Why Stock Market Curve Balls Are Getting Easier to Hit – Episode 184

The internet’s information revolution has evened the playing field for public markets.

On this episode of the Dentist Money™ Show, Reese and Ryan talk about why Ted Williams, the last baseball player to hit over .400, wouldn’t be able to do it today. Increased access to information has changed baseball, and it has narrowed outcomes when it comes to stock market investment returns too.

From baseball to communications to the stock market, everyone has access to more data than at any time in history. Find out why that’s good news for diversified investors and bad news for stock pickers.

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Podcast Transcript:

Reese Harper: Hey, Dentist Money Show listeners. It’s Reese Harper here. Today, Ryan and I, had a lot of fun going back into the history of America and talking about one of Ryan’s favorite sports, baseball. I think it’s one of Ryan’s favorite sports because he likes to go to the games, not so much that he likes the game, but that’s beside the point. In our discussion today, Ryan and I talk about how people like Warren Buffett have changed their tune in how they’re describing investing in the stock market, and what they see today that’s different from what they’ve seen in the past. The information and technology that’s available to traders and investors today, and the volume of professionals involved in the industry versus retail investors, has changed substantially over the last several decades.

Reese Harper: And it’s important that you understand how to take this information and apply it to your own circumstance to secure your financial future. Take some time to book a free consultation at dentistadvisors.com. Go to our website and pick a calendar time that works for you. We’ll call and help you take control of your financial future. Or, just give us a ring at 833-DDS-PLAN. It’s always more fun to do this job with a buddy. Enjoy the show.

Announcer: Consult 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 co-host, Sir Ryan Isaac.

Ryan Isaac: Man, you got… was that a C for chief, for yourself?

Reese Harper: It’s a good day in the studio.

Ryan Isaac: That’s a yes? Okay, that’s a yes. Well, welcome, yeah, welcome with the chief.

Reese Harper: Excited for today’s episode. Been watching your social media flurry lately about this topic and pretty excited about it. You got any-

Ryan Isaac: [crosstalk 00:02:02].

Reese Harper: … you got any intro ideas for us today? Intro stories or anything cool?

Ryan Isaac: I got a good story. I mean, my flurry of social … Am I an influencer now? Did I hit that status?

Reese Harper: I think you’re considered an influencer.

Ryan Isaac: What am I an influencer of?

Reese Harper: I would say…

Ryan Isaac: Breakfast tacos.

Reese Harper: That’s yet to be determined.

Ryan Isaac: TBD. All right.

Reese Harper: Your future is bright.

Ryan Isaac: Influencer TBD. I like that. That will get me some sponsors. Yeah, I got a story today. Are you a baseball fan, Reese? I know you like yourself some sports, you like the sports.

Reese Harper: Of all the sports, it’s probably like my fourth favorite. There’s three of them that are higher.

Ryan Isaac: Bottom.

Reese Harper: But it’s not the bottom. I like it better than water polo.

Ryan Isaac: Okay, or like cricket?

Reese Harper: I like it better than bowling.

Ryan Isaac: Really? I like bowling. That’s fair.

Reese Harper: I like bowling, so yes, I like it, but I wouldn’t say I’m a baseball guy.

Ryan Isaac: You don’t follow it. Yeah, not a baseball guy. I would say I like World Series. It just feels very traditional, some playoffs I like, and then I like going to baseball games. Going to baseball games is still just one of the last sporting experiences I think have been well preserved.

Reese Harper: It’s kind of like, do you like baseball or do you just like going to the game? They’re very different.

Ryan Isaac: Yeah, the experience. They are. It’s funny, because I love football, but I don’t really enjoy going to football games as much as I love watching football at home.

Reese Harper: Yeah, interesting.

Ryan Isaac: But, I don’t like baseball that much, but I love going to baseball games. They still preserved it. It’s an ancient tradition.

Reese Harper: Yep, it’s classy.

Ryan Isaac: The story is a baseball story. Any big baseball people will know this story, but do you know … Okay, I had to learn a little bit myself here because I’m not a baseball guru, but do you know much about batting averages, and kind of how they’re ranked, and how they work, and what’s good and what’s not? I didn’t know this myself as much.

Reese Harper: I know a little bit just having … there’s a few movies about this that I own that are like Brad Pitt’s famous role from Money Ball and whatnot.

Ryan Isaac: Yeah, Money ball.

Reese Harper: Like the history of some… I know a little bit about it, but not enough to where I wouldn’t want to know your answers to this cool story. I need it explained because I would like to learn more.

Ryan Isaac: Well, that’s fine. One of the many statistics that’s kept that shows how good somebody is, is the batting average, which is kind of … it’s an interesting statistic because a good batting average in baseball is like barely more than a third. You have a little more than a 33% average and that’s considered, like you’re a good player. You’re like, “What else in life?” Are you like, “Yeah, I do well like 33% of the time and I’m in the top of my … I’m in the elite for doing well 33% of the time. That would be kind of cool.” So, it’s an interesting average.

Ryan Isaac: The story that I wanted to tell today is the history of the 400 batting average. 400 is like, it’s one of those sporting milestones that few people have reached or it’s just a pinnacle of it’s-

Reese Harper: For those of you who don’t know, this is like once every … out of ten times that you get up to bat, you hit the ball three out of ten times, is pretty good. For those of you who don’t know what bat … We needed to back up just a teeny bit. That one critical nugget. There’s someone out there that’s like, “I still don’t know what you’re talking about.”

Ryan Isaac: I still don’t get what a batting average is. It took me a little while.

Reese Harper: Yeah.

Ryan Isaac: Three out of 10 times, you actually hit the ball, which that’s what I’m saying. That seems-

Reese Harper: Not to go very… It actually has to go … You just don’t hit it-

Ryan Isaac: You can’t get out. You hit it and you don’t get out. That’s what it is.

Reese Harper: … You have to be on base.

Ryan Isaac: Yes.

Reese Harper: If you hit it up in the air all the time and guys just catch it, and you’re out, that doesn’t actually count.

Ryan Isaac: It’s not a thing.

Reese Harper: It’s not just actually making contact with the physical ball-

Ryan Isaac: Yeah.

Reese Harper: … it’s getting to base.

Ryan Isaac: The coveted batting average in the history of baseball is a 400 average, a 0.4, 40%. Which, that’s what I’m saying, think about it, what if you said, “I’m in the top of the financial planning industry because four out of 10 pieces of advice I give are actually good. They work.”

Reese Harper: Yeah.

Ryan Isaac: The other six, they were pretty bad.

Reese Harper: Mm-hmm (affirmative).

Ryan Isaac: Didn’t work out. So, what’s interesting about this though is the last time anyone ever achieved a 400 batting average was in 1941.

Reese Harper: Okay, wow.

Ryan Isaac: Yeah. It’s crazy. It’s this guy named Ted Williams and there’s some cool stories on this. I mean, there’s books about this, and any baseball history buff will just know this and probably roll their eyes at the way I tell this story, but it was really fascinating. He played for the Boston Red Sox, which you could probably say that with a better accent.

Reese Harper: No, I can’t. I’d slaughter it if I tried.

Ryan Isaac: You can’t? You have good accents. I like when you do your accents.

Reese Harper: I might … I’ll try it. I need to practice it. You’re calling me out on the spot.

Ryan Isaac: That’s fine. Later on, you just have to say the Boston Red Sox or the Sox or something later and then that would be cool. Ted Williams, 1941. What was cool about this story though is there were two games left in the season, and he was really close. I think there was like a dozen people since the turn of the century, since 1900 that had actually accomplished this 400 batting average. He’s got two games left in the season and his managers and his friends were like, “You just sit out the last two games. No one would … Nobody would blame you.” Because his average was like right on the line. And if he had two bad games, then he wouldn’t accomplish it. And if he had two good games, then he’d go down in history. It’s a really cool story.

Ryan Isaac: Over the next two games, they were consecutive games, a Saturday and a Sunday. He said, “I either make it or I don’t,” and he said that he didn’t want to have … he wanted to have more than his toenails on the line. He didn’t want to sit these things out. He’s like, “No, I’m going for it.” It turns out … I mean, the story’s cool because it turns out that he homered and he got a lot of hits and he actually had two really great games. He ended his streak on a really high note.

Ryan Isaac: But what’s interesting about this 400 story, and if you Google it you’ll see this all over the place, it’s almost … technically, it’s possible. You should be able to pull it off, but it’s … basically, nobody’s ever going to do it again. And there’s so many things that have changed. I guess that’s the point of the story that we’re going to relate to kind of like investing in markets today, is that the game has changed so much that it’s maybe technically possible for someone to hit a 400 again. But, it hasn’t happened since ’41 and it’s probably never going to happen again.

Ryan Isaac: And it’s due to a few reasons, like they used to play a lot fewer games, so people … The season was a lot shorter, injuries, and fatigue, and burnout weren’t a factor as much.

Reese Harper: Or unusual periods of out performance, like where … When you have less data points to look at, it sometimes skews the data to a broader distribution.

Ryan Isaac: Skews it because it doesn’t get averaged over a longer period of time. They didn’t have … This was still … In 1941, they still called games, they just stopped them because it got too dark. There weren’t lights.

Reese Harper: Yeah.

Ryan Isaac: They’re like, “Game over. It’s too dark.” Like when you’re a kid. It’s dark at night.

Reese Harper: Interesting.

Ryan Isaac: Anyone who’s a baseball expert will tell you that pitching has changed a ton.

Reese Harper: Oh yeah. Pitching has changed a ton.

Ryan Isaac: Yeah, a ton. There’s all sorts of specialty pitchers, and they’ll come in for short periods of time just fresh. Unlike back then, a pitcher would go most of the game and would have to kind of pace himself, kind of save some for the middle, late part of the game. Now, pitchers just go in and blow themselves up and then leave, and three more guys will come in before the game’s even over.

Ryan Isaac: Then, the other one is the defense is different. I had to have someone explain this to me, but they said you’ll see shifts in the outfield. Unless you’re a hitter that you can literally call your shot on any spot [00:10:18]on the field, at any time, and different heights, and all this kind of stuff, then defense is now shifting for what they know the kind of hitter you are, like, “Oh, this guy always hits to the right.” You’ll see defenses shift to the right, you know? That didn’t used to happen.

Ryan Isaac: By the way, I just kind of want to give some credit to where some of this came from. There was this article in… it’s called financialpoise.com, it’s just a financial education website written by this guy named Larry Swedroe. This is where some of this came from. He was comparing this phenomenon in baseball of something that used to be more common and possible that just isn’t … I mean, it’s technically possible, but it’s probably not going to happen again.

Ryan Isaac: The takeaway from the story is that things have changed so much that it used to be easier to pull off in the past and it’s just not the same anymore, and you can’t approach it with the same strategy. Like a batter can never have the same expectation that like, “I can play this game and hit a 400 ever again,” because the game around them has changed so much. And that’s kind of what we wanted to talk about today, is how that ties into specifically public markets and investing.

Ryan Isaac: There’s another great article we’re going to pull in here. A recent interview from Warren Buffett, how he talked about the same thing, how it used to be a lot easier to identify an underperforming stock that was clearly identifiable that, “Oh, there’s just a problem here and we can exploit this or take advantage of it.” He says nowadays you just can’t do that for a handful of reasons. We’re going to talk about … there’s like four or five reasons I wanted to go through. Any comments on the 400 story?

Reese Harper: Yeah.

Ryan Isaac: Did it inspire you?

Reese Harper: I think the real … just the summary is that one of the reasons why baseball, like if you’ve ever seen the movie Money Ball with Brad Pitt, it basically summarizes a period of time in baseball history where the Oakland A’s were trying to manage their team using data in order to make decisions. Baseball really is a very… for those who are into it, it’s a very data heavy game.

Ryan Isaac: Oh, it’s crazy.

Reese Harper: And it’s a very statistical game. The premise of the movie was essentially that the more on top of the data that you are… There’s a specific strategy that this team was trying to deploy using numbers. And jury’s out on whether it’s really the best strategy or not, but it worked for them in a short period of time. The point that I’m making about it is that as people get more information, as they get more data, and as things get spread around more people, as information is spread and dispersed among more people, then the outcomes become less varied. You don’t have as big of a variance in outcomes when everyone has information. You see that with your batting average example, more people have information on how to control a batter’s outcomes, and so the outcomes are less varied. They become in a tighter range. Outcomes become a lot tighter.

Reese Harper: That’s essentially what happens in a public market because people have information. If you think back to the time where the oracle of Omaha, Warren Buffett, probably bought his first stock, a few of the first stocks were … I remember one of his firsts was like City Service or something. He was like 11 years old, and he went into this like-

Ryan Isaac: Sounds like your oldest son, basically.

Reese Harper: … Yeah, I think he was working with his sister, and he bought a handful of shares, like six or eight shares of City Service, which apparently he had identified as an 11 year old, according to his biography and stuff, as a really undervalued stock.

Ryan Isaac: He might misremember that. That was a long time ago for him, but credit to him. Let’s just, let him have it.

Reese Harper: But, that particular stock ended up losing like a third of its value within just a few weeks of purchasing it. He learned a couple hard lessons, but then he held onto it. And then it rebound to $40 a share, and then he made a bunch of money, and then he cashed in and was excited.

Reese Harper: His story about this was that back at this period of time, newspaper clippings and newspapers contained information that no one else had. It’s like, if you happen to be the person that read the newspaper that day-

Ryan Isaac: Or got it.

Reese Harper: … and were looking at the ticker tape in the newspaper, you had some information other people didn’t have about these stocks. And so, kind of like baseball in the early days, like someone who was really, really savvy and was like, “You know what? If we could just minimize the number of errors that we had, then ultimately, we’re going to be able to win because it’s all about error minimization, not batting averages or home run hitting. We just need to get base hits, base hits, base hits, and no errors.” Anyone who … That was kind of one of the things that Oakland Athletics did at the time.

Reese Harper: Once people started realizing that that was a thing, then that became information that everyone had and then that no longer worked because now people know it. And so, stocks have gone through this evolution of like information was not that readily available to the public when all the information was coming through the Wall Street Journal sometimes only once a week. I mean, it wasn’t even a … initially, it wasn’t even daily.

Ryan Isaac: Or sometimes, the only people that had that were the actual physical traders still in Wall Street, present in Wall Street, on the floor, and you had to place a phone call to someone, if you knew someone, if you knew the right someone, who had the right information.

Reese Harper: Yeah, you knew the right someone, and you see-

Ryan Isaac: On a landline with a big curly cord off of the wall.

Reese Harper: … Yes, and if any of you have seen Boiler Room, you can remember a scene in that movie where a doctor’s calling into his broker, and the broker is telling him information that only the broker knows and broker knows because he knows someone that knows something. It’s not insider trading back then, it’s just like-

Ryan Isaac: Very few people knew every-

Reese Harper: … very few people knew things about the companies, one of the biggest advantages to that information. And as time passed, similar to baseball, and in the stock market, the internet has just created a revolution in information that is like, everyone has information unlike any time in history.

Ryan Isaac: … Yeah, totally.

Reese Harper: The variance in outcome’s a lot tighter, they’re not as spread.

Ryan Isaac: Yeah, it changes. There’s this guy, we’re going to quote a few times here named Charlie Ellis. He’s done a lot of things, connected Chief Investment Officer of some really large funds. Famously, he was one of the main chairman for the Yale endowment for a long time. This guy Charlie Ellis he… this is one of the things we’re going to hit. So it’s perfect segue.

Ryan Isaac: He just said, “Everyone knows everything all the time now.” One of his quotes is he said, “Everyone has access to the same information, because everyone has the internet. And that means worldwide information is yours instantaneously, all of the time.” He had this phrase in his article I read, where he used the phrase instant price discovery. He actually related it to a couple other industries too. Think about, like I recently sold and bought a house.

Reese Harper: Yeah.

Ryan Isaac: That process, even 10 years ago, was dramatically different than the process is nowadays. Even though it’s not completely accurate, the fact that I can pull up Zillow, and there’s something in a ballpark that tells me information about my house that 10 years ago, a human being had to physically come do the job to help me figure out that information. I mean, buying and selling houses, that’s totally different.

Ryan Isaac: Or think about buying a car 20 years ago. Who was the only person that knew anything about the car, or the actual price it should be, or the condition, or [crosstalk 00:18:44]-

Reese Harper: Think about dental fees. Think about dental fees now. I mean, there’s like websites, all they do is publish average dental fees of different… specific provider fees. Information of prices has changed. Think about Amazon, like you’re at Amazon. I’m at Target yesterday-

Ryan Isaac: … What do you do every time you shop physically at the store?

Reese Harper: … Everyone around me, they’re just like scanning the price of something and seeing if they should just order it on Amazon or buy it right there.

Ryan Isaac: Wait one day and get it on Prime for cheaper. Yeah, it’s really cool.

Reese Harper: So, that’s the first principle, I think, or one of the principles here is that, information continues to become more and more and more widespread, which makes it even more difficult to have informational advantages over other people. The only way that you can end up winning in the stock market picking game, like if you’re going to be a stock picker’s, you’ve got to get the timing right, or you’ve got to get the directional forecast right. Or you have to be able to get some… you have to have some kind of informational advantage in order to really be able to get a deal that is most say batter average 400 instead of batter 300 or 200, right?

Ryan Isaac: We wanted to take a break for just a second to remind you how easy it is to book a free consultation with one of our Dental specific advisors. What you do is go to dentistadvisors.com, and you’ll see a big green button that says Book Free Consultation.

Reese Harper: Can’t miss it.

Ryan Isaac: Click that button and book a time that works for you. Or you can just call us at 833-DDS-PLAN. Let’s start a conversation about how we can help you with your finances.

Ryan Isaac: Okay, so one of the things Buffett said in his recent interview, one of his quotes, he was being asked-

Reese Harper: This was an interview that was what?

Ryan Isaac: … it was… Let’s see, it was done… It was published on MarketWatch. A few news outlets published this-

Reese Harper: I saw it all over last week.

Ryan Isaac: .. Yeah, it was in the last two weeks.

Reese Harper: It kind of went viral.

Ryan Isaac: May 10th is when this was published.

Reese Harper: Okay.

Ryan Isaac: He was being asked because this was after their recent meeting too, they just did their shareholder meeting where everyone meets up and listens to him. And he was being asked, should people buy Berkshire Hathaway or should they buy the S&P 500? And his response was, “I think the financial result would be very close to the same.” And then he went on to say, speaking of-

Reese Harper: And then the Board of Directors is like, “What in the crap are you saying? Stop talking.”

Ryan Isaac: … “Whoa! Whoa! Whoa! Get this… Take this guy’s coke away him.” But then he said what was really interesting, and this is kind of to the point of, the market of 50 years ago is not the market of today or even 10 years ago. He continued speaking about just buying the market like in an index fund. He said, “I think it’s the best investment, because most people don’t know how to pick stocks.” And then he said, “And most of the time, I don’t know how to pick stocks.”

Reese Harper: He’s talking more like this in recent years. And I think the truth is, the results of Berkshire Hathaway’s performance are becoming closer and closer to the market average anyway. And he’s finding it more and more and more difficult to do anything that actually outpaces the market average. It’s just like, “Man, all the information is just spread around to everyone.”

Ryan Isaac: Yeah. To the point I’ve been making about the baseball analogy, it’s just not the same world, it’s not the same market that it used to be. Kind of along these lines I’ll go back to a quote from this Charlie Ellis guy who, he helped manage the Yale endowment fund for a long time. He was talking about the old market years ago. And he said, “Back in the ’60s, I remember mistakes were made by individuals that they would last for months.” And he said, “I remember once watching DuPont drop 50% in price for reasons that were clearly predictable.”

Ryan Isaac: And it’s kind of interesting to hear these people that have been around for so long, they’ve just seen it evolve for so long, kind of like somebody who’s been a statistician in baseball for 60 years or something, they can see the trends. And this guy saying, once upon a time when nobody had all this information, and few people knew what was going on, you could see a human make an error in a company and the stock drop by 50%, and you could pounce on that. Because you could exploit it and take advantage of it. But everyone would see that instantaneously these days. I mean, everyone would know it. And there’d be a million analysts covering that exact same situation.

Reese Harper: Yeah, one thing to speak to this I thought was really interesting is I was looking at a Twitter quote that was kind of going viral last week, had like a few like 10,000 likes or whatever. And it was showing the age at which certain people became billionaires, like famous people became billionaires. And it was interesting for me, because I was looking at the list. And if you go, like, from oldest people down to youngest people, the oldest person on the list, I think, that they had on there was Sheldon Adelson. And then after that, the second oldest person was Warren Buffett. And Warren Buffett became a billionaire in his late 50s, I think he was 56 or 57. There was Charles Cook, Michael Bloomberg, and a bunch of people that had heavy stock interests in their life. They got rich off of public stock or some public stocks that they had traded or ownership positions in public equity that they’d had.

Reese Harper: And then if you get down to the bottom of the list, there’s maybe 15 people on the list. The youngest person was 23, was a billionaire at 23. And that they had the recording, it’s not the youngest billionaire ever, but the youngest one on this list was Mark Zuckerberg. And after him, it’s like Larry Page, and Bill Gates and Jeff Bezos, and like all the technology people. You saw this list of like…

Ryan Isaac: Oh, it’s interesting.

Reese Harper: To me, it was like going from the oldest down to the youngest. And you’re seeing all these people that got rich through stock ownership, right?

Ryan Isaac: Yes.

Reese Harper: To the point where all these people now are getting rich through private companies.

Ryan Isaac: Well, it used to be kind of the same thing of like 60 years ago, right?

Reese Harper: Well, and a lot of this went public. Like Jeff Bezos, he was a billionaire privately before he was a billionaire publicly. And it was technology and innovation, that’s really the thing that I was thinking of, is like, man, innovation and technology and private business interest is really what was driving this.

Reese Harper: And then a lot of the people that had achieved that status before, a lot of them had some significant help from the stock market through passive investments, like not active private business interest that they hadn’t started. That was interesting to kind of look at and just see how that kind of speaks to this message of how things are getting more efficient in the stock market. And then the places where there are inefficiencies, are not in the public market, right?

Ryan Isaac: Yeah, for sure. And we talked about this before. Is this kind of along the lines of the idea that maybe the stock market 70 years ago was a place to build and create wealth, where today it’s a place to park and preserve and slowly grow wealth? And now the place’s to build like massive amounts of wealth? They’re just in different places? Is that kind of like the same dollar bill you’re talking about?

Reese Harper: And I think that, that’s actually a healthier view of the equity market. That’s the right view of it in today’s generation. This isn’t a place you’re going to create the wealth, but it’s a really, really predictable place to park the money and grow it without as much uncertainty about the outcome more than the past.

Reese Harper: In the past I’d say, the outcome of certainty was lower, because you weren’t as diverse, the market wasn’t as diverse. It wasn’t as global, there wasn’t as many companies in the market. There wasn’t as many participants in the market, the trading volume wasn’t coming from as many people. Today, it’s like stock market returns going forward, who knows if they’ll be lower or slightly higher? It’s hard to tell, there’s arguments for both sides. But what we do know is that, it’s becoming more and more difficult to fight against the market average.

Reese Harper: And for those of you who this is your first time listening to this, we’re basically talking about the difference between what people call indexing or what people call active management.

Ryan Isaac: Passive and… Yeah.

Reese Harper: And we’re not like… In our firm, we have clients with positions in both camps. We have clients with active management positions that consciously know that the probability of success in that model, and the fees that they’re paying for that, you even pay someone to trade stocks. If you pay Berkshire Hathaway to take your money, that’s a little more expensive than paying an index. If you are picking, different investments to own or if you hire a manager that does that, that costs a little more, because they’re like trying to understand forecasts. And as time passes, and information gets more spread, it becomes much harder for that to ever show up in results. And so markets are great place to park your wealth, and it grows nicely in a lot more predictable fashion, than a lot of other things that you might do with your money.

Reese Harper: And as I’ve aged man, I’ve become a lot more… My stock market money’s the money that I’m like, I feel like the least Russian Roulette Wheel about. As a private business owner, I’m like, “This stuff’s going to be fine.”

Ryan Isaac: Yeah, the private business depends on like 25 human beings that are irrational and unpredictable.

Reese Harper: Yeah. I’m like, “I’ll put this… ” This money in the stock market that I have, that thing is the whole global brain trust of workers and human capital, is going to push my mind upward, and I don’t have to worry about that. My retirement is secure. I love that feel.

Ryan Isaac: You’re right.

Reese Harper: I really do feel a lot of confidence in the power of the collective wisdom of a market. I think the point is like, a collective markets brain trust, like Warren Buffett is saying, has more predictability than one’s security, especially when it comes to a public market.

Reese Harper: Now, in the private market, it’s still very speculative even more so because there’s no vetting, there’s no third party testing of financials, there’s no compliance. You invest in a private company, you’re just depending on the goodwill of that CEO, and that board, no shareholders. They don’t-

Ryan Isaac: Yeah. Well, think about, on a smaller scale just how many times have you seen Dental transactions where it’s literally Dentist to Dentist? One guy selling it, and he’s kind of made it look a certain way in his spreadsheets, and if no one’s getting outside help, then the other guy’s buying it, and they’re just like, “I don’t know, this looks good I guess. Let’s do it.”

Reese Harper: … Well, both people are doing the transaction with as much knowledge as they have, but it’s probably not a… If we wanted to say, is it a fair transaction? No, it’s probably not, because neither party really knows accurately what… There’s not thousands of people looking at the transaction and analyzing whether it’s fair.

Ryan Isaac: And actually here’s the other point I want to make. There’s two more points I want to make from this article that I thought were like, really, really interesting. One of them is that, you keep saying the collective market. The collective market, all these people, they’re all getting smarter and better as the years go on, right?

Reese Harper: Just like the baseball players.

Ryan Isaac: Just like the baseball players, they’re getting smarter, they’re getting better, and-

Reese Harper: Imagine you grow up being raised by a dad that now has been trading securities for 30 years. And then he taught you everything he knows. And now you have another 30 years to learn how to be an investor. It’s like, people are getting smarter and wiser as time passes, for sure.

Ryan Isaac: Yeah, due to technology and information. So there was this, in this article, he quoted an author who writes about poker, and how collectively, like in the 70s, he was saying that very few people had access to poker strategies. There were only a handful of books that would circulate, and most people wouldn’t read them. A few people became elite poker players. But he said… I got to find this quote, it’s really cool. He said, “Oh, it’s no longer that difficult to become very good at the game relatively quickly, especially if you’re willing to put in the hours. As a result, the very best players in poker have seen the ranks of their rivals swell to the point where there are now many more sharks at the top of the pyramid.”

Ryan Isaac: And you kind of made this point like relating it to poker, in the ’70s, it used to be easy to be elite, because there was very little information. And if you were willing to put in the time, and you could go find it, you could know the strategies. But now the average person playing poker is really… compared to the ’70s, they’re like, the masters, and now they’re the average people.

Ryan Isaac: The other one that I wanted to comment on, statistically was really fascinating about how it’s changed is that, the majority of trading in public markets now is done by professionals and institutions. So they estimate that as much as almost about 90% of all trading is now done by institutional investors, where if we go back to at the end of World War Two, households, individual people, retail investors, did about 90%… owned and did all the trading. So since the ’40s until now. And that’s just another transition.

Ryan Isaac: And what… Who said this here? I think it might have been Charlie Ellis. Oh, yeah. He said, “Now you can only buy or sell to other professionals.” And the article was saying that the amount of suckers is gone. Actually from the poker book, the author said that most profit at the poker table, comes not from your own brilliance, but rather from the mistakes of others. And so, there’s point that the mistakes of other’s becoming it’s just few and far between, because it’s professionals doing all this stuff now. It’s not part-time hobbyists and individual investors. I guess it’s all professionals now. So the field’s just so much harder to exploit.

Reese Harper: And I feel the misconception here is that, well, if indexing is easier than stock picking, then I’ll just index. And then it’s easy. And then someone just ends up going and buying the S&P 500 index, because they hear Warren Buffet say that, and then they’re like-

Ryan Isaac: I’ll just do that. I’m done.

Reese Harper: … I’ll do that, and I’m done. It’s like, dude, that’s not the right approach. That’s not even what Warren Buffet is saying.

Ryan Isaac: That’s not the right takeaway.

Reese Harper: That’s like not the right takeaway here.

Ryan Isaac: Which is what I want to finish with this. What are the takeaways dentists should have?

Reese Harper: It’s much more complicated.

Ryan Isaac: Yes. What are the takeaways from all this then that dentists should have?

Reese Harper: Well, number one, I would view the stock market as a place to park your money and have it grow predictably. I think that’s really important. Don’t think of it as this Russian Roulette Wheel. It’s not gambling. You’re not going to get informational advantages by picking stocks. There’s a reason that the penny stock is worth 11 cents. And it’s just not like… There’s a reason that a stock declines in value. There’s a reason that prices are literally fair because there’s thousands, millions of professionals, looking at every price every day and trying to say, “If it’s cheap, we’re going to buy it. And if it’s expensive, we’re going to sell it.” That’s happening constantly.

Reese Harper: And so, there’s not a lot of informational advantage, you should view the stock market as a place to park wealth, that is going to grow predictably. I think that gives me a lot of confidence, it gives me a lot of peace of mind.

Reese Harper: But the thing I would caution people against is just because we’re saying that markets are efficient, that’s different than portfolio management. Portfolio management is complicated. It’s very complicated. And it’s because once you start buying an index fund, you start building up a tax position in that index fund. And every time you make new deposits, you’ve got to decide do I want to buy that same index fund again? Or not? Or does it make sense to buy a different one, as I get bigger? Or does this index fund give me the same diversification that it used to? Because the S&P 500 is only a portion of the global market. And the global market is not just the S&P 500.

Reese Harper: And so, at some point, you’ve got to be able to have a plan for saying, “If Brazil continues to become a bigger and bigger part of the world, or if Japan continues to become a bigger and bigger part of the world, how do I think about that?”

Ryan Isaac: What should I do about that?

Reese Harper: How should I own that? Because if the world continues to grow and evolve and become more… If the index of the world essentially becomes broader and larger, you’re either going to have to just say, “You know what? I don’t care about the rest of the world. I’m just the United States only, investor. And that’s where my money is going to be.” Well, if that’s the case, you have to say, well, are you going to invest in small companies in the US, or the large ones? Are going to invest in growth stocks or value stocks, or just the S&P? Too many people are just buying one target date fund, or what S&P index are calling it good. And I just don’t feel like that’s going to serve them [crosstalk 00:37:21].

Ryan Isaac: Yeah, that’s missing the point of this data, it’s missing the point of what really smart people are saying about how to invest in public markets. Wrong takeaways.

Ryan Isaac: And I think I mean, the whole other side of that feud-

Reese Harper: Because the thing is like, there’s a tendency for people to get dumbed down with this, and go like, “Okay, well, this is easy, then all I have to do is buy an index fund.” Well, that’s like… That actually-

Ryan Isaac: But people still screw that up, it’s still getting messed up a lot while people just keep thinking that’s path.

Reese Harper: That is not portfolio management. Portfolio management is about deciding when you take money out, or you put money in to an account, or a portfolio, what things should you buy and what things should you sell? And the more you automate it, that’s fine if you’re small. If you’re a really small investor, small accounts, automating all of this stuff is not going to be that consequential because your taxable consequences are very low. But you get to… here’s the thing, if you start building a position now and you only have $50,000. But in five years, or 10 years, you have a million dollars, or $500,000. And you have a significant amount of tax that’s been built up in that position. There’s consequences to buying and selling that, that are pretty significant. You can’t just start doing something and say, “Later, I’m going to redo it, maybe later when I have some money.” Well, there’s a cost to starting out in a strategy of indexing that’s not scalable, that you can’t grow with as you grow, and there’ll be some cost of changing.

Reese Harper: So I just think that it… We won’t go into the details of portfolio management today, today’s more about how markets have become more efficient. But I think that it really is important that people understand the difference between indexing and then managing their portfolio. Because the real… there’s a very significant amount of cost that people incur by miss managing their index funds. They miss manage the trading, the buying and selling when they need money out, and when they’re putting money in, of their index funds.

Ryan Isaac: Yeah.

Reese Harper: And it creates a lot of… It’s some unnecessary drag.

Ryan Isaac: Well, and that’s still not to say anything about choosing the appropriate amount of risk for the account that you’re holding, and the timeframe, and the goals. And that says nothing of the behavior of the human being behind that portfolio too, when market cycles change, and news happens, or there’s like fear and different thing. I mean, it’s a very complex situation.

Ryan Isaac: But you’re right. The point of this is that markets are very different than they were 50 years ago, or even 10 years ago, and you have to behave. You have to have different expectations, you have to see them differently. But it’s still not a set it, forget it, easy, anyone can do it thing, because even simple concepts are being executed the wrong way.

Reese Harper: Yeah. And it’s costing people money. I think most of the dental market understands that. As they get bigger, then the consequences get higher, then they kind of just go, “Yeah, I’m kind of winging this.”

Ryan Isaac: Like, I get it. Yeah.

Reese Harper: I got to-

Ryan Isaac: I’m done.

Reese Harper: … I got to really take a look at this again. Anyway, I think that’s good for today, man. That was classic.

Ryan Isaac: That’s good. Well, let’s just end that with an invitation then. So if that’s something that you’re feeling, you’re kind of wondering like, “Am I building this thing right? Have I invested right? Am I seeing my portfolios the right way?” Then, reach out and let’s talk about that.

Ryan Isaac: You can go to our website, dentistadvisors.com, and click on the big button that says Book Free Consultation. And that’ll set you up with an appointment with one of our awesome advisors. Or, you can just call us 833-DDS-PLAN. Either one of those, get in touch and let’s talk about your situation and your portfolios of what you’re doing with your own investment accounts.

Ryan Isaac: Also, we’d invite you to join our Facebook group. It’s growing like… What do they say? Like hotcakes! Do hotcakes grow? They stack? They grow?

Reese Harper: Yeah, they sure do.

Ryan Isaac: Grow like hotcakes. You should go to dentistadvisors.com/group, or just find the Dentist Advisors Facebook group on Facebook. And join in there, post a question. We get in there every day and answer questions.

Ryan Isaac: So thanks again Reese, for the wisdom of baseball and markets.

Reese Harper: Thank you.

Ryan Isaac: It was good time.

Reese Harper: Carry on.

Behavioral Finance, Investing