Afford Anything - Michael Kitces: Is the Economy Worse Than We Think?

Episode Date: July 23, 2024

#525: We chat with renowned financial advisor Michael Kitces at the Morningstar Investor Conference in Chicago. Kitces answers a big question: Is the economy worse than we think? He explains that a few big companies like Nvidia, Meta, and Alphabet are holding up the S&P 500. But this doesn’t mean the economy is bad. It's common for a small group of companies to drive the market. Since it’s hard to predict which companies will do well, he stresses the need for diversification. Kitces tells us to focus on long-term growth instead of trying to time the market. He shares a famous quote from economist John Maynard Keynes: "Markets can remain irrational longer than you can remain solvent." This means it’s better to invest broadly and wait for the market to grow over time. Kitces also says that career development is important. He believes boosting your income through career advancements can have a bigger impact on your financial health than trying to get the highest returns on your investments. He says, "Spending more time focusing on my career and getting a raise... will actually be more meaningful than trying to improve the returns on my own money." We discuss the importance of index investing and proper asset allocation. Kitces advises owning a diversified portfolio that includes international and small-cap funds. Even if these funds aren’t performing well in the short term, diversification helps spread risk and capture growth from different sectors and markets. Kitces talks about the cyclical nature of markets. Some people worry that the market will go down just because it’s been up for a long time. He explains that markets don’t "die of old age." Many factors influence market cycles, and it’s hard to predict when a downturn will happen. This reinforces the idea that staying invested and diversified is usually the best strategy. Finally, we talk about inflation and interest rates. Kitces explains that it’s hard to predict when inflation will return to the Fed’s target rate of 2 percent. This means that interest rates might stay high for a while. It’s important to keep a long-term perspective and not make drastic changes based on short-term market movements. This episode offers practical advice on investment strategies, the importance of diversification, and why focusing on your career can be more beneficial than trying to outsmart the market. Kitces’ insights help anyone who wants to reach financial freedom. Timestamps [Note: Time codes will vary on individual listening devices based on advertising run times.] 1:23 - Becoming a famous financial advisor. 2:08 - Role of a small number of companies in holding up the S&P 500. 5:11 - NVIDIA's role in AI and cryptocurrency. 7:38 - Importance of diversification. 11:27 - Irrationality and efficiency of markets. 16:26 - Role of international and small-cap funds in diversification. 18:10 - Impact of regulatory frameworks on AI development. 32:11 - Demographic advantages of emerging markets. 40:01 - Cyclical nature of markets and investor fears. 51:30 - Inflation and wage growth. For more information, visit the show notes at https://affordanything.com/episode525 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Is the economy actually worse than we think it is? We're going to tackle that question today as well as several more with famed financial advisor Michael Kitsis. We are here in Chicago recording from my hotel room at the Morning Star Investor Conference, where Michael just delivered a keynote this morning. You'll remember Michael Kitsas as a previous guest on this podcast. So welcome back. And for those of you who are watching or listening, welcome to the Afford Anything podcast. the show that understands you can afford anything, but not everything.

Every choice carries a tradeoff. This is known, of course, as opportunity cost. It applies not just to your money, but also your time, your focus, your energy, your attention. So what matters most and how do you make decisions accordingly? Those are the two questions that this podcast is here to explore. Michael, the famed financial advisor. How do you become a famous financial advisor, by the way? I don't know.

Apparently you type some things on the internet and what enough people find them on Google It carries some strange momentum unto itself. I started that road, I guess, more than 15 years ago now, and we built up a lot of people that just wanted to check out these nerdy financial planning thoughts we were sharing out into the world. It's a testament to the level of insight that you bring to the discipline because to be respected among financial advisors, among those who are in the know, is quite an achievement.

I appreciate that. The time that I spend these days is teaching and training advisors, as you noted, was here for the Morningstar Conference delivering the keynote session out to the advisor community about what's happening in our investment world and our industry more broadly. So excited to get to talk to you and talk a little bit more directly to the, as I think of it, the end clients that we serve as advisors than that we were trying to support. To the common folk. To the end user of those that we try to support.

Speaking of the investment community, let's kick off with the investing question that's on everyone's mind. And we all understand that our 401K balances are more or less being singularly held up by Nvidia. A small handful of others, but you have very few in that bucket right now. Exactly, exactly. Invidia, meta, alphabet, cohort of stocks known as the Magnificent Seven are holding up the S&P 500.

Is the economy doing worse than we believe? Are the markets doing worse than we believe? It's easy to think that, oh, the S&P 500 is doing well, but is it the case that seven companies are doing well and everything else sucks? The challenge I have in kind of thinking about it and framing it that way, I understand the concern. We hear it from clients in our practice as well, but in sort of a literal sense, those companies are the largest because they do represent the largest segment of the economy and what's literally happening in it. In other words, it's perhaps less a testament of, well, if these seven

are doing well and the others maybe aren't doing as well as that a bad sign of for the economy, or is it simply an actual statement about the economy that a huge portion of innovation and value creation right now happens to be driven by a small number of companies that are doing it in very large ways and propagated across everything. And that phenomenon is not unique. Now at seven, a few years ago, it was four because we were just talking about Fang. So apparently we're doing better because it's seven instead of four. If you go back 20 years ago, it was the dot-com bubble where a small number of companies at the top of the dot-com bubble were driving like all of the mathematical returns. If you go back before that, it was a small number of leverage buyout companies

in the 1980s and like the heyday of Wall Street that were driving all of this. We had the nifty 50 in the 1950s. It was the startup car companies in the 1920s before we got down to GM Ford and Chrysler. it was railroad stocks in the 1900. This phenomenon that there's a certain segment of the economy and a sometimes not huge number of particular stocks in the country that are driving it is actually a very common phenomenon. Like, that's kind of the norm. The challenging thing from any kind of markets or investing perspective

is you never really quite know which ones is going to be. If I said 10 years ago, I got a great thesis going forward. Cryptocurrency is going to be a thing and AI is going to take So let's buy the graphics card company. Is not what anyone would have said. Right. So even there's even this strange world like, okay, am I buying Nvidia because of graphics cards and kind of their roots? Or invidia is a strange proxy for a lot of crypto and AI because it turns out they all need

ginormous amounts of computing power. And so the ones that make the computing power cards end up being the winners in that marketplace. To me, like, it's not even Nvidia for the sake of Nvidia. Nvidia is like this strange proxy for the entire breadth of AI and crypto in the economy, because I'm not really sure which cryptocurrency is going to be successful, which AI company or multiple of them are going to be successful, but it turns out that they all need computing power, and so that's become the indirect play.

So I don't look at it and say, well, is the economy unhealthy because AI companies are struggling, but Nvidia is doing well. I kind of look at it and say, no, maybe just the reality is we'll see which companies end up being the ones that are successful, but they all need computing power in the way that, like, I didn't know who was going to be successful in the gold rush, but there was gold to be found, and the people selling the pickaxes and the shovels did very, very well regardless. And so sometimes a company can be a proxy for something much larger than just the company unto itself. And so do I worry about like literally seven companies driving the markets?

Okay, maybe a little bit. Like, I get it. We all live this like the whole world being shaped by this magnificent seven. But what? But they're ultimately driving the underlying trends that they're feeding off of that are making them successful really are much broader economic impacts that just happen to roll up to a particular subset of companies that most benefit from it. And so what I'm hearing then is it's common for a very, very tiny cohort of companies to drive the overall market. It is.

And when you look historically, I mean, if you look over the past hundred years, the overwhelming majority of the largest companies last hundred years are literally dead and gone. The railroad companies. The railroad companies were down to very few car companies. Almost everything that came forth in dot-com era is gone. GE used to drive the world and it's vanished. And so the secondary challenge was over a more practical perspective for investing is even if you're concerned that maybe it's too focused in the seven and you want to find other things,

is it's really hard to find what the other things are and predict in advance which ones are going to turn out to be the things and which ones are not. Again, very much in that spirit of, well, there were a zillion dot-tom companies who knew that the guy selling books was going to be the one that would take over the world. And we've been talking about the rise of crypto for 10 years and the emergence of AI has been out there for a long time. But who thought the graphics card maker was going to be the one that would profit from it? So part of the challenge to me is like the fundamental nature of why we buy diversified markets and own broad-based portfolios is the problem isn't that it comes down to seven, right? right now, the problem is you never really know what seven is going to be and it was four or five a few years ago. And I can't tell you next if it's going to go back to four or five or it's

going to go up to 10 or 12 or where it's going to shift because that is kind of the dynamic nature of markets and investing. Michael and I, we're in Chicago right now. We're at the Morningstar Conference. One of the things that we heard at the Morning Star Conference yesterday was by large cap value. at least among some people, there is the idea that large-cap stocks are poised to do well in the coming five years, and value stocks, large-cat value in particular, are poised to be the winners because they have the moat that a large-cap company has, but they haven't yet gotten the pop that the large-cap growth stocks have. What do you think about that?

So I'd answer this in two ways. If you look at market trends in history overall, this is a common thing. One of the reasons why we talk so much about growth and value, growth versus value, is there is kind of a cyclical effect. When markets are doing well and the economy is doing well and new companies are emerging as the new champions in this new era that's coming forth, investors in the aggregate tend to pile a little bit more into growth stocks. You get some high-flying names that drive some really favorable returns, which then makes more of us want to own them. And then the companies over here are like, yeah, we just do like really boring, slow things that everyone needs and make a profit.

But we didn't grow 172% last year. So apparently no one wants to buy us. They kind of get increasingly unloved from the metrics end. The value stops become deeper value stocks because just the raw amount of dividends and earnings that they make when you buy one of their shares. It just has significantly better metrics than growth stocks. And then eventually at some point the economy turns and all of a sudden the high flying growth stuff doesn't fly so high anymore because now the economy's in recession and things are

shrinking and all of a sudden investors love their way back over to value stocks, which tend to have a wonderful heyday for a couple of years. And then eventually the cycle begins anew and some soon things grow and a new part of the economy goes forth and investors go off after the next growth cycle. So there is, to some extent, I would say, a very true reality that markets have some tendency to shift between growth and value and growth and value. And you can at least to some extent, predict that because there are metrics that folks like Morningstar spend a lot of time with looking at how much more buying power do you get with a share of a value stock versus a share of a growth stock when you just look at the end of the day, what's the share costs and how much

earnings, how much cash does this country generate relative to the price that you brought the stock? And those metrics kind of gap out over time and then come in over time sort of like a rubber band. If you stretch the rubber band far enough, you know it's probably going to snap back sooner rather than later. And we are at one of those points in the cycle. That being said, the cautionary tale I feel compelled then to acknowledge, I started my career 24 years ago, basically at the peak of tech stocks that had already been saying for three years, the tech stocks have a ridiculous valuation. They can't possibly go any higher.

And then they doubled over three years. And then eventually they went down and gravity kicks in eventually. but if you acknowledge very much the same way in 1998, growth was ridiculously overvalued by any metric. Value was egregiously unloved by any metric. And then the growth stocks doubled. And then they got to like the most overvalued. We've ever had them in the history of measuring markets.

So eventually gravity kicked in. But all that is to say it's one thing to acknowledge, maybe these have gapped apart. You still have to be very, very wary as investors, say, therefore, I think I can time it. The great economist John Maynard Keynes was famous for saying the markets can remain irrational longer than you can remain solvent. And he said that because he was one of the fundamental, formative minds about how

economies and markets work that everyone has built off of for 100 years. And the guy went bankrupt several times because he kept making market bets and they would keep going longer than he expected while he bought them with leverage, and he kept losing all of his money. Like, the most brilliant economic mind kept losing his money over and over and over again because he mastered how to measure these metrics, but he couldn't anticipate when markets would actually respond to them because markets can remain irrational longer than you can remain solvent. And so whether that's tech stocks in the late 1990s, real estate for a run in the 2000s, where

everyone kind of said, seems like the market's a little frothy. and then we kept buying it, real estate kept going up. And if you made that call in 2006, you were right in the long run and broke in the short run, or at least missed a lot of opportunity in the short run. The numbers are what they are. That value is certainly a bit unloved compared to where it usually is in growth seems a little called frothy, compared to where it is by historical metrics. But be wary of how much you actually try to capitalize on that in the short term,

because that can be absolutely true. And then value continues to do not well for another year or two in growth, continues to do great for another year or two, or they might change next Tuesday. And that's always the fundamental challenge of trying to time markets down to that level or relative to. I know what you're a fan of in the context of your podcast. Like, you know, are you someone that wants to spend all of your days and all of your free time watching markets and obsessing over that? Or are there other things that you would like rather do with your time than hanging out, staring at market data all day, trying to make, try to see if you can time the turn. And to be fair, some people really do

actually enjoy spending their time doing that. So if that's you, more power to you, the challenge I has is why it's a lot of people that are kind of fomowing their way to, like, is this the hot thing in the market? This is a hot thing in the market? Like, I don't really love reading about this stuff, but I feel like I'm supposed to in order to be a steward of my money and be a good, responsible adult. Or you can just kind of broad-based, diversified things and do other stuff with your time. And like, that's an okay answer to because even the people that do this all day long, every day for a living, have brutally slim success records over just owning the aggregate market and letting the market go where it's going to go. You mentioned markets can be

irrational. How do we square that with the idea that markets are also efficient? So, again, I'll go back to the famous sayings in our space in the short-term markets are a voting machine, in the long-term markets are a weighing machine. At some point, economic reality comes to bear. Tech stocks went bonkers, and anything that had dot com in its name could do an IPO even if it had no actual revenue or business model. Pets.com was infamous for this in the day. But then eventually all of those companies crashed,

the few that had legitimate business model survived, and then we marched forward. If you tried to time the day or the week or the month that was going to happen in 1996, 97, 98, 99, or 2000, you could have gotten busted out the markets entirely, you know, John Maynard Cain's style. But then 10 years later, you look back and it's like, yeah, that really was a bit frothy.

And I think we had a similar thing that happened with real estate in the 2000s as sort of a practical example that some may recall. And again, markets do that in cycles. The challenge is herds can do some herd-like behavior for a while. Trying to tell the herd to stop stampeding is a very challenging problem. opposition. But at some point, the herd finishes a stampede and goes wherever it's going. And then a

positive look around says, like, why are we here? Let's go over there. And then market's turn. From the traditional advisor end, that's where we come back to say. And that's why we just own a broad-based diversified portfolio, because at some point, all of that stuff gets packed in. And either you can spend a just portion amount of time trying to get those turns and like figure out when the herd is turning just before the herd actually turns. And so some people do that with valuation metrics and some people do that with technical metrics and there's different sects within the investing world about how you're supposed to predict which things are going to move and the timing of when they move because you don't have to just be right about the direction.

You have to be right about when the change in direction occurs or you just decide you want to spend your time doing other things. And when you zoom out and look at markets over very long time periods, the fascinating thing that comes is the more you zoom out and just look at this kind of like aggregate growth of markets over a long period of time, basically you can't even see the bumps anymore. Like it just kind of migrates up into the right because the economy grows and markets the aggregate grow and, you know, I don't know what's going to be the hot company of the 2030s. But by definition, it will be the largest thing in the S&P 500 in the 2030s because it's a market weighted capitalization weighted index.

So whatever the big thing's going to be in the 2030s, if I own the index, I'm going to to own it and I'll participate in all its growth because it's in there. Right. And I don't have to figure out which one it is because that's how index investing works in the first place. Right. So many of your answers keep coming back to index investing and a part of index investing is also proper asset allocation.

Yes. We recently answered a question. We received a question from a listener who asked something that I think is on a lot of people's minds. She said, all my life, I've been told to own international funds and to, you know, own small cap funds and that sucks. International funds? Recently, yes. Yeah. Should we be rethinking our international allocation? Should we be rethinking our small cap allocation?

And I know the cardinal sin of asking questions is asking two at the same time, but I'm going to commit that sin right now because I want to layer some context onto this. One of the other sessions at Morning Star yesterday, one of the speakers talked about the regulatory frameworks around AI across the world and mentioned some concerns around the way that Europe in particular is regulating AI in such a way that it looks as though the US and Asia are really going to be the winners in AI development. And Europe is probably, based on current regulations, probably not going to innovate very much in AI.

And that bodes poorly for Europe. future prospects. Layering that on in particular, should we be rethinking that international allocation? I'll answer the second part first. So there's an economic principle, technical labels comparative advantage. It's the idea that often economies work best when particular players in the economy are in a global context, like particular countries, essentially do the thing they're really good at and let other countries do the things that they're really good at, and then you trade with each other, right? It's easier for, you know, Germany to be really good at cars and us to be really good at something else, and we'll trade them whatever we're good at, and they'll give us the

cars, and then we get our German automobiles. There are some risks to that from a global economy perspective, because it means if your trading partner has problems, suddenly you don't have the things that you need, and we got a version of that when the pandemic broke out and a whole bunch of supply chains got disrupted and we suddenly really realized there's a lot of things we don't make in the U.S. that we really like to have in our lives that get very disrupted when the supply chains get thrown off. But what it ultimately allows to happen is, and just what happens in practice, is countries still tend to go deeper into the areas that they're good at. And that also means they stop doing or they do much less of the things that they're not as good at with some constraints around

countries making sure they can provide for their citizens with supply chain disruptions. So when I hear that, like, in the context of AI, I'm like, cool. I think some parts of AI are clearly going to drive a lot of the future, right? Technology marches forward. I don't know quite how it's going to show up, but, you know, I'm pretty sure I'm going to have, like, my glasses are going to be augmented by AI at some point. Anyone I'll see on the street, there'll be like a heads-up display, like Terminator style that tells me the last time I met them and how I'm connect to them on LinkedIn or whatever

it's going to be. Right. Like, great. So China will make me. my digital AI glasses, America will make all the robots, and then we'll trade them to Germany to get our cars. Because we still need cars. And if we change all of our factories to make AI robots and jet packs and all the cool things that we're working on right now, like as long as we're still buying cars, someone has to make them. And apparently we're not making as many of them here

if we're putting all of our factories towards other stuff. And so that phenomenon means Europe doesn't have to make any AI to have an economically successful future. They have to to make something that AI countries want. They're not making something if all they're building are things that are built off of AI and robots. And so as long as Europe's got something they make, they can still be effective trading partners and they can still have an economy that's growing. When you look at just economies in the aggregate, what tends to drive growth at the end

of the day is more people and more productivity. If there's more people, so, and that's become an issue for some countries that have just, aggregate birth rate challenges. As long as you have more people and they're incrementally more productive in what they create, the overall size of your economy grows above and beyond inflation. And we find over time what countries want to produce and what they want to trade for and what their thing is going to be that they're particularly good at. So all of which is to say, no, I don't necessarily worry, like, well, if Europe's not going to be the one that drives AI, then I don't want to own Europe. Europe makes a lot of other things besides

AI technology tools, and frankly, if you even look at where relative country strengths are already, most people would not view Europe as the powerhouse of making microprocessors and chips and computer technology that AI leverages. That's not really the place that they've had the strength already, which probably is why they're not doubling down on having that be the place that they're developing in the future, right? It's not a coincidence that the countries that already do a lot of that work are the countries that are strong. the regulations to support more of that because they're doubling down where they have an advantage. And Europe will double down in the places that it has an advantage.

And then we trade. And it means that all of the countries can grow. The underlying question to that, though, I think it's just the, but right now I own all these like diversification things that are kind of being sucky for me. Because I look at my portfolio. Am I really supposed to own these things that are like not doing as well as the other stuff? the whole nature of diversification, right, not putting all your eggs in one basket is if you don't put all your eggs in one basket and one basket turns out to really be good, by definition, the eggs in the other baskets are going to be a little jealous.

Like, that's how it works. If there's not something I own that's doing less well than everything else, then by definition, I'm not diversified. I'm apparently owning all of the same thing that happens to be favored in the current. environment that's going up. So it's a little bit of a cop-out answer to say it, but like the fact that something is not doing well in my portfolio is probably a decent signal that I'm diversified in the first place. Right. Because if everything's going up at the same time, it's almost guaranteed you're not very well diversified because not everything in the economy does well all at the same time.

And so if everything you own is going up, you're probably not well diversified, which means everything that goes up together often goes down together. And that's going to get really noticeable. whenever the market turns. Right. My whole goal of diversification is I want some things that zig while the other thing zag. That also means they're zagging while the first thing is zinging. Right.

They're supposed to go contrary to each other. And so the investment principle that underlies it is, A, do I own things that are distinct enough that one could zig while the other is zagging? Well, yes, like there are times when the U.S. is doing better than other countries, and there are times when other countries are doing better than the U.S. Like that does happen as global trends emerge. There are times when value stocks are doing better than growth stocks and when growth stocks are doing better than value stocks.

So to say, I've got some diversification to value. I've got some diversification international. To me sort of passes the fundamental sniff test of, okay, I'm buying things that could zig when something else sag. So maybe they'll hold up well at some point when the U.S. economy turns because it will eventually. It does not grow up into the right indefinitely. Recessions happen.

But if I have that level of diversification, that means I fundamentally expect there will be parts of my portfolio that are lagging at any given point. If there aren't, I'm not diversified. I think part of the fundamental thesis underlying that question is the notion that small caps in particular are not poised to succeed as much due to the fact that the benefits of AI, at least right now and at least for the, the next few years seem to overwhelmingly accrue to the biggest companies because they can harness that power in a way that small cap companies can't. Yes, in the microcosm of AI in particular, right? There are certain industries where economies of scale dominate, right? Like somewhere out there is probably like a startup company in making baking powder and flour, but I probably wouldn't want to own that because I'm pretty sure the three companies that drive flour. I make like a billion pounds

a flower a year. And you're probably not going to be successful as a flower startup because you don't have 47 factories globally connected and a global supply chain to produce this at the lowest cost. There are always some industries and segments that are particularly conducive to economies of scale. And yes, I think there's certainly a lot to be said for AI around that with the caveat that there are still companies that are going to come up with very niche focus uses for AI. Maybe it's in a particular industry in a particular segment. If I look in our financial advisor world right now, the big hot thing is AI tools to do meeting notes. Because we happen to be a high compliance industry where we need to capture what happens in every client meeting.

So that if there's ever a compliance concern, we can go back and say, well, here's what was discussed and here's what was shared. And then if you're going to be a good advisor, you really kind of want to give a summary to the client at the end to make sure that we're all on the same page. And then there's usually some action items takeaway, which have to tie into some kind of workflow management system. And the average financial advisor spends one hour in prep and follow up for every one hour that we meet with clients, which is actually a lot of time. Yeah, that's a huge amount of time. So there are a whole bunch of AI tools that are like focused and obsessed on how financial advisors in particular need meeting notes. And it's even specific for us because we have to capture certain parts of the conversation for compliance purposes and certain parts that have to be documented. and most of us use only one of three CRM client relation management systems, so it's got to tie into that.

And so someone's going to have a wonderfully successful company making a great meeting notes tool that's very specific to the needs of financial advisors. There are only a couple hundred thousand of us. That will never be a billion dollar company. That will never IPO into the public markets. In fact, the most successful company that does that will struggle to ever even be a small cap company by public market standards where you already are worth hundreds. of millions or a few billion dollars. Someone is going to do that and merely make tens of millions of dollars building that company and creating it into the marketplace. So there's always an immense range of what companies can be created at various points in the spectrum from large to small. So yes,

if I'm trying to find the next $10 billion company, it's hard to be a $10 billion company if you're not first a $1 billion company and you need a certain kind of size and scale to have a shot at doing that. That tilts towards a certain large cap segment of AI. But it doesn't mean there aren't a whole bunch of small and mid-sized companies that can be created for that for particular use cases, for particular industries, for particular segments. And then guess what? If it turns out that there's a meeting notes thing for advisors, because we have that challenge, there's probably going to be meeting notes things for doctors. They also have a lot of patient notes that they have to do, but a whole bunch of different needs because you've got to make like an AI tool that can do

meeting notes for doctors that translate the drug names correctly. Good luck with that and then generate the prescriptions properly because otherwise the doctors are writing the scripts by hand. That's a handwriting challenge. So there'll be a doctor version. There might be a lawyer version. There'll be a whole much of other professions. And then maybe someday someone will roll all of those up into an aggregate meeting notes conglomerate that covers 17 different industries. And they'll appeal in the public markets and they'll be the next successful small cap AI company.

Because these still can roll up to various sizes throughout. So yes, there's some segment of the biggest of the big AI that definitely has a size advantage because of how the models work and you need your LLM to ingest more things than anybody else's LLM to do what you're trying to do in at least the current version of AI. But that doesn't mean a zillion other companies can't be made off of it, right? There's probably a startup every minute right now that's trying to do something with chat GPT or another system off of their chassis but building their own version. and then they're all picking powered off of Nvidia cards to power all the AI for the work they're doing.

And so, Nvidia gets huge and some AI companies get huge. And a bunch of focus players can still be successful at small and mid-cap range. And then that's before you get into every other industry in our economy besides AI. That also is still out there, right? We said 25 years ago.com and the internet was going to take over the world. And to be fair, Amazon delivers to everybody's house, like 80% of the country is prime. And we can all order our things and live off of our smartphones. But we also still manufacture equipment and we also still buy cars and we also still make

furniture and we also still have a huge services economy. And the overwhelming majority of the economy is not Amazon and dot coms. It happens to be one of the biggest companies in the country. But the overwhelming majority of our economy is not Amazon and not the Internet because there's still a lot of other things that happen. Like someone's got to put food on the shelves and we still need farms and everything in between. So yes, we'll do a version of this with AI, the way we did a version of it with the internet, just the way we did a version with computers, right? It's kind of bizarre to think that,

okay, 50 years ago there were no computers yet. Right. And now they're everywhere, but the overwhelming majority of the economy is still not tech. It's a very big segment, but the majority of the economy is still not tech. And so there will be plenty of room for other companies that are not the few largest AI companies to survive and be successful and to participate in as an investor. Going off of small caps and back onto international again, we talked in broad strokes about Europe and Asia, but we haven't talked about some of the more emerging areas. Saudi Arabia, in particular, the development of Riyadh and Jeddah and moving over to Dubai, like across the Middle East, we're seeing a lot of progress happening.

And in Africa, we're seeing quite a bit of progress. What's your view on some of the more emerging economies? So from the traditional investor end, I would say, like, this is why we have a slice of portfolios in emerging markets, so that we get to participate in those if they grow as they grow, when they grow, to the extent they grow as they become larger. Eventually, they're not even emerging markets anymore. and we call them develop markets, and then we tend to give them bigger allocations. Yes, diversification principles to me just hold inherently here.

I think there's some interesting tailwinds for a lot of those countries in particular. It's part of what makes emerging markets an interesting place to invest. At the most fundamental level, many of them get a demographics boom. At the most fundamental level, the real economy gets lifted when the population grows and productivity grows. Productivity is a hard thing to move, but we do it with the ongoing expansion of technology. But countries that have birth rate challenges have some very significant structural headwinds in how you expand your economy when there's just literally fewer people doing things in your economy. And a lot of emerging markets tend to have much, much higher birth rates.

And there's a non-trivial structural tail one that comes from that. Now, you'll be able to see that like 30 years from now looking back. That does not get expressed into the markets next Tuesday. look at the birth rate news. We're going to buy more companies in this country. That plays out literally over the span of a generation. But it provides a very healthy tailwind for a lot of emerging countries. Your challenge on the flip side is not always the most stable political structures,

not always the most stable trading partners. You know, you've got real challenges when there's a possibility that your country could end out in war or in challenge with someone that used to be a trading partner. And now all of a sudden, all the money that you were getting from them and trading with them just kind of vanishes in your economy overnight. Historically, there have been countries that have been very devastated, not just by war and competing interests with neighboring countries or trading partners, but just literally the economic impact when all of a sudden your trading partners go away. And now all of a sudden, your companies don't make money, which is rather catastrophic for the stock market in said countries, which is a long way of saying there's still a lot. of risk that emerges in those countries about how their political environment plays out, how their geopolitical environment plays out, right?

It's not a coincidence that we're here at the Morning Star Conference and, you know, I delivered a session about industry trends and the impact of technology. And the immediate following speaker was a geopolitical speaker. Right, Ian Bremer. Ian Bremer, from GZero, who's absolutely brilliant. Because geopolitics is a very, very significant factor in investing particularly in emerging countries. Right. And so part of it to me again of saying, is that a good place to have some of our dollars? Yes, because I want to participate in that growth. Is that a place

that I want to place bets about my life savings and hoping I make correct geopolitical calls about what the geopolitical environment is going to be in three, five or ten years? Very challenging. But should we then, at least with a small portion of our portfolio, make country-specific bets? Because you look at a country like Pakistan, all right, there's some geopolitical problems there to put it mildly. Then you look at some other emerging economies that are very stable, right? Should we be making these country-specific bets? Saudi Arabia, you know, very stable.

For folks that really want to spend their time doing the investment research to try to drill down to say, I think I can figure out which of the countries are going to be relative winners over the others. Sure. I mean, the amazing thing, like our modern ETF for us is like an ETF for anything. Like, you tell me the bill. building block you want, someone has probably made an ETF that will allow you to invest it that way. The caveat from the market's end is the valuations, how much cash and earnings power you get from a

company when you buy a share of their stock. Valuations already tend to be stronger, even amongst emerging market countries with more stable environments versus less stable environments, which is a nice way of saying if you drill down to the underlying economics, the emerging market you're interested in because it seems more stable, might actually have stocks that already cost twice the price of the ones in the less stable economies because other investors have realized this as well and have already bid up the prices of the stocks in those countries. So yes, more stable, no, not necessarily a better deal because you're already going to pay for the better deal in the fact that those stocks might be 50 or 100% more expensive than stocks in less expensive countries.

Markets tend to be remarkably good at pricing this in the aggregate, at least for all called the obvious opportunities, then you get the less obvious ones, and whoever's the better analyst prevails. That's kind of how markets can be made right there. Anytime I buy something, someone on the other side thought it was a good time to sell it. The only way I could buy it is someone thought it was a good deal to sell at the same price that I bought it at. That's how a match happens in the market. So every buyer has a seller kind of by definition. So I'm only winning that bet if I was right and the seller was wrong. I might be, but that takes a lot. But that takes a takes a lot of investment research and time to do. So some of us may want to spend the time and do that,

and we go after our country-specific bets. Some of us say, like, all right, I think there's an opportunity to do that, but I don't want to do that personally. So you get mutual funds that are managed by professional managers who do emerging markets for a living. So they travel all the countries and go out there and do site visit. I knew an emerging markets manager that had a lot of success in the early 2000s when a lot of the globalization was happening and shipping. a lot of offshoring out to China because he bought plane tickets and went to China to do due diligence on the actual companies and made a great deal of money when he found out that one of the companies, their actual factory was a rice paddy. There was no factory there. Wow. The whole company was

fraudulent. Wow. And lots of other people had bought it because globalization and China was the future. And then they were the emerging, a roaring economy of the time. So you had to make all your money there, and no one was actually bothering to find out whether the companies were really doing what they said they were doing, and he found one that was entirely fraudulent and shorted it and was very financially successful with it. But that's because the dude went to Asia every other week to do due diligence on all the companies that he was buying. I have no interest in traveling to China to do that on a bi-weekly basis. He wanted to, and so he invested our client's money for a period of time, or his fund company did, because that was the kind of due diligence work

that they were doing. So some of us will want to spend the time doing the investment research. Some of us may say, I believe there's enough opportunity there that I'm willing to pay a professional manager who does that, right? In the aggregate, that's what a mutual fund is. It's a professional manager that ideally is doing that level of research and due diligence about their companies. Or I may just say, okay, I just want to own emerging markets, international stocks in the aggregate, therefore I'll have exposure and by definition the ones that get bigger will have a greater waiting because that's how indexes work and I'll just buy some international indices and know that I'm going to participate and move on to other things in my life. Right? And you kind of get the,

you kind of get the spectrum. The only piece I sort of generically caution about just because as advisors, we see it over and over again with new clients that come on board is I want to invest in these countries individually, but I don't really want to spend the time that it takes to really analyze and figure out something about the way that this country is going to do better that apparently no one else on the earth has figured out that I'm getting this companies at a deal because no one else has figured this out and already bought shares themselves, which is essentially what has to happen for that to be more successful than just owning the market and the aggregate. And that's a really hard thing to do that at the least takes a lot of time, energy,

and focus. Just saying like, this sounds neat and seems like an opportunity I'm going to do it. You may be entirely right about the opportunity. Unfortunately, it already went up 117% in the past three years because everybody else saw that one, two, three years ago. And by the time you're buying it, you're getting, you're completely right. It's a growth thing. And you're going to get a terrible deal because everybody bit up the price over the past three years. So it goes back to markets being efficient.

Yes. It goes back to markets being efficient. It doesn't mean they're always right. Right, because sometimes they're irrational also. Because sometimes they're irrational. And there's just a lot of uncertainty, right? I can very efficiently, rationally believe there's a 70% chance that this company is going to be wildly successful. And that does mean there's a 30% chance I will just be catastrophically wrong.

And you can't even tell whether I'm good at it until you look at 10 bets I've made and figure out if I was actually 7 went up and 3 went down. Because it's supposed to be three that go down if I'm 70% accurate. And at any individual level, you can't even tell which one's going to be successful. and it does mean by definition, three of these are going to fail, and that means I was good at what I do. So even if markets are efficient and right, that doesn't mean all the things go up. You can efficiently rationally believe there's a 70, 30 chance on this, and that means 30% of time it's supposed to fail. Fortunately, I diversify, and so if seven go up, the three go down, I'm still doing okay. But individual stocks can still go up and down even when markets are relatively efficient and rational, individual segments of the economy.

individual whole countries can do that. And that's before you put in the and in the short term, we're kind of engaged in herd behavior and could be a little bit irrational before we get around to being rational again. And it's really hard to tell when the herd is going to turn. Right. I want to circle back. You know, earlier we had that conversation about markets being both efficient and irrational. There was another topic that you mentioned within the context of that conversation and it is the notion that markets are cyclical. Now, one of the comments that I often heard from this audience, particularly pre-pandemic, so in 2017, 2018, 2018, 2019, a lot of people said, hey, we haven't had a recession in a decade. Aren't we

do for one? You know, markets are cyclical. It's been 10 years since the last recession. And so there was this pervasive idea that I would often hear from the audience that people started conflating cyclical markets almost with a timer-like effect. Correct. And people started having a bit of a fear of heights. The market has gone up so much, isn't it due to come down? As though markets die of old age or as though markets fall because they rise. Can you address that? I mean, how do we square the notion that markets are cyclical, but also they don't die of old age? I kind of come back to Keynes' markets can remain irrational longer than you can remain solvent phenomenon. it doesn't mean they remain irrational indefinitely.

It just means it's really hard to figure out when they're going to finally come back to Earth. So we get this fundamental challenge that, okay, market's been running for a long time, but is now the point that the recession is supposed to come? We have the crash in 0809. It's like, is 2017 the year because nine years is too long? Or is 2018 the year because it's been 10?

Or is 2019 the year because it's 11? Or like, no, no, 2012's got to be it because it's even dozen. Like, does it matter if we're also on the 100-year global pandemic cycle? because we got the pandemic cycle in 2020 at the same time as the recession in 2020. So apparently that was finally the year we were due. Oh, and you finished up at the end of the year. Right. You could be right about the recession being 12 years overdue and successfully predict the global pandemic

because you saw something in medical data in January of 2020 before anybody else did and realized there's going to be a global catastrophe and gotten out of the markets in January 2020. And that would have been the wrong decision for the year. Because if you just open your statement on December 31st of 2020, you would have had more money in than at the beginning of the year, if you just left it all alone and completely ignored the 12-year overdue recession and the 100-year pandemic cycle. And, I mean, that's all of what comes back to. This stuff gets brutally difficult in the aggregate because you have to be right about what's

going to happen. You have to be right about the timing of what's going to happen. And you have to be right about what everybody else is going to think about what's happening as well because they're all making their own investment decisions about whether to get in or be out or this is too scary or this is a buying opportunity. and it's really hard to outsmart all the people all the time with the exact right timing with things that are fundamentally uncertain. Right.

Which just comes back to, okay, if you really want to do that for like spend all your time, do that. Knock yourself out. I know folks that they love that and they revel in that. And like that's fun to be spending all their time, nerding out and analyzing that. Frankly, some of those folks come into our financial advisor industry and do that not only with their own money, but make it a living doing that because they so enjoy it. but most people really, really don't.

It's not what we want to like spend our spare time with, which to me then comes back to just how much time do you really want to spend on this? It's one of the reasons why I very much appreciate your show. It's sort of the underlying principle of like spending all your time doing this investment stuff has an opportunity cost as well. Is this what you want to be spending your time doing compared to something else in your life? Or is this just even what do you want to spend your time doing compared to other ways you could have a side hustle and make more money? than trying to get the next 1% out of your portfolio.

If you look over any long, multi-decade period of time, stock markets typically average somewhere between about 8% and 10% a year compounded out, which means your money doubles every 7 and 9 years, just kind of math of compounding. If you even look at some like the greatest, most successful long-term investment management track record folks, like they maybe added a percent or two over the long term. They might have had like a really big year, but then they have an off year and you kind of average them out. And like, okay, so instead of getting 9% for the long run, you got 10% for the long run.

Like, is that what you want to do that changes your life? Does that meaningfully change the trajectory of your life that you're on? So for folks in our industry, well, if I do that with dozens or hundreds or thousands or tens of thousands of clients at a time with all the dollars aggregated together, I can actually have quite a magnified impact, which is why a lot of people in our industry do this for a living. You know, when you're doing it individually for yourself, it takes a lot of time for relatively limited incremental rewards. If that's what you love doing, do your thing. But hopefully at least going eyes wide open, there's a lot of other people with a lot of money that's spent literally all day every day trying to do this and be on the other side of

whatever it is that you're trading as well. And you have to outsmart the majority of them kind of by definition to do the sales when they're buying and do the buys when they're selling and end out ahead. Right. That reminds me of something that former guest on the podcast, Nick Majuli talked about where he said when he was in his early 20s, he spent all of this effort trying to squeeze little incremental gains out of his portfolio, never considering the fact that his portfolio balance was small enough such that if he had just skipped a night of drinking, it would have been the same thing, you know? I got to a point early in my career.

I live the investment side literally as like a career in a chosen profession. So like very familiar and comfortable with it and literally got to a point in my own career by my mid to late 20s of saying, just like spending more time focusing on my career and getting a raise, like getting a promotion will actually be more meaningful than trying to improve the returns on my own money. Like I'd rather just buy a bunch of index funds and participate in the bulk of the markets. return that I'm going to be able to get and just grow my earnings capability because I will add more dollars from a higher salary, then I'm going to generate an incremental returns getting

1% higher return on my account balance at the time, which was not the most sizable yet because I was in my 20s and there wasn't a lot of dollars there left. Ding, ding, ding, ding, ding. Yeah, yeah. You and I were talking before we started shooting. We're afford anything is building a second course and the big focus of that course is going to be teaching people how to, get a raise, how to make more money at their day job, because that's where the returns are. Yeah, if you think of your life, your working career is like an asset unto itself, right, the present value of your future earnings is like an asset on your balance sheet, because I have to adjust it for time value of money, so we have two present value.

Your earnings power, your ability to work in the marketplace and generate earnings, is essentially an untapped asset on our personal balance sheets. And there's a whole economic school of thought that essentially says, like, the function of our working careers is to turn our untapped earning potential into actual cash on our balance sheet. That translation function is you work in the marketplace, spend a portion of it, save the rest. And depending on how efficiently you do that function, determines how 12th you finish with. But the major X factor to that is you can control how big that bucket is by the profession you choose, the work. way you reinvest into your career, your willingness to change companies for better opportunity, your capability to negotiate for raises or promotions, your ability to invest in your own career

to do better work to get notice for your raises and promotions. Right. And when you're early in your career, when you're in your 20s and 30s, frankly, even pretty well into your 40s, you've still got multiple decades of that earning power potential left. And it's just enormous, right? If I'm a 20-something and I go get a $1,000 raise, I get that over the next 40 years, plus salary cost of living growth,

plus I can bank that and then grow that in my portfolio. And like, you do the math out. Like a $1,000 raise in my 20s could literally be worth six figures on my retirement wealth. It's really hard to do that with like another 1% return on my IRA balance. I can move that needle much, much faster by making investments in my career. Now, there comes a point when you get far enough in your career that, like, the number of years remaining is smaller. If I'm doing a pretty good job saving, the account balance is bigger.

And so, like, that relative dynamic does shift. So by the time you're in your 50s, it really is probably a bit less about what you're doing with your career and your earning power aside from continuing to work however many years you can and are able to work. And much more about what's happening with this pot. of money that may have grown to a sizable point here. But I do see a lot of folks in their 20s, 30s, and 40s. Just we avoid a lot of those career decisions because they're hard and potentially awkward and can be scary and dangerous. And career changes have a lot of other ramifications in our

world around where I'm living and my health insurance. Like there's a lot of stuff that's packed on top of thinking about a new or different job or asking for a raise of my job is scary. but it has so much more economic impact than a lot of investment decisions that we make in our retirement savings. On the subject of earning more income, a lot of people feel as though their wages have not kept up with inflation, and that's a major source of stress for a lot of people. So in just a moment, I'm going to ask you about inflation and about keeping up with inflation. But before we get to that, we're going to take a break to hear. from the sponsors who allow us to bring you this show at no cost to you.

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no matter who or where they are. From November 25th to December 2nd, your donation will be doubled. That means every dollar goes twice as far to help build a future where no one's seeking help is left behind. Donate today at camh.ca.ca.givings Tuesday. Welcome back. Many people feel as though their wages have not kept up with inflation. Let's talk about how to address that. But first, I'd like to hear what your predictions or assessments are in terms of how long will inflation in the U.S. continue to persist. As of the time that we're recording, the trailing 12-month inflation rate is, I believe, somewhere around 3.4%. When will we get down to the Fed's target 2%? And incumbent with that, when will interest rates start to decrease? Oh, the unfortunate answer is that,

those are sort of related in that the longer it takes for inflation to come down, the longer it's going to be before the Fed gets around to cutting rates, right? In the purest sense, they keep rates higher because the goal is slowing the economy down. And then when the economy functions a little slower and people are buying a little bit less, it's a lot harder to keep pricing up your goods. And that's what starts to peel inflation down. So in the investment realm, we often talk about that from the context of, okay, let's hope the Fed gently slows the economies, like inflation cools off and we don't have like mass unemployment

and layoffs. Right. The bad version is like, oh, I could slow the economy down. Like, just give me a sledgehammer for a moment. We'll take inflation right out of the system. Unfortunately, a quarter of the population may be unemployed, which would be very unpleasant. So the Fed tries to do this slowly because they want to take the heat off with that. really destabilizing and causing a lot of unemployment because that's what happens if people

really slow down their buying because rates got too too high and companies slowed down too too much. But the fact that inflation has been so persistent, to me implies we're probably in higher rates longer than shorter because there's clearly some heat still to pull out of the system. And the fact that getting rates up here and having them hang out as long as they have, hasn't done it already, means there's apparently a good amount of momentum to buying power and inflation. So the Fed ain't done yet. Right. So two follow-ups to that. First, the Bank of England has put out a statement predicting that England will get down to the target 2% rate in about two years. Does what happens there happen here across

the pond? Like, will the U.S. follow a similar path to what England is expecting? Not necessarily there comes a point where a lot of this is what happens locally. England's real estate market does not look like the U.S.'s market. The U.S. is particularly services intensive as an economy, which ironically, unfortunately, is a little bit less sensitive to interest rates in the first place. When you have economy that's heavily built around construction and manufacturing, you know, as we all experience for anybody who's shopping for a house these days, like every point higher on rates sure slows down the viability of,

of real estate, which eventually slows down real estate construction, which slows down demand, which kind of ripples through the economy. But not a huge portion of our economy is actually construction. It's a non-trivial piece, but a huge portion of our economy of services. I don't make the decision about whether to go to the doctor or whether to hire a lawyer or whether to work with a psychologist based on interest rates, except in the most indirect of like, well, I guess if my rent gets really expensive because rates are high, then apparently I can't afford to do a couple of other service providers because I'm running out of money because of my rents,

because of my high interest rates. Yeah. And like... Rents is too high. I can't go to therapy. Yes. Like, it ripples down the line. But the nature of our services economy in particular gives us some really, really nice stability in

some ways. The U.S. has ridden through a lot of the turmoil in recent years with less volatility than a lot of other countries have, but it also means a little bit harder to get us to move with interest rates. And the system just fundamentally is so large and so complex that even the Fed at the end of the day struggles a little bit to figure out exactly how much do we need to turn this lever to get it down to where we want, to get inflation down to where we want to be, which is why they tend to move a quarter or half point at a time, and then they look around for six weeks and see what's going on.

And then they move another quarter or half a point. Then they look around in another six weeks. Then I'm like, okay, we're going to hang out here, but we're still watching for the next six weeks because it's such a complex dynamic system that even for the smartest economists, this is a really hard thing to figure out where you have to watch real time and see what's happening. Inflation in other parts of the world is quite a bit worse than it is in both the U.S. and the UK.

Feels depressing by comparison because it doesn't feel very good here. Yeah, exactly. Exactly. In this very globally connected economy, how concerned should we be about that? So it shows up indirectly in that, per our earlier conversation, the nature of our global economy and the purest sense is lots of trading. Countries have the things that they're good at producing manufacturing and they trade with other countries and eventually we all get the computer chips and the cars and the food and the rest of the stuff that we need to live our lives. That does mean there is a phenomenon that when other countries are experienced a lot of inflation that's lifting up the cost. to make things in their countries.

The portion of the inflation effectively is imported to us because we're buying their stuff. And if their stuff's getting a lot more expensive, then it comes downstream to us as well. In the long term, eventually economies and companies react to that. It's getting so expensive to import some of our parts from that country. We're going to open up a factory here and we're going to make it here because we can now make it cheaper. Right. But that's CAPEX, which, you know, there's a long lead time to that. That's a very long lead time.

Now, some of that began happening already because of inflation that we've seen for the past few years, particularly because of the supply chain disruptions that happened in and shortly after the pandemic where a lot of companies said, wow, that destabilized us way more than we'd expected. We're going to start bringing some stuff back to the U.S. just because we don't want the supply chain risk. Oh, now it turns out things are actually inflating more in other countries than here. They're going to double down on the thing, but they actually started the CAPEX investment for some of those a few years ago. And so that may help us a little bit at the margins.

But this is why at the most fundamental level, like why the Fed and other global bankers around the world spend so much time looking at it, focusing on inflation, is because it's really scary for them when it starts rearing up because it gets really hard to tamp down once it's there. The flip side is, I think there's also a lot of work that the global bankers are trying to figure out because the irony is most of the past 20 years, globalization was this phenomenally deflationary phenomenon. Right. I mean, for anyone that remembers, the Fed's response to the financial crisis and the money they injected in the economy was supposed to cause the worst

hyperinflation in 100 years. And inflation sat at like one for a decade. Right. And it had been that for the preceding decade through the 2000s. And now as we, somewhere we're calling this at the time, but now in particular as we look back, globalization ended up being a very deflationary force because countries and companies around the world start looking and saying, we're producing this thing that's getting 3 to 5% more expensive,

but if we ship it to the country over there, it'll be 20% less expensive. And if we rearrange enough things, we can offset all the inflation we're experiencing locally by shipping select pieces out to areas that are less expensive. and it keeps the net change pretty darn close to zero. So the weird challenge we had for a lot of the 2000s and 2010s was fear that we were on the cusp of a deflationary trend.

And as bad as inflation is, deflation gets much worse. It's much harder to break out of a deflationary spiral once you get into one because at the most basic level, deflation means things are getting cheaper. So there's never any reason to buy anything sooner rather than later because it only gets cheaper when you wait. So everybody stops buying because it keeps getting cheap. cheaper. And if everybody stops buying, your economy crashes. Then the economy crashes and everything gets even cheaper faster. And it's like, you know what I'm really not going to do now is start

buying anything because the longer I wait, the faster it gets cheaper, except the faster it gets cheaper, the more my economy is crashing. And I mean, that's essentially how oversimplified. Like, that's essentially how you get to the Great Depression. Right. As painful as inflation is, global bankers are even more terrified of deflation than they are inflation? And so the fear for 20 years was, are we on the cusp of this giant deflationary spiral that's about to unfold because it's darn near zero? And we keep doing these monetary policy things that are supposed to make inflation. And it's still staying near zero. And now all of a sudden

it's not near zero. We're like, oh my gosh, now inflation's here. I was like, well, that's what we were shooting for. Not quite this much. So oops, might have overshot a little bit. But again, these are really large complex dynamic systems. And so just the unfortunate reality is like they don't, they don't turn on a dime. And because economies are so complex and so adaptive as they go, things that used to work or work a certain way don't quite work the same way anymore because the underlying economy and behavior shifts. And that's part of why global bankers have a job, trying to tune this in and figure out what to do. And it's why you just you see the fundamental nature of how interest rates are managed from central banks around the globe is very much this like,

we're going to do this little thing and then we're going to see and then we're going to see. And we think if we stay on this trajectory, this is where we land over this time period. But the truth is when any of them make that prediction, there's like this giant. And we'll be looking at the data every single six weeks over the next two years to figure out whether it's actually playing out that way. And if not, we're going to make changes. Because the system responds as we go, right? You see it in areas like rates are up.

So commercial real estate's getting slammed. But now we're talking about turning a bunch of old commercial real estate office buildings into new kinds of condos and apartment buildings, which could actually change our housing stock and then provide some relief in housing prices from the interest rates that are breaking housing prices because they're breaking commercial real estate worse than housing prices. So maybe the commercial buildings turn into houses and then we actually get better after all. And good luck building that into a three to five year model. Smart economists will try, but it's really hard to figure out.

exactly how this is going to turn out. So again, just the reality is it is going to be a lot of incremental. We did something. Let's see how it's going. We did something. Let's see how it's going. We did something. Let's see how it's going. As the Fed tries to figure out, how do we navigate to, we don't want deflation, but this inflation's a little hotter than we wanted. And they're trying to get it down into that zone.

There are certain elements of our economy that are deflationary, though. Not the economy as a whole, but you look at the cost of computing. Right. Yeah. Our computers are a billion percent more powerful than they were 30 years ago. A bazillion percent more powerful and they consistently get cheaper, right? Just the cost of having a personal home computer has only gotten cheaper over time. And you see this in specific sectors of the economy. They are deflationary sectors. Now there's talk that AI will make certain things deflationary. Some parts probably. Yeah. AI will have a deflationary effect in specific sectors as the cost of doing certain things will get much cheaper.

So how do we bake that into our understanding, not just of broader macro forces, but at a personal level, again, this goes back to people feeling as though their wages aren't keeping up with inflation. On one hand, you go to the grocery store, and your grocery bill is just a lot higher than it was before. On the other hand, you can now take a picture of your pantry, load it into chat GPT and say, hey, based on the ingredients that are in my pantry,

help me come up with a meal plan that means that I don't actually have to go buy anything at the grocery store anymore. And chat GPT will write you a freaking menu for every day for the week and say, all right, here's exactly how to make the most efficient use of everything that's currently in your pantry and you don't have to spend any more money. Go. So on one hand, you've got inflation at the grocery store. on the other hand, you've got personal savings that arise from the use of AI.

How do we square all of that? So the economists try to do a version of this when they're modeling out inflationary trends in the first place. So in the economy's world, these are substitution effects. So in the purest sense, if beef gets really, really expensive, we start buying more chicken. And so food inflation doesn't quite move at the pace of just what the beef's inflating at, the chicken's flaining that because the beef gets too expensive too fast. We start buying chicken. The chicken gets too expensive too fast. We go back to beef again. And so they start equalizing themselves. We rein in the getting really expensive thing with shifting behavior.

Now, like it's challenging some areas, like most states, you are legally obligated to have car insurance in order to drive. So I can't opt out of the car insurance that's getting really, really expensive lately. In many areas we can, and AI at least hopefully makes that incrementally more efficient, right? I don't just have to figure out what the beef is better than the chicken, cheaper than chicken. Either I take a picture of my pantry and get a meal plan where I don't need to shop, or I tell the AI what I like to eat, and then it's going to like shop for me and find the best cheapest places to do those in particular. Like, have you considered making this dish with lentils instead? Because it would bring down the cost significantly, because apparently they're cheaper than

whatever else I was going to put in the dish, I say as someone who has no cooking competencies to know what goes into dishes. The tools and technology can make it easier for us to find some of the substitutions that does help at the micro level, right? It helps us get through the day and manage our budgets a little bit, and it can potentially turn the cost of some select items. You know, we're buying a little bit less of the chicken, we're buying a little bit more of the beef. We do that and the aggregate and the prices normalize. It doesn't necessarily to solve our macro problems of inflation, which I, in the purest sense, kind of boil down to too many dollars chasing too few items in some select areas that's driving it up. And some of

those are much, much bigger societal level imbalances that don't resolve very quickly from interest rate policy or anything else. Which actually brings me to the question. There are some people who argue that we are already currently in stagflation. And they point to the high levels of government spending that really are propping up big portions of the economy for the sake of everyone who's listening. Can you describe why some people believe

that we are in stagflation and then give us your take on whether or not you think we are? So the essence of stagflation, why it has like its own special bad name. The fundamental principle that essentially interest rates in the economy operate on is

if interest rates get higher, lots of stuff gets more expensive because interest rates are indirectly or directly priced into things, right? It makes housing more expensive immediately. It makes factories more expensive because companies borrow debt to build factories. And if the factories are more expensive, we don't make as many of them and it slows down production. Higher interest rates are in the aggregate, bring down activity and demand. If it brings down activity and demand, then companies have to start pricing down because there's, otherwise literally no one will buy it. And so you get this slow,

indirect but fairly well-established mechanism of the rates get higher and the prices start to come down and it solves the inflation challenge. The stagflation phenomenon is interest rates get higher and the inflation doesn't cool off, which was a version of what happened in the 1970s. And there's a bunch of very smart econ research about like why that happens and how that happens and some debate about the various ways that that can happen. You know, sometimes that happens because everything got expensive because there was some external event that disrupted prices and made it happen. So in the 1970s, like, things didn't get expensive because of interest rates.

Things got expensive because there was an oil crisis, and it made oil and gas really expensive. And then it made basically everything else that relies on oil, gas expensive, which is pretty much everything because you can't even move stuff on roads around the country or on trains or on trucks if gas and oil gets real. expensive. So an external shock picked everything up, which means just bumping up interest rates doesn't really correct the mechanism because that's not the mechanism that made it expensive in the first place. The secondary challenge that can happen is if wage inflation starts picking

up, right, we get to the point of saying, like in the aggregate across the whole economy, well, things are getting so expensive, all companies have to give raises to make it more affordable. the good news is you can now afford everything. The bad news is, well, now when everyone can afford everything, they buy everything off the shelves and the company is like, look, buying powers back, we can raise prices again. And then the wages pick up, and it makes the prices pick up more. And then we go back and say, well, we need more and more wages,

which makes the prices pick up more. And you can get trapped in a spiral now where the higher wages are pushing the prices of everything higher. And it spirals upwards, which was kind of a version of what we were getting into by the late 1970s. It wasn't the original cause. but it was what it started to spiral into, where you eventually get for that, or the solution that economist Paul Volker infamously found was, well, eventually you can break that. You just jack up interest rates to the moon. Right, which is what they did in the 70s.

Which is what they did in the 70s in very early 1980s, where we got to the point where, like, you got 15% in a money market and had to pay 18% for a mortgage. Yeah. And then things stopped inflating. Right. And we basically spent 20 years of interest rates then, like, slowly ratcheting back down from how dramatically they'd been scaled up. So we did eventually get there. If you sort of think about how that plays out, yeah, you get 18% interest rates. Like, houses just can't be this expensive.

Like literally no one will be able to buy one if you get there. And it forces the prices to come down, which brings real estate prices down, which brings rents down, which starts to take the inflation edge off and propagates through the economy. So we kind of know how to solve it, but that is clearly very painful for all involved, right? In the purest sense, when inflation gets rampant and you're trying to break it, you're basically trying to break people's affordability to buy stuff to force the prices down. Because unfortunately, if you try to put more money in to just make it more affordable at current prices, it just makes the prices go up more. And practically speaking, If you're trying to destroy demand and force prices down that way, it has unfortunate side effects

like a lot of unemployment and job losses because kind of by definition, like, everything got so expensive. No one buys anything there anymore. So all the people who worked there got laid off. Good news is we solved inflation and got cheaper. Bad news is a lot of people don't have jobs making the things and selling the things that we used to buy until they got so expensive when we jacked up interest rates to solve it. At the meta level, this is why Federal Reserve spent a lot of time trying to make sure we have enough inflation that we don't get into the deflationary spiral and not so much that we get caught in the inflationary stagflationary spiral.

Because the systems feed on themselves, because we're wonderfully adaptive human beings and do that, both can create very problematic spirals. The wages, make the wages higher, the price higher, make the wages higher, make the prices higher. and you get a spiral that direction, which takes very significant price or interest rate increases to solve. Or you get the deflationary version where no one buys anything and that gets cheaper. So then they really don't buy anything. And then it gets a lot cheaper and they really don't buy anything. And now there's vast unemployment because factory shut down because no way's buying anything.

And the Federal Reserve tries to keep it in the golden zone in between with a relatively blunt instrument like interest rates and hope that that changes our behavior at the counter. Right, right. Well, interest rates are a blunt instrument, but then again, you have technological advances that also influence the cost of things. Yes. Right? As we talked about earlier. Yes.

But again, with the caveat that as much attention and kind of credit as technology gets, it's not the majority of our economy. Right. And it only has so much effect. You know, just most of us underestimate. Like, in most small towns, your most successful business owner in most small towns is the person. that installs the HVAC equipment and usually has the largest business because every building needs one. And if you're the only one in town that does that incredibly manually labor work with large

equipment and machinery, that's actually a wildly successful business and is not really probably going to change in any material way from the advent of AI. Like someone's got to get on the roof and put the thing in and run the piping through the building. Maybe it'll be a fancy AI driven system that like turns off. on and off at optimal times and is super energy efficient because of all the needo technology. But like some service business has to go and put the thing into the building. That kind of work is actually a huge portion of our economy in the aggregate,

all of these different services layers that exist in the economy. And they're less, AI shows up in a lot of indirect ways, but they're less impacted by AI and even just technology advances in the aggregate. And so, yes, they show up. I mean, there's a reason why NVIDIA is the largest company out there. But most of your local towns, successful business people, are installing the HVAC systems. Right. We know from the millionaire next door that the majority of American self-made millionaires are people who own HVAC, plumbing, pest control, janitorial services.

Just like the pure services that people in the neighborhood need to live their lives. And then every few years I buy a new fancy television maybe. Right, right, exactly. That gets exponentially better for cheaper. But then I still just need all of these core services about living my life, managing my house, the neighborhood, the office building is my place of work, great, everything that builds around that. And it's a less visible layer for most of us, unless that's an industry that you work in. And almost by their nature, these are all small local businesses. So, you know, the stock market gives them zero credibility because they're not publicly traded

companies because they don't operate at that kind of size and scale. That's literally the bulk of our economy that's out there chugging along doing what it's doing. Yeah, and there's an uptick in Gen Z going into those professions, which is great to see because no student loan debt or low student loan debt plus high wages. Plus, in addition to high wages, you then, you spend your 20s working those jobs, you spend your 30s creating the company, right? And so then millionaire by the time you're 40. And with all that power of the earlier I can get my earnings going, the more I kind of lift that lifetime earnings opportunity and all the different ways I can translate that into savings

and investments and growth and kind of building my personal net worth or whatever I want financial independence to look like in the future. Absolutely, absolutely. Yeah, start the pest control company. Start the HVAT company. That's a brilliant entrepreneurial route. Yeah, and frankly, like, I don't care how good AI gets. Like, they're not likely coming into my house to remove the pests anytime soon. Right. We're a long, long way from that. Right.

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A lot of smarter economists than me out there analyzing it. If you really go back and look at what inflation, both in jobs and, cost of goods looked like in the 1970s, it has not looked like it does today. I mean, just seven to 10% raises were normal year after year after year. And it didn't help because everything was getting 10 to 15% more expensive. But that kind of stagflationary cycle, wage increases tend to be much higher. The frustrating part is like you're getting them and you don't feel like you're getting a heck.

It's like, yay, I got a 7% raise because cost of living raises are up so much. crap milk costs 12% more than make any headway so the whole nature stagflage sharing environment's like the wages really start picking up and I'm not making any headway on how expensive things are that's like the scary part of it but unfortunately we're not even really getting the wage inflation the bigger cost of raises part yet that's not showing up yet and so different people defined a little bit different about exactly what fully defines when in like wage inflation, stagflation cycles. But I think when most of us are talking about stagflation fears, like we're talking about,

are we going back to the 70s? Yeah. And this is not showing up the way that the 1970s did. That was a world where we're getting the raises and it's not enough. The phenomenon of it keeps getting more expensive and we're not feeling the raises, like that's also a very significant problem. Like that's a different problem. Well, and that goes back to what we were talking about earlier, the need to increase wages, right?

And then the course that we're building, which is all about teaching people how they can ask for a raise, how they can negotiate for a raise because a lot of people feel as though prices have gone up and they need to get paid more as a result. Yeah, I have to look at this relative to my own career journey and experience. I still remember the first job I had and first job I lost. And how terrifying it was to get fired and be like, so how am I making rents in a few weeks? It gets really real, real fast when an income disappears. What was that job? Insurance salesman. So I started in the insurance sales side at the end.

industry and turns out like I'm pretty good at the nerdy financial planning stuff. Not so good at the sales stuff. Don't tell me it was whole life. No, this was 2000. So it was variable universal life because why by whole life? You could put stocks into your life insurance. That was the thing at the time. So lost that job, had the incredibly good luck fortune that literally the day I got fired,

I went down to the cafeteria, grabbed the job. section of the newspaper because this was print newspaper 20 years ago so you still actually mostly found your jobs from the newspaper it wasn't quite all craigslist yet and open up the want ads and literally found a want ad that day for what turned out to be the next job sheer dumb luck but it terrified me to realize like if that had happened and that wasn't a good job I was going to have to take basically anything that I could get. Right. It turned out actually to be a job with a decent wage,

but I was going to have to take anything that I was going to be able to get in fairly short order, which meant if I didn't luck into finding a want-out that was actually a good fit at the time, I would have been trapped into something that was going to pay me a lot less. And then be stuck in that because I can't afford to not work to find a better job because I can't bridge the rent. And so it made me really focused early on. to say, I need enough dollars saved up that if I'm ever at a point where I'm in a crappy job, I can go find another one. Either I can go find another one and say goodbye, see ya, and be able to last a little while

until I find the next one, or that I can have enough that I can go into my boss and ask for a raise. And if he says no, and you're fired for asking for that, which doesn't really happen much, but it's, I think, all of our, like, natural fears anytime I'm going in that, like, I don't care. I've got enough to bridge until I find the next job. And I basically thought of it was my, I guess class of people call it emergency savings. I always thought of it as this is my like opportunity fund that if I get stuck in something that's not working, this is how I bridge to get to the next job. And in practice for me, it bridged two jobs and then actually became the bridge to launch

my own business on the same thing. I was like, I, okay, I built up my opportunity fund enough that I can actually go like launch a business of my own. And if it takes quite a while for it to get going, I've got enough saved up to manage my expenses. And I cut my living expenses really low because I split an apartment with multiple friends for the entire decade of my 20s while I had a ridiculously cheap car I bought off of eBay, which I actually still have. So kept my fixed expenses very low, built up opportunity funds so that I would be able to make job changes. And that's what let me navigate through multiple jobs and then eventually starting a business of my own.

And to the point where like I was not maxing out my 401K, I was barely contributing to my 401K for many of those early years because it was much more important to me that I could swap jobs, something that would pay better. Like back then I left a job that was paying $46,000 and got a job that was paying $55,000 and thought I like died and gone to heaven because it was so much more money than I was getting before. but I could only do that because I knew I was able to weather being out of work for a month

because I'd actually what ended up happening was like I had to wind down the old job because some stuff was changing. I didn't want to continue and use that as an opportunity to find a new job. But the new job, the position wasn't starting until like two months out because it was tied to some budget cycle. And so I had to have a gap month. And so I got like a 20% raise that kicked off an entire change in my career trajectory. That only was possible because I could float the month.

month. And I could only float the month because I had my first experience of almost not being able to float a month and saying like that is more important even the building of my retirement account out at the gates. Like I have to be able to be flexible for take another job, move if I need to take a job, be able to float a month or few if something bad happens and I'm trying to find a new job and not have to capitulate to the first person that gives me an offer even if it's an equal or worse salary, like be able to hold out at least a little bit for something better and I still see that as a challenge for a lot of young people that I talk to today where they would like to find something new.

They might even have a shot at getting something better, but if it required them to move or be out of work for a few weeks to get from A to B, they literally couldn't float that time window or at least they couldn't float that time window without trying to pull money out of retirement plans where you get like the early withdrawal penalties and the taxes and all the other stuff that comes with it, which. you can do, but that feels very punitive because it kind of is, that at least for me, led me in the direction of, well, I need an opportunity fund that I can navigate career changes or just at least be confident enough to ask for the raise of the promotion and not have to

be terrified about the consequences if that conversation doesn't go well. So then I had the confidence to do that and then actually turned out things went relatively well. Sometimes having that flexibility is more important than having that tax advantage. Yes, yes, because again, when we're early enough, the ability to have successful job changes or career changes or promotions or switch industries or ways or whatever it is. Like multiplied across decades of my working career ahead is so radically more impactful than getting a little bit more dollars into my IRA early on. Even as cool as like, I'm all for my tax-free Roth compounding to the sky thing and do

as much as anyone. I appreciate that as much as anyone, but like career trajectory has so much more impact in our 20s and 30s. And so if leaving the dollars flexible, granted Roths, you can like pull your contributions out tax free. They get a little more flexibility. But having that flexibility and being able to know deep down, like I can make a job change or relocate or be able to float a little while if I push for that promotion and it doesn't go well, the confidence that gives you to then actually find the next thing is a huge moon. It doesn't work for everyone all the time, but it works way often than being financially constrained and never being able to give that a shot.

Right. We're approaching the end of our time, but the very last question that I want to ask, you mentioned that you bought a car on eBay. Yes. And you still have that car. Yes. And I know, because you've written about this recently, the math today around, do you hang on to a clunker or do you replace it?

The math today is different than what it was five years ago. We're living in an era where the math around what it cost to buy a car is different, and the math around car insurance is different. You touched on that a little bit earlier, and car insurance is legally mandated, so we can't cut that bill. How has the math changed? I feel like the car industry is kind of trapping itself in a strange place right now. There's sort of a double whammy around the new car environment.

days. Just sort of the general price spread of new as expensive relative to use. We always had that to some extent. But if you buy new and drive it till it dies, at least still amortizes relatively well if you do it long enough. But cars have added so much in electronics now that are just getting surprisingly expensive to fix and repair, which is part of what's lifting up car insurance because auto claims are more expensive and I don't just like, I don't just fix the part. I fix the part in like a thousand dollars worth of electronics that was attached to the part that also have to be ripped out and changed and needs a more sophisticated trained person to be able to insert the electronics on top of the rest of the car parts that it's making this interesting math of not only is there

some affordability effect for used cars but there's a lower cost of maintenance effect to fix cars from like five to ten years ago that just have like normal car parts and not the cars that have the cool electronic stuff that is some really cool electronics in cars these days, but it's making them really expensive to repair. And so, look, from my end, financial spending is choices and tradeoffs. Like, the car works. Yes, and point of fact, I actually had to repaste a bunch of brakes and pads and calipers and whatever all the parts are.

I know very little about cars that are work cooking. I stick to investments in financial planning. I put a bunch of money into that car. but the thing works. It's worked for going on 20 years now. It's a 2006 Kia. The thing's working going on 20 years. I was actually looking like that car can still sell on the secondary market for like $35 to $4,000.

I bought it for five. Wow. 18 years ago. And I mean, it was used then. Actually, I bought it 16 or 17 years ago. It was a few years used when I bought it originally. But like the things basically. held as value because I bought a cheap inexpensive car then and just driving it into the ground.

And actually, I don't do a ton of driving these days because I've got some remote work options as well. So I'm not even putting a huge number of miles on. It's like the thing could go another five or ten years easily with just some incremental repairs. Like I'm so much happier to put another, whatever was, like $700 into rebuilding all the brake system than going and buying a brand new car where like a sensor breaks. It cost me $700. At least I got a whole new brake system for my $700 repair a couple of months ago. That's a tradeoff of what I don't spend on cars. Our family went to Disney World and had a lovely trip.

My kids are 12, 10, and 8, so we're like at the age that Disney World's a good thing to do. We're not in the teenage years where they want to be far from us and we're out of the strollers, which made Disney easier. And it's like what I don't spend on cars. We put into extra upgrades on the Disney vacation because I don't really care what I drive at the end of the day, but we'll always have our family Disney vacation memories. And so part of it to me is the practical challenges in our world are like cars aren't just transportation, cars are transportation and status symbols.

And like there's a whole bunch of other stuff that a lot of us wrap into our cars and why we sometimes choose certain cars or brands over others. You know, for me, like, it's just a utilitarian. It gets me from A to B. and I need it to work when I turn the key. And it's old enough that has a key that you have to turn. Thank you. I love that.

Yeah. Still remember my kids got old enough to realize like, mommy's car has a button because we had to buy the minivan when we had the kids. And it's more electronics. And like, Daddy's car has a key. And you have to actually turn the key. And then I explained to them that it has three pedals and not two because it's a manual. Their minds are blown.

Like the thing works. It solves my utilitarian need to get from A to B and back again. And as long as it keeps working, like, I would just rather put my dollars towards other stuff that I enjoy more. Ironically, older cars are surprisingly more cost-effective to maintain than some of the new ones because the electronic parts are making it expensive. Right. So the technological advances in cars have made them more expensive. Yes. More expensive to buy and more expensive to repair. Which makes clunkers an even better deal.

Yes. But, you know, the electronics are. I can't totally diss the other electronics. There's some neat stuff that you got. But I'm like, it still gets me from A to B, and it turns out it's a lot cheaper to just replace an old-fashioned brake system when it wears out.

Nice. Well, thank you for spending this time with us. We've talked about everything from global inflation to small-cap stocks to large-cap value to cars. Invest in your career opportunity funds and buying clunkers. Exactly. Is there anything I haven't asked about? that you want to emphasize as you look ahead at the markets, at economics, at careers,

at social capital. Yeah. I think the only thing I would bring it back to again, I like, I appreciate the irony given, like, our whole first half of the discussion was all around investing in markets and growing your dollars that you've saved. But if you're in your twice 30s, maybe even into your early 40s, just don't underestimate how powerful it is to be able to change the wages that you. earn, whether that's asking for raises, asking for promotions, changing companies, changing industries,

investing in your professional development if you're in a career where that's a thing, the ROI, the impact of that of even just like a one or $2,000 change in composition multiplied over decades of earnings and then like you get to save that and grow that is immense. And sometimes the dollar opportunities are bigger than that for people. and the biggest constraint I find for a lot of folks is they don't have enough dollars saved to be able to weather a career change opportunity. And so putting that kind of opportunity in fund in place that you can make good career decisions is what ultimately powers forth a lot of the other opportunities that come later around

how do we grow our dollars and grow our dollars more efficiently. I always chuckle over with all these articles that are like, how I managed to save a million dollars by 32 years old and you start going through it's like well you know I live really frugally I make these good decisions I cut out the extra coffee and I make $220,000 a year and I did it up and I'm like I think I found the thing I think I found the thing not everyone's going to get their opportunity fund and go get their $220,000 salary unless that's your thing and bless you but so much of that wealth creation trajectory is not the ways you do cool, frugal things and get another 1% on your returns, it's how you change your wage earning

ability or your employment income or your self-employment income, if that's your proclivity. It's changing what you earn. Right. That is usually the underlying factor in most of those stories. At some point, the dollars get large enough that incrementally how you invest. The math impact is bigger. But so much if it comes down to figuring out how you get on a good earnings track. And so, I mean, you talked about that even the context of trade schools over.

traditional college because you get out in that earnings trajectory with often higher dollars and lower wages than a lot of aller than a lot of dollars and lower oh sorry higher wages and lower debt thank you yeah so focusing on how you lift your earning power is really actually the thing that that drives the most all the way through our 20s 30s and well into our 40s so just make make sure you're focusing there and giving that it's due attention it's hard and scary but it actually usually has more of an impact. Perfect. What a beautiful way to end. Thank you so much, Michael. My pleasure. Thank you. Thank you to Financial Advisor Michael Kitsis. And thank you to Morningstar, the investing conference, and the investing education platform for inviting me to come to Chicago out on beautiful

Navy Pier to spend the week with some of the nation's best financial advisors and investment minds as we talked about what's ahead. One of the highlights of my time in Chicago was this interview with Michael Kitsis. So, what are three takeaways that we can derive from this? Key takeaway number one. Diversify your investment portfolio. Now, I realize that sounds like it's straight from the school of duh. But in today's market, when the Magnificent Seven, a small cohort of stocks are runaway winners,

it is tempting. Tempting to under-diversify. But as Kitsis says, relying on a few top performing stocks can be risky because the market is inherently unpredictable. And diversification helps mitigate this risk by spreading your investments across different sectors and different asset classes. The problem isn't that it comes down to seven right now. The problem is you never really know which seven is going to be and it was four or five a few years ago. And I can't tell you next if it's going to go back to four or five or it's going to go up to, 10 or 12 or where it's going to shift because that is kind of the dynamic nature of markets

and investing. That is key takeaway number one. Key takeaway number two, focus on long-term growth rather than trying to time the market. Yes, there are some stocks that will perform exceptionally in the short term. Hello, Nvidia. But it's tough to predict which ones are going to sustain their performance over time. Invidia is everybody's darling right now. But what will the story be in the year 2030? Remember the beginning of the internet? Remember Netscape?

If you don't remember it, ask Jeeves. It can email the answer to your earthlink.net account. And by the way, if you're enjoying this podcast, don't forget to list me in your MySpace top eight. Right? So we don't know what's going to happen to today's winners. Some of them do stand the test of time. Look at Amazon.

Let's take this conversation off of individual companies and let's go to broader asset classes. Sometimes there are entire asset classes that do incredibly well in the long term, but suffer or struggle in the short term, which is why contrarian investing, buying when the chips are down, can be a great long term bet. So think long term. because if you chase short-term trends, then there's a chance you're chasing irrationality. The markets can remain irrational longer than you can remain solvent. And he said that because he was one of the fundamental, formative minds about how economies and markets work that everyone has built off of for 100 years. And the guy went bankrupt several times because he kept making market bets. and they would keep going longer than he expected while he bought them with leverage,

and he kept losing all of his money. Like the most brilliant economic mind kept losing his money over and over and over again because he mastered how to measure these metrics, but he couldn't anticipate when markets would actually respond to them because markets can remain irrational longer than you can remain solvent. And so whether that's tech stocks in the late 1990s, real estate for a run in the 2000s, where everyone kind of said,

seems like the market's a little frothy. And then we kept buying it. Real estate kept going up. And if you made that call in 2006, you were right in the long run and broke in the short run or at least missed a lot of opportunity in the short run. That is the second key takeaway. Finally, key takeaway number three. If you're young, and you don't even have to be that young, if you anticipate that you're going to have 20 or more years left in your career, if you're thinking of your future career in the order of decades, rather than years, then focus on career growth and focus on increasing your earning potential

because this can be far more beneficial than trying to maximize investment returns. Higher income from career advancement can more significantly impact your financial health than some small percentage gains, some eking out a couple of extra basis points in your investments. Spending more time focusing on my career and getting a raise. like getting a promotion will actually be more meaningful than trying to improve the returns on my own money. Like I'd rather just buy a bunch of index funds and participate in the bulk of the market's return that I'm going to be able to get and just grow my earnings capability because I will add more dollars from a higher salary than I'm going to generate an incremental returns getting 1% higher return on my account balance at the time. Those are three key takeaways from this conversation with Michael Kitsis, which,

We had face-to-face in Chicago during the Morning Star Investor Conference. This interview, by the way, I don't know exactly when this interview is going to be published on YouTube, but keep checking our YouTube page, YouTube.com slash afford anything for the video version of this interview, because this was an amazing setup. We had three camera angles. We had professional lighting. I mean, of the shoots that we've done, this is one of my proudest so far. The editing takes a while, so I'm not quite sure when it's going to hit our YouTube channel,

but subscribe to our YouTube channel for notifications. That's all the more reason to subscribe to YouTube, YouTube.com slash afford anything. Come find us, subscribe to us, hit the bell for notifications, say hello in the comments. We are so thrilled to be building out our YouTube channel and really making it a focus. And this interview with Michael Kitsis is in terms of productive. quality, one of our best yet. Thank you so much for tuning in. This is the Afford Anything podcast.

If you enjoyed it, please share it with a friend, a family member, a neighbor, a colleague, a son, a daughter, a niece, a nephew, a mom, a dad, an uncle, and aunt. You, you get the picture. Share it with the people in your life. Because that's how you spread the message of smart financial choices. This show is here to help you do two things. This show is here to help you make more money through your day job, through your business, through your investments. Today's conversation, of course, focused on, well, really, day job and investments. As we talked about in the key takeaways, your career and your investments are two of the biggest drivers of how much comes in the door.

So this show is here to do two things. One is to help you make more money through your career, your business, your investments, and the other is to help you make smart financial. choices. So make more money and be smart about what you do with that money. That's what we do here. And if you get value from it, the number one thing that you can do is tell someone. Tell a friend, tell a family member, tell somebody in your life about this show. Send them this episode or send them one of your favorite episodes. Tell them why it's one of your favorites. And find us on YouTube. Thank you so much for being part of this community. My name is Paula Pant. This is the Afford Anything podcast. And I'll

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