0:00 welcome to investing for idiots yes
0:02 you've come to the right place this is a
0:03 video for the Libra bag holder option
0:05 day trader the Wall Street bets
0:08 afficianado I'm making this video for
0:10 the people for the victims who find the
0:12 scams they're in featured on my videos
0:14 and today we're doing something a bit
0:16 different this is a series where we have
0:17 real experts on the show and a perennial
0:19 topic of this series is investing given
0:21 that so much of my work is investing
0:23 gone wrong we've had Patrick Boo the
0:25 playing bagel and today we're joined by
0:27 Ben Felix the whole point of this series
0:29 is to point people toward channels which
0:31 give a sound theoretical understanding
0:33 to finance and moving them away from
0:35 gambling and financial nihilism and
0:38 towards basic Common Sense investing
0:40 welcome to the show Ben I appreciate you
0:42 coming on if you don't mind I want to
0:44 start at the end in mind for those who
0:46 just watch you know the first minute
0:49 what is the optimal strategy for most
0:51 people not considering individual
0:53 circumstance for most people to put
0:55 their to allocate their money and then
0:58 we'll back up to why that is the case I
1:00 think you've said that inv investing is
1:02 a solved issue what do you mean by that
1:05 yeah I I call it a solved problem
1:07 because we have these tools called index
1:09 funds which is what you're I think
1:10 referring to in the question which are
1:12 funds that give you really lowcost tax
1:14 efficient exposure to an entire stock
1:16 market so the S&P 500 is an index that a
1:19 lot of people have heard of that's I'm
1:20 not saying that's the index people
1:21 should be investing in we can talk more
1:23 about that later but an index is a
1:25 representation of a stock market so the
1:26 S&P 500 it the way that they describe it
1:29 that S&P describes it is that it
1:31 represents 500 leading companies in the
1:34 US Stock Market and it's a
1:35 capitalization weighted index which
1:37 means that larger companies measured by
1:39 their size by their market
1:40 capitalization have more weight in the
1:41 index and smaller companies have less
1:44 weight so we have these things called
1:45 indexes we have these things called
1:47 index funds that all they do when you
1:49 invest your money in the index fund is
1:50 they invest your money in the stocks in
1:52 the index and that's a really efficient
1:55 way to get exposure to the stock market
1:58 and so I mentioned not just the S&P 500
2:00 there are indexes representing stock
2:01 markets all all over the world and so
2:04 you can use these tools to build a
2:05 portfolio that's going to give you
2:06 exposure to Global stock markets which
2:09 is kind of all most people need uh in
2:12 terms of building a really high quality
2:15 portfolio yeah so there's this so now I
2:17 want to thank you for that I think that
2:19 is the answer that basically I was like
2:21 looking for and I've heard so many
2:23 people say so many experts say but now I
2:26 want to back up to sort of the beginning
2:29 let's just start with a bit about you
2:31 and then I want to talk about why it is
2:34 kind of counterintuitive that in experts
2:36 would tell you sort of not to go with
2:39 experts there are active financial
2:42 advisors things like that and we'll get
2:44 into why you and I think I also think
2:46 that that is not the most prudent
2:49 strategy for you know uh most people not
2:52 to get into individual situations but um
2:55 start with a bit about yourself what is
2:56 your back I think your engineering to
2:59 start right like just like me I did
3:00 chemical engineering I did nothing with
3:02 it and uh I think you are the same
3:05 mechanical right yeah that's right you
3:08 you know yeah mechanical engineering at
3:09 at nor Eastern I'm I'm Canadian I live
3:11 in Canada but I went to North Eastern
3:12 University in Boston did mechanical
3:16 engineer engineering there and then I
3:17 came back to Canada and did an MBA in
3:19 finance after that and that's how I got
3:20 into into finance and like you I never
3:23 used my engineering degree went straight
3:24 to the NBA yeah why did you what made
3:27 you interested in finance why why were
3:29 you you kind of taken by the idea of
3:32 investing and I wasn't at all I I was I
3:37 was not taken by the by the idea of
3:38 engineering I I knew I I probably didn't
3:40 want to work as a mechanical engineer
3:43 but uh I I was playing basketball that's
3:44 why I was at nor Eastern I'm I'm 6 foot1
3:47 people don't often realize that because
3:48 they see me sitting down on my YouTube
3:50 channel uh so that's re really are you
3:54 joking no I'm dead serious like actually
3:57 610 I'm listed at 611 for like if you go
4:00 on the North Eastern website you can see
4:01 it from when I played uh oh man yeah wow
4:05 yeah so I played basketball that's why I
4:07 was at nor Eastern and then I came back
4:09 to Canada primarily for basketball I
4:11 came to play at a Carlton University
4:13 which is like I don't know what to
4:15 compare it to um the best basketball
4:17 school in Canada by far uh so I came
4:19 back to play there and I had to choose a
4:21 program an academic program so I went
4:23 there for basketball but it's like okay
4:25 I probably don't want to do a masters in
4:26 engineering uh maybe I'll do an NBA
4:29 because you know that's pretty flexible
4:30 with what I can do with it afterwards
4:32 and then I picked Finance for the same a
4:35 concentration of Finance for the same
4:36 reason that I picked an engineering
4:37 degree in the first place was that it
4:39 was kind of the hardest program I was
4:41 told mechanical engineering is the
4:42 hardest thing you can do and I was like
4:44 all right I kind of like mechanical
4:45 stuff I'll just I'll do that and then
4:47 same thing for finance like of all the
4:49 streams you can pick in the NBA Finance
4:50 is the hardest one so all right let's do
4:53 it and that's that's it but I was never
4:55 like I love investing or I love finance
4:56 that no I do now yeah no no I was going
5:00 to say that really bleeds through a lot
5:02 of your videos that actually you are
5:04 very interested in the research side of
5:06 Finance that's how I found your videos
5:09 is I was looking for somebody who talked
5:12 about not just like their opinion about
5:15 stocks but what the research actually
5:16 said and you'll often cite you know
5:18 journals and articles in your videos
5:20 which I really appreciate but it's
5:22 interesting so the counterintuitive
5:25 thing that I want to get at in this
5:26 video why I'm calling it investing for
5:28 idiots be besides the Prov of title is
5:31 that I think it is interesting and
5:34 deeply counterintuitive that in most
5:37 Industries expertise is how you get the
5:41 superior advantage in the field so if
5:45 you would want you know something done
5:48 right you hire an expert to do it for
5:50 you that is the intuition that is at the
5:52 heart of almost everything we do in the
5:54 world and there's like a saying you get
5:55 what you pay for right um there's a
5:58 reverse saying in Finance now which is
6:01 popularized by I think Jack Bogle which
6:03 the the founder of Vanguard where he
6:04 says in finance you get what you don't
6:06 pay for meaning that it's the reverse
6:09 and that often times hiring the best
6:13 wealth manag manager in the world will
6:15 lead to worse outcomes than doing the
6:18 very at this point now simple and dumb
6:22 thing and the idio like it almost feels
6:25 too dumb which is hold a very Broad
6:30 Diversified Index Fund not choose stocks
6:33 not choose timing not choose any of the
6:35 things that you would think you would
6:36 have to do if you want to achieve a kind
6:38 of
6:39 a above average is a bit misleading
6:41 because actually you're getting the
6:42 average but the getting the average is
6:45 in finance weirdly above average can you
6:48 break down why this is the case that
6:50 that that is deeply
6:51 counterintuitive so I think the average
6:53 return piece there that you just
6:54 mentioned is actually really important
6:56 that with with index funds I've heard
6:58 people say like well why would just
6:59 settle for the average return why
7:01 wouldn't I try and do better by by
7:03 picking stocks or timing the market but
7:05 I think if you look at what are average
7:07 returns like what are what are the
7:09 average returns of investors or what are
7:10 the average returns of actively managed
7:12 mutual funds they're way below index
7:15 fund returns so I think what you said is
7:17 not incorrect that you're getting
7:18 relative to other investors you're
7:19 getting above ad average returns using
7:22 index funds you're getting the market
7:24 return which is the average but if you
7:26 compare yourselves to yourself to other
7:27 investors uh or or other types of funds
7:30 I think you're getting an above average
7:31 return with index funds why is that the
7:33 case expertise is weird in financial
7:36 markets I think it's because financial
7:38 markets are competitive they're a
7:40 competition now if you have one skilled
7:42 person and nobody else is doing anything
7:44 to price stocks St stocks are priced
7:46 based on trading so if I think a stock
7:48 is worth more and you think it's worth
7:51 uh and you think it's worth less we
7:52 might have a transaction and and every
7:53 time that that happens it puts
7:55 information into stock prices now
7:57 everybody wants to make a profit if
7:58 there's one person pricing assets and
8:01 nobody else is there they they could
8:02 make a lot of money because there'd be a
8:03 bunch of mispriced assets and they could
8:05 go decide what to pay for them and and
8:07 they' they'd be become very wealthy very
8:08 quickly but that's obviously not the
8:10 reality there's a bunch of people
8:11 competing to be the one putting their
8:13 information into the price to try and
8:15 make a profit and that competition is
8:17 what sets stock prices but it also
8:19 results in a situation where you've got
8:22 if you've got two extremely skilled
8:23 traders to and like you know we talk
8:27 about active manager underperformance
8:29 and I think a lot of the times it almost
8:30 becomes pejorative where active managers
8:32 are dumb and I don't think that's the
8:33 case I think they're some of the
8:34 smartest people in the world like
8:36 finances become this brain drain for all
8:38 the other smart Fields so it's really
8:40 smart people and but they're competing
8:41 with each other to be the ones to to
8:43 make a profit and when you get that you
8:46 you get this thing called the Paradox of
8:47 skill where when the the players playing
8:50 against each other in a game are
8:51 increasingly skilled the outcome is
8:53 increasingly determined by luck rather
8:55 than skill take like NBA games for
8:57 example uh you take two NBA players that
9:00 are equally skilled and make them play
9:01 oneon-one against each other and they
9:03 play 100 games like the winners is going
9:04 to be determined by luck assuming
9:05 they're equally matched right uh yeah so
9:08 I think that's it there's there's a
9:09 paradox of skill and it creates a
9:11 situation where being skilled does not
9:14 lead to better outcomes and then for
9:17 investors the the you get what you don't
9:19 pay for comment is because for the
9:21 service of hiring someone to try and do
9:23 that for you you're going to pay a high
9:25 fee you're also going to have high
9:27 transaction costs because every time
9:28 they trade a there's a cost implicit or
9:31 explicit or or usually both and so net
9:34 of fees and costs trying to beat the
9:36 market on average is going to be a
9:37 losing game so you got those two pieces
9:40 one the outcomes are determined by luck
9:42 because all the players are so highly
9:43 skilled and two you're paying a cost to
9:45 participate in that game to try and beat
9:47 the market and so net of costs on
9:49 average you're going to lose it's a it's
9:51 a losing
9:53 game when you say it it it sounds simple
9:56 but it it is uh hard to get your head
9:59 around and I have you know I have a
10:02 bunch of uh you know family members for
10:04 example who will tell me like yeah I've
10:06 got this active manager he's charging me
10:08 you know sort of 1% and uh and I want to
10:11 like I want to shake them I want to just
10:14 tell them like this is gonna be horrible
10:16 for you but they just always tell me
10:18 like no no no this guy's a smart guy
10:20 he's a smart you know he's a smart guy
10:23 and
10:24 um and I've I've said something in the
10:26 past and and my wife has told me like
10:27 hey you got to stop this you got to stop
10:29 it's not you're not you don't need to
10:31 evangelize about this because for some
10:32 people they need this get they wouldn't
10:34 save the money if not for the fact that
10:37 somebody's holding on like if they if
10:38 they were in charge of these decisions
10:41 they wouldn't act as rationally as you
10:42 think they would act which is they would
10:44 just put it in you know an index fund
10:46 and just hold it can you there also is
10:49 this piece which I think is hard to expl
10:52 understand and wrap your head around
10:54 when you think about it in terms of like
10:56 textbook Math versus there's a
10:58 behavioral side of this too um how do
11:02 you think about Behavior behaviors as
11:06 they impact returns and how
11:09 do people work against themselves so to
11:12 speak I think there's like a saying like
11:13 we've met the enemy and the enemy is us
11:15 um that I think is true of most people
11:17 who are
11:18 investing yeah for sure I mean you look
11:21 at the data on how do investors perform
11:23 relative to the assets that they invest
11:25 in so you can look at that for indexes
11:27 you can look at for mutual funds
11:29 investors pretty much always
11:31 underperform so you take the a stock
11:33 index fund for example or a stock index
11:36 and and the index returns whatever 8% a
11:38 year or something like that investors
11:40 typically would earn uh less 7% or 6% or
11:43 something like that depending on what
11:45 asset class we're talking about explain
11:47 by
11:48 what that's the the difference what's
11:50 the explanation for the behavior no no
11:52 what what is causing that
11:53 underperformance are they just trading
11:55 it because they trade at the bottom and
11:57 they buy at the top it's it's bad
11:58 timeing decisions yeah so that's it's
12:01 it's really comparing money weighted and
12:02 time weighted returns I mean Finance
12:04 terms I guess but there's this Gap if uh
12:08 if people are investing at the top and
12:09 selling uh at the bottom there's going
12:12 to be a difference between the money
12:13 weighted and the time waited return the
12:14 mechanics that don't really matter but
12:17 that's why we see those those gaps it's
12:18 poor poor timing decisions and that's
12:21 really it's it's really everywhere and
12:22 it's been around for a long time but I I
12:24 think your your comment about the person
12:26 needing handholding is important because
12:28 there's a separation between
12:30 the investment strategy and the fact
12:32 that somebody may need investment advice
12:35 I'm I'm biased here because I'm the
12:37 chief investment officer of a wealth
12:38 management firm we use lowcost funds to
12:40 build portfolios like we believe all the
12:42 stuff that I'm saying on the investment
12:44 management side but I still do think
12:46 that there's room for handholding as you
12:49 called it but also other things like
12:50 Financial Planning and tax advice that
12:52 people need so I don't think those two
12:54 things have to be combined someone who's
12:56 giving Financial advice doesn't have to
12:57 be selling you crappy High fee
12:59 investment funds unfortunately that has
13:02 been the synonym for a while where
13:05 Financial advice has become synonymous
13:08 with like this self-dealing that is
13:11 happening where they're selling often
13:13 tools that they are getting kickbacks
13:16 from selling um so that is just an
13:19 unfortunate like you know I think
13:22 well-deserved reputation of the
13:23 financial it is well deserved yeah I
13:26 industry industry but um you touched on
13:28 something thing which I think is worth
13:30 talking about which is uh market
13:32 efficiency where you said you know as
13:35 the players get better then the outcome
13:38 is increasingly determined by luck which
13:40 brings me to a question which H are
13:42 markets getting more efficient as
13:46 information gets faster and the players
13:50 become more
13:52 sophisticated market efficiency is a
13:54 really really hard question to answer uh
13:58 whenever I ask academics about this on
14:00 my podcast they kind of laugh and like
14:02 how how are you defining market
14:03 efficiency how do you want me toine
14:04 market to Define market efficiency
14:06 market efficiency is is technically is
14:09 kind of the plain English definition it
14:11 means that prices reflect all available
14:13 information stock prices reflect all
14:15 available information now how do you
14:16 actually test for that to check like our
14:18 Market's getting more efficient there
14:20 are a lot of different ways none of them
14:21 are completely conclusive uh but if you
14:24 look at something like information
14:25 production so is is there is information
14:27 about individual stocks
14:29 uh being produced at at a higher rate or
14:31 or a lower rate than than the past uh I
14:34 think from measures like that markets
14:36 are at least as efficient as they've
14:37 been in the past possibly getting more
14:39 efficient but that's not the only thing
14:41 that that uh that matters like another
14:43 big one is active manager performance so
14:45 we talked about can active managers beat
14:47 the market and that's been pretty stable
14:49 for a very long time very few active
14:51 managers are able to beat the market if
14:53 markets were getting less efficient we
14:54 might see we might expect to see that
14:56 reverse the other thing so yes
14:58 information is more available yes
15:00 technolog is getting better the other
15:01 thing that we're seeing though as a big
15:02 trend is that a lot of people are moving
15:04 to index funds which means there are
15:06 fewer dollars invested with active
15:08 managers and the way that prices got
15:10 right in the first place is because the
15:11 active managers were trading on
15:13 information trying to make a profit so
15:15 this is a thing called the Grossman
15:16 stiglets Paradox it's basically the
15:18 Paradox is basically that markets can
15:19 never be perfectly efficient because if
15:21 they were there would be no more
15:22 information production it's kind of like
15:25 an equilibrium though in reality where
15:27 if if the pendulum ever swings too far
15:29 toward passive there will be
15:30 opportunities for active managers then
15:32 at least in theory they'll come back
15:34 make a profit for a bit and then markets
15:35 will be efficient again yeah because
15:37 fundamentally Index Fund investors are
15:39 sort of getting a free lunch of the work
15:42 of pass of active managers to determine
15:45 the price of stock the fair price of
15:47 stocks uh talk to me about about
15:50 diversification and what a type of risk
15:54 is that you can diversify away and
15:56 things that you can't diversify away
15:58 because I I think this is also something
15:59 that's counterintuitive where you go why
16:02 would I buy a basket of stocks when that
16:04 basket of stocks is for sure going to
16:05 have a bunch of losers like stocks that
16:07 are going to be terrible why would I not
16:09 just pick the stocks that I know are
16:11 going to be good you know I know hey I
16:14 believe in Tesla right I believe paler
16:17 Alex C whatever his name is uh that that
16:19 guy you know he's got he's got Big Ideas
16:22 Ben why don't I just invest in that
16:24 instead of your dumb idea where I you
16:25 know invest in these losers what is what
16:28 is the answer to that
16:29 yeah it's really easy to identify past
16:31 winners like we can say hey that guy's
16:33 really smart or hey this company's doing
16:35 really really well that's reflected in
16:37 the price and so I think that's a bit of
16:39 a trap that people get can get caught in
16:40 where people can end up paying a really
16:43 high price to invest in an objectively
16:46 good company but because you paid a high
16:48 price for it your investment returns are
16:49 going to suck we've seen that happen uh
16:52 throughout the course of financial
16:53 Market history again and again like it's
16:54 it's a again back to investor Behavior
16:56 it's something that people kind of love
16:57 to do they love to overpay
16:59 for exciting companies more generally
17:02 though the problem is most stocks
17:04 perform poorly they perform poorly
17:07 relative to treasury bills they perform
17:09 poorly relative to the market a few
17:11 stocks perform really really well so I
17:13 mean to your question can we identify
17:15 those winners ahead of time that's
17:17 really really hard to do and because
17:19 most stocks perform poorly you're much
17:20 more likely to pick losers than to pick
17:24 uh winners so if you look at people
17:26 building concentrated portfolios there's
17:28 a study that looks at this if you build
17:30 concentrated portfolios of stocks you're
17:32 much more likely to underperform the
17:34 market than to uh to outperform it so
17:38 that that's concentration uh the risks
17:40 that you can diversify away are company
17:42 specific risks or industry specific
17:44 risks so that's like take two companies
17:46 that are otherwise identical they're
17:48 exposed to the same uh the same big
17:50 picture risks but one Company CEO starts
17:54 doing some crazy stuff that the market
17:55 really doesn't like that company is
17:57 going to do relatively poorly its
17:59 returns are going to be relatively poor
18:01 compared to the other company uh because
18:03 of what the COO is doing not because of
18:04 anything that's going on in the overall
18:06 market so that that's company specific
18:08 risk that can be Diversified Away by
18:10 owning all of the companies in that
18:11 industry or or uh or sector okay right
18:15 and then when you diversify all the
18:17 risks away like company specific risk
18:19 you've got industry risk which you can
18:20 diversify Away by investing in other
18:22 Industries you've got country specific
18:24 risk which to an extent you can
18:25 diversify a way by investing in other
18:27 countries and then you roll all that up
18:29 you're left with what's called Market
18:31 risk the reason this matters is that
18:34 market risk is priced that means you
18:37 expect compensation for taking on Market
18:40 risk you do not expect compensation for
18:42 taking on individual company risk or
18:44 industry
18:46 risk is this that is this why they say
18:49 like diversification is the free lunch
18:51 in finance or like there there's some
18:52 saying about that because you're
18:55 actually getting above average or you're
18:58 getting extra expected return for not
19:02 having uh for not taking on more risk
19:04 where most of the time taking on getting
19:06 more return means taking on more risk
19:09 yeah yeah so if if you diversify with a
19:11 bunch of risky assets those stocks are
19:13 risky if you have a whole bunch of them
19:15 you're reducing your risk without
19:16 decreasing your expected return whereas
19:18 typically in finance if you want to take
19:20 less risk you have to expect lower
19:21 returns so why do all these people pick
19:24 stocks I think it's exciting I think
19:26 people think they're smart I think
19:27 there's a lot of overom confidence in
19:29 investing uh whenever I make a video
19:31 smart I I'm no that's why this video is
19:34 investing for that that is like the
19:35 whole premise is that kind of the most
19:38 genius thing to do as an investor is to
19:41 know what you don't know and sort of and
19:44 kind of take the counterintuitive
19:47 position of
19:49 of realizing that average returns are
19:52 really easy to get and above average
19:55 return slightly above average returns
19:56 are incredibly hard to get and almost no
19:58 one gets them that is like the very odd
20:02 thing at play here yeah and you're
20:04 introducing a whole bunch of risk that
20:05 you're going to get below average
20:06 returns by trying to get above average
20:08 returns and you're much more likely to
20:09 get below average
20:11 returns I think it's the overconfidence
20:14 uh people want to believe that that
20:16 there's a smart person out there or that
20:18 they're the smart person that can give
20:20 them a out performance but yeah it's uh
20:23 not not very well
20:24 supported okay so I got another another
20:26 question for you which is I hear about
20:29 AI Hot Topic robots Hot Topic I want to
20:33 screw you know Screw the total market
20:36 index I want to put my money in the uh
20:38 roll the dice in the AI funds in the you
20:41 know whatever uh why is that a bad idea
20:45 or a good idea is it a good idea so I
20:48 got a lot of questions about this when
20:50 Arc Kathy Woods fund or funds were doing
20:53 really really well like there were a
20:54 couple years or a few years where they
20:56 were just crazy rocket ships crushing
20:59 and so I started getting questions like
21:01 why would we invest because her
21:02 narrative was the index has all these
21:04 old boring companies that really suck
21:06 and they're not Innovative and we're
21:07 going to pick the Innovative ones they
21:09 going to do really well so I started
21:10 getting questions from clients like why
21:12 why wouldn't we why would we want to
21:13 invest in these old companies why
21:15 wouldn't we want to invest in the new
21:16 economy so I did a lot of work digging
21:18 into that I made a couple videos on it
21:20 on investing in technological
21:22 revolutions I did one on uh Superstar
21:25 fund managers or something like that too
21:27 uh which those two things of go hand
21:28 inand so what tends to happen why is
21:31 investing in Revolutionary Technologies
21:33 or or or new economy stocks historically
21:36 a losing a losing game it comes back to
21:38 asset pricing so when something's really
21:41 exciting so AI for example I think
21:44 crypto went through this too marijuana
21:45 stocks went through it too electric
21:47 vehicles I mean it's just recent history
21:49 but this is a this is something that
21:50 happens throughout history Railway
21:52 stocks went through this too so what
21:53 happens is people people realize this
21:55 thing is exciting they realize it's
21:56 going to be impactful and ass prices
21:59 start to reflect that and so the asset
22:00 prices shoot up and what happens when
22:02 asset prices shoot up more people hear
22:04 about this thing oh AI it's going to be
22:06 really big and the stock prices just
22:07 went up a bunch so more people invest in
22:09 it and the price keeps going up and that
22:11 cycle carries on for a while and you see
22:13 asset prices go up up up investors tend
22:15 to buy after they've gone up and then
22:19 they tend to come back down because
22:21 nothing nothing tends to be as as
22:24 revolutionary as quickly as I think
22:26 people expect
22:29 and you have a dilutive
22:31 factor don't you like the companies also
22:34 are issuing a bunch of new shares
22:36 they're also you're not capturing the
22:38 full um profits of that sector that you
22:42 think you are yeah that's one of my
22:44 favorite pieces of this whole thing so
22:45 you get high asset prices and one of the
22:48 reasons that they're high I've heard
22:49 someone called this the big Market
22:51 delusion which is basically that every
22:52 stock is priced as if they're going to
22:54 capture all of the market share of that
22:56 new industry but that's never what
22:58 happened so even if there is a massive
23:00 amount of new earnings that are going to
23:02 be available for an industry to capture
23:04 when it's a new exciting industry like
23:06 you said a lot of companies are going to
23:07 issue new stock a lot of new companies
23:10 are going to be created and so there's
23:11 this huge earnings pie but it's not one
23:14 company capturing it and the more
23:16 companies that go after that huge
23:17 earnings pie the lower the earnings per
23:19 share which is what matters to investors
23:22 which is what matters for stock prices
23:23 is going to be and so you can end up
23:25 with massive earnings growth for a new
23:27 industry and really bad earnings per
23:29 share growth for all the companies that
23:30 are issuing stock to try and try and
23:32 capture that that new opportunity and so
23:34 investors end up just kind of getting
23:36 getting hosed and this is like you go
23:38 back through history this happens again
23:39 and again and again High stock prices
23:42 exciting technology investors buy at the
23:44 peak and they get
23:45 smoked this this is what is so
23:48 interesting to me
23:51 about um finances there are all
23:54 these traps for otherwise smart people
24:00 to make catastrophic mistakes with their
24:04 finances because of things that seem
24:09 intuitive until you like know a bit more
24:11 of the picture like um you're not I have
24:14 a guy I won't say his name but a very
24:18 you know popular Finance guy on YouTube
24:21 and he was he's telling me behind the
24:23 scenes oh you got to invest you know
24:25 this smart you know industry and da d d
24:27 d da and he was making the case so
24:29 strongly to me that I was like what is
24:31 the like research on emerging market
24:34 like like some of these like really you
24:35 know interesting Industries and that's
24:37 when I found your video on I was like oh
24:39 this is not the easy buy that I thought
24:42 it was where it's like yeah just buy a
24:44 few of these you know hot AI stocks or
24:46 hot robot look it's going to be the
24:48 future it's not as simple as I
24:50 identified as if not as if everyone
24:53 can't see that Ai and robots are going
24:55 to be an important part of the the
24:57 future anyway to say nothing of that um
25:00 I want to touch on an interesting piece
25:02 which is that even though we all know
25:05 past performance is no indicator of
25:06 future you know results we all kind of
25:10 behave a little bit differently than
25:11 that everyone sort of behaves as if the
25:13 opposite is true and I want to talk
25:16 about us versus International right this
25:19 is a big
25:21 conversation um where the US has sort of
25:24 especially in the past decade or so has
25:27 sort of crushed um and so there is a
25:30 narrative that crops up every time
25:32 something like this happens which is
25:35 well I just want to abandon this loser
25:38 which is everybody else but the US US
25:41 number one we're the Kings sorry Canada
25:44 you guys are you know you guys
25:47 are sorry I'm just it's you're not
25:49 performing I'm dumping the loser for my
25:51 portfolio in theory intuitively like if
25:55 you just didn't know anything else it
25:56 kind of there's some tendenc to believe
25:58 that idea can you explain why this might
26:00 be a problem and explain the trend of us
26:04 assets that have become higher priced PE
26:07 wise relative to other International
26:09 assets AKA is investing in international
26:12 stocks a dumb
26:13 idea yeah so the the US market has been
26:17 wild for for the last 15 years it's been
26:21 just I mean incredible insane like
26:24 anyone that was not investing in the US
26:26 over that period like you you you you
26:28 missed out on a lot of returns and you
26:31 don't get those back like that's it uh
26:35 which which is one of the reasons that
26:37 you know even though we're about to talk
26:38 about us expected returns maybe being a
26:41 little lower than the past I don't think
26:43 that means anybody should get out of the
26:44 US market because I could have sent I
26:46 could have said the same thing five
26:47 years ago and here we are the US market
26:50 has been
26:51 incredible uh so what has happened over
26:54 the last 15 years but really over the
26:56 last 30 or so years years is that us
27:00 stock prices have gotten higher relative
27:02 to their
27:04 fundamentals and that the fundamentals
27:06 have been they' been good um like
27:07 there's no question there the US market
27:09 is objectively strong economically uh
27:12 but but the other thing that's happened
27:14 is the valuations of US Stocks have
27:16 gotten Higher and Higher and Higher and
27:18 right now if you look at the the the
27:19 Schiller price earnings ratio which is
27:21 one way to measure stock market
27:23 valuations it's you know it's not as
27:26 high as it was in the year 2000 but it's
27:28 really high Ben it's really high it's
27:31 about as close as it's been since since
27:34 then since the 20 year 2000 and you know
27:37 it's not conclusive by any means but
27:40 typically when stock prices are high
27:42 expected future returns are low and
27:44 realized future returns are are low like
27:46 if you go and sort historical US market
27:49 returns by their starting Cape they're
27:51 starting cyclically adjusted price
27:52 earnings ratio higher starting capes are
27:55 ass explain what you just said what's a
27:57 what's a cape I'm sorry sorry sorry
27:59 cyclically adjusted price earnings ratio
28:00 so it's a way of measuring stock market
28:02 valuations it's the 10year smoothed real
28:05 earnings of companies yeah so you're
28:07 measuring the prices relative to that
28:08 smooth earnings figure and that just
28:10 helps to balance out big changes in
28:11 earnings from year to year and so that
28:14 that measures really high right now
28:15 meaning meaning buying a dollar of
28:17 earnings of us company earnings is
28:19 really expensive right now compared to
28:20 history and historically that has led
28:23 had been associated with lower future
28:25 returns now what does this mean for for
28:28 does international investing make sense
28:30 if you look back to 1980 or so up until
28:33 now a huge portion us has completely
28:36 obliterated International stocks over
28:38 that period and a huge portion of that
28:41 difference has come from rising
28:44 valuations and so if we think about is
28:46 the same thing going to happen for the
28:47 next 20 years for the next 30 years it's
28:50 it's really hard to say that valuations
28:52 us valuations are going to keep going up
28:54 the way that they have over the last 15
28:56 or so years to deliver the type of
28:58 returns that people might expect when
29:00 they say oh I'm only going to invest in
29:01 US Stocks so I think that's a little bit
29:03 of a trap uh currently expected returns
29:06 are low uh they're low partially because
29:09 past returns have been high which has
29:11 led to increasing valuations and so
29:13 people see the past returns and they
29:14 project that into the future but in
29:17 reality they should probably probably if
29:19 anything be expecting the opposite lower
29:21 returns now if we look at uh US versus
29:24 International stocks throughout history
29:26 I looked at this a while ago I looked at
29:28 10year rolling periods from I think 1900
29:30 to 2023 or something like that and it
29:33 was about 60% of the time that us beat
29:36 International which is like it it won
29:39 most of the time but it wasn't all the
29:40 time by any means it wasn't what you'd
29:43 expect if you were only alive from 2010
29:46 or something that's right that's right
29:48 so yeah like I I I think International
29:51 divers diversification makes sense I
29:52 made a video on it I I diversify
29:55 internationally the US is only one part
29:56 of the world it currently makes makes up
29:58 about 65% of the global stock market
30:01 which is a lot uh it's increased each
30:04 year partially because valuations have
30:06 been going up and up uh but there's a
30:08 huge portion of the global stock market
30:10 that is not the US and the US I don't
30:13 think will perform the way it has in
30:14 recent history forever and historically
30:17 when the US has faltered when it's had
30:18 lower returns International returns have
30:20 been better relatively speaking and
30:23 that's diversification it's like basic
30:25 this is another way to diversify it's
30:26 just interesting because people who talk
30:28 about diversification especially in the
30:30 US are usually talking about us Equity
30:34 diversification they're not actually
30:35 they don't want to diversify to the rest
30:37 of the world they're like they actually
30:39 want to bet on their country there's a
30:41 bit of a country preference of you know
30:44 and and and we have uh historical
30:47 returns we look back and we go see look
30:48 we proved it we're we're the best we
30:51 want to but it is interesting like the
30:53 same I I I find this because I follow
30:56 some of these um there's this community
31:00 called the bogleheads have you heard of
31:01 these guys oh I've heard of them yep
31:03 these bogleheads uh they're they're like
31:06 people who kind more or less subscribe
31:09 to the the theories of Jack Bogle the
31:11 Vanguard kind of father of uh index
31:15 investing they and to some I don't want
31:17 to treat them all as a monolith but some
31:19 of them have issues with this idea of
31:22 international like most of them are like
31:24 look even people who in theory
31:26 completely subscribe to the idea of
31:29 diversification sort of half subscribed
31:31 to it cuz they go look I don't want to
31:32 really hold that much you know I back
31:34 tested this and I'm a little smart I
31:36 backed and I found out that you know
31:37 International is not worth holding so
31:39 I'm fully us and then Jack Bogle even
31:41 himself is like I don't hold any
31:43 International I I hold like and Max 20%
31:46 something like that
31:48 so
31:50 do if we are looking at this from what I
31:53 wanted to give my audience is no advice
31:56 just a theoretic
31:58 understanding a framework for how to
32:00 think about this in my mind this is an
32:02 irrational side of both Jack bogle's
32:06 philosophy and in the philosophy of a
32:08 lot of people who even subscribe to
32:10 diversification if you really subscribe
32:11 to it you kind of have to subscribe full
32:14 send unless you're making arguments
32:16 about like tax efficiency of
32:18 international like I guess I guess but
32:20 uh what what is your thought about that
32:22 do you think that the the most sound
32:25 theoretical framework is just buy
32:27 everything
32:29 and if that's true do you buy more than
32:30 just equities do you buy every like
32:32 Commodities you buy oil yeah yeah yeah
32:35 what what is your answer yeah so I I
32:38 think on the international
32:39 diversification piece if someone wanted
32:42 to be only us
32:43 Equity it's it's probably not the end of
32:46 the world I don't think it's a good
32:48 decision but there are worse countries
32:50 to invest 100% of your wealth in like
32:52 the US is 6 it's 65% of the global
32:54 market and it it it has companies that
32:56 do have exposure to markets all around
32:59 the world right it's not it's not quite
33:01 globally Diversified because us
33:02 companies that sell overseas are going
33:04 to perform differently than companies
33:05 overseas so it's not perfect but again
33:09 if if you wanted to invest in one
33:10 country the US is probably the way the
33:12 way to do it I do also think for us
33:14 investors like you mentioned tax there's
33:16 also currency issues costs there are
33:19 reasons to have Home Country bias if
33:22 you're in the US or elsewhere like in
33:24 Canada many people have a home country
33:25 bias and I think to an extent that can
33:27 make sense
33:28 just because of of the frictions of
33:30 owning foreign stocks there's other
33:31 weird stuff too that you can start
33:32 thinking about like the risk of
33:35 expropriation by Foreign governments in
33:37 times of conflict like those are real
33:39 things that are worth considering and
33:41 thinking about
33:42 diversification uh so I you know I don't
33:45 think it's the end of the world if a
33:47 us-based investor said I'm going to
33:49 invest everything in US Stocks I'm not
33:50 recommending that or suggesting it and
33:52 I've argued against that including with
33:54 the bogleheads community many times
33:55 every time I make a video on
33:56 International diversification they lose
33:58 their
34:00 minds
34:02 yeah by the way I like this guy I like
34:05 that I'm not I'm not hating I I I think
34:07 uh they're one of the more sound you
34:10 know um Financial groups out there
34:12 actually but and and they have you know
34:14 interesting discussions but it is
34:17 something that's cropped up that I think
34:18 is interesting because I'm like wow this
34:21 uh knowing the theoretical underpinnings
34:24 and actually believing in it when you
34:26 have all this data that that kind of
34:28 pushes you towards well the US seems so
34:31 good um is is hard
34:34 to it's kind of hard to argue against
34:37 the past performance of a guy who's like
34:38 I invested in the US in the last 40
34:40 years and I you know everyone who
34:42 invested in Fe you know International is
34:44 an idiot compared to me and like the
34:46 yeah you know in theory no yeah not not
34:50 in theory but I guess in practice he's
34:52 right in those 40 years he was right you
34:54 know correct just like if you invested
34:57 in Nvidia for the last 10 years and I'm
34:59 going to come to you and say hey you
35:00 shouldn't have shouldn't have done that
35:02 and they would say well in theory you're
35:04 right in practice you know you're wrong
35:07 yeah I think be there there's a little
35:09 bit of rear viw mirror bi bias because
35:12 the US market has done so well on recent
35:14 history but you go back like from 2000
35:17 to 2010 US Stocks returned
35:20 zero for 10 years it's like those those
35:24 those periods happen and over that
35:25 period uh other other St elsewhere did
35:28 did better I mean even in the US I don't
35:31 know if we're going to talk about this
35:32 but even in the US the US market which
35:34 is what everybody sees the past
35:36 performance of right now was flat us
35:38 small cap value stocks over that 20120
35:41 period did incredibly well that's not
35:43 quite diversification that's not like an
35:45 appropriate term for it um but investing
35:48 in something other than the US market
35:51 capitalization weighted index can make a
35:54 lot of sense in some cases the theory
35:56 piece of that is is pretty simple if
35:59 markets are efficient uh the global
36:01 portfolio of assets is the theoretically
36:04 optimal portfolio and that like that's
36:07 the it's pretty simple that's the basic
36:09 argument for why you should be globally
36:12 Diversified okay question on top of that
36:16 because you say that Ben you say that
36:18 but you don't do that you don't do that
36:21 in your own life you do a little thing
36:23 called the slice and the factor tilt
36:26 yeah what are the uh you know see I've
36:29 done my research I've done my homework
36:31 what are the
36:32 factors uh in the F French model what is
36:35 the F let's back up what's who's
36:38 fam and does he know French and what are
36:41 these things I think we have to back up
36:43 even further actually I think we have to
36:44 go back one step further to this is for
36:47 idiots B yeah we're going for going for
36:49 idiots yeah I'm G to I'm going to do my
36:51 best here so we talked about Market risk
36:53 earlier you can diversify everything
36:54 away uh and you end up with Market risk
36:57 and that's the one priced risk that's
36:58 the risk you expect compensation for for
37:01 taking okay uh that's you get that by
37:03 owning a an index fund a total market
37:06 index fund so that idea really comes
37:09 from a 1964 paper in the Journal of
37:12 Finance by a guy named Bill Sharp who he
37:14 won the Nobel Memorial prize in economic
37:16 Sciences for this this work he came up
37:20 with this thing called the capital asset
37:21 pricing model the capm and this model
37:24 basically predicts I hope this is not
37:26 too nerdy but it basically predict
37:27 predicts that uh expected returns are
37:30 explained by exposure to Market risk so
37:33 you you take on Market risk you get you
37:35 get an expected return if you take on
37:37 more Market Risk by taking by owning
37:40 stocks that have a higher Market beta
37:42 that's pretty Nery what talk but riskier
37:45 stocks should have higher expected
37:47 returns in his in his model uh but it's
37:50 a single Factor model meaning Market
37:52 risk is the only risk that explains
37:55 expected returns so that's 1964
37:58 from then until the '90s there were a
38:01 whole bunch of things that were
38:02 violating that that model so there were
38:04 a whole bunch of types of stocks where
38:05 if you looked at their capm if if you
38:08 analyze them through the lens of the
38:09 capm it looked like they had higher
38:12 returns that were too high for the
38:14 amount of Market risk that they were
38:15 exposed to so that could mean two things
38:18 it could mean markets are inefficient
38:20 and that there are all these profit
38:21 opportunities these risk-free profit
38:23 opportunities for people to take or it
38:25 could mean that the capital asset
38:27 pricing model was not the best model to
38:29 to to explain how assets are priced to
38:31 explain what risks are incorporated into
38:33 stock prices so this is where F and
38:35 French f is the guy who came up with the
38:37 idea of market efficiency in the 1960s
38:39 and 70s and his co-author Ken French uh
38:43 they came up with the idea that maybe
38:45 there are more than the one market risk
38:47 maybe there's more than one risk that
38:48 investors care about when they price
38:50 assets because the the capam was
38:53 empirically wrong meaning you could find
38:55 lots of way lots of places where it was
38:57 not not working yeah so they they came
38:59 up with this uh a three Factor model
39:02 where they said it looks like investors
39:04 probably care about Market risk but also
39:06 the specific risk of small stocks and
39:08 the specific risk of of value stocks and
39:11 those were two of those empirical
39:13 irregularities is this dumb enough I
39:15 don't know like we be no yeah this is
39:17 fine no you want to explain value versus
39:19 growth real quick yeah yeah okay so
39:21 value the way that F and French measure
39:23 it they they measure price relative to
39:25 book value so the book value is like the
39:27 just the value of a company's assets and
39:29 then its price is the value of its
39:31 assets plus the discounted value of
39:33 future cash flows so basically if if
39:35 people think a company's going to do
39:36 really badly in the future it might
39:38 trade at its Book value like this
39:39 company's going to generate no profits
39:40 it really sucks right if a company's
39:42 going to do really well it's going to
39:43 have a really high price relative to its
39:45 Book value so a growth stock would be a
39:47 high price relative to book value stock
39:50 a value stock is a cheap stock it's got
39:51 a low price relative to its Book value
39:54 so they had observed that value stocks
39:56 tended to beat grow stocks
39:58 over time likewise they'd observed that
40:00 small companies measured by their market
40:01 capitalization had tended to outperform
40:03 big companies so they added these two
40:06 independent factors to the asset pricing
40:08 model and all of a sudden a lot of those
40:10 empirical irregularities that the capm
40:12 was failing to explain they kind of went
40:13 away so from that paper this whole field
40:16 of of financial economics was born
40:18 called uh multiactor asset pricing which
40:21 is really the study of like how are
40:23 assets priced like what what information
40:25 goes into the price of a stock what do
40:26 investors car about uh so they had that
40:29 three Factor model and they later in
40:30 2015 came out with a five Factor model
40:34 let's not talk about the five let's just
40:35 let's just do let's stick with the okay
40:37 for now for now yeah that's that the
40:39 three Factor model is really the it
40:41 explains the the the capm explained like
40:44 two-thirds of the differences in returns
40:46 between Diversified portfolios the three
40:48 Factor model brought that up to about
40:49 90% that means like if you take two
40:51 actively managed portfolios for example
40:54 and ask why are their returns different
40:56 the capm is going to explain about 2/3
40:58 of it the the three Factor model is
40:59 going to explain about 90% of it the
41:01 five Factor model explains about 95% so
41:03 there's definitely some diminishing
41:05 returns that is to
41:07 say their returns are explainable as a
41:11 function of the amount of risk they're
41:13 taking on that is fundamentally their
41:16 the whole idea is exactly that yeah
41:19 so because this is something that was
41:21 con that was confusing me when I first
41:23 learned about this is I was like oh are
41:25 the factors like another way like
41:27 diversification to get sort of this uh
41:29 free lunch like I just buy more small
41:33 cap index funds and I buy more value
41:36 stocks and I just get better returns as
41:39 opposed to people who buy the whole
41:41 market index is that what you're
41:43 saying well theoretically there are
41:47 independent risks that a lot of
41:49 investors probably should not be taking
41:51 and that is why they're compensated so
41:54 the market portfolio in theory the the
41:56 market capitalization weighted like you
41:57 go and buy the market index fund that's
41:59 the optimal portfolio for the average
42:02 investor now if you're not the average
42:04 investor if you're in a position to take
42:06 more risk than than the average investor
42:08 and take more risks that show up at
42:10 really bad times than the average
42:12 investor like risks that will show up at
42:15 the same time that you might lose your
42:16 job somebody who has a job that's
42:18 exposed to those types of risks they
42:19 maybe shouldn't be investing in value
42:21 stocks someone who's retired for example
42:25 and doesn't depend on their income at
42:26 all Maybe they can take a little bit
42:27 more Risk by tilting toward toward value
42:30 stocks but they're they're not for
42:32 everybody and they are risk at least in
42:35 in the F French thinking they're risk
42:37 premiums which means like no it's not a
42:39 free lunch it's an additional risk that
42:42 you're taking and doing it can suck like
42:45 if you were investing in value or small
42:47 cap value stocks over this recent period
42:48 where the US Market's been going nuts it
42:50 hurt like I I have a value tilt in my
42:53 portfolio and it sucks yeah because
42:55 growth actually has been value doesn't
42:57 always beat growth and growth has been
42:59 killing yeah um so anyway I wanted to
43:04 kind of uh bring that up because it's an
43:06 interesting you know um Deep dive on the
43:10 specifics of you know diversification
43:12 people talk about these Factor tilts
43:14 they're not talking about the same thing
43:16 as diversification where you get sort of
43:18 an increase in expect expected returns
43:20 for no additional risk you are getting
43:23 an increase in expected returns for
43:25 taking more risk just like if you were
43:27 to have you know 100% equities versus
43:30 having 80 20 bonds or something like
43:33 that you would get an expect more return
43:35 but you're taking on more total risk um
43:39 I think probably we should touch on
43:41 bonds a little bit everyone kind of is
43:44 bored to death by bonds but for the
43:46 first time ever they've become a little
43:48 bit interesting well at least the first
43:49 time in sort of my investing lifetime um
43:54 where they're actually paying something
43:56 how do you think about Bonds in
43:59 somebody's portfolio so far we've just
44:01 been talking about equities but that is
44:03 not sort of the uh the commonly
44:06 understood way to invest because if you
44:08 want to diversify you should also be
44:11 thinking about diversifying away from
44:12 just pure Market risk as well depending
44:14 on how much risk you want to take what
44:17 is the kind of theory behind why someone
44:20 should consider Bonds in their portfolio
44:22 what are they maybe just jump into that
44:26 sure so stocks pieces of equity
44:28 ownership in a company you're
44:29 participating in in the expected future
44:31 earnings of a business and because of
44:33 that earnings are they can fluctuate a
44:35 lot businesses can have bad times and so
44:37 stock investors are exposed to a lot of
44:39 risk so that's investing in a company's
44:41 stock there are also these things called
44:43 bonds which is another way for companies
44:44 to raise Capital if they don't want to
44:45 issue stock they can issue bonds and
44:48 that's they're effectively borrowing
44:50 money so if you buy a bond you're kind
44:51 of lending money to a company or to a
44:53 government or whatever and they're going
44:55 to pay you interest they're called
44:56 coupon payments and then at the end of
44:58 the when it when it matures they're
45:00 going to give you your principle back
45:01 the the other interesting thing is that
45:02 if a company goes bust stockholders
45:04 usually get zero but Bond holders often
45:08 have some claim on assets so there's a
45:09 couple different reasons there like
45:10 you've got guaranteed payments you've
45:11 got principal at maturity and you've got
45:14 potential claim on assets in a worst
45:15 case scenario so all of that together
45:18 suggests that bonds are a little bit
45:19 safer than stocks which you know it's
45:22 more complicated than that but that's
45:24 kind of step one they're a little bit
45:25 safer yeah want to talk about what is
45:28 risk later if you have if you have time
45:30 I I don't want to take too much of your
45:32 time but
45:33 um okay the point is a little bit lower
45:37 downside in the in theory bonds have a
45:40 lower uh downside risk of losing money
45:43 especially when you talk about what a
45:45 lot of people are thinking of when they
45:46 think of bonds at least for their
45:48 Investment Portfolio is some type of
45:49 government bonds or highgrade bonds um
45:54 for a while the us especially has been
45:57 in an odd position I don't know the
45:59 interest rate situation around the world
46:01 but the US was in the interesting
46:03 position of paying very little for bonds
46:06 so there was you know the what's
46:09 sometimes known as like the risk-free
46:10 rate for the least risky thing we can
46:14 think of is like sort of what the
46:15 government going bust um so the closest
46:17 thing to risk-free as you can get was
46:20 basically nil I mean nearly nil um so
46:24 how should people think of bonds and and
46:27 there's long-term bonds there's
46:29 short-term bonds there's medium-term
46:32 bonds I
46:35 ironically these are have different
46:37 types of risk because when I first
46:39 understood bonds I was like oh well the
46:40 longterm seem the safest get a 30-year
46:43 Bond you're guaranteed to have that
46:45 payment for like what's the risk can you
46:48 explain the different types of risk of
46:51 short medium long-term bonds yeah really
46:55 question no it's it's a great it's great
46:57 question it's it's not an investing for
47:00 uh idiots question but but I love it but
47:02 I love the
47:03 question okay so shorter maturity bonds
47:06 are going to be really low in volatility
47:09 so volatility is like the price can
47:11 change if you buy a a short or treasury
47:13 bill for example like it's basically
47:15 like cash like you're going to earn some
47:16 interest it's not going to move around
47:18 the price is not going to move around as
47:19 you go longer out in maturity the price
47:21 is going to move around more and more uh
47:23 day-to-day based on changes and things
47:25 like interest rates break that down
47:27 because if I buy a 30-year Bond today at
47:30 5% just so everyone's
47:32 clear I will if I wait the full 30 years
47:36 the price doesn't fluctuate and the
47:37 interest rates don't fluctuate so why
47:39 are you saying that the price
47:41 fluctuates it if all of a sudden
47:43 tomorrow so you've got a bond that's
47:44 paying you 5% if all of a sudden
47:46 tomorrow I can go and get a bond for 6%
47:49 your bond is going to be worth
47:50 relatively Less in the in the market so
47:53 it'll be repriced based on what the new
47:55 what the new rates are and if you went
47:56 to sell it you're not going to get your
47:58 principal back so and because because
48:00 assets are priced daily you're going to
48:02 see a price fluctuation the longer you
48:04 go out and maturity the more extreme
48:05 those price fluctuations are going to be
48:08 so at like the 30-year Mark you they can
48:10 be extremely volatile but now back to
48:12 your question what is risk so for short
48:13 maturity bonds uh you're not going to
48:15 have any volatility which is one way to
48:16 think about risk you're also going to
48:18 have a relatively low interest rate uh
48:21 and if you look in the in the data
48:23 around the world for how to bills like
48:25 short very short-term government debt
48:27 obligations how do they perform they're
48:29 there's a pretty good chance you're
48:30 going to lose money in real terms
48:33 holding very short-term debt so they're
48:36 not
48:36 volatile but there's a good chance they
48:38 won't keep up with inflation so you're
48:40 not taking on volatility risk but you're
48:42 taking on the risk of losing your
48:43 purchasing power if we go to the other
48:45 end of the spectrum uh it's nominal
48:49 bonds what we're talking about so bonds
48:50 that don't adjust for inflation there
48:52 are also real bonds or tips in the in
48:54 the states that do adjust for inflation
48:56 it's this is an idiot's class it's hard
48:59 it's hard to ignore them so I I'll talk
49:02 though about long long-term bonds like
49:04 you mentioned earlier if you if you have
49:06 a a nominal liability and that's
49:08 important it's frustratingly complicated
49:10 but it's important if you have a nominal
49:12 so it's $100,000 but it's a $100,000
49:14 nominal so it's not going to change in
49:15 in real terms like there's no inflation
49:17 on this liability that you have right
49:19 and you buy a bond for that you're going
49:21 to get your interest over time and
49:22 you're going to get your principal back
49:24 at maturity and even the price
49:26 fluctuations in the inter term are not
49:28 going to matter to you because you have
49:29 this 30-year liability that you need to
49:30 fund and you don't care about the end
49:31 term so it's not it's going to be
49:33 volatile uh but it's going to hedge your
49:36 future
49:37 liability the problem is most
49:39 liabilities are not nominal like I don't
49:43 think an individual house like you or I
49:45 do not have nominal liabilities I don't
49:47 think in in any anything like there's no
49:49 nothing that I'm going to want to buy in
49:50 the future that's not exposed to
49:52 inflation insurance companies have
49:54 nominal liabilities because someone buys
49:55 a million dollar insurance policy it's
49:57 going to be a million dollar insurance
49:58 policy in 30 years or whatever uh but we
50:01 we households people want to buy stuff
50:04 food whatever those are real liabilities
50:07 so a nominal Bond even if it perfectly
50:09 Hedges a nominal liability can be
50:10 extremely risky in real terms and so
50:13 this gets to the the really interest
50:15 interesting thing about now you can buy
50:16 you can buy an inflation protected bond
50:18 to hedge that real liability um but
50:20 bonds more generally nominal bonds how
50:22 do they fit into portfolios they reduce
50:25 your volatility for sure bonds to your
50:27 stocks reduces your
50:28 volatility but they probably decrease
50:32 your ability to maintain purchasing
50:34 power in the long
50:36 run and so we should yeah we yeah we
50:39 should
50:40 first we need to we need to probably
50:42 Define what volatility is even though
50:44 we've been talking about it for a while
50:47 because most of us myself included we I
50:50 usually think of risk in just in terms
50:54 of volatility like you know the the risk
50:57 that price will go up or down and the
50:59 the size of those swings um but that is
51:04 not all that risk is risk is actually
51:06 very hard to Define anyway go ahead
51:08 what's
51:09 volatility uh it's the price how much
51:12 the magnitude of price changes I guess
51:14 is one way to think about it so a stock
51:16 is going to be volatile it's going to be
51:18 worth you know $10 today but it might be
51:19 worth $15 tomorrow or $5 Bitcoin is
51:22 volatile you know Bitcoin one day it's
51:24 worth you 10,000 one day it's worth
51:26 100,000
51:27 um and then as compared to that we talk
51:30 about bonds as being less risky what do
51:33 we mean by that we mean they are going
51:35 to be subject to lower price
51:39 fluctuations but that as you say is not
51:42 the only risk a huge risk that we you
51:45 know all are concerned with is okay
51:48 in 30 50 80 years when you know when I
51:52 need to fund some retirement do I have
51:54 enough money at relative to uh my
51:59 standard of living and infl the
52:01 inflation that has happened during that
52:02 period of time that is a huge risk that
52:06 and there is an argument maybe you could
52:08 give it that equities having equities as
52:11 part of your portfolio actually Dr risks
52:14 that yeah so equities are very risky in
52:17 the sense that they're volatile and they
52:19 do have an uncertain long-term outcome
52:21 like there there's no sane world where I
52:23 would say that investing in stocks is
52:25 going to give you a guaranteed
52:27 inflation adjusted return the long
52:28 there's still a chance you lose money
52:30 but relative to nominal
52:33 bonds uh Bond stocks have historically
52:36 been much safer there's a paper on this
52:40 that's not published yet it's going
52:42 through like the conference uh cycle and
52:44 stuff and it's it's getting interesting
52:45 comments I've been talking to the author
52:47 about it the whole time but it's uh the
52:48 paper's called challenging the status
52:50 quo it's basically saying that the
52:52 status quo is that people think they
52:54 should start out investing in stocks
52:56 when they younger and then add bonds as
52:58 they get older because bonds are safer
52:59 and that's like you know Common Sense
53:02 textbook and so their paper basically
53:04 shows if you go and look at the they use
53:06 global data going back to 1870 and they
53:09 did something called bootstrap
53:10 simulations basically they they created
53:12 a whole bunch of hypothetical scenarios
53:14 using actual historical data but it gave
53:16 them way more potential hypothetical
53:18 scenarios based on historical data than
53:20 we actually have historical data right
53:22 and what they found in those simulations
53:24 is that the optimal portfolio for the
53:26 whole life cycle is 100% stocks now this
53:30 is like it's pretty controversial
53:32 because while their data show that like
53:34 a lot of people get really upset that
53:35 anybody would possibly say that but it's
53:37 at very at the very least it's a very
53:39 interesting finding and it's driven by
53:41 the fact that stocks are still very
53:43 risky and they emphasize this in the
53:45 paper stocks are still super risky at
53:46 long Horizons but bonds nominal bonds
53:49 are a lot riskier you're much more
53:52 likely to lose money in bonds and so
53:53 adding them to your portfolio crazy
53:55 right adding them to your portfolio
53:56 makes it riskier it makes it less
53:59 volatile which is great if you're really
54:01 worried about volatility but it makes it
54:03 riskier from the perspect perspective of
54:04 funding your future
54:08 consumption okay that that being said
54:12 one thing that always freaks me out
54:15 about things like that and maybe this is
54:17 the you know
54:19 the slightly risk averse volatility wise
54:23 guy in me which is that every Financial
54:27 investor can read all the theory till
54:29 they're kind of blew in the face but
54:32 they only get one shot at the financial
54:36 markets and they can't predict
54:38 beforehand what their ride is going to
54:40 be so they have they have all this
54:42 history but they're guaranteed a
54:44 different ride than the historically was
54:48 the case so saying historically we had
54:51 all this you know evidence that you know
54:53 stocks or whatever um stocks don't
54:57 always beat bonds now they beat bonds
54:59 over if you take a long enough time
55:00 frame you could say that they you know
55:02 they they beat them over you know this
55:03 many if you take this many years but we
55:05 also don't know that that's even a
55:06 guarantee that that will continue to be
55:08 the case so what always you know freaks
55:11 me out about that is like you have to
55:14 plan for what historically didn't happen
55:17 to happen and that is like to me the
55:19 basis of a lot of a sound framework for
55:22 investing is you have
55:24 to build a portfolio
55:27 where yes you want us stocks to rip a
55:31 100 like for the rest of time but you
55:35 have to plan for the event that doesn't
55:36 happen because you only have one shot at
55:38 the your investing time period does that
55:41 make sense it does it does make sense
55:43 and I mean there there are different
55:45 ways that people have tried to express
55:47 that I've seen some pretty crazy
55:48 portfolios that take what you're saying
55:49 to the extreme where it's like we're
55:50 going to have 10% gold 10% stocks 10%
55:54 Bitcoin like every possible thing that's
55:55 going to perform potentially differently
55:57 from the other stuff so I I don't
55:59 disagree with you and bonds are a pretty
56:00 tame example of of diversification
56:02 obviously and I I'm not advocating for
56:04 100% stock portfolios we have not very
56:07 many clients that are firmed that are
56:09 actually invested that way I I think
56:11 it's an interesting idea um yeah I mean
56:13 there there are limits to that thinking
56:15 I I we don't know the distribution of
56:16 all future asset returns and because of
56:18 that we don't know which assets are
56:19 going to be good diversifiers I think
56:21 looking at historical data is one
56:24 interesting lens but I agree with you
56:25 like if you look at just the theory and
56:27 forget about that empirical paper yeah
56:30 of course bonds makes sense but then you
56:32 look at the empirical paper and it's
56:34 like well yeah okay this gets me to
56:38 actually where I want to um where I want
56:42 to sort of try to start wrapping things
56:44 up which is
56:46 through listening to the boggles to the
56:50 Ben Felix's of the world to all you
56:53 smart guys who are reading all these
56:54 papers
56:56 I've sort of come to an
56:58 interesting
57:00 um place
57:03 where the fundamentals are sort of
57:07 Undisputed in a lot of these circles
57:09 where it's like okay passive investing
57:11 you get what you don't pay for most
57:13 active investors will lose so the
57:15 average makes sense and then it's almost
57:20 like when you get into like the basics
57:22 of fitness and then you get into
57:24 advanced Fitness where there's all the
57:26 these new papers that come out and
57:27 people excitedly rush into these like
57:29 new theories about like how to optimize
57:32 the you know the little tidbits of this
57:34 or that but they are sort of
57:37 making tiny little I would say like a
57:40 like uh you know
57:42 theoretical I don't know bets is the
57:44 right word I guess in finance it's a
57:45 little bit more of bets uh because you
57:47 don't know the outcome But
57:51 ultimately when you do think about
57:54 people who are not plugged in
57:57 what do you think about this is I guess
57:59 where we're going to end where we
58:00 started which is what should most
58:03 investors okay that they're not reading
58:06 journals they don't want to pay
58:07 attention to any of this stuff they
58:09 don't want to be worried about um you
58:11 know sort of what the latest paper says
58:13 about allocation what are their what is
58:16 like the basics and then we can't tell
58:19 them what portfolio to build because
58:21 obviously they need to make their own
58:22 decision based on that but let's get
58:25 back to ignoring like the daily trends
58:27 of or I get it's not I know it's not
58:30 daily but like the year-to-year decade
58:32 to deade trends of you know we think
58:34 this is interesting this is you know a
58:35 slightly better way to do it what is the
58:37 ad not advice but framework for most
58:40 people to think about investing going
58:42 back to for idiots so let me give you an
58:45 interesting example we talked about
58:46 factors we talked about the F French
58:48 three Factor model we didn't get to the
58:50 five Factor model and that's okay but
58:52 there's a there's this term that's
58:54 that's uh been created in acad Finance
58:56 called the factor zoo and that term was
58:59 created because there were so many
59:01 documented factors there were so many
59:03 they're called pricing anomal anomalies
59:05 like so many observations that this type
59:07 of stock or that type of stock did
59:09 better than other models would predict
59:12 and for the exact reason that you're
59:14 saying that is that is a problem for
59:15 someone who's trying to optimize down to
59:17 the most recent paper so I I I don't
59:20 think that anybody should be doing that
59:22 the problem that creates for people who
59:23 want to pursue Factor investing is that
59:26 there's always competing models so the F
59:27 and F and French have a model but
59:29 there's a ton of other models out there
59:30 and a lot of people say now that while
59:32 the F French model is no longer relevant
59:34 because of this this and this so if
59:35 you're a f French value investor it's
59:38 really hard to stick with your value
59:40 portfolio when it's underperforming and
59:42 people are saying well no F and French
59:44 are wrong now because of this this and
59:45 this you should be using this Factor
59:47 model so for most people who don't want
59:49 to get into the details of why they
59:51 think F and French are still right uh
59:54 they should probably not that type of
59:56 investing now some some people can do it
59:58 like I have we have an online community
60:00 for our podcast called the rational
60:02 reminder Community named after our
60:03 podcast and there's a bunch of people in
60:05 there that like it it blows my mind
60:07 honestly I I love that community and I
60:09 interact in there often but there are
60:11 people in there that literally nerd out
60:13 all day spend hours in there talking
60:15 about you know value should be defined
60:17 this way no it should be this way or
60:18 like momentum is a good Factor no it's
60:21 not uh so some people love that and I
60:23 mean I think that those people probably
60:24 treat it like a hobby that is not most
60:26 people the rational minor Community is
60:28 not most people so I think for someone
60:31 who's listening for the uh Investing For
60:33 idiotes listener the intended consumer
60:36 of this podcast they should probably be
60:38 using lowcost index funds that just
60:40 track the market now whether that's us
60:42 or globally Diversified I don't know man
60:45 like there there's funds like VT that's
60:48 a that's not a recommendation but that's
60:49 an all stock Global portfolio that's a
60:52 that's a pretty nice security as a
60:55 starting point at least on the equity
60:56 side of a portfolio one thing you don't
60:58 have to think about it you have to worry
60:59 about it in Canada we have similar
61:01 products called asset allocation ETFs
61:03 they're not quite like V VT because
61:04 they're not they give an overweight to
61:06 Canadian stocks they're not market cap
61:08 weight but same same idea one thing and
61:10 you buy that and that's your portfolio I
61:12 think that level of Simplicity like we
61:14 talked about investor Behavior earlier
61:15 too uh when you look at the data on that
61:18 funds that are self-contained that
61:20 rebalance themselves they tend to have
61:21 much lower Behavior gaps investors tend
61:24 to behave much better in those products
61:26 so for for the typical person that's
61:28 listening to this podcast that's like
61:30 trying to learn about investing and they
61:31 want to just make good decisions uh
61:33 total market index funds market
61:35 capitalization weights are a great
61:36 starting point and the more simple you
61:39 can make it the better you're going to
61:40 be in the long
61:42 run and if I could humbly add one tiny
61:45 thing to your great wrapup there low
61:47 fees we didn't really Touch Too Much on
61:49 like because ETFs and and mutual funds
61:52 have their own set of fees involved you
61:55 need to pay attention of that and keep
61:56 it as low as low as possible um Ben
62:00 Felix you have been a uh fascinating
62:04 character for me to to learn from and I
62:07 really appreciate you coming on the show
62:10 where can people find you obviously you
62:12 have the rational reminder podcast and
62:13 you have the YouTube channel is that
62:15 your main two outlets where people can
62:18 discover your work yeah those are I
62:20 release videos every two weeks on my
62:22 YouTube channel and then I just search
62:24 Ben Felix I guess on YouTube and you'll
62:26 you'll find my channel and then rational
62:27 reminder we post an episode every week
62:31 those are like they're pretty nerdy I
62:33 mean if people want to be like really
62:34 get into the weeds I guess that they can
62:37 listen but I mean yeah investing for
62:40 idiots is not is not rational reminders
62:42 intended
62:43 audience yeah that's not a bad that's
62:45 that's fine these are our meme coin
62:48 investors our our our Wall Street bets
62:50 guys uh okay thank you for watching
62:53 we'll see you next time
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