Apr 29, 2022
Money for the Rest of Us w/ David Stein
- BRT S03 EP17 (116) 4-24-2022
Things We Learned This Week
- Investment vs. Speculation vs. Gambling: You must understand the difference and recognize which camp the product you’re considering is in
- The three drivers of asset class performance: These all relate to cash and earnings, cash flow, cash flow growth and change in valuation, and how each impacts the future price of an asset class
- The Efficient Market Hypothesis vs Adaptive Market Hypothesis: which combines behavioral finance w/ EMH
- Wayfinding: An alternative to traditional rebalancing of asset allocation - use current market conditions to help evaluate where you should increase / decrease your exposure, depending on how the asset is doing currently
- Modern Portfolio Theory vs. The Asset Garden Approach when adjusting asset allocation, focused on diversification between return drivers - Like landscaping, there are rules of thumb, but there’s freedom to create and build the portfolio. And it’s much easier to make changes.
Guest: David Stein, Money for the Rest of Us
https://www.linkedin.com/in/jdstein/
https://moneyfortherestofus.com/
https://moneyfortherestofus.com/about/
Book: https://moneyfortherestofus.com/how-to-invest-book/
David Stein’s Bio:
David helps individuals become better and more confident investors through his writing, audio, and video. He hosts the personal finance podcast Money For the Rest of Us. The show reaches more than 40,000 listeners per episode and has over 10 million downloads. The podcast has received mention from The New York Times, Forbes, The Chicago Tribune, and the U.S. News and World Report. David also provides investment insights and model portfolios to 1,000 members of the Money For the Rest of Us Plus community.
David Stein author of Money for the Rest of Us 10 Questions to Master Successful Investing Prior to launching the podcast, David was Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group, LLC, a $33 billion investment advisory firm. At FEG, David co-headed the 21-person research group. He co-founded the firm’s $2.2 billion asset management division where he developed its investment philosophy and process and was the lead portfolio manager. David’s former advisory clients include The Texas A&M University System, the University of Puget Sound, and the Sierra Club Foundation.
David splits his time between Idaho, Arizona, and locations around the globe. In his free time, he loves to bike, fly fish, hike, read, and spend time with his family.
Money for the Rest of Us – 10 Questions to Master Successful Investing book was published in 2019 by McGraw-Hill and is available in hardcover and e-book formats as well as an audiobook.
Money For the Rest of Us Plus is the premier investment education platform (membership) that can teach you to manage your financial assets like a professional. Membership gives you access to step-by-step video lessons, spreadsheets, and written materials to guide you as you build a diversified portfolio plan and adapt it as market conditions change.Re
Guides & Resources – Investing, Rebalance / Asset Allocation, Tail Risk, Inflation, REITs, TIPs, Gold, Oil, Bonds, Farm Investing, Frontier Markets & more…
His podcast, Money for the Rest of Us is “about money, how it works, how to invest it and how to live without worrying about it.” - with the goal of “demystifying investing for nonprofessionals, so they can invest more confidently”. David’s resources, book, etc. is all for the do it yourself investor to provide info, advice and a community.
Notes:
David invests in ETF’s, REITs, MLPs, and other low cost funds mainly, with some other investments like Bonds, Bank Loans (variable rate bonds), Land, Gold (5%) or Crypto, he is not picking individual stocks though. Example: Vanguard VT total market fund.
Money for the Rest of Us Book subtitle: 10 Questions to Master Successful Investing
Everyone should ask as they think about various asset classes -
- What is it?
- Is it investing, speculating, or gambling?
- What is the upside?
- What is the downside?
- Who is on the other side of the trade?
- What is the investment vehicle?
- What does it take to be successful?
- Who is getting a cut?
- How does it impact your portfolio?
- Should you invest?
Other Ideas from his book and writings:
Investment vs. Speculation vs. Gambling: You must understand the difference and recognize which camp the product you’re considering is in
Investing consists of "opportunities that have a greater likelihood of being profitable."
Speculation consists of "opportunities where the investment outcome is highly uncertain,"
Gambling is something else altogether – "opportunities that have a greater likelihood of losing money."
The danger of using historical returns: It’s the present and the future that matter, not the past, look at the possible future outlook for different asset classes
The three drivers of asset class performance: These all relate to cash and earnings, cash flow, cash flow growth and change in valuation, and how each impacts the future price of an asset class
Bond yields to maturity: Understand bonds, the impact of maturity periods, and how to include potential default risk
A bond's yield to maturity (YTM) is the internal rate of return required for the present value of all the future cash flows of the bond (face value and coupon payments) to equal the current bond price. YTM assumes that all coupon payments are reinvested at a yield equal to the YTM and that the bond is held to maturity.
Maximum Drawdown Risk: What is drawdown risk and the historical months to recover loses, and your exposure, how it impacts your investments in bad times
A maximum drawdown (MDD) is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period. Drawdowns present a significant risk to investors when considering the uptick in share price needed to overcome a drawdown.
The Efficient Market Hypothesis: Per David it’s flawed, and prefers Adaptive Market Hypothesis, and how it differs from the efficient market hypothesis
The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible.
According to the EMH, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. Therefore, it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can obtain higher returns is by purchasing riskier investments.
The adaptive market hypothesis (AMH) is an alternative economic theory that combines principles of the well-known and often controversial efficient market hypothesis (EMH) with behavioral finance. It was introduced to the world in 2004 by Massachusetts Institute of Technology (MIT) professor Andrew Lo.
Evaluating Investment Vehicles: All investments analysis needs to include liquidity, costs, structure and pricing, David likes closed-end funds and ETF’s vs picking individual stocks
Wayfinding: An alternative to traditional rebalancing of asset allocation - use current market conditions to help evaluate where you should increase / decrease your exposure, depending on how the asset is doing currently
When we know exactly where we are going, having step-by-step directions to our destination can be extremely helpful. The only requirement is to follow the steps.
The American explorers Lewis and Clark were wayfinders. They didn’t have a map as they explored the western United States looking for the easiest route to the Pacific. When you are wayfinding, you need to be prepared for the unexpected.
Investors are wayfinders. They only have a general sense of what might happen. There are no guarantees we will reach our destination. We get in trouble as investors when we forget we are wayfinders and believe outcomes are certain. That if we just follow the correct formula, we will reach the wealth level we desire.
No precise location, no map, Lewis & Clark analogy, no one knows market direction, uncertain
Modern Portfolio Theory: David does not believes this works, prefers “The Asset Garden Approach” when adjusting his asset allocation, focused on diversification between return drivers - Like landscaping, there are rules of thumb, but there’s freedom to create and build the portfolio. And it’s much easier to make changes.
The modern portfolio theory (MPT) is a practical method for selecting investments in order to maximize their overall returns within an acceptable level of risk. A key component of the MPT theory is diversification. Most investments are either high risk and high return or low risk and low return.
Dollar-Cost Averaging vs. Lump Sum Investing: this delves into the psychological side of investing, and how to allocate money consistently to keep investing, David prefers lump sum investing, and argues dollar cost averaging underperforms over time
Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals.
Reversion to the Mean –
Momentum ETF & Growth
Emerging Market – lower P/E, higher dividend
P/E vs long term historical average
Case Shiller CAPE Ratio
Lower P/E = higher returns over 10 years
US Stocks are 60% of global stocks
Risk more important than volatility
Risk Tolerance & asset allocation depending on your age and investing time horizon
Investors David likes:
Howard Marks – Oaktree Capital, talking risk in his Memos & books
Book – Wisdom of Finance by Mihir Desai
Rob Arnott of Reasearch Affiliates, contrarian value investor
https://www.researchaffiliates.com/about-us/our-team/rob-arnott
*some info c/o of Investopedia
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Investing Topic: https://brt-show.libsyn.com/category/Investing-Stocks-Bonds-Retirement
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