Paul Winkler: Welcome to “The Investor Coaching Show.” I am Paul Winkler, here as always talking about the world of money and investing. Also joining me here today — this doesn’t always happen — are Anne Sawasky and Evan Barnard.
Anne Sawasky: Yeah.
PW: Where’s my ice cream?
Evan Barnard: I thought about bringing some, actually.
PW: I’m kidding. I’m kidding. You know everybody’s got to have a weakness. You can’t go through life with no weaknesses.
EB: It only took me 16 years to find yours, but by golly, I finally found a way to poke the bear.
AS: It is tough.
EB: It is true.
AS: Because half of the stuff he puts in his mouth, I don’t even know what it is, honestly.
PW: Yeah, there you go. That’s what it is.
AS: Yeah.
PW: But it’s funny because I have all these friends of mine that if they’re going to get me something, it’ll be one of these gift cards for an ice cream shop.
EB: Oh, super.
PW: I have several of them I haven’t used yet because I really don’t do it as much as people think. I am way more disciplined than people actually think I am. But I joke about it a lot.
EB: I’ll be raiding the desk drawer after the show.
PW: That’s not where they are.
Multi-Generational Wealth
PW: Okay, so we talk finance here, and I know, Anne, that you always have come loaded for bear on things and I have things to talk about, and a lot of topics to really get into today. There’s just a lot of stuff going on, is there not, in the world of finance?
AS: Always. Always. Yeah.
PW: It’s always, yeah, it’s always something.
EB: We can send men to the moon, but we can’t make an investment without a prospectus.
PW: That’s right. Okay, so I’ll let you go, Anne. You start off. Where are you going to start?
AS: Well, I thought this was an interesting article — Jon Foster talking about how to do multi-generational planning and the psychology of big wealth.
PW: Okay, now you’re talking my language here.
EB: Swinging for the fences right off the bat.
AS: Why not? Why not?
PW: I like it. Okay.
AS: I don’t know. I just thought this was interesting because this gentleman, he owns a firm that deals with legacy wealth type people. He said a lot of their clients — high net worth clients — have been dealing with wealth since the 1800s.
EB: Wow.
AS: Or they could be new money, it “might be a guy that started a business and it just took off.” Right?
PW: Okay.
AS: So what he does with them, which is different than the average investor, and I think we can all —
PW: Oh, that’s kind of fun.
AS: Yeah. I mean I just think it’s kind of interesting to me.
PW:
Sometimes people think there’s a secret sauce with wealthy people that doesn’t exist and that they think differently.
So, I’ll be really curious to hear what you have to say here.
AS: Yeah. I thought this was kind of fascinating. So he said that the ultra-high net worth families, they’re not the ones that come in your office and say, “How did my investment do versus the S&P 500?”
PW: Well, it’s kind of like Warren Buffett, who said, “I put all my wife’s money when I pass away into an S&P 500 fund.”
You know why? Because you can put up with all the risk in the world, and you could put up with 20 years of no returns like the S&P has provided historically, and it wouldn’t be a big deal. She wouldn’t run out of money. She still has billions.
AS: Right, right.
PW: Exactly.
AS: So I thought, Now that’s kind of an interesting insight. So he said that they have a better ability to think multi-generationally and that they are not as worried about what the current return is, but about how it’s invested for the long term multi-generationally.
The Biggest Reason Investors Fail
PW: Well, I would think that you’re dealing with trust work quite often and a lot of people don’t have to jump through all those hoops where you have to go and set up things and do some kind of an irrevocable trust. Well gosh, I think about trusts, and one of the things that you’re dealing with when you’re dealing with trusts, Evan, is what? What’s the biggest issue with trusts?
EB: Well, the law could change for one thing. Taxes.
PW: Thank you.
EB: Tax issues, yeah.
PW: Yeah, the taxes are what I think about. And one of the things that we talk about here on the show all the time is this: What is the biggest reason that investors fail? Biggest reason? Oh, this is your favorite —
EB: Behavior.
PW: I was going to say it’s your favorite question, Evan.
EB: I wasn’t sure if it was a trick question.
PW: This is not a trick question.
EB: I’ll take behavior for 500, Paul.
PW: This is totally up your alley.
Yeah, so behavior is that people trade too often and they try to figure out where markets are going to go. They try to figure out which stocks are going to do better than others.
Well, what would be the death knell of creating terrible, terrible tax problems with a trust would be anything where you’re trading and realizing capital gains. So they’re allowed to maybe let things sit and simmer longer than the average investor.
And for that reason alone they would probably have better returns since they’re not messing around with it. Because they’re not messing around with it, they’re not worried about returns.
But the irony is that because they’re not worried about returns, they probably end up with better returns.
AS: That’s true.
PW: Because they’re not doing the things that they think —
AS: That cause the taxation. Yes.
PW: And the things they think they have to do to get higher returns, which don’t result in higher returns.
EB: Yeah.
PW: Yeah, isn’t that funny?
EB: Yeah, that’s interesting.
AS: Yeah.
Establishing Money Goals
AS: So anyway, the other thing that he was saying is it’s important to establish goals and define the legacy for the clients. So he said, “I’ll ask them, is your goal to be the richest person in the graveyard or bounce the check to the undertaker?” Now I know a few boaters that would say the latter.
PW: But it’s funny though. I was talking to somebody the other day, and we were talking about the aging process in general. You know what it was — I was at a Treveca meeting, and I was actually mentioning this to a bunch of people around the table, all these professors. And I made the comment that I feel like I live life in a time machine — that’s what I like to tell people.
I see people in their 20s and what they think about, what they think about in their 30s, what they think about in their 40s. And if they’re in their 40s, I tell them, “I know what you’re going to be thinking about in your 50s. I know what you’re going to be dealing with in your 60s and 70s.”
So I’m in a time machine where I can tell you kind of what’s coming and I’m going to tell you, if you’re in your 40s, and you have that bumper sticker that says, “I’m going to spend my kid’s inheritance or my grandkid’s inheritance,” that typically people’s mindset changes and they don’t like to bounce the last check. They don’t like that.
They go, “Wow, you know what? I’m not going to be around on this planet forever and I do want to leave something.”
AS: Right. So that’s the third option: Do you want to create a legacy supporting your family intergenerationally or philanthropically with your charities or community, et cetera? So when they define those goals, of course, that then is when we do our true —
PW: Purpose.
AS: Purpose for money.
PW: For sure.
AS: That’s really what that is.
But you have to help them define that so that they can start directing it. Especially if they’re first-generation wealth, they don’t know how to do it.
They don’t.
PW: Right. That makes total sense because how do we know how to raise kids? We watched our parents raise us. It’s the same thing.
How we know how to do anything is typically because somebody did it before us. For sure. Yeah.
AS: Right. Right. And that’s where having advisors — financial advisors and attorneys and accountants that can help with that process — is really valuable because it’s something that, especially if you’re not a multi-generational wealth family, is totally new to you. So we need help on those things.
PW: Yeah. And sometimes hurting bias isn’t terrible. That is following what other people do, for those of you that don’t know.
EB: Yeah. It’s interesting. I mean, those three questions I don’t really think would be limited to the ultra-high net worth investor.
AS: Well, I agree with that.
EB: I think somebody could have 400 grand, a million. You can define ultra-high net worth however you want, but I think all clients really have those three options.
I want to bounce my last check. I want to leave something to family and charity or so forth, or I just don’t want to be a burden. That’s kind of the middle road for most people.
AS: Right.
Seniors Reflecting on Their Lives
AS: That’s why I think this is such an interesting discussion because I think really when you look at the way he’s handling higher net worth people, why is it really any different?
EB: They’re people.
AS: Yeah.
EB: Yeah.
PW: Years and years and years ago — I know you guys heard me tell this story before, but I usually talk about a different aspect of the story — I did the commencement speech for one of the local colleges. They said, “Hey, could you come in and speak?”
I said, “Well, yeah.” And they said, “So I heard you’re a good speaker, blah, blah, blah.”
I’m like, “Okay, great. Thank you. What do you want me to talk about?”
And he said, “I don’t know. What do you want to talk about?”
EB: Market timing.
PW: I will never forget that — “What do you want me to talk about,” that conversation. And he said, “I don’t know.”
And I said, “You know what? I’m going to talk about a study that I just saw.” And he said, “What was it?”
I said, “It was a study of seniors age 90-plus, as I recall, and the three things that they would do differently if they could live their lives over again.” And he said, “Oh wow, that sounds cool.”
So number one was that they would’ve taken more risks. They would’ve stepped out and they would’ve done things.
You always hear that. What would you do if you knew that you couldn’t fail? That type of thing.
The second thing is that they would have spent more time contemplating, which is what am I here for? What do I want to do? What do I want life to look like?
Now I added a fourth thing.
EB: What was the third?
PW: I’m going to get to that.
EB: Oh, okay.
PW: I haven’t gotten to the third yet. I missed something.
AS: You were really sharp picking up that he said one.
PW: Nailing it, baby. Yeah. So the fourth one I added was that they would actually — because a lot of people say this — continue the education process.
That has always been something that I said, that I would do something every single year after I graduated from college. And I think I’ve been pretty good at doing that — constantly staying in education.
Leaving a Legacy
PW: The third thing was that they would’ve created something that survived them. And these are people 90 years old. So that’s why I think this is a fascinating conversation. People want to know.
The example that I often give is when we went camping as kids, and I will never forget this. We would pull out of the camp. See, we had one of these campsites that’s dirt and it’s a little cut-out area. And it was a very heavily wooded area that we would go to, this campsite in upstate New York in the Adirondack Mountains.
And we would go in there and we would camp and then we would leave. We’d pull the campers out into the road off to the side so people could still get around. And we would rake.
First of all, we would build a fire for the next people that came in. We’d set up the wood, and we’d leave them a note on how much we loved camping there. And we would leave this note in front of it, and we put kindling in there. We’d leave some firewood all set up for them to set their first fire when they got to the campsite.
AS: Oh, so you didn’t keep it lit?
PW: No, no, no.
AS: Good.
PW: No, we would set it up so they could do that. And then we would rake the entire campsite, kind of like you’d rake a shag rug in the ’70s, and that place looked — and we would leave it better — than we found it, was the idea.
AS: Yeah, yeah.
EB: Yeah.
AS: Absolutely.
PW:
That’s the idea behind legacy to me, is thinking in terms of leaving a place better than you found it.
AS: Right. Right. Yeah, that’s perfect.
Focusing on Happiness
AS: Here’s the other interesting thing with the higher net worth. He said he would often help them by not focusing on the money, but on their happiness in life because he found a lot of them, they were very successful in their businesses or whatever, but they’d say, “Why am I not successful at home?”
PW: “What Happy People Know,” that book, that was that guy’s story. Basically, he had an unhappy, miserable, terrible marriage. And he would get into arguments with his wife and his kids, and they didn’t like it. And that was the whole thing was to get him to start focusing on other people.
And the thing that I remember from that book so much is that he literally told him the first thing, the first assignment, was to go to the kids’ cancer ward. And he said, “What do you mean go to kids?” He said, “You want to be happy, don’t you?” He said, “I’m not that unhappy.”
EB: Do you remember the name of the author offhand?
PW: I do not.
EB: Because I’m thinking that Justin had sent me a heads-up, this is now probably four or five months ago, about I think he’s a Harvard MBA professor that actually wrote a book, and he was talking about contentment and happiness. And there’s a course that he teaches in the MBA program. It’s always full to the gills with students.
PW: Dan Baker. I just looked it up.
EB: Okay. I can’t recall.
PW: Yeah. So this guy, he was a therapist and what he did was he had this client that was a rich guy who took copious notes when he was doing the therapy sessions. He would write everything down.
AS: The client would?
PW: Yeah, the client would write everything down. And he literally had all these things he had the guy do.
Then what ended up happening at the very, very end was things were better, his life was better. He was going, “Oh my gosh, things are so much better.” And he said, “Can you do me a favor?”
As I recall from the book, he said this, Dan Baker said this. I don’t think I’m confusing the book. I’m pretty sure this is it.
He said, “Could you give your notes? I want to write a book.” And that was it.
AS: Yeah, yeah.
PW: The same one?
EB: No, this guy is Arthur Brooks.
PW: Arthur Brooks. No, no, no.
EB: “How to be Happy.”
PW: Oh heck yeah. Arthur Brooks is great. Oh yeah.
EB: It was a great about an hour-long lecture on some of the results of some of that research. Really fascinating.
PW: Yeah. Yeah.
Arthur Brooks is fascinating because he gets into the two stages of life. When you have the first stage in your life, fluid intelligence is what it’s all about.
You create things, you come up with new things, you’re able to solve problems really, really well. You’re able to calculate math equations a lot quicker than an older person would.
An older person maybe used to be able to do it, but now they can’t anymore. Their brain doesn’t work quite as quickly in that particular manner.
But the older person has wisdom that they’ve accumulated that the younger person doesn’t have.
They have all the stories and things that have happened to them. So Arthur Brooks is phenomenal.
EB: What do you call it? Crystal intelligence?
PW: Crystallized intelligence.
EB: Crystallized.
PW: That’s right. Crystallized intelligence. That’s correct.
AS: Yeah.
Stock Allocation and Business Heirs
AS: So anyway, another one, which is an obvious one, but it was determining stock allocation for clients.
He said, “When someone asked me with the people of great wealth, ‘how much money should I have in stocks,’ the answer was, ‘I don’t know.’ The answer is the right allocation and risk assets is the maximum amount you can own and never get scared out of the market no matter what happens.”
EB: Yeah. Works for everybody.
PW: But I think, here’s my thing about that.
I think you can educate a person on the right asset mix because risk tolerance is problematic.
And the studies have shown it to be the problem because when markets go down, everybody’s risk intolerant.
When markets go up, they’re risk-averse. They’re like, “Bring it on, baby. The market’s going up.” And so I think that that is partially true.
AS: Yep, right. I mean, I think certainly our philosophy is that our education will help keep you —
PW: No question.
AS: — from making that singular worst mistake by panicking and selling or whatever.
PW: Yeah. As I often tell people, you’re sitting there worried about the market going down. If the market goes down and never comes back up, it’s because earnings went away.
And if earnings go away, taxes go away. If taxes go away, the government goes away and everything falls apart. So you start to understand that it’s not as scary anymore.
AS: That’s true. That’s true.
Anyway, then just the last thing is the long-term compounding of money in a tax-aware manner, which we kind of addressed earlier. But the other thing he gets into a little bit is the wealthy and unhappy part.
I’ve seen this. I used to sell businesses. Very often, successful business owners don’t have a child to take over the business.
So they look at it and they’re not happy with their children because they want them to be something they’re not. So that is a struggle that business owners have to deal with when they’re selling. Or maybe they’re not selling and they want to keep it as a legacy, but they don’t have an heir that is capable.
PW: Well, and so often you see that where somebody’s trying to control what their child turns out to be.
AS: Yeah, because that’s really kind of what we’re talking about.
EB: And that always works out really well.
PW: I often have to tell people, “You got one person you got control over. You ready to know who it is? Look in the mirror. That’s pretty much all you have control over. You can only control how you respond to people.”
And God makes us all different. So often when some kid takes over your business, they run it into the ground. That’s why so few businesses last beyond one generation. Right?
AS: Right. Two or three at the most usually. But yeah.
Parents’ Expectations for Children
AS: So that’s part of the lack of happiness, is they are unhappy because that child isn’t meeting their expectations. So what do you do about that? And is it even a realistic thing?
PW: Is that a question for me?
AS: Go ahead. Go ahead. Yeah.
PW: Well, it’s interesting because when you look at, let’s say an experiment, let’s say we’re doing a laboratory experiment and we’re trying to figure out how people respond under pressure. What’s the best way to actually see how somebody’s going to respond under pressure?
The answer is to watch them, watch them, watch. And so many times what parents do is they’re watching, they’re trying to control, they’re trying to do what they can, and it actually puts the kid under greater stress, and they respond even worse under that type of stress.
Whereas we can look at it and go, “What did God put the kid on the planet to do? What are their gifts and talents? What is it that they do really, really well? Where do they lose?”
I always loved it because a friend of ours, of all of ours here at the table, Mark, would always say, “What is it that you do that when you’re doing it, you lose track of time?” Because that tells you when you’re in your element, when you’re really doing what you’re designed to be doing, and you just lose track of time because you’re in your gifts and your talents and the things that you really do well.
And what kind of problems can you solve? If I were in trouble, let’s say, or the way he would put it is this, “If one of your friends was in trouble, what would they call on you for?”
AS: Great question.
PW: “What would they need?” And I always love that question. So to me, that’s where the rubber meets the road — trying to force your kid into the position of doing what you do.
Sometimes the kid will be in their area of talent. I’ve seen it happen. But a lot of times, you’re trying to fit a round peg through a square hole.
It just doesn’t work. That’s not what they want to do. And then when they do it, they won’t do it your way.
EB: And two of my pegs are a thousand miles away in two different directions anyway.
PW: Right.
AS: Well, and they may not be successful at it because it isn’t something that’s their element.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
