’t have.
And this is what we found when John Stossel was throwing darts at the stock table and Burton Malkiel, professor from Princeton, is, “So why are they doing this?
And he had another great line.
JW: And they’re paid to believe they have that ability.
PW: I was going to say, that was like his line. They know that they don’t know, but they … I forgot how he said it. But they get paid big bucks for acting like they know.
JW: I think what you’re … “It’s hard to change somebody’s opinion when they are paid to have that opinion.” And I just butchered the quote, but—
PW: No. That wasn’t the quote that I was looking for, but that is another really good one.
So often what happens, and I’ve had this, where I’ve tried to convince financial advisors that what they’re doing is wasting their time, and they’re spending their wheels.
And I’m blue in the face and I’ll give them tremendous amounts of evidence as to why what they’re actually engaging in is actually harmful and not helpful, and I can’t convince them. And why? Because they’re paid big bucks for holding that opinion.
And I can’t fault them. I was there. I remember when I sold insurance products and … I didn’t sell much in annuities. I could never get behind annuities, even though I would’ve been paid well.
PW: I did really try hard to believe in whole life and permanent and variable life insurance. But the problem was that what ended up happening is I just became convinced that it just didn’t work.
But I kept you hearing from different voices out there saying, “This is not a good idea. This is not a good idea.”
But I fought it like crazy. And finally … I guess the outcome was okay. I’m thinking back to those times because here’s what happened to me.
Jim, when I heard that it wasn’t okay, and when I saw the evidence that it wasn’t okay, instead of going, “Talk to the hand, I’m going to go sell this stuff anyway.” I just didn’t sell.
But for a lot of people, it’s, “I got to feed my family. I’m either going to feed my family …”
PW: And I had the opportunity to sell health insurance because I was working for a company that was really good at it. Not everybody has that opportunity.
They may work for a company and your job is to sell whole life policies. Your job is to sell variable life policies. Your job is to sell annuities, period. End of sentence.
Like if you work for a bank, you don’t find banks in the health insurance employee benefits industry. That’s not what they do.
Therefore their job is going to be to sell that annuity to you and a lot of times it’s just like, “Don’t confuse me with the facts. My mind’s made up and I’ve got to keep my job, so I’m just going to sell whatever it is my manager or the owners or the powers that be at this bank want me to sell.”
JW: Well, I think everybody that works with us in the different offices has some version of that story you just told, in terms of we came from the broker-dealer side and the company doesn’t teach you about the academics of investing or any of that. They teach you how to move products.
And it’s just like where I worked, the guys who sold all the annuities, they’re the ones who had the corner offices, went on all the nice trips …
PW: Ain’t that the truth.
JW: And stuff like that. And I just was uncomfortable with a lot of that, so I did okay, but I certainly didn’t thrive or anything because I never felt great about it.
PW: Hence, the reason that it is so important to get on the academic side. I can’t preach it enough. But those are just some things that you can do to protect yourself.
Again, if you’re somebody who doesn’t know anything about this, don’t expect that the fund companies are going to be doing this. Just because they’ve got these huge buildings doesn’t mean anything. The huge buildings are gotten because of the levels of fees and expenses and trading costs that go in their pocket.
If you look at the research and the data it’s like that professor who said one time, he was going down to Wall Street, getting a tour, and the person points out to the harbor and says, “Look out there. There are all the brokers’ yachts and the investment companies and the management companies’ yachts.”
And the professor looks at them and goes, “Where are all the clients’ yachts?”
That’s the key, really. Hence, the reason this show exists.
I want to educate until you’re blue in the face, because I want you to get this stuff. You can get it. And the more you get it, the harder it is to take advantage of you.
Back to that style box really quick, before we go to a break, back to that box I was talking about that looks like a tic-tac-toe box. What do you want it to look like?
I want a little bit in the top left-hand corner that gives me a large value, a little in the middle top, which is going to be a large blend. I want some of my funds to be down in the bottom, the very bottom middle, and the bottom left.
I don’t want all nine. And you may think it needs to be all nine, but I want those boxes right there.
JW: Now given, this is hard to do sometimes, giving a limited number of options in your 401(k), but you’re always really trying to just kind of make the best of whatever your options are that are available.
PW: And if this is something where you’re going, “This is over my head. This is overwhelming.” That’s what we do.
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