Paul Winkler: Welcome to “The Investor Coaching Show.” I am Paul Winkler, talking money and investing. I’m joined this hour by Anne Sawasky. Hi, Anne.
Anne Sawasky: Hi.
PW: There we are. Let’s go.
AS: We’re ready.
PW: We’re ready. Want to know how to stay mentally sharp in your eighties and beyond?
AS: Yeah. Yeah. Tell me.
PW: I think it’d be good.
How Stock Markets Set Prices
PW: An economist at Chapman University just finished writing a book about Adam Smith, one of our favorite people around here, because he wrote “The Wealth of Nations.”
Now, that’s part of what caught my attention in this particular article. Because when we were talking about investing, you actually had something you brought up, and I said, “Oh, isn’t that funny? Because I actually included that in our workshop that we teach on basic investing.”
AS: Right.
PW: A story came up today, and I’ll get back to Adam Smith in a second because it’s all related. It was about Lyft stock.
AS: Yes.
PW: Yeah, talk about that.
What happened with Lyft stock is really instructive for investors when it comes to how stock markets price things.
Because what people typically do is they try to figure out which companies they want to buy, and they try to figure out which one’s stocks are going to take off or which areas of the market are overlooked, undervalued, and need to be considered. And they’re looking really for, as we call it, mis-pricings, where the stock is priced at a different price than what it really is worth based on the earnings of the company and the sales and those types of things. But what happened with Lyft?
AS: Yeah. So this was actually kind of a classic example we would use for why market timing doesn’t work.
PW: And stock picking for that matter, but they’re very related.
AS: And stock picking. Yeah. But anyway, yeah.
So Lyft, as all big publicly traded companies do, they will put out their earnings report. And so they did, and they projected that they were going to expand this year by 500 basis points in their profitability.
PW: That’s a lot —
AS: That’s a lot.
PW: — of profit. Yes.
AS: So stocks surged 67% because this was not the expected amount of gain. It was way, way more than it was supposed to be. And this happened instantly. So this is how fast the markets work — literally overnight when people were asleep, the market was still working and it went up 67%.
Betting on the Stock Market
PW: If you look at the chart, I think it’s one of those things that’s really helpful. It’s the polar opposite of another chart that we use in our workshop. Now, we use this one chart where we’re actually talking about that. There was a tweet.
AS: Yes, a false tweet.
PW: Back when you had tweets, when that was what they called them, though people still call them tweets. But it was a false tweet about the White House being bombed.
And then all of a sudden what happened was the stock market dropped down and they figured out, oh no, it was fake. And the market went right back up to where it was, and then it traded as it was.
AS: In minutes. Minutes.
PW: That information was literally digested, and it happened in seconds. I mean, literally you say minutes, but it’s even in seconds that it happens. But what happened here is that that was bad news and the stock market went down, and then when they found out that it was fake bad news, it went right back up.
AS: So what happened here was less than an hour after they put out the statement, the CFO of Lyft said, “Oh, you know that earnings projection? We were off by a zero.”
PW: Yeah, it just makes a little difference. It makes a little difference.
AS: We accidentally put an extra zero. So it wasn’t 500 basis points, it was 50. Which is what? 10 times less.
PW: That is.
AS: That’s a pretty big difference.
PW:
The point is that when we look at markets, you have all of these people all around the world betting, so to speak.
I use the term bet because you think about when you’re betting on something, then you have so many points that the team has to cover. And I don’t know much about that.
But I know that you might have it where it’s going to take this team with seven points to win the game. So in other words, they got to win by more than seven points, I guess is the way it works. But it shows you how much I know.
Market Timing Doesn’t Work
But the idea is that you have all of these different people, and it’s hard to beat it because the general consensus of all informed investors is that a stock should be selling for a certain price.
AS: Right.
PW: Then all of a sudden this news comes out and says, “Oh, we were really wrong about that,” and that is what’s so frustrating about it. Matt Murphy and his wife and Eric and I, we were all getting together and we got to talking about this. And they were just sitting there going, “Whoa, whoa, this is really, really interesting.”
Because I was talking about how pricing happens. And they were just saying, “Well, so this is what Wall Street’s doing all day long, and the reality is that nobody gets a leg up on anybody else over any length of time where they can consistently figure out where things are mis-priced.” And I was like, exactly. You’re getting this.
AS: Yeah, and the interesting thing I think about this particular case is the 67% jump happened after the market closed. Which tells you, again, it’s like you think there’s just a “market” quote unquote in the US.
PW: But you have derivatives trading after hours.
AS: Well, but you have worldwide markets trading too, so all over the world.
PW: Well, what I’m talking about is when you look at, for example, if you ever watched TV — and I’m not talking to you, Anne, I’m talking about to you folks out there. If you ever watched TV and you’re looking at what the market’s going to open at, it’s like how do they know the market’s going to open at that?
It’s because of futures. That’s what they’re following: futures.
Think about futures as being a derivative. It is a stock derivative. Its value is derived based on the underlying stock.
Government-Regulated Pricing
PW: So back to Adam Smith. Adam Smith, this is what he said. He said, “Markets are efficient.” And they will become more efficient with two things, is what he was saying.
He wrote “The Wealth of Nations” back in the 1700s. And our economy is based on what he was writing.
And he said, “There’s an invisible hand.” You try to get very smart people in a room together to tell you what prices of goods and services are appropriate — what commodities should be selling for, what crops should be selling for.
Back in his time, that’s a lot of what was being traded. And what you’re doing is you’re hoping that those people are so smart that they know better than the general consensus of all people that might be actually buying that stuff and determining what the demand for that stuff is, that they know better.
The reality is that when economies have been set up that way around the world, that’s why so often you’ll hear people rail a bit about big government. Because big government comes in and says, “Oh, we got to do this. We got to do this. We got to set up this regulation.”
You look at countries like China — and it wasn’t just China –- I mean, you go back before China, you go back to Russia in the 1970s, and people thought that Russia was actually going to do really, really well because they were producing more shoes than other countries around the world. And you had pricing of cars and things like that.
Well, the problem was that the government was setting those pricings. They were setting how shoes were produced and how many shoes were produced.
What people didn’t quite get — even economists were fooled by this — was that they were producing garbage.
And what happens is the government says, “Hey, we need to really focus on this industrial sector and we need to be doing that.”
I remember back years ago, Anne, there was this big push by American manufacturers. They were upset that Japan actually had a leg up on US companies because the government was funding some of the research and R&D in TVs.
AS: Oh, okay.
PW: And what happened was they were saying, “You got to do this. You got to do this.” Well, at that time, our Congress was not terribly favorable of going and bailing out companies. And the interesting aftermath was that US companies not backed by the government, but backed by their own ingenuity, ended up coming out with better technology than the government-funded companies of Japan.
AS: Well, when you think about it, that’s not too surprising.
PW: It isn’t. It is surprising if you’re somebody that thinks the government really has it together, it’s not that surprising now if you’re —
AS: I don’t know. Seriously, how many people would say anything run by the government is run well or better? I don’t know. Not too many I know.
PW: Not many.
AS: So it kind of makes sense that that would be the ultimate result.
PW: Exactly.
Staying Mentally Sharp
PW: So Adam Smith, he wrote “The Wealth of Nations.” But this economist at Chapman University just finished writing a book about Adam Smith, it says here. And he works about eight hours a day, seven days a week in his home office in Colorado Springs.
I don’t recommend that. Seven days a week’s a bit much. You need recharging. As I often tell people, you take vacations, you take time off because people hire you for your energy, your ideas, and your enthusiasm, and you have none of those if you don’t take any time off.
But anyway, Smith says, “I still have a lot to do. I want to keep at it.” Smith, who won the Nobel Prize in economics in 2002. Who am I to argue against a guy that won the Nobel in 2002?
But it says “Recent memory flubs by President Biden may be one. Former president Donald Trump” — I guess they have to get both sides — “have kindled debate on how to stay mentally sharp in your eighties and beyond. There’s no silver bullet.”
But basically what this guy says is that cognitive performance peaks in healthy adults in their 20s and 30s. Over time, the brain shrinks and it’s about 5% per year. I’ve seen data on this before. It is actually true.
The outer layer thins. Deeper regions become scarred, and communication between neurons become less efficient. That’s how information gets around in your brain.
I use the example of pathways. If you walk through the forest and there’s a path and it’s a well-worn path, you see the dirt and you go, “Wow, that’s something.”
So a lot of times we get really stuck in our thinking because those pathways get worn that way.
But he says, “These brain changes can cause memory, reasoning, and other cognitive skills to erode. But some people can stave off cognitive decline better than others.”
This neuropsychologist from Columbia University, Yaakov Stern, says that the brains might be more resilient to change and have better cognitive reserve — the ability to adapt to brain changes. Genetics is thought to play a role, as does diet and exercise, in a person’s risk of vascular disease. And that’s why exercise is such an important part of life as people get older.
Years ago when I first started this radio show, it was like, how did I put it together? Well, I had people that were sponsors of the show, and one of them was a gym.
I’ll never forget talking to this one guy that worked at the gym. And he and I still stayed in contact from time to time. But he would talk about getting people into exercise and how he would literally help them not only cognitively, but help them off of medications with the exercise that they were doing.
So there’s a lot to be said for that. With brain changes, a lot of it is diet as well, but a lot of it is just literally keeping the brain moving.
AS: Yeah, exercising your brain.
The Importance of Having a Purpose
PW:
He talked about here that you have the super-agers who have the mental faculties of people decades younger.
What they find is that these people have a purpose — it’s one of the things that they found in the research. Now, we say a lot of this stuff because — and I want to take a break, but I want to talk a little bit about this — we think a purpose is kind of important around this place. And we’ll talk a little bit about what our input regarding that is.
Because a lot of people go through depression, anxiety, and have all kinds of issues as they age, and they start to feel kind of like, what am I here for? And I hear that a lot. But there are things that we can do, and we’ll talk a little bit about that.
And I got something coming up. I want to talk a little bit about something we got coming up and let you all in on some of the things that we’re doing around here because I think we got some cool things going on around our place here.
But I want to talk a little bit about that and then talk about some things that I think you can do just to deal with money better. Because Adam Smith, when it comes to “The Wealth of Nations,” when he talked about market efficiency, he was onto something. And it grew the United States economy at a greater rate than any other country around the world.
Still, if you look at it, something like 60% of the value of companies worldwide are US-based companies. There’s something to that.
And what we find in investing is that the philosophy that doesn’t work in terms of growing economies tends to dominate in the investing world. Why would that be? More about that in a second.
Can a CFP’s Advice Improve a Marriage?
PW: So Anne, you brought up an interesting article. You were talking about something during the break. What was that?
AS: You’re talking about …
PW: The CFPs.
AS: Can a CFP’s advice improve a marriage?
PW: You want to improve your marriage?
AS: Yeah.
PW: They did a pilot study on this.
AS: Yeah. Now, this is a preliminary study.
PW: Yeah, it’s funny.
AS: But it is put out by the CFP board, so I’m just saying.
PW: Well, of course. There’s no bias there. Yeah. Well, yeah, you and I are both Charter Financial Consultants, which is the same curriculum as the Certified Financial Planner, but there are a couple of extra courses.
AS: Right.
PW: And there’s a comprehensive test with the CFP where each one has a test in the CHFC. So basically I’m indifferent between those two designations. That’s the way I look at it.
AS: Right.
PW: But so when you hear CFP — Certified Financial Planner — they just have better marketing than a Charter Financial Consultant, but it’s the same college. The same college actually teaches most of those courses.
AS: Right.
PW: But yeah, I was just thumbing through the article and it said something to the extent that they had 70% of those served by CFP professionals who said they were very satisfied with their marriage versus 45% by a non-CFP. There you go.
It’s almost double. Not quite double. No, not exactly.
And what was this one thing? I see this line here. It says, “This one is probably my absolute favorite data slide,” says Ludder, who is a licensed marriage and family therapist. That’s the degree that I’ve got, in addition to the Chartered Financial Consultant and all those other degrees.
But it says, “Because while I said I don’t use the pilot data, maybe you can kind of use this one a little bit because it’s so exciting. It definitely represents other data that I have collected.”
And I think just looking at this, I just think back to this: Okay, so what is the data? What are the things that we typically study in getting these degrees?
General financial planning principles would be one of the things that you study, and professional conduct.
You’re going to be looking at making sure you handle yourself well.
AS: Insurance.
PW: And insurance. Risk management. Investment planning would be another area that you’re going to be looking at.
AS: Law and estate planning.
PW: Estate planning for sure. Estate planning and retirement accounts and retirement planning.
Communicating With Your Spouse About Finances
PW: I think it’s just the process itself of planning.
You’re dealing with getting on the same page with each other when you’re making decisions.
AS: Right, right.
PW: And you’re not necessarily hiding information from each other anymore. As a matter of fact, you’re not. You’re bringing it all out and you have to communicate about it. And both people feel like that they’ve got a part in the process.
So I can see where you look at that and you go, “Correlation isn’t causation.” But I can see where a lot of these things where we’re getting into discussions and deep discussions can lead to better marriages and better communication.
And both of you saying, “Hey honey, I want to do this.” “Well, I want to do this.” “What do I want in retirement?”
I remember there were guys that I have worked with, and oh man, I remember one. We got into a conversation. He’s a well-known person, a very well-known person in the Nashville area. I don’t have permission to talk about his situation.
But I remember talking about what he wanted retirement to look like. And his wife had a different idea. But they came to a compromise that both of them were happy with. But if they had never talked about it, that would’ve been a different deal.
AS: Well, that kind of gets back to one of the whole things I like about the American Dream Experience too.
PW: True.
AS: Really it gives you two days to sit down with your spouse or your significant other and really figure out what you both want and how you’re going to get there. But I mean, to your point in general, I just want to bring up, as a woman advisor, I think it’s so important for women to take an active role in their finances with their husband.
Because I have a lady who just became a client, and she’s elderly. Now she kind of has some cognitive issues. Her husband handled everything, and now it’s really difficult because she has no idea.
PW: Real good point. And I think the key to success many times isn’t always having the right answers, but it’s asking the right questions. And that’s part of it: There are a lot of questions to get you thinking about what you really want to accomplish and how you want life to look. And I think that’s why it’s key.
AS: And just what are we doing?
PW: Right.
Hey, this is Paul Winkler. Hope you enjoyed today’s edition of “The Investor Coaching Show.” If you want to learn more about what we do, go to our website, paulwinkler.com. You can watch some of the videos there, and if you’re not already a client, you can set up a free initial consultation.
Until next time, I’m Paul Winkler reminding you that I believe that more educated investors are more competent investors and confident investors are more successful investors. Have a great one.
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.
