Transcript
Paul Winkler: And welcome to The Investor Coaching Show. Paul Winkler, talking about the world of money and investing. Yeah. Interesting week, once you say I did a video this week and, you know, I thought it would be kind of fun to just, we need to do something that is going to be bad for business.
People Will Adjust
Maybe raising taxes, maybe raising regulation, maybe costs of energy going up. These are all things that I hear, you know, and these are all things that people are talking about. Well, this is going to raise the price of gas and so on and so forth. And what I like to point out is that people are rational and people want to take care of themselves, you know? So how are they going to take care of themselves? They’re going to do whatever they’ve got to do to adapt to whatever curve ball is Thrown at them. You know? So let’s say let’s use the gas example. If fuel costs let’s say go up and gas costs this much more per gallon for gas or whatever. You know, people are going to drive less. Maybe they’re going to commute less. Maybe this whole thing with, you know, with, let’s say doing your meetings online becomes a bigger deal because they don’t want to commute. And they don’t want to spend time in traffic. You know, I remember the seventies when we had, you know, carpooling and then people, you know, doing that, or they were turning down their thermostats.
But let’s say that we do that. Or maybe that we go and start to move more towards some of the new technology that is making cars even more fuel efficient, faster. And that’s not unlike, you know, the whole idea of having online meetings. And we’ve had online meetings. We’ve had the technology for these types of remote meetings and being able to do, you know, big conferences, long distance from each other. We’ve had the technology for quite a while. Why is it that we’re all really good at it now? I mean, we’re all very well versed on how these various technologies work now. Why? Because we had to be when we literally had no choice in the matter.
We’ve got to get good at the technology of transmitting documents back and forth to each other in a way other than handing them a sheet of paper, you know? So, you know, you can’t go and say, I’m going to hand you this sheet of paper. And we adapt to the circumstance and, you know, it’s, it’s like we, we often hear about Elon Musk with the electric car and, and, and we go, well, you know, wow, you know, who’s the next Tesla. And the reality of it it’s there are a ton of companies out there doing all kinds of things to improve upon some of the technology that has been invented.
What Happened Last Time?
And you know, that is really something that we’re doing to a great extent right now we’re seeing that type of work being done everywhere. So you’ll look at that and you say, well, what if they increased taxes? You know, what, how are we going to respond to that? Well, you know, you look at how they responded. Last time taxes were higher than they are now. Now we don’t know when taxes are gonna go up. Could they go up? Will they go off? There’s a good shot it might happen. Well, what did corporations do last time? Well, they did corporate inversions. He also, they basically had these inversions where they were able to avoid the taxes. They lent money to each other. Company A lent money to company B and vice versa.
And they avoided the taxes in that way. Or maybe, you know, what people do is they find other ways to reduce their taxes, you know, through trusts work and you know, those types of things. So company companies adapt. And the point is what do you do if let’s say, as a person, either your income goes down or your expenses go up, well, maybe you, if your expenses go up, you do substitution. You find something else that we’ll do as a product that will serve the purpose of whatever you’re trying to do. Or what you’ll do is maybe stop buying things.
Maybe you change your purchasing behavior. Maybe you get a second job or you change jobs, or you do something else to increase your income, But whatever you adapt. And the point is, if you’re a CEO of a company, you’re the board of directors of a company, you are running a corporation, you’re going to adapt as well. Why would we think that a corporation is going to act in any other way, other than what you would do? You know? So when we get nervous about the stock market, I think it’s misplaced because we have to realize that the stock market is running. They’re companies that are run by people and their job is to increase the profitability of that company, whatever way they got to do it.
Now I’m not necessarily saying that the economy is going to be great, and the other things that they do are wonderful for the economy, but the reality of it is they have the ability to change direction and do other things, You know? So if we have, have some of these changes that people worry about, I don’t worry about companies adapting. Matter of fact, I like, you know, what, if we have inflation, Oh my goodness. Well, I, you know, prices go up. Who’s raising prices, companies. What do you own when you own companies? When you own stocks, you own the companies that are going to raise those prices. So you have protection against that. Now there are certain types of investments that could be negatively affected by that.
Investments That Could Be Affected
As a matter of fact, I was reading an article. You know, it was yesterday about this topic, about bonds and some of the risks with interest rates rising. Well, why were interest rates rising? You know, Because you have inflation concerns. Well, if you have inflation concerns and you see interest rates going up, if I’m running to put my money in cash, I’m not helping myself. If I see interest, I may go, wow, interest rates are going up. I can get a higher return on my fixed rate investments. That’s great. It isn’t necessarily. If inflation is going up too, that’s just appreciating the purchasing power of the dollar, You know?
So you gotta realize that so many things that we think we’re going to do to help ourselves actually end up being very counterproductive. Now, I actually covered a study in this workshop that I thought was funny, because all of the things I’m talking about are ways that people are thinking, well, maybe I need to adjust this. Maybe I, I need to go and do this. Maybe I need to buy bonds. Maybe I need to put money in cash. And, you know, often point out that when the people want to put their money in cash, why do I put it in cash? Because I don’t trust the government. And I say, well, who is it? Cash, you know, who, who issues cash to the government, the treasury, you know?
So yeah, you’re literally investing in everything in whoever is actually issuing the very cash that you’re putting all your money into. You’re putting all your trust in them, so to speak, which is kind of, it’s kind of ironic if you think about it. But this one study was, it was a study that was done years ago, but is one of those ones that I think I need to really bring back to your attention. And it was a study by fidelity investments. Now fidelity is a very actively managed oriented fund company. They, you know, have some indexes, but they have a lot of active management again, you know, hundreds and hundreds of funds out there.
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Active Management Is Not Good
And one of the things that I have always talked about on this show is active management is not good. You know, trying to pick stocks and trying to time the market. It doesn’t work real well. It hurts returns. Now it’s not the end of the world. So I’ve had people that come in with 401(k)s and go, Oh my gosh, I got this 401(k). And it’s got nothing but active management. And I’ll say, well, you know, it’s not the end of the world. It just increases expenses. But you know, one of the things I often point out is behavior is the biggest deal. When it comes to investing. If you were to say, what’s the number one reason investors get low returns. It’s behavior. It’s how we manage a portfolio.
It’s when we buy, when we sell, when we trade, how we rebalance the portfolio, what asset categories we choose, you know, what asset mix is we choose and how we come to those decisions and, and how we get polled by every sway. Then, when new information comes out, something happens, or maybe I’m getting closer to retirement. I get a little bit nervous and I get more conservative, or, you know, maybe I’ve seen some TV program or somebody getting really, you know, doing really well in this certain investment. Or I see an ad for something, or, you know, I talked to another financial person and the financial person says, Oh, I think you’re doing that. Oh my goodness, that’s crazy. You ought to be doing this. Look at what your return would have been. If you’d done this over the past 5 years to the past 10 years, this is all stuff, you know, this is real.
A Fidelity Study
I mean, this is what people get pulled by. Well, this study was of a fidelity that they actually reviewed, which investors did best. And what they found was hilarious was the title of the article. If you want good investment performance, here’s the advice. Forget that you’ve got an account. They had this, this conversation between these two guys, and much of their discussion was talking about waste. People mess themselves over, not exactly their words, but close enough, because nothing gets in the way of returns.
Quite like somebody that thinks that they’ve got a great idea or somebody that’s gone on the internet. And, you know, they found some article on something. I remember it was something I saw. It was “your internet search does not Trump my medical degree” or something like that. And I, and I liked that. Cause it’s kind of funny. It’s like people think their internet search trumps when you have, you know, multiple financial planning degrees and you know, no, there’s a lot that people don’t know what they don’t know.
If you think about it, you know, people basically forgot that they had an investment account. And when you forget you have an investment account, what are you not likely to do? You’re not likely to trade. You’re not likely to go and tell the investment manager, you know, I’m really nervous about the presidential election.
And I think you ought to pull the money out of this and put it into this. Or I would think I’ve just seen this thing. And I think out to go do this, I think y’all to increase my cash holding, I think grease my cash holdings. I think the stock market’s going to take off, you’re not likely to sabotage the portfolio is basically what they’re saying and it’s behavior biases. And this is what I always talk about behavioral biases. You know, I knew that was going to happen. It’s hindsight bias. I knew that was going to happen. And you know, then you go and, and, and say, well, you know, now I think we have need to change it right now because I knew that was going to happen. Well, if you really knew that it was going to happen, whatever it is, you would have bet the farm on it. You would have mortgaged your house.
You know, this investment has done so well. I think that, you know, the past performance it’s apparent, this person really has skill managing money. I think we all move our money over to this investment asset mix. Or I think we’re out to do this because here’s what the president is likely to do or what Congress is likely to do or whatever. So these are all behavioral biases and this is what drives the bus. But the point is this, keep in mind that, you know, anytime you’re thinking about going and changing something around, remember this study, you know, it really gets down to who had the best investment performance at this fund company.
Don’t Make Investment Decisions Based on Emotions
People who forgot that they had an account. And because they didn’t know that they had money someplace, they weren’t tempted to do it. Now, I’m not saying that, you know, forget you have an account in never, you know, when, when we look at we have accounts, we’ve managed them rebalancing daily. We threw in inside the US and incite international. And we rebalanced at least quarterly based on deviations from target between US and international and fixed income. And, and, but what we’re doing is, is doing what constitutes prudent investment management based on 70, almost 80 years of academic research. But what we’re not doing is making changes based on what we think is going to happen next or based on, based on emotions. That’s what it gets down to.
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