Episode #2 – Investing vs. Speculating

Welcome to the Millennial Money Moves Podcast. On this episode, I am joined by Kenny Gatliff, CFA, to talk about the difference between investing versus speculating.

This is something most do-it-yourself investors get wrong and a surprising amount of industry professionals do too. We hope you enjoy. This content is purely educational.

It’s not intended to be financial advice or financial planning. Please consult your professional financial advisor or tax professional to receive tailored advice to your personal situation.

Babin Wealth Management is not responsible for action taken by listeners based on educational content provided. If you would like to receive personal financial advice, please reach out to Babin Wealth Management directly at babinwealth.com.

Let’s make moves. Welcome to another episode of the Millennial Money Moves podcast. I’m your host, Sean Babin, and with me today is a very special guest.

We have Kenny Gatliff, CFA, with me in the studio. Kenny and I have known each other for almost a decade now.

Kenny was actually pretty inspirational in my financial journey, he hired me on at a company and actually worked for Kenny for about six years. Kenny is an amazing talent.

Like I said, at the top, he has a CFA, which stands for Chartered Financial Analyst. That is like the gold standard of the financial industry when it comes to showing off your credentials and your smarts in the investment realm.

Thanks, Sean, it’s a good setup.

Yeah, I have a CFP, that’s a Certified Financial Planner. That’s kind of like the advisor world, and then the CFA is on the investment side. So Kenny went to the University of Miami in Ohio, and I believe you studied finance there, correct?

I did, yeah.

And he’s been in the investment world for pretty much your whole career, right?

Yeah, almost 20 years, yeah.

20 years.

So I wanted to bring Kenny in today, and I really wanted to have the discussion with you about investing versus speculating.

I think a lot of individuals think that because on their phone, they can buy a stock or buy a mutual fund or an ETF and own a couple of them, they think they’re investing.

They think they’re doing the right thing with their money, when in reality, that was the same thing as putting money on black or red at a casino, or if the chiefs are going to win the Super Bowl. Thank God they didn’t.

And so, I really wanted to dive into that with you, what I think an end investor kind of believes that is, and mistakes that they make, as well as financial advisors, because I’ve seen that before, where a financial advisor thinks that their value to

their clients is coming up with different stock recommendations, when in reality, that is just taking a gamble with their clients’ money, because it’s unlikely they know what’s going to happen next. So, wanted to dive into that.

I’ll let you kind of start talking about what you see out there, and kind of what your take is on kind of that investing versus speculating conversation.

Yeah, no, it’s definitely a good one. And I do think the two terms get conflated a little bit. And so the way I like to think about it is, when you’re investing, there’s some strategy behind it.

There’s some academic principle behind it. It’s very systematized. And you’re saying, look, I’m going to invest.

I’m going to put money into something with the expectation that it is going to grow and I’m going to get paid off in the future, essentially.

And so the most common aspect of this is saying, okay, investing in a stock, or if I invest in Apple or Microsoft, I hope that company grows. I’m a tiny shareholder in that.

And as they grow, as they generate profit, me as the shareholder, I’m going to get paid off. But what it’s not is just making a gamble or a bet.

And that’s kind of when you talk about speculating, saying, okay, I think that this individual stock or this holding is going to do better than what other people think it’s going to be. So I’m going to try to beat the market.

Or like you said, if you can take it out to, I’m going to put something on black or I’m going to bet on the chiefs, that’s generally going to be a speculative move saying, you know what, I’m going to take some guesswork here and hope I get paid off.

And those are very different. So on the investing side, if you do put money in Apple or Microsoft, well, that is investing but it’s investing in a very narrow way.

And what we like to do is say, okay, how can I invest strategically to not take on more risk than I need to? And that’s where it is a little bit of a spectrum. So very little things are straight gambling versus the most complex form of investing.

But what we want to do is move further and further away from gambling. And the way we usually do that is to build out a systematized investing strategy to eliminate a lot of the risks that we don’t need to be taking.

And that’s really the key, is to not take risks that aren’t necessary.

Absolutely.

I think the decreasing the risk aspect of it through quote unquote investing is I think the miss of that user, end user investor that does it kind of by themself, is they’ll own 10 stocks, they’ll own five, they’ll go to a Morningstar, read some kind

of analyst ratings, or maybe just own the S&P 500, or because it’s done well the last decade. And they kind of sleep comfortably knowing that, oh, now I’m investing, I’m doing it, I’m doing something versus nothing.

Which, when you’re having that narrow focus, the increase of different expectations of return, whether that’s good or bad, increases the risk profile of that.

And so I think when we’re talking about investing to our clients and having kind of that systematized strategy, it’s also on what we call a risk-adjusted return basis.

So we want to be able to increase their expected rate of returns while reducing the risk. And how we do that is by adding diversification to portfolios, adding thousands and thousands of stocks to a client’s account versus five stocks.

Give me your kind of input on what you see kind of commonly, mistakes made when you’re looking at different statements and portfolios that clients bring to you guys versus what we try and teach them on in regards to investing kind of an academic

Yeah, and I think that is really key.

And people, if you’re in this industry at all, or you ever read anything, there’s always the adage that diversification is key. And it’s there for a reason. That absolutely is true.

And if you take this all the way back, there’s the old statement of saying you don’t want all your eggs in one basket. And that’s really what you’re doing if you’re speculating versus investing.

You’re making one gamble that this one thing is going to do well. And if you buy a lottery ticket, it’s binary. You either win or you don’t.

Well, if you buy 10 lottery tickets, well, you’re not really diversifying that much because it’s the exact same risk. And so what we try to do is say, okay, let’s find things that are going to move differently from one another.

And really just say, what benefit can I have from owning some additional piece in this portfolio?

And if you want to get specific on it, Sean, what we do see a lot is that people have these handful of holdings, but these handful of holdings are going to have some similar risk to it.

So we see statements that have Microsoft and Apple and Nvidia and Netflix, and all these stocks that people have heard of. And they say, look, I own five stocks, I own 10 stocks. This is a good, well-diversified portfolio.

But what they don’t realize is, okay, well, those are all stocks that are domiciled in the US. And not only that, but most of those are in Silicon Valley. They’re all very growth-oriented stocks.

They’re all tech stocks. And all of these different attributes mean that they have common risk factors. And that’s what we’ve seen historically, is that those type of stocks go up and down together at the same time.

So while a client might think, hey, I have five or 10 different holdings, therefore, I don’t have the risk of one going down and hurting me. Yeah, that’s true. You don’t have the risk of that one Enron type situation.

But you do have these shared risks that should be diversified away, but so many people don’t. And that’s the biggest thing.

And by far, the most common thing I see is that owning a bunch of stocks that have one singular risk that can bring them all down together.

Well said. And what’s fascinating is how many clients or do-it-yourselfers all own the exact same things. And it’s because they’re the ones that have done the best for the last 10 years.

Or the ones that have the highest returns in the last year or two.

And when I see that on my end, when I see time and time again, the same statements or same 10 holdings purchased by random people, man, is that like a calling of like a bubble coming soon.

That reminds me of the day, you know, the 08 days when the taxi driver owned three homes.

So, when I’m just at random chance having different prospects come in and talk to me and I review their statements and they all own the NVIDIAs, the Microsofts, the Apples, the Amazon and the Facebooks, I’m like, okay, like there’s some, that run has

Yeah, and when I mentioned earlier saying, you know, what is investing, what is investment management?

And I said, you know, you have to have a strategy, it has to be systematized, you know, it should be academic and evidence based.

And one of the things that we don’t look at in investment management is what it’s done for the last five or 10 years, in terms of saying, okay, well, this is gonna mean it’s a good holding because it’s performed well over the last five or 10 years.

All that tells me is what it has historically done. It doesn’t tell me anything about the future.

And actually, a lot of times, to your point, Sean, what that can mean is if it’s done really well, it means it might be over purchased a little bit and due for a correction. And that’s what we’ve seen as well. There’s plenty of scenarios in history.

You mentioned 08, going back a little bit further to the.com bubble. I know a lot of us weren’t really around in the industry to see that, but I think that it’s popular enough that most people remember in 99, 2000.

That’s when all of those first.com internet stocks were doing super well. They all got overpriced. And then the NASDAQ or any measure of the technology sector then dropped by 80% over the next few years.

And it took well over a decade to get prices back to what they were before. So it can be very, very dangerous to only use what something’s done recently as your guide for what you’re going to purchase.

All right, I want you to take on this one, because this is one I remember even as a kid. I think my dad took me to his financial advisor. And we sat there and I think he was like, okay, we got a thousand bucks.

We’re going to buy two stocks for you. What do you use daily? What do you like?

And I think one of them was Nike, because I love Nike shoes. And then the other one, I think it was Valero. So a gas company because you fill up your gas every day.

And I think that misconception right there, like, look, I was programmed right then and there by my dad’s professional financial advisor that picking a couple of stocks was how investing works.

And I’ve heard that term over and over again about people getting started of just pick what you know. You know, you have an iPhone, so let’s buy Apple. You have a ThinkPad.

Okay, well, they’re run by Intel. Buy some Intel stock. You know, you do wear Nike shoes.

Buy some Nike.

So, how, any thoughts on, and this is not a perfect answer, but any thoughts on like how we can change that narrative from like people thinking that just buying the things that we use every day is now they’re investing, and that’s where they should

Yeah, I mean, so it’s not that those products are necessarily bad.

It’s that you’re limiting your scope so greatly that there’s no way you’re going to have a well-diversified portfolio by just looking around and seeing the clothes you wear and the cars you drive and things like that. So it’s just so limiting.

And one of the keys to successful investing over the long term, as we talked about, is having that level of diversification.

And what that means is going to be, there are times where these products that you’ve heard of, which are all inevitably going to be large US companies, there’s times where that section of the market, that asset class does really well.

But there are other times where that asset class does not do well. And that’s why it’s really important to smooth out those returns to own companies that are smaller or not as well established, or maybe not even domiciled in the US.

You have the international companies and emerging market companies. And if you have that broad swath of investments, that can really temper those big drawdowns. And there’s really two things that can absolutely damage a portfolio long term.

And one is to have just a dramatic drawdown, something 60%, 70%, 80%. And that’s pretty easy to diversify away from.

If you own more than a couple of stops, or you’re not putting everything that you have into Bitcoin or gambling or anything that is very well known to have that potential drop, you can remove that one from the ledger.

But the other one that I think most people aren’t aware of is the long sustained underperformance to the market. And we talked about already on this podcast, like right now, large US stocks have done incredibly well for most of our memory.

And so we get this false sense of security that they’re going to do well forever. But it wasn’t that long ago. In fact, I mentioned that the.com bubble.

Well, a lot of that was just large US well-known stocks did very poorly for a very long time. And fortunately for us in terms of being data guys, it happened to split almost on exactly the decade.

So if you look at one one of 2000, that next 10 years, US large cap stocks underperformed by a significant margin, and it took you over 10 years to recover. And that’s not even inflation adjusted.

So if you put $10,000 into a bucket of US large growth stocks on one one of 2000, at the end of that decade, 10 years later, you had less than $10,000. And that right there is almost as damaging as that 60-70% drop.

And that could easily be made better, or you can easily fix your portfolio to not expose yourself to that risk, I guess I should say, by diversifying and not just owning that one asset class.

Because during that same 10-year period, a lot of these other asset classes, small stocks, value stocks, international stocks, did significantly better.

And we’re able to smooth those returns for people that were well invested during that time period.

Many people don’t know about the lost decade, do they? So yeah, even that hints on the idea of like, okay, I own the S&P 500, which is the largest 500 companies in the US. That’s got to be some diversification too, right?

You’ll hear on this podcast time and time again, especially when we’re talking about investing or asset classes. So asset classes represent different areas of the stock market. It can be large companies in the US.

That’s one asset class, large companies internationally. That’s another asset class. It could be cap companies.

Basically, their market cap is more in the middle of the spectrum. There’s small cap companies. There’s emerging market companies.

There’s international companies on all those different ranges. Those are all different asset classes.

So when I think of professional investment management, or what I’m trying to deliver to my clients or recognize that there’s a drastic difference between investing and speculating is, you have to own those asset classes in an engineered way that is

increasing your expected rate of return while reducing the overall risk. So if you think of that just conceptually as a listener, so the more stocks you add to this basket, yes, you’re reducing the potential increase of returns, but you’re also

reducing the downside of that too. So you’re limiting kind of the scope, what you’re trying to get more closer and closer together with.

And we can create different portfolios for different investors based on how aggressive of a growth focus they want to be.

And we try and dial that in for them versus telling somebody, I couldn’t sit across the desk from a prospect or a client and say, hey, this portfolio could potentially be up 50% of the year, but I could also lose you 60%.

Versus we try and do, when we’re talking about historical expected rates of return, anything from like 10 to 12 on a very aggressive portfolio is great, where the downside protection or downside risk is more, could be, you know, worst I’ve ever seen

is kind of in the 20s range. So that’s what we’re talking about when we really want to kind of understand the differences of putting these pieces together and how you can go from the speculation side to the investment side.

Yeah, and you know, you bring up a good point there. You as a professional within the industry say, okay, you know, here’s my goal for it.

And you know, unfortunately, a lot of what you and I have seen, Sean, is the investment professionals that don’t necessarily do that. And the reason being is, it’s scary to look different from what you see on the news.

And what you see, you know, if you watch MSNBC or, you know, any program talking about the financial markets, well, they do list at the bottom, you know, the tickers they give you are the NASDAQ and the S&P 500 and, you know, the Dow Jones.

Well, all of those are controlled by just a handful of companies. You know, the top five companies in the S&P 500 make up about 25% of its movement. The other 495, you know, combine to do the rest of it.

And, you know, that’s a sliding scale. So it’s just these handful of large companies that exist in the NASDAQ and in the S&P 500 and in the Dow Jones. There’s a ton of overlap in all of those, are what people think the market is.

And so, you know, for me, as a financial advisor, if I’m putting you in something that is not, you know, going to be listed as the ticker on the bottom of your screen, well, even if that has a longer, you know, a long-term expected higher rate of

return, that’s scary for me because it doesn’t necessarily, you know, pan out in the first month, the first six months, or even the first, you know, year or two. And what’s scary for me as that advisor is to be underperforming what a client might see

on the news. And so instead of being academic with it, instead of, you know, having that systematized portfolio, what we do see a lot is people just trying to not look bad in front of their clients.

And unfortunately, that’s not doing what’s right for them.

That’s akin to a doctor saying, well, what do you think you should do about your broken arm or, you know, this ailment you have, because they don’t want to offend them and tell them it’s, you know, something else.

And it’s really doing a disservice to a lot of clients and it’s, you know, perpetuating this idea of, well, that’s what kind of investing should look like.

Absolutely perfect.

I would love to know this story, and I’m sure we could look into it one day, is why the S&P 500 became the end-all be-all for everything on the news, for everything a client knows, or we as people just know, like, that’s what we understand. And why?

Like, is it just a great marketing ploy? They spend a lot of money to be on all those tickers. Why, when the S&P 500’s up 20% and my clients are only up 16, are they upset?

But then when the S&P 500 is down 27% and my clients are only down 12, you know, no one really understands that downside difference for the upside.

You teed me up perfectly on just a, I wanted to share a couple just rate of return numbers of why I think it’s so funny that the S&P 500 is the one quoted all the time, and why it’s the only thing people focus on, and why they just want to own more

1. When, as an advisor, that’s true across the spectrum, especially when it’s doing well, and then as an end client, you think that, or do it yourself, or you think that that’s, okay, we need to diversify with that.

So these are some annualized returns, which go back to 1970 to 2023. The US large cap stocks is represented by the S&P 500. Its annualized return is 10.7%.

Large cap value stocks, which again, this is a different asset class for you listeners out there. So, these are more of the tried and true Warren Buffett, Coca-Cola, companies that have a lower price per earnings than the high-flying growth stocks.

Their annualized return since 1970 is 12.4%, so almost 2% higher. And that’s on an annualized basis, so year over year. And then here’s an asset class that no one ever talks about.

You will never, not never, that’s a bit brash, but on CNBC, they’re not going to lead the ticker line or lead a story or in the newspaper of the Wall Street Journal, are they ever going to talk about small cap value companies?

So these are smaller companies in the US, probably don’t know many of the names, and their annualized return from 1970 to 2023 is a whopping 14.6% annualized. So I get clients all the time that want to compare.

Again, their outcome to just the S&P 500. For whatever reason, it’s in our program dentist, that that is the thing that makes clients the most money.

And I just showed you that a small cap value, if we put all of our money in that, would have blown away the S&P 500. Here are the growth of wealth numbers.

If you had invested $10,000 in the S&P 500 in 1970 to, again, 2023, the growth in the S&P 500 would have turned $10,000 into $2.4 million.

The same investment, $10,000, into small cap value companies from 1970 to 2023, would have turned that $10,000 investment into $15.7 million. Kenny, I can see over there, jump in here.

It’s fascinating to me that most advisors don’t even put this asset class in the client’s accounts. Most clients don’t even understand it or know about it.

But if you’re looking across the scope of the spectrum, small cap value has the greatest expected rate of return of any area of the market, and most people don’t own a single penny of it.

Yeah, and honestly, that’s always been the case. And you’re right. The reason is that it does move differently.

It oftentimes moves in big spurts. And then there will be times where it does underperform from the S&P 500, and it’s exactly what I said before. For one, prior to the last 10, 20 years, it was hard to access those.

You had to have your trading license and go pay a lot of money to buy that stock, and it was expensive to trade these small stocks. So the access wasn’t as good, and people just got used to buying the bigger, better known stocks.

And so even though that data is out there, it is largely just ignored, and it is crazy. And I think the other thing that really stands out about what you just said is this power of compounding. And this is the Millennial Podcast, right?

So this is people that have a long time to grow their assets. And it is crazy to look at those numbers.

The $10,000 growing to $2.5 million and then $15 million, they almost sound fake when you say that, but that’s what happens when you have, in this case, 53 years of growth.

Now, a lot of us don’t necessarily want to have a 53 year time window of growth, but you can just see how much that those can grow and how much just a small difference. You mentioned the difference between those two asset classes.

The S&P has done very well. We’ve talked in this podcast about, don’t go all S&P 500. It’s still a very good investment.

It still makes 10% a year historically over any long time period you’ve looked at. And that means it’s doubling every seven years.

But the difference going from a little over 10 to just adding a couple percent in the small value makes the difference over a long term of, what’d you say, 2.7 million versus 15 million.

Now, obviously, again, that’s 50 years of those few percent compounding, but that’s obviously a huge difference. So just to ignore that, to say, eh, it’s only a couple percent. I don’t know those companies.

It’s not worth looking into those. That should be really compelling for anyone listening to say, okay, yeah, maybe it is really important to have that efficient portfolio, especially if I do have a long time horizon.

Absolutely. And while you were talking, this speculator in me was asking myself, why don’t I own just all the small value?

And yeah, and that’s obviously a good question. We see that, but it’s just like anything else in that, you know, historical returns are informative, but there’s no guarantee associated with them.

And that’s why, you know, that disclaimer is written on every single piece of financial literature is that, you know what, maybe the next 50 years, we don’t see that. There’s no way of knowing that.

And certainly maybe in the next 10, we don’t see that. And so it is silly to bet on any one just because it is higher risk.

And so even if there is some idea that there’s a higher expected return, it’s not guaranteed and you in the short term can take on considerable more risk that you might not have, you know, at the time horizon to come back even if 50 years from now,

Exactly.

Yeah, I think it’s, I get to ask that question too when I show these numbers, why don’t we just own all small cap value?

And just like Kenny said, you know, the volatility associated with owning one asset class, whether it’s small cap value, which would be way more extreme than the S&P 500, is the whole point of why we’re not trying to speculate with it, understand

where returns come from, understand that there’s asset classes like small cap value out there that deliver some pretty solid rates of return. And if you marry that with other categories of investments, that will again, like I talked about at the

beginning, is you’ll reduce your overall risk profile of your investments while increasing your expected. So what you would expect that rate of return to look like going forward.

Yep, yeah, exactly. And that’s truly what the science of investing is, is knowing that information and applying its portfolio. And I think we’ve talked a lot about the misconceptions that people have today.

And it does make sense that they’re misconceptions. And it’s not like people are blind to this data or just dumb and can’t apply it.

It’s the fact that the entire system, the entire financial industry is tailored toward one specific way of doing things that in a lot of ways is just not correct for, if you’re able to open the hood up and look in a little bit, that you realize that

there are some things that are done regularly that are good. Investing the S&P 500, good in general. But it’s not ideal.

And it is just one of those things, the more layers you peel back, the more you realize there’s more to it, there’s better ways to do it. And there’s ways to be a lot more efficient in how you’re investing.

And like I said, for those of us that have this long runway to grow our assets, it’s vitally important to be building that efficient portfolio and incorporating these ideas we talked about.

Yeah, when we talk about academics, you know, an academic, efficient academic portfolio, academics basically in the, was it the 70s and 80s, they kind of went back through time and tried to gather all the data that they possibly could and try and

figure out where areas or where returns come from, where, what part of the market do returns come from. So when we use that term academics, it’s basically data driven research that shows us that, like I just pointed out in those different return

numbers, that there are different areas of the markets that perform better than others over long time. So we’re talking data going back to the 20s and 30s. And that’s how you string out a hypothesis or make something statistically significant.

A 10 year, 5 year time horizon is not a data significant event, and therefore becomes more of a speculation of clients putting more and more money into it.

So I see it with the advisors, too, that I’ve worked with in the past is, like Kenny mentioned, they don’t want to look any different than the news.

So if their clients accounts look like the news, meaning the largest 500 companies in the world, or sorry, in the US, then it’s an easier conversation for them. They’re also human beings themselves.

They, if an advisor does not have a philosophy or conviction in what they’re doing, they will start playing around with your money. And you will notice, if you’re a listener and you’ve had these phone calls before, they call you with an idea.

Hey, I’ve been researching X for so long, or I’ve been thinking about you and I want to talk to you about X, this, that, and the other. Or hey, it was another bad year for international markets. We want to reduce X percent and move it into the US.

These are all indications of a speculative bet. They’re trying to adjust your portfolio or your investments based on a forecast. And all we know about a forecast is they’re as good as the time that it’s said.

Look at the Weather Channel for any great forecasting methodologies. And so those are scary moments for me, for you, the end client, and the advisor too.

Like I said at the jump, I think advisors can fuse their value with bringing different ideas on the investment side to an end client.

When I tell all my clients, my value to you is making sure that your financial future is intact, and we can come up with a game plan to hit your financial goals. It is not for me to make you the most money as possible.

Because if I knew how to do that, I wouldn’t need any clients. I wouldn’t need to build a business. I would just sit in my room, day trade or expose market efficiencies that are supposedly there, and I’d make money on my own.

And that isn’t the reality of it. So time and time again, I hear from other advisors and clients that, you know, so-and-so called me with this idea, or so-and-so has that idea, or hey, I’ve been selling my clients this, you know.

We think that large growth companies, well, you know, I want more Nvidia, I want more Facebook, and it’s an I thing. It’s not a here’s what’s going to happen thing. So be weary of that.

If that is your advisor’s style of working with you, where every quarter they’re pitching you something different, and you think they’re some kind of guru, they are not. They do not know what’s going to happen.

No investment company knows what’s going to happen.

You know, no matter how big they are, JP Morgan, Edward Jones, Merrill Lynch, all of them will happily put out a forecast every year, but they don’t go back over it at the end of the year and tell you what they got right and what they got wrong.

And so, that is one of the scariest things that I’ve seen in our industry is the amount of people willing to stick their necks out and tell clients and other people what to do with their money, when in reality, they have no idea what’s coming or what

it’s going to look like in a year, two, three, five, ten years from there. Thoughts on that?

Yeah, I’d say if we’re looking at what it takes to be a successful investor, it’s definitely more consistency over hitting that home run. Go for singles and doubles, not home runs.

And the reason being is that within investing, risk is asymmetric, meaning if you’re taking that risk and the benefit you can get on the upside, it might be beneficial, but the downside risk of making a bet on something and missing is dramatically

more negative or detrimental to your portfolio than whatever possible benefit that you’re going to get from it. And over the course of a lifetime investing, all it takes is a couple mistakes, right?

A couple times of selling everything and getting out of the market or putting everything on some hot stock and having it drop 70%.

You can be over a course of a 40 year investing career, you can make two mistakes that you do something that you didn’t think you should do, but you just got caught up in either fear or greed or the water cooler talk of your friend saying you did

this. You make those couple mistakes and even just if a few months later, you come back to reality, you put your money back in where it was, those can cost so much.

And so the key over, like I said, the life of investing is just that consistency, is never making that big mistake, just kind of chug along, let compounding do its thing.

And at the end, at the finish line, whenever we’re ready to retire or need to spend that money, like that’s when you look back and say, you know what? Yeah, maybe I didn’t hit that home run, but I’m set up really nicely here.

And that’s what we’ve seen kind of time and time again. So to your point, Sean, the value of an advisor oftentimes is just talking someone out of what might seem like a good idea, but what could be a lot costlier than they realize.

Oh, investing is insanely emotional. With all the access that we have to all of our financial accounts, you can literally track the value of your account minute by minute, second by second.

And so we all get very happy and excitable when the market’s doing well, or we’re making money every time we log in, we’ve got more money than we did the last time. And we get extremely emotional when we’re losing money.

Where it’s pain, it is an absolute painful event. No one invests money to lose. That’s not why you do it.

That’s not why you were sold on. That’s not why you were taught. So when there are moments, inevitably there always will be, there’s gonna be periods of time where the market’s correct, for whatever reason that might be.

But it’s a painful thing. We don’t wanna lose. We didn’t do this to lose.

So most people’s just human instinct is I need to cut, I need to be done with this. I’m tired of looking at my account going down. I need to walk away.

And they’ll sell out. And they’ll feel great about it. And they’ll keep their head down.

And then they never get back in. The amount of times that clients have come to me or prospects have said, I hate the stock market. I’ve never made money in it.

Okay, tell me your story. Well, in 08, we lost everything. Our accounts were down 45%.

Our advisor never got us out. And so we just got ourselves out. Okay, well, did you know that if you would have just closed your eyes for a year and a half, you would have made all your money back?

Like, yeah, that was real. That was real. People lost 45%, 35%, 40% in 08.

And that is a wild experience. And so, yeah, the power of an advisor is to be that coach there for you, to educate you that, look, this event’s happened, we get through these, and it’s a year and a half. And that’s one of the worst recoveries, too.

I think, you correct me if I’m wrong, I think you know a little more data than I do on this, but the average recession is about eight and a half, nine months? Am I in the ballpark on that?

Yeah, it depends on how you’re defining things, but generally, if you see a market drop of the true correction or crash territory of over 20%, it usually comes back if we’re looking at averages in less than a year.

Now, obviously, the steeper the crash, sometimes the longer the recovery, but to your point, it’s never been over 10 years or over 20 years.

So for those of us that are investing in the stock market inequities that do have some time before we need to spend that money, for one, you shouldn’t be invested in the stock market if you don’t have longer than two or three year time horizon

anyway, so that’s a whole separate point. But assuming you do have 5 to 10 years, yeah, there’s not been a time since the Great Depression that the stock market really, whether you define it as the S&P 500 or a broadly diversified portfolio, there’s

been basically no 10 year time where a decently well diversified portfolio hasn’t made money. So as bad as things look, like you said, if you just kind of close your eyes, usually within a year or two, it’s back.

And yeah, maybe it might take a couple longer years than that, if we’ve gone through a really difficult time. But in the long term, it’s almost always paid off to just stay invested and to not give in to that fear.

And that’s what, as you talk about being emotion, fear and greed are the greatest emotions, and they’re by far the most prominent for investors.

Everyone either has a friend making a ton of money in something else, or everyone has a fear that the economy is going to sink and the stock market is going to sink and it’s going to stay down forever, and the dollar is going to go to zero.

Whatever people are talking about, there’s always some fear out there. And we’ve gone through a lot as a country in the last 100 years, and the stock market’s just kept chugging along.

And so it should be a good data point for people to look back and say, you know what, if I’m investing for the long term, all of these short term fears shouldn’t really dissuade me.

Yeah, we’re hardwired to emotionally not let this work in our advantage. You know, we as humans want to chase things. When people are making money, we want to be a part of it, and that’s typically near the top of something.

And then when things are going down, we want to run away from it. So we are buying high and we’re selling low. And the classic line, buy high, sell low, repeat till broke.

And so for the listeners out there, just think of a dip in a chart, you know, on the 08 example. So if you had 100 grand, down 40%, you’ve got 60,000 now. So you sell out there.

So what happens to most investors is, instead of writing it, they sell out near the bottom. That’s typically how it goes. The day you sell is the next week it turns around.

And then they invest that 60 grand back at the top again, when they’ve been like, okay, I’m gonna wait till it gets back to X to get back in.

And they’re leaving thousands and thousands of dollars on the table and to start back over at the high of when it was. And those are those mistakes Kenny talked about, that you do that twice in your investing career.

Think about that on a larger scale, a million dollars down to 600, 600 at the top, then for whatever reason, maybe it trickles back down a little bit to half a million. And you just cut out half of your worth, million to half a million.

Whereas you rode through that year and a half adventure, you would have had a million back in a year and a half and then we’re on to higher highs.

But again, it’s that emotional piece that makes the difference between investing and speculating, I think even harder because the speculators believe that they have control.

They believe that they, okay, I picked these five stocks because they’re gonna work, and when they’re not, I’ll just sell one and pick another one. Versus kind of letting the control go to professional investors and managers.

I appreciate you coming in and doing this for our listeners. I also appreciate you helping out my firm and our clients with the education that you bring to us.

So yeah, kind of to recap, again, there’s a huge difference between picking a couple stocks and thinking you’re investing versus having a systematized process, proven process, that has some kind of philosophy, whether it’s academics or research or

evidence base, that is repeatable time and time again. Any final thoughts from you? Again, we really appreciate having you in and joining us on the podcast today.

No, I mean, I think that’s great. Again, just in summary, have a philosophy and stick with it. It’s one sentence, but it really does kind of encapsulate what it means to be a good investor, assuming that philosophy is a sound one.

So have a sound philosophy and stick with it. I think maybe it’s a better way of putting that.

Well, again, Kenny, appreciate having you on the show. Thanks again, and I know we’ll have you on in future episodes because your wealth of knowledge is huge and enjoy learning from you every single time.

All right, sounds good. Thanks, Sean.