Is AI Propping Up the Economy? This Is Why We Diversify

Paul Winkler: Welcome. This is “The Investor Coaching Show,” and I am Paul Winkler. We got pop filters here and everything. Wow.

I’m just not used to being at the station. Yeah, we’re actually at the station today, Evan and myself. Evan Barnard is here hanging out with me today.

Evan Barnard: Had to drag you downtown.

PW: Do you have a pop filter on yours?

EB: No.

PW: Oh, man. Okay. Watch those P’s and S’s, man.

EB: I’ve got the cover on. It’ll be fine.

PW: He’s got the cover on it. It’ll be fine. It’ll be all right.

Yeah, that’s right. That’s right. That feels so fancy today.

Yeah. Oh my goodness. There is so much to talk about this week.

I don’t even know where to start, but that’s never stopped me before. So, how are you doing, man?

EB: I’m doing very well. Actually, a little bit sore.

PW: Sore?

EB: I was stringing electric fence, and doing some yard work and stuff like that out this morning before I did some show prep.

PW: Oh, gee.

EB: I’m looking forward to sitting still for two hours.

PW: The chickens?

EB: Cindy takes care of the chickens.

PW: Cindy takes care of the chickens. You’re just going to be off the grid before we know it, aren’t you? That’s the way it’s going to go.

Companies Going Down in Value

PW: So there is some good stuff to talk about. I have a lot of audios this week, and I think it’s going to be educational, some of these topics that came up this week.

I don’t know if there’s ever a week that’s not busy. Got to have some interesting conversations with people that were outside the industry. Outside, not clients, but just regular people, and got into some really interesting conversations regarding what they perceived investing was all about and what is investing. This couple of ladies I got into this conversation with.

She said, “I got to read your book. I got to read your book about investing,” and one of them said she had purchased a used copy.

I said, “I won’t take that personally. You couldn’t even pay full price for my book.” No. Then, another one found the old version of the book, Evan, “Above the Maddening Crowd.”

EB: Oh. Yeah, yeah.

PW: And found that for $130 online.

EB: Wow.

PW: And I said, “All right. Somebody values it.”

EB: That’s better than the S&P.

PW: I know. I know. It’s not bad.

That’s some growth, right? That’s funny.

So, we got into a conversation. I said, “So what are you hoping to pick up?”

“I just want to know what to do.” She likes the numbers and, “I really want to get into the numbers.”

I said, “What are you hoping to find?” “For example, companies and things like that, how to figure out which companies I should be investing in.”

I said, “Well, first of all, don’t do that.” She goes, “Well, why?”

I said, “Well, you just think about this: What do you think the job of the investment manager is? What do you think their job is to help you with when it comes to investing?”

She said, “Well, help me just make sure that I stay out of companies.” That’s the way she said it, “Make sure I stay out of companies that are going to go down in value.”

EB: Oh, wow.

PW: And I said, “Okay, all right. So, find companies that are what? That they’re getting ready to go down in value?”

“Yeah, that’s kind of it. I want to make sure that I avoid that.” I said, “Okay, that’s fair enough.”

EB: That would make her normal.

PW: That would make you normal. That’s right.

Then I said, “Okay, so what your assumption is, is that those companies aren’t selling for the price that they ought to be selling for, that they’re selling for more than what they should be selling for.”

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“They’re selling for a price that is significantly higher than what it’s going to be once the news comes out that says, ‘Hey, it’s a bad company.’”

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“And the job of the investment managers is to make sure that you avoid that.” She goes, “Yeah, that’s kind of what I’m thinking.”

I said, “Well, that would be something that you would think professional managers would be able to do, and guess what?” And I told her the data on it. She’s like, “Oh my gosh.”

Non-Systematic Risk

PW: I said, “Yeah, you think about it. We want to avoid what’s called non-systematic risk,” and I explained what that is.

I said, “Imagine we were sitting in front of a large table. I want you to imagine that this large table is the ocean, and you’ve got thousands and thousands of boats on it. What’s the likelihood that a couple of these boats could sink or maybe a handful?”

She goes, “Yeah, I suppose it could. Yeah, a big storm comes along. Sure. Yeah, absolutely.”

I said, “What’s the likelihood of all of them sinking?” And, “No, that’s not going to happen.”

I said, “Okay, good deal. So, in effect, what happens when we invest in all of these different types of companies, you’re getting that risk off the table that you happen to have the select number of companies that sink, and that you end up in that situation where you lose everything, and that’s where people historically have lost everything is when they do that type of activity, and that’s the problem you run into.”

And I said, “Think of what companies want to do. They want to use your money. They want to pay you as little as they possibly can to use your money. You want to get paid as much as you possibly can, so you come to a price that is reasonable, based on what you want, highest expected return, and what they want, lowest possible cost to use your money.”

She’s like, “Oh. Well, that’s kind of …” And we just got into that conversation, and I got into a lot more in depth.

And what was really cool is she walked away, and her friend, who was numberphobic, walked away from the conversation, and because I hit it in a way that both of them would be okay with what they were hearing, and they wouldn’t feel like they were overwhelmed, they both walked away, going, “This is something you can grasp, isn’t it?” I said, “Welcome to the message for 25 years on ‘The Investor Coaching Show.”

EB: Yes. Yeah. I mean, that is one of the most welcome conversations I have with clients is somewhere down the line, I mean, it could be in an initial meeting, but usually it’s a few weeks into the relationship, maybe months, is the disinterested spouse or the concerned spouse, whichever one —

PW: For sure.

EB: — it could be the husband, it could be the wife, or if it’s widow or divorce, just the individual makes this statement: “Wow. I understand this.” That is just the most gratifying thing to me.

PW: And it’s critical.

EB:

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Whether the account goes up or down, once you understand it, you’ve already won 90% of the battle.

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PW: And then you don’t worry about it so much, because it makes sense, and we fear that which we don’t understand.

AI and the GDP

PW: Okay, so a bit of talk about our favorite subject, AI and GDP, some conversation that was taking place on TV this week, so check this out here.

Speaker 1: What does this economy look like when you take out AI?

Speaker 2: It looks much softer, but you have to be careful. We were just talking about …

Speaker 3: We were just talking about this. It’s a crazy series of calculations.

S2: The contribution of AI investment in GDP in the first quarter of this year was 1.5%.

S3: Of the 2% growth.

S2: Three-quarters of the 2% advance came from AI.

S3: Information office equipment and intellectual property are both places where AI is showing up, but there’s also a big import component of it that you subtract from it.

S2: Yeah. When you think about GDP, you have to subtract reports, right? Because otherwise you’re double-counting what you’re actually producing, and gross domestic product is actually growing at a 2% clip with a 1.5% contribution from AI, but two percentage points of imports in that, so net net or probably a slight drag when it comes to AI.

PW: Isn’t that interesting?

EB: Wow.

PW: That, I thought, was so interesting, simply because we look at, “Okay. Why is the economy doing well? Why is the economy doing fairly well?”

Some people would argue that it’s not doing well, but you look at markets and say, “Well, why are stock markets …” Let me go there first. “Why are stock markets doing so well?” Like last year, and we talk about international, Evan, how well international markets have done.

EB: Right.

PW: Especially the smaller companies, how well they did last year, the international small value set, which is something that most investors don’t have in their portfolios, but up like 52%. Why is it that that area has done so well?

Why are U.S. markets performing well? They did last year, so far this year. Things are pretty decent.

The stock market is a leading economic indicator, okay? We can look at it and say, “Well, the reason they’ve done well, even despite the Iran war, despite what’s going on in Russia, Ukraine, it’s done well because the stock market leads us into what is likely to happen in the future.” And in effect, what we’re looking at is productivity increases that may not be showing up necessarily in the data right now.

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So what’s happening is the market’s going up in anticipation that you’re going to have these increases in productivity. 

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That’s how the markets work. We look at that and say, “Well, it’s looking like it’s going to be really great in the future.”

A lot of people are complaining that the economy is not as good as they’d like it to be right now. And you have a lot of reasons for that, maybe housing issues and things like that. Another topic, why is housing going up so much, and the lumber prices?

There are a lot of things that are playing into that. People blame interest rates, but you have a lot of different infrastructure input costs that have been expensive in that particular area.

Diversification Internationally

PW: But let’s go back to what he said, which is that “If you include it, it’s a drag on the economy.” What on earth is he talking about there?

That tells you a little bit about maybe why the international has done so well, because so much of what we’re using for AI, chips, those types of things, is coming from outside the country. This is a screaming reason that we want to make sure that we want to have diversification all around the world, unlike what we typically see in most people’s portfolios. All we typically see, Evan, if we see international at all, what do we see?

EB: Large.

PW: Yeah.

EB: Every once in a while, I’ll see a large emerging market fund as well, and a choice, but that’s about it.

PW: Yeah, and if you look at what has been going on in the economy and the economic changes that have been taking place around the world, that is not the area that has benefited. It is not the group of companies.

Because you think about large international, what do you think about it? You think about companies, the big car companies, the Nissans, the Toyotas, and the large companies that are producing, and you got the Taiwan Semiconductor and those types of things, but by and large, a lot of those companies that are producing some of these technologies that are coming in are smaller than that.

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So in effect, what happens is, if we’re not diversified across these other areas of the market, when these sea changes happen, you’re not there.

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You don’t have those benefits at your disposal. So I thought that was fascinating.

When we look at GDP, and GDP, what is it? It’s gross domestic product, for those of you wondering what on earth they’re talking about right there. It’s the goods and services produced. And I was geeking out, looking at the formula and how it was affected, and it was interesting, looking how they were actually making these calculations that they were talking about here.

The Stocks in the AI World

PW: Then, they were talking about the stocks in the AI world, and this is an observation that was made regarding that.

Speaker 4: Did you say on the call the other day that the average stock is down 15% from its high?

Speaker 5: Yeah. The average S&P side is, I think, 13 maybe. That’s not too abnormal though, to have a lot of variation of service.

But what I do point to is equal weighted consumer discretionary stocks in the S&P are 9% below their high. They’ve really lagged the overall index, so that suggests the market’s noticing a lot of these trends.

PW: So, this is something we talk about an awful lot. We talk about how the market’s overvalued, right, Evan? I mean, that’s why you hear that from people.

EB: Yes.

PW: It’s overvalued.

EB: No, we don’t agree that it’s overvalued.

PW: No, I wasn’t saying that. Let me be clear here. Yeah, because when you hear somebody say the market’s overvalued, that means that we ought to get out because it’s selling for higher than what it’s worth.

EB: Right.

PW: And that is a market timing statement. We don’t think about that, but we hear investment advisors, investment managers, we hear mutual fund company representatives say that a lot.

“We think the market’s overvalued. We think it’s undervalued,” and that is a sign that we need to do something different, that we need to change the investment portfolio mix. This is something we’ve heard a lot recently, is that markets are “overvalued.”

Now, if you look at the S&P overall, which is just one segment of the market, you’ll have small companies. It’s a totally other segment, a totally different segment, large value companies, totally different area. International large, small value, and so on and so forth.

Well, what we heard just there is that if you start to look at other companies, even within the S&P 500, which look at it, and it looks like it’s “overvalued” based on historic averages, these companies haven’t been doing so well. A lot of them haven’t.

And this is why, when we talk about capitalization weighting in indexes, that this is problematic. When you have investment portfolios and funds, which is the way indexes are typically managed, which you’re weighting based on the size of the companies, this is why you run into problems like that.

You can look at the index and say, “Hey. The price is really, really high, which could cause it come down.”

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Well, why does it look high? It looks high because so much money is in just a select few companies. 

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This is a reason that we want to make sure that we diversify into other areas that haven’t really necessarily done well. You think, Well, why do I want to own things that haven’t done as well recently?

Well, it’s because what goes up comes down, and what goes down comes up. If we look at the market, it sounds like a song, but that is why we make sure that we don’t just put everything in one basket.

Any comments? Any other comments about that, Evan?

Big Gap in Tax Revenue

EB: As you were going through that, what came to mind was, and this will be kind of a political comparison, but I think it’s how humans and maybe Westerners, in general, struggle with math and percentages and things like that, is it’s very easy to make a comment about two or three billionaires leaving New York City, and that’s going to have a big gap in their tax revenue and that’s big news.

PW: Yeah, it is. I love where you’re going with this. Keep going.

EB: We’ve got seven stocks that comprise whatever, 30 or 35% maybe of the S&P, and if two of those go in the toilet, that’s a big hit.

PW: It is.

EB: But we don’t think about it in those terms. When you hear this other example, you’re like, “Oh, wow. I see that,” but it’s the same exact principle.

PW: Yeah, yeah. No, I love that. That’s a good parallel that you’re making right there, because you’re right.

We talk about it all the time that if you raise taxes in a city that is really dependent upon wealthy people paying the tax revenue, the tax revenue coming from wealthy people and they’re paying the bills, when they leave we go, “Oh my goodness. This is going to be terrible,” and the Art Laffer, Rex Sinquefield research shows that every place that they raise taxes, revenue went down.

Why? Because rich people are mobile. They get out.

EB: We’re not stupid.

PW: Stupid. Yeah, that’s exactly right, and we don’t think about it when it comes to investing. When you invest in portfolios that are weighted based on the size of the company, when those companies go down, it can have a huge impact, and that’s why you’ve got to make sure you have better, like spread the money more. As I say in the book, I have that little cartoon.

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I can’t remember where we got it. It says investing is like manure. If you want to get good results, you got to spread it around.

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EB: Was that Mark Twain also?

PW: I have no idea who said that, but it’s good.

How To Succeed in Your First Job

PW: Okay, so Evan, you go. What you got, man?

EB: Yeah, this is just a short little nugget out of Business Week or Bloomberg. We hear a lot about how hard it is to get hired for these new college graduates and this is a tough job market and things like that.

But there was an article on how to succeed in your very first job. I thought it came at a good time, but it’s interesting. They say, “It can be jarring to transition from college, where you learned how to succeed in a specific ecosystem and exited at the top of the food chain, to the working world, where you’re back at zero.”

PW: Back at the bottom.

EB: And so one of the points they made was being discomforted, uncomfortable about that doesn’t equal this thing called imposter syndrome. You’re not faking being good at this new job.

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So the key is embracing a beginner’s mindset and taking advantage of just being new.

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PW: Well, they’re stealing all that stuff from psychology, the beginner’s mindset, imposter syndrome.

EB: Right. So it’s your chance to be a sponge and all this kind of stuff.

PW: Right.

EB: But so here were some of the top points. Some of these are almost self-evident, but you just don’t hear it a lot. “Show up on time.”

PW: Yeah, that wouldn’t hurt. My dad said, “If you’re not early, you’re late.” See it like that. Okay.

EB: “Take notes in meetings. Deliver an assignment when you say you will.”

PW: What I love these days, those of you who haven’t messed with stuff like this, like HyNote, H-Y-N-O-T-E, you can actually record meetings, and it’ll give you summaries and bullet points. Those types of things. Any kind of program like that. AI is great for that.

EB: Well, yes. And I think part of what they were indicating, and I’m reading into it at this point, is you’re visibly taking notes so that your manager can see that you’re interested in all this kind of stuff.

PW: You’re interested and it matters. Okay. Yeah, no, that’s a really good point.

EB: It’s great to have a backup because when I take notes, I always miss something.

PW: Sure. Yeah. Okay. I got you.

EB: Most of the time. “Don’t let the boring stuff get overlooked.”

And particularly, once you finally find your footing in a new job and you’re like, “Okay, hey, I understand this, I got this,” it’s not as exciting and it may seem boring, but that’s still your job. I mean, that’s still your responsibility.

PW: And I would add: Don’t expect everything to always be fun and wonderful and meaningful. The reality of it is, sometimes you’re doing stuff that you don’t feel like doing.

EB: I’m still folding the laundry in the afternoon. It’s like, okay, well, whatever.

PW: Well, you get paid for putting up with stuff that other people don’t want to put up with.

EB: Yeah. “Take in all the details, from superficial things like what people are wearing to what the relationships are, because a lot of organizations are political.” Pay attention to how the people you work with like to communicate. Now, I thought this was interesting.

PW: Yeah. That’s a really good point.

Teach Yourself To Be a Fast Learner

EB: A junior partner was doing a PowerPoint presentation that just wasn’t landing for a client, and this client prefers memos, and so he retooled the format and all that kind of stuff, repackaged the content, and then it was successful.

PW: Well, it’s interesting because let me make a comment about that. One of the psychologists that actually does a lot of work with personality disorders, he refuses to use PowerPoints, and he says the research shows that retention is very, very low.

EB: Yeah.

PW: He said, “You have to interact with the presentation. If you’re going to use PowerPoint, draw on it.”

Literally draw on it, because you will actually pull people in by doing that. They do not retain it because they’re often in La La Land reading your PowerPoint presentation while you’re talking, and you want to have that interaction with them where they’re watching you draw something out and it actually leads them through the presentation. An aside for those of you that do PowerPoint presentations: Just heads up, they’re not that great.

EB: Yeah. One of the interesting ones was “Teach yourself to be a lightning fast learner. … A decade ago, the advice was learn how to code, and now all these AI tools can partially do that for you.”

PW: Well, that’s one of the areas where you’re having job losses, yeah, in technology.

EB: Yeah. And so here’s your advantage because you grew up in the era of social media and things like that.

“There’s a crop of college students who are as close to AI natives as we have. … Becoming versed in the newest efficiency techniques can help you distinguish yourself, and even put you in a position to educate those more senior than you.”

If you’re used to AI or all that kind of stuff, I’m more than happy for James to come in and show me some little tool that can make my life better, because that’s the world that they live in. So don’t be afraid to do that. And then it goes on to talk about cultivating just the traditional mentor in an organization to help you navigate that, and also cultivate a mentor outside of the organization that just has a different perspective on life and things like that.

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But once you get that job, do everything you can to become indispensable to the business.

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PW: Yeah, grow. Keep rolling. Yeah. That was one of the things I was really big on is continuing to learn throughout your entire work history, just continue to grow, grow, grow, grow, because that’s it.

Things are changing. One of our friends makes a comment that he tries to reinvent himself every five years to make himself obsolete.

EB: Yeah.

PW: And I think that’s really good advice. Continue to grow because the world will leave you behind otherwise.

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.