Ignore Traditional Investment Advice That Doesn’t Work (Episode 36)

Well, individuals should own stocks, but they should not pick stocks themselves. Because if you tell me that I'm gonna be a stock picker and I'm gonna listen to, uh, CNBC or Kramer and buy stocks. My question to you is this. You're probably gonna spend if you're really devoted to this 30 or 40 minutes a day on your stock selections. So explain to me how you're gonna do better than somebody who spends eight to 10 hours a day doing the same thing. Who's following the stocks a lot more closely than you. And who's probably analyzing them a lot deeper. So my conclusion is you're probably setting yourself up for pale. If you picked your stocks yourselves, let the professionals do it or buy an index

You exactly. And letting the professionals do the picking, if you decide to go active.

Yeah. Now, first of all, let me make a broad comment, picking up what you just said. Kate. Think about what happened when the couple of years ago, when the pandemic first came about and all the jobs were being lost, GDP was going down. It was absolutely the most frightening economic scenario the United States could have imagined. And everybody figured we were gonna have the worst crash ever. And what happened instead, we had one of the biggest bull markets ever, right? Go figure and take that into account. The next time you try to predict the market. Okay? But now valuations, especially in the tech area, got out of whack. And since the beginning of the year, we have had a massive correction. The question now is this the decline in the stock market. If you had to pick one, cause it is inflation. And that is the thing that people are most worried about. And it's caused by a lot of different things, including the war, including the war in Ukraine, supply shortages, pent up demand from the people who couldn't buy anything during the pandemic were now out, uh, spending, spending money like crazy. So inflation is the big worry. But in the last couple of weeks, we have noticed that commodity prices have come down significantly. Gasoline prices have ticked off their high. So there may be array of hope here, which is why the market has been so strong in these past few days. I think

They? Yeah, no, absolutely. Right. And I have a particular advice for the federal reserve, somewhat presumptuous of me, but I do have advice. I've been doing this for over 50 years. So I figure I'm entitled to give them advice. And here's my advice at your next meeting in few weeks, announce that we're gonna raise interest rates, not by 75 basis points the way you've been promising for the last month, but only by 50 basis points because inflation has come down a bit. If that happens, the consumer confidence will soar through the roof. The market will do a major happy dance and the fed will have accomplished something positive with good reason.

Got it. Right. But so imagine if they surprise a positive surprise by saying, guess what prices have come down, it's working. We only need the 50 basis point increase the, the positive sentiment that will engender is going to be massive. I think if that happens, that's my advice anyway.

Okay. Again, depending on the age and the financial situation of the clients, clients who are older my age, or even a lot less younger than me, need to worry primarily about a preservation of capital because they cannot afford a 20 or 30% decline that sticks around. Hopefully not this one, younger investors should not worry at all because uh, history shows, we can talk about this. A little later history shows that the market always comes back. We have a hundred years of history that the market always comes back. So my advice to younger investors is to be invested primarily in equities. And unlike the advice we used to give to clients that, you know, rebalance and look at your portfolio every month, uh, my advice is get it right the first time. And I could tell you how and don't look at it except maybe once a year out of curiosity, because it's gonna grow until you reach that 55 or 60 year old stage, by which time you'll have amassed quite a fortune. And then you can worry about preservation.

This is the substance of my book. My prescription is this. After having studied this for over 50 years, number one, you should invest in two index funds, the cap weighted S and P index, which is weighted by size of the company and the equal weighted S and P index, which is where all 500 stocks have the same weighting. The reason for that is begin with the tech boom, six or seven companies in the cap weighted the normal S and P index, uh, account for something like 25% of the index. So that is very vulnerable. And we've seen that in the recent market decline. So owning both cap weighted and equal weighted indexes is the way to go. And I also add a small amount of gold, but the main thing is history shows again, that it is very hard to beat the index and 80% of active managers don't. So where do you wanna put your

Good. I'm glad you mentioned that because we did a study on that too. And I think there's only one international market, over many, many decades that has outperformed the us. And I think it might have been Australia, which is a pretty small market. I have to double check that, but it's in my book and there was no value long term in investing international. Number one now, by the way, companies are so diversified internationally. Now that you don't need to go to Europe to buy something with exposure to Europe, most large American companies have a lot of exposure to Europe. Secondly, emerging markets, same thing. History shows that emerging markets over long periods of time, don't help your portfolio over short periods of time. They might, but you're only gonna own five or 6% of emerging markets in your portfolio anyway. So it's not gonna help much,

Absolutely. Kate, Kate, we got it. Absolutely. And there's been no advantage. And again, I'm looking at long periods of time, decades, not short periods of time, uh, which we can't predict and modern portfolio theory. I, it doesn't work for investors who are growing their assets. It works for people who have a lot of money and wanna preserve it. That's what diversification does it diversification doesn't help you at all when you're young and trying to grow your assets because we know the only thing that's gonna make you a lot of money are equities bonds. Aren't gonna make you money. So when you're young, you should be concentrating on only investing in equities and worry about diversification after you're rich, because it's not gonna make you rich.

Okay, good point today, especially in this period of volatility and uncertainty, there are a number of investments with high yields and safe yields that provide income in the six, seven and 8% category that are really quite good. Now, in some cases, they're individual investments. In many cases, they're master limited partnerships. They are funds of preferred stocks. Uh, there are a number of these and investors by doing a little bit of research, can find some names that are very, very well researched with quite safe dividend incomes of six, seven, 8%. Most people are very happy to get income of six, seven, and 8% a year, and this they can do with much less volatility than the overall market.

Uh, they're both in some cases, individual securities, but when I say individual securities, it might be a single R E I T for example.

Warren buffet owns one.

Exactly. And again, there's a little bit of timing effect here too, because this is a good time to be looking, you know, for high yield. That is great. And again, I have to emphasize that, you know, the analysis has to show that the yield is pretty well protected and it does.

Well, I've just written a book. This is I think my eighth book, investment book, two of which we're pretty good best sellers. This one is the culmination of 50 years experience in the market. Can I show you this is the title. Okay. The plus plan. And it basically is a very simple plan based on a hundred years of history that works. And it mirrors what we talked about just a few minutes ago that you put your money systematically every month into two index funds, the cap weighted S and P 500 and the equal weighted S and P 500 with 10% in goal to act as a little buffer and you put it away and you forget about it. The book is very short and it shows how to do this. You don't need any help in doing it, and you can set it up in minutes and just keep at it.

I want to tell you, I conclude on the very last page in the book with, I transcribed an interview that Warren buffet did with Becky quick of CNBC. And he said, I bought my first stock when I was a teenager in 1942. He said, that's when I bought my first stock. And he said, since 1942, we didn't even know who was gonna win world war II. At that point, we didn't know about inflation in the seventies. We didn't know about nine 11. We didn't know about banking crisis. We didn't know any of that, but let me tell you this. If you had invested $10,000 in the market, generally in 1942, how much do you think it would be worth today? And then Warren buffet paused. He said, I, Becky, I want your listeners to think about this and I'll give you the answer. And he paused for a couple of seconds. And he said that $10,000 without you having done a single thing would be worth 52 million today.

Maybe they'd settle that maybe they'd settle for 10 or 15 million.

Yes, it is. What works. All you have to do is look at history and what has worked, uh, the market is the single best source of wealth in the United States. And we have a hundred years of history to prove it. And it always comes back and sets a new high. Now you wanna say, history's gonna change good for you all rely on the a hundred years that we've already got. And it is deceptively simple.

Exactly. So it's amazing how simple it can be. It's just that over the years we've overcomplicated the process. And as I said, there is a very simple path for young people. It just takes a little bit of discipline and very little work to achieve a multimillion dollar retirement income.

Well, the easiest way in the world is to look it up on amazon.com and you'll find my book there. And you'll also find a whole bunch of other ones that I've written over the years, but stick with this one, if you're young.

Then you do such a great job, Kate. It's been a real pleasure.