The podcast starts with Steve’s look back at the life and times of Daniel Kahneman. Who’s Daniel Kahneman (Said everyone with a life and/or hobby)? He’s a psychologist whose theories on human behavior have had a profound effect on the world of finance…Oh, that Daniel Kahneman!! We also discuss some questionable investment advice from another guy who knows a thing or two about human behavior, motivational speaker Tony Robbins. So if you’re a human and have ever exhibited behavior, you’ll love episode 111 of Plan for Life Now…
Steve:
Welcome to Plan for Life now episode 111. Welcome Dave. Welcome here to April the fourth.
Dave:
Hello. What’s happening today? We decided to do something different because normally we’ll do a what we like to call a 22nd to 32nd prep, which means that Steve will give me an idea or sometimes I’ll give him an idea of what I have for this podcast and then we’ll go from there. We don’t want to waste it on a personal discussion, but today, in a move even lazier than the normal podcast, I told Steve, I don’t even want to know. We’ll just do it on the air.
Steve:
You want to be surprised. All right, well,
Dave:
Which tells you a I’ve brought nothing to the table today.
Steve:
Well, I did bring a couple things and hopefully you’re not totally off guard by them.
Dave:
It’s impossible to be totally off guard when you’re just reacting in real time.
Steve:
You’re a professional. You can roll with any topic,
Dave:
Right?
Steve:
So welcome everyone here to early April. Hope I’m in the mindset. I was out last week on spring break, and as I’ve talked to some clients, I’ve told people it was the most exhausting vacation I’ve ever had. We did the whole Disney and universal thing down in Orlando, and we didn’t keep up this pace the entire time, but the first couple of days where get up at six 30, you’re in the parks till 9, 9 30 at night, just exhausted. So I know everyone’s not on that schedule. Most of our clients don’t have kids who are 15, 12, and 10 like I do,
Dave:
Right? You’ve already made everybody feel better who’s listening because it’s like that’s all behind us. I’m speaking for most of the listeners here that’s behind us. Been there, done that. I should say I take it back for the grandchildren, that could be something else, but usually you have your kids who are helping you with something like
Steve:
This.
Dave:
Although I do know one couple who really do this stuff still. They’re in their mid sixties and they still will take the kids and do these things by themselves. I give them a ton of credit. They’re an excellent physical condition though.
Steve:
No, you need to be, I mean, I shouldn’t say you need to be. There are plenty of people going around in wheelchairs and scooters and whatnot, but man, it’s a grind there. But it was one of those things where we did it. We knocked out six days in the parks over a week and I said, great, I’ll be happy never to do that again.
Dave:
You’ve done that twice. You are done. That’s the quota you’re done.
Steve:
We got it in for the kids just at the right ages. So we are done. Shifting gears here to investing and the world of finance. I always like to do a little check-in with where we are with the markets. Where’s everything so far this year? So like I said, we’re recording this today on April the fourth and markets up this year s and p 500 up about 10 and a half percent. Dave, a pretty good start to the year.
Dave:
I’d say that’s an understatement.
Steve:
I mean, I think most of us would take that as a pretty good end to the year if we could lock that in. But the pretty good first quarter of the year in the books there, Dow Jones Industrial Average, just up a little less around 6%. And then the NASDAQ actually trailing behind the s and p 500. So remember the NASDAQ is that technology heavy index, but doing well up 9.3% there. So the story in the markets has continued to be the big AI dominated themes have done very well. I don’t have the number in front of me, but Nvidia is, it’s crazy. I think it’s up another 70% this year. I mean, give or take 20%. I don’t know what the number is today, but Nvidia and a lot of those stocks around anything related to artificial intelligence have done very, very well. The general consensus for interest rates has gone from the Fed was going to cut rates. I don’t remember where it ended last year, but I think it was somewhere around five or six times. Now. The market thinks the Fed’s only going to cut rates about three times this year,
Dave:
Which I still think is a positive for, I think the market is trading on that, even though that’s been cut in half still positively. I think if they were to shift and say, you know what? We’re going to be raising rates, then you would see an effect on the stock market. But even the notion that they’re going to cut rates, I think is working in the market’s favor.
Steve:
Well, it’s always that confusing thing is if they are cutting rates that basically, usually that means, well, the economy needs some sort of support there and they need to cut rates to stimulate the economy. So keeping rates higher means that the economy is strong enough to support that. But then there’s the argument that, well, this is kind of above that normal rate, whatever you want to define as normal there of around 4%. So yeah, they’re a little bit high, but I’ve been making the argument when we talk to people, higher rates have been a great thing for our clients. It’s been a great thing because our clients don’t carry credit card debt. They have a long-term mortgage that’s either paid off or so they don’t have a mortgage or it’s locked in at a super low rate. So they don’t care about higher interest rates. Higher interest rates just mean they get more return on their cash or CDs.
Dave:
And quite frankly, now that the bond market is stabilized, we’ll say for sure, even on the bond investments, you’re getting a higher yield.
Steve:
Oh yeah.
Dave:
So right now is really a wonderful time to be investor with the backdrop of AI pushing the stock market, which by the way is another thing that’s just positive for our clients running this firm and maybe not for regular people, because if AI just takes jobs, hey, the downside of that is people won’t have jobs and that’s bad. But the upside is for a lot of our clients, they’re already retired or some of them might say, yeah, at this point, go ahead and take my job. I’m already running on. This is basically just sort of extra earning time. So the notion that the market is as a catalyst, and that’s the catalyst, maybe worse for young people in the long term than it is for our clients.
Steve:
Definitely. I mean, I feel like the issue is much more for my kids and maybe your kids as
Dave:
Well. I would say for my kids
Steve:
Also twenties and thirties, yeah, they’re going to see a dramatic shift during their career in the type of work, the amount of work that’s done by AI and who knows what that’ll look like,
Dave:
But it is looking like a four day work week, whatever that means.
Steve:
Yeah, I mean, I don’t know. I, I wonder about that because so many people talk about, oh my gosh, when we have all of these advances, we’ll have all this extra time to do all these extra things. I don’t know if that’s always the case or people will just find more work to do in that time.
Dave:
I think the four day work week, which is in the news right now, is more something that is, it’s just, okay, my kids all have, I’m trying to remember the phrase, I’m going to sound like an old boomer, I can’t remember the phrase, but basically there is no vacation. They just take as much as they want, but they can’t because then they’d be fired. And I forgot what the three letter designation for that is, but I forgot what it is. It’s like
Steve:
Unlimited,
Dave:
Right? It’s some sort of unlimited vacation. But the reality is you could only take so much. As a matter of fact, my kids would rather have a designated, they’ve said, Hey, I’d rather have three weeks vacation than this deal, because you don’t really know. They end up taking that anyway, but you don’t really know what you have. So when you look at how that’s working in the modern work world, combined with the quote, four day workweek probably never will be a four day workweek because people who care and employers who care are going to, you got to get the job done is bottom line.
Steve:
Alright, last thing on the markets and updates so far this year. I was just going to say the bond market’s been pretty flat to slightly negative so far this year, but like you mentioned, Dave, I mean yields are so much higher across the board on all of these bonds. When people ask, could we have a replay of 22 where maybe things reverse and interest rates do increase from here, could we have negative returns in bonds? And of course that’s possible, but when you’re starting from a place of five and a half percent yields, you’ve got a lot more cushion in there than you did when we were starting with yields of 1.2%. So I think the bond market is much more attractive than it’s been in, I dunno, 15 years, 16 years since the financial crisis in oh eight.
Alright, let’s shift gears. Dave, I wanted to talk about venturing into topics that you have no advanced warning of. So let me, here we go get your reaction on this. A couple weeks ago, Daniel Kahneman died, and if you’re not sure who Daniel Kahneman is or you need a small refresher, he is one of the sort of fathers of behavioral finance. Behavioral finance was this industry that I feel like maybe five, six years ago we talked about it an awful lot. I think at the time Richard Thaler won a Nobel Prize. Kahneman won a Nobel Prize, I think it was a while ago when he won it, but he passed away. And a lot of people say that without his work starting in the late seventies or so, you wouldn’t have any of the current work that he kind of laid back groundwork. And his book, the only one that I’ve read at least thinking Fast and Slow, that was his big book that I think came out 10 or 15 years ago.
So when we talk about concepts and behavioral finance, I think the most powerful one that’s attributed to him that I think quite honestly, Dave, this frames a lot of our planning and the way that we approach clients and retirement is this concept of loss aversion and the concept of loss aversion is not complicated. It’s basically this idea that losing money is roughly about twice as painful as gaining money. So the idea of losing a hundred bucks, I would need to gain 200 bucks to have a balanced out. Gaining the 200 made me that happy and losing the a hundred made me that unhappy.
Dave:
That’s a theory. Well, that works with you and me or does that work with you? Boy, that’s me. That’s why I don’t, that’s why I have zero interest in going to Vegas gambling. Although I did go there on the last trip just to see what it was like and it was exactly what I thought it’d be like. But basically
Steve:
Good shows, good dinner. Well,
Dave:
No, that’s different. You want to go to a show? I mean, from the gambling perspective, because I feel like winning money cool, but if I blew the money, it’s be like,
Steve:
Wow,
Dave:
Why did I do that?
Steve:
Totally. Oh absolutely. But I mean obviously that comes into play with investing is our clients, they’re not interested. Sure. Would we like to own Nvidia and be up 70% this year? Yeah, that’d be nice, but it’s going to be so much more painful. If I’m trying to think of a stock that’s been way down recently. I dunno, pick any stock over history that’s just crashed and burned. You were in WeWork or something like that. I guess
Dave:
I could say true social, but then I’d be predicting based on today’s
Steve:
Date,
Dave:
We don’t want to
Steve:
Predict, but there’s plenty of stocks you could pick that just crashed and burned, lost 80, 90% of their value. I mean, a lot of those work from home stocks, even if they’re good companies, Peloton, zoom, stuff like that, they’re still down 80% from their highs there. Those losses are much more painful than the gains. So when that comes to investing, when that comes to putting together retirement portfolio, it’s much more important to be able to hit those singles and doubles than to be swinging for the fences and trying to hit home runs,
Dave:
Which is why we like broad diversification because it is more over a long period of time, it is far more predictable.
Steve:
And I think it also psychologically helps when if we have a portfolio, if we’ve got two different portfolios and one is this just homogenous lump, you don’t know what’s in there and it gets you a 5% return. Right? Okay, that’s fine. And then you’ve got another portfolio and you see all of the components within there and you can see that, okay, well this one got, well, this one got plus 40% and this one was down here and there. I think that particularly helps when you have negative returns. So let’s back up and I’ll do a different example. Everything was down 10% in two different portfolios. In one, you just see that down 10% that stinks in another one, you look at that and you say, okay, yeah, I had some things that were down 10, 15, 20, but I also had some elements in here that were flat or they were up two or 3%. That really helps because psychologically you can segment that and say, okay, well that risky stuff, it’ll just do its thing. But I’ve got this other money here. And of course a lot of the other behavioral finance stuff that we’ve talked about in the past, but it probably has been a few years things, this is more than just finance, but confirmation bias. This gets talked about a lot in the media, that confirmation bias, you look for sources and things that confirm what you already think. So I think something, and I’m going to go to sources that confirm that I’m going to go out of my way to try to find something that contradicts me.
Dave:
But I also blame the great grandchildren of ai, which is the current internet for part of this, because they know what we look at once and then they just push it on you. You can’t blame the computer for what we do. But the reality is,
Steve:
Yeah, I mean things like algorithms and Facebook and all those places, they feed on that confirmation bias anchoring is this idea of, you can think of an example, you can think of a certain stock price that this should be at, and you’re anchored to that regardless of what’s going on. I mean, the market doesn’t care if you bought a stock at $200 a share and it’s at one 50, that’s irrelevant. But people will anchor to, oh, well this is how much I originally invested. So it’s either house money and they tend to gamble a little more with the winnings or no, I can’t sell a loser because I bought it at this price. That’s really kind of irrelevant. Alright, so there’s our tribute to Daniel Kahneman.
Dave:
Certainly not, I’m pretty sure I can only speak for myself. I’ve never heard of this person, but all the principles you just discussed are very interesting.
Steve:
Well, our tribute to him, not nearly as exhaustive as some of those that were in the Wall Street Journal or Fortune or Forbes. So feel free to Google that if you want to learn more there. The last thing I wanted to talk about, Dave, is I want to do, this is a little risky. I want to do a book review of a book that I haven’t read yet.
Dave:
Interesting.
Steve:
It’s
Dave:
Not risky because you set it up this way.
Steve:
Okay, well that’s
Dave:
Technically, Steve did a review of a book you didn’t read. It’s not like you didn’t say, Hey, that could be the glass half empty part of this book review.
Steve:
Yeah, I didn’t sandbag that one until you at the end, by the way, I didn’t read,
And it’s not that I don’t want to read it, but I’m somebody, I’m not going to pay for a book that I want to read if it’s going to be available on the library app that I like audio books. For me, that was kind of life-changing to discover audio books instead of physical books. Great for me, I can just listen to it while I’m doing other stuff. But I think I’ve got a couple weeks left before I am up in the queue to get this book. And it’s a book by Tony Robbins. You familiar with Tony Robbins?
Dave:
I’m very familiar with Tony Robbins. He does things that are basically going to make me better according to him.
Steve:
And
Dave:
A lot of times it’s positive stuff. And
Steve:
No, I am not going to sit here and knock him because I think as a personal motivator, he’s a life
Dave:
Coach guy,
Steve:
Life coach, all of that. I watched some of his Netflix documentary stuff and I was pretty jazzed up and fired up, yes, I can do this. I can conquer things. So I think he’s,
Dave:
He’s a motivational speaker and writer and they do motivate. The good ones really do for that moment in time. They get you motivated, but then ultimately it’s up to you to follow through
Steve:
Through on that. So he has written a couple, and I say written, I think generally what he’s doing is co-writing with somebody else, but he has written a couple of different personal finance books. I don’t think I’ve actually read any of the other ones either. But this latest one has been getting a little bit of criticism from different people because to boil it down from what I’ve listened to and read, and I have, even though I haven’t read the book, I have read a number of different reviews and criticism.
Dave:
You’re implying that Tony didn’t write the book,
Steve:
So he’s off the hook for that. But basically what it is, he talks about diversification. Diversification is the only free lunch in finance. Hey, we’re totally on board with that. We are.
Dave:
I just mentioned that earlier and we didn’t even prep for this podcast.
Steve:
Right? Totally agree with that. Diversification. Fantastic. And then he starts talking about how assets in the financial world have become more and more correlated, and I’m with him on this. This is true that if you look 30, 40 years ago, international stocks were maybe 50% correlated to US stocks. Now it’s something like 87, 80 8% correlated. So very highly correlated. You don’t get the same diversification from owning a global portfolio that you once did. Okay, I’m with him there. But what he says is the solution to this, and here’s where I don’t know all the details of what he’s recommending, but he’s talking about instead of using publicly traded investments in stocks and bonds to using private equity and private credit. So if you’re not familiar with the term private equity or you’ve heard it and you go, I don’t really know what that means, private equity just means that it’s not a publicly traded company.
And a lot of these private equity firms, they will buy these companies. Sometimes they are public and they take them private, sometimes they’re just privately held and they get bought up by these private equity firms. And what private equity firms a lot of the time do, they’ll install their own management, they’ll do a lot of cost cutting and things like that. But generally speaking, to get into private equity, you got to have a lot of money. This is the stuff that endowments are investing in, big, rich people are investing in. And it is not mom and pop main street investors putting money into private equity.
Dave:
But it might be Tony, because I just looked up his net worth and it’s a half billion dollars.
Steve:
I was going to say he’s got to be worth a couple hundred million. Just
Dave:
Looked it up. It’s 500 million.
Steve:
Alright. Maybe we should listen to Tony then, huh? But I guess the problem is, and the criticism that a lot of people have is basically what he’s doing with this book is saying, Hey, use private equity. Use private credit, which is the same idea with bonds. Instead of having publicly traded bonds that are bought and sold, these are private bonds. Use these private instruments and you’ll get better returns. And to do this go through my co-author just happens to be my co-author that runs a firm that does private equity and private credit. That’s where it would really, for me, set up a lot of red flags of, oh well, is he just chilling for his co-author here? Which actually might just be the author and pushing people towards whatever fund that they’re running there.
Dave:
Yeah. I’m going to go with yes. So far based on your not reading the book, but your book review so far.
Steve:
Well, and I will tell you that this is not the first time we’ve heard this concept. I mean, you and I can go back to hearing this concept, roughly speaking, I remember it back in 2009, 2010, I won’t name the different firms. There were a couple firms out there that were pitching this idea of private equity and some of these alternative investments. You can only get access to ’em and endowment funds and pension funds, but if you do it through us, you’re going to get the same sort of returns. And it just didn’t work,
Dave:
Did it? Did not.
Steve:
That’s
Dave:
Exactly what I was thinking of when you were starting to talk about all this stuff. I could confirm what Steve’s saying. It did not work for regular people
Steve:
And for whatever reason, if the deals they were getting just weren’t the same as the ones that the bigger investors could get. I think that’s a big part of it, is they’re going to have these sweetheart deals that you’re only going to be able to do it if you’ve got half a billion dollars to invest or more or something like that. So very wary of that. I’ll come back and give everybody an update when I’ve actually read or listened to the book and maybe he’ll change my opinion, but I’m a little skeptical of that.
Dave:
Right. So far, and this is, again, I hate because I don’t want to say I know everything because I don’t. This is just where I am right now. There’s a reason they call it private equity. If it was private equity, but kind of public, that’s what it would be called. It would’ve a longer acronym. Is that fair? Do super rich people get a better deal than I do? So far my analysis is yes.
Steve:
Yeah, totally.
Dave:
But you got to be super rich and just doing that quick check on Tony Robbins, and this is, again, whatever you deem super rich, I deem net worth 500 million, super rich.
Steve:
So you’d look at somebody who’s got a net worth of a hundred million and you’d tell them, Hey dude, you’re kind of poor. Get to work. I dunno, that’s so subjective. What is,
Dave:
I can’t put it into the terms of the private equity market, right? I’m just basically saying, you and I have explored this in the past and we’ve realized my premise so far, as far as we know is correct. There’s a reason they call it private equity. If you have an endowment fund you’re working on, cool. If you’re Tony Robbins, cool, but for most people, you’re not getting some sort of deal that people like us can wrangle somehow.
Steve:
Right. Alright, thanks for joining us. We hope everyone’s doing well, and we’ll check in again real soon.