Welcome to episode 170 of The Retirement Years on Profit Boss® Radio! In this episode, we’re talking about investing in what is probably the freakiest time period we’ve ever lived through. The markets are just as wild as life right now, and you need to be educated and have a solid investment philosophy you will abide by to avoid getting off-track.
The market has been massively positive for owners of US large stocks. The market has not only recovered the 35% lost in March, but gained another 10 to 15%, and has become massively volatile. It’s easy to get emotional, to be ruled by hindsight bias, and to overthink bad decisions.
So, are you ready to create a solid plan, put it into place, and give yourself at least a little more peace of mind, even in difficult times? If so, tune into Profit Boss® Radio today!
Here’s what you’ll find out in this week’s episode of Profit Boss® Radio
- Why the markets are so volatile right now – and how 12 companies are propping up the rest of the S&P 500.
- Why you should still feel good about making the right choices, even when they have bad outcomes.
- The massive misunderstanding that people have when it comes to their investments.
- The difference between traditional active and evidence-based investing – and why it’s so important to be diversified right now.
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Okay. Some of that was a little tongue-in-cheek but isn’t this just the freakiest time period we’ve ever lived through? So, I want to talk to you about investing because the stock market is just as wild as life right now. It has been a massively wild ride. In March of this year, the major markets and I’ll just speak sort of casually, generally, I say when we talk about the market, most people mean the S&P 500 which is 500 domestic. That’s US large-cap stocks was down 35% but really in truth, the global markets were down about that much and people were massively emotional. I know that if you’re a regular listener sit through my legal disclosure at the end of each episode, let me just say again, though, because I am talking specifically about investments, I’m not giving you investment advice today. Literally, my call to action to you is to get educated and to get an investment philosophy that you can abide by. So, these short-term gyrations and your emotions don’t get you off track. Okay. So, that’s what we’re talking about is investment philosophies. I am going to share with you what my philosophy is. I didn’t make it up. I have very smart Nobel Prize-winning finance people to thank for it, but it has served me and my clients well for two decades and I encourage you to get a philosophy and that philosophy can be followed in high times and in low times.
I hesitate to say good times and bad because obviously good times are when the market’s up and bad times are when the market’s down but the market goes up and down. That’s what it does normally. So, it’s not actually bad. When the market is down is when you earn your mettle, your M-E-T-T-L-E as an investor. That’s when you know if you’re a sophisticated investor or if you’re a fair-weather investor. So, let me just acknowledge that uncertainty, which is a very tough place for the human animal to be in is high. It’s high about both health and money. It’s hard to think about 2021. You can’t plan a vacation or see your parents or your grandparents. We have sort of accepted at this point that we’re all locked in our houses until there’s a vaccine. And as of last week, they stopped some vaccine trials because someone had an adverse reaction and it can be tempting to get hopeless. So, it’s just a really tough time to be a human. So, my commitment is that this time not leave you with negative repercussions and your money and this is how we’re going to do it is to educate you and encourage you to get out of your emotional mind, your lizard brain, and do something, do this aspect of your life intellectually.
So, the market has been both massively positive if you own US large stocks. I mean, I don’t know what you own. Like if you just own REITs or bonds, you could probably diversify a little but you may not be having the same investment experience other people are. So, most people are having a positive experience since March so the market has recovered the 35% it lost plus 10% or 15%, depending on what you own, and it’s massively volatile. Apple and Tesla both had stock splits and the public tends to love that even though it has zero long-term impact on the value of the stock. Stock splits just make the stock more affordable. That’s it. If there’s a temporary uptick after a split, it’s only due to investor sentiment. So, remember that the value of a company or a stock has two things that comprise it, make up the value, the price you see on the trading desk on the market. That is the fundamental value of the company or the book value of the company. Yes, companies have real measurable value that’s called book value and investor sentiment.
So, when you saw the market dip 35% in March, some of that was fundamental company value. There’s a lot of companies who were doing business if they’re doing business in person or can’t do business during the COVID pandemic, they’ve lost significant market share revenue and maybe even gone out of business. But then, of course, contrast that with companies like Zoom, who now like rule the world. So, some of that dip was undoubtedly investor sentiment. We don’t know how much but of course when there’s fear and uncertainty, there’s going to be negative market movement, and then, bam, it went right back up. So, Apple, first of all, is the most valuable company on the planet worth $2 trillion. Tesla stock has it now worth more than Toyota when Toyota sells something like four times or eight times the number of cars Tesla sells, so something odd going on there. Apple and Tesla and NVIDIA and Facebook seem to gyrate in price 10% or more every day this week. Positive returns from the S&P 500 so far in 2020 are mostly being carried by just 12 companies. So, the other 487 or 488 on the S&P 500 are down for the year. So, you look at the market and you think it’s up. Turns out that’s just 12 companies. It seems a little unsustainable to me and then, of course, everybody wishes they had bought Zoom stock in January.
And if you look back and think to yourself, “Oh, it was obvious or predictable that Tesla or Facebook would be up right now,” you actually are suffering a cognitive bias called hindsight bias, meaning it’s not actually true that that was predictable. Stock prices change based on new information. So, all available information is already integrated into the price of the stock on an up-to-the-minute basis. Okay. So, don’t get to thinking that stock prices are ever predictable. And then if you sold Tesla or one of the stocks mentioned, you are definitely watching it and having hindsight regret which is never fruitful. So, looking back in the rearview mirror given the way the stock market works, you can measure your short-term mistakes. Annie Duke is a world-famous female poker player and she in the last year came out with a new book and one of the sections of that book define this term called resulting. She says resulting is when you make a good choice and it has a bad outcome. She said you should still feel good about making the right choice regardless of whether or not in the short-term you had a bad outcome because if you continue making the right choices, the good choices, the choices where the evidence aligns with you, that eventually you will have that good outcome. So, I like that, resulting.
And you know, there will always be outliers. There will always be companies having temporary short-term moonshots. They take off like meteors. And you can’t worry about that because people have been trying to predict those moonshots accurately since the invention of the stock market. And nobody, nobody, nobody, nobody, nobody, despite what Hollywood might want you to think has been able to extract meaningful profit. In other words, they reliably get in at the bottom and sell up at the top reliably and consistently. So, I do want to say one other thing about these single stock moon shots. So, when people come to me and they say, “Oh, I bought Tesla at 20 cents, and now it’s worth a million dollars,” Invariably, my response to them is, “Oh, that’s fantastic. So, you made money. So, you sold it?” And they say, “Oh, no. No, no, no, no, I’m not going to sell it.” You haven’t made any money on a stock until you’ve sold it. That is paper fodder. That is digital bits and bytes staring back at you on a screen when you log in to E*TRADE. You have to sell the thing to actually make money so you can spend it. Until you’ve sold it, you haven’t survived the lifecycle or managed the lifecycle of the investment.
And that is a massive misunderstanding. People walk around all the time saying, “I’ve made XYZ dollars on this investment.” No, you have not. You haven’t until you’ve sold it, liquidate it, and you can spend that money. Whatever you do with it after that, it either goes back into the lifecycle of a new investment or now it becomes spending dollars for you, which is ultimately the purpose of money. So, that’s an educational point for you today. And so, of course, my job is to educate people on why their investments, if I work for them, why their investments are the way that they are. And so, what I’ve been saying to my clients whom I work for is, remember, we have an investment philosophy that we’re abiding by. Now really isn’t the time to reduce diversification and chase short-term returns. So, what kind of investment philosophy am I talking about? Well, you can either have a traditional active investing philosophy or you can be an evidence-based investor. So, I would say Wall Street was definitely built on active investing. This is where you try to guess which companies are going to go up. Before they do, your intention is to buy low and sell high. Almost no one accomplishes that, by the way. It’s the number one rule in investing, buy low, sell high. The number two rule in investing is diversify, diversify, diversify, in case you are wondering.
So, let’s talk about the difference between traditional active investing and evidence-based investing. Okay. So, characteristics of evidence-based investing. You have a long-term market perspective. You are in it to win it. You’re in it for the long-term. I’m in my early 40s so I’m thinking about I’m probably going to live to 95. I have a 50-year time horizon in the market. That’s a long-term perspective. I am guided in my investment choices by peer-reviewed academic evidence, which means it’s gone through the academic wringer and it has merit, and it’s practically applied and I’m very patient as I participate in the markets. That’s evidence-based investing. Traditional active investing is short-term market forecasting. I might rely on “expert opinions” whether that expert is someone who talks to me on a radio show or who I read in an opinion piece in a paper or who is an active investing financial advisor or investment advisor at a Wall Street bank. And it’s very speculative in nature and you’re doing things rapidly. So, If you have a financial advisor who calls you minute-to-minute or week-to-week and says, “Hey, I think this next thing, we need to get on this rocket ship before it takes off. This market, this segment, this industry we’re going to get, we’re going to sell some of what we got, and we’re going to buy in because this is my next hot prediction. That is definitely active investing.
Let’s talk more about how the evidence-based investing philosophy differs from traditional. So, if you’re evidence-based, I’m just going to talk about actually let’s switch. I’m going to talk about active and then we’ll talk about evidence-based. So, traditional active investors believe they can successfully predict when and how to trade on breaking news. Okay. So, they are in denial of the assertion that stock prices are up to the minute with all available information instantaneously. Active investors feel a sense of urgency to make the “right calls” to beat the market. Active investors act on “expert opinions” which are of course vulnerable to biases, blind spots, and changeable conditions. Active investors define success as outperforming others or making a lot of money. Of course, it’s never defined how much. It’s like the infinite amount, trillions, quintillions, lots of money. Active investors don’t distinguish between market risks, which are factors that are expected to yield extra returns, and concentrated risks which just add more risk. The way I say this in plain language to my clients is, “I am extremely careful. When I add risk to your portfolio, I demand that for every ounce of risk I add to your portfolio, you get an extra ounce or two of expected return.”
So, for example, if you had 100 stocks, that’s a fairly good diversification right now. And if you sold those 100 stocks to buy just one company, that would be taking on what I’ve just referred to as concentration risk. So, now while, yes, you could shoot the moon, your investment could also go to zero, right? Every one of us listening is old enough to remember Enron. Enron went out of business in basically a day and it was a massive surprise. And they had hundreds of thousands of employees that were not only left without a job but also without the pension that they had been promised. So, it’s a big deal. Active investors focus on cleverly timed trades over the costs, commissions, and taxes they incur, which of course means they tend to incur a lot of those transaction costs. And active investors try to beat the market or the indexes through clever stock picking and market timing. I would also add to that that my experience is active investors suffer from overconfidence bias. They’re always certain that they can do what the PhDs and Nobel Prize winners have not been able to do.
Contrast that with evidence-based investing, if you’re an evidence-based investor, you understand that near-term market swings like the ones we’re suffering right now are unpredictable. So, you would ignore the noise. Evidence-based investors assume that time is on their side. Like I just said, I’ve got 50 plus years so you have to give your plan time to grow. Evidence-based investors are guided by peer-reviewed academic inquiry. In other words, the stuff the national financial news media doesn’t tell you, and definitely take a steady as she goes resolve. Evidence-based investors define success as being able to comfortably fund their personal financial goals. So, you have a reasonable expectation of long-term returns from your portfolio. Evidence-based investors manage market risk factors and their expected returns and diversify away concentrated risks. So, that’s the correlate to what we talked about before and that is being very conservative when adding risk to your portfolio. Volatility can be the enemy. Depending on where you are in your lifecycle as an investor, it’s important not to have too much downside risk.
Evidence-based investors focus on minimal trading, understanding that the costs involved are among the biggest drags on their end or final internal rates of return. Evidence-based investors participate in the market to earn expected long-term returns according to time-tested academic evidence, their personal goals, and individual risk tolerances. So, that means if you take on this evidence-based mindset, you can find a place where you can allow yourself to be impervious to or insulated from what’s happening right now in the markets. And like I said, today, my call to action to you isn’t to go invest in or buy anything based on what I’m saying to you. I just want you to get educated. So, I encourage you to get good information. You could go home tonight and google evidence-based investing. There are lots of providers who will make evidence-based investing available to you, who can implement that for you. My firm is one of them and my intention in today’s conversation is just to give you some perspective to alleviate some concern and to provide a way of thinking that brings me a lot of peace of mind. So, unfortunately, I cannot bring you peace of mind about health and COVID and the pandemic and the vaccine but I know that I can bring you peace of mind about your money. So, this too shall pass and the markets will at some point in the future look very, very, very, very different than they do today or feel very different and we’ll have different conversations that match or mirror or are appropriate at that time. But I’ll always come back to this evidence-based investing philosophy.
Hilary Hendershott: I have something very exciting for you today. If you liked this conversation and want to learn more about how to adopt mindsets and practices that allow you to have financial peace of mind, one of the things I’ve been talking about is that this is the first major downturn event that I, as an individual with my husband, so we’re a financial partnership have been through together and I’m proud to say that while our income is down, our peace of mind definitely is not. Our financial independence definitely is not. And that is something that didn’t seem like it was in my future 12, 13 years ago when I suffered my own financial crisis, personal crisis of finances, and I created out of that like the phoenix rising from the ashes, I created a coaching program that I have implemented many times before with many different kinds of people and it is definitely a system that is successful and produces profit and teaches people how to grow their net worth and how to make their financial situation unmissable with.
So, in the next couple of weeks, I’m going to be sharing with you about my wealth multiplier course. And this year’s wealth multiplier course is expanded in terms of it has been limited to women in the past. Now, we’re making that available to all genders. As I’ve always said, my orientation toward working with and for women was never about excluding men. It was always about wanting to empower women and I just really realized that I’m committed that all people thrive. And so, we’re making this available to all genders and limiting it to business owners. So, I’m talking to you, if you’re a business owner, I know that you want to be confident in your financial standing and I know you want to live a fulfilled life. I totally believe that hard-working entrepreneurs shouldn’t have to pour everything into their business. I know you’re clocking 80 hours a week. I mean, I know what’s happening out there. Some of you have businesses that are positively impacted by the pandemic and some of you are really having a hard time and I know that can leave you frustrated, stuck, and overwhelmed and I definitely do not want you to convince yourself that a certain level of financial success isn’t possible. So, that’s why I created the wealth multiplier course.
In this course, I’m quite literally going to walk you through the necessary steps to change your relationship with money, scale your business for massive growth, and help you increase your net worth on a consistent basis, month-to-month, quarter-to-quarter, year-to-year for the rest of your life. And so, that’s totally going to transform everything, including your outlook, what’s possible for you, your confidence, your freedom, your choices. It’s going to be totally transformational for you. As a precursor to the wealth multiplier course, I will offer a training called seven ways business owners can transform revenue into personal wealth. That training will be totally free. If you go to the show notes for today’s episode, HilaryHendershott.com/170, you can put yourself on the interest list for this year’s wealth multiplayer course. We will make preorder pricing, early bird pricing available to you, and that training will be free, totally free, always free for all of you who choose to take it. More on this to come. I’m just letting you know this is coming up. The first mastermind for the wealth multiplier course is Friday, October 16. Mark it off in your calendars. I hope to see you there and the course is six months long so totally immersive and comprehensive.
Alright. That’s all on that for now. I hope this gave you a new perspective on what you hear on the media, what you’re seeing in your accounts. And know, as always, that my intention is to have this peace of mind that I talk about be replete in you and hope we get to work together to do that. Okay, profit boss, talk to you next time.
Hendershott Wealth Management, LLC and Profit Boss® Radio do not make specific investment recommendations on Profit Boss® Radio or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of Hilary Hendershott, CFP®, MBA.