The Industry Wants You To Trust Them As the Experts. This Is a Big Trap.

Paul Winkler: Welcome. This is “The Investor Coaching Show.” I am Paul Winkler, along with Evan Barnard and Dan Hill, hanging out. Danny, we got Danny in the house.

This is cool. Are you angry today? Are you happy? What are you today?

Dan Hill: You know, I mostly have happy news.

PW: You guys, happy news, really?

DH: Yeah. I don’t think I have any angry news, but I’ll think it over.

PW: Oh, oh. I’m disappointed. We need a little angry, Dan. I’m thinking.

PW: Evan, how are you?

Evan Barnard: I’m doing great.

The Purpose of What We Do

PW: All right, you guys have been off to an advisor conference, so you got a little bit of stuff with you, don’t you, today?

DH: Well, I was at Nerd Camp.

PW: Nerd Camp.

DH: Recuperating. He was at a different camp.

PW: You know, we were accused of being nerds? The smart guys. It wasn’t nerds, but it was the smart guys. You know who accused us of that?

DH: The dumb guys?

PW: Other advisors, other advisors on the station.

DH: The silly guys.

PW: I’m just saying.

EB: Wow.

PW: I’m just saying.

EB: Yeah.

PW: Isn’t that kind of cool? I’ll take it.

DH: It is, sir.

PW: I’ll take it all day long.

DH: Yeah, yeah.

EB: Imitation is the highest form of flattery.

PW: It is, something like that. Yeah, so we’ve got a lot. I think we’re going to have a lot of stuff to talk about.

I think we’ve got just a little bit. We’ve been busy in various forms of education and endeavors.

EB: Yeah, yeah.

PW: So, a couple of things, guys. And I think this is probably a good one to start with. I’m going to start with this one little clip that I had.

Simply just because I was watching TV, and this reminded me so much of the purpose of the show, and the purpose of what we do. So, years and years ago, I probably started when, I started this show back in 2001, right?

I had a little office in a bank building. It was the upstairs of a bank building. And I’m having meetings with clients at this 566-square-foot office.

EB: Yeah.

PW: I’m starting this thing off, and I’m going, “Is this whole experiment going to work?”

DH: Right, right.

PW: 

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You know, taking all of the academics and research and investing, will people like hearing about that on the radio? Will they like understanding it? 

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Dude, they really want to understand investing. And it was just a big thing that I was going back and forth on. And it was just this grand experiment. And I’m having meetings with clients.

And first thing I’ll do with a client, of course, as you guys always do as well, is look at their portfolio and go, “Hey, what are the rules of investing? What do you know to be true about investing? What are the things you’ve learned?”

“Buy low, sell high,” is usually the first thing that comes out of somebody’s mouth. “Buy and hang on to things. Don’t try to time the market.”

“Bonds are there for stability of the portfolio.” Oh, by the way, I’ve got a bond story coming up.

DH: All right.

Selling Municipal Bonds

PW: I got something coming up. I was talking to a guy the other day, going to his bank.

DH: Oh.

PW: Oh, I might as well just tell it really quick, because it’s kind of funny. So he goes to his bank, a client of mine. He goes to the bank, and the bank has an investment firm inside, because a lot of times, banks don’t have their own investment firm. They pair up with a big investment firm.

And he says, “Yeah, this guy’s been trying to get me to do something.” I said, “What’s he been trying to get you to do?” “Municipal bonds.”

And I said, “Oh my goodness. That reminds me so much of me 30 years ago.”

And he goes, “Really? What?” And I said, “Well, I used to have these inventories.” You guys ever get the inventories for bonds?

DH: Yeah.

PW: And you get the new inventory sheets, and I’d have clients come in. I’ll never forget this one client that would come in.

So, quick story. He would come in every couple of months or so, every six months, maybe something like that, and he would want to buy new bonds.

And he would come in and say, “Hey, Paul, what’s in the inventory right now?” And I would go through, and you’re able to buy the bonds and you mark them up.

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So you get the bond, you mark it up, you sell it to your client, that’s how you make money.

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And you didn’t have a visible commission, but it was kind of like this invisible markup that was in there. And you could figure out what you could get away with is kind of the way it worked, right?

EB: Yes. It’s still that way.

PW: It is still that way. I’m just saying it used to be that way for me.

EB: Yeah.

DH: Right, right, right.

PW: It’s not that way for me anymore, for us anymore, right?

EB: Yeah.

DH: Right.

PW: So I would do that. And all of a sudden, what happened, we ended up in a situation where, of course, went and studied all of this academic stuff. And I said, “I can’t do this anymore. Can’t do it anymore.”

So, this guy comes in, “Time for a new bond.” And I said, “Bud … ” I won’t say his name because it was a really unusual name. “I can’t do it anymore.”

He said, “What are you doing now?” And I said, “Let me just tell you what we’re doing now.”

And I went through the academics. Well, he was so old school, he wanted that bond. That’s all he wanted.

And I said, “Look, I can’t do it.” “Well, this is what I got to do.”

And I said, “Okay.” And I referred him to a guy that worked for another big investment firm in town. I hate to say that I referred him, but I did because I didn’t know anybody else that was doing that, and was going to continue to do that.

So he goes to this guy. Years later, he marries another client of mine.

EB: Oh, wow.

Understanding Municipals

PW: Yeah. So he marries another client of mine. I was like, “Okay, this is really interesting.”

And what was really good for her is because she had a low-income history, when he passed away, she got his Social Security. So, all is not bad. I mean, you look at that. Well, she comes in with this whole bunch of bonds that she inherited from him.

EB: Inherited. Yeah.

PW: Worthless. Worthless.

EB: Oh no.

PW: Yeah. The bonds were worthless. And I was telling this guy this story.

EB: Did he know that while he was alive?

PW: I don’t know that he did.

EB: Wow.

PW: I don’t know that he did. So, we got to talk about municipals. And I said, “Well, do you understand municipals?” And he goes, “Well, no, not really.”

And I said, “Well, you have the federal government would use land for the states.” They needed land for the post offices, for the military bases, and therefore they wanted to have this land usage without property taxes.

So basically, what they did is they said, “Hey, we’ll make a deal for you. You, the municipality, will be able to borrow money at a lower interest rate. If we do this, not tax the bond interest on your bonds.”

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So people will lend you money, and they don’t have to pay taxes on the interest because they’re actually not being taxed. 

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The market being what it is, you’ll have lower interest rates in the marketplace for that type of bond, and therefore, you get to borrow for a cheaper price. And your investors get a tax-free benefit, and everybody’s happy, and we get to use the land without property taxes.

So that was kind of the idea behind it, right? So anyway, I said, “The problem is this, is that if you look at the differential between the risk bonds —”

DH: Right.

PW: “— that you would compare it to with municipals, because you have default risk, and you have interest rate risk, and you have all of those issues that go on, you end up with a situation where you have an interest rate after taxes that is actually … you look at after taxes when you pay taxes on the corporates, you’ll have a reduction in your interest rate paid, but it’ll still be higher. Your interest rate, the net interest rate will still be higher than what it is for those stinking municipal bonds.”

I said, “You are not in a high enough tax bracket for this to make any sense whatsoever.” And I said, “It just sounds good.”

And so often, financial advisors use tax law just because it has a sizzle and it has appeal, and it seems sophisticated, and it seems smart. I’m beating the man, is kind of the idea behind it.

Why You Need To Understand This

PW: So anyway, fast-forward, I’m actually meeting with, or I should say in reverse, meeting with this guy in my little 566-square-foot office, and I’m teaching about investing. And this guy is, he’s loving learning. He’s really wanting to learn how this stuff works and what’s going on, how things are happening.

And I said, “You know what? You don’t have to understand all of this.” Because I’m thinking he wants to know even more than I was in my early days wanting to teach, right?

And I said, “I’ll worry about that.” And it was some detail, “I’ll worry about that.”

And he goes, “Paul,” he said, “let me just tell you something. I can’t have you worry about my money, like I worry about my money. That’s just not going to work for me.”

And I looked at him and I said, “Lesson learned, I will teach you as much as you want. ” And that’s the way we’ve been ever since, right?

EB: Yeah. Yeah.

PW: “I will teach you as much or as little as you want to know, because that is where your peace of mind comes from. You build up that cognitive part of your mind. The more you understand it, the less you worry.”

EB: I bet I say that every week to people.

PW: Do you?

EB: “The more you understand this,” because even if someone agrees with our philosophy and okay, they get it and so forth, there’s still a lot of paperwork. There’s a lot of legalese in the documents for investment policy statements, and all those things.

And we go through that line by line in many cases, and clients sometimes feel kind of sheepish asking questions. They’re like, “I don’t know if this is … ”

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The more you understand about what’s going on, the better off both of us are.

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PW: Yeah, please ask questions.

EB: Oh yeah.

PW: So his point, “You can’t worry about this for me,” resonated with me for years. So I turned on my TV this morning, and what do I hear but a commercial?

And it sounds like this. It basically says, “We’re going to worry for you,” is in effect what they were saying in this commercial. And all I could think is, Oh.

Clip: Yes, when you bundle home and auto, you can be free of all these worries and more, because we’re already worrying for you.

PW: So, let me go back again.

Clip: How many spiders do you really eat in your sleep? Yes, when you bundle home and auto, you can be free of all these worries and more, because we’re already worrying for you. Oh, and the answer is eight.

PW: So it was a Progressive commercial. “We’re worrying for you.” And all I could think of is, No, no, no, no, no, no. No, you’re not going to worry for me. 

Because I am not going to have a product sales company, or a company that produces products, worrying about my decisions about home insurance, auto insurance, life insurance, disability insurance, investments, nothing. You’re not worrying for me. I want to understand this.

And that is for me so critical. And this is like I kiddingly say that I think my mom passed through Missouri when she was pregnant, because you’ve got to show me. I’ve got to understand this stuff.

So anyway, that is the purpose. That is the point of the show, is the idea is for you to get this stuff. And the more you want to know, the happier we are.

Why Don’t We Recommend Muni Bonds?

DH: Paul, what was the timeframe of that when the guy was buying the munis from the other guy? Was it 20, 30 years ago?

PW: Oh no, no, no. This was actually recently.

DH: Oh, wow. Okay.

PW: That was actually recently.

DH: Okay.

PW: Yeah, this was not an old story. This was actually recently that this was happening. And I thought, Wow, they’re still doing that garbage.

DH: Yeah. Yeah.

I wondered, because I just had a client, it’s been a year or so, making some good money. So he’s in a high tax bracket, which is a good thing. And he said, “Hey, my other advisor,” who, he already came to me because he doesn’t like at all, “recommended I do some muni bonds because I’ll save some money.”

PW: Oh, interesting.

DH: “How come you didn’t tell me to buy muni bonds?” I said, “Because they’re not good for you.”

PW: Because you shouldn’t do it. “Why didn’t you tell me to take arsenic?” “I don’t know.”

DH: I said, “We already told you we do stuff based on science, math, 70 years of research, and muni bonds are not good. The risk reward, blah, blah, blah.” I went through the whole thing.

And then he was going to invest like, I mean, $10,000. I said, “Even at $100,000, how much money are you actually going to save in taxes?”

PW: Yeah.

DH: And what you said earlier, and then with risk adjusted, what’s the benefit from it?

PW: Right. Oh yeah.

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You look at a lot of these muni bond funds, and the duration on them is so stinking long. 

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And duration, for the folks that you don’t know, if you have a duration of 20, it means you have just a 1% increase in interest rates, your bonds go down 20%. It’s just ridiculous.

DH: And then I mean, I don’t know what the last one was, I know Detroit went bankrupt.

PW: Oh, sure.

DH: I know, what county? Orange County.

EB: Orange County.

DH: What’s it, Orange County?

PW: Oh yeah, yeah. Yeah.

DH: These people, do they not watch the news?

PW: Let’s go get some Puerto Rican bonds. What do you think?

EB: You know, we don’t talk about munis much on this show for the most part.

PW: No, we don’t. Because it didn’t dawn on me that somebody still does that. And this is a major, major, major investment firm too.

EB: We don’t tell people where to find the crack dealers downtown.

PW: No, we don’t.

EB: Just not good PR.

PW: Well, it’s funny, you see these mutual fund companies out there, they’re advertising, you know, like Vanguard, and there are different fund companies out there advertising how many percent of their bond funds have beaten their peers. And this is, “Oh, I can get behind that.” And I’m like, “Do you even realize what you’re getting behind?” I laugh at that line in the commercial.

EB: What if they’re the fastest kid in the slowest school? Right? You know.

PW: Fastest kid in the slowest school. Anyway, sorry I interrupted you, Evan.

Default Risk

EB: No, just we don’t talk about it a lot. And one of the things I like about money or finance and all of that, it affects every aspect of our life in some fashion.

PW: Oh yeah.

EB: And whether it’s positive, negative, worry, happy. I was on vacation last week and we could get the BBC. We couldn’t get U.S. news.

PW: Oh yeah. Yeah.

EB: Which was great. I love the BBC’s.

PW: It is interesting. Oh, it’s interesting. Yeah.

EB: It’s more objective for the most part. But when you talk about muni bonds and default risk and things like that, a government bond, it’s pretty hard to leave the U.S., right?

And it’s kind of like federal taxes is one thing, but if there’s state that has no income tax, okay, it’s, “We can change states.” And with some of these policies that Mamdani keeps coming out with, you kind of just see the news of the exodus of some of this stuff.

PW: Yeah, oh yeah.

EB: Default risk is going to become very real for someone —

PW: It’s going to be real.

EB: — that got a bond 10 years ago or 15.

PW: Sure.

EB: Giuliani’s been out of office a long time, but maybe when Bloomberg was in office, they bought the bond.

PW: Sure.

EB: And now, New York may be in default. And I haven’t heard anything on a rating, so that’s not what I’m saying.

PW: No, no, I know, I know. But the default risk could be going up.

EB:

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People are mobile, and municipal bonds don’t have that safety.

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PW: Well, you could have bonds go down just to default risk.

EB: Yeah, yeah.

PW: I mean, just the risk that it might happen, you could have bonds go down. So yeah, great point.

EB: So, you know, it matters, is my point.

PW: Yeah. Yeah. It matters a lot. And you made a point that money affects everybody’s lives.

EB: Yeah.

PW: It’s a big deal. One of the things I’ve been thinking about a lot lately, and just thinking, This is something that I guess really hits home for me. When you look at how much of long-term care is paid for by welfare, that tells you that there are a lot of problems out there when it really gets down to people not having enough in retirement, and anything that creates more of a problem like that, I mean, you just need to be paying attention.

EB: Yeah.

PW: It is important. It matters.

All right. Tell you what, you’re listening to “The Investor Coaching Show.” We’re going to take a quick break. We got a bunch of stuff on the plate today to talk about that we’ll get into right after this.

Wedding Dresses and Futures Markets

PW: Paul Winkler, along with Evan Barnard and Dan Hill hanging out here today. Always good to have you fellas in here hanging out with us. Okay, so big investment firm stuff. Oh, you guys have … Evan?

EB: Yeah.

PW: Go for it.

EB: Well, we were talking academics, and I imagine we’re going to swerve into that lane a few more times this show.

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I always like to highlight stories of how many moving parts actually exist that you have to factor in when you’re trying to do these things we teach against. 

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Stock picking and market timing and all of that — just the stuff that’s easy at the first layer. “Oh, oil prices are going to go up, so probably gas. I maybe need to make this decision.” And it was like, “Okay, that may be valid or not …”

PW: Even Nobel-winning economists fall prey to that one.

EB: Yeah.

PW: Yeah. Can we talk about hurricanes down in New Orleans? Yeah. Yeah, okay.

EB: Right. Or light snow in Tennessee and Nashville.

PW: Or investing in China in 2009.

DH: Yeah, exactly.

PW: Remember that one?

DH: Yeah, okay.

EB: Well, here was an interesting story of both how the market works and how it’s incredibly difficult to figure out what people are going to do: “Wedding Dresses Now Come With a Legal Waiver for Brides on GLP-1s.” So these drugs like Wegovy and whatever, Ozempic or these GLP-1s, I have no idea what GLP stands for. That’s right.

PW: Pringle party.

EB: But it’s a weight loss drug. Something. No, it’s GLP.

PW: Okay. Oh, GLP. Sorry.

EB: And so what’s happening is with the drugs, these people are getting fairly dramatic weight loss.

PW: They’re losing weight.

EB: Right.

PW: So the wedding dresses they’re buying are too big by the time they actually have their wedding, or they don’t get enough weight loss.

EB: Here’s the deal: It’s like the futures market. So what they’re doing is they’re buying a six —

PW: With a prediction.

EB: — while they’re a nine or an eight, whatever, because “I’m going to lose 40 pounds by the big day” and so forth. And of course, if you don’t, you’ve spent $3,000 or $10,000 or something on this dress.

PW: You indulged a little too much in the bachelorette party.

EB: “I couldn’t afford this third dose of the GLP-1.” Anyway, so now some retailers are having brides sign legal waivers of, “I realize that this dress doesn’t fit today.”

PW: Oh, yeah. For sure.

Butterfly Effect

EB: It’s really interesting. And so as you went through the article, though, you had some businesses that their adaptation was, “Okay, we’re going to stock more inventory. We’re just going to carry more sizes of dresses.”

And so it used to be, wedding dresses usually were bought five to six months in advance of the wedding. That’s the historic thing. It’s closer to 45 days now.

DH: Oh, wow.

PW: Really? They’re not sure if they’re going to go through it?

EB: Because people don’t know what they’re going to weigh in six months.

PW: Okay. Well, just the level of commitment sometimes we see out there.

EB: Yes, yeah. So some companies are carrying more inventory; that’s how they’re doing it. Or some are saying, “No, you just can’t return.” Or, “Well, we’ll charge extra or you can exchange it.”

So you see this thing, and you think, Okay, I watched this Ozempic ad on TV. And you don’t realize what daisy chain of effects all across the spectrum are going to be affected by the American population losing 20 pounds.

The insurance market, okay, weight loss, okay, rates are maybe going to go down. Just any little thing affects the butterfly effect. It affects everything else.

PW: Yeah. And that reminds me a lot of this whole thing with we’re in a war with Iran. We’re going through this crazy time overseas and people are like, “Why is the stock market going up?”

Because it’s not the only game in town. You have a lot of things going on right now.

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How do you figure out where technology takes us in the future and what’s going to happen in the future? You try to put all this stuff together, and you can’t. 

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We’re finite beings. We can’t do it. There’s no way; there are too many variables out there. So yeah, really cool stuff.

Free Market Capitalism

PW: So I had this thing that I thought I’d have you guys listen to. One of the things I heard from somebody the other day, they were just like, “These CEOs make way too much money.” They were just going on and on and on about how angry they were that CEOs were making too much money, right?

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We talk about free market capitalism. Let the market determine what somebody’s worth. 

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And you look at them and say they’re making too much money. What’s too much? What’s too little? What’s the right value?

Well, there’s a little segment on CNBC that I thought was really telling about whether somebody’s actually worth what they’re being paid. And it was regarding GE Vernova. So check this out.

Speaker 1: One point was $600 billion. Do you remember what it fell to a couple of years ago? And I just can’t understand how you can go —

Speaker 2: I don’t remember the exact month.

S1: 70.

S2: Yeah.

S1: 70 back to 700 or 600. What happened to go to 70?

PW: $70 billion company goes up to $600 billion company, is what he’s pointing out here. A company almost goes up tenfold in value.

S1: Happened to go back to 600.

PW: Now he’s asking a question of somebody that’s like probably in the area of, I think they’re paid too much. You see what I mean? You notice his hesitation. And of course, who’s asking the question right there?

EB: Joe.

PW: Yeah. Who is typically very, very conservative in his leaning toward things. So he’s asking this question.

S1: To go to 70, and what happened to go back to the 600?

S2: Well, that’s splitting the company into three companies, which was …

S1: I know.

PW: So he tries to come up with a different explanation.

S1: All right, you know my point.

S2: What’s the right move?

S1: The assets were assets.

S2: It has worked out.

S1: Yeah, that’s it. I’ll say. Management matters. I just thought it was amazing because we were there at 600, we were there at 70 and actually, unfortunately, we’re not there now back then.

S2: We were there when it was $5 a share.

The Beauty of Capitalism

PW: And the point just being right there is that you have a management decision to do some things in a company that are bold and a little bit scary and a little bit risky. And the people that are willing to do those types of things, take those types of risks, are worth what they’re paid. And I just thought that was just interesting.

Because we often talk about how markets work and the beauty of capitalism and the beauty of being able to participate in the growth of capitalism around the world. And I often talk about the idea that let’s say that’s you, you’re at work in your entire life, it’s you at work. If you don’t show up, you don’t get paid.

And the beauty of it is, as we close in on retirement, when we own stocks, now we own tens of thousands of companies run by people that have one goal in mind: Grow that doggone company. And then you get down to looking at how many people work for that company. Everybody has the same goal.

And we say, “Well, government could screw the whole thing up.” Well, they have a vested interest as well because if they screw the whole thing up, there’s no tax revenue.

EB: No tax revenue. Yeah.

PW: And so the reality of it is they could screw it up for a little while, but then they’d go, “Oh gosh, what have we done?” And then that’s why you diversify, because you’d be in other countries too.

And that’s where I think a big mistake that people make is they’re just too concentrated in just the U.S. And like last year, case in point, oh my goodness. And go back decades, we had some data regarding international versus U.S., and people are surprised when I go back 50, 60, 70 years and I point out that in British companies and U.S. companies, about the same rate of return, but very, very different in the short term, in the short run.

So just an interesting little point about investing and just understanding that a lot of times, we try to massage things and we try to change how things are done, but the reality of it is it’s a system that has worked pretty doggone well all around the world.

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As investors, we ought to just rejoice in the idea that we have free market capitalism all over the world to participate in.

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DH: Yes.

EB: Totally.

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.