How a $2 Billion Private-Equity Fund Went Bust – Episode 91

How does brainpower impact your investment outcomes? Do smart people have the edge when it comes to recognizing the most lucrative opportunities? In this episode of Dentist Money™, Reese & Ryan highlight a major private equity fund that lost everything despite participation from some of the world’s most respected organizations. They also glean three critical lessons every investor should apply.

Podcast Transcript:

Speaker: Consult an advisor or conduct your own due diligence when 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 co-host, Sir Ryan Isaac.

Ryan Isaac: Hello, good morning. Howdy.

Reese Harper: How you doing Sir?

Ryan Isaac: I’m doing finger guns at you for those at home that can’t see it. What’s happening?

Reese Harper: Good morning to Q and I’d like to also extend a trusty, good morning welcome to Q in the studio.

Ryan Isaac: A hearty.

Justin Copier: Top of the morning.

Ryan Isaac: Yeah.

Justin Copier: To hear.

Ryan Isaac: The voice of the common man. We have a story today about a massive failure.

Justin Copier: Your life.

Ryan Isaac: It’s my life. Spoiler alert, guys, this is a story about my life. Call it a massive failure. The young and still restless.

Reese Harper: A brief synopsis. Okay, so let’s tell this story. I will-

Justin Copier: Here’s close at home man.

Reese Harper: This one was a Wall Street Journal story that really kind of stuck out to me a few weeks ago, as I peruse through my evening mobile application that’s kind of got me addicted because the new user interface is beautiful. If you haven’t really ever downloaded it. Shout out to Wall Street Show.

Ryan Isaac: Shout out to Wall Street show.

Reese Harper: They are not a sponsor, in case you’re wondering.

Ryan Isaac: Soon to be.

Reese Harper: The story was about a $2 billion hedge fund and a really interesting a few insights into it. I’d like to let sir Ryan Isaac share some of his thoughts of the story.

Ryan Isaac: Well, I mean, here’s the thing is, it’s the story of a $2 billion hedge fund that lost everything. And in the history of private funds like this, there’s only I mean, it’s a single digit number of funds over a billion dollars that have ever done this.

Reese Harper: Yeah.

Ryan Isaac: I mean, this was backed by a massive bank, which is-

Reese Harper: Is it okay to talk about these names?

Ryan Isaac: Well, yeah. Well-

Reese Harper: So it’s public data.

Ryan Isaac: Yeah. I’m just laughing because the news today on that bank isn’t very…

Reese Harper: So there’s-

Ryan Isaac: Not a bad swing of luck.

Reese Harper: All of you Wells Fargo people out there, shout out to our friends.

Ryan Isaac: You weren’t opened fraudulent accounts.

Reese Harper: You didn’t open the fraud accounts okay.

Ryan Isaac: Our friends once [crosstalk 00:02:25].

Reese Harper: But Wells Fargo got thrown into the bus from this story.

Ryan Isaac: It’s been a cycle.

Reese Harper: Actually it was mostly, Wells Fargo [crosstalk 00:02:33]accounts opening, but Wells Fargo lent a lot of the money to this hedge fund.

Ryan Isaac: Yeah.

Reese Harper: The hedge fund was a leveraged hedge fund that purchased oil and gas wells right before the energy market crashed.

Ryan Isaac: Yeah.

Reese Harper: And this was I think it was in 2013. I didn’t write down.

Ryan Isaac: Well it was. The company though that manage these oil and gas wells. They’ve been around for a long time and they’ve been very profitable and had made good returns for their investors over a long period of time. But there were a lot smaller. And people, they just got, I mean, they just got really big really fast because of leverage through Wells Fargo. But yeah, they had managed different assets for decades. And then the way they did it was interesting too.
The article pointed out that usually when company funds like this, go and get money borrow money to grow bigger like this, they won’t commingle different assets or different funds, like they’ll start a new fund and they’ll raise money as part of this new fund. So if that one goes bad, the creditors can’t go get the other funds. In this one, they gathered everything they had. So the funds were basically tied to every oil and gas well they had everywhere. All the equipment, all the land. I mean, it was everything. That’s part of what made it so tragic.

Reese Harper: Yeah, this was the fund was called the EnerVest Fund. And-

Ryan Isaac: Because they had been around EnerVest, they had been around for a long time.

Reese Harper: So yeah, this was a really sophisticated pool of investors as well. Right and that’s kind of a… probably the most important point of this is that some of the investors included Wells Fargo, well call them an investor because they were the ones that allowed the fund to lever up. But there were also equity investors like the Orange County California Retirement System, which is a huge public pension. Canada’s second largest pension. Florida’s largest pension fund manager, Michigan State University, Arizona State University, the Paul Getty trust, Catherine T. MacArthur Foundation foundation animal, the Fletcher Jones foundation.

Ryan Isaac: Yeah.

Reese Harper: And all of these collectively are… there some of them I mean, these are very sophisticated institutional investors. And this fund is going to end up being worth single digit pennies on the dollar by the time everything goes through bankruptcy and Wells Fargo gets all their money back.

Ryan Isaac: And even the the owners went back. The two of the owners went back and tried to put in $85 million of their own money to give to Wells Fargo be like, “Can we salvage we just keep something going, we make it okay.” And it just wasn’t enough. Can imagine.

Reese Harper: I read that and was kind of I mean, you could tell they were trying, right?

Ryan Isaac: Yeah. Yeah.

Reese Harper: Wasn’t poor intentions. I think it was one, they were just super disappointed. It was one of their I mean, and the point isn’t here. This was not a Ponzi scheme. This was a very, this was an aggressive investment.

Ryan Isaac: This is a company that had done this same line of business for a long time.

Reese Harper: Yub.

Ryan Isaac: It’s just they hit a point where they’re like, “Okay, we think we can quadruple down on spent, more than double down.

Reese Harper: Yes.

Ryan Isaac: And go really, really big on the bet that this sector of the of the economy that we’re in oil and gas and energy is going to explode because, well, what I thought was interesting to it’s kind of relatable to the everyday investor, is they were doing this at a time when oil was really expensive.

Reese Harper: Yeah.

Ryan Isaac: And it’s kind of like the investor that’s like waits on the sidelines to invest and finally sees the market start going up and up. He’s like, “Now I feel comfortable.”

Reese Harper: Yeah.

Ryan Isaac: “Now putting all my money from business cash.”

Reese Harper: Yeah.

Ryan Isaac: And then-

Reese Harper: Totally. Yeah, I think that’s one of the takeaways here is that even smart people, even super smart people are really susceptible to big investment mistakes when they don’t stick to basic and time tested investment principles. When you’re levering up, and you’re going into one asset class, in hopes that you’re going to strike it rich, that’s going to put yourself in a lot of risk. And a lot of these public pension funds, they couldn’t handle that kind of risk. They’re already in a tenuous position.

Ryan Isaac: Yeah.

Reese Harper: And a lot of them were not risking money they could afford to lose but they were trying to recover from low interest rates, that they’re getting… low returns that they’re getting from a lot of their fixed income in the rest of their portfolio, they’re not able to make these pension payments as easily as they might have been in the past. So trying to make this trying to knock the ball out of the park in this one sliver of their money so that they can make up for the lower returns are getting elsewhere. And instead of having something good happen, you end up putting even more money.

Ryan Isaac: It was bad for some of these guys a lot of money. So I think you’ve gotten the point of our story, hopefully. And it was an interesting one that was pretty unusual for the last 15 to 20 years. Like we said, this doesn’t happen at this scale very often.

Reese Harper: Yeah.

Ryan Isaac: And I think today, we’re going to try to cover three takeaways from the story that we can apply to dentists that we think are really relevant. How would you start us out with the first one?

Reese Harper: Yeah, I mean, so the whole point of this discussion is that even really smart people can make the mistakes like you said. So point number one is that trying to predict market returns is always dangerous, even if you are really smart. And not just maybe market returns, but trying to predict the future of the economy or world politics or how it affects the market or business cycles. It’s just a dangerous game to play with historically really bad consequences for even the smartest, biggest, most sophisticated investors.

Ryan Isaac: And that’s why I like sharing the story because I think most of the time, when you say don’t try to predict market returns, a lot of the feedback we get is, “Well, I do my research, or I actually really enjoy this. So I spend a lot of time doing it. So I know that it’s dangerous, but I’m a little bit more sophisticated and more informed than the average person.”

Reese Harper: Will talk about that. There’s some good research about that.

Ryan Isaac: Yeah. So I think it’s human nature to make predictions. I think we all like to, it’s fun betting on the outcomes of different things.

Reese Harper: Yeah. I think that’s a big part. You did something, you just said that, you have those conversations with people and they say, “I do my research. I’m really smart at this, but it’s also kind of fun.”

Ryan Isaac: Yeah.

Reese Harper: It feels nice to gamble but-

Ryan Isaac: Like I like to bet on which person is the last person in our office to make it up the mountain bike trail.

Reese Harper: Everyone looks at me in the room. I get it guys. I don’t know how to shift down the base.

Ryan Isaac: The basic.

Reese Harper: I didn’t know the seat is supposed to sit higher when you climb. Just the lock in and I didn’t know that but we bet on you but you weren’t the last one up. I think we-

Ryan Isaac: I have some insider information on that bet.

Reese Harper: Yeah. Yeah, you guys rig my bike. So I’m a new comer, I didn’t know. I did beat someone though.

Ryan Isaac: We threw that rain.

Reese Harper: That’s good company to be in. There was a really, really good podcast done by Freakonomics few years ago. It was called the folly of production. It was cool because they interviewed people around the world in really different industries. And that made a living making predictions like they interviewed people in Russia that were gypsies that did fortune telling and they made a great living doing it. So they interviewed all these people who make a living doing predictions, and I thought it was funny in the text of the podcast, they started out with, “Fact human beings love to predict the future. In fact, human beings are not very good at predicting the future.” And it was funny because they travel the world interviewed all these people who make a living predict the future and that was their that was their takeaway. We human nature we love to do it, but we’re also really bad at doing it.

Ryan Isaac: And you’re really bad. I’m terrible.

Reese Harper: I’m a little bit better. I have some pics for tonight’s games. So the another fact that was in that I think that was interesting is-

Ryan Isaac: Is incentive part of it.

Reese Harper: They said because the incentives to predict are quite imperfect. Bad predictions are rarely punished. The situation is unlikely to change.

Ryan Isaac: Yeah.

Reese Harper: And I think this is what we see a lot in the overall financial press and financial news is that bad predictions about the future are rarely punished. People don’t hold-

Ryan Isaac: No.

Reese Harper: The media doesn’t hold bad predictions accountable.

Ryan Isaac: Yeah. They said sorry, they were saying they were saying what if on financial media, every time someone comes up for an interview, that is like a little tally by their face, like a little number of score, and it’s in red. The number of bad predictions they’ve missed, you know?

Reese Harper: Yeah.

Ryan Isaac: The guy comes up and he’s really smart. He’s got like a negative 17 and bigger. What if we did that?

Reese Harper: Yeah, I could see like a positive number for the black right next to a negative number for the red.

Ryan Isaac: Yeah.

Reese Harper: And you’d see like, Okay, he’s gotten to right and he’s gotten 27 wrong. Because that’s just the native story of it. But it says it goes unpunished. And people can make… Someone could call up the downfall of Western civilization and the economy and the collapse of the world for every year. And it doesn’t mean, goes unnoticed.

Ryan Isaac: Yeah, I think that’s an important kind of point is that you can make a poor prediction, and just say it over and over, and over. Year after year, month after month. You can just say it for a long time.

Reese Harper: Yeah.

Ryan Isaac: And no one will stop listening to you, because they’re just like many probably really might know what’s coming.

Reese Harper: Especially if you’re smart.

Ryan Isaac: I mean, compellingly like well, and that’s what’s kind of ironic, I think just I want to slow down on this point just for a second, which is if you make a prediction about the decline of an economy, okay and you say that, “This this is going to be one of the worst years in stock market history.” You could say something about one of the worst years in stock market history. And that sounds kind of severe, right?

Reese Harper: Yeah.

Ryan Isaac: But if you said that every year of your entire life and kept saying that, you’re going to be right.

Reese Harper: People do.

Ryan Isaac: Yeah, people do that.

Reese Harper: And make a career.

Ryan Isaac: Make a career of it.

Reese Harper: Yeah.

Ryan Isaac: Just like the the gypsies in Russia predicting fortunes.

Reese Harper: Yeah.

Ryan Isaac: You say it every year, and probably once or twice every decade, you’re going to be right.

Reese Harper: Statistically, yeah, that would be once or twice a decade.

Ryan Isaac: Yeah. So people will look back and be like he knew, or she knew.

Reese Harper: Yeah.

Ryan Isaac: “Look at how she was able to predict this.”

Reese Harper: Well, and that’s the funny thing. What are what are the incentives for when they finally get it right? They get book deals and TV shows and interviews and their high profile people. Now there’s not the tell the story.

Ryan Isaac: Totally.

Reese Harper: The point is, there’s not really a punishment for getting it wrong. There’s just a ton of upside for getting it right. And you’re going to get a bad prediction about the financial, about financial forecasts, you’re going to get it right periodically, just by the nature of averages. And you’ll be able to find some redemption. And people will call you hero for a lot.

Ryan Isaac: At some point.

Reese Harper: So I was thinking about a story. Recently, I was talking to a client, and he was telling us relating a conversation that he was having with another dentist friend of his, and they were talking about the fact that our this client had hired an advisor, and his friend kind of directed his own investments and our client was telling me, “I think he could probably, maybe use the help,” We were just having this conversation and his friend was telling me a lot, “I pick my own stuff, I do my research, I do my own, I pick my stocks, and it’s kind of gone pretty well.” And this just kind of got me thinking about, I think that’s a common belief, but I don’t, I’m not sure it’s because people really believe they have some great ability to predict the future I think what happens a lot of times with average everyday investors is you’ll start with maybe a small amount of money, maybe it’s the first little bit of money you’ve saved after the practice is open and finally paying back some debts, you have some cash flow. Maybe it’s 20 grand, maybe it’s 30 grand. You pick a handful of stocks, they’re well known companies, you happen to do it in a nice bear a bull market, and it does well.
Again, seven out of every 10 years, you will do well and feel good about it.

Ryan Isaac: Because basically, it’s a pretty good if you do it, and then just kind of sit on it, I mean, statistically, it’s probably going to end up okay at some level. And so I think what happens with a lot of people is they start doing this with small amounts of money. And two things either happen, they either feel pretty confident about that, which can lead to some bigger mistakes down the road, doing the same things with larger amounts of money.

Reese Harper: You mean, they’ll gain some overconfidence.

Ryan Isaac: Yeah.

Reese Harper: And then-

Ryan Isaac: I feel five stocks seven years ago, they seem to be returning pretty well. And then kind of keep doing the same thing, or I think what happens to more commonly is, in this, what I was telling a client, I said, over time will probably happen is your friend who felt really good at 50 grand doing that with a few stocks, business cash will get up to 250 and three and five and six or whatever and is probably not going to feel as confident doing that.

Reese Harper: The larger the money-

Ryan Isaac: It’s so hard to pull the trigger. So then what happens then you end up kind of still trading a few, a tiny portion in your stocks in your, but then the other huge amount of cash sits around, or you start just throwing money at other things you’re like, I don’t really feel confident that thing I used to do when it was small. And so you make choices you wouldn’t have otherwise make, leave too much cash around, it becomes inefficient. So I think either one of those paths. I think that’s just a common way people start out and-

Reese Harper: Well, one of the quotes from the Freakonomics podcast that I thought was really good and it says, “From the economy to the presidency to the Super Bowl, educated and intelligent people promise insight and repeatedly fail by wide margins. These mistakes and misses go unpunished both publicly and in our own brain, which has become trained to ignore the record of those who make them.”

Ryan Isaac: Yeah. And I think that’s kind of maybe the [crosstalk 00:16:25]

Reese Harper: That I’d like to do for today.

Ryan Isaac: No, I wasn’t to see because you’re training me. You’re faking it. Yeah.

Reese Harper: That was a G.

Ryan Isaac: Yeah. That was clearly.

Reese Harper: There’s a C.

Ryan Isaac: Thank you. So listeners know by now listeners now.

Reese Harper: Listeners know by now. Teaching him music here along the way.

Ryan Isaac: Thank you.

Reese Harper: So if you can kind of remember this first point, that it’s just really it’s easy to make bad predictions about the future and statistically people will get those right periodically, but I think it’s also easy to get overconfident really quickly if you make some kind of an investment decision and have a good result. And statistically, quite often the averages are that you will have a good result when you invest your own money in a stock or in an kind of investment. Statistically if it’s a public investment, the rising tide raises all boats, right. And that’s what you’ll see is that stocks perform well on average-

Ryan Isaac: That’s not an uncommon and that’s not an uncommon conversation. The one I was mentioning, I’ve had several of those conversations where someone mentions I don’t know about, seven, eight years ago, I bought a handful of stocks and I’ve done really well I did my research I pick the right ones and I’ve done really well.

Reese Harper: Yeah.

Ryan Isaac: So like everything’s done pretty well.

Reese Harper: Yeah. So I mean, what you have to be asking yourself is did you do better than the overall market did? Or did you just do… did you just your stuff go up? Because the overall market-

Ryan Isaac: That’s a good question.

Reese Harper: … has the really the is the tide right?

Ryan Isaac: Mm-hmm (affirmative).

Reese Harper: It’s rising. And the question is, did your investments rise higher than the tide or just at the same level of the tide or not even as high as the tide rose?

Ryan Isaac: Yeah.

Reese Harper: And I think that’s the thing that kind of goes left on kind of unacknowledged is just because you have something that goes up, or just be obvious, even if you have something goes down doesn’t necessarily mean that you’re as good or worse than the averages. You just need to compare what you’re doing to the right benchmarks before you start giving yourself credit for predicting the future.

Ryan Isaac: Well, and that and you acknowledge it, I think it’s hard to see far down the road, when the practice is just getting started, you first start to make money. It’s hard to see the fact that if you have a healthy savings, right, you will have hundreds of thousands, if not millions of dollars at some point in your working career. And I think it’s hard for people to realize that what you do with 25 grand will not feel the same with 250 or 500 or a million bucks at all, so. One more quote that I wanted to leave from Steve Levitt, who’s one of the authors of Freakonomics, he said, “So most predictions, we remember are ones which were fabulously wildly unexpected, and then came true.” Now the person who makes that prediction has a strong incentive to remind everyone that they made that crazy prediction which came true.

Reese Harper: Yeah.

Ryan Isaac: If you look at all the people, the economists who talked about the financial crisis ahead of time, those guys harp on it constantly, I was right, I was right. I was right. But if you’re wrong, there’s no person on the other side of the transaction, who draws any benefit from embarrassing you, or by bringing up the bad prediction over and over? So there’s nobody who’s got a strong incentive, usually to go back and say, “Here’s the list of the hundred and 18 predictions that were false.” And without any sort of market mechanism or incentive for keeping market predictors honest, or prediction makers honest. There’s lots of incentive to go out and make these wild predictions.

Reese Harper: So just keep doing it. Yeah.

Ryan Isaac: So I think it’s just an interesting way of thinking about the business of making predictions and trying to let that affect you too much.

Reese Harper: Okay.

Ryan Isaac: I think we should hit a commercial break.

Reese Harper: We should hit one. I need to wet the palate, cleansing palette. What do you say?

Justin Copier: I’m going to get some sorbet and cleanser.

Reese Harper: I’m going to get some sorbet on our break and we will come back and talk about two other ways that really smart people can make financial mistakes 10 for.

Reese Harper: 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 assess 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 and 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 dentistadvisors.com. Thanks again for listening. Now, let’s get back to the show.
And welcome back from commercial break, everybody.

Ryan Isaac: Thank you, sir. Thank you Q.

Reese Harper: It’s Q.

Ryan Isaac: I’m back from break. Sorbet in hand finishing up.

Reese Harper: Let’s kick into the second point of what smart people can do to air with their money.

Ryan Isaac: Yeah. Well, the point is that smart people can get caught up in the hype just like anyone else can.

Reese Harper: That’s the second point, not the point.

Ryan Isaac: That’s the second point.

Reese Harper: Yeah.

Ryan Isaac: That’s the second point.

Reese Harper: I’m excited about this second point.

Ryan Isaac: Well, you go back to the original hedge fund story. And you had some of the largest and most competently ran funds, pensions, charitable foundations that got involved one after another into this pretty speculative investment, you know?

Reese Harper: Yeah.

Ryan Isaac: Yeah, and I think that was a somewhat of a herd mentality. Okay, that’s what we’re talking about when we say the hype. When smart people do things, other smart people do them.

Reese Harper: It’s kind of a gravity to it. Isn’t it?

Ryan Isaac: Yeah, I mean, you can just Freyre-

Reese Harper: Bernie Madoff was primarily that kind of herd mentality, a gravity right. It’s easy to sort of feel pulled in magnetically by other smart people doing smart things right, and-

Ryan Isaac: Yeah.

Reese Harper: And you don’t want to be left out, and you don’t want to be the person that didn’t see it. And you’re working so dang hard every day that if you can find a way to get a little bit of an edge and just not have to grind hard getting these like mediocre 7% return.

Ryan Isaac: Boo-boo! 7% returns.

Reese Harper: You just don’t want the market rate. Heaven forbid you actually made like 10%.

Ryan Isaac: Yeah.

Reese Harper: That’s the market rate.

Ryan Isaac: Past four. For just get, even getting four. Stake 30% and get four.

Reese Harper: My prediction that I make is most people, this is a very prediction, a bold prediction.

Ryan Isaac: Okay here we go.

Reese Harper: So you might want to jump on this-

Ryan Isaac: On the prediction episode, but if most people would just not lose money and make 3% a year they would probably be wealthier than the average person.

Reese Harper: Who’s trying really hard to get a high return.

Ryan Isaac: Yeah, if you just didn’t lose anything.

Reese Harper: Okay.

Ryan Isaac: Everyone listening, have you ever lost money doing one thing that’s been stupid. If you can think, at least seven out of 10 of you listening to this are like, “Yeah, I did that one thing and it didn’t turn out well and my money’s now gone.”

Reese Harper: Just don’t ever do that.

Ryan Isaac: If you didn’t do that thing, and you just took that money back, you took all your money and you made 3% a year, my guess is that, that would be more money than what you’ll have because you lost that money.

Reese Harper: Not an invitation to put your money into insurance products as your investments. Not an invitation to make bail.

Ryan Isaac: Not an invitation to make [crosstalk 00:24:17] percent.

Reese Harper: Not an invitation to bail if there’s volatility, it’s not the same as losing money. But I agree with you. And we talked about this a lot with clients. I think people would be surprised to know how much smaller the rate of return required for them to hit a work optional point in their life. If their savings rate is high enough, and if they can avoid some mistakes, then it’s smarter than they think it probably is.

Ryan Isaac: Totally.

Reese Harper: So a couple weeks ago, we talked about, we had a podcast called seven signs you’re about to get hosed.

Ryan Isaac: Very serious podcast.

Reese Harper: It was a viral title.

Ryan Isaac: It was viral.

Reese Harper: I like to give that credit to Q.

Ryan Isaac: Thank you.

Reese Harper: And then secondarily, I’d like to give the credit to me for reading through the 30 titles and being like that’s the perfect title.

Ryan Isaac: I like that phrase. Secondarily. I’d like to give the credit to me. Okay, fine. I like that phrase.

Reese Harper: We should start the podcast with that.

Justin Copier: That’s a sign of a great leader is taking credit.

Reese Harper: We’ve talked about that, a great leader takes credit for the work of everyone else.

Justin Copier: And that’s not true. That’s not true.

Reese Harper: Okay. Yeah, seven sides. You’re about to get hosed. You can find it on dentists advisors.com slash listen.

Ryan Isaac: Well, it’s funny because one of the things that you guys talked about a couple weeks ago is that a lot of times it’s compelling when somebody with like a big name is involved with an investment. And literally like two days after we recorded that show, we got a call here from a prominent former NFL star. And this isn’t something that happens all the time, but was just interesting timing. He’s involved in this hedge fund opportunity and we got the call like two days later, and it might be a very viable opportunity, but it’s just interesting. It was kind of what-

Reese Harper: Well, we just talked on the show about how there can be a herd mentality and a lot of times in certain investment. Sometimes scams, sometimes they’re just legitimate opportunities. You’ll have a famous person, it could be a famous wealthy business person, a lot of times athletes, ex-athletes will be involved. And we had just finished recording that. And then there’s a local I mean, it’s a it’s a very widely respected local charity event. They’re raising money for charity and some other things. And but it was funny because it was the next day that a very famous NFL star called-

Justin Copier: The highlighting.

Reese Harper: Yeah.

Ryan Isaac: To talk about that, but it was just kind of funny that we had just barely gotten done talking.

Reese Harper: Yeah, so well, and I think I think what’s important is, if we look at what drives people to participate in investment, sometimes it’s a headline person. And there’s nothing inherently wrong with that to like, have a-

Justin Copier: Although I think Mike Tyson is pitching cryptocurrency these days.

Reese Harper: I think so I think he’s…

Ryan Isaac: Yeah, I think he’s-

Reese Harper: [crosstalk 00:27:02] I mean, we’ve had our fair share of content around here about former NFL players and they’re kind of prominence in the investment world. We talked about we had an article that was in was it in dental economics?

Ryan Isaac: Yeah, dental economics.

Justin Copier: Dental economics.

Reese Harper: About John Elway and his history and it’s interesting just how a big name goes so far in making people feel like they need to get involved in something. And so I think dentists can get caught up in the same hype, though. And I think that when they when dentists look at other prominent dentists, or other well known entrepreneurial dentists, and they see that they’re expanding and that they’re opening more locations or that they’re expanding their footprint and trying to do something innovative or creative, you end up sometimes feeling like maybe you should be doing that too or you should be doing what someone else is doing that seems to be smarter or more sophisticated or, a better plan and that can that can send mixed messages.
I think if we compare ourselves too much to other people around us, and the things that they’re doing, especially business owners, when business owners compare themselves to other business owners and try to almost have personal judgments about their own success based on what other people are doing, it can really cause people to make a lot of mistakes.

Ryan Isaac: Well, yeah, I mean, I think that’s a good example it, I talked to a lot of dentists that call our firm for the first time and I’ll hear that comment a lot. like, I’ve got one location, it’s going really well and I have a partner and associate but isn’t the way to go like a bunch of locations, isn’t it the way I’m supposed to do it is not the way to build wealth is I need 10 locations and then sell the some private equity later. I hear that a lot. there’s the there’s a pressure to kind of follow what some of the bigger opportunities are, and it could be for some people.
But I think what’s your point, you end up when you do that comparison, you end up ignoring or not placing a value on what your own strengths or talents are, what your own personality is, too.

Reese Harper: Yeah.

Ryan Isaac: And you can’t, you can’t go against that grain for too long, too much, or else it can be disastrous.

Reese Harper: I think you see that quite a bit. And I think it’s important to just kind of be comfortable with who you are. Get as much advice as you can from people around you, giving you feedback and take the consensus of kind of all that advice and what you feel and then just gain confidence in your own plan, and just get a sense for what you want to accomplish with investing.

Ryan Isaac: Yeah, well, I was going to say maybe that’s the takeaway, then, as a dentist is exploring an opportunity, maybe as an investor or as a business owner, an entrepreneurial endeavor to just get a lot of feedback. And maybe it’s fair to say that if there’s not at least someone in your circle of feedback loop that’s giving you push back, not just agreeing, like that’s a great idea, but someone who’s actually questioning it, then maybe find someone that will help.

Reese Harper: Yeah, I think yeah, I think you need people that don’t agree with you every time.

Ryan Isaac: Yeah. Okay.

Reese Harper: So the third tip today that we want to talk about how smart people air is when they become a little overly opportunistic

Ryan Isaac: Excited.

Reese Harper: Is excited not feel the same way?

Ryan Isaac: I don’t know, I feel like if you’re being opportunistic, you’re excited about something?

Reese Harper: Yeah, I think you probably right.

Ryan Isaac: Or maybe a little overly. So let’s say let’s define it this way. When someone’s being opportunistic, they’re basically saying, “I know that I have more information than someone else, or all the other investors don’t know as much as me. They don’t have as much information as I do. So I’m going to take advantage of a situation. I’m going to take advantage of something we call a mispricing.”

Reese Harper: Yeah.

Ryan Isaac: Tell fancy economic economist or finance people will talk so-

Reese Harper: That’s how we talk normally day to day but pricing.

Ryan Isaac: Yeah.

Justin Copier: After we eat our sorbet.

Ryan Isaac: Yeah. We say Mispricing.

Justin Copier: As cargo.

Reese Harper: Yep. So this is where we talk about the difference between an efficient market and an inefficient market. Now you’ve heard this podcast before for all of you, longtime listener, so we won’t make it lead.

Ryan Isaac: And you’ll hear it again in the future.

Reese Harper: You might as a possibility. When markets are inefficient, it’s possible to know more than someone else. It’s possible to know more than other investors in a group because you have more information than they do. And that means that information is scarce. Let’s give an example. Ryan, do you have an example of an inefficient?

Ryan Isaac: Do I have an example I do have an example. But like to clarify, what we’re saying is that there is a possibility to take advantage of a lack of information or mispricing like you’re saying in an inefficient market. Inefficient market has fewer transactions, less buyers and sellers there happens less frequently, there’s less information. So there’s this documentary on Netflix, I don’t know if it’s still on there was really cool. It’s called sour grapes. And it’s this documentary on how the first ever case of someone being convicted and put in prison for wine fraud ever in the history of the world. It was this young kid from California in his 20s, who had, he was bottling he was taking old bottles like recycled bottles. And he was with a chemist mixing. He was really good at it though. And the kid had talent. He was mixing wines, like cheap newer wines, brand new wines to taste like older ones. And then he was getting old corks and he was waxing everything. And he was aging everything.
And for years, he any kind of a little bit of help from other people who knew what was going on that was auctioning off these ones. He sold 10s of millions of dollars worth of fake wine to some of the country’s wealthiest people. And it’s crazy, they would show they would go into these wine cellars of these wealthy people and show $20 million of the wine in the cellar, and a quarter of it would be fake from this kid in California. And he did it for years. And there’s footage of him and the point about the inefficient markets is that and he specialized in… I’m not a wine guy, shoot, I can’t remember what kind of wine is. He specialized a type of wine that’s pretty rare.
And so the point is that there were so few transactions taking place in this wine. And he was dealing in wines that were from the 40s, and 50s, and 60s, so few transactions so little information known. He actually got away with selling bottles of a particular brand, claiming they were from the 40s. And they didn’t even start manufacturing until the 60s and no one caught that for a long time.

Reese Harper: Interesting.

Ryan Isaac: And these were people who frequently bought expensive bottles of wine at auction. So this kid took advantage of an inefficient market where very little information was known. One side had more information than the other very few transactions, very few buyers and sellers. So that’s very inefficient market.

Reese Harper: I think it’s just I think it’s important to recognize when what kind of investment you’re looking at doing and understanding if it’s an inefficient or inefficient market. And in a lot of markets, there’s you can take advantage of mispricing, but that’s more speculative.

Ryan Isaac: And realize the risks that comes along with that.

Reese Harper: A lot of risks in that. So why why do a lot of people prefer efficient markets? Why do people invest in a stock market, as opposed to investing in something like a cheap wines market, like Ryan just said. And that’s because an efficient market creates prices that you can really trust.

Ryan Isaac: Yeah.

Reese Harper: You trust that those prices are fair.

Ryan Isaac: You can also trust what’s being bought and sold is a real product.

Reese Harper: Yeah, and it doesn’t have to be just the stock market. But the stock market’s one of the most efficient markets of the public bond market, the S&P 500, these are really efficient markets, because there’s thousands, even millions of shares traded for the securities every day and two people are agreeing, millions of people are agreeing on the price that’s being exchanged that day. Think of like the in Seattle there’s a really famous fish market there. The Pike Place fish market.

Ryan Isaac: Yeah.

Reese Harper: Right. And so you’re buying, if you’re going to buy fish a project, let’s say you’re going to, you’re trying to buy salmon at the fish market. And there’s like 17 different vendors of salmon. I mean, and they’re all basically harvesting from the same source, meaning the same area.

Ryan Isaac: The harbor.

Reese Harper: And they’re all bringing you the same fish and piling it on different tables and you’re walking place to place to place. There’s not going to be like a lot of-

Ryan Isaac: Price discrepancy.

Reese Harper: Yeah, there’s not a big price discrepancy because everyone knows and it’s not likely that the salmon is really like some crappy catfish or something. It’s not like you’re in-

Ryan Isaac: Yeah, I mean, I wouldn’t see it. I think the orange one would look better than the great.

Reese Harper: Yeah, you should be able to tell but that’s also kind of the point you’re getting.

Ryan Isaac: Totally I just think you match… investors prefer efficient markets, or let’s say people that choose to invest in efficient markets are partially doing it because they just want more safety and security.

Reese Harper: And it’s easier.

Ryan Isaac: Yeah.

Reese Harper: I mean, the barrier to entry to buy a mutual fund is a lot different than trying to get in on some private deal that…

Ryan Isaac: Yeah. And you just have less regrets. There’s less opportunity for regret and also less upside.

Reese Harper: Yeah, fair.

Ryan Isaac: So let’s take a let me show you an inefficient market that I came across this week. All right. There is a piece of land on a major highway right now, that is going to be purchased by the great state of Utah. And they have to purchase it because they’re putting in a new road. All right. And there’s a few people that know that this is going to happen.

Reese Harper: Yeah.

Ryan Isaac: Because they have connections with a senator or a Congress.

Reese Harper: Yeah.

Ryan Isaac: Or someone in the government.

Reese Harper: Why does this sound story sound familiar? Like it happened a few times.

Ryan Isaac: Like it happens all the time. In every state.

Reese Harper: Yep. And so in that kind of situation, someone has both illegal and insider information that they are going to try to exploit-

Ryan Isaac: And act on.

Reese Harper: To take advantage of something and they’re going to act on it. Yeah. And you could act on that information by saying, “Okay, I’m going to buy this piece of land and I’m going to just park on it and refuse to sell out.”

Ryan Isaac: How did I know that the city would put their major railway right through the center of this and build a shopping mall and a bunch of condos, I had nothing… I’m lucky.

Reese Harper: I mean, things like that happen a lot where someone actually has insider information. That’s not legal information to have.

Ryan Isaac: And that’s so if you’re excited about jumping on the deal with the maybe the government official or the person that works for the construction company that knew about the project five years said, “Be careful.”

Reese Harper: Be careful about that. That’s illegal.

Ryan Isaac: Second, you when you’re… if you think about this happens a lot in public companies and a lot of people go to jail, i.e. one of our dear friends of the show, Martha Stewart. Okay.

Reese Harper: Shout out to Martha.

Ryan Isaac: So anyway, recognize what kind of market you’re going in rather than thinking I’m going to get on this opportunity before it slips away.

Reese Harper: Yeah.

Ryan Isaac: Before it gets away from me, think about how does this actually fit in the context of my plan?

Reese Harper: Yeah.

Ryan Isaac: Does this fit in the context of my plan? And do I need to do this in order to reach my goal?

Reese Harper: Is this going to be really expensive? Is this going to wipe out my liquidity? Is this going to put me at risk to lose other things that I can’t afford to risk? Is this going to make me stay up at night worrying and stressed about whatever? Is this illegal?

Ryan Isaac: Yeah.

Reese Harper: Yeah.

Ryan Isaac: I think a lot of people will feel like, they want to be opportunistic at some point in their life. And there’s nothing wrong with that. A lot of people have to do that in order to build company.

Reese Harper: Well, that’s fair. I mean, some of the greatest things that have ever been built were from risky ventures.

Ryan Isaac: Mispricing.

Reese Harper: Yeah.

Ryan Isaac: Right.

Reese Harper: Sure.

Ryan Isaac: I mean, that’s entrepreneurship and to some degree, I mean, it is very healthy, and that’s a part of our economy. We’re just saying that all these investments are not comparable, and you can’t compare an efficient transaction like buying fish at a fish market, where you know that you’re buying something that you’re confident in the price and then something that doesn’t have a lot of information. Something that you’re kind of an insider in.

Reese Harper: You’re in Arizona desert and you’re at a clam market. And you’re buying clams.

Ryan Isaac: Oh, wow. Yeah. I mean-

Reese Harper: That would be just one guy stand in the desert. Is this worth the price I’m about to pay? Is this a real clam?

Ryan Isaac: Totally.

Reese Harper: You wouldn’t know. So I think you think.

Justin Copier: There’s times when people think that they’re investing in an inefficient market when really it’s actually efficient-

Reese Harper: That’s the mistake[crosstalk 00:39:39] point there.

Justin Copier: They’re local real estate market and they think that they’ve got the inside track on a property.

Reese Harper: Well, that’s the mistake that’s made.

Justin Copier: But then but then they realize like, or, but they what they don’t realize is that you got all the developers, all the real estate agents, all the investors in their entire market have access to the same information, but they just don’t realize that.

Reese Harper: Yeah, totally. That’s actually I think really common people do that. I mean, probably the most famous example that people do that on a daily basis with the public stock market.

Ryan Isaac: Yeah.

Reese Harper: I mean, that’s where it happens all the time where people feel like there’s an inside track or I know something that’s going to happen that someone else does. And I could take advantage of this thing happens a lot.

Ryan Isaac: Yeah, I think a lot of times like Q said that the real estate market is perceived as one that’s inefficient. Right. And there’s not I mean, in every city there are there. I mean, it’s, I would say the real estate market is less efficient than the public stock market.

Reese Harper: Fair. Yeah.

Ryan Isaac: It’s much less-

Reese Harper: Number of transactions and volume. Yeah.

Ryan Isaac: Right, but it’s still a quite an efficient market.

Reese Harper: Yeah, I mean it, especially in major metropolitan areas where there’s a lot of buyers and sellers.

Ryan Isaac: Yeah. It’s probably a little less efficient out in my hometown of Rupert, Idaho, where the farmland might not have quite as many buyers and sellers and quite as much but I as I look at that still, when I talk to people that live there, I mean, it’s even farmland in a rural area tends to be fairly efficient because people are looking for land on a regular basis.

Reese Harper: Yeah.

Ryan Isaac: Trying to find an opportunity and getting a fair price.

Reese Harper: So an acre in the middle of your city, you probably didn’t discover the gem that no one knows about in you’re about to uncover the treasure that…

Ryan Isaac: Yeah, I think I would even say that a lot of people, the real mistake is made when they find a piece of land that hasn’t been developed and hasn’t been taken through the city and isn’t entitled yet. But they feel like the price they’re getting this raw land that is so inexpensive, that there’s a massive amount of margin.

Reese Harper: Now someone in that transaction is taking advantage of a lack of knowledge and it’s the person selling you because you don’t know how much it’s going to cost.

Ryan Isaac: Yeah.

Reese Harper: And there’s a reason usually land isn’t developed. To close out. I’d like Ryan to kind of share a story about an article that he’s read recently that he liked.

Ryan Isaac: Yeah, this article was, it’s called why smart people make bad decisions. It was from collaborativefund.com, just give some credit.

Reese Harper: It was like it was National Geographic for kids.

Ryan Isaac: Why smart people make bad decisions. A guy I follow on Twitter really smart guy named Morgan household. Anyway, they this article pointed out two reasons why smart people tend to make bad financial decisions. One is because intelligence increases the ability to fool yourself with elaborate stories about why something happened. The first one they made was that intelligence increases the ability to fool yourself with elaborate stories about why something happens.

Reese Harper: Okay.

Ryan Isaac: So there’s a quote in there, a line from the article that says when you’re blessed with intelligence, you’re also cursed with the ability to concoct intricate, and often false stories about why things happen. The second point was that intelligence pushes you to the idea that calm, and I like this one a lot, pushes you to the idea that complex problems require complex solutions.
And if you take that in the point of a dentist looking at, I’ve got 30 years to build this practice and I got to save money, got to pay off my debts and retire. That seems like a really complex problem. And a lot of times it can feel so overwhelming. And especially being an intelligent, well educated dentist, you can feel like the solution must also be really complex. There’s so many moving parts and things that have to happen, that the solution is really complex. There was something in this article that said the irony of some of our biggest problems is that they have solutions too simple for the people working on them to find intellectually stimulating.
So I think is I think that probably explains half the people on financial media that are just obsessed with trying to beat the market and exploit inefficiencies. The other way just too boring for their really smart brains to want to do that for a living.

Reese Harper: Yeah, I think one of one part of that too, I thought was really interesting was a part of the article said Albert Einstein, Warren Buffett and Steve Jobs are all brilliant, but a lot of people are brilliant. What made them famous, is their ability to distill complexity into something elegant and simple enough for the average person to understand or even use. And I think that’s really what is challenging about a good financial plan and a good overall financial strategy, is that most financial advisors can’t boil it down to something as simple as it needs to be. And they over complicate it and consequently, their clients end up feeling a little confused about what’s even going on with their accounts. And it’s not a durable, like lasting solution. So it doesn’t allow people like you said, sometimes, the simple solutions aren’t really intellectually stimulating.

Ryan Isaac: Its fun to work on.

Reese Harper: The smart people just don’t like want to do the boring path.

Ryan Isaac: Yeah. Well, there is a part of the that article too, sorry, that they were talking to an MIT cancer scientists. And he was saying, “Really, we could solve a lot more problems by just getting people to quit smoking, which is psychological.” He’s like, “But that’s not very fun for me because I want to talk about molecules and cell structure and how cancer spreads. And my solution… we can actually do more with a simple solution than someone like me could ever do in a whole lifetime.”

Reese Harper: Yeah, that’s interesting. Well, keep in mind these three principles we talked about today. They’re always going to hold up, whether you’re smart or whether you’re just average. Okay.

Ryan Isaac: So another part will do a podcast another day for how to know if you’re smart. Or if you’re just after average.

Justin Copier: I don’t want to know.

Ryan Isaac: First, don’t try to predict returns. Second, don’t get caught up in the hype. And third, think long term instead of being opportunistic time. Thanks, Reese. Thanks Q. Thanks for everyone for listening. We would love if you could take a minute and review us on iTunes. Just hit that little thing that says write it and give us some stars and leave a comment about how much you love Reese’s voice in the mornings when you drive to work.

Reese Harper: Oh boy.

Ryan Isaac: Yep, you can visit us online dentistadvisors.com to book a free consultation. There’s a link at the top or call us at 833 DDS plan. Thank you, everybody.

Reese Harper: Thank you. Carry on.

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