TMBA 328: How Do You Manage Your Money?

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As many longtime listeners know, Dan and Ian recently sold one of their businesses. This has put them in a fortuitous situation faced by many entrepreneurs: wondering what to do with their exit cash.

Managing your money requires a completely different skill set from building a business, and even the most savvy entrepreneur might decide to seek the advice of a professional.

On this week’s show, you’ll hear from Joe Wirbick, the president and co-founder of Sequinox. Joe shares some thoughts on the macroeconomy as well as tips on how to evaluate financial professionals and identify whether or not they are the right fit for you.

Transcript

Listen to this week’s show and learn:

  • How different generations have different attitudes about the economy. (3:40)
  • Some common mistakes that people make when they are dealing with a financial planner. (11:46)
  • How taxes can have huge implications on the financial planning of entrepreneurs. (14:01)
  • Why it isn’t a good idea to just leave all of your money in a savings account. (18:27)
  • The differences between the ways that entrepreneurs and traditional retirees save their money. (23:43)

Mentioned in the episode:

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Thanks for listening to our show! We’ll be back next Thursday morning 8AM EST.

Cheers,

Dan & Ian

Published on 03.17.16
  • Craig Gentry

    I believe the true road to preeminent success in any line is to make yourself master in that line. I have no faith in the policy of scattering one’s resources, and in my experience I have rarely if ever met a man who achieved preeminence in money-making … certainly never one in manufacturing …who has not in his works some machinery that should be thrown out and replaced by improved appliances: or who does not for the want of additional machinery or new methods lose more than sufficient to pay the largest dividend obtainable by investment beyond his own domain. And yet most business men whom I have known invest in bank shares and in far-away enterprises, while the true gold lies in their own factories.

    I have tried always to hold fast to this important fact. It has been with me a cardinal doctrine that I could manage my own capital better than any other person, much better than any board of directors. The losses men en-counter during a business life which seriously embarrass them are rarely in their own business, but in enterprises of which the investor in not master.

    My advise to young men would be not only to concentrate their whole time and attention on the one business in life in which they engage, but to put every dollar of their capital into it. If there be any business that will not bear extension, the true policy is to invest the surplus in first-class securities which yield a moderate but certain revenue if some other growing business cannot be found.

    – Andrew Carnegie

  • http://empireflippers.com/ Joseph Magnotti

    I still think most entrepreneurs would be better suited sitting on 9-12 months runway *plus* start up costs for their next venture. This could be in the range of $60k to $100k for even small one man band type operations. Putting this capital at risk even in relatively safe investments, makes me very apprehensive. Annuities or other type of drip feed accounts that penalize you heavily for early withdrawal are just not setup for guys like us.

    That said, a big windfall from the sale of your business should be protected tax-wise and grown depending on your risk tolerance. However, you still need that safety net in place, IMHO. Good luck supplementing your income with anything other than cold hard cash should your business take a downturn.

    For tax saving ideas on the sale of your business, Justin did a great podcast with Mario Lucibello, CPA:

    https://empireflippers.com/cpa/

  • Eagan Heath

    Long-time listener, first time calling bullshit. Your guest failed to meet the challenge of buying and holding index funds at a fraction of his expense ratio. Read John Bogle’s Common Sense on Mutual Funds and A Random Walk Down Wall Street for what is essentially the consensus among academics who study this. I also believe value investing can be a viable strategy. See The Little Book of Value Investing and The Little Book that Still Beats the Market for brief but good introductions to that approach. Whether an indexer or a value investor (or a mix of each), you can do better than give so-called professionals 1% of your portfolio per year. Your skepticism about misaligned incentives was justified.

  • http://empireflippers.com/ Joseph Magnotti

    Totally agree Eagan, I have used Wealthfront and Betterment with success.

  • SeanJawnz

    It was interesting to listen to this back-to-back with Planet Money’s recent episode about Warren Buffet’s bet that an S&P index fund would beat a bunch of hedge funds. (Buffet’s winning.)

    There’s a great Frontline about retirement investing you should watch. Info comparing money managers and index funds starts ~20 minutes in:
    http://www.pbs.org/wgbh/frontline/film/retirement-gamble/

    Also, those 1% fees advisors charge you really add up. An amount you invest now with a 7% return minus a 1% fee with be worth something like 36% less in 50 years than a 7% return without the fee.

    Buy some diversified index funds. Shit, just last week, one of the smartest guys in our industry (DHH) told you he just invests in index funds. If you want to try to beat the market with some pro investor or money manager, find an investor with an index fund or company you can buy (like Buffet’s Berkshire Hathaway).

  • SeanJawnz

    This is way better than a 1% fee but their fees still add up and the tax-loss harvesting doesn’t even matter if you’re in a non-taxable account. I was also really turned off by Wealthfront because of their misleading marketing “Performance Chart”. The largest factor in it is “index funds over mutual funds” which is something anyone can do. It’s not some special benefit of Wealthfront.

  • lion

    “A Random Walk Down Wall Street”
    “I also believe value investing can be a viable strategy”

    the cognitive dissonance is strong in this one

  • lion

    at first I thought you were channelling a colonian author lmao

    I think the modern translation to that, for someone who’s sold their business, would be a) build/buy a new one, and b) activist angel invest

    unlike Carnegie I don’t think these have to be mutually exclusive

  • SeanJawnz

    Something else I just realized: the advisor on your podcast says he hires outside money managers, so your actual fee is probably even higher than 1%. If the money manager also takes a cut off the top, you might be looking at 2% plus.

  • Joe Wirbick

    It might benefit you to take the time and do some research on actual returns from active managers. While buying an index fund is definitely “cheaper”, active managers have far outperformed their indexes in the 3,5,10, and lifetime averages. That is after the 1% fee we take. Cheaper is not, nor hardly ever better. Especially when it comes to your money.

    That also does not take into account any advice you would receive on more efficient tax management of your assets. Don’t be “penny wise” and Pound foolish, as they say. Take into account the 25-41% taxes you might be paying annually for the rest of your life and you can start to see how our fee makes senses.

  • Joe Wirbick

    Not recommending “tax harvesting” I want the entire account placed in a tax deferred or tax free status. That way your not focused on selling losses to outpace gains. All your gains don’t count.

  • Joe Wirbick

    I would agree that if you were returning 7% on your own and you hired me to get you the same 7% then after my fee you win. Of course, that is simple math. I am recommending you hire someone to do better, not perform the same. And yet again everyone is missing the elephant in the room. The TAX man. He takes way more than 1%!!

    Remember, when you lose money in the market it may come back, but when you lose money to the IRS, it is never ever coming back.

  • Joe Wirbick

    It is interesting to read all the comments. Thank you all for your input. Glad you listened and hope you enjoyed it. I understand how people want to focus on the fee, and if that is all you focus on then you turn my service from that of a service, into a commodity. We are individuals working hard to ensure your entire financial picture, not just the annual returns, work for the next 30-40 years.

    Anyone can go out and buy an index fund. And when you do you can expect market like performance. We expect more. We want to plan your entire financial picture, wholistically, and help you to achieve success. Not just in your portfolio returns, but also in your net income to ensure the IRS does take a large bite out of your behind.

  • Joe Wirbick

    I couldn’t agree more Joe. It is wise to leave assets that you plan on reinvesting in the short term, liquid. Never place them in accounts that have risk or short term redemption fees.

    However, those long term assets, ones you should be placing aside, are best suited in higher performing investments.

    I think it is wise to do both, invest both in your businesses and in your retirement outside of the risk of your businesses.

    That way you have multiple areas that can grow and you’ve reduced your risk.

  • rumurphy

    100% agree with you Eagan. I abandoned active funds and went Vanguard indexing (a variation on the three-fund portfolio https://www.bogleheads.org/wiki/Three-fund_portfolio ) and am quite happy with the simplicity of it all. Dan and Ian I suggest you counterbalance this active fund argument with someone representing the low-fee passive side.

    Joe, can you give us data showing active managers as a whole “far outperform” passive indexes (perhaps against VTSAX)?

  • http://www.zugdigital.com/about/ Tom Krawiec

    Hi Joe – Are you able to benchmark your companies return say against the say the S&P 500 index for the same period?

  • Joe Wirbick

    Any of my managers run reports against any number of indices. SP500, NASDAQ, over any number of periods. We of course try to match the manager style and assets against the appropriate index for a fair comparison. If you’d like I can send you reports over a specific time. Let me know.

  • http://www.zugdigital.com/about/ Tom Krawiec

    Sorry I should have been more specific.

    Yes could you please upload a picture/graph here of your companies returns vs the SP500 over the time period of since your firm started up until today.

    And just to confirm on the podcast you said you take 1% and when you don’t make money for your clients you lose as well. But you’re still taking 1% of their portfolio right? It’s just a smaller amount.

    Is that correct?

    Thanks.

  • http://www.zugdigital.com/about/ Tom Krawiec

    But you don’t need to be paid 1% for the rest of a customers life for tax advice.

    The 1% is for actively managing funds to ‘beat’ the market.

    Tax advice/structuring can be done on a ‘project’ basis?

  • thewinevagabond

    I worked in the Fintech industry alongside top hedge funds for 8 years. Unless you have 10M+ to choose very specific style HFs (which actually hedge investments not just have the HF fee structure sitting on ordinary asset managment) active management on average makes no sense compared to low fee ETFs. Anyone can pick out managers who have ‘beaten the market’. It’s called survivorship bias. The asset management industry (when you get them after a few drinks) who make millions a year in fees will quietly admit to the dartboard nature of most strategies.

  • Nick

    Long time listener, investment analyst by trade, CFA. I invest in bonds for an institution and manage my own money…

    I liked the pod. This active vs. passive debate shouldn’t be a pissing contest. It’s refreshing to hear something other than “WEALTHFRONT because they’re a sponsor” yada yada.

    Bogle/passive indexing/Betterment approach is great for a lot of people. I like it. It’s generally what I would recommend to family or friends if we have a 60 second conversation on investing. It’s a great low fee avenue for folks that are wary of investing that gets them to save money regularly, invest, stay invested, learn about investing, learn how to stomach volatility/drawdowns, and avoid scammy financial advisors as they get more comfortable with the markets. You can’t really go wrong with it if you’re a super long term retirement investor with no near term liquidity needs.

    BUT….. the thing is, most people that have jumped on the passive bandwagon haven’t seen a market correction or downturn. This is where FAs can be beneficial for most imo. Managing the emotions and perhaps having a more tactical approach that isn’t 100% long all the time. I’d even suggest that wealthier entrepreneurs should pay someone solely for advice and consultations, like a therapist, even if they refuse to invest their money with a FA.

    A strategy for managing money is 100% dependent on people’s risk appetite, willingness to take risk, ability to take risk, personal constraints, and objectives. They have to be defined, and FAs are good at going through the process and checking the boxes. I personally am more risk averse and am not willing to be 100% fully invested in the S&P and Barclays Agg with Betterment… Others might be comfortable doing so.. neither’s right or wrong. Investing is emotional and one size fits all approaches are generally not wonderful.

    A LOT OF good financial advisors are more than worth the fee for the educational, hand holding, emotional management that goes into advising clients – especially if the clients are not willing to do their own due diligence or self education..

    For people that beginners should follow, Jeff Gundlach from Doubleline is generally a good follow for those new to investing – well respected, sharp, a little entertaining, and easy to read/listen to (not esoteric).Ignore most on CNBC and I’m not a fan of Dent, or anybody that’s promotional for that matter. Investing requires stoicism, not sensational forecasting/calls. Tangent/not super related, but for those wanting an entertaining econ primer video, EconomicPrinciples.org is good for understanding the business cycles at a high level.

  • David Schneider

    Some food for thought:
    1. The concept of retirement is an outdated and in my point of view very foolish concept. You work for about 40 years and expect yourself (or private banker), like a squirrel, to have enough nuts ready for the remaining 30+ years. And you and your loved ones can live happily ever after. Mind you, on an average salary trusting our governments and our friends from Wall Street. In history, that might have worked for a few generations – I assure you all, it wont work for us and the generations that follow.
    2. Have you ever considered that your standard index fund investment itself has created a massive bubble just waiting to pop. Look at Japan, now third largest economy, but 2nd largest economy not too long ago. Consider your assumptions you all have today – I make a bet with you – exactly the same assumptions the majority of Japanese had before 1990 – It is called the rear-view mirror dilemma.
    3. If you want to give your purse and the keys to your house to a complete stranger, who claims to be an expert and argues that only experts can be holder of your purse and keys – be my guest and contact me – I am an expert in holding purses and spending OPM.

  • David Schneider

    My tip: In a 0% interest environment you don’t buy/invest in financial assets (Unless you have proper inside knowledge or an enormous competitive edge) you create and sell them.

  • Mike

    Hey Dan and Ian. I’m a long time listener and in a similar situation to you. After last week’s show I was excited for this episode to air, but was disappointed that it ended up just being an interview with another active money manager.

    I’m a location independent entrepreneur like yourselves. For context on my situation; I’m 30 years old with a wife and 1 kid, have just over $1M in cash and investments and will make about $700k this year before taxes. I manage my own money and investments. It isn’t hard. Active money managers want you to think it is because obviously they make money if you decide to use their services. Here’s the approach I took:

    1) Educate yourself. Read the Stock Series by Jim Collins: http://jlcollinsnh.com/stock-series/, and take a look at this Mr Money Mustache article: http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/. Also this discussion on money managers vs index investing might be interesting to you: http://forum.mrmoneymustache.com/investor-alley/our-financial-adviser's-argument-for-active-fund-management/.

    2) Beware of the fees. The active management fee may be 1%, but what are the fees on the underlying funds they’re putting your money into? Often times the fee ends up being closer to 2%. That’s $20,000/year out of your pocket on $1M invested. That’s a lot of money. Over 10 years that’s $200,000, not including the opportunity cost.

    3) Pick an asset allocation. This could be as simple as 50% stocks, 50% bonds. You can find out more here: https://www.bogleheads.org/wiki/Asset_allocation. My own personal allocation is: 20% cash/bonds, 40% US stocks, 30% International stocks, 10% Real estate.

    4) Don’t sell when the market goes down. This is why some individual investors make less than the average. The market goes down 10-30% and they panic and sell. The market then goes up and they buy back in when it’s higher than when they sold and have lost money. This is called “market timing” and is a very bad idea as nobody (even the professionals despite what they tell you) can predict the future and know whether the market will go up or down the next day, month, or year. I couldn’t believe it when your guest said they went to all cash when the market dipped recently. That’s the worst thing they could have done! I would fire my financial adviser immediately if they did that. The market has since rebounded back up – I’m guessing they didn’t see that coming. Smart people continued to invest as the market went down and as it came back up. They didn’t panic and sell.

    The market goes up and down every day. Every so often it crashes 30-50%. Don’t freak out. This is normal and healthy for the market. It will go back up again. If possible, continue to buy MORE investments when this happens as you’re getting a great bargain on the price.

    5) Don’t speculate on individual stocks. It’s very unlikely that you’ll be able to consistently pick the winners and will end up underperforming or losing money more often than not. The easiest and safest thing to do is to diversify and purchase a small part in thousands of companies spread out across the world. This is what index investing is. You buy a small slice of every company in a specific “index”, such as the US stock market index, or the International stock market index. That way, if one company tanks, you don’t lose all your money. Diversity is the key. Don’t try to get clever thinking you can pick the next hot stock. Even the professionals can’t do this consistently. I tried doing this when I first started and learned very quickly that it’s incredibly difficult to do well on a consistent basis.

    6) Buy index funds. I’d recommend Vanguard (http://vanguard.com). They are unique in the fact that the shareholders of the company are actually their customers and so they have your best interests at heart. If you call them they will help you get started and select funds free of charge. Their expense ratios are the lowest around (think around 0.1% on most funds). The three funds I’d recommend as a starting points are:

    US Total Stock Market (VTSAX): https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT
    International Total Stock Market (VTIAX): https://personal.vanguard.com/us/funds/snapshot?FundId=0569&FundIntExt=INT
    Total Bond Market fund: (VBTLX): https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT

    Or you could just pick a target date fund: https://investor.vanguard.com/mutual-funds/target-retirement/. These are funds which are a collection of funds, so it already have an asset allocation built into them. Super easy!

    7) Get tax advice from a tax professional as needed. You don’t need to pay someone $20k+ a year for one-off tax advice. You can pay a financial adviser $500 for a tax plan specific for your situation. Minimizing taxes isn’t rocket science. Put investments which are taxed more heavily (bonds, real estate) in tax-deferred accounts and those which are taxed less (stocks) in regular accounts. An adviser can walk you through this stuff.

    I hope that helps. It honestly isn’t that hard. I used to be in the same boat and knew nothing about investing (I moved here from Europe a few years ago and had to learnt from scratch about US taxes and investing). I’d advise against paying someone 1-2% of your assets for the rest of your life just to avoid learning this stuff. If you have any specific questions then just let me know, I’d be happy to help!

  • Joe Wirbick

    At the end of the day it comes down to the simple fact that we don’t work with everyone.

    There are those that love doing it themselves and hate the idea of having someone else to do it for them.

    Then there are those that hate the idea of doing it themselves, never get around to starting, don’t bother checking to see if they are on the right track, and fail simply because they were too busy doing something else.

    For those people the 1% is more than worth it. Knowing someone is dedicated to them, out there working for them, their own personal financial planning advocate!

    It allows to them to rest easier knowing I have their back. I will not only show them how to get to a successful retirement, I will be there along the way ensuring they stay on track.

  • Joe Wirbick

    To reconfirmed, yes I take 1% regardless of returns. To give back during negative years is called “rebating” and is very illegal.

    I literally work and plan with hundreds of clients and each has a very specific personalized blend of investment strategies. Really cannot display them all here.

    You are welcome to visit my site

    http://Www.sequinox.com

    And look under the account access tab and you can check out some of our managers returns there.

    Or I’d be glad to put a plan together for you and show how I can help you. I only work with clients that I can actually make a difference. I have turned clients away when they did not need my help.

  • http://justagirlandherblog.com Donnie Lawson

    The guest had the perfect thing to say for every situation! His idea of picking the best money managers sounds awesome but I think it ignores reality. I try not to pick people or money managers but instead make decisions based on investment principles. Here are a few of those:

    Fama/French Three Factor Model
    Modern Portfolio Theory
    Black-Litterman Model
    Capital Asset Pricing Model
    Behavioral Finance

    I’m guessing Wikipedia has a decent overview of some of those. I also highly recommend a short read called The Elements of Investing by Burton Malkiel and Charles Ellis. It’s an easy to understand primer on many investment myths versus realities.

  • http://justagirlandherblog.com Donnie Lawson

    I don’t think there is a cognitive dissonance with that. Small/Value tilts historically have outperformed the market as a whole for a given amount of risk. Fama/French.

  • http://justagirlandherblog.com Donnie Lawson

    Wealthfront has oddly changed strategies in recent years. They seem less guided by principle than Betterment.

  • http://justagirlandherblog.com Donnie Lawson

    Survivors bias.

    Doing research to find money managers that beat the market doesn’t make sense. If there are thousands of money managers there will always be some that beat the market when looking back in history. Does that mean their chance of beating the market for a given amount of risk moving forward is better? No.

  • http://justagirlandherblog.com Donnie Lawson

    Joe’s not a bad guy. I just think the active strategy is very appealing to our senses but not supported by reality.

  • lion

    so a monkey can randomly choose a portfolio and see the same results as any manager but it’s also possible to beat the market via value investing?

  • http://justagirlandherblog.com Donnie Lawson

    Are you familiar with the research of Eugene Fama and Ken French? All I’m saying is that historically there’s a risk-adjusted premium that can be captured from tilting (as opposed to a market cap allocation) towards small cap and value stocks.

  • Evaldas Miliauskas

    Wow this really inspired an interesting discussion. First thing to mention even thought it might be ABC for crowd here – value investing: The Intelligent Investor & Security Analysis, then on speculator/investor mentality Reminiscences of a Stock Operator. I think these are timeless pieces and will still be relevant years to come.

    Personally I’ve been hooked up on investing myself for quite awhile and having tried and failed many times and being constantly better at loosing money then making any I realized that you need a lot more effort to actually try make consistent gains. This is where timeless lessons start ringing the bell from Warren Buffet, which advocates never loose many when it comes to investing and Jim Rogers, invest only in what you really know and don’t listen to anyone.

    Now for the actual content of the show it was really useful from the perspective that was taken. Taxes is one thing that many might overlook especially if it just creeps up overtime you don’t realize how much of money does it actually take away. Thought my guess is not all listeners are US citizens which is one of the 2 countries on earth that taxes on citizenship and enforces that aggressively. This means there are a lot more options when it comes to managing your assets across the globe, especially if you already have business internationally.

    Another point that was touched lightly, but I would like to add as well is the macro-economic implications. Some people already mentioned the fact that we are in zero interest rate (if you add inflation that would be even negative) environment. Which means that cash in a long run is literally return free risk. Not to forget the fact that US is the largest debtor nation in the history of the world at this point. A lot of people smarter than me are saying that this won’t continue forever so that might be something to look forward to as well. I really hope that what Mr. Joe has mentioned about 2020 being a start of a new bright future will come to fruition.

    In any case it was a good show even thought it was going sideways from the usual topics, respect for that for having the guts to do it.

  • http://GarinEtcheberry.com/ GarinEtch

    Do you guys know Mike Dillard? He did the same thing- sold a business and tried to figure out how to manage his money. So he started a business where he interviewed experts to develop the best investment strategy. Cool guy, awesome entrepreneur, and he lives in Austin.

  • http://www.funnelengine.com Richard Patey

    Great episode – as an investment noobie I’m not understanding at 14:25 where Joe mentions the money made from selling a business is taxed every year for life. I thought (in the UK at least) you pay capital gains tax just once on an asset and it’s only cashflow income that’s taxed every year? i.e. once you’ve sold your biz, paid your tax and have all the money in cash in say a regular current account, it’s only the profit on interest that’s taxable every year?

  • http://taylorpearson.me/ Taylor Pearson

    “I’d even suggest that wealthier entrepreneurs should pay someone solely for advice and consultations, like a therapist, even if they refuse to invest their money with a FA.”

    I had a really interesting conversation with someone who at one point in their managed part of their own money and left some with a CFA.

    They said what they realized was essentially this. The money managed by the CFA grew faster. Not because of superior performance vs the market but because they didn’t do anything irrational/emotional with it. He more than justified his “irrationality/therapist fee” that kept them from pulling out at the bottom and reinvesting at the top.

    My guess is that because (Western?) cultural values generally look down on therapy as for people who “can’t hack it” that CFAs can’t effectively market themselves as therapists and so they market “we beat the indices” and they deliver therapy (what the client really needs).

    This makes tremendous sense to me.

  • Michael Clara

    Is it impossible for a financial services company to truly share risk with their clients?

    Instead of charging 1% of the entire portfolio, even when the portfolio doesn’t make money, why not charge a higher percentage of only the positive returns?

    Scenario: I invest $100,000 on the first of the month. At the end of the month, I have $100,590 in my account (just over 7% APR). The company gets 15% of the $590 gain in fees. About $89 in fees. Just over the $84 the company would have taken from my whole portfolio.

    Maybe the percentage needs to be higher, since there’s more risk on the company. Maybe there needs to be a balance baseline so the investor doesn’t pay for a market dip then a big jump. Maybe it’s averaged over 3 months. Details are up for discussion, but the principle is the same: Earn me more money, get more fees. Don’t earn me money, don’t get paid. Every month.

    Even more justice would be to subtract the increase of the S&P from the earnings. I’d give an even higher percentage for that. The company would only make fees if my portfolio beat the S&P.

    This kind of model would ensure we were in it together.

  • http://empireflippers.com/ Joseph Magnotti

    I’ll give you one reason that model will never work — marketing dollars. A firm that collects 1% no matter the market conditions has consistent cash flow to spend on marketing to new customers. This means they still have funds during down markets to attract new clients not only via advertising, but affiliate and sales. In a highly competitive niche like this the firm with the most marketing dollars will come out on top.

  • Josh

    I thought it was well played by Joe when he asked, “We live in an economy driven by spending, would you agree with that?”
    “yeah”
    “If people stop spending then the economy disappears.”

    Thats a fundamental assumption that needs to be questioned before you make any long term bets on the economy.

    The Keynesian worldview believes that spending is what drives the economy and that the government needs to stimulate the economy at all costs, or else.

    Other schools of economic thought teach that investment is what drives the economy. If people stop spending money, they’ll save more.

    Those savings will result in lower interest rates, which signals to entrepreneurs that they should take on longer term projects since people have a delayed spending preference.

    Of course when the central bank disregards market factors and artificially lowers interest rates it fucks with the whole equation, causing the boom and bust cycle.

    I don’t want to start throwing around a bunch of economic jargon, but if you want to see these differing worldviews placed head to head in rap form, check out this video:

    https://www.youtube.com/watch?v=d0nERTFo-Sk

    If you’re still interested, watch them go at it for round two:
    https://www.youtube.com/watch?v=GTQnarzmTOc

  • Nick

    a few more cents:

    The financial advisory industry generally has gotten a bad rap due to the incentives of many financial advisors (FAs).

    FAs pay themselves by
    1. Charging fee-only on % of assets (better – they’re indifferent about the products/investment vehicles)
    2. Massive Commissions from selling you annuities or mutual funds with high loads (obvious potential for conflict of interest here)

    Not that annuities are automatically bad – they *do* have their place – but an FA can make 4-10% commission on selling you one. Pretty bonkers. Goes with the saying “Annuities aren’t bought, they’re sold.”

    All things equal, I would recommend those considering a financial advisor (FA) to seek out someone who’s a CFP, or on track to becoming one.

    Painting a broad stroke, the CFP designation demonstrates the FA knows their investment shit, as well as the tax, advising, regulatory, hand holding, psychology of financial advising. It’s really difficult and expensive (time-wise) to become a CFP, so they’re generally committed to their craft and aren’t just sales folks.

    A CFA is a “chartered financial analyst” designation – a designation more focused on security analysis, strategy, analysis, esoterics of investing. Many FAs are CFAs, but most CFAs probably aren’t FAs, if that makes sense.

    One other word of advice to those interested in self education, read a book on behavioral finance to get an understanding of your cognitive biases, shortcomings, tendencies, etc. People, investors especially – educated or uneducated, are really irrational – another reason why a good FA might be helpful.

  • http://www.memberman.com Ryan Crispin Heneise

    Wish I’d seen that when I was in school!

  • Eagan Heath

    No cognitive dissonance at all. Read Malkiel to the end. He talks about the strong and weak versions of efficient market hypothesis. I think the evidence bears the weak theory out and the strong version is absurd. Most equities are fairly priced, so indexing works, but some prices overcorrect (see Shiller’s Irrational Exuberance, Fama and French, Tobias Carlisle’s Deep Value, Christopher Browne’s The Little Book of Value Investing). As mentioned elsewhere in the comments, the world’s most famous value investor Buffett bet against the hedge funds and won using a simple index fund.

    http://www.npr.org/sections/money/2016/03/04/469247400/episode-688-brilliant-vs-boring

    Like indexing, value investing can be a relatively passive strategy: lots of buying and holding while the mutual fund guys rack up their transaction costs and cancel out any gains.

    Nod to Donnie re: tilting.

    https://www.bogleheads.org/wiki/Value_tilting_-_stock

  • Eagan Heath

    I agree with Donnie again. How is an investor to pick the winning active managers ahead of time?

  • Ryan

    I’m only familiar with random walk insofar as it was briefly mentioned in a brief history of hedge funds & I’ve heard of Buffet’s challenge

    I think what you’re not taking into account is that behind hege funds, there are People

    Imagine an mma fighter is the ‘fund’ and every opponent is the market. he may do well, but 1) he changes and 2) the game changes – people watch eachother and different styles become more prevalent at the top.

    Just because a fighter wins in one era then loses in the next doesn’t mean it’s random

    There are a lot of valid strategies:
    Event driven funds – is the likelihood of company A succeeding in acquiring company B hard to guess? Sure. Is it random? Absolutely not

    Or macro funds where a bill passed here will likely affect the price of something there. Are the chances of each of these happening random? No. But the climate does change over time and people are affected by hubris.

    This is to say nothing of shareholder activism where proxy fights can directly change the direction of a company

  • Eagan Heath

    That’s interesting about the game changing. These have been brutal years for value investors, so it’s possible that advantage is eroding. On the other hand, there have always been periods of underperformance for the strategy, and these last years may have just been another such period.

    I think you’re right that special situations arise that present outsized opportunities, but often the market reacts in anticipation to the same public information. It’s only when special opportunities are not bid up by others that those would work to beat the market. Those of us who index are just riding on the work of everyone else who is actively pricing stocks, which has worked well in the aggregate over the last 40+ years in the U.S. As you say the game could change. Part of that change might be too many free rider indexers just buying the whole stock market without considering individual equity prices at all. Conceded there that there could be different winners in the future as the market changes. To date though, the majority of mutual funds have not beaten the dumb overall average and the ones that did were impossible to pick ahead of time.

  • http://empireflippers.com/ Joseph Magnotti

    This discussion has gotten beyond the point IMHO. Entrepreneurs need 12 months cash in the bank PLUS start up for the next thing. That’s a lot of capital for most people.

    Don’t feel you are “missing out” by sitting on cash. Even Warren Buffett agrees.

    http://www.marketwatch.com/story/when-it-comes-to-stock-vs-cash-follow-buffetts-lead-2015-04-08

    Remember who we are here. We’re off the life script and that’s means we need a significant safety net with additional capital to take advantage of the next opportunity.

  • http://www.tropicalmba.com/ Dan Andrews

    thanks for the comment Joe, read your thoughts on the follow up episode.

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