5 Misunderstood Financial Quotes – Episode 79

Milton Friedman, Peter Lynch, Warren Buffett. When financial advice comes from a nobel laureate, a legendary mutual fund manager, or an Oracle of Omaha, people tend to listen. But do they really understand the context of the advice? In this episode of Dentist Money™, Reese and Ryan dissect quotes from five famous economists and clarify the intended message of each. They also explain how the principles taught can be applied to dentists.

Podcast Transcription:

Reese Harper: Welcome to The Dentist Money Show, where we help dentists make smart financial decisions. I am your host, Reese Harper. Here with my trusty old co-host, Sir Ryan Isaac.

Ryan Isaac: Good morning/afternoon Reese.

Reese Harper: Good morning to you, co-host.

Ryan Isaac: Yes, it is good to be a co-host in the morning.

Reese Harper: We are both pretty excited about today’s podcast episode.

Ryan Isaac: As opposed to how it is usually?

Reese Harper: Yes, usually people have to drag us in here.

Ryan Isaac: It is true.

Reese Harper: You know, to force us to record. But this one, we were actually highly motivated to do.

Ryan Isaac: Ya, you were telling me about an interesting story. A run in with a neighbor the other day.

Reese Harper: Well, I was backing out of my driveway in my truck.

Ryan Isaac: Run in makes it sound like you got in a fight with the neighbor.

Reese Harper: I didn’t actually have a fist fight with my neighbor.

Ryan Isaac: There were no shenanigans.

Reese Harper: I just backed out of my driveway and saw him hacking away at things in his yard with some large power tools. I stopped and said, “hi.” We started catching up, me and this friend. I have a lot of respect for him. He is a very successful guy. He has a lot of opinions about finance, and we talk about finances a lot, so he was asking me some questions. We were just having a good discussion. Anyway, bottom line is, when I’m about to leave after catching up on old times, he says, “Alright man, go kill it today. Go make a lot of money trading today.” He said it in a serious way, not joking with me. But seriously, he meant, go out there and make lot of money placing the trades. I didn’t say anything because I was pulling away as he said it, but I just kind of smiled and thought about all of the conversations we have had about investing over the years and I was kind of like, “do you really think that’s what I do when I go into my office?” I sit down at my desk and I am like, alright the day is about to begin. It is time to go long goal, I am going to short oil, and I am going to find the next Facebook and knock it out of the park.

Ryan Isaac: You are going to mine some bitcoin too! If you are on top of the world today.

Reese Harper: That isn’t the only time that this has ever happened to me. That conversation has happened several times with several people where I am like, “don’t you listen to my podcast, weekly?” This guy I’m talking about is a big advocate of good financial advice, he listens to the podcast, he knows what we talk about, and I don’t know.

Ryan Isaac: When you hear investment advisor though you get images of big desks, four screens towering everywhere that are curved around you, and flight of the navigator stuff. You have got like CNBC waiting for the opening bell to clang and you just get after it. Your sales manager just comes in and rallies you to start the day. They have some in office shrink that comes in and convinces you that you really can see the future?

Reese Harper: Yes, exactly, that is basically a day in the life. Ya, I just think the tie in today is that people really mis understand people.

Ryan Isaac: That is fair. That is the root of the entire world’s problems right there. Today we are going to examine a few quotes from investing legends and see if we can get to the bottom of their opinions and get some good advice for our dentists.

Reese Harper: This is advice that is often misunderstood by some of their most passionate followers. I think that happens a lot. You have strong advice, everyone agrees with it, but no one really actually understands what the advice is.

Ryan Isaac: What was he trying to say?

Reese Harper: I think that happens to us quite often. Just a few weeks ago I remember you telling me some story about someone who are up to you and said, “oh, I love the podcast, huge fan, listen to it all the time and I love how you are great at pickings stocks. The way you pick stocks is so much better than anybody else.”

Ryan Isaac: Ya, “I would really like you to be my advisor, I think you can pick the best ones.”

Reese Harper: “I have listened to every episode and I am confident that you guys can do it.” It is interesting because it is a complex subject. Whether it is nutrition, medicine, finance, economics, different rigorous academic subjects have a lot of confusion around them. That includes investing. Let’s jump in and hit these.

Ryan Isaac: The first one is from a guy named Peter Lynch. You know Peter Lynch? He was a really famous mutual fund manager for Fidelity in the 70/s and 80’s. What was his fund called? The Magellan Fund right?

Reese Harper: Yes, that is what he was most famous for. He is still around. He is a philanthropist, investor, author.

Ryan Isaac: He got like 30% annual returns from 1977-1990. He is more than double the S&P returns.

Reese Harper: That is crazy!

Ryan Isaac: That would be a thirteen year period of time, right? Which is an interesting subject in and of itself because what happened with his departure when everyone piled in at the backend. They all saw the returns and then jumped in.

Reese Harper: Then they got crushed. When the majority of investors came into the fund no one was there to capitalize on it. After he left they had over 14 billion dollars of investments. Most of the money came in his last couple of years though.

Ryan Isaac: It wasn’t very Magellan like after that. Anyway, here is a quote from him, “All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage.” Which is funny considering that he was the right fund, the hot hand, the great manager, ya know?

Reese Harper: Yes, I love this quote because you can read into it two ways, right? A lot of people read into this and say, “that’s right, you have got to pick the right guy. All the time and effort that people devote to picking the right fund, the hot hand, there is no advantage because they didn’t pick the right guy.” A lot of people read that and say, “they didn’t pick the right dude or gal. You have got to find the right guy.” I really think that what Peter Lynch is saying, if you read his book, and you read his commentary, he does believe in active management and stock picking. He believes that it adds value, that was his whole career, but he feels like luck pays a huge part in it and that in most cases people are just paying a lot of money for someone to try to pick the right stocks and it won’t lead to any advantage. So statistically, he really believes that it won’t add a lot of value and it is hard in advance to know which manager is going to be the most successful. In most cases, you will find that he advocates for a strategy that is the opposite of what he made a living doing. Which was picking the right stocks, or the right fund manager, the hot hand, right? He did that for a career, but he is advocating that most people should not go after that approach especially a dentist who has very little financial experience. They are not going to be able to pull it off effectively.

Ryan Isaac: Ya, people would hear a quote like that and then relate it to the first thing you said which is, “I better do a better job at picking my stocks or picking the hot hand, and the great fund.” That is what I would think people relate it too, then what do they do? They spend more time and money trying to do just that. Maybe they, if you are using a dentists for an example, maybe the dentist now keeps an hour off of his schedule open to not take patients so that he can research more. Maybe on his day off when he used to go hiking or swimming or something on a Friday, now he is coming in to the office to do a better job trying to pick his stocks.

Reese Harper: I think that is a great point. I think that is the point of highlighting this quote. This is one of the most successful managers of all time and he is basically saying that it doesn’t lead to any advantage to try to pick the right fund or the right securities and he actually has another quote that I really like that I noted here, it says, “far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” What he is basically saying is that if people just rode through these cycles, these corrective cycles, such as the 99-00 tech bubble, 07,08,09,2010, real estate crisis and global financial crisis, if people had the right portfolios built and they rebalanced them effectively and stayed consistent through the market cycles than not very much money would be lost by approaching it that way. Most people try to anticipate that cycle. They leave the market. They enter and exit the market prior to a cycle. That is where real losses occur. You don’t lose money if you just hold an asset that goes down and back up again. If you hold a house and the house declines in value and comes back up in value than you never really lose money. He is saying that more people lose money by preparing for corrections or trying to anticipate corrections. This is an active manager. This a very, very active manager.

Ryan Isaac: That is the kind of advice you would want to listen to because he spent a career doing one thing and then he is telling the general public to do another.

Reese Harper: I think that is a really good quote. It is interesting how most people misinterpret that advice. Because Peter had that run at Fidelity from 1970-1990 everyone looks at him as an icon of active management. He just crushed it. So they will follow him believing that he would advocate for that same approach for everyone. He was a money manager that got paid to manage money and that was the objective of that fund was to pick stocks. It wasn’t necessarily a reflection of his entire philosophy on the world. That was just the job that he was hired to do.

Ryan Isaac: That was his job, ya.

Reese Harper: That was the objective of the fund. I think it is interesting how people will follow Peter Lynch down a certain road, and really, I think if you read into his comments and his insight you will see that he didn’t necessarily advocate for that for the whole population. How can dentists apply this? I would say as dentists look at the people that encourage them to pick individual stocks, or to pick the right manager, and you need to examine your portfolio and make sure that in most cases you shouldn’t be paying extra money for an active manager to be in your portfolio. You shouldn’t have a stock picker, a market timing expert, and forecasting. You should just have a portfolio that reflects the overall market and is as inexpensive as possible. I think that is the best way to interpret his advice there.

Ryan Isaac: Ya, and I am just kind of thinking when you talk about the career a guy like Peter Lynch had and how he made his career and maybe his own personal philosophy, what worked for him and his job, versus what he might tell millions of people to do is a common thread. Some of these experts that give advice are totally misinterpreted. What a guy by himself has successfully been able to do over a career versus what he actually believes the rest of the world should be doing. What Warren Buffett has done his whole career is really different than what he tells his own friends and family and the rest of the world that they should do with their money. I think it is easy to look at the success of that one person and feel like, ya know, I should try that too.

Reese Harper: I think that is good insight. I would add to that, if you think about really successful people, they know how hard it is to replicate what they have done. I hear that advice from a lot of business owners. I wouldn’t say I have achieved an amazing amount of success or anything, but I have heard a lot of business owners, and I feel this same way, tell other people when they say, “should I start a business or my own company or how did you start your own company?” A lot of people are pretty hesitant to give the advice to go out there and just start your own thing.

Ryan Isaac: To do what you did!

Reese Harper: Yes, because they know how close they were to failure the whole time. They know how hard it was. A lot of dentists could relate to that as they tell an associate what to do. If you have had a really, really successful practice and you know how hard it was to get it to that point you are a lot more tempered about the advice you give. I think in investing that holds true for a lot of people. Really successful active managers who have made millions of dollars off of being the anomaly, they are not as strong of advocates for that. Same thing when it comes to other people implementing what they did. I think that is insightful. Let’s hit another of my favorite quotes.

Ryan Isaac: Quote number two, Milton Freeman…Milt! You know Milt?

Reese Harper: He is one of my favorite economists by far.

Ryan Isaac: A weird trend I noticed was that a lot of these guys died in the same time range. They died between 06-09. A few of these famous economists died in their nineties, something finally did them in.

Reese Harper: Could have been the water.

Ryan Isaac: Nobel laureate, he spent most of his career at University of Chicago teaching a lot of people that have shaped markets and investing philosophy and investing in general. The quote from Milton Friedman is, “the most important, single central fact about a free market is that no exchange takes place unless both parties benefit.”

Reese Harper: You need to repeat that. “The most important, single central fact about a free market is that no exchange takes place unless both parties benefit.”

Ryan Isaac: I would hear that and I would go, if that is understood, who believes it? Does everyone believe that when a trade is made, a buy or sell, that both people on both sides have exchanged for some value and benefit? I bet a lot of people don’t believe that.

Reese Harper: I think that what Ryan is saying here is that Milton Friedman was a big believer of how free markets price things in a very fair way. If you are a free market, it means that there is a lot of information that everyone has about what is being exchanged. It could be a really free market about wheat, corn, copper, or the stock market. The stock market is an example of a free functioning market. Meaning that there is a lot of information about everything that is being exchanged there.

Ryan Isaac: Yes, hard to hide the information from one side to the other. There are so many transactions taking place, and so much information is everywhere. Most people believe inherently as consumers that there is a right and a wrong price when it comes to buying a stock. They would say, “Apple is expensive,” or, “Apple is cheap.” Or they would say, “Facebook is expensive,” or “Facebook is cheap.” They say things like this. Inherently, if you believe that, then what you are saying is that you have more information than everyone else has in the world.

Reese Harper: Which is causing you to buy or not buy. In a free market there are thousands and thousands and in many cases millions of buyers and sellers on both sides of the transaction. There are people that want to pay a certain price for Apple’s stock and people who want to sell it for that price. Every day everyone has all of the information available to them and they get to make a choice. It is just really interesting to me that it is a fact that when you go to the market and you pay for a security you are getting a fair price. It reflects all of the information that everyone has. That is not to say that we are not going to go through a decline. It is just that no one knows when that is going to happen. All of the information that we have available to us today gives us a fair price. This is one of many quotes about free markets, but people need to look at free functioning markets and say, “that price is fair!” Just like if I went to the grocery store and bought a pound of sushi grade tuna and wanted to prepare my little spicy tuna roll at home. When I go to the store and I pay for that pound of sushi grade tuna, I don’t question whether it is cheap or expensive. It is just the market price.

Ryan Isaac: Well you might, I think that is a good illustration actually. You might go to the store and think, “this is more expensive than it was six months ago.” But you aren’t going to go, “someone is pulling a fast one on me.” You are just going to think that something happened in the supply chain.

Reese Harper: Maybe fish have decided not to be caught anymore.

Ryan Isaac: They are hanging out in deeper water. What you are illustrating though is that when someone misunderstands the nature of a free market the consequence it can have is that it might keep them away from participating in that market, ya know? If someone has the view that it is not a free market those aren’t fair prices, or it is rigged. You hear that a lot. That will keep someone away. It will keep someone from participating in it. That is probably the danger of misunderstanding the principle behind this quote.

Reese Harper: Yes, and there are inefficient markets. There are markets that are not really free! Let’s take the private equity market, for example. Let’s talk about selling stock to an investor or an employee. Let’s say a business owner starts a company and you have grown it to a certain size and you want to go and raise money from venture capitalists. You go out to the market, and the venture capital firm has a certain amount of information about you that you have provided to them. There is not a lot of other information that third parties are providing to them about you. They can try to dig up as much as they can, but what they know is what you’ve told them basically. What you know about them is what they have told you and shown you about their own experience to guide your company. If they give you money. If you take their money, and they invest in your company, that is not necessarily a free market. It is a functioning market, but the information is not quite as free flowing as it would be in a public market. There is an opportunity there for someone to get a really smoking good deal or a really, really bad deal. There hasn’t been enough information exchanged between both the seller and the buyer. This is not a big market, it is not a freely flowing market, without a lot of information. There is more opportunity for the buyer or the seller to know more than each other, when you do a deal like that. Same thing if you are to sell your dental practice to an associate. You may or may not know what is going on perfectly. You will know a lot about what is going on in your practice, but you may not know that across the street someone is about to move in or across the street someone is about to sit down their shop. That would dramatically affect the price. This is what happens when you have a transaction that is really narrow and what we call a less efficient market. Real estate is the same way. It is not a super efficient market, especially if it is not a listed property. If you are buying dirt or making an offer to an estate who is just someone who is passed away and you are trying to pick up the dirt that they left to their heirs and there are only three people who showed up to the auction. In a public market like the New York Stock exchange then these future markets there is a lot of different sources of third party information that comes to the table and says, “here is what everything is worth and why it is worth what it is worth.” It gives you confidence that what you are paying for is the consensus for the time.

Ryan Isaac: It doesn’t necessarily mean that the consensus for the time of the set price is always going to remain at that price or keep growing from there. It could very well be that the main consensus even in a free efficient market could go down the next day. The consensus the next day could very well be like, “wow, new information. Now we don’t believe it is worth this much anymore so we are all going to sell it and value it slightly less.” That is how cycles happen.

Reese Harper: Yes, and let’s talk about what a dentist can take away from this. How can this help a dentist Sir Ryan Isaac?

Ryan Isaac: I think it just goes back to how someone views how the public stock market works in the first place. That it is a rigged system, a gamble, basically a casino. I think it just stems from a lack of understanding about what the understanding is, ya know? When you boil it down, and when I talk to dentists about this, about what is the market anyway, and you relate it to them as a practice owner it can help. I will ask them, I will say, “what do you want more than anything out of the next twenty five years in this business?” They will all say, “I want it to do better than it did the previous year.” When you think about what the market is, it is just millions and millions of companies and people that think exactly like that. It is just a huge market of people that think just like a dentist does. They own companies, they want it to grow, they have every incentive in the world for it to grow. They want revenue and profits. When you are investing in this market that is all it is. It is a collection of people just like you as a practice owner that wants it to grow. Misunderstanding what the fundamental principles are, the cycles it goes through, how it is priced, why a stock is listed at one stock one day and a different price the next day. Why that is happening, a misunderstanding that can keep people away, which will cause people to hoard cash or put money into investments that are actually worse for them and higher risk. They might be less liquid and they pursue other more dangerous avenues that are not as helpful.

Reese Harper: I think my big takeaway for dentists would be that every transaction you engage in is fair and your are not being taken advantage of by someone who knows more than you do in the public market. That is the definition of a public market. No one can take advantage of you by knowing more than you do if your portfolio is built properly. If you are investing in a portfolio that represents the global marketplace, and you are investing in every stock in that market place, thousands and thousands of stocks, not two or three or five or seven than you won’t be taken advantage of because you are paying a fair price at the time you bought it. Let’s go to our third quote.

Ryan Isaac: You found us a Canadian brother. How do you say his last name, it is John Galbraith.

Reese Harper: He is a Harvard guy. The podcast has been going global right now, we have seen a lot of Canadian downloads lately. John Galbraith is a very famous economist that is known for a lot of different research, but he did advise a lot of white house administration. He was a professor at Harvard, he did a lot of research on forecasting and human behavior as well. One of my favorite quotes from him is, “Pundits forecast not because they know but because they are asked.”

Ryan Isaac: Love that.

Reese Harper: Let’s talk about pundits. Like who is a pundit? What does that even mean?

Ryan Isaac: First thing that comes to mind is when you turn on CNBC in the midday. That would answer the question. They are pundits.

Reese Harper: Ya, a pundit could be a political pundit, a financial pundit, it is just someone who has some kind of an opinion. Usually like an editorial.

Ryan Isaac: Are we pundits?

Reese Harper: Ya, we are totally pundits.

Ryan Isaac: The Dentist Pundit Show.

Reese Harper: Now when an economist is a type of pundit they commonly get pressured into making forecasts about the future. That is kind of their thing. I get pressured into making forecasts about the future every day. That is probably one of the most highly repeated questions that I get. Where is the market headed tomorrow? What should I do, Reese?

Ryan Isaac: We talked about that on our last podcast when people are sitting on a lot of cash, “where are we headed?”

Reese Harper: I think the thing he is highlighting here, the nuance of what he is highlighting is that when you ask someone to predict the future, the first reaction they have is to tell you there prediction for the future. It is just like if you ask someone, “what is your favorite restaurant?” They are not going to be like, “well, there actually is no favorite restaurant, and I don’t have good information about the local restaurants in my community.” You ask a question about a favorite restaurant in Chicago and someone lives there? They will give you an opinion about it even if they are not qualified to give you that opinion. They will opine on it. That is your thing. You live in Chicago so you should know. So they will give you a opinion about their favorite restaurant. They may have never even been to the place that they are going to tell you. You just feel pressure.

Ryan Isaac: I just did that this weekend. I said, “I have friends from Arizona up in Park City and they want some restaurants to go to and you gave me five that I have never been to.” I passed it along as if, “you have got to go to these restaurants.”

Reese Harper: It happens all the time. It is not a super negative thing, it is just that you have got to know when you ask for someone’s opinion the most common response is not for them to self asses their worthiness of whether onto they are qualified to give you that opinion. They are just going to give you their opinion.

Ryan Isaac: Here are five restaurants I’ve never been to, enjoy. When you ask what is going to happen to the market you will get an opinion on that. Thy are going to give you the answer because you asked them not because they really know. There just aren’t people out there who can tell the future of a market. They can’t. No one really knows that a Tsunami is about to hit the coast of Japan and throw their capital market into a complete disaster for the next twenty four months. No one can in hindsight say, “I saw that coming.”

Reese Harper: That is cheap.

Ryan Isaac: It is cheap to say. You always see people out there banging a drum about how the world is going to end in some market cycle. You know, this year I have had ten articles forwarded to me in the last week and it is no different than what has happened over the lat ten years. I get some pundit writing some big article about how this crash is going to be the biggest one of his lifetime and it is coming soon. I am like, “well, yes, that probably is going to happen. The biggest crash of your lifetime is always the next one.” As the market gets to be worth more and more and more the amount that it crashes in points, the Dow Jones dropping like 1000 points feels massive when maybe on a percentage basis it is the same as if it drops 50 points ten years ago. It is just that it is worth a lot more and the numbers we start valuing it at get bigger and bigger so people feel like it is worse this time. What is important is to really look at the actual percentages that markets move and say, “was it really worse this time, or was it just another time when we have had another big correction.”

Ryan Isaac: Let me read you something the you just reminded me of that I read this morning. I won’t use the guys name, but there is a guy who has been famous for always calling a crash. Here are headlines since 2011. “100% chance of crisis worse than 2008.” In 2012, “It is going to get really bad after the next election.” In 2013, “you better run for the hills.” In 2015, “we are overdue for a stock market crash.” In 2016, “68 trillion dollar biblical crash ahead.” In 2017, “The bottom line? Legendary investors expect the worst crash in our lifetime.” This is not just some shlub of a dude.

Reese Harper: The reality is, what is he saying there? What is he telling you?

Ryan Isaac: It is going to go down! And eventually he is going to be right!

Reese Harper: He is right, but he has been saying it for six years, every single year, with as much passion.

Ryan Isaac: It is not fair though, his newsletter subscriber rate is going to skyrocket when he is finally right.

Reese Harper: You could say the market is going to crash. It will crash statistically at least once every seven to nine years. That is an average statistic from 1926. That is about how often we see a crash. It is once a decade, and sometimes twice a decade. That’s what happened in 2000 and in 2009. We had a really rough time. Two major crashes within a two year period. That is just the truth about how markets work, and business cycles work, and has been that way for a long time. I think it is always easy for fear mongers to profit off other people by saying it is going to crash. You can say that every year of your entire life for your entire life and you will be right once in every seven years. And then people will be like, “see he knew!”

Ryan Isaac: Forget the other seventeen times he is wrong.

Reese Harper: Meanwhile their clients are sitting in cash, just sitting around waiting for the market to crash and then when it hits they are like, “see, knew it was coming!” Our clients have been invested the whole time and they said, “ya, they told me it was coming, but I am still up quite a bit as opposed to having sat in cash for a decade.” I think that is just an important thing to consider.

Ryan Isaac: I just pulled up statistics I would like to share. This is U.S. stock market data going back to 1929. On average since that period of time the market falls at least 10% every eleven months. That is the average of how often it is happening. Not like clock work, but that is how frequent it happens. What people consider a bear market or an actual correction, a turndown, is a 20% decline. That happens once every four years statistically. A 30% decline or more happens once every decade. It just happens so often.

Reese Harper: It is 30% or more every ten years. I just don’t like when I have people make vague claims like, “the market is going to crash the worst it has crashed in my lifetime.” Well, that statistic will probably be true once every eleven months at a 10% decline, once every four years at a 20% decline and once every decade with a 30% decline or more. Congratulations! Should we sit on the sidelines the whole time because we know that is going to happen? We made that quote earlier from Peter Lynch, “a lot of people lose money preparing for corrections or trying to anticipate corrections than they lose in the correction themselves.” The U.S. stock market is worth more money today than it was before the crash of 07,08, and 09. I always say those years because it is a process, not an event.

Ryan Isaac: That whole time period.

Reese Harper: I just think people should be very careful before listening to pundits forecast about things.

Ryan Isaac: That includes us, chime ringing pundits.

Reese Harper: C for Chi, don’t ring for pundits.

Ryan Isaac: On that note, literally, let’s take a quick break. We will cover two more quotes when we come back. Including a nugget from the great Warren Buffet.

Reese Harper:: And we are back, let’s go into how dentists can get help from these last final quotes, Ryan.

Ryan Isaac: Ya, up next is the great, mighty Paul Samuelson.

Reese Harper: P Town as they call him.

Ryan Isaac: P Town, I mean, his closest friends might. We have had University of Chicago, we have had Harvard, here is our MIT representation. Paul Samuelson was the first American to ever win the Nobel Memorial Prize in Economic sciences. Also died in that same time period, 06-09.

Reese Harper: Totally, and for those of you who don’t know that is really the primary category of Nobel Prizes. If you hear someone win a Nobel Prize in Finance. What it is formally called is the Nobel Prize in Economic Sciences.

Ryan Isaac: This seems like an old farmer quote. Something you would say after a life on the farm, but he said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement take eight hundred bucks and go to Las Vegas.” I wouldn’t take 800 though, I would take like $50.

Reese Harper: If you take your $800 and go to Vegas you won’t even be able to get a hotel and a meal. You can get a cheap, cheap hotel and a few meals, but it probably wouldn’t leave you any left over to go gambling. Maybe he wasn’t talking about gambling with it? Maybe he was just saying, go buy a bunch of milkshakes..

Ryan Isaac: Eat at a nice buffet…Maybe that’s what he meant! What is the point here?

Reese Harper: The point is that most investing, done correctly, is probably a little bit boring. It doesn’t move very quickly. Most well built portfolios move quite slowly. If you have ever watched grass grow, which I have done. Every week I will look at my yard, and I am always surprised how it needs to be cut. Every week or week and half it needs to be cut, but I never notice it on the daily. I just notice that overtime it needs to be done. I have these dead spots in my grass and I want to water them and make them grow back green real fast, but it doesn’t work that way.

Ryan Isaac: Not the way it goes.

Reese Harper: It takes like a month to heal. I think that ultimately what he is saying is that you shouldn’t get thrills from your portfolios. You shouldn’t take extreme risks with your money. The way that you can make money with investing is through a really well built portfolio that really moves predictably but doesn’t really make you get too excited.

Ryan Isaac: Let me ask you a question, the previous quote we just got done talking about how frequently markets actually do decline and not that everyone would describe a decline as excitement, but their is some rising blood pressure and anxiety for sure. Some of the same symptoms as Vegas money. What is the difference between someone saying markets will go up and down a lot, that’s just the nature of it, and someone who says it should be kind of boring? What part of that should be boring?

Reese Harper: Well, it does go up and down a lot. Let’s just take his example: grass. It is not like it dies over night, or grows over night. You don’t get immediate responses from it. When you talk about a decline in the market the hardest part is watching how slow that actually occurs. I one day drop is something that happens occasionally. Usually it is just little bits of pain over time that suck the life out of you for like two years. That is what really happens. It declines slowly over a long cycle and you just have to sit there and watch your grass die and you try to water it, but it is just dying.

Ryan Isaac: There is nothing I can do! I am dumping all of this water on the grass, I bought fertilizer, I thatched the thing, and pulled the weeds.

Reese Harper: I don’t know. There are a few ways that people misinterpret this advice. I think that’s where I want to focus our time here. A lot of times people are told that there is nothing to do. You don’t have to do anything and your portfolio will be fine. The reality is that there is a lot of things to do. The right type of diversification, exposure, and markets. You need to have enough securities at an inexpensive cost. All of that is not easy to pull off. Building the right portfolio takes some effort, but a lot of times when people hear a quote like this it gives them peace of mind to sit back and do nothing. They think they are taken care of. If it is just like watching grass grow then I can’t stand it and it goes really slow and never seems to make any money. You can’t use this as an excuse to over simplify things, right? It is not true that there is nothing you can do to mess it up or that it won’t move up and down hardly at all. I think people can misinterpret that a little bit.

Ryan Isaac: I think the grass is a perfect metaphor. If your grass isn’t built well in the first place and you have bad soil, no deep roots, wrong watering schedule, not putting down the right fertilizer at the right time, you are not cutting at the right blade length. If those things are not in place then you don’t sit back and watch it grow! There is something wrong and there is action. I think the problem is that most people view the change in the markets that do happen frequently as stimulus to go take action and change something that could be fine. You might have cut it to the right length, you might have fertilized appropriately, and you might have done everything that you are supposed to. But like you are saying, you don’t just go out and chop all of your grass down and then replant seed the next day, and dump fertilizer again, even though you did yesterday! You can’t water it for five hours in a row.

Reese Harper: Yes, exactly.

Ryan Isaac: There is this balance between the fact that there are things you need to be doing in a portfolio to make sure that it is done correctly form the beginning. Then just because markets decline you shouldn’t jump in and change everything. It also does not mean the opposite. It can be misconstrued as, “Everything is fine, whatever is in there is in there and I am just going to leave it and it is fine.”

Reese Harper: I think what he is saying about the Las Vegas comparison is valid. There is not instantaneous thrills that you should get from your investments. Anyway, that is good insight.

Ryan Isaac: Yes, it is kind of funny, I was thinking about the ways that people misinterpret this advice. I saw this chart after reading an article a few weeks ago. It is a chart of the top index funds that have the most assets and their average holding period. It is funny because the article was written after they saw this chart. The top index funds the average holding period is listed in days instead of years. By nature, these funds that have been built to mimic an index are being cycled through in such short periods of time that the holding periods are measured in days, not months, or years. I saw this and as we were talking about that quote it reminded me. This is a manifestation of how people behave in their portfolios. For example, they might go buy the index fund that says, “I am an index guy, a passive investor. I am just going to go buy the fund and sit and wait.” Behavior is being shown in statistics here, though. People are buying the right funds, with the right philosophies, but they are being cycled through really fast, ya know?

Reese Harper: I think that you are bringing up great advice. This could really help make a lot of difference. If you look at the chart that Ryan is referencing than you see that the largest fund in the U.S. right now, one of the largest, it has approximately 204 billion dollars of exposure. That is a Spdr S&P 500 ETF. It is a ticker FPY. It is a good ticker symbol, that is why a lot of people use it. But the average holding is 15.4 days.

Ryan Isaac: That is crazy!

Reese Harper: That is as reported by Morning Star. That is not what we mean by a long term time frame.

Ryan Isaac: It is funny because these funds are attracting people who have a long term mentality that they intend on keeping. That is their intention. That is why they are going to these funds because they are saying, “I am not an active manager, day trader guy. I am just going to buy this portfolio that will mimic the index for a long period of time and then trade it in two weeks.”

In fairness, there are a lot of active traders that use this fund as well for some of their spread strategies. A lot of their derivatives trades. If you look at some of the longest holding periods, like Vanguard’s total stock market ETF is probably the best example. That is a retail investor fund, that only retail people are investing in, and they have a long term time frame. It is a very, very large fund and that average holding period still is not even a year. It is still less than a year. You can see that even in firms, like Vanguard, that is full of investors that have that John Vogel mentality. They are still not holding things for any meaningful period of time before they make adjustments. The takeaway for dentists is to realize that even though you probably feel like you are the type of person that wants to build a portfolio with a long term time frame and you agree with this quote that investing should be more like watching paint dry or grass grow, the majority of you are not holding anything for a long enough period of time to see the grass grow! You aren’t holding it long enough and the grass is probably still not having a chance to grow. Let’s go to our last quote.

Ryan Isaac: You know who we saved the last for, the oracle of Omaha, Warren Buffet. Instead of just saying he is famous, I googled some little known facts about the guy. We will see if this makes the production cut. He eats 2500 calories a day and he loves junk food. He is quoted as saying that, “he doesn’t care how he gets them, he would much rather enjoy them. If he is going to eat 2500 calories a day he will eat it in junk food and candy and he loves Coke. If he dies a few years earlier because of that then whatever, he enjoyed it.” But he knows that 2500 is what he needs to maintain his body weight and stay alive. He also still has an ancient Nokia flip phone.

Reese Harper: I just gave one of those to my son and he hates it. He thinks he is the most biggest loser in school because I gave him my Nokia flip phone.

Ryan Isaac: He only sent one email in his entire life and it ended up in court once because of some unrelated thing. The only email he ever sent, and it ended up as something in a court case, so he decided to never do it again. He says that he spends 80% of his work time reading. We will take that as an example. His quote though, you do this one.

Reese Harper: His quote says, “put 10% of the cash in short term government bonds, and 90% in a very low cost S&P 500 index fund. I believe that trusts long term results will be superior to those obtained by most investors.” The context for this quote is that he put it in his 2013 letter to shareholders. Every year he writes a letter to shareholders who come to the annual meeting of all their investors, and this is the direction that he gave to his estate. This is what he told them to do with his money once he passed away. He said, “Put 10% of the cash in short term government bonds and 90% in a very low cost S&P 500 index fund.” This is probably pretty eye opening to most people listening. I mean, Warren Buffett is known as one of the most successful value investors, and low cost stock pickers.

Ryan Isaac: Hand picking, yes.

Reese Harper: The fact that he in his letter to shareholders advised that his assets be invested in the S&P 500 index fund is so interesting. He is not saying get rid of all the holdings I have completely. He is just saying that of any liquid securities, any liquid that I have, all of my estate that is not being managed directly, this is how he wants it invested. You would think he would say, “I want to have someone try to pick value stocks with it.”

Ryan Isaac: Right? I will hire a manager to try to replicate my philosophy and strategy with my family and their trusts and holdings. He is like, “nope, buy a cheap index fund.”

Reese Harper: If you listen to him, it is amazing how many times he has said this in public. He is the most misquoted investor of all time. I hear people quote Warren Buffet as like, “You know me, I am following the Warren Buffett strategy.” I am like, “what’s that?” Or they say, “You know how Buffett does it?” I am like, he actually has a very, very broad portfolio with a lot of different things going on. What do you think the Buffet way is?

Ryan Isaac: I have heard some whacky stuff, man. They will say, “Well, you know that challenge Buffet threw down online a couple years ago to pick stocks?” I have heard that like two or three times, and I am like, “nope!”

Reese Harper: You know how Buffett is, he is always recommending that people buy the cheapest stocks and stick with a value philosophy. Just Google Warren Buffett’s investment philosophy, then hear him in videos online talk about what his family and friends should do. How he wants his own trust to be invested. He is a very, very cautious active investor. That means that he likes investing in companies that he has control over, he likes having a meaningful ownership stake in something where he can influence the growth of the organization, where he feels like his capital can be put to use in an effective way, or it has a synergy with one of his other businesses. Not when it comes to just investing your retirement savings, and investing your excess cash, any money that he couldn’t identify a specific investment for he is really recommending this to be indexed in an S&P 500 index fund. That is an interesting takeaway.

Ryan Isaac: I think there are some things you could misunderstand about what he is saying here. Is he recommending everyone has a 90/10 allocation? No matter their position in life? Probably not.

Reese Harper: He just has enough assets in his estate that they will be around indefinitely anyway.

Ryan Isaac: The 10% of cash in his portfolio is bigger than enough.

Reese Harper: That allocation is enough that just the dividend from the S&P 500 that pays 2.5% a year, that will pay his family. He is just saying grow the estate because he has plenty of money to live on.

Ryan Isaac: Even if we have a down year, is he giving specific advice from global asset allocation, stay away from international? Is that what he meant?

Reese Harper: No, he is not saying that. He is making a general commentary about investing in a low cost way that is using an index fund. That is what he is doing. You will find in various comments that he is not opposed to global investing. He is just a guy that prefers the United States because he wants to support it. He is a very U.S. centric personality, he is from the Midwest, and has had most of his success in U.S. based companies. He is not making a specific asset allocation recommendation to anyone. He is not trying to give advice on where people need to buy stocks globally.

Ryan Isaac: What can a dentist take from this Buffett quote then?

Reese Harper: Make sure that you realize that one of the most successful investors of all time feels like it is going to be difficult to beat an index strategy when it comes to investment management. That is tough. It is an interesting take away from someone who has had so much success.

Ryan Isaac: I would like to end with one more quote from one of the most famous quote givers in the whole world, non finance guy. I got a few here, but I am going to end with this one, “sometimes the questions are complicated and the answers are simple.” Thank you Dr. Seuss. You didn’t follow that with a chime, so maybe not as much?

Reese Harper: You had another one I really liked.

Ryan Isaac: Which was the one you liked?

Reese Harper: “Step with care, and great tact, and remember that life is a great balancing act.” Again, Dr. Seuss, followed by a C for Chi.

Ryan Isaac: Ok, end it there. Thanks everyone for listening. Again, we would love if you would leave a review on itunes. It makes our podcast pop up higher in the search results when dentists are looking for us. You can see a whole list of episodes at dentistadvisors.com/listen, and while you are on the site, you can book a free consultation with one of our advisors. At the top of the page is a link for our calendar. We love to talk to you and hear from you.

Reese Harper: Carry on!

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