Paul Winkler: Welcome. This is “The Investor Coaching Show,” and I am Paul Winkler. We had a few technical issues, but nothing that we couldn’t handle, nothing that you can’t get through.
Nik Gienger: Because you’re dealing with me.
PW: That’s right. And it’s beautiful outside. I was going to tell Nik that we need to just go outside and do this show.
NG: We can run it from outside. Let’s go.
You guys know we don’t have enough time. All right. We should just let it run and keep going this way.
PW: We’ve created enough problems. Let’s not do that.
Lovetecus Allen: I’ve been dealing with problems all day.
PW: Have you really?
LA: Yes, sir.
PW: All right.
LA: I called you dealing with problems.
PW: That’s true. You did. That is true. It has been one of those kind of days.
LA: Sorry, Nik.
PW: It was like just fly with it. Just put something out there and then it’s like, no, let’s go. I want new stuff. You’ve got things to talk about here.
LA: Yeah, and I love it.
PW: Yeah, don’t even bother. Don’t even bother.
Investing Trends
Okay, so let’s talk about trends. We’re talking about trends right now, and AI is a big trend, a big thing being talked about right now.
When it comes to investing, people are really sucked in by trends.
And this next piece that I had seen, I had to share with you because quite frankly I have seen prophets without honor in their own house.
I’ve had friends of mine that have basically said, “Oh, Paul, you ought to be investing in this. I think forget diversification and investing based on academic research and history and all that. You need to be investing in some of these companies.” That’s basically what my friends say.
So I got to choose my friends better. But anyway, shares of Roblox plunged yesterday. The gaming platform company is giving disappointing bookings.
Guys. Now number one, when you look at a stock and you go, “Man, I really want to own that. That company is like the future of whatever,” recognize that you don’t know anything that everybody else doesn’t know already. That’s number one.
Number two, people will get it in their minds that something really great is going to happen to a company and the sky is the limit. “This thing’s going to take off and it’s going to be the thing that gets me rich.” For so many people, they want to somehow get ahead and beat the system.
That is so much of what it is. Testosterone particularly can be problematic there. You talk about something to try to get you going. If I could just somehow get the next big thing, the next big Microsoft or the next big Apple or whatever.
Then you have GameStop, right? And that was that big deal and people got all excited about that. Well, this is very much related. It’s an online gaming platform and people build and play games on it, if you’ve never heard of Roblox.
But they became public in 2021, meaning that the public could buy the stock; it wasn’t a private company anymore. And its stock has fallen from a high of $130 a share to about $30. Ouch.
Flash in the Pan Trends
The jury’s still out on whether the Roblox craze ends up being a flash in the pan or a lasting trend, but think about how many people look at that and go, “Wow, this is a great product. I love it. I love what they do, and I think this is great. I want to be on board.”
This isn’t anything different from Peloton. During the pandemic, people got excited about Peloton, and really, some of these products are pretty cool. Have you ever seen what those Peloton units do? It’s pretty neat.
The stocks collapsed, making Roblox look like a gentle slide. This is talking about Peloton now. Down 97%. Can you imagine being an investor who says, “I’m going to get rich on this one,” and then you lose 97% of your money?
Then the other one, this is where I’ve had friends say, “This is the future, Paul, this is great.” And if you looked at the companies that have used this particular company’s products, you could see why people would think that this is going to be taking off. It’s going to be really, really good. Beyond Meat is the company.
Now, this is really one of those companies that came up with something that is pretty amazing. I mean, if you’ve gotten a Beyond Meat Burger, you go, “Whoa, it’s hard to tell the difference.”
They’ve had little side-by-side taste tests and things like that. And some people may differ on that one.
But the shares of the company that came up with something pretty amazing have taken a grilling.
Let’s just put it that way. That’s my own little thing.
I mean, it’s just the eighth straight quarter of declining year-over-year sales. It’s been just absolutely pummeled as a stock. But how many people looked at a company like that?
Individual Stocks
I know people — because people talk to me about it — and they said, “Man, you ought to be investing in this, Paul.” And I’d be like, “Well, the reality of it is I don’t do individual stocks.”
Even when you look at portfolios that brokerage firms put together of 10, 20, 30 stocks, you think, Oh, that’s diversified. No, it’s not.
I mean, literally I had one fund recently, I was looking at a portfolio and I said, “This ETF only holds…” And people get really excited about ETFs — exchange-traded funds.
Like, “Oh, they’re really low cost. They’re really low cost.” Well, I looked at the fund, and I said, “I don’t want anything to do with this particular fund.”
It had less than half of the stocks in it that I believed you needed for the asset category. That’s large-value stocks, that is. Now, for those of you who’ve never heard me talk about this before, historically, 97% of 20-year period value stocks outperform growth stocks.
Now most Americans invest in growth stocks. As a matter of fact, I just did a video on that — and that’s going to be coming out really, really soon — about growth stocks. And I may talk about it in a second because I came up with this metaphor that I thought I’d share with you.
But anyway, large growth stocks are what most people invest in, while large value historically is what has done so much better.
But this particular fund, an ETF, is very, very low cost, and a lot of people get sucked in by low costs. It had less than half the stocks in it than I thought should be in the portfolio.
It’s just one of those other things you have to look at. How diversified is it? Because when you look at it and go, “150 stocks, isn’t that enough for an asset category? Isn’t that enough for that area of the market?”
My answer would be no. No, in most areas it’s not. And the reason is something called non-systematic risk.
Non-Systematic Risk
Now, the way I like to explain this to people is think about the ocean and think about the number of boats or ships on the ocean. Lots, right?
Now, if we look at the grouping of boats that are on the ocean, we would say, “Well, what’s the likelihood that a group of them in an area, let’s say in maybe the Gulf of Mexico or some area like that, could sink?” Well, you could have a hurricane come in and hit that particular area, and absolutely you could have a lot of boats sink.
Now think about it. When I’m dealing with an asset category and I’m looking at value stocks or I’m looking at growth companies or some asset class, as we call it, if I have a significant problem and all of a sudden it affects that area, I could have a lot of companies that are very negatively impacted by that.
So you want to have enough stocks in the asset class that you get rid of that non-systematic risk or the risk that something can happen to those few companies.
Now, what’s the likelihood that all boats on the ocean all over the place will sink? Extremely low. And that’s the idea.
When you actually increase the number of holdings, most people think If I increase the number of holdings, what am I going to do? I have too many stocks. I’m going to what? Dilute the returns because if I own too many companies, there are going to be some bad performers in there that are going to offset the good performers.
And technically that’s true if and only if you have the ability to pick the winners. If you have some magical ability to pick the winning companies, all of this stuff’s off the table.
Now, how do we know that people don’t have that ability? Because somewhere between 90 and 95% and sometimes higher percent of investment managers fail to match market returns or have failed over the past 15 years no matter what asset class you look at — no, what area of the market you look at. So I look at that and go, “Well, gosh, if the pros can’t do it, what’s the likelihood of my being able to do it?”
So when we invest, we find that there is a point that you can hit where that non-systematic risk or that risk that something happens to specific companies goes down enough that even if you add more companies, that doesn’t help any. And that’s what you have to be really cognizant of.
Increasing Your Number of Holdings
Now, if I’m looking at small company stocks, I might want to have 2,000 or 3,000 stocks in a small-cap fund. And you have no idea how many times I look out there in people’s portfolios and I go, “Gosh, you only have 50 stocks in this portfolio and it’s a small-cap fund.” Or 150, or even if you have 2, 3, 4, or 500 stocks, it’s not as diverse as real, because especially when you’re dealing with an asset category like small companies, you can have lots of risk.
But what we want is to be able to have lots of companies, knowing that some of these companies aren’t going to do well.
Now the metaphor, I came up with it as I was thinking about this driving into work, and I’m thinking it’s kind of sort of like we have been through in this period of time, especially when Trump was in office.
Now since he hasn’t been in office, this hasn’t been the case. It wasn’t because of Trump necessarily. A lot of people say that markets do what they do because of what some president does. That’s just a small part of it.
For example, you can look at presidents who were in office when great technological strides came into usage, and we find that the president may have been doing things that were really counter to any kind of good economic growth policy, and yet stock markets went up. There have been lots of times when that has happened.
But if we look at the last several years, really, U.S. stocks in general, but large U.S. stocks in particular, have done fairly well. And that is what most investors are in.
Now if we look at target date funds, we find that they’re very, very much in that particular area of the market. And there was actually an article about the S&P 500 as a matter of fact. I may spend a little bit more time on it, but it talks about the S&P 500, which would be large growth stocks over the next decade.
This is Market Watch, a Wall Street Journal publication. It’s titled, “How the S&P 500’s return over the next decade could average just 1% per year.”
And there’s a possibility. It’s a prediction of the future, so who the heck knows? But it is possible.
We’ve had 20-year periods where the rate of return of the S&P after inflation has been zero. So yeah, this is not out of line at all, what they’re saying, and they’re giving the reasons.
Walking Away From Diversification
I may get into it — I don’t know if I have time — but here’s the point: Imagine yourself as a person building a house and you’re going, “You know what? The sun has been shining. It’s been shining for quite a while.”
Maybe it’s summer in middle Tennessee. And you’ve gone for quite a ways and you haven’t had a rainstorm or a thunderstorm or anything like that.
And let’s say that you’ve been sitting there going, “Yeah, it’s sunny again today.” The next day, “Oh, it’s sunny again today.” The next day, “It’s sunny again today.”
You decide to build a house. And you go, “You know what I’m going to do is I’m going to save some money. Why on earth should I put a roof on my house? I could save money, I could do that.”
Or let’s say that it’s winter time and you’re sitting there going, “Why on earth should I put air conditioning in this house?” You could save some money.
And I thought there’s a metaphor there in that when you have a period of time where large companies or U.S. companies let’s say in general have done better than other areas, you might be inclined — especially because you’re more familiar with those big companies — to just walk away from diversification.
Say, “The heck with it. Let’s just stick all our money in large U.S. companies.”
In the video, I chose three of the huge mutual fund companies — Vanguard, Fidelity, and Voya — and I actually showed what their portfolios are for people retiring in the year 2035, the ones that they put together as a company. And I actually showed the percentages in the video. It’s eye-opening. It’s eye-opening.
So one of those ways you can see those types of videos is by going to my website, paulwinkler.com. It’s not up there yet. It’ll probably be up there sometime next week.
But to me, that is a big problem right now. And I keep harping on it.
The last time I harped on it a lot was back in the early part of the 2000s because people were going through the same thing they are now, where they’re just really exuberant about tech companies and big U.S. companies, and they just don’t recognize what could happen when the rain starts to fall. It is a very, very real possibility.
So this is why I think it is so, so important that you understand, what am I doing? Why am I doing it? What is diversification?
How do I measure it? How do I know that I’m actually diversified?
Don’t stick your head under a rock and think these big fund companies know that they’re really doing what is prudent for an investment portfolio.
Because really what they’re doing in many cases is putting together something that you want that you will buy and it may not necessarily be the best thing for you.
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.
