Chuck: Welcome to Money Talk. I’m Chuck.

Ed: I’m Ed.

Chuck: Ed, here’s a quote. I want to just start out.

Ed: No, no. Wait a minute. Today’s topic is who’s talking, right?

Chuck: Well, yes.

Ed: Okay. Go ahead.

Chuck: And so, for this quote, it’s the Los Angeles Times talking and reading their praise on the back of the dust jacket for this book, A Random Walk Down Wall Street by Burton G. Malkiel, and their quote says, “Do you want to do well in the stock market? Here’s the best advice. Scrape together a few bucks and buy Burton Malkiel’s book. Then take what’s left and put it in an index fund.”

Ed: That’s bad.

Chuck: This book probably costs $20 maybe if you overpay. For a mere 20 times that per year, Ed, you could instead subscribe to Jim Cramer’s website.

Ed: Oh, yes, Jim Cramer, this guy’s over the top, $399 per year. He’s got a special, or you can do $49 a month. And incidentally, he talks about how you make money in the stock market. 

Chuck:  Right. 

Ed: His net worth, the last information I have, is $71 million. I represent a dog Jack who has more than $71 million in stocks.

Chuck: We represent quite a few clients who’ve accumulated more– I’m actually surprised at the level of his fame if that’s what he’s accumulated because we’ve represented an awful lot of people who’ve done better than that.

Ed: Oh, Chuck, I want to disclose names.

Chuck: They would not be considered nationally famous people in their fields.

Ed: The idea is to go on TV, and you’ll make a fortune. 

Chuck:  Yea. 

Ed: This guy makes like $12 million a year in pedaling advice at $49 a month.

Chuck:  Right. 

Ed:  Oh my. The point is, who’s talking? 

Chuck:  Yes. 

Ed: With today’s program, let’s address who’s talking. What is the source of the information that you’re relying upon? Specifically, should you be listening to someone who’s talking? My answer to that is no. Specifically, you’ve got this guy, Ramsey, you got Oprah Winfrey, you’ve got Joe Namath.

You can go on and on and on about either advisors on consumer goods, or you can talk about financial advisors, Alec Baldwin or Jimmy Fallon, or Tommy Lee Jones. And how about Pat Boone? All these people have accumulated gazillions of dollars for endorsements without having made a nickel on their own investments.

Chuck: Yea. It’s not just investments. I was watching TV the other day, and I see that Subway now has a series of ads where they’re getting endorsements from athletes. I assume these people are athletes. Whenever I see a celebrity, and I don’t recognize who they are, I assume it’s an athlete. It’s usually a safe bet for me. Now, they’re the experts on not what sandwich to eat but which fast food restaurants should prepare your sandwich, right? It’s still fast food.

Ed: I don’t get this endorsement thing.  Bottom line here, I’ll cite two or three books. And my view of the world is read, think, and then analyze, and then maybe invest.  

Chuck:  Right. 

Ed: But you shouldn’t have more than 10 stocks. I don’t care who you are. Unless you’re Einstein, you can’t follow more than 10 stocks a year.

Chuck: Well, let me modify that a little bit. I would say that if you’re going to have more than 10 stocks, just buy an index. Right?

Ed:  Yes.

Chuck: Because you’re probably going to end up putting together a portfolio that’s going to behave somewhat like an index anyway if you’re going to throw a bunch of stuff in there. So, instead of doing it the hard way and almost certainly underperforming the index, just buy the index, then you will perform with the index.

Ed: That is the best advice anyone could ever give or receive. That is, if you’re looking to accumulate vast amounts of wealth, you’ll have concentration.

Chuck: Yes, if you want to overperform the market, all these people will tell you that, “Oh, you do this through more diversification.” I’ve never seen that actually work. What I have seen work is people who take concentrated positions overperforming the market.

Ed: Yes, the other issue is th at why. It’s the fun. It’s the process from what I’ve observed, not having done it myself, but just observing what’s the fun of it. Well, if you can figure what 10 stocks to buy, and you go through a process of all A-rated stocks, large-cap dividend producing. You watch those, you read the Wall Street Journal, and you see how you’ve done. But if you want to go with diversification, just as you suggested the book you cited, but the other one’s The Little Book of Common Sense Investing by Jack Bogle, and he talks about index funds, the founder of Vanguard, by the way, and he suggests never pay more than than 50 basis points to an investment advisor, but you don’t really need an investment advisor. I don’t get that.

Chuck:  Right. 

Ed: That’s a whole different issue, but who’s talking? Well, if you read the book Behavioral Investing by James Montier, The Anxious Investor by Scott Nations, as well as The Little Book of Common Sense Investing, you’ll understand that a diversified portfolio is just fine for my dog Jack. Right?

Chuck:  Um-hum. 

Ed: You don’t have to watch anything. You can watch TV. Y ou can go jump over bushes, do whatever, but it’s going to work out because over the 200-year history of the market, we have an advantage, the annual rate of returns from 6% to 8% inflation-adjusted.

Chuck: As a matter of fact, I would say for that type of portfolio, which is probably what 95% of people should be doing, is that it’s not only something that you don’t need to monitor constantly, but you’re probably better off not monitoring constantly. You should set it and forget it. Let the market do its thing and don’t try to dabble in it. Right? That’s a big part of this book, The Anxious Investor that you quoted, talks about how people overreact emotionally to the market swings and so on. If you’re not paying attention, then you won’t overreact.

Ed: Right. The idea is the impact of a loss versus a profit. We’ve talked about this before. You have $100,000, you lose 50, to get back to 100,000, you got to make 100%. You make $50,000. Well, you made 50%. Making 50 is not a big deal, so to speak. Some people would be, but to lose $50,000, you’re going to—

Chuck:  Right. 

Ed: Wat bridge can I jump off of? 

Chuck:  Right. 

Ed: In other words, investing whether it’s $100, $1,000, $100,000, $1 million, $10 million, the same principle exists.

Hold steady get either diversify with low-cost index funds, emulating the tech sector with high dividends or whatever, and leave it alone or select up to 10, not more than 10 stocks. How long are you going to hold those stocks, Chuck, we talked about it.

Chuck: Yes. I think that the idea is you don’t want to buy, you don’t want to add something to that list. You don’t want to include something in that list of 10 unless it’s something that you’re reasonably confident you should never need to sell.

Ed: Right. You hold it forever. 

Chuck:  Right. 

Ed: People can’t get that. Now, when I say that, it is you got to monitor it. If you’re talking about 10 stocks, unlike your index funds, which you leave it alone.  You’re talking 10 stocks, you better watch those a little bit in the sense that there could be a see change

Chuck:  Right. 

Ed: That you can see coming if you’re watching those 10 stocks but only 10.

Chuck: Right, Yea, that’s one of the reasons why it is a limited number of stocks and by the way maybe less than 10. Right? You don’t have to go all the way to 10, right, but you want it to be a number that’s small enough that you can actually keep track of what’s going on with these companies, not just looking at their performance numbers but actually reading the news about these companies and what’s happening with management structure changes and that kind of thing. That’s important.

Ed: Chuck, I will tell you, 10 is an outrageous number. I feature 3 to 4.

Chuck:  Right. 

Ed: And people look at me as if I’m crazy, and I say, “Yes, I am crazy.”

Chuck: You are. 

Ed:  I admit to that. The performance has not been too bad.

Chuck:  Right. 

Ed: The fun is watching it, but you figure good ones, and how do you get the good ones? Well, for example, look at Vanguard’s offerings and look at the Vanguard offering the high dividends or a large market cap and schedule them. See of those funds which issues predominate. For example, Apple would be in every one of them. 

Chuck:  Right. 

Ed: Are you going to not buy Apple? Of course, you’re going to buy Apple. It’s too high. Where’s it going to go? I haven’t a slightest  idea, but I don’t think it’s going out of business anytime soon. 

Chuck:  Right. 

Ed: Then you look at the other stocks within that select group. Then the next step is go to a rating agency, and I happen to like Schwab and see how they’re rated. Is it A? Well, okay, fine, that’s not a pretty good rating. Then you look at the difference between the 52, 53 week high and the current price. Is there some gap there so you got opportunities to grow? 

Chuck:  Right. 

Ed: Then you would look at return on equity or invested capital. Is it outperforming, or is it a reasonable amount? Then buy that stock and leave it alone.

Chuck:  Right. 

Ed: I can be wrong, but the only time I was wrong is when I thought I was.

Chuck: Why would you gravitate towards something like earning on invested capital versus– most people would look at, they would gravitate first towards something like price to earnings ratio. Can you comment a little bit about that and why you’re focusing on one stat versus the other?

Ed: I’m not capable of looking at a whole bunch of statistics. I got to focus on, they give Charlie my money, and I’m going to say, “Okay, Charlie, I expect a rate of return of safe investments of treasury rates, say 5%. I’m going to give you 20% of the excess.” Then Charlie is charged with the responsibility of earning money on that invested capital. That’s a good marker as far as I’m concerned.

Chuck: Right. It really should be consistent, even if the price fluctuates, the invested capital does not.

Ed: I don’t care about price earnings. The last thing I worry about is trying to predict earnings in the future. 

Chuck:  Right. 

Ed: I see this all the time. “Projected price surge.” What? 

Chuck:  Right. 

Ed: I’m sorry. Maybe Jack can do it, the dog Jack, but I can’t. Predicting the future, we have had a couple issues that suggest that the future is not something you can predict. 

Chuck:  Right. 

Ed: So, you assume that you’re not going to be right in predicting, but are you going to buy the stock? Are you going to hold it? Are you going to buy bonds? Which of you on bonds, Chuck, fixed investments?

Chuck: What’d you say?

Ed: What’s your view on fixed investments?

Chuck: Well, I am sour on fixed-income investments in general. Mostly because I don’t feel like I’m smart enough to do it properly. I’ve probably met people who are smart enough to do it properly, but I wasn’t able to identify them when I met them. It is a market that really, the best advice I ever got was a gentleman who I used to work with, he actually was a person who invested in bonds for clients, and he said, with fixed income, the market is always moving against you.

I think we did an episode once where we talked in a little more detail about this. But it’s really true that as an individual investor, when you get into the bond market, no matter what happens next with interest rates and market prices and so on, there’s some aspect of that bond that’s going to move against you. Knowing whether you’re coming in at the right time, buying the right thing and that you’re not going to be left holding the bag when market conditions change is to me, it just strikes me as 90% of the time a losing proposition.

Let me just put a tiny bit of meat on those bones with one example, which is it used to be fairly popular and still is in some circles to buy for a bond portfolio to consist of a lot of mortgage-backed securities. When you have mortgage-backed securities, it’s basically just an invest where you’re basically purchasing people’s mortgages or little slices of their mortgages. That’s considered to be a fairly secure investment because there’s collateral behind it. But the deal there is that if interest rates go up after you’ve purchased that bond, the value of your bond is going to go down because that’s how fixed–

Ed: Wait a minute. I make sure that I understand. Let’s assume, forget about the mortgages, I buy a bond that yields 5%. I pay $100,000 for it. Now, the rates go from 5% to 3%. What happens to that bond?

Chuck: If the rates go from 5% to 3%, then the value of that bond actually goes up because the price of a bond is basically based on how much cash or how much interest in terms of dollars is being paid to you. So, he idea is that the market price of your bond is, how much would you have to invest at current rates in order to get that same dollar amount of interest? So, if you’re getting $30,000 a year in interest because you have a bond that paid 3%, and you invested $1 million in it. Right? T hen rates go down to 1%. Then the question is, “Okay, so how much would you have to invest today in order to get $30,000 in interest at 1%?” Then the answer is $3 million, right?

Ed: Right.

Chuck: So, the value of your bond has gone up. When interest rates go up, the value of the bond goes down for the same reason. You buy something like a mortgage-backed security, this is the easiest one to wrap your mind around. Let’s say the rate on that is 5% and rates go down. You think, “Oh good, the value of my bond went up.” Well, no, it didn’t. What happened instead is that all of those people who held those mortgages that you invested in, they refinanced their house. You just get your capital back, and now you’re back. You have to try to reinvest that capital in a market where the values of the things that you’re buying, i.e., bonds, have just gone up.

The market is always against you when you’re investing. Right?  If now you buy that same mortgage-backed security and now, interest rates go up, so the value of your bond goes down, you’re like, “I really don’t like this. I’d like to get out.” Guess what? The people who own those mortgages, they are not refinancing. 

Ed:  That’s right. 

Chuck : You’re stuck with the bond. It’s just one of those things where there’s always some trade-off in the fixed-income market that makes it very difficult for individual investors to navigate that properly. I have given up on it personally.

Ed: Oh, wait a minute. You’re a math major?

Chuck: I am.

Ed: You manage the trust department?

Chuck: Yes.

Ed: Yet that’s your view?

Chuck: It is. Part of the reason, part of this is I guess the luxury of now being involved in investments only for long-term, often multi-generational type investments where there’s no immediate need to be cashing out of an investment. If you have that perspective, then that gives you the ability to look at equities as something that isn’t as risky as the way most investment advisors talk about equities.

You can generate good cash flow from dividends if you properly select equities in order to generate dividend cash flow. You can reconstruct the same kind of cash flow from an equity portfolio as you can from a fixed income portfolio, typically, or you can get close to that. And you don’t have this complexity of trying to navigate around the fixed income market. At least at my skill level, you can do that over the long term with greater consistency than trying to do the same thing with bonds.

Ed: I come at it a little differently. I’m not bright enough to understand the ups and downs as I did spend some time trading bond futures, and the result was a little story. I ran into some guys with one of the major houses in New York, and I was with a gentleman, that was his forte.  And I’d just been at it for three months investing in the interest rate futures.

This guy, a foreign national mathematician, he had  to be the next coming of whomever in terms of numbers. And he walked up to me, I had been at it three months, and this was on Wall Street. He said, “Eddie,” whatever his name was, I don’t recall. He said, “Are you long or short on the interest rate futures?” I’ve been here three months, and this guy’s managing a gazillion dollars, and he’s asking me. I walked away from that, and I said, “You know what? I’m not investing in interest-rate futures. I’m going to buy a stock that produces dividends, and I’m going to hold it.” How long? We’ll let’s say ask Warren Buffett how long he’s held Apple. 85% of his portfolio is Apple.

Chuck:  Right. 

Ed:  Are you not going to buy Apple or you better yet maybe you want to buy Berkshire Hathaway?

Chuck:  Right. 

Ed: The point is, you don’t have to be a rocket scientist or at least not even think you’re one, just invest in good quality dividend-producing stocks and hold them forever and forget the noise.

Chuck:  Right. 

Ed:   Now, the issue is who’s talking? Where’s this coming from? Where is Jim Kramer coming from? Well, he’s selling a subscription to his knowledge base which is great.  A registered investment advisor. Probably has a beautiful home and 15 cars, and you’re riding around with a Model T. Why does she have all this wealth, and you have nothing? Well, if I get a percentage return on assets where they go up or down, that’s the greatest thing since sliced bread.

Chuck: Yea. The other thing is, if you’re charging $400 a year for a subscription for people to get investment advice from you, you better make sure the advice is complicated. Right? It’s not worth it. If the best investment advice is the quote that I started out this podcast with and just scrape together a few bucks and buy a book, read a book for $20 and then take what’s left and put it in an index fund, nobody’s going to pay you $400 a year to give them that investment advice.

Ed: That’s right. 

Chuck:  Right?

Ed: When you have excess cash, put it back into that same stock or index fund. 

Chuck:  Right. 

Ed: Discipline and leave it alone. People have to think they’ve got a trade and listen to the noise, whether you’re–

Chuck: Go into all these what I would consider exotic investments or hard-to-understand investments, there’s always a story behind why you need it. But, e verything we were just talking about with bonds, I feel the same way about international investing in emerging markets. Again, if we were managing the fund for the foundation for Yale, and they’ve got a gazillion dollars, I can’t remember now exactly.

Ed: It’s a lot.

Chuck: It’s a lot of money. They’ve got this pool that’s invested here and this pool that’s invested there and that kind of thing. They can probably afford to have a couple of people on staff who do nothing but worry about emerging markets. They can have a few people there who do nothing except worry about the fixed-income part of the portfolio. For the rest of us or at least for me, for you, for the people we work with who have the kind of wealth we were talking about Jim Kramer has in a lot of these situations, diving into an investments in say Brazil where you have to know all the same stuff as you would to have to know in order to invest in a US company and have some understanding of how currency markets work as well. Right?

Ed: Not going to happen.

Chuck: International politics, layer all those things on top of that and somehow get it right. What’s the benefit at the end of the day when you can just buy Apple?

Ed: It’s not going to happen. I get the biggest kick at it. If I cannot explain it to a 12-year-old, I better not buy it. 

Chuck:  Yea . 

Ed: You got to keep it simple.

Chuck: It just occurred to me, this is why no one’s paying you and me to give them investment advice. It’s not complicated enough.

Ed: That’s right. We can go complicated. Let’s just say that, but it doesn’t make any sense. 

Chuck:  Right. 

Ed:  Ed, “I watched my portfolio. I traded. And I’ve got these puts and calls,” and said, “Do you understand it?” “Well, no, my advisor knows.”

Chuck: My friend.

Ed: My friend.

Chuck: It’s never an advisor to tell you, “Well, this person’s my friend–” By the way, here’s the thing. You’ve seen this. We’ve done this. I mean, we do have the perspective of seeing all these investment strategies. People we work with–

Ed: I’m in my 60th year of doing this. 60 years.

Chuck: We see the statements. We see what’s happened. We’ve seen the investments. And, we don’t typically rely on the performance numbers that are provided by the service provider. We get the data, and we calculate that ourselves. I have never run the numbers on a client’s portfolio, no matter who’s managing, no matter what strategy they’re using, I’ve not yet seen one that over a period exceeding five years outperformed the S&P.

Ed: They don’t. You look at the studies, they cannot. I’m talking about Bogle, I’m talking about any of the authors that are quants, numerically oriented. You cannot outperform the market. It just doesn’t happen.

Chuck:  Right, because I’m lazy, I just use the S&P 500 as the index-

Ed: Most people do.

Chuck: -as the benchmark for whatever it is I’m looking at. They’re always under that benchmark over a period. I don’t typically look at it for shorter periods because there’s a lot of noise in the data. But, for longer periods of time, five years or longer, every single time I’ve looked at it, they can’t meet much less exceed that. Given the fact that you can buy from multiple providers, if that’s what you’re interested in just an index ETF with no fee, and you’ll get exactly that performance. What is the purpose of all this complexity? What’s it getting you?

Ed: Because it’s got to be complex, otherwise it is not good.

Chuck: Whoever’s giving you the advice for that complex investment can’t justify their fee, right?

Ed: Right. I get the biggest kick in translating it to cars. I have my inheritance, my dad’s ’94 Buick Century. It’s got only 100,000 miles on it. It gets me from my home to the office the same way what a Tesla would. 

Chuck:  Right. 

Ed: Am I going to spend $50,000–

Chuck: Probably a little slower, although not the way you drive.

Ed: They only get back to a different issue, and that is the accumulation of wealth. The stock market, the bond market, hybrids, all these things are great. If you’re looking to create the greatest value, and I mean quantitative value, dollars and cents, qualitative value, that is feeling good. Do you know what you do? You start your business, and you make it successful. 

Chuck:  Yes.  

Ed: The most successful, and I mean in both sense, being able to accumulate wealth and to change lives are from those individuals, male or female that start and have a successful business that hire people.

Chuck: That is actually the ultimate expression of having a concentrated stock portfolio.

Ed: Exactly, right.

Chuck: That’s your stock.

Ed: It’s narrow and deep.

Chuck:  Yes. 

Ed: But you create not only dollars and cents value, but what’s the second question someone asks you?

Chuck: What do you do?

Ed: What do you do? If you’re creating an organization, Caterpillar, John Deere, whatever, at the very beginning, and this individual can say, “I work for CAT!” All of a sudden, you’re a special person. You must be very good. Let alone for those that have created jobs for those people that couldn’t get jobs otherwise. We went to Culver’s the other day, and they staff a lot of folks with special needs. I’m thinking, “Wow, that founder of Culver’s, he must feel so good about himself every day. He’s not only making money, he’s creating jobs for those people to say, I have a job.”

Chuck:  Yes. 

Ed: Anyway, don’t get me preaching on that stuff, but this stuff is so simple. I just can’t believe how simple it is, and yet the world tries to make it so complicated. You have to have a rocket scientist from Harvard that can tell you what to do. Otherwise, the advice is wrong.

Chuck: That’s what you’re told.

Ed: Well, yes. You believe everything you hear, and you’re crazy. But, if you read everything and come to your own opinion, you’ll be able to sleep at night. This is too much of a lecture on this podcast.

Chuck: It’s unusual for us.

Ed: I’ve been around this for so long, and I see this for so many times it’s just disingenuous. Hey, keep it simple.

Chuck: Yes, I agree.

Ed: Anyway, next topic.