Bullshit on Stilts: Tackling the bullshitology of financial decisions.
Join two financial brains turned podcast hosts unleash their wit and wisdom drawing on vast financial backgrounds. Using highly-tuned bullshit sniffers they call out the clichés, crap spackle and flapdoodle spewed by so-called experts across the landscape of financial advice. Identifying as doctors of bullshitology you can count on your hosts to bring you a lively if not deadly mix of serious analysis, hijinx, and tomfoolery. All within a 99.1% bullshit free safe space.
Bullshit on Stilts: Tackling the bullshitology of financial decisions.
Evaluating Your Investment Performance: How yah doing?
Curious if your investment manager is actually adding value to your portfolio, or just riding the market's coattails? Get ready to navigate the murky waters of investment performance with a mix of humor and hard-hitting analysis on Bullshit on Stilts! We start by unpacking the often confusing concept of "alpha." Using a relatable shed remodeling analogy, we'll show you how to determine if your portfolio is truly beating the market or just keeping pace. Learn how to compare your investments to the right benchmarks and measure the value of your active manager’s contributions.
Ever wondered how to spot a financial advisor’s smoke and mirrors during a market downturn? Reflecting on the 2008 financial crisis, we reveal how a seemingly modest return can actually be a win. We delve into the nitty-gritty of understanding investment performance and fees, arming you with the knowledge to avoid unnecessary losses and potential fraud. Discover why knowing exactly what you own and why can save you from financial disaster, and get the inside scoop on how the financial industry often overcomplicates things to keep you in the dark.
Should you go active or passive in your investment strategy? We break down the evolution of investment management, comparing the benefits of index funds in efficient markets to the potential goldmine of stock picking in less efficient ones. Hear about our humorous takes on financial terminology and the practical aspects of tax management. With engaging analogies and insightful discussions, we’ll explore whether your broker’s supposed genius is just luck in disguise. Tune in for a session that’s both educational and entertaining, perfect for both novice and seasoned investors.
Developing your financial bullshit sniffer one episode at a time.
Welcome to Bullshit on Stilts, a podcast hosted by two guys with vast financial backgrounds and great bullshit sniffers who call out the cliche crap, spackle and flap doodle spewed by so-called experts across the landscape of financial advice Identifying as doctors of bullshitology. You can count on your esteemed hosts okay, maybe knuckleheads to bring you a lively, if not deadly, mix of bullshitology. You can count on your esteemed hosts okay, maybe knuckleheads to bring you a lively, if not deadly, mix of serious analysis, hijinks and tomfoolery, all within a 99.1% bullshit-free safe space. Let's get after it. So today, on Bullshit on Stilts, we're going to be focusing on question number three in the Fab Five for investing, which is how are you doing?
Speaker 2:I'm doing just fine, kelly, and how are you? I'm fine, I'm okay. I'm a little tired, but you know what? My left toe is kind of sore the answer to that is a throwaway. That's not really an assessment. It's an automatic response. I'm fine.
Speaker 1:You mean in terms of interacting with people? Yeah, like how you're doing.
Speaker 2:Yeah, you really aren't paying attention to me, but you answered, you're fine.
Speaker 1:Yeah Well, I tend not to pay attention to you. I mean, that's just, it's a knee jerk response, I think on my part.
Speaker 2:Well, and you're making my point, because most people don't pay attention to their investment returns when you ask them how they're doing, I'm fine, it's good.
Speaker 1:Well, I'm higher than I was last month. I'm lower than I was last month.
Speaker 2:Right, right, which is really just volatility.
Speaker 1:And yet you ask the same person how did the I don't know Detroit Lions do last Sunday? And they'll give you play-by-play commentary, you know, as an example Interesting they will. Why is it so hard, do you think, to know how you're doing when it comes to your investment retirement accounts?
Speaker 2:Well, traditionally, most brokers didn't want you to know how you were doing Don't look behind you so it really was never quantified. Now it has been in 401k plans, but I'm talking about the traditional broker, kelly. Why would they not want you to know how you're doing? Because more often than not, just like your typical mutual fund, you're underperforming. Commissions can really eat away at your total return your net return.
Speaker 1:You use the term alpha. What does that mean For the person driving down the 696 in Detroit right now and they hear alpha? What do they think?
Speaker 2:Well, I really don't know what it means, but I can tell you what I've heard it means is that it is the return that your manager adds over and above what you could have gotten with a passive investment like the S&P 500 index. So if the stock market index and let's say it's the S&P 500, returned 10%, but your broker or the investment manager of your mutual fund returned 12%, that as two percentage points of alpha.
Speaker 1:How does a person that doesn't do this as a job trying to do it themselves? How do they figure out? How am I doing when it comes to their investment accounts?
Speaker 2:All right, let's put this to remodeling a shed in the backyard. Okay, I can do it myself and I have a skill level to some degree, but I'm going to pay somebody else to do it. Did they do a better job for what I paid them than I could have done myself? In investing, I can put that into a passive index, but I've hired you to add excess return, so how did you do? No different than in management, I'm paying you to do a job. Did you do that job? And if I'm hiring an active manager, I'm not asking him to track a benchmark. I'm asking him to add excess return because that's what he told me he could do, minus all of the fees associated with that.
Speaker 1:Ultimately, what we're talking about is compared to what. Right now, we're not talking about how did I do. We're talking about comparing how you did to something else, and there's a difference in performance.
Speaker 2:So let's start with the preferred flow of questions. The first would be how did I do so? If I have a stock portfolio, how did my stocks perform, let's say, over the one year period? Let's just use one year? If I have bonds, how did my bonds do? What if I've got both, Kelly? Then you compare both. Do I compare them individually or do I blend?
Speaker 1:them. You analyze them individually and then combine them into a sort of a sandwich, so to speak let's call it and then compare the combined performance to a appropriate combined benchmark made up, in this example, of both stocks and bonds, relatively speaking, the same exact weight. So if you had 60% of your money in stocks, you would have 60% of that benchmark. You're comparing yourself to be a stock index of some sort. And likewise, if you had 40% of your money in bonds, you would compare that performance that you achieved compared to a bond index at about a 40% weight.
Speaker 2:So what would math look like? And I don't want to get into too much air math on this, that's what I like. But if we had 60% in stocks? I'm touching my calculator right now, I know, yeah, I'm touching my calculator right now, I know, yeah, okay, sorry, yeah, if we had 60% in stocks and my broker told me that my stocks performed 10%, I had a 10% return net of all costs, but the index was only 8%, for example, the S&P 500 index. We can assume, or it's apparent, that the broker added value two full percentage points, the difference between 10% and 8%.
Speaker 1:Yeah, I definitely think the broker wants you to conclude that. Now the question is was it just lucky? Did you just own NVIDIA and that's why you got the 10 and the one name made it? So Is that luck, Is that skill, or is that just taking a position equative to the S&P holdings?
Speaker 2:Well, I think it's very difficult to.
Speaker 1:I know I'm getting detailed right now.
Speaker 2:No, it's very difficult to assign skill, particularly over the short term, and there are studies that show it might take a decade to determine if there really is skill or you've just been lucky.
Speaker 1:Yeah, I know in institutional business back when I was working in institutional land big pensions endowments they would typically rule of thumb not change a manager for at least three years. Let's see how they do for about three years. They would also typically not include a brand new manager with less than five years of a bona fide audited track record of their performance. So it's twofold.
Speaker 2:But I think you use the same metric three years with personal relationships. Am I correct with that?
Speaker 1:Typically three years for most people. They are totally fed up with who I am and they just walk away, so it's their three year. Yeah, me, I'm happy to go into a fourth year. But it's the humor, it's the hijinks and tomfoolery. That just I guess it's just and the crap spackle and tomfoolery. That just I guess it's just and the crap spackle. You had to use that one, the crap spackle and the flap doodle. Absolutely. Yeah, you never know what's going to happen when you pull out a flap doodle.
Speaker 2:So let's talk real simple, particularly when you do it in a public place. That's right. I'll tell you right by that water fountain down by anyway.
Speaker 1:So the math is really simple, isn't it? When it comes to how did I do? On a simple basis, it's really fourth grade math, right? So what is that math? How would I take my investment account at the end of the year and figure out did I add any growth to my overall assets? Did I lose some value in my? How do I do that?
Speaker 2:Well, what you would do would look for the appropriate benchmark for your portfolio. If you're in stocks, you'd have to assign a benchmark. Or are we more basic than that?
Speaker 1:I think we're more basic than that. What I'm looking for is look before we get to the benchmark right, which is how did I do compared to something?
Speaker 2:Oh, I've got the answer. Go ahead, I've got the answer answer.
Speaker 1:I've got the answer. I would take my starting value and my ending value. Did you call a lifeline? Is that what happened? Is that what just happened?
Speaker 2:Okay, All right, go ahead. Yeah, actually, I would take my ending value and minus the starting value and whatever that differential is. I would divide that by my starting value and whatever that percentage is plus or a negative would be how I did.
Speaker 1:Yeah, and in fact you come out with usually a decimal, and the little step is then multiply that by 100, and you'll get your percent of your performance Right, good, bad or ugly.
Speaker 2:Yeah, this is the booth question what the hell does performance mean, what I mean, performance mean, what I mean, what is what? And we want to avoid the little negative sign in front of that, the minus sign.
Speaker 1:However, let's talk about that because it's how did I do If the market in the last year let's just use stocks for a quick second was down 30% because of a bear market correction and your account's down a negative 10%? Should you be upset or should you be patting if you're working with a broker and advisor on the back saying, hey, thanks for taking care of me and covering my tail when the market has had a huge correction? I don't know whether anybody's ever said that to their broker. We had a client. I should say that back in 08, at the end of 08, right, everybody remembers it's a catastrophic event, it's the Great Recession, blah, blah blah.
Speaker 1:We had clients that came in and we had allocated to lots of different non-market-related investments. Their return for 08 was a negative 4.35%. I can remember this like it was yesterday. They come in really nice folks, but they both were like well, we're paying you guys to grow our money. I don't think I should be happy with a negative four. I took that a little personally and I got a little upset in that the average long-term strategically allocated investment plans that we find in 401ks and endowments and pensions and so forth the average of just 40% stock and 60% bond was down between 24 and 28 percentage points. They ended the year at minus 4.35. And only until we helped them understand compared to what where they're like. Oh wait, I get. I'm sorry, I don't know what the hell we were thinking. So it does happen out there.
Speaker 2:Yeah, managing risk is a thankless job. Oh my gosh, what you avoided them experiencing is always thankless.
Speaker 1:That's a good way to put it. That's absolutely a good way. So, when we come back to how am I doing? Real simple, right? I can take my December statement, december 31st value on my statement. I can subtract from that number December 31st of the previous year's value and I come up with a plus or minus number and I divide that number by December 31st of last year's value and I multiply that by 100, and that'll give me my actual percentage return of my investment over the last 12 months in this example, correct. Let's go back to I think we talked about this in the big Fab Five, right? The bigger podcast earlier, which was but what if we have 50% in stocks and 50% in bonds? Do I still think of just the stock market when it comes to am I doing okay or not? How did I do? How do you approach that?
Speaker 2:Just as a reminder, Well, you'd want to divide it. Ultimately, now it might be nice to know what your total portfolio did, but to identify where there could be problems, I've got to look at both the equity component and then if I've got fixed income. That component, yes, Because I could have had excess returns in my stocks. But uh-oh, something happened with the bonds Sure, bonds. That negates what I did with the stock portion of my portfolio. So this is where you start separating out, to start forming benchmarks, or identifying benchmarks, to get into the compared to what. So the how did I do is very simple math. Take the ending value minus the beginning value, divided by the beginning value times 100. Yeah, super simple.
Speaker 2:That's for your whole portfolio, and then you do that if you have different asset classes, distinctly different asset classes. So if you have a bond component and a stock component, maybe a real estate component, then you'd have to do it with three different appropriate benchmarks Indexes of some sort.
Speaker 1:Yeah, it's an interesting thing. Lots of people don't understand it, and yet it's probably amongst the simplest things to do when it comes to measuring how you're doing Right N minus beginning, divided by beginning times 100.
Speaker 2:Super simple. Why do you think most individuals, most investors, can't tell you how they're doing yet? It is salient and has to be on their 401k statement. Usually it's on the brokerage statements now, but nobody knows what it is.
Speaker 1:I do think that it's an issue around the way the industry goes about bullying consumers. This is way too complicated, you can't figure it out, and I think that over time a person ends up accumulating sort of immediate reactions to things and if they open up a statement, their immediate reaction is I really don't know what this is telling me. All I know is that the value is $10,000 higher than it was last month. So I must be doing okay and I can't. If I heard that and was paid a dollar every time I heard that over the practicing career I would have a retirement all on itself.
Speaker 2:We were doing work with the SEC, state of Michigan Regulators and CFA Institute and I forget who the nonprofit was and the discussion was around investment fraud and at that point the average person who was scammed lost $14,000. And sometimes there was recovery, but the net loss was about $14,000. But here's what's worse than that. Mrs Johnson has a $200,000 portfolio and because of excessive fees, a lot of commission, a lot of churn and underperformance, because of that she's losing $10,000 a year. And that's just not for one year because they catch the guy. It can go on for decades. Sure, yeah, so that's where it's insidious.
Speaker 1:So when people don't know what they own, why they own it and how they're doing, they're setting themselves up for failure, and they're the ones that put themselves there for a failure to understand and know how they're doing and compared to what Don't you think that, when it comes to the consumers out there that do work with an advisor of some sort, when they do meet their advisor, whether it's periodically or every once in a blue moon my experience was always they were asking me how am I doing? They had no preconceived notion other than my accounts up or down, that's it. I think there was three clients out of 128 families that I worked with years ago. Those three knew how they were doing. One knew everything about what was in that portfolio, everything even down to the voting for new board members, and they would come in and ask me who's John Smith? Should I vote for John Smith? And so forth.
Speaker 1:My point is the vast majority of people just want everything to be on a remote control. I don't want to do any work. I want to set myself up to be lied to, misled or something. Do no preparation for my meeting with my advisor hey, mark, how am I doing? And then I shut up and I sip on my Coca-Cola and break little pieces of the cookie Mark brought into the conference room in order to tell me or answer that question in a manner that may or may not be very accurate.
Speaker 2:Often you get a lot of what's called explocative gloss and you really don't get, you really don't get an answer.
Speaker 2:So this falls under the category of the cost of not knowing. And when you don't know there is a tremendous cost and it can be insidious. So where we are in life is not the last really stupid thing we did or the last great decision we made on themselves over a multiple year period, or neglect and poor decisions compounding themselves over a multiple year period. That has you where you are. So anyone in isolation example, last year not knowing how you did in isolation, no big deal. But year after year after year, the compounding of that, negative or positive, has you where you are.
Speaker 1:Agree 100%, by the way. And you said neglect and I was thinking about the twigs in your hair and how you just neglect to even comb your hair in the morning, but that's not part of it. There was a family of four living there, a little fox squirrel. So how am I doing?
Speaker 1:I've come across this frequently where a consumer, an investor out there, is working with an investment firm and they're convinced to go into a managed account, managed account being that, let's say, acme Widgets will use, will protect the innocents out there.
Speaker 1:Just Acme Investment Company wants to convince me to use their managed account and in a managed account it means that some financial analyst professional is making decisions on what to buy and sell inside the account that is in my account itself, right, so it might be just stocks where they're buying and selling stocks and they're comparing themselves to let's make it easy the S&P 500. And yet they're charging fees for doing that. Rarely have I come along and done analysis on that account that demonstrates the account is anything but some of the top holdings in the index itself. Can you comment about how a person should kind of think through what they're doing with their advisor or with their investment management firm when it comes to managed accounts, over just what we've talked about before funds, whether it's an index fund, mutual fund, etf and does it make sense for most people to spend an extra one plus percent on a managed account that simply oftentimes mirrors the index itself?
Speaker 2:Well, this might sound like glib opinion, but it certainly is substantiated by lots of data that the average mutual fund, actively managed mutual fund, does not outperform its index, particularly over multiple year periods. Might for one year, might for three years, but for whom, when and for how long? And is it really replicable? And is it really skill, or is it just luck? Well, you might take a decade to find out one way or another.
Speaker 2:My thinking is this why do that? Why go through all of the rigmarole of active management, their investment philosophy, how they select stocks, when I know statistically you're not going to beat the index? So why I'm even going through all of these financial ratios? I can't optimize human intention and it's all retrospective, yeah, so some of those are silly. Why am I measuring and doing ratios on a loser? I mean the average actively managed mutual fund. Yeah, yeah, I would rather know how am I doing? Is that number close to the index or slightly above the index? I'll handle some tracking error to where it might be a little bit negative, but that's getting into the minutia.
Speaker 2:Do I have the right asset allocation based on my time horizon. I have returns that are acceptable to me and are tracking closely to the index, or are the index, then I'm pretty happy with that. So just there alone. Why am I confusing this and complicating it the thing?
Speaker 1:that pops into my mind as you're talking is there are some bonafide reasons why a managed account might make sense and typically it's from tax-wise management and less of the implementation itself. What I mean by that is it's awfully hard to manage losses in an index fund, depending on how you purchase that index fund. If you purchase it over time, year in and year out, year in and year out, purchase it over time, year in and year out, year in and year out, you can handle and actually grab a purchase that's in a net unrealized loss position and match it with another purchase that's in a net unrealized capital gain and you can kind of utilize that to offset. But most people that I ever encountered, or even recommended going into managed accounts, were really about the tax management of the underlying holdings that made up the portfolio, where the manager could go ahead and optimize yeah, fair enough, the tax loss versus tax gains at the end of the year and that applies also to fixed income.
Speaker 2:Yeah, fixed income You're using there.
Speaker 1:Yes, there is that. But beyond that, from a standpoint of, are you getting alpha, let's say, excess returns over the index that you follow as your benchmark, or indexes that you follow as a benchmark, indices, indices, indices I thought it was indexes. Yes, and so like data and datum like, if you say four of them, you have to go indexes zucchini and zucchinis, candelabra and candelabrum.
Speaker 2:Wow, you're throwing this all out, aren't you? Yeah, because I think it's also put your thesaurus away.
Speaker 1:Yeah, it's just, you know just like data and datum.
Speaker 2:The data are come on, you don't do that with anything else? Huh, candelabra zucchini. So what terms should I use?
Speaker 1:indexes, indices, indices. Okay, yeah, so if you're using indices, you know you can, you can apply those but I just lost.
Speaker 2:I just lost a very weak point I was going to make, so hopefully I can recover. I don't know what the hell it was I don't know either.
Speaker 1:I'm thinking of fajita for lunch. That's what I'm really thinking about when?
Speaker 2:were we?
Speaker 1:I don't know, but we're at 33 minutes.
Speaker 2:I feel like I'm at a restaurant. You know the look on the face of an individual where they're looking for the bathroom and they get this look on their face like they're lost.
Speaker 1:Yes, that's kind of me right now. Yeah, I agree, I agree. Yeah, there's a little lost look in your eyes, almost like the puppies in that Sarah McLachlan song.
Speaker 2:I've gone too far, I've said too much already, yeah let me just let this roll, because I want to get back to what we were talking about. We were talking about tax efficiency.
Speaker 1:We were oh, oh, oh, oh oh yeah.
Speaker 2:So here's the conversation to the client, mr and Mrs. Client, I've got some great news. We've got some great loss carry forwards that we're going to be able to offset at some point, because I totally murdered your portfolio this year.
Speaker 1:My point is you can't run money without having that conversation once in a while. It doesn't exist conversation.
Speaker 2:Once in a while it doesn't exist. That's right. So as I have grown, I've evolved into in my earlier years from being a big proponent of active management to now not very much. Kelly, though you made a very good point on the management of taxes.
Speaker 1:Yeah, we talked about this before and I don't know that it'll make this cast, but there is the ebb and flow of efficient and inefficient markets. During efficient markets, indexes are extremely difficult to outperform because in an efficient market everything is working Well. If you own the S&P 500, you own 500 companies of thousands that are listed in the America. But if you have an investment that has exposure to all sorts of names within the market, even the bad names or the names that people don't have a lot of confidence in skyrocket. And that is sort of an example of an efficient market. Back in the 90s, a monkey could throw a dart at Wall Street Journal and hit any stock and if you bought it you would have made money in that stock Efficient market. And then you get to inefficient markets where guess what Stock picking rules the day during those cycles and scenarios. Why did you use a monkey? Because I was born in the year of the monkey. Let's wrap this.