Why Most Dentists Miss Out on Bull Market Gains – Episode 86

Would you be happy if your investment portfolio earned average market returns?
Is that enough to secure a comfortable retirement? In this episode of Dentist Money™, Reese and Ryan discuss four important habits followed by effective investors, how to set proper expectations for portfolio growth, and a new way to measure the value of a good advisor.

Podcast Transcript:

Speaker: Consultant an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Reese Harper.

Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, here with my trusty old cohost, Sir Ryan Isaac, and Q in the studio.

Justin Copier: Q in the studio.

Ryan Isaac: Hey, guys.

Reese Harper: Uncle Q.

Justin Copier: I’m here.

Ryan Isaac: Uncle Q?

Reese Harper: Q’s like a father figure in the studio, I would say.

Justin Copier: Yeah.

Reese Harper: I would say.

Justin Copier: Although, that “Hey, guys.” Reminded me of the kid in the back seat of the station wagon.

Ryan Isaac: Hey, guys. Hey, it’s me. [crosstalk 00:00:47]

Justin Copier: Driving back here.

Reese Harper: Ah, cute. I got to tell you a story, Q. So last night I was out on my walk, which I do, I’m aging, so I go on evening strolls.

Justin Copier: It sounds like a very elderly thing to say.

Reese Harper: Yeah. I was going on my evening walk.

Justin Copier: Okay, you were going on your walk, and this is like 4:30 before bed.

Reese Harper: Okay. I was going down my road, and I was going past my favorite pine tree, and I saw one of my neighbors sitting on his porch. He was just kicking back drinking a cold one, and we went up and we started talking.

Justin Copier: Okay.

Reese Harper: He was partially inebriated.

Justin Copier: All right.

Reese Harper: And I could tell that we were going to have a … kind of a jovial conversation. It was more … It was an exciting moment for me because I like it when he’s more humorous.

Justin Copier: Yeah, okay.

Reese Harper: And, Trumpian economics came up just casually like it does in conversation with people around the neighborhood, and he started talking about how the market … And, this is a … this person’s not a financial person, okay? Not a financial person, and this is probably the … this is representative of at least half the population when they’re drinking a beer on a Monday night after a hard start of the week.

Justin Copier: And it’s hot outside?

Reese Harper: Yeah. And he says, “The market right now, Reese, is arbitrarily propped up by all of these Trumpian policies about deregulation and unleashing the free market, and we’re headed for a crash, and wages aren’t there to support all of these propped up prices in the market.”

Justin Copier: In the market.

Reese Harper: And I was like, “Holy cow.” I just wanted to say, “Hi, how’s your day been?”

Justin Copier: It’s like, “You see this pine out here? Smelling good. You smell it?”

Reese Harper: “It’s a great tree.” And, it just made me kind of … it made me kind of pause for a minute, and I’m just smiling the whole time, because I’m like, “This is an incredibly descriptive forecast, or economic commentary about why the market is up.”

Justin Copier: Why. Why, yeah.

Reese Harper: Why things are priced.

Justin Copier: We hear it a lot now.

Reese Harper: Yeah, and I thought, “Let’s ask listeners, how often do they hear someone say why the market is doing what it’s doing?” Just describe why. And someone will say, “Well, it’s because right now, all the banks are just … they’re gouging people because they’re … they’ve got internet. Banks are holding down those rates.”
Or, that corporate profits are just really high because companies like Amazon are finally … they’re finally churning up their prices.

Justin Copier: Bezos is jacked these days, though. I mean …

Reese Harper: They’re slowing down … Prime shipping’s not prime anymore, it’s now 3-Day. They’re finally taking it to the man. There’s all these reasons, right? What are some reasons you hear why the market’s propped up? What do you hear?

Justin Copier: Well, I’m kind of a … I’m a Twitter obsessive, and so I mean, you just see giving credit to politicians for arbitrary reasons. I don’t know how they actually get the credit for it.
It’s just like, “Because of so and so, it’s skyrocketing.” And I’m like …

Reese Harper: Because of this policy from …

Justin Copier: Sometimes they don’t even say that, it’s just … I mean, they’re saying … They’ll be … People will just say, “Trump has moved the stock market up.” But, people have said that up or down about presidents in the past, too, but it doesn’t mean anything.
I always read those, though. I mean, being in this industry and realizing how we have zero control over what the market does. Every time I see someone take credit for a peaking market, I’m like, “Buddy, you don’t want to be on the … you don’t want to be on the other side of taking credit for this skyrocketing market right now.”

Reese Harper: When you give people credit for the upside, you’ve got to give them credit for the downside, too, because it’s coming. Right?

Justin Copier: I just see those Tweets sometimes. I’m like, “I wouldn’t take credit for this right now.”

Reese Harper: Yeah. The reason I’m telling this story is, we want to talk today about a few investment principals, and the first one that relates to my story the most is, we want our clients, and we want our listeners, to embrace what we call market pricing, to embrace this concept of market pricing, and we want to talk about what that means, exactly, and Q, you can hold this accountable as we kind of get … delve into the weeds here.

Ryan Isaac: Okay, I’ll keep it up.

Justin Copier: “Hey, guys.”

Ryan Isaac: I’ll keep it at a higher level for our listeners.

Reese Harper: But, the market doesn’t respond in a sustained, in any sort of meaningful way, from irrational or arbitrary forces. It’s not an arbitrary measure of things. It’s not like … It’s not a guess, it’s not a gamble, it’s not a speculative mechanism. The market is, in it’s simplest form, it’s just … it’s like a dental practice, and if your dental practice is doing a million dollars in collections, it might be worth anywhere from 600 to as much as 900,000 in a reasonable kind of low to high valuation metric.
And, if you combined a lot of dental practices together into one group, the valuation might go up even a little bit more.

Justin Copier: Yeah, I was going to say. Yep.

Reese Harper: Right? And so the stock market, all it is is a … think of it as a bunch of dental practices combined into a big bucket and to where investors can buy shares of that big massive dental practices.

Justin Copier: Yeah, except every tiny bit of detail is constantly being reported, so every time you have a no-show, the stocks … dental prices go down. Right? Or, the front desk quits unexpectedly on Christmas Eve, and then they take a dive.

Reese Harper: Or, one of your hygienists bails on you and goes and joins a competing practices and steals a third of your hygiene department.

Justin Copier: Or, your example, there’s a merger, and well, it used to be a one-location kind of alone practice gobbled up by someone who owns 50 practices, and now, instead of selling for 70% of it’s collections or something, now it’s worth one and a half times it’s collections or something.

Reese Harper: Yeah. Every piece of information has to be revealed in an email, real-time, to the whole world.

Justin Copier: Millions of people buying these on a plan.

Reese Harper: Every time you have a little accident on a procedure …

Justin Copier: You break the file off in …

Reese Harper: You break a file off on …

Justin Copier: Your price goes down.

Reese Harper: Your … At least the public is aware of it, and they’re …

Justin Copier: Yeah, they get to decide.

Reese Harper: They’re made known instantly of your, either competency as a dentist, of your lack of thereof that day, right?

Justin Copier: Yeah.

Reese Harper: And so …

Justin Copier: If there’s a scandal in the office?

Reese Harper: If there’s rumors floating around.

Justin Copier: If there’s rumors of scandal, then that could affect prices.

Reese Harper: Just think about it … think about it in those terms. It … That’s literally what it is, except to even make it more …
Imagine if that were the case, all the information’s floating around, but then you also have a live market happening to buy the dental practice, okay? Where all day long, everyone can buy or sell instantly in and out of your dental practice, or this group of practices, by just looking at the information that comes across their email, the instant emails they get everyday.

Justin Copier: There’s a channel, there’s got to be a channel.

Reese Harper: A channel, a Slack channel?

Justin Copier: It’s going to be a … Yeah, a news channel like TV.

Reese Harper: Okay, so is it … There’s several news channels covering all the activity.

Justin Copier: Yeah, and it’s like the dental trade of the afternoon?

Reese Harper: And imagine this, PhDs, Masters in …

Justin Copier: Scientists, yeah.

Reese Harper: Yeah, scientists.

Justin Copier: Mathematicians? Yeah.

Reese Harper: Neuroscientists, all the MBAs from Harvard, and Wharton, and Stanford, they’re getting the data, and they’re making a decision on what they think the price should be given the new information that they now have, and they’re either selling or buying based on that new information.
And when that happens, what you end up getting, is you get a price that what we call is efficient, or it’s a fair price, or it’s a price that’s reflective of all the information that all of these smart people have about this group of dental practices.

Justin Copier: Yeah. What if a dental supplier drastically changes the pricing, the cost of a fundamental supply that every office has to have? And, it triples in price.

Reese Harper: Let’s say bibs.

Justin Copier: Bibs. Bibs skyrocket. The bib market is out of control.

Reese Harper: Yeah. Some …

Justin Copier: Bibs.

Reese Harper: Shine takes over control of all bibs.

Justin Copier: I hate the bib, I’m just going to say it.

Reese Harper: Yeah. Okay? And, they’re the exclusive supplier of bibs, but the government also passes legislation requiring you to use a particular bib material that only Shine has a patent on, and they decide to just gouge everybody for six months.

Justin Copier: They EpiPen it, yeah.

Reese Harper: Yeah, and so there’s a lot of things that can happen.

Justin Copier: So system-wide, that would go, profitability is going to be down, and immediately, all the smart people do their analytics and they say, “Well, we’re not going to get as much money from our shares in these companies and these dental practices, so let’s sell some off. They’re not worth as much as we thought.”
Selling takes place, prices go down instantaneously.

Reese Harper: Yeah, exactly. And so I think that’s a … it’s just a good way …

Justin Copier: Bibs.

Reese Harper: Glad we did this random example that’s just kind of off the cuff. Hopefully it worked.

Justin Copier: It turned out well, the bibs. I like the bib example. That was good.

Ryan Isaac: So, the advice is to invest in bibs, is that what we’re saying?

Justin Copier: That’s … You took it right, yeah.

Ryan Isaac: We’re bullish on bibs.

Justin Copier: Yeah.

Reese Harper: Just a little forecast here for you. Think about this in terms of when you hear the word “market pricing”, or “market efficiency”.
The stock market is one of the most highly vetted, highly competitive prices of anything in the world, and it reflects a large amount of … it effects a large amount of markets, or large amount of economies. It effects a large amount of sectors, meaning the companies aren’t just dental practices, they’re thousands.
In the United States, somewhere between 3,500 and 4,000 companies that are in every industry, in every sector, in every natural resource, in every service industry, in every product. It’s every industry, and you’re getting these MBAs and these PhDs that are checking and vetting the prices, kind of like we talked about the example of people vetting the dental practices, there are specialists in each market vetting each sector.
You’ve got people checking the prices on toilet paper and making sure that the toilet paper manufacturing company is prices fairly.

Justin Copier: Yep, and all down through the retail chain it’s all priced fairly, and … Yep.

Reese Harper: It’s just … We’re not saying it’s a perfect mechanism, we’re just saying there’s a huge misunderstanding in the general public about how a market is priced.

Ryan Isaac: Well, yeah.

Reese Harper: Thinking of my story, just talking to my buddy that I’m walking out of the house and he’s like, “All these Trumpian deregulating market economics.” It’s like, fundamentally, that doesn’t have a sustainable … Unless something actually happened, unless there was some actual data, these smart people, they’re disciplined, and the market’s fairly disciplined as well.
There’s a lot of people contributing to these prices.

Justin Copier: It’s reflective.

Reese Harper: And so it’s reflected in the price. Today’s price that you see reflects all of the available information we have about it. It’s kind of like if you went to the grocery store and you’re going to go buy some …

Justin Copier: Broccoli.

Reese Harper: Well, I was going to think some …

Justin Copier: Where are you going to go?

Reese Harper: Alaskan wild caught, line caught salmon.

Justin Copier: Okay.

Reese Harper: Okay?

Justin Copier: You’re going not a very liquid market, although there’s some play on words with water and salmon, but we’ll skip that for now.

Reese Harper: Yeah. I’ll give you that. I mean, if I’m going to go to the store and I’m going to buy a piece of fish, I’m not going to question whether that price is cheap or expensive, I’m just taking the price because I trust that …

Justin Copier: Someone along the distribution channel has vetted the price? Yeah.

Reese Harper: Yeah, and it’s like, I’m not going to go to another store to try to save 50 cents. If I’m at the store, I’m just going to take that price.
I think more … What people would … It would be better for most investors if they’d just accepted the price that they’re … that the market’s offering, as a fair price.

Justin Copier: Mm-hmm (affirmative)

Reese Harper: Of the entire market. We’re not talking about …

Justin Copier: Yeah, is reflective of all available information and …

Reese Harper: Yeah, and the more you get down … To go with my grocery store example, this wild caught, line caught salmon …

Justin Copier: Line? You mean like a man was holding …

Reese Harper: Yes.

Justin Copier: Or a woman was holding a fishing line? Yeah.

Reese Harper: That may not be quite as efficient of a price, okay? As the …

Justin Copier: Farm-bread?

Reese Harper: Halibut … General … The general halibut frozen fish sticks price from Associated Foods.

Justin Copier: Shout out to Associated Foods and their halibut fish sticks, though.

Reese Harper: If you’ve got those two possible things to buy, the line caught salmon might have quite a bit of variability in that price.

Justin Copier: More fluctuation? Yeah.

Reese Harper: And I’m just making the comment or the comparison that my fish sticks are more like the market price of stocks of the whole market, where my line caught salmon might be one company. Right?
Or, one sector. Or …

Justin Copier: This feels like a whole other principal all together, yes.

Reese Harper: It does, but that’s … If you’re going to the grocery store, you’re probably going to be a little more speculative. You’re going to be a little more questioning of the dragon fruit in the fruit area than you are the Red Baron’s Pizza in the frozen food section, because one has more information about it.

Justin Copier: Way more buyers and sellers.

Reese Harper: Way more buyers and sellers.

Justin Copier: Which is the key to all this.

Reese Harper: Yeah.

Justin Copier: The market for the dragon fruit is a lot smaller.

Reese Harper: Yeah, it’s my one kid.

Justin Copier: Transactions aren’t taking place as quickly as the Red Baron’s Pizza?

Reese Harper: Yeah. We were in … And we had … It was an organic dragon fruit, too. We’re in the food section and I’m just like, “Seriously? Just get a honeydew melon.” And he’s like, “I want the dragon fruit.”

Justin Copier: Come on, son.

Reese Harper: I’m like, “That’s like $9 for two bites of fruit.” He’s like, “But … ”

Justin Copier: You know what a dragon fruit is?

Reese Harper: “I really want that.” I’m like, “Well, can you get the … maybe the traditional conventionally grown dragon fruit? Or, do I have to get the organic one?”

Justin Copier: Okay, so let me say something about this market that comes up a lot, too, and you alluded to this in your tree walk story with your neighbor, and that a lot of people have this feeling that the market is this random arbitrary nothingness, this void that is, prices are random, it’s fixed, it’s a gamble, it’s a casino, someone’s manipulating it somewhere.
But, when you take it down to what a market actually is, if we go back to our example of a market full of dental practices and you just imagine that these are individual people running companies just like your dental practice today, just like our business today, that want nothing more than to grow their business and have revenues and profits at the end of the day, and they want that more than anyone participating in their business, as the business owner, whether it’s one guy, or a board, or multiple owners.
And so, you kind of have to bring a little bit of the human element back into the market and realize these are companies that want, more than anyone else, to make money and grow, and be worth more tomorrow than they are today, and so you can’t really say that the market is this arbitrary rigged system and …
It’s just people running businesses with every incentive in the world to make money.

Reese Harper: Yeah, and especially the CEOs of these companies. I mean, most of them are compensated on stock options that are driven by the performance of their company.

Justin Copier: The growth. Yeah.

Reese Harper: The growth of the company, the profitability of the company, the …
And, it’s not … In most of … And, people know when they set compensation for these employees and these CEOs, when the board of directors sets compensation of a public company, the way this works is you got a … you got a board, a few people that set compensation for both employees, executives, and the CEO.
They set compensation metrics up to really incentivize people to make smart long-term decisions and good short-term decisions, they’re also profitable.
And so, it’s not a perfect system, but there, arguably, are more incentives that are being managed properly in the public market than in the private market, and that’s why you see so many private businesses failing, but the public market will continue to escalate in price over time, because it really is the cream of the crop of what has survived.

Justin Copier: Mm-hmm (affirmative), and they have the resources to do it, too.

Reese Harper: Mm-hmm (affirmative).

Justin Copier: The accountability and the trends, everyone’s looking at it.

Reese Harper: Totally. I think that’s the first principal, is embrace market timing. Okay? Embrace the time … And, sorry … Embrace market pricing.

Justin Copier: Price?

Reese Harper: Do not …

Justin Copier: Jeez. Wait …

Reese Harper: Okay, I know Justin’s going to cut that out.

Justin Copier: No, don’t cut it. That’s …

Ryan Isaac: Well, no. I wanted to interject one other point I think you guys were making is that on one side of the transaction, you have all these business owners, boards of directors, partners, whatever, trying to create value. On the other side of the transaction, you have investors that are voting with actual dollars.

Justin Copier: Mm-hmm (affirmative).

Ryan Isaac: With all the information, they’re not just saying, “I would pay that price for that stock.” They’re actually putting their money where their mouth is and doing it.

Justin Copier: They’re doing it, yeah.

Reese Harper: Yeah, that’s great insight.

Justin Copier: Yep, totally true.

Reese Harper: And you see very few … You see very few examples of that in life in general. There’s not a lot of tests out there of actual money being placed that are … that’s not speculative, but it’s based on actual research.
There are lots … There’s a lot of betting. There’s a lot of bets out there. Right? There’s betting on a horse race, there’s betting on the NBA finals, there’s betting on the Super Bowl. Right?
But …

Ryan Isaac: The crossfit games coming up.

Reese Harper: The crossfit games, little shout out.

Justin Copier: Reese … Or, Ryan’s Super Bowl week is this week.

Ryan Isaac: It’s my Super … But, it’s my Super Bowl week. Made it last for four days, though. Anyway, back to your point. There’s a lot happening.

Reese Harper: Let’s go to point two, okay? Point two is, I don’t want people to try to outguess the market.
First, embrace market pricing and know what that means. Second, don’t try to outguess the market. How would you kind of cover this?

Justin Copier: Well, and there’s a lot of ways that people try to outguess the market. Sometimes people try to pick individual companies inside of this list of 15,000 worldwide, I don’t know what the exact number is.
They try to pick individual ones that are going to do better or worse than others. Right?

Reese Harper: Yeah. It would be like me in the grocery store when I was like, “That dragon fruit, that organic dragon fruit is a steal. I’m going to buy it, and I think I can sell [crosstalk 00:20:29] it to my friend for a profit.”

Justin Copier: Yeah. I’m going to buy a lot of them, yeah.

Reese Harper: I don’t trust the price. I don’t trust the price that I’m delivered by the grocery store.

Justin Copier: I don’t trust the price. Yeah, and you could be right. You might be.

Reese Harper: And, I will often go into the dragon fruit section to try to accomplish that. Right? I’m not going to do that in the Red Baron Pizzas aisle.

Justin Copier: Red Baron. Because everyone knows it’s worth what it says it is.

Reese Harper: I can Google that one.

Justin Copier: But, dragon fruit, you can’t?

Reese Harper: Yeah.

Justin Copier: All right. Well, I think even the dentists that we talk to frequently every single week, I find that market timing is happening more, not so much in stock picking, that’s not as common from the people I talk to, as much as, “I just don’t trust this market, so I’m sitting on $500,000 in practice checking.”

Reese Harper: Yeah.

Justin Copier: And, “I don’t really know what to do with it.” People are timing the market that way, or they’re just saying, “I think this thing … ”
If it’s going down, people are saying, “It’s going to keep going down, I’m going to wait.” And if it’s going up, people will say, “This thing’s near a top, and I’m going to wait until it comes down.”
That’s more where I see people trying to time the market, then picking individual stocks.

Reese Harper: It happened last night with me at the …

Justin Copier: At the tree?

Reese Harper: At the tree.

Justin Copier: Well, the same tree? It was just same tree, different guy? Same tree, same guy?

Reese Harper: Same tree, different person about a hundred yards up later.

Justin Copier: Jeez, that’s a retreat.

Reese Harper: We got talking about markets and things. I don’t bring this stuff up, people. Okay?

Justin Copier: You just walk around with a sign around your neck that’s like, “Talk to me about money.”

Reese Harper: “I want to talk about investing.”

Justin Copier: “I need a new topic for my podcast, can we have a conversation?”

Reese Harper: It does feel like a theme, now. You just walk around your neighborhood, instigate these uncomfortable dialogues.

Justin Copier: Like, “Sorry.”

Reese Harper: But I did have … I did have this conversation, and someone told me that they were just waiting for this thing to crash, and once it did …

Justin Copier: Then …

Reese Harper: Then they were going to get back in, but they were ready to head to the sidelines.

Justin Copier: They’re waiting. I mean, I remember specific conversations. The last time the market took a little bit of a … I don’t know, a downturn? What do you call a downturn in today’s market?
I see jokes all the time, like, “If it’s only up 50 points today, then that’s a dip. Buy that dip.” But, it was 2015 during the year the market was down 14-ish?

Reese Harper: Yeah.

Justin Copier: During … It ended basically flat. But during the year, I remember specific conversations where it was down six or seven, and some really disciplined intelligent people were saying … friends or clients of ours, too, were saying, “I’ve got … I’m going to wait. 10%’s my trigger. I’ve got some cash, 10%’s my trigger.”
And then I remembers having a discussion after 10%, and it was like, “No, this thing’s … This … It’s still running. I’m going to wait. I’m going to wait.”
And then nothing happened, and then it rebounded that whole year, and then it’s back up since then, and that’s the psychology that’s so hard is when it’s going down, everyone thinks, “Yeah, a little bit of a dip, I’ll buy that. I’ll get in.”
But the fear takes over, and then you just think, “That’s going to keep going.” If it’s down 5, it’s going to be down 10, if it’s down 10, it’s going to be down 20. I’m going to wait.
I mean, it’s just … it’s impossible to play that.

Reese Harper: Well …

Justin Copier: Emotionally and statistically, it’s just so hard to do.

Reese Harper: Well, and professionals do it, too, and probably one of the strongest evidence of that, we’re going to … I want to just share an example.
In the mutual fund world, there are mutual funds that accept first principal we talked about, which is just, “Trust market pricing.”
Or, I think the way we worded that was embrace market pricing.

Justin Copier: Embrace.

Reese Harper: Some mutual funds we’ll just embrace market pricing. That … You might see that within an index that … a vanguard S&P 500 Index, they’ve just chosen in that scenario to deliver to you, the actual market. They’re not delivering something better to you. They’re not trying to pick the dragon fruit, they’re just saying, “Look, we’re going to own every item in the grocery store, including the dragon fruit, but we’re going to own Red Baron Pizza, and we’re going to own the halibut sticks and everything. We’re just going to deliver this whole price of all of these things to you.”

Justin Copier: That was good insight into your refrigerator.

Reese Harper: And then you have these people that are trying to buy components of the store, okay? And hoping that they can resell them, and at a profit, where someone else just says, “I’m going to own the whole thing, and it will move. I’ll trust that it will move.”
The dental practice analogy earlier where we own all the dental practices and we just trust that they’re moving in the right direction, and if one of them fails, we’re not going to get hurt. That would be … would call a mutual fund that’s just embracing market pricing. We own all the practices.

Justin Copier: Yeah, some aren’t going to do so well, and some will.

Reese Harper: Yep. Now, some mutual funds choose to go the opposite direction. They pick one of the dental practices, or two of the dental practices, and say, “I’m either going to … I’m going to buy that practice, or in some cases, I’m going to short that practice.”
Or, “I hate that practice so bad. I know it’s going to go down, I’m going to bet that it goes down. I’m going to borrow someone else’s stock, and then I’m going to sell it because I think it’s that bad.”
Mutual funds have the option to do a lot of different things with picking out of the group of dental practices, they could pick just one or a few based on certain attributes and hope that they could do better than the mutual fund embraces market pricing, and just says, “We’ll own all the dental practices.”
And which one do you think costs more? Right?

Justin Copier: Yeah, right. The specialty, yeah.

Reese Harper: The specialty kind of manager, that the reason that they charge more is because they’re saying that they’re smarter.

Justin Copier: “We’re going to deliver more.”

Reese Harper: Yeah, and they’re going to deliver more.

Justin Copier: And they’re going to spend more time and hire more people to do the analysis.

Reese Harper: And in some … I’m not saying that it never happens, but I’m just going to give you the data right now so you can kind of see from …

Justin Copier: Let’s go to the data.

Reese Harper: From 2002 to 2016, all right? The mutual fund market, there were 2,587 equity or stock mutual funds alive that you could buy.

Justin Copier: In 2002?

Reese Harper: In 2002. And over this, I guess it would be a 14 year period of time?

Justin Copier: Yeah. Yeah, almost 15 years.

Reese Harper: Almost 15 year periods. How many were surviving? How many survived?

Justin Copier: Yeah, 15 years later, a little less than half were even still around 15 years later. 48%.

Reese Harper: So, 15 years later, 48%, or 1,253 of the 2,587 were even …

Justin Copier: Still alive anymore?

Reese Harper: In business.

Justin Copier: Yeah, even in business anymore.

Reese Harper: At some point, things were going so bad that they just were … quit, or they were bought by somebody, or … I think this survey actually eliminated the acquisitions, I can’t remember.
But, the 400 … the … let’s find out how many people actually beat the actually.

Justin Copier: Yeah, so over that 15 year period of time, 17% of those 2,500 mutual funds beat their benchmarks.

Reese Harper: Yes.

Justin Copier: It doesn’t say by how much. I mean, it could’ve … might not have been as much as they charged, but they beat their benchmark, whatever their benchmark was, which is also kind of a funny …

Reese Harper: Yeah. Well, in this survey, they did beat their benchmark by net of what they charged, I believe.

Justin Copier: Okay, all right.

Reese Harper: And so 40 … 17% of the … 451 of the 2,587 actually did better than the average.

Ryan Isaac: So, can you guys, just for me and maybe for some of our listeners, explain what the benchmark is?

Justin Copier: Good question.

Reese Harper: Well, in this particular benchmark they were using the S&P 500 as the benchmark. The benchmark were the 500 largest companies in the United States taking their return over that 15 year period and saying, “That’s what you should have gotten had you just embraced market pricing.” Right?
But only 17% of the mutual funds that started out ended up beating the average of the 500 largest companies, and so …
I mean, that’s kind of the crux of the argument for stock picking for managers, is it’s very expensive, and for most investors, there’s not a payoff, and in my experience, as a financial advisor, the majority of people I interact with still have mutual funds that are playing these odds. Right?
They’re trying to … They’re trying to beat the market, and taking on more expense to do so, and our argument is that that’s not embracing market pricing and it’s not going to be good for you, and that it won’t turn out to …
We’re not saying it never happens. I mean, clearly, 17% of the time it was happening.

Justin Copier: They did it, yeah.

Reese Harper: We’re just saying the odds are not in your favor, and the outperformance, if you take the outperformance of all of those combined and say, “Well, how much was the outperformance?”
I mean, it’s not compelling, right? In most of these surveys …

Justin Copier: Not worth the risk or the cost …

Reese Harper: Associated with it. And even though they outperformed, it doesn’t necessarily mean they didn’t take more risk to do that, and there was more volatility to achieving that return, and so I think it’s important right here.
I want to take a break, but I want to talk about another side of this argument, of … Because some people look at it and say, “Well, the 17%, I could find that. I can … ”

Justin Copier: Well, you can search for it.

Reese Harper: I can figure that out. I know who the 17% are, just the smart people.

Justin Copier: Yeah.

Reese Harper: So, here’s what we’re going to do, is we’re going to show … When we get back from break, we’re going to talk about the smart people and how the smart people did those 17%, and how nearly impossible it would have been for you to determine which of those 17% would have been the winners from the beginning of that 15 year period.

Justin Copier: All righty.

Reese Harper: After break.
Hi, this is Reese Harper. I’m the host of the Dentist Money Show, and CEO of dentistadvisors.com. I want to take just a minute and explain why dentistadvisors.com is different than your average team of financial advisors. We help you plan, invest, and retire better using a unique set of tools you won’t find anywhere else.
First, we use our proprietary methodology called Elements to asses your financial health. The Elements framework enables us to give you data-driven objective advice based on a comprehensive picture of your personal and practice finances.
We maintain that picture in a custom dashboard that tracks all your assets, debts, and accounts, so you know what you’re worth anytime and anywhere, and because we work with dentists and specialists, we can leverage our industry expertise to weigh your progress against your peers.
We are the premier wealth management firm for dentists and specialists, and we’re ready to put you on a more predictable path to financial independence. Start now by booking your free consultation today at dentisadvisors.com.
Thanks again for listening, now let’s get back to the show.
Welcome back, we’re back from break. That was a good break.

Justin Copier: Thank you, Sir Ryan Isaac. Thank you Q, for being back from break.

Reese Harper: Yeah, let’s jump into this.

Ryan Isaac: Yeah. A lot’s changed.

Justin Copier: Yeah.

Reese Harper: Let’s go into the third principal. Okay? It has to do with what we call survivorship bias, or which one of the smart people were left around after the 15 year period? How would you have been able to guess, of the 17 … of the very low probable odds that 17% of these mutual funds over the last 15 years beat their average?
How would you have known which of these in advance?

Justin Copier: Well, it’s easy. I’m just going to go to a piece of software, maybe a dongle, or an app or something.

Reese Harper: A widget?

Ryan Isaac: A widget.

Justin Copier: Okay. And I’m just going to screen … There … It’s easy, there’s free stuff online. I’m just going to screen for the top performing mutual funds in the last five years.

Reese Harper: Let’s just look at how hard it is to track performance and known, in advance, which one of these funds is going to be better than another. There’s … There was a study done on mutual funds from 2007 to 2016, they just finished this research up at the end of last year, and they took the top 25% of highest performing funds over the previous five years.
So they said, “Look, if in the last five years, we’re going to … ”

Justin Copier: Top core tile, yeah.

Reese Harper: “We’re going to look at the funds that have done the best. The top 4th 25% of best performers, we’re going to see how those funds perform in the next year.”

Justin Copier: Yeah, just one year later.

Reese Harper: One year later. And they did this rolling periods, so they took every five year period and said, “I’m going to take the top 25% of performing funds and see how they did the next year.”
26, we’ll go to 2011, and then we’ll see how 2011 ended. From 26, 2011 end, and in 2012, what happened? And then we’ll go 27 to 2012 and see how they did in 2013, and vise-versa.

Justin Copier: Yeah, yep.

Reese Harper: And if you do that, only 23% of the stock mutual funds actually performed in the top quartile that next year.

Justin Copier: Meaning 3/4ths of the top funds fell out of the top quartile the following year?

Reese Harper: Yeah. Every time?

Justin Copier: Every time. Yeah, and so the hard …

Ryan Isaac: It’s tough.

Justin Copier: Yeah, it’s tough.

Reese Harper: So basically what you … You don’t … I mean, our point here is you don’t … there may be … there’s a very, very, very low statistical probability that a mutual fund will outperform the average of this idea of embracing market pricing that we talked about.
There’s a very low probability. We said it was 17% from 2002, 2002 to 2016, but of that 17% of funds, right? That very low probability, your ability to pick those is really really limited, because if you just look at the highest performers, or the top star ratings, or the best performing funds …

Justin Copier: It doesn’t mean anything year-over-year.

Reese Harper: It doesn’t mean anything necessarily …

Justin Copier: It doesn’t guarantee you anything.

Reese Harper: The following year, and many of them fall out of their performance trends, and that’s really typical, and so you have to stay on top of it and pick it … you have to pick and rotate out of funds.
This doesn’t take … In order to do better, you have to rotate out of funds and know what’s going to perform better in the future, because it won’t be a consistent fund over a 10 year period of time.

Justin Copier: Yeah.

Reese Harper: It’s just a lot of work and energy that you can’t really …

Justin Copier: Tons.

Reese Harper: Guarantee that you’re going to succeed at, and you’re going to … The other thing we’re not talking about is, you’re going to incur a lot of taxes and feeds to make all these changes, which this research doesn’t really take into account.
If you’re going to make a change, not only do you have to make the change into the right fund, but you have to do it in a way that minimizes your taxes. It’s hard to do, because if you have any gains and you sell it, you’re going to pay taxes on those.

Justin Copier: Not to mention you went to school for a decade and are hundreds of thousands of dollars in debt to run a dental practice. When is it worth your time to try to do this?

Reese Harper: Yeah. Well, and probably maybe even more importantly then, because there’s a lot of people listening to this that are like, “Dude, I would never try to do this on my own. I’m not trying to do this on my own.”

Justin Copier: Yeah.

Reese Harper: Well, most of your financial advisors might be doing this.

Justin Copier: That’s a good point.

Reese Harper: And they can’t do it any better than you can. I mean, it’s … they might have a slightly higher possibility of doing it, but these odds are just so low.

Justin Copier: But probably not. Yeah.

Reese Harper: And, you’ve probably seen a bunch of stuff on economics. Funny comedic papers about how monkeys can pick mutual funds better than humans, or the ape at the zoo, Cornelius, ended up beating all of the smart people at …

Justin Copier: [inaudible 00:36:27]

Reese Harper: At Stanford.

Justin Copier: Oh, okay.

Reese Harper: I mean, it’s just a … it’s a very common theme that in the investment world, everyone’s aware of this, but there are some financial advisors that persist to try to add value in this way rather than trying to deliver market returns in a way that’s going to give you more predictability.

Justin Copier: Which is, I mean, as we’re talking about this, our market returns, that’s kind of the next point is let markets work for you. Our market … If I just do the boring plain route, and I’m trying to do all this guessing and all this work, are market returns enough for me to retire?
Well, yeah. There are plenty. If you’re starting this early enough in your career and you’re having a high enough savings rate, the boring market return is plenty to retire. It’s one of the highest returning asset class that dentists will have a chance to invest in in their careers, but even that is really really hard to do.
I mean, just buying a market portfolio, and holding it and rebalancing it, and making slight changes according to your own situation and goals, liquidity needs or whatever, that’s just because of the emotions of that.
I mean, think of the emotions you go through in any given … these days, any given day, of world events, or politics, or whatever, how emotional those things feel.
Now, imagine sticking to that for 30+ years. I mean, just doing the boring thing is really hard, too. But I think that’s the next principal is, it is enough. Let the markets work for you. You don’t have to outsmart them, you don’t have to outguess them. They are enough, but you have to let them work for you.
And part of that … part of them working for you is being willing and able to pay the price of volatility as they go up and down.

Reese Harper: Yeah, and I think it really … This is … It really does help, I’m working … I’m finishing this book right now called Never Split The Difference, and it’s a book from a former FBI director on how people are influenced, and how people …
He was in negotiations, and conflict resolution, and kidnapping, and stuff like that.

Justin Copier: Crazy.

Reese Harper: And so his job was to try to make sure that, in any given situation, as few of people died as possible, and he was able to try to figure out how to convince or persuade or influence the kidnapper or the person that was holding everyone hostage, or the terrorist, or whatever.

Justin Copier: Cool.

Reese Harper: And so what his … He referenced this Daniel Kahneman research that was done in the 70s on economics as kind of one of the drivers of what he saw in conflict resolution, and what he was saying was that, there was a point in time when all of these economic people, all of the Ivy League schools really felt like people would behave rationally in a for-profit kind of way, where if you’re going to …
If the … If we’re telling you that by owning the stock market from 1926 to 2016, you’re going to achieve a 10% annual return in the broad market, and if you’re owning small cap market, you might get more, and that long-term government bonds might pay you 5%.
Those are very rational numbers I’m throwing out there, but he would … But … And so these Ivy League schools were like, “Well, people are going to behave rationally.”

Justin Copier: They would just assume that people would be incentivized by that enough to just behave fine, yeah.

Reese Harper: Yeah, because it’s like, “Dude, you … ”

Justin Copier: Yeah, why wouldn’t you want this?

Reese Harper: By definition, if you have your money sitting in a bank account, you’re losing 10% per year by definition if this is true. Right? It’s not every day. Right?

Justin Copier: No. Yeah.

Reese Harper: But you’re making the conscious the choice to say, “I’m going to figure out a way to do it better, and I’m not going to be exposed to the market.”
Where what Kahneman was saying in his research that influenced this FBI director was that people aren’t rational, and in-fact, they’re mostly animalistic and very emotional, and they don’t respond to reason very often, especially when it comes to investing money.
And so the point that this FBI director came to is, you have to be able to combine logic and this rational side with the emotional way that people really deal with money in order to be an effective conflict resolution specialist, and I just feel like most people, right? The terrorist or the person that was holding everyone hostage, they don’t the … they’re … they don’t have the ability, in a lot of cases, to sort of self-diagnose and figure out that they’re really being emotional. Right?
And that they’re being frustrated, or they’re going through this journey, and it helps to have someone talk them through it and kind of help coordinate, and at the risk of offending our entire listening audience with comparing them to terrorists or comparing them to a conflict … a hostage person that’s holding everyone hostage, I’m saying that a good financial advisor really is there to sort of act like this FBI director was acting and talk people through situations that they might … about to go through that are going to hurt their financial situation.

Justin Copier: Well, I was going to … Yeah, I think that is dead on, and it’s really kind of an older mentality in our industry of financial planning, money management, investment advice. The old mentality was, help people stock pick and do the strategic stuff to pick the best funds and kind of outguess the markets.
That used to be the old value, and because there was such a lack of access to information and ability to … for retail individuals to get their own funds and everything, I mean, that was kind of the value.

Reese Harper: Yeah.

Justin Copier: And they’ve really held … Our industry’s held onto that.

Reese Harper: Well … And the average of a financial advisor in our industry …

Justin Copier: Is 56 or 55? Yeah.

Reese Harper: Yeah. I mean, they grew up in that generation of …

Justin Copier: That was the value.

Reese Harper: That’s the value that you bring.

Justin Copier: And in media, that’s still … they’re still clinging to that value.

Reese Harper: In media, it’s still … I mean, everything in CNBC is arguing that, right? Almost everyday.

Justin Copier: Yes, it’s still. But what you’re saying is the real value is to be able to negotiate that balance between the logics of, this … “Investing this way can give me a really great rate of return and I can retire wonderfully if I save enough money into it.”
With, “I’ve got 30 years of emotion to deal with, and it’s so volatile that I have to be able to stay logical and stay committed.”
And that is the value. It’s not a sexy value. It’s hard to sell that value, but that is the value of a good financial advisor, is just being able to get what the market’s going to give you, which is easy in concept and really hard in practice.

Reese Harper: Yeah, and I mean think about this … think about the fact you’re having a week, and I … you’re going through a period of time where you have some staff turnover. You have an office manager leave, you have a hygienist leave, you have some volatility in your practice that really throws you off.

Justin Copier: Something just broke.

Reese Harper: You need liquidity, you need access to your investment accounts, you’re going, also, through a volatile market. Maybe we’re going through a downturn, so your … you need some cash, you’ve just had a disruption in your practice.

Justin Copier: You have external stressors. Yeah.

Reese Harper: And, you’ve got to decide, “What’s the right approach to take with my accounts right now?”

Justin Copier: Yeah.

Reese Harper: Ryan’s telling me that this is how it should be. I should continue to invest my money, and this new deposit should … I should be doing it this way, but I’m feeling this tension to make a different decision right now. Everything’s kind of going awry.

Justin Copier: That’s so common, man. Yeah.

Reese Harper: And it just … That kind of conversation will come up three times a year, and a good financial advisor …

Justin Copier: With one person.

Reese Harper: Yeah, with one person. And you should have … A good financial advisor should have conviction in their ability to embrace market pricing and help you navigate through, not timing the market, and not letting external pressures change your plan, and making sure that you are in a position to just successfully come out on the other side of all of these emotional battles that happen every day.

Justin Copier: Mm-hmm (affirmative).

Reese Harper: I think kind of just a way to summarize this podcast episode, if we said, embrace market pricing, that’s kind of the first thing we hit.

Justin Copier: Yeah.

Reese Harper: Second one was, don’t try to outguess the market. Right? I mean, just accept these … accept that reality.

Justin Copier: Yeah.

Reese Harper: The third one was, resist chasing past performance.

Justin Copier: Yep.

Reese Harper: Don’t assume that historical performance is going to be an indicator of future results. You wouldn’t be chasing past performance, by the way, if you embraced market pricing, and that’ll help you avoid that.
And then, just let the markets work for you.

Justin Copier: Mm-hmm (affirmative).

Reese Harper: Let the markets just work on your behalf. Right?

Justin Copier: Yep.

Reese Harper: What would you add to any of that?

Justin Copier: When I think about the, let the markets work for you, I think there is an element of good planning where it’s easy to say that if you’re 25, “Let the markets work. I’ve got 30+ years, that’s easy.”
What if you’re 45? What if you’re 50? Good planning would also help prioritize other things. Maybe you don’t need to risk a lot of … Maybe you need to keep some of your money really conservative, because you’re going to need it soon.
You shouldn’t expose it to risk, or if you have a project coming up that’s kind of short-term needed money, maybe you got to remodel the house, or move, or build a building, or …
Good planning is a part of letting markets work for you, because someone might hear this and be like … You know the stories where someone’s like, “Uh, I don’t trust the stock market. My dad was going to retire, and it was 2007, and he had his money in the stock market, and then it ruined his retirement. He couldn’t retire.”?
There’s an element of good planning in conjunction with investments, too, with the markets.

Reese Harper: If you do good financial planning, you don’t have … it’s … What we’re not saying is, every person, regardless of their age, should just …

Justin Copier: Or goals, or situation.

Reese Harper: Yeah, should just trust the market to help you retire. What we’re saying is that good financial planning allows you to have a portion of your portfolio.

Justin Copier: And know how to let it … Yeah.

Reese Harper: Yeah, dedicated to the market, and without it, though, I mean, I sat down this week with multiple that, without this methodology, I mean, this calendar year would have hundreds of thousands of dollars in net worth that wouldn’t be there, if not close to a million dollars in net worth for some people.
By trusting the power of the market instead of guessing, or timing, or questioning things, or looking at past performance, they really have been able to reap rewards of a consistent, both financial plan, and investment policy, and so …

Justin Copier: Okay. I think with that, we can close it up, unless Q has any words of wisdom, and he might just want to say goodbye to everybody.

Ryan Isaac: No more questions for me, I think it was great. Really educational, thanks guys.

Justin Copier: Okay, well thanks for everyone for listening. If you want to leave a comment or question on this episode or any episode, you can go to dentistadvisors.com/listen. You can call us direction at 833-DDS-PLAN, that’s our fancy custom phone number.
We also have a link at the top of our website, dentistadvisors.com. If you want to want to schedule time on a calendar, speak with us. Love to hear from you any time. Love to hear your feedback, and questions, and comments.

Reese Harper: Carry on.

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