Animal Spirits Podcast - Panic a Little (EP.53)

Episode Date: October 31, 2018

The one thing we're certain of about the markets going forward, why volatility begets more volatility in the markets, expectations vs. the economy, what to do if you've been sitting in cash, when to panic, why investors are fleeing bonds, are all the economic gains really going to the wealthy and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, the podcast that takes a completely different look at markets and investing, hosted by Michael Batnick and Ben Carlson, two guys who studied the markets as a passion and invest for all the right reasons. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. When we first started this podcast, one of the episodes that we threw away, not because the content was bad, but because we were terrible, was this. Corey Hofstein posed a question on Twitter a few months ago. Something along the lines of, what are you 100% certain on in terms of financial markets going forward? I don't remember

exactly how we poised the question, but that was sort of the gist of it. And you and I had something of an epiphany this week. Maybe that's too strong of a word. But why don't you share what we feel really confident about going forward? One of the things that we've done a lot of work on over the years is volatility regimes in the market. And we're not exactly, it's not like we came up with us ourselves. We're kind of piggybacking on the work of other people that came before us. But the idea that volatility begets more volatility in the markets. And that's something that just because of human nature that I'm fairly sure of. So if you look at the gains and losses on a daily basis, since October 10th alone, there's been a down day of more than 3%, a down day of more than 2%,

up 1.4%, up over 2%, down 1.4%, down 3%, up almost 2%, down almost 2%, up 1% and then now up over 1.5% today so far. So I think the idea is that bad things happen during bad markets. And that's because of the human inability to handle losses and to panic in both directions when things are going bad. Well, and also not just bad things happen in bad markets, but we get bigger bounces, bigger updates in bad markets. So I wrote a post last week showing the average daily return in a bull market, the average update, the average down day, and the average up and down day in a bear market. And the average update in a bare market is actually 1.1% whereas in a bull market, it's only 0.65%. Something along those lines. So both up and down, you get higher highs and higher lows

is what I wrote in the article. And that's kind of a hard thing for people to wrap their minds around. I think most people would assume when the stock market is going up, that stocks must be just doing great, but it's just little tiny gains here and there. And then when stocks go down, you have these big down days, but you also have these big up days, which kind of make it so irritating for anyone trying to make money during a down market. Yeah. So there are few iron laws in finance, but we feel like this is one thing that will persist pretty

much forever. And I don't see how that could be different. Right. I mean, there's no set stopwatch to it or something that it says that volatility will go for as long as it goes. So there's no timing on it. But the idea that volatility against volatility, I think, yeah, that's something that I would, that I'd like to see that will never go away in the markets. So let's move on to some economic data that came out last week. Q3 GDP showed 3.5% annualized growth, which is two back-to-back quarters of really pretty strong. economic growth. So taken from the journal, third quarter corporate earnings have been largely positive with some 80% of reporting S&P 500 firms posting profits that exceeded Wall Street's

expectations. Sales performance has been more mixed with more than a third of firms so far missing revenue projections. And what's really different about the past few weeks of earnings season is that even sales and particularly earnings that are beating are not enough. So FACSET has this great chart showing the SEP 500 company. reporting positive EPS surprises for Q3 2018 are seeing their largest average price decline since Q2 2011. So S&P 500 companies that are beating EPS are having an average price decline of negative 1.5% on that next day. And that is pretty troubling. So it's almost like the expectation of the expectations have gotten too far out of whack. And even these companies

that are beating aren't beating by what some people would want them to be. So they're getting they're getting rejiggered down. Right. And Dave, I'm sorry, I don't know if this last name is Benoit or Benoit tweeted. Benoit sounds a lot cooler. Sign of how crazy this tech market is. Front page of Wall Street Journal highlights these, quote, disappointing results. Amazon revenue up 29% to 56 billion. Google search revenue up 22% to 27 billion, but both missed Wall Street expectations by less than 1%. Expectations are in the stratosphere. I think this is, One of the reasons that investing is so hard because it's not good or bad, but better than worse. And even sometimes trying to figure out that better and worse, like trying to figure

out what's priced into a market or a stock is so difficult to do. And it's easy to like think about this second level thinking from Howard Marks, but getting to that point where you really understand what is being priced in and what's not is so difficult to do. Yeah. And you'll, I mean, of course, you only find out after. And I wrote about this in my book that, and Mubeson, learned a lot about the parallels between horse betting and the stock market. But when you are betting on a horse, you might know that probably one of these three horses are going to win. However, the odds are terrible. So you bet five to win one, right? Or the Golden State Warriors, yeah, they're probably going to win the championship. They're probably going to win. But the payout is

lousy. In the stock market, you don't see the odds. You don't like see the expectations embedded in the price until after the fact. Yeah, that's why like the gambling metaphors don't really work because if you go into casino, you can have a pretty good idea what your odds are in the market. You have no idea. You can use probabilities, but there's no set thing. So that's why when trying to figure out the relationship between the economy and the stock market, it's so hard because, I mean, a lot of times the stock market is taking the pulse and they're thinking ahead, who knows how far in advance. And so it's just a resetting of expectations. But it's hard for. people to know what those implied expectations are to begin with. So it's difficult to do.

We'll get to your wages thing in a minute. But two things that stood out to me, the Washington did this really great graphic that breaks down different components of GDP. And one of the things that they said that caught my eye was for the six months between April and September, defense spending rose at its fastest pace since 2009. So I thought that was kind of interesting. And then also So they show that business investment is falling. And the image says a lot. So we'll just, we'll put this on the show notes. Okay.

So basically it says rising oil prices are making people spend less in the energy sector. Okay. So I went to a little diner this weekend and posted kind of a little, what I thought was a joke on Twitter. And it basically said that this diner is going to be closing on all Mondays because there's a shortage of labor. And I just put it out there on Twitter. And it kind of actually made me real.

But I just did it kind of as a funny thing. I said, this is what a 3.7% unemployment rate looks like. And I got so many comments on this thing. A lot of them were political in nature, which made no sense. But the other ones were just how difficult it can be to figure out this idea between wages and labor and economic growth and what it all means. And so, of course, a million people said, well, if they just raise their wages, then they could find more workers. But I don't think it's always quite that easy. It's obviously a business owner would consider that before deciding to shut down.

and obviously they would have considered that. So it's interesting this idea of like inflation and wages, how difficult it can be when you think about it on an individual business level. Because of course people think about these things before they pull the trigger and decide to not have any revenue for a day or not any payments to their employees. But you are seeing signs of this. This is just my anecdotal economic data, but there's a lot of manufacturing in West Michigan.

And a lot of these manufacturing companies are having to offer bonuses to people for the jobs on the floor, the hourly workers, just to get them in the door. And then they're having to offer bonuses three months later for staying on the job. So they're having that hard of a time keeping people. So it's interesting because a few years ago, all these people were worried about keeping their job in the first place. And now they're having a hard time keeping employees. Well, there is obviously a push and pull between labor and capital, and it's hard to know what drives the other. It's sort of like people think that the economy.

me drives the stock market. And certainly there's, I mean, there's a lot of nuance, but also you can make the case that, like, in certain instances, the stock market actually drives the economy. Yes. And it's kind of interesting because if you have this capital versus labor debate, capital is one hands down for the past three decades or so probably. So I think it's almost like people don't know what to do now that maybe some people in the labor force have some more bargaining power. And so companies are having a hard time figuring it out. So taking a step back, I guess one of the things that I didn't lead with that I was meaning to was that the economy is so strong. Maybe it's even overheating, right? Shortage of

workers, GDP is very strong. And yet, stocks are having a fairly tough time right now. And I think that it's confusing for some people, but the stock market is looking forward. Right. It's not always right. It doesn't necessarily mean that we're going through a recession. But this economic data that we're getting is by definition backwards looking. Yeah. And things were just the opposite a few years ago where people were saying, how is the stock market booming so well when the economy really isn't taking off that much? And now we've kind of reversed roles a little bit. So yeah, it should be interesting to see if this is just a little minor change in expectations or a huge change based on something that may happen. So where is the stock market going, Ben?

I have no idea, Michael. I was trying to lay you up for a segue into your next post. Okay, so I wrote a post last week, and I looked at the probabilities of the stock market falling, and I went back to 1928, and so I said, when stocks fall 10%, what happens then? And I found roughly 60% of the time they didn't fall any further than 20%. So the majority of the time, stocks are just in a correction when they fall double digits, but I mean 40% of the time is not nothing. So this is since the late 1920s. So let's say 6% of the time stocks fall between 10 and 20% when they fall double digits. And the other 40% of the time they fall into a bare market.

Yeah. So we'll link to that in the notes. But you broke it down further like what happens when it falls 20? What's probably they're falling more. And is this a huge sample? No. But is this reasonable to at least frame expectations? I think so.

And it's also helps. I showed the average number of days that it lasts. So anytime the stock market has dropped over the last 90 years, double digits, but fall in less than 20%, let's say this is just a run of the middle correction, it still lasts at 132 days on average from peak to trough. So that's, uh, this, it's only been a couple weeks so far. So maybe things happen faster now in the markets because of technology and the influence of computers and algorithms. But the majority of the time, these things take some time. I feel like these data, these statistics are so useless, even though they're interesting

because 132 days doesn't sound like that long a period of time. You're like, all right, what's, you know, it's a big deal. It's a couple of months. But each one of those days can be a grueling fight to survive. Yes, it's not, yeah, it's no fun in your, plus a lot of times, like we said, when stocks are falling, you get these big up days and they give people hope. And it's like, okay, I see light at the end of the tunnel. And then your hopes are dashed. So it's, yeah, it's never easy. So I heard another piece this week about the psychology of sitting in cash and what to do when you're staring the face of one of these corrections and you have some cash. And I think I still get a lot of emails from people saying, I just couldn't pull the trigger.

I've been sitting in cash since 2009, 2012, whatever it is, I got out of the market. And I think some of the time you'd think now is like, oh, it's a fat pitch. Things are going down. You should be able to find a lot of deals. But I think it's almost harder to buy when stocks start falling because cash becomes like a gateway drug to just sticking with it. And it's like an addiction. Well, you know why it doesn't make it any easier to pull the trigger? Why?

Because you would assume it becomes easier to buy stocks when they're falling, but cash is a comfortable place to be during a correction. It's like you're tucked in under your warm comfort on a freezing Saturday morning in the winter and you never want to get out of bed. I thought that was what Ben wrote. I thought that was a really great way to frame this. Yes, but I don't have that ability anymore to stay in my bed on a cold Saturday morning because my kids are waking me up so early, but a man can dream. But yeah, I think there's never a good or bad time, I think, to invest. And as much as you want to use like the sayings of some of these great investors, you can look back at the averages in the past times when it made sense to put money to work. But if you take an extreme position in the market and sit in it for a long time, it just becomes harder and harder to act. Hold on. Let me let me challenge you just for a moment. Are you telling me that Jesse Livermore quotes do not add alpha to your portfolio in a bare market? Only if you have a hashtag when you, after you say them. I think that's the thing. People want to like find a margin of safety and a fat pit. But that sounds so much easier in a quote from Buffett or Benjamin Graham than it does to actually do something because of these expectations we're talking about. Well, okay, I'll put money

in when stocks fall 20 percent. But what if they fall another 20 percent from there? Then what do I do? Right. So getting out is easy. I think getting back in is extremely difficult because let's say that you do nail it, right? You sell the exact top and then stocks fall 20 percent. Are you like dying to get back in? Of course you're not because you think they're going to fall another 40 percent. So I think the key is having a rules-based system to get back into the market. And there was an article in Bloomberg last week talking about Betterment, and they said that 60% of Betterment's customers use automated deposits, which is a really good way to at least dampen some of the emotion that is involved with investing through tough times.

This was a pretty good profile. They also said, so Betterment started in 2010, and it says since then the company has attracted about 400,000 customers all in the U.S. who have an average of $40,000 in the betterment account. And it's kind of funny because when robo advisors first burst onto the scene, everyone was worried about are they going to take over for financial advisors? And I think a lot of advisors put these systems down for whatever reason, maybe because they were a little nervous. But I think the great thing about betterment is that they are serving an underserved market that was never being paid attention to the past. And so people with 40 grand in their accounts,

for the most part are not going to be taken by any financial advisor in the country. But Betterment will take them and give them a simple, low cost, low fee, really easily elegant, technological way of putting their money to work in the market. And I think it's great. Here, here. All right, there was an article over the weekend in Barron's written by Jack Ho. And I think he said some really great things that I'm going to read. He said, quote, accurately predicting what the stock market will do next year as impossible, inaccurately predicting it is easy. I thought that was pretty good. He also said, the subject of whether stock prices are normal or not is fraught with analytical slush puddles. I also thought that was pretty good. But I thought that this was a really important point that he makes. He said, the rest might want to do some late cycle soul searching. If the Dow Jones Industrial average worth to drop, say, another 3,000 points in hurry, would you dump everything? If so, consider quietly panicking now just a little while other investors are buying on the dips. Now, I think that, that is actually pretty decent advice. If you are, if you ask yourself that question, if the Dow drops

another 3,000 points or falls another X percent, whatever it is, are you going to be extremely uncomfortable and potentially do something rash like press a button that you shouldn't be pressing? If that's the case, then it's not an all in or all that decision. Then just maybe alter your asset allocation a little bit. If you're 60% stocks, maybe to take it down to 50 or 45 or whatever that number is that allows you to stay the course if and when this thing gets worse. And it might not, right? This might be the bottom and it might be okay. But like, these are the questions that you need to be asking. And I think the idea that you maybe panic a little bit is a lot better advice than hoping this thing turns around. So if you're going to panic, make sure you panic early.

And no, but seriously, but panic a little. Right. No, I think that. And so Jonathan Clements posted a tweet last week. I thought was pretty good. He's a former Wall Street Journal writer. And he said, anytime stocks start to fall, I put three questions up that ask people, how much cash do you need from your portfolio in the next five years? What's the value below which you never want your portfolio to fall and how much will you save in the years ahead? I think the number two question is really good because you could back into the type of losses that you could expect if you never want to see your portfolio fall beyond a certain amount. And in some ways that, thinking that way, caps you're upside in a lot of ways. But if you're more worried about protecting your capital than

anything, that's kind of something you can back into to figure out, you know, how much pain you can really take. Yeah, I think that's a really great way to frame it. People should be, people are, not should be, people are much more likely to make a mistake on the downside. Like, yes, people will chase and do something stupid when stocks are flying. But the majority of the mistakes, I think, and actually maybe I'm second-guessing myself here, are probably on the downside. Are we going to come back next week and say I changed my mind? So there was an article in Barron's investors are fleeing bomb funds. And I thought this was really interesting that investors are behaving in bonds, and this is very broadly speaking, but the same way that they

do with stocks. So when stocks go down a lot, expected returns go up, but people are selling stocks when they should not be. Similarly, when interest rates are going up and prices are going down, people are selling bonds when literally return expectations are going higher. Like not, with stocks, it's a little bit more squishy, right? Because expectation returns are going up, but who the hell really knows, with bonds. You can measure. No, literally, your expected returns are going up. So they said that this month is on track to be the worst one for bond outflows in almost three years. This month through October 19th, clients pulled $23.6 billion from mutual funds, blah, blah, blah, blah, blah. What do you say, Ben? I think that it makes sense because this is how

the investor psyche works. When people see losses on their statements, they sell first and ask questions later. And it's interesting because both bonds and stocks are now having a, difficult time. So I wonder how this tug-of-war is going to work if the stock market correction continues. And bonds, I looked, bonds over the last month since stocks peaked out are basically flat, maybe down a few basis points here or there. So you wonder if this will reverse course of stocks continue to go down. But I think part of the problem for bond investors is most people assume that they're never going to lose money in their bonds. And so when interest rates do rise and they see some short-term losses, I think people flip out. Right. Because it's

treat it like cash in their head. Yeah. So I think it maybe in some ways people expect stock market losses now more readily than bonds. And so it's easier to overreact in bonds. But I agree with you that, you know, people have gotten a raise in their bond funds lately, even though they haven't seen it yet. It's just going to happen in the future because those expected returns are higher because interest rates are higher. Right. So earlier in the year in February, when stocks were selling off, I think, and no way to prove this, but I think that interest rates going up and bonds going down quite a bit was dragging down the market. People were afraid that rates were going to go up so much. And then I guess they did. I mean, rates are significantly higher

today than they were in February. But now on the big down days for stocks, bonds are holding up fairly okay. Yes, which is what you'd hope for in a diversified portfolio, that that safe piece of your portfolio is protecting in the short term when stocks go down. Okay, I got a survey of the week here from Jason Zweig. He wrote a piece about because they had the mega millions powerball lottery going on. By the way, did you buy a ticket? My wife did. Okay. Did you? No, we didn't, we didn't bother. Hold on. That was, you shook your head, like, are you sure? Yeah, no. We, we, I mean, whatever. Teach their own. If people want to do that, I'm not going to judge, but that, I don't know. It sounds very, it sounds very judgy. I mean, is there a way to buy them online, so I don't have to go

into like a 7-Eleven to get one? That's the biggest thing for me. It's just the time it takes to get it, and I'd look like an idiot because I don't know how to do it, because I don't do it very often. But anyway, he found in one British survey, 22% of the people said that they would win the national lottery jackpot in their lifetime. And he was kind of talking about the gambler mindset and where that comes from. So yeah, not quite. All right. Okay, so I read something of a mind-blowing piece this week from Russ Roberts. And Roberts, do you ever listen to his podcast? Here and there. Here and there. Yeah, I kind of pick and choose based on the guest. But he's a really sharp guy. And his piece was called, Do the Rich Capture All the Gains from Economic Growth?

And one of the big themes in the last, I'd say decade or so, and it's really been growing in the last few years is the fact that all the gains are going to the very wealthy and mostly the 1%. And everyone else is just getting left behind. And so he shares a staten here from Thomas Piquetti, who was one of the people who really brought this idea to the forefront. And he said, Piquetti said, income stagnated for the bottom 50% of earners over the last 30 or 40 years. And for this group, the average pretext income was $16,000 in 1980, expressed in 2014 dollars using the national income deflator, and it's still 16,200 in 2014. So basically, after accounting for inflation, people on the bottom 50% made no gains in their income level. And Roberts says this

all sounds terrible and obviously this is not the way you want things to work, but it doesn't really look at the data correctly. So what Roberts did was look at, instead of just looking at things sectioned out by percentiles or desiles of people making money, he looked at the actual people. And so one of the studies said, 70 percent of children born in 1980 into the bottom desal exceed their parents' income in 2014. And those born in the top 10 percent, only 33 percent exceed their parents' income. So I shared this with you, and we were both kind of blown away at some of the different studies in here. Yeah. Is this sort of regression to the mean a little bit? I think that's probably what it is. So the idea is you can look at the different

income levels by strata or whatever, but it doesn't really tell you anything unless you look at the people within the group. So while yes, the income at those levels has not changed much, the people within those different levels have changed a lot. And he found that the children from the poorest families had the largest absolute gains, and the children in the top quintile did no better or worse their parents once those children become adults. So he actually found the children from the poorest families when they actually followed these people through the decades ended up twice as well off as their parents when they became adults. So a lot of these people, when they're young, start off in the lower income brackets but actually are able to pull

themselves out of it. And so when you look at the actual individual people and families and households, it tells a different story than looking just at the income breakdowns. Yes. So this is, I think, how to perfectly describe what's going on. He wrote, The pessimistic story based on comparing snapshots of the economy at two different points in time misses the underlying dynamism of the American economy and does not accurately measure how workers at different places in the income distribution are doing over time. And you're right. This was something of a mind-blowing thing because when you think about it, it really does

make a lot of sense that almost by definition, people that got into the 1% of course did disproportionately better than people in the bottom 20%. But that group is changing over time. And how did people that were in the bottom 20% 20 years ago do compared people that were in the top percentile? I've never seen, he presented a handful of studies in here, so it's definitely worth reading the piece. And I'd never seen it presented this way. And it kind of changed my mind, I think, in some of ways. And maybe, I'm sure you could poke holes in some of these studies as well,

just like you can pull holes in the other ones. But it shows that there needs to be a little more nuanced to this conversation. And it's not so black and white and you just look at the income levels. Yes, that is probably the key takeaway, because I sort of had a battle in my head going on. Like, wait a minute, how can this really be? It doesn't make sense. But to your point, it's not so black and white either with what he's saying versus what the constant narrative has been that all the gains are going to the top 1%. Yeah, this was, the way that he looked at this was, it was very unique and I'd never seen it presented this way.

So definitely worth the read. Okay, apparently Uber is going public. That sounds like it's the worst kept secret on the markets these days. And they think that some of the talk behind the scenes is $120 billion valuation. Scott Galloway wrote about this in his weekly newsletter. He said that would make Uber's valuation greater than the entire value of the U.S. airline industry or the U.S. auto industry excluding Tesla. And I think it's funny he excluded Tesla there because does that assume Tesla is going to go out of business soon? Is that what he's saying? Or, no, I'm just kidding.

So what do you think? Uber being valued, let's say it comes out at $120 billion. That may be on the high side of things, but is that ridiculous or is that too soon to tell? My totally uninformed opinion is that I can't imagine any growth rate that can justify that. Okay. See, my way of thinking is it's either brilliant like Facebook or it's asinine and it's going to be like the cover indicator in a few years that people are going to go see Uber came public and that was ridiculous. I honestly have no idea. It's like I agree with you that the expectations embedded in a valuation. that high are exceedingly high.

The counterpoint, to my point, was that we spoke a few weeks ago about thinking in terms of market capitalization, how that could be a really bad anchor because it's just a number. So I think, however, when you frame it that it's greater than the value of the airline industry or the auto industry, that gives a little bit of a way to compare it. But I would have said the same thing about Facebook at $100 billion when it came public, and now it's $400 billion. And so it doesn't mean that this makes sense. but my knee-jerk reaction is that this doesn't make any sense at all.

Yeah, I think I'd be leaning that way as well, but I, yeah, and it seems like there's a lot of other tech companies that could come in and do this, but I'm sure you could have said that, like you said, the same thing about Facebook. So there is like leave 10% maybe in this for Wiggle Room in this, but it seems exceedingly high. And I feel like if this would have come public when the markets are still doing well, this would have been like everyone would have been said, this was a screaming sell signal for the market because. It's, yeah, it's out of this world. So last week we spoke on the podcast about some of the housing-related numbers going on,

and B-spoke had a good thread that I just wanted to share. They said the last four months of housing data relative to expectations, which is the key, has been beyond bad. Existing home sales have missed expectations for six straight months. New home sales have missed expectations for four straight months. Housing starts weaker than expected in three of last four months. and building permits weaker than expected in three of the last four months. So economic data is actually the type of thing, unlike the stock market, well, I guess you see

what expectations are for, you could see like whisper numbers for earnings estimates, but sort of the economic data, you actually do see the expectations ahead of time. Whisper numbers, is that a scientific phrase? No, that's a real thing. Is that? Okay, I know. But this is the reason why the home builder stocks that we talked about last week have just been getting crushed because expectations have been being missed left and right. Is that what we're saying?

That's what we're saying. And actually one of the stocks that you profiled last week, was it Mohawk? That's when you're talking about? Yeah. Was down like 25% last week. So even after we highlighted some of the losses that had already seen, it got crushed again after reporting some numbers that people didn't like. Before we move on to listener questions, let's talk quickly about the annuity article.

Okay. So the Wall Street Journal had an article about sales of annuities. And in some ways, reading this kind of made me feel like I was getting thrown back to the 1990s. I can't believe some of this stuff still exists. So they talked about a woman who was taken to a financial product sales because they were giving away free steaks and chocolates. Is that it? They gave a free dinner to sell annuities.

And she liked the idea of not losing principle. Yes. So it says this woman invested much of her savings in annuities several years ago after getting a flyer in the mail for dinner at a nice local restaurant with an annuity salesman. I can't believe that people still buy their financial products this way. But I guess I guess that's how it works. And they also kind of made the point that when the fiduciary rule, got rolled back. There's now a huge influx of jobs for annuity salesmen and also the sales of

them have gone through the roof. So the basic, an annuity is an insurance product that protects you against the risk of outliving your money. I don't necessarily think that it's an investment, although I guess it has to be bucketed that way, but it's an insurance product, which is fine. I don't think it's necessarily that annuities are good or bad. It's all, like, you know, like everything else, it's how they're sold and how they're just grind. and the article said something that's just like an amazing thing that needs to be written. The annuity's resurrection stems from the demise of the Labor Department's fiduciary rule and Obama-era proposal that would have required brokers who oversee retirement savings

to act in their clients' best interests. Yeah, and I think unfortunately, like you said, there's good ways to do this in bad. And for a lot of people, an annuity probably is the right option because they don't have the financial resources to be able to provide a steady stream of income, but a lot of the incentives in this world are structured the wrong way, and it gets people to sell them rather than buy them. And it's, yeah, I think there's just a lot of misinformation, and these things are so complex. Some people in the industry don't understand how they work. And there are, I mean, people are scared in general. People are scared. And the idea of selling

somebody principal preservation is so easy. So I went to the comment section just to see what was going on, because these are pretty polarizing topics, and there was 130 comments, so I just pulled three of them that stood out. Quote, the last one I went to, the salesman compared his annuities return to the S&P 500, less dividends, which was a patently deceptive comparison, we would agree. Another one was the main thing that bothers me about annuities is that they called the annual cash flow income. The annual cash flow is not income.

It is mostly return of capital. Another good distinction. And then lastly, somebody said, don't make your money. long-term investment decisions based on a dinner. That's a pretty good rule of thumb. That's not bad. Okay, let's get to some listener questions. So someone called us out on Twitter because we always are talking about the long-term

ramifications of the market and how it's good to be a long-term thinker. So they said in the UK, if you invested in the Futsi 100, 20 years ago, your investment has gone nowhere. Do you entertain this as a serious possibility for U.S. indices going forward? And if not, why not? And I looked at this, I looked at the MSCI UK index over the last 20 years and it's up 4% a year. So I suppose it could be structured a little differently than the footsie, but maybe this was

just on a price basis or maybe that has something to do with the currency fluctuations, but whatever, that's still not a great return. So what do you think? I guess there's never been a time where the US, the SP 500 has a loss over 20 years. Total return. Total return. It's always been positive. Yes.

Now, to answer this question directly, I 100% entertain this as a serious possibility. Do I think it's probable? No. Do I think it's possible? Of course it's possible. And the idea that U.S. stocks might have a lousy 20-year return, well, that's what risk is, right? I mean, that is what risk is. You might not get returns.

But the fact that this person is saying that U.K. stocks had a 20-year flat return, well, to me, that screams to having a globally diverse. portfolio because we might have a 20-year lost two-decade period. I have no idea. I don't think that's not what I would bet on, but it's certainly possible. One of the reasons that you do diversify globally, and because people always are quick to point out the Japan scenario where they went nowhere for a long time, I don't think the idea of diversifying globally is necessarily to increase your risk-adjusted returns. I think it's to get rid of these outlier situations. So you don't have to have a grease or Japan on your hands. Because if you're overweighted or

exclusively in one of those markets and you do have this scenario that is awful, then, yeah, that's why you diversify because you don't want to be stuck in that situation in an extreme position. But the people that are always talking about this, of course it's possible, but what's the alternative? Do you not invest? Do you not save money? Do you not defer current consumption in the hopes of a better tomorrow to give yourself

a cushion, a little bit of breathing room in the event that something really lousy happens. Like, what is the alternative? Exactly. Do you hoard cash? Do you hoard cash and then lock in lower real returns? Because I guarantee you that inflation will probably be above zero. Well, I can't guarantee anything. But I would think that there's a much greater probability of inflation being positive over the next 20 years than stocks being negative. Right. Yes. That's why I like to say like a bad plan is better than no plan at all. So you have to do something. You have to invest somehow. And that's what I think a lot of people have lost out in the last few years, that you have all these doom and gloom people saying the markets are overvalued, interest rates

are too low. So it's like, well, what's the alternative? A lot of financial advisors are moving to using third-party asset managers or models created and managed by investment companies. All things considered, is the end client better off in the long run working with an advisor that pick their own allocations or outsources? I don't think that this could be answered. I mean, I think that if you are a CFP and you are really, you focus on planning, then it's probably not a bad thing at all to outsource the investment side of it. Are you better off working with an investment advisor who does this in-house? I don't know. I think that there's that's so case-specific. Ben, do you have any strong feelings on this? It's probably good to

understand where your strengths lie. And obviously, there's probably some outsource options that are better. And there's some in-house ones that are better. It depends on a lot on the execution, I suppose. But, I mean, the thing you can outsource is your understanding. So the advisor has to understand what they're getting into. Then the client has to understand that, too, if you're going to outsource, that you know exactly where you're getting yourself into. And you're not just taking what the investment firm or company or strategy is using. So I think you have to understand exactly what you're getting into if you're going to outsource.

What do you recommend? Okay. Let's see. This week I read Atomic Habits by James Clear. He's kind of newish to me, but I guess he's been around for a while as a habit guy. I enjoyed the book. I can hear on your tone that you skimmed. it. No, I actually read it. And I finished it pretty quickly. I thought it was like the first two chapters, like the way he described habits and how they're formed and what they mean and the whole idea of like process over outcomes. Like the first two chapters like were amazing. I thought it was borderline motivational book. And that always kind of turns out a little bit. That's your kryptonite. Yeah. It's a little too motivate. And, but I mean, it was really good. The guy, he's really smart. He tells a lot of good stories. There's a lot of good research. Have you read the power of habit by.

Charles Duhigg? No. I think if you're deciding between a habit book, that's probably, I like that one a little better, but this was good. I'd say 90% of it was good, 10% too motivational for me, but I still enjoyed it. So this week we tried out one of those meal delivery services. Have you used those before? Kind of like a blue apron.

There's a million of them now. Have you done it before? Nope. Okay. Thumbs down, I think. It was actually the food was pretty good, but for the price you pay, it wasn't enough food for me. I could have eaten a whole portion, both double portions for myself.

So the food is good. I think the only thing it really saves you on is time going to the grocery store because it still took like a half hour to cook and put all the ingredients together. Then what is the point? The point is it saves you time. I know that's kind of what my thought was because it took a while. Like I'm not a big cook and I followed the instructions and I'm chopping stuff up and I'm mixing stuff up and I'm like, wait a minute, this isn't saving me any time at all.

It just saves you time going to the store. There's a scene. I mean, there's a scene in Alien Resurrection. Okay. Where the guy puts like a cube under a machine and it just gets zapped and it turns it to like scotch. That'd be great. See, that's about the extent of my cooking ability.

So why would you order something that's packaged and then you got to take half an hour to cook it? I totally agree. That's, I'm like, okay, this, like any of them you sign up for, you get like 50% off the first one. So I'm like, all right, we'll try one. But I'd say, unless you're really straining for time and don't want to go to the grocery store, it's probably.

not worth it. And finally, we started Bodyguard on Netflix. I think a few listeners actually recommended this one. I saw the trailer. It looks quite good. We're two episodes in. By the way, do you need subtitles? No. It's not like snatch. I like the first, very first scene of the show like 10 minutes in, it immediately brings you in. And I don't think you can give up. And the best part about it, it's only six episodes. Like, if I can, like, right when I saw that, I'm like, that is a perfect amount like if all shows were six episodes okay that's like the perfect amount of yes and it's really good it's with rob stark from game of thrones speaking of six episodes the new i don't even know if it's new anymore but the rob delaney show catastrophe i didn't see the third season did you because

that's six episodes yes i'm i'm caught up as far as it it is so you saw the third season yes i have not seen it yet so you recommended forever last week what did you think i took you up on it I was into it and then like did you finish the season yes is it good I like the end I it's an odd show is it good I yes yes I liked it okay because I was like into it where is this going it's sort of boring but I want to see more and then the fourth episode the one with the mom from 40 year old virgin yes nothing happened yeah that's true I hold you personally responsible give I'd say keep going. I had a lot of that feeling, too.

Like, it's, I'm already halfway going. It's kind of, yeah, it's kind of boring, but it's unique. I'd say keep, keep going. Okay, I do like the concept. So I'm going to, I'm going to see it through. Okay. Okay. And then, did you watch the Adam Sandler stand up?

Not yet. Worth it? I don't think so. Really? So I've watched it, like, I've watched it three times. Not that I've seen it three times at full, but I've, like, press play and stop three separate times. Ah, that's not a good sign. It's sort of weird.

Like, he's kind of. of old and I don't know it's just it's weird to see him doing like hit the same stick sort of from Billy Madison like the good what do you do you know like yeah it's just a little it's it's probably I'll probably try it but I feel like we've got a lot of D recommendations this week well I have another D recommendation okay all right so I've tried the audible thing and I thought to myself I've always wanted to read like the classics. So I thought that I would start with Dracula. It was only a dollar. I don't have the annual subscription to Audible. So I thought that I would start with Dracula. And I have stuck in there

longer than I should have. I probably have listened to five hours already. And it's sort of like old English. So Bram Stoker was Irish. And I think he wrote this in the late 1800s. So not only is it like sort of a different language, but I'm finding it so boring. And I'm literally reading the cliff notes while listening to it and I still can't follow it you need to put a stop in on that one I think I'm going to cut my losses tight stop all right so I don't really have any recommendations I guess it's just next week we'll try to come back with stuff you should actually watch yeah all right thanks for listening send us a email animal sears pot at gema dot com