Steve Forbes Interviews Liz Ann Sonders, Charles Schwab chief investment strategist
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My Notes on the Interview:
2:20 – Establishes her investing philosophy of long time guidance over market timing
3:15 – Explains emotion and time as two components of risk
4:40 – Over time proper asset allocation drives 90% of returns (selling into strength and buying into weakness). It’s also automatic
8:00 – Pockets of recovery throughout the economy
9:45 – Bloomberg financial conditions index as a snapshot for the credit market
12:00 – Fed has a tough balancing job between stimulating economy and limiting inflation. Sonders gives them a good mark
18:30 – Greatest financial lesson: Finance needs to be more accessible (Hope I’m helping!)
19:50 – Not bad a time to go to graduate school, then come back out during boom
20:50 – Agreed, most models are BS. A lot of models are really complicated but depend strongly on a few variables, which can be tweeked by bankers. There’s also the real life problem of “garbage in garbage out” meaning if what you use as inputs isn’t accurate, you’re output will be significantly off.
Steve Forbes Interviews John Catsimatidis, Entrepreneur & Commercial Real Estate Developer
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My Notes on the Interview:
2:20 – Own every piece of your business, including the real estate
5:50 – I hope nobody in who works in finance was dumb enough to buy their homes with company stock as collateral
7:30 – Americans like buying American? Well that depends on the product. On most stuff Americans don’t care. On politically sensitive issues, I agree
9:00 – What happened to oil when it jumped to $140 or why people hate Wall Street
11:40 – Principles of starting a business
13:00 – Salesmanship 101
14:30 – Doing his best Clinton impersonation
Steve Forbes Interviews P. Brett Hammond, TIAA-CREF chief investment strategist
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My Notes on the Interview:
Preinterview – A Republican complains about a Democrat. Shocking.
3:08 – Reframing 401(k)s, annuities (income) vs. nest eggs
5:05 – Differentiate the goals of your money
6:05 – Variable annuities explained (riskier than fixed annuities, but chance for higher payouts)
8:00 – Streamlining 401(k)s (autoenroll, assett allocation, annuities)
9:30 – Average contribution rates of 6-8% is not enough. Aim for 17%. (Increase your auto contribution)
10:30 – Why you should default into a lifecycle fund
11:30 – The paradox of choice affecting 401(k)s
12:20 – Inertia. Or people are lazy
14:30 – Pick the best company in a sector rather than sector. I disagree. I don’t think anybody should be picking their own stocks. Knowing just enough to be dangerous is worse than knowing nothing
16:20 – Look at Management. Buffett & Peter Lynch mentions investing in companies that are so good, that an incompetent executive won’t mess it up, as eventually somebody incompetent will be in charge
21:00 – Macroeconmic Viewpoints. Feel free to skip this
25:20 – “Bold Prediction: Euro as new standard.” Feel free to skip this
Thoughts:
Although inertia plays a role in why people aren’t more proactive when it comes to 401(k)s, behavioral economists have long proven that people feel the pain from losses much stronger than the joy of gains. So when the average small investor thinks about investing, he focuses more on what he might lose rather than on what he might gain. This is why left to their own devices, people tend to buy high and sell low.
This is also why people tend to adopt their company’s default option when it comes to selecting a 401(k) plan. Just making an option the default makes people think of it as superior to the other choices.
Extra Reading:
Loss Aversion and Status Quo Label Bias
“Don’t wear it now,” she simply said.
“What? Why?” I whined.
“You’ll get it dirty. Save it for later,” she responded.
“Um, when?”
“Maybe when you go back to America.”
At the time, it made no sense to me why I should “save wearing a T-shirt.” Aren’t new clothes meant to be worn?
When I was six, my grandmother was escorting me to America for the first time. I had not seen my parents since I was two and had never left China. On the Delta flight over, my grandmother saved portions of every meal that we were served, even the bones from my chicken wings which still had a few pieces of flesh. There were also times when I was still feeling hungry after finishing a meal. Instead of asking the flight attendant for more food, she’d say “no you’re not” and take away my Jello! But then when I wokeup from a nap, she’d conjure food from nowhere.
“I saved my meal from earlier because I knew you’d be hungry later,” she said.
That same evening, during a layover, my grandmother realized that we were missing one of the chicken dinner she had saved. I tried to reassure her that it was no big deal. But the look of pain on her face was as if she had been told a loved one was a dying. It was unbearable. She was angry with herself for being slightly careless.
That day, I learned two important lessons. The first was of the uselessness of delayed gratification. The second, and more important lesson, was about being honest with myself.
Everybody loves to place blame. We blame society, wall street, the media, the government and each other for our collective inability to save. But looking at what’s wrong with the world is the wrong approach to personal finance. Now there’s nothing wrong with taking an interest in the economy. And in this global environment, it may very well be a necessity to educate oneself on macroeconomics.
But when people focus most of their mental energy on things they can’t control, they are inherently paralyzing themselves. Because what else is paralysis?
Instead of developing habits based around saving or investing, people focus on the things that they can’t fix. So they do nothing but lie to themselves. This is why when people buy something they can’t afford, they might feel anxious, but then quickly reassure themselves that “they’ve been good and deserve it” or that “it’s on sale so it’s a deal.”
To face ourselves, that’s the hardest thing to do. To learn how to do it at an early age, that’s God’s gift to make the act of self-examination bearable.
“Wall street people learn nothing and forget everything.” – Benjamin Graham
Let’s pretend that you’re the owner and general manager of a major league baseball team. Here’s the rules. If you’re in your twenties, then you have 40 to 50 years to run the team and try to win a world championship. A world championship is defined as saving and investing enough so that you can retire happily without worrying about your money running out. If you’re not in your twenties, then subtract your age from 65 and that’s how many years you have to win.
As a general manager, you have two to ways to fill out your roster.
- Pick all the best players yourself.
- Higher a VP of Scouting who does the work for you. There’s two very different types of VPs on the market.
- Jim Kramer: A high powered baseball guru. Although he’s very expensive, he comes highly recommended and promises results. If not he’ll throw chairs around.
- The Baseball Tron 5000: A simple computer program. The Baseball Tron 5000 doesn’t take into consideration a particular player’s strengths or weaknesses. Instead, it issues a contract with every player available and pays them all a small retainer to be on your team. However, because your team will be so large most of them can only play a few games for you. In that sense no single player will have a huge impact on your overall performance. The program is very inexpensive compared to Jim Kramer.
Let’s say you picked the “Do It Yourself” approach. I’m going to be honest with you, this is a dumb choice. First of all, you don’t know anything about baseball. You don’t know what an ERA or what an RBI means. When you make a trade for another player, you’re probably going to get screwed by more knowledgeable managers. All you know about baseball is that after watching a few games, it’s exciting to see somebody step up to the plate and crack a homerun.
So you know you need a homerun hitter. But he needs to last 40 years. Ideally, you’d like him to hit 60 home runs every year but you know that would be impossible. In some seasons he might be so bad that you want to fire him. If he does, you’ll have lost a huge amount of your capital. That’s a lot of risk to take on a single player.
“What the hell,” you say to yourself. You’re young and you have to be aggressive. You subscribe to Baseball America, which has identified 10 players who did really well last year. You decide to make a substantial investment, 20% of your capital in a couple of these hotshots. It’s risky, but they come highly recommended! The next year, your guys start off good but fall into a slump. Now you have a problem. You’re debating whether or not if you should trade them and take the loss or wait and hope they improve. As you’re debating this, a new copy of Baseball America arrives. It’s touting 10 completely new “Must Own” players. They’re gonna kill it!
In investing, picking a single stock or even a couple of stocks that you think will kill it is like trying to identify a top slugger. There are many great players who do better than expected, but do you really trust YOUR ability to pick the best players when most professionals GM’s can’t do it? You might get lucky and find a Cal Ripken who returns above average results for a long time. But for every unidentified consistent winner, there’s a Sammy Sosa, an overpriced stock everybody loves in the short term. In the long run, these stocks probably won’t be giving you above average returns every year. They’ll return to the mean unless their really special. But even if they are special, you won’t know when they’ll slump or when they’re about to take off, so any investment that depends on when you buy/sell rather than buy/hold will depend on a healthy does of luck.
After learning more about baseball, you realize that it’s a bad idea to concentrate your capital into only a few players. Instead, you realize you need infielders, outfielders, and pitchers. Most people never learn the lesson you just learned. They try to find as much offensive one hit wonders as possible and forget about defense. They load they’re portolio with 5-10 stocks and think they’re “diversified.”
You carefully avoid that trap by filling out 10% of your roster with pitchers who do well when hitters struggle. For a small price, bonds will offset your risk to equities. This is the basic meaning of “hedging,” before hedge funds made the word a catchall for exotic investing.
You can also diversify your offensive. You not only buy U.S players, but also players from China, Costa Rica, Japan and Europe. In investing, this means having pieces of small, medium, and large companies which are both domestic and international. The key takeaway is that after you are diversified, if one sector goes down, it doesn’t drag your entire portfolio with it.
Let’s forget about picking our own players and go back to the second option. You hire a VP of Scouting. The way the VP of scouting does his job is by buying you small shares of every single player available so that you can create a farm system. No single player will have a great impact on your team, but if they all do well, you win. Statistically speaking players get better with time. You can get all these players through a Jim Kramer, who actively manages finding new players, or through the Baseball Tron 5000.
Out of your two VP’s who does a better after 40 years? Is it Jim Kramer, the bald but brilliant, chair throwing, temper tantrum guru? Or is it the silent and emotionless Baseball Tron 5000?
As it turns out, the Baseball Tron 5000 is the winner. That shouldn’t really surprise you if you’ve learned your lesson from trying to pick your own players. The Jim Kramers of the world, the actively managed mutual funds, have numerous fees and expenses that will cut into your profits. Because of these fees, almost all of them fail to beat the market. It would require somebody with an extraordinary amount of skill and information to succeed. Secondly, even though a few of these guys exist, (e.x. Peter Lynch, Warren Buffett) LIKE STOCKS, YOU WILL NOT BE ABLE TO IDENTIFY TOP MANAGERS UNTIL AFTER THEY HAVE SUCCEEDED.
On the other hand, the Baseball Tron 5000 is both cheap and effective. What it lacks in marketing it makes up for in performance. Since we know that as a whole, stocks do better over time than other investments, we know we need to be in the market. But we want to reduce our exposure to egregious fees and unnecessary risks. The best way to do this is by buying the entire market. Passively managed index funds do this for a very cheap price.
Vanguard and Fidelity are two of the most trusted name in the industry as far as passively managed no load funds go. Vanguard’s fees are usually around 0.19%. Fidelity’s Spartan Funds, are even cheaper with a 0.10% fee. They have no other fees or restrictions. Compare these prices to an actively managed fund’s fees of 2.0%. Over time and through the power of compound interest, that’s a HUGE difference. It could mean that you lose nearly 50% of your gains over time if you pick an active fund over a passive fund.
If you want something that you basically “set and forget,” take the time to look into a lifecycle fund. These funds work the same way as an index fund, except that they change their mix of stocks and bonds on their own as you age. If you want diversification and proper asset allocation (which you do!), these funds do it by themselves, although they aren’t perfect.
For example, be wary of the overpriced lifecycle funds that have fees around 0.70% which will cost you quite a bit of money in the long run. Also, make sure that whatever fund you do buy doesn’t concentrate all in one type of sector. There’s so many exotic sector index funds that it basically beats the purpose of indexing if you buy into them. Like any investment, these funds are not guaranteed. They just have less risk and upkeep compared to other ways to investing in the market.
Before you go dumping your 401(k) into one of these funds, make sure that the retirement date matches up to your age. If you’re fifty-five DO NOT buy into a target retirement fund set for 2050. You don’t want to see your entire savings reduced by 40% in one year if you’re just about to retire.
Also, don’t just plunk all your money down at once. That’s like spending all your capital to lock down contracts for every player in one season. It would be much smarter to have capital on hand so that you can renegotiate contracts the next season when prices change. In investing, you do this via dollar cost averaging to deal with the tyranny of the market.
Checkout the 22 year chart below for why you should dollar cost average into the market. It also shows the results between two of the more popular and “successful” actively managed mutual funds versus the Vanguard total market 500.
Here’s the main takeaway from this chart. You’re just gambling if you try to time the market rather than dollar cost average. The past won’t predict the future so the best way to invest is to do it a little bit at a time, over a long period of time.
Extra Credit Reading:
Bloomberg Story: Magellan Shows Peril of Active-Managed Stock Funds as Fees Bite
A Random Walk Down Wall Street