Fundamentals of Investing (Part 1)

Paul Winkler: And welcome. This is “The Investor Coaching Show,” and I am Paul Winkler.

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Okay, so I want to talk about something near and dear to my heart. Now, I may be going back to the basics for a few people, but the basics are a good thing, because sometimes we forget stuff.

And one of the things that I have often pointed out to people is that you’ve got to get brilliant at the basics. It’s like, beginning of the football season, “Gentlemen, this is a football!”

That type of thing where you have to get brilliant at the basics. You have to start at the beginning and remember why do we do the things that we do as investors.

How Aggressive Should You Be?

Now, of course, a couple concepts that I want to hit right off the bat is, of course, when we invest, we look at time horizons. Now, how long before I’m going to be pulling money out of something?

If it’s going to be a very, very, very short period of time—one to two years—if I’m going to need all of the money, I’m going to spend every dime, then we want to put it all in cash if it’s going to be that quick.

If it’s going to be longer than that, we start to add stocks into the mix because now inflation is our big concern.

Back in the 1970s, you could buy a house for $30,000. Now, forget about it.

You can’t do that anymore. So you have to have something that keeps up with inflation.

And the things that people talk about as being inflation hedges, like gold, forget about it. It is not a good inflation hedge.

If you look at the worst performance for gold in modern history, it was in the 1980s when inflation was the highest. That’s when gold went down the most, so forget about it.

It’s just marketing that you’re hearing when you hear that.

If you look at fixed income investments, forget about it. They’re not designed to keep up with inflation.

Matter of fact, right now, you’re losing anywhere from 2% to 3% to 4% per year to inflation because it’s just not meant to be a protection against that.

Now, inflation is prices going up. And you know, when we buy things, we have a medium of exchange, which is dollars.

That’s what we buy things with here in America. If you live in Japan, it’s going to be yen.

If you’re going to live in Europe, it’s going to be a euro. It just depends on the country you’re in.

But that medium of exchange, it used to be: you go in and take your dollars, and you hand in for gold. You get gold back for your dollars, and vice versa, you can hand in your gold for dollars.

And you had something it was actually backed by, but now it is what people like to call fiat currency, and it is.

It’s not backed by anything. So hence, its value can go down because it’s not backed by anything.

How Interest Rates and Inflation Encourage Spending

And of course what happens is we want to have a little bit of inflation, because if we have some inflation prices are higher in future years, and people will buy things now rather than wait till they’re more expensive in future years.

So it’s not a conspiracy. It’s just the way it is.

Now, if we look at fixed income investments, you’re just getting an interest rate that appeases you enough that—instead of going and spending the money right now—that you might put it in there and spend the money a year later.

If I was going to buy a car right now, I’m thinking about, Yeah, I think I’m going to buy a car right now. But you know, I really don’t need a car right now. How about if I just wait a year?

Well, if I’m going to go put my money under a mattress or something like that, that $40,000 car is going to cost more next year. It’s going to cost maybe $45,000 or something like that.

Probably not that much of an inflation rate, but it could be. Let’s say it’s just going to cost more.

I’m going to go, It’s going to cost me—I’ve got $40,000 saved. If I wait a year, it’s going to be $45,000, and I’m going to have to come up with another $5,000 to buy the car.

I might think twice about sticking the money under a mattress and waiting a year to buy the car. I might just go, I’m just going to buy the car.

Well, a car’s probably a bad example with the chip issues right now, but you get the point. If it’s going to cost a lot more in the future, then I’m probably going to not wait, and I’m just going to buy the doggone thing right now.

And that’s the reason that we have a little interest rate at financial institutions, is so that we might be incentivized to put the money in savings and then wait a year to when we are actually going to buy the car anyway so that my $40,000 grows by something.

If it grew to $45,000, that’d be great. But you know, right now it’s not the case.

Interest rates are super, super low, and inflation is outstripping it because it’s kind of a weird period of time. And nobody really knows how long it’s going to last and if it’s going to be transitory or not, and that’s the big debate all the time.

Are Fixed-Income Investments Worth the Rate of Return?

But here’s the idea, is I know pretty much with fairly decent certainty that I’m not going to get a higher rate of return high enough to really compensate me, long run, for my money if I stick it all in fixed-income investments.

Historically, we go back to the 1920s and look at Treasury bills, and say, “Okay, what was the rate of return?” About 0.4%, right?

So I take that, and I go, “Okay, so how long does it take for my money to double?” And you get up to 130 years or even longer.

So you go, “Okay, that’s ridiculous.” You don’t want to do that.

But yet there are people that’ll go and do that all day long, and you can’t talk them out of it.

They’ll go stick their money in CDs, they’ll stick their money in annuities, they’ll stick their money in something that is safe. “Safe,” I should say.

And you can’t talk them out of it because they have this fear of the stock market. And as much as you try to explain to them that, “Hey, look, stocks are your only hope”—because what’s inflation? Prices going up.

And who’s raising prices? Well, companies.

Companies are raising prices on their goods, and they’re going to raise prices.

Now that could drive stocks down in the short run. People hear that and go, “Oh, the stock market’s going down! It’s inflation!”

You can have it happen. It may actually go up in the short run.

How the Media Affects Our Decisions

You’ll tie it—you’ll hear people tie things. The media, especially, try to explain to you why the market went up and went down.

And there are so many thousands and thousands of factors that they can’t possibly name something.

But you know what? If you’re going to do a news story, you better name one thing or two things, otherwise people are going to tune out.

So guess what? They’ll do it.

They’ll name a couple things that they think caused the market to go up or go down.

And of course, longer run, we look at stocks. And if you look at longer periods of time—two, three, four years plus—you see a hedging against inflation because prices go up, and companies charge more, and the earnings go up.

And you’re getting the earnings of the companies when you invest in them. So hence, that’s why we invest in the stock market.

Well, the problem is you don’t know what will happen outside of that. You may have a weakening of the dollar.

You may have a strengthening of the dollar, which makes U.S. or international stocks good. And you may have a difference in how things are produced and shipping costs.

And you may have logistic issues that actually cause big companies or small companies to do better than the other. You may have a crazy virus that causes one area of the market to do better.

I’ve talked about this before, and people are still surprised when I say it, that if you look at the S&P 500 last year and you take out just six companies—Facebook, Amazon, Netflix, Google, and Microsoft (now it’s not Facebook anymore)—but if you take those companies out, you basically have wiped out all the return of the S&P 500.

Now that is kind of daunting if you think about it. Now, there are other areas in the market that were up as well.

So if you just had all your money in that one area, you may have felt really bulletproof because you went up 18%. But the reality of it is there were just six companies that were responsible for all of it.

And so it’s the lowest performing area of the market. One of the lowest performing areas of the market so far this year is that.

And why? Well, those companies haven’t done as well, and a lot of those companies in that particular area of the market.

So if we look at the year, and we go, “Okay, so we don’t want to just own one market segment. We want to own small companies. We want to own value companies and growth companies and U.S. and international and various different types of companies to try to mitigate some of that risk.”

So that’s modern diversification, right? And as we’ve pointed out so many times on the show, if you look at the big fund companies, you don’t see that diversification.

Target date funds? Forget about it. You’re not seeing it there.

Why? Because investors like seeing their portfolio move with the Dow, the S&P, and the NASDAQ.

Markets Move Too Quickly for Us to Predict What’s Next

Listen to when they do reports on the stock market. What are they telling you?

What did the Dow, the NASDAQ, the S&P do? What do large stocks and large stocks and large stocks do?

It’s just ridiculous. But that’s the media again.

And the media is going to tell you—they’re great historians.

It’s like Warren Buffett said, if history were all there was to the game—I’m paraphrasing, but I’m probably pretty close—if history was all there was to the game, then the best investors would be librarians.

Why? Because they’ve got access to all the old media publications. They can give you access to anything.

And yet they’re not because it isn’t about what happened yesterday. Investing never is.

Now, new information comes out, and it moves markets immediately.

The example I give quite often is a video that we show when I’m teaching new investors, where I actually take the space shuttle Challenger and the explosion, and take the four companies that were involved in the putting together of that particular vehicle, and show how three of them went down 2%, and one of them, one stock, actually went down 11%. And it happened to be the stock for the company that made the O-rings.

So you go, “Whoa, are you kidding me? In, like, less than five minutes, Wall Street figured out what it took Congress six months to figure out?”

Yeah, that’s what I’m telling you. So markets move way too quickly for you to try to figure out what’s going to happen next.

The Problem With Index Funds

So what people do is they often come to the conclusion, “Let’s just throw all our money in an index fund.” And for large U.S. stocks and large international, yeah, indexing works quite well because those companies don’t change very often.

Very, very big companies. They don’t have a lot of change in those companies.

Now with smaller companies, you have a little bit of a problem with indexing because you have more change there. So small company becomes medium-size company.

And you have another problem because of the design. For a while, there was a commercial running for a professor from a university, and he was doing a commercial talking about how he didn’t like the way index funds were put together because it was lazy.

But most people just saw it, and they probably didn’t even know what he was talking about. But basically he was talking about how the indexes overweight the bigger companies and the less value-oriented companies.

Well, where do I expect more return? Smaller companies. More value-oriented companies.

So they’re underweighting what you expect more return in, and significantly what has done better so far thus far this year. So hence, index funds struggling.

Now what’ll happen is index funds will probably—it’s just a prediction—you’ll have them struggle, and then all of a sudden people go, “Well, that doesn’t work.” And then they go and switch.

Investors Are Tempted to Change Their Portfolios Constantly

And there’s another problem with investors. Constantly, they’ll look around and go, “What worked in the past two, three, four, five years?”

And then they’ll switch around. And the investment industry is really good at selling you and getting you to do something different constantly.

I mean, I look at my investment portfolio, and I haven’t changed the asset categories held in 20 years. Now I’ve rearranged things to capture those categories at a lower cost over the years, but I don’t make constant changes because I don’t get thrown by the media.

And in effect, it was a faith journey for me 20 years ago to say, “You know what? I’m not going to play this game anymore.”

Been a broker for 12 years, and it didn’t satisfy me. It didn’t feel like I was really getting what I should be getting out of markets based on when I started really studying markets and how they worked.

But what happened is I just decided that I was going to; glad I got off that train, because it’s a failed way of investing.

And you know what happens? The media will constantly come out with stuff, and they will come out with new information that tells you you’ve got to change what you’re doing based on what we’re seeing right now.

How Much of Your Investing Knowledge Is Actually Marketing?

I was actually doing a meeting with some of the various offices, some of my colleagues, and I was just digging through some stuff.

And I was just going through and saying, “Well, you know what’s been going on? Paul’s been out there doing a little bit digging through …”

“I got a big box just full of stuff. I’m going to share some of this stuff with you.”

Just a big box full of stuff throughout time. My goal is to get you to the point where you tune out when you hear somebody tell you that you ought to be making a change based on news, based on what’s going on, what’s happening in markets, based on marketing, and let’s face it, so much of the information we get about investing.

Think about, where do you get information about it? Just kind of sit back and write down things that you know about investing.

And think about, where did I learn this stuff? And I’m going to bet you anything that most of it was learned through a veiled marketing message someplace.

And here’s the thing. I may be learning about a certain mutual fund company.

I mean, back in the late ’90s, it was Janus. I mean, they were the fund company.

A.I.M mutual funds. Nobody could talk about anything else.

How Fortis at one time was a fund company. Probably don’t even remember who they were, but I’m going to tell you, in the early ’90s, they were the bomb.

And so what happens is we don’t think about it, but we’re getting … now today, it’s Vanguard and Fidelity, right?

We hear about—American Funds, another one.

We hear about fund companies, typically not thinking about the fact that we’re just regurgitating marketing.

You hear about target date funds. Why? Because your employers do it.

And why do they all do it? (And they’re not very well diversified.)

Well, they all do it because there’s safety in numbers. If everybody’s doing the same thing, there’s safety.

But I’m going to tell you, just 10 years ago, you couldn’t give away the target date funds. Nobody wanted them.

Ten to 15 years ago, about 13 years ago. Yeah. Somewhere between 10, 13, 12, 13 years ago.

You couldn’t give them away. Why?

Because they were very U.S. large company centric, and you had the dead decade—from 2000, literally a lot longer than that, to 2012—where you had no return in large U.S. stocks.

So nobody wanted them. Then all of a sudden, after 2008, then large U.S. companies—2009, good year, decent year, ‘10. And then you literally had a string of years that even to this day has been pretty decent.

Not as good as other areas of the market so far this year since Biden. But the reality of it is not terrible.

Investors Repeat Patterns Based on Past Performance and Marketing

So therefore what’s happening is they’ve got new marketing life. And people are talking a lot about, “Oh yeah, yeah, it’s what I’m doing, doing this target. Oh, I’m doing a life strategy fund. Oh, I’m doing an asset allocation fund.”

Not to mention the research we see on asset allocation funds going back over 35 years: the returns are terrible. Terrible. Investor returns in these portfolios, according to DALBAR Research, is terrible.

Why? Well, because guess what? Nobody wanted them after a bad string of years from 2000 through 2008. 2012, actually, as I said.

Nobody wanted them. Why? Because they had terrible performance.

Why? Because they happened to be overweighted in an area of the market that had terrible performance.

Why were they overweighted there? Because in the late ’90s, that area of the market did have good performance.

So people bought based on what had happened in the ’90s, not knowing that the next 12 years would be an absolutely abysmal period in history. Terrible.

And then the next 10 years, good, and now you’ve got people buying them again.

And this is the pattern that people go through over and over.

And you want to know why investors get bad results? It’s because most of the information they’re getting about investing is veiled marketing.

Don’t Be Swayed by Marketing From the Media or Financial Advisors

And sometimes people pick up on it. They’re going, “You know what?”

You hear people: “I don’t trust financial advisors.” That thing about millennials saying, you know, “Thanks, but no thanks!” to financial advisors.

And it’s because they’ve figured out that it’s marketing. What they haven’t figured out is the media is in marketing.

What they haven’t figured out is that they’re buying stocks (because that’s what they’re doing) in Bitcoin and things like—and they’re doing the same thing. They’re making the same exact mistakes previous generations have made by buying based on historic past performance.

I mean, you look at the thousands of cryptocurrencies out there. The only reason anybody was talking about Bitcoin at all was because it was the winner.

If it wasn’t the winner, you wouldn’t be talking about it. Nobody would be talking about it.

I don’t even know the names of the cryptocurrencies that had terrible performance.

You know why I don’t know them? Because nobody’s talking about them.

You know why nobody’s talking about them? Because they failed.

So what happens is we do this.

And the fund companies that had the best performance from 2000 to 2012, you don’t even know who they are. Bet you never even heard of them.

And the reason? Because they were in areas of the market that Americans just don’t invest in.

We don’t hear about international small value. You don’t hear about those asset categories at all.

So you see how we are just driven by the media, and we don’t even recognize it as investors.

And we go, “I’m not investing in the stock market.” And you’ll hear somebody do that.

They’re going to stay away. Why do they stay away?

They stay away because they don’t know anybody that got great returns. But you know why you don’t?

And the reality of it is markets: huge returns, through historically. And I’ve talked about this many times before.

Tremendous. A dollar in 1926 is $10,000 in large companies. And ridiculously, some of these … and that’s the lowest performing area of the market, going back to that period of time.

And you look back through history, and you go, “Wow!”

It has been the greatest wealth creation tool known to mankind. The best protector against inflation.

And some people kind of intuitively know that, but they haven’t benefited from it because of where they get information.

Learn Enough to Become Immune to the Messages of Panic

So let’s walk through a little history here. My goal is to inoculate you from the messages that you are hearing and you will hear.

It doesn’t matter what time of the year, what year, what decade, whatever. These are the things that really, really get us.

So of course, what was happening last year—2020, March—of course, you had a huge downturn.

You had a huge downturn in the market, and you had big, big drops in the Dow, the S&P 500, small companies, small-value companies. There was no place to hide.

And it was because: looks like business is going to be bad going forward.

And I remember coming on here. I remember coming on this show and going, “Folks, stop listening, tune out, don’t pay attention to this stuff.”

And doing videos. And it’s what I always do.

And back in, I was telling somebody this this past week. I said, “Yeah—”

We were talking about, they had been clients for a long, long time. And they were just talking about 2008.

I said, “Ah, yeah, you remember that?” And he said, “Oh yeah, sure.”

I remember this guy’s wife, she was going, “I remember being really scared.”

And I said, “But you know what? You didn’t mess it up. You didn’t go and respond and act on your fear.”

And I said, “You got great credit for not responding and acting on that fear.”

Because our brain, when we go into fear and the amygdala kicks in, that little fear center in your brain kicks in, it is so easy to let that thing take over and just go, “I got to do something. Don’t just sit there. Just do something.”

And then, of course, you go and do something, and you lock in the losses, and you’re messed up.

In 2008, December 2008, I remember doing video after video. Going on TV.

Oh my goodness, I can’t remember. I don’t remember how many times I went on Fox 17 and Channel 4.

And I went to—various places I went on, and did interview after interview on radio and just telling people, “Here, let me tell you what’s going on. It’s okay. Don’t worry. Don’t panic.”

And I did 30, I think it was 32, 33 videos in the month of December.

It’s supposed to be Christmas season. I should be having fun.

I should be relaxing and enjoying myself, and no, what am I doing? I’m doing videos and interviews because I knew that investors, and mainly sending this stuff to our clients, are going to self-destruct if I don’t do this.

And you know, of course, we had a huge year in 2009. The markets recovered incredibly well, even though there were people that were going on TV right up to the bitter end and saying the market’s down.

They kept telling me, “Oh, it’s terrible. Oh, if you need your money back in five years, please take it out of the market.”

One of the biggest talk show hosts on finance was telling people that. And one of the biggest authors of financial books out there, this lady, I’m not going to name names, but you can probably guess who I’m talking about, was telling people, “If you need your money back in five years, get it out of the market completely.”

And these people are people that the public looks at as having credibility. They’re big-name people.

And of course, what happened? They told everybody to get out.

You had this article, it was “Worst Mutual Fund Outflows Over 15 Years.” In 15 years, we had the worst outflows.

When was this article written? It was written March 25, 2021.

Which was what? The market low last year.

The very market low, they’re saying, “Hey, look, the worst mutual fund outflows.”

So you have huge amounts of money—it was like 30% of investors’ money over the age of 50— that had just completely pulled out of the stock market at the market low. Locked in the losses, and then with the huge gains that occurred for the rest of the year, they weren’t there.

You go back to 2009. Remember I said that 2009 was a huge up year, right?

Beginning of the year, what do you see? “Broken banks.”

Business Week. I mean, it looks like a window shattered. And you see the words “Broken Banks,” and the words are all broken up as if somebody had shattered a window.

“The bailout is a bust.” They’re talking about TARP, the bailout.

So that’s what they were doing. The Troubled Asset Relief Program.

I remember doing shows on this. I remember going into the radio station and talking about the TARP plan and going, “Guys, this is why this is—don’t worry about this.”

“People have got your eye on this, but I’m telling you, there’s a whole bigger picture out there than what’s going on with banks and what’s happening with the TARP plan.”

And you know what? The reality of it was the TARP plan was a government spending program.

And the point that I made about—you can have government spending programs, and they scare the living daylights out of you because you look at it as if you look at your own family budget.

It’s more complicated than that. But you look at it that way and go, “Wow, this is going to be really bad, big government spending program.”

And I’m not a fan of big government spending programs, but I look at it and go, if I own stocks, they’re going to spend money, and what’s going to happen?

That money is going to end up going to companies that make things and put things together, and it’ll all end up in the bottom line of profits of companies.

And what do I own when I own stocks? I own the companies. So I look at it that way.

So what happens is in 2009, yep, banks spent lots of money. They bought assets off of the bank balance sheets that weren’t worth anything or were worth very little.

And the crazy thing is they actually made money on TARP, the government did. Who would’ve thunk, right?

Because when you saw all this stuff—“Broken Banks,” “The bailout’s a bust, and the sooner we realize it, the better”—you think, This is terrible. This is going to be really, really bad.This isn’t going well.

What ended up happening was just the opposite.

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