Money Talk

Episode 03

Asset Accumulation

Ed and Chuck dive into the asset accumulation stage. Becoming a part of a tribe. Everyone wants a friend. Get a dog. Default to the truth. What are your concerns, what are your fears. Focus on the journey. Where are you going? What is your destination? Are you better today than yesterday?

Welcome to our listener-supported podcast, Money Talk, uncompromised absolute financial truths behind financial perceptions with host, Ed Sutkowski and Chuck LeFebvre. Let’s listen in.

Chuck: Hello, I’m Chuck.

Ed: I’m Ed.

Chuck: Today we’re still talking about the accumulation phase and specifically talking about the philosophy of asset accumulation. Ed, one of the first things I wanted to touch on here is we’ve had a recent reminder, thanks to Malcolm Gladwell’s new book Talking to Strangers. He reminds us of what I think is a fairly old set of research by Timothy R. Levin that involves they call it The Default to the Truth. The idea is that Levin did this research where he was investigating how it is that people are so bad at gauging the truthfulness or falsity of statements that are made by other people. What he determined was that people are actually pretty good at predicting true statements, but they really are terrible at detecting false statements. His conclusion of the research was that there is a default to the truth. That we all walk around with this, operating assumption is that the people we are dealing with are honest. My question is where does that– the philosophical implications of that when it comes to this asset accumulation process?

Ed: Well, it really relates not only philosophical but kind of sociological instincts. We want to be part of a tribe, a fraternity, sorority. We want to be able to wear a Chicago Bears uniform, at least a jersey. We want to be part of a group, a tribe if you will. We’re always looking to increase our tribal instincts. We want to have more than one tribe and as a consequence, this does make society work in a way in the sense that if you had to be skeptical of everything that anyone ever suggests nothing would ever happen. You must default and that the issue is defaulting to the truth. We try to trust everyone but in fact, that’s not fair. We’ve got to pull ourselves back and say, “Look, this seems to be the case, but let me dig deeper.” Let’s ask X doctor how many procedures have you performed? Let’s ask the tax attorney how many pieces of litigation have you been involved in? By the way, did you win, or did you lose and what was the cost? The accountant, well, how many audits like this have you done? We’re are disinclined to ask someone their background. Mr. Financial Adviser let’s see your balance sheet for the last three years. How have you done with the investments that you’re recommending to me? Have you done it for yourself? We’re afraid of asking that question when in reality it’s because we want that individual to be part of our tribe and want everyone to be our friend. I must tell you if you really want a friend, get yourself a dog.

Chuck: I don’t think that’s the first time you’ve said that either.

Ed: No. It’s a recurring theme and I see that virtually once a week, twice a week, maybe even every day. You hire a contractor, and he tells you, “You must have X, Y, and Z done in your house”. Are you going to say, “Well, let’s go through those in detail.” Because to the extent you’re doing that you have no time to do what you’re best at. We tend to default so that we can do the things that we really enjoy. The theory is never do anything someone else can do. The folks that have accumulated a lot of wealth or prestige or both tend to delegate, then they relapse and tend to delegate. That’s a good thing but a bad thing because you’re no longer as skeptical as you should be.

Chuck: This default to the truth concept applies not just to factual statements but really to the degree of expertise that other people might be bringing to the table. We’re talking now specifically about a financial advisor.

Ed: Yes. Let’s assume a listener would say, “Well, Chuck, Ed, why should we believe what you’re saying?” People should be skeptical of what we’re not expressing. My responses is, well, look to our website. We’ve been at this for 75 years. This is not our first rodeo and we’re not telling you what we’ve done. We’re telling you, recounting to you, observed results. We’re not going to be talking about something that’s a potential. We’re talking about real life examples. We’re not giving you advice; we’re reporting to you. You want to be skeptical you can say, “Well, where’d you get the information?” I can produce that; I have the background. Someone who’s Phi Beta Kappa well, let’s see the Phi Beta Kappa certificate. Are you going to ask someone that when they say I’m Phi Beta Kappa? I don’t think so.

Chuck: You’re suggesting maybe we should,

Ed: Maybe we should. Well, it depends on what you’re doing. Because if it’s not essential to your life, why ask the bus driver, “How many times have you driven the bus on this route?” That is necessarily essential or the Uber driver, “How many years have you been doing this?” If you’re going through open-heart surgery, the first question is, “Zack, how many times have you done this?” If that individual says, “Four times in the last three years.” Do you think you might want to get a second opinion? It really relates to the time available to view the the provider of the services in detail or not. You’re not going to ask the taxi driver, how many times you’ve driven this taxi from A to B but you are going to ask the heart surgeon how many times you have performed this procedure.

Chuck: Well, it’s interesting in the application of that to a financial advisor. That it would almost be an unfair question to ask a financial advisor how many clients have you taken from the day of their first job all the way post-retirement and then following their death and into the next generation, which is really the type of planning that you’re looking for from them. The answer is, of course, very few financial advisors have been across that entire spectrum, even once if not dozens of times or hundreds of times, which would be ideally what you would be getting from them. You assume they just have training from people who’ve collected the wisdom over the years of this type of advice or what works.

Ed: The real question, Peter, advisor, let’s see your balance sheet for the last– not your income statement, whatever you made is your business, given other sources. Let’s see your 1231 hopefully audited but really unaudited financials. The statement you give to the bank, for 1231 in the last three years. Let’s see the nature of the investments and how have you done. Especially your short and long-term capital gains. Then you have some credibility, “If you did that for you, you can probably do it for me.”

Chuck: Well, I see this playing into what is probably the most significant conversation and something we’ve touched on before, that you would have with a financial advisor which has to do with risk assessment. The general approach that you as a client would take to investing. When you sit down with a financial advisor and you have that conversation and you’re talking about long-term goals, the conversation will turn to the advisor asking you, quizzing you about things like, “What type of income do you want during retirement?” They’ll ask you to look down the road and think about the goals of what you want to do with your money later, instead of now. The entire thrust of that conversation in a way it’s about saving and accumulating wealth but, in a way, when you think about it, what they’re really talking to you about is how do you want to spend your money. Just not spend it today but spend it tomorrow. I’ve always thought that conversation is exactly backwards in a sense. That the conversation really should be much more focused on what are you doing today? Just a review of your philosophy about money and money management and wealth accumulation, and so forth today. As in what are you going to do in your daily life right now to help you accumulate wealth. In this podcast, we’re talking about myths that permeate the industry, and in by virtue of permeating the industry, kind of permeates society about financial planning and financial health. There’s kind of a myth that’s promoted, if not spoken out loud as a result of these conversations that people have with financial advisors. That myth is that, gee, if I tell a financial advisor that post-retirement I want to buy a vacation home, and I want it to be in Hawaii and I want to be able to spend this amount of money, that we can sit down today and we can actually map out a plan. We can make a prediction about that outcome and we can work backwards from a future goal towards what I need to do now. I’m just thinking about conversations that I’ve had, and I know you’ve had with, for instance, the entrepreneur. They never talk about stuff like that. When you’re sitting down and you’re talking to an entrepreneur, they’re so focused on what is happening right now. When you think about what drives them, I think they would be lost in one of these conversations with the financial advisor view. What are you talking about 30 years from now? 30 years from now, I’m planning on doing exactly what I’m doing today because I’m enjoying it so much. It’s just an entirely different attitude. Their motivations seem to be much more driven towards freedom. What they’re looking for is freedom in their life. They typically are people who are self-motivated, they don’t want to be under the thumb of other people and what they’re driving towards is achieving a vision for themselves and for their families and for their business. The time that they want to achieve it as soon as it can be achieved without trying to do this planning that operates from some kind distant goal and working backwards. It’s just I see that goal and I’m going to head towards it. I’m going to take as many steps as I can today and I’m going to get up tomorrow and I’m going to do the exact same thing. They’re willing to make sacrifices along the way and they’re willing to fail along the way. That to me is so– I don’t know if what I’m saying is making a lot of sense here, but I juxtapose those kinds of conversations that you have with entrepreneurs, and those people tend to be very successful people they tend to epitomize in many ways, what financial planners are telling their clients that they’ll be able to help the client achieve. It’s almost like a conversation with an accountant versus a conversation with a racecar driver. In the sense that these don’t even seem to exist in the same world in some sense.

Ed: Well, let me give you an example. Over the 50 plus years I’ve been doing this, I’ve never asked a client new or ex-client that’s been around what are your expectations? Wrong question. Right questions are, Mr. Client, Ms. Client and, Mrs. Client what are your concerns? Number one. Number two, what are your fears? Never expectations because it’s not fair. People will say, X, Y and Z when it’s silly. They’ve heard that from the milkman. The issue is, what do you fear? You fear losing money? A person, the entrepreneur, Mr. megabucks? Losing. So what if you lose money? I can get up again, I’ve got a plan B, plan C, plan D. I don’t care about losing money because I know that 20% of the time, I’m going to fail. Failure is not a big deal so that’s not a concern.

Chuck: Wow.

Ed: If you identify that then you can address it and you can tailor your recommendation, your response around that versus, what are your expectations? You see a heart surgeon and you’re going to get bypass surgery, “Hey, Charlie, what are your expectations?” “Well, I want to be able to play NFL football tailback after the surgery.” That’s not realistic. Versus, “I just want to make sure that I don’t die.” They maybe die at the table; I know I’m going to die but I don’t want to do it at the table.” I hope I’m making sense there. By the way, you will not get answers to those two questions until the end of the interview and typically the individual is ready to leave. “By the way, what I’m really concerned about is this grandchild that is married to someone I don’t like.” Why didn’t you tell me that sooner? The point is, that’s the way the world works and when you understand that you are then in a position as a, “Professional” of coming up with a solution that satisfies those fears and those concerns. Forget about expectations, that’s a silly question.

Chuck: It may not be apparent immediately but those comments you made seem to me to directly apply to conversations and thoughts that people have about managing their wealth accumulation plan. We discussed this in one of the earlier episodes of the podcast, the idea of how do you determine what your risk-profile is. One of the points that I attempted to make, maybe articulately and maybe not, was that when people talk about their risk assessment, they are coached to use certain type of language in these conversations with their financial advisers. But their real thoughts are something very similar to what you said about being on the table with the surgeon. It’s like, “Hey, look, I know I’m going to die but I don’t want to die on the table.” When you are talking about, “I don’t want to lose money.” Well, when, when don’t you want to lose money? Does it matter to you if that’s a week from now versus a month from now? The real fear there is when someone says, “I’m more concerned about the return of my money than the return on my money.” Well, let them put that money in a cash account for 20 years and not have it grow at all and then they’ll suddenly decide that, “Wait a minute, I didn’t actually mean that when I said that 20 years ago. I actually did want to get some return on my money.” What they really meant was, I’m going to need this money for some specific thing 10 years from now and I want to make sure that it’s there at that moment in time. If they think about it rationally, they’re not all that concerned, or they shouldn’t be all that concerned about what sort of fluctuation occur in-between the beginning and whenever some kind of withdrawal has to make. Again, this comes back to these conversations that people will have, the people who actually go to a financial adviser. They get coached into thinking about risk in a way that clouds their eyes against, and coaches them into a type of thinking that is the opposite of the entrepreneurial thinking.

Ed: I’m always afraid of losing money. I’m going to design a portfolio for you that you’re not going to lose a nickel, and by the way everything I send you is plastered on with the phrase “You can lose.” Versus “You can win.” I just don’t get; I don’t understand that. Why are you telling someone when someone knows, “I can fail.” Why do you keep reminding them?

Chuck: Or just tell them that you need to expect to fail some of the time. Like playing poker, I might occasionally say, look, I’m going to lose with a winning hand on purpose so that later on in the game I can win with a losing hand. It seems like the coaching that should take place would be the kind of coaching that teaches them, look, this is how you go about this, you need to go in knowing that there is going to be some losses along the way but those losses are in fact the key to making gains over the long term. Rather than being afraid of them or feeling like once the client says something like, “Well, I don’t want to lose any money,” that suddenly it’s, I’m done coaching you on that. I’m just now going to completely adhere to that fear of yours and build everything around it. These conversations take a bad turn. There is a third kind of person that seems like we could mention here and that’s the person who’s not the young or driving entrepreneur but someone who, let’s call it the megabucks achiever. Someone who has in fact accomplished the goals that everyone says that they want to achieve. The goal of actually accumulating a great deal of wealth. When you have conversations with them, it seems like that’s almost a third type of conversation, isn’t it? When I have conversations with those kinds of people, it seems like those are people who are just– unlike the entrepreneur who might be very passionate about a specific vision for a specific business and so forth, there’s a different– I can’t quite– maybe you can put some words on it, put these in the words for me. The kind of passion you see from the megabucks achiever.

Ed: Well, number one in every instance over 50 years it’s humility. Your light shines brightest under a bushel basket. You never know how wealthy or the nature and extent of the accomplishment of Ms. or Mr. megabucks because they don’t display it, they don’t talk about it. What they’ve garnered is self-respect. They feel good about themselves; they get up in the morning, look in the mirror, “I had a good day yesterday, I’m going to be better today than I was tomorrow. I’m going to improve. I’m going to create value.” Let’s talk about value. They think of value as a two-sided coin. First value in the economic sense, “My net worth is up X%.” By the way, everything is in percentages it’s not in dollar amounts. It’s in a percentage typically round numbers. “That’s good because I’ve created some jobs, I feel good about myself, I respect me.” The other side of the coin is the qualitative value created, “I created jobs.” The second question that’s asked anyone is what do you do? If that person can say, I do A. Well, that’s something, B, C, D. The second question is, what do you do which means, how do you feel about yourself? The megabucks person has more wealth than that person could ever spend. There aren’t enough purses or shoes or cars or airplanes or jets because they don’t have any of those. They have one home and maybe some small home elsewhere and, in a tax advantageous State. You never know what they’re worth by looking at what they seem to be doing. Because they seem to be swimming in the ocean like a fish with no friction. Yet they’ve got these megabucks and you think, “Well, here’s what I think we can do. What are your fears and what are your concerns.” My concerns are I think I can do a better job. There are some charitable opportunities of doing the best for the country than can the government. Also, when you’re thinking about maybe charitable gifts or a foundation or a donor, you can approach it that way. Number one humility, absolutely no fear of failure. I took bankruptcy 30 years ago but yet I achieved, and I paid back all those creditors, not with interest but I paid them all back. Because I not only endured, I prevailed. Everything is on a very high philosophical plain. I’m going to fail 20% of the time but so what, because I’m going to win 80% of the time? I have these constant fears. That fear is, “I must do better today than I did yesterday, and the measuring tool is me, it’s not you.” Does that make any sense to you?

Chuck: It does. It also makes me wonder if the megabucks achiever is the same person as the entrepreneur only at a later stage or this is a fundamentally different person?

Ed: It is interesting. The licensed professionals are not megabucks achievers, are not entrepreneurs. The greater the number of designations after the last name the more you should watch out. CPA, MBA, it goes on and on and on because those people are afraid of taking risk. Recall the lawyers tell you what you can’t do, the accountants tell you what you’ve done, and the achiever, the entrepreneur, the value creator just does it. I think of Nike, Just Do It. Well, there’s something to that. After you’ve thought about it and how does that fit in with what you’re doing? In other words, a lot of folks don’t really spend a lot of time thinking. I don’t know if it makes any sense to you.

Chuck: It does, and I agree.

Ed: 80% of your time should be spent thinking. I’m not talking about your day job. You shouldn’t be watching TV; you shouldn’t be messing around with the internet or all these things that folks nowadays do. You should be thinking, reading, and getting different perspectives. That’s my view of the world and I’m sure the only time I thought I was wrong is when I was wrong. The beauty of this is you’re going to be wrong hopefully not too many times, but you never tell someone what to do. You address those fears and concerns and give them options. Make any sense?

Chuck: It does. I’m trying to bring this conversation to let’s say someone’s listening to us and they’re saying, I understand the concept here of the entrepreneurial mindset. What I’m interested in doing is I don’t have my own business; I’ve got a regular job. Maybe it is a licensed professional, Ed, who’s listening, who’s saying I want to become a mega-achiever, a mega-saver but I work for the hospital, I’ve got an employer there’s really not an entrepreneurial opportunity there. How do we apply this discussion we’re having today to that person? I’ll give you what my answer is to that and I suspect you might have a slightly different answer. My answer to that would be that you need to think about this wealth accumulation process in terms of not looking at it in terms of here’s what size of a nest egg I want to get by such and such a date, but in terms of this is now a project that I consider to be a self-fulfilling project. The act of doing what I can today to set aside and to plan for the future and to use good sense in terms of how to make investments and manage investments and work toward that goal is in itself needs to be a gratifying activity. The end result will come if you can get some enjoyment out of that on a day to day basis. That becomes your entrepreneurial exercise. Is actually working towards that goal versus spending lots and lots of time with spreadsheets trying to figure out what that end product is going to be and then trying to find back your way into it. That’s just what I’ve observed. Maybe you completely disagree or maybe you’ve got some other thoughts.

Ed: No. I happen to think that you’re right on. Let me give you an example. 1200 or 1500 BC and there was two books, one was called The Iliad and the other was called The Odyssey. The Odyssey among other things demonstrates that the destination is the journey.

Chuck: I’m glad I don’t have to read that book now.

Ed: Well, you’re missing something if you don’t and I know you have. It’s just the idea is those self-evident truths are true today. Addressing this issue, you’ll recognize from that hospital employee or health care provider or whomever you’ve asked what are your fears and what are your concerns? The fear is losing money or fear of not having a job. Well, don’t try to convince that person to borrow money to invest. In addressing the needs and concerns of the individual, don’t make that person into the image of you. That’s not your job but identify what are their fears and concerns. You would never say that the person that’s a wager is a nice W2, the children if any, are well educated or are getting scholarships, very bright people. That’s okay. You don’t have to have everyone be Mr. or Ms. Megabucks. You have to be careful in assessing the nature and extent of the recommendations. Bear in mind that I think the big deal is focusing on the journey. That is the destination. The process is what this is all about.

Chuck: Are you saying that someone let’s say a wager and let’s say maybe not a physician, not someone who’s super highly compensated but someone who’s just at let’s say, an ordinary job who’s a wage earner. Is that person engaged in a futile effort by wanting to become the megabucks achiever? Or are you just simply saying– I’m not sure if what we’re saying here is, “Hey, don’t bother because you’re not going to be the megabucks achiever.” Or if what we’re saying is, “Look, whatever you do achieve, you need to enjoy the journey.”

Ed: Yes. I think about the carpenter and he or she is the most rewarding professional I’ve ever run into. You can see the product; you take pride in that and that process of creating that value is more than enough. You would not ask the carpenter to put the carpenter’s tools down and let’s become a race car driver or let’s become an investor and borrow X thousand dollars against your home. In that instance, it’s the process, the creation of value. Wealth to them is the job well done. Whether it’s plumber, electrician, a carpenter, roofer, it’s just how you do have pride in the end and that’s the process. That’s the journey. It isn’t necessarily toward the accumulation of wealth because how many meals out can you have a week? How many vacations can you have? After a while the process is nothing more or less than a game. You recognize that and see where you are in that game, is it a monopoly? It should be fun and if it’s not fun, go do something else. Chase rainbows and you’re getting a better result chasing rainbows and then you will trying to be Mr. Megabucks.

Chuck: Well, can we tie this all together? We started by talking about the theory of default to the truth and there actually is a theme to everything that we’re talking about here. How would you tie this all together added into a cohesive theme as to where we’re going with this conversation?

Ed: It is where are you going? It is what is your destination? Do you enjoy the process? You’ve got to create value; I don’t mean monetary value. Value can be the success of children or grandchildren. Do you enjoy today, are you better today than you were yesterday? The investing issue, the conversations, the psychology of it, ratios, all fancy but the real issue is how do you feel about this? You’re not going to get that in the first 15 minutes or for that matter, maybe the first year of the conversation with that individual. It takes time. It’s got to be self-realization. You cannot lecture and force your ideas down the throat of the individual. That individual must recognize what they are about. You ask questions, you don’t give answers. I recall my daughter, she was in fifth or sixth grade when I asked her, what does your dad do? She said, answers questions. [chuckles] Well, I’m not sure that’s quite what I do. I really ask questions and never answered them. Has that been your experience, Chuck?

Chuck: Well, I probably ask more questions than I answer but I do have clients that would probably not still be my clients if I didn’t answer at least some of their questions.

Ed: I get that. You’ve got to add value, you’ve got to create value in the eye of the holder. That value may not be in dollars and cents, but I get that. I recall having a discussion with an accountant about the tax treatment of partnerships, which is really bizarre. This individual made a point that, “I got it now. I understand the difference between partnership tax and corporate tax. Thank you.” Now that’s value.

Chuck: If you’re listening to this podcast, our theme for you would be to know what your journey is and to know what you are, what you find value in on a day-to-day level. Be truthful to yourself. Next time we’re going to be talking about the forms and combinations of business organizations and we look forward to seeing you right back here.

Thank you for listening to Money Talk. Please join us again and do check out our previous Money Talk topics.

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