Animal Spirits Podcast - The Sellers Are in Control (EP.58)

Episode Date: December 5, 2018

On this week's how we discuss Michael's CNBC appearances, the FIRE movement, making your savings last for 50+ years, when FIRE goes bad, the average amount people spend in retirement, steak dinners paired with investment pitches, where is the Vanguard of annuities, the pressure to work long hours in the finance industry, normal accidents & 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 study 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 Ritthold's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Today's episode is sponsored by Michael and Ben. So I did CNBC twice in the last few months. Hashtag humble brag. And this is why you never open your mouth. I am living proof. So on October 9th, I went on the show with Michael Santoli. And I asked him the question, was this a bullish washout? Like, a lot of stocks were already getting creamed.

The indexes were holding up fine. Hey, this is what happens in bull markets. There's a correction under the service, and then the index catches up. I mean, the stocks catch up with the index, and it's all good. Okay, after I went on that show and said that, the SP500 probably felt 10%. Nice. And then last week on November 28th, I went on, and we were talking about the fang stocks and the nifty 50. And I said something like, actually not something like I actually literally said, talking about Apple,

how it couldn't get an intradate balance. I said, sellers are in control. Oh, my God. You did not say those words. I literally said those words, and I got back to the office, and the Dow was up like 500 points. And since then, stocks were up like 3 or 4%. So I got it precisely wrong both times, which is just fantastic. That's perfect.

All right. What was your first one, bullish washout? But that's a good thing. Well, it was a good thing in all other times that this happened. And the only time that I went on TV to talk about it was the top or a time. Potentially a top. Good time. Nice times.

Good times. Good time stamps. Good times. Okay. So there was an article on CNBC speaking of last week. This couple who retired in their 30s with over $1 million are living their best lives. And boy, do I know Justin McCurry very well after going down this rabbit hole and fact-checking every aspect of his financial life. Do I not? I want to say I got 12 to 13 slacks

from you on a Sunday morning and you were ready to go. Yeah, I was really doing some forensic analysis on this. So they linked to his blog. So of course, this guy has a blog. So he has a spreadsheet of how he got there. So he shows 2004 to 2014. He has his salary. He has his wife's salary. He has how much he added to the portfolio and he has a portfolio total. So what I did was I added my own columns. How do you like that? Uh-oh. I added the total pre-tax salary. I added their pre-tax income after adding to their portfolio.

And then I had some notes as well as some questions. And for instance, in 2004, they made $48,000, or he made $48,000. She was in school. They added $15,000 to the portfolio, and the portfolio value was $64,000. Now, in 2004, Justin graduated from law school. She is still in law school. They own a condo, and they bought a house in Raleigh. So my question is, how did they have a rental condo, a house that they owned, and a $50,000

portfolio with little income and six figures and loans? So they, wait, back up a sec. They retired with a million dollars. Is that what they're saying? Yes. So we'll get there. But so they showed a spreadsheet. And in 2004, when the spreadsheet started, they had already a portfolio of $64,000.

but I just don't understand where that came from because there was also a link that I looked at just briefly where he was doing some odd jobs. Like his entire life, this guy was an entrepreneur. He was always working. So big, big kudos to him that he had accumulated some money. But how did he accumulate $50,000 buy a condo, buy a house while going to law school and paying six figures and loans? It just... Basically, you're putting a big fat actually on this. I just don't understand. He said that he never received stock options or worked for a company that went public, no winning lottery tickets or inheritance is either. So I just don't understand how he got started. But let's just say, I'm not calling him a liar. I'm sure that there's a perfectly good explanation for this.

But like, as a for instance, in 2005, they made $54,000. They added $101,000 to the portfolio. Now, that's explainable because they sold the condo and they invested those proceeds. In a three times levered ETA. But they had their first child. And then in 2006, they had their second child. their total pre-taxiality was $95,000. They added $75,000 to the portfolio. So my question is, how do they support themselves and to children on $20,000 before taxes? You're all fired up about this. I think the point that you're getting after, and I think it's probably a true one, is that a lot of these stories sound great in a headline, but when you really dig deeper, there's probably usually something else going on.

and the whole fire movement is maybe not as easy as some people make it out to be. Now, here's another thing. After child, here's a quote, after childbirth, we didn't spend a whole lot. We brought a mattress, crib, and some child seats. So it was several hundred dollars, but not thousands and thousands. Having kids was kind of a blip on the radar in terms of spending. Yeah, I don't know about that one. So he has, her mother watched the kids for child care.

So that's how they did that. But shit costs money. Like, how do you live? Now, obviously, I live in New York, in Brooklyn, so it's more expensive. I get it. But, like, even still, how do you live on $20,000 before taxes? And then they had a third child. By the way, before we go down this rabbit hole, are you sure you want to go after the fire crowd? Because I think they are even more cult-like than, like, the gold people. No, no, no. I'm not going after because... You're going after this specific instance. I'm just... The thing where, why I think it might touch a nerve is because, like, Justin and his wife and his three kids are obviously, it sounds like they're doing great and they're living an amazing life and I'm not

doubting his integrity or anything like that. I just think that you have to have such incredible discipline with your spending. And he did. He used like the free financial planning stuff from personal capital. He was extremely diligent and it worked. He said by 2014 we had lifetime earnings of a little less than $1.2 million while our investment portfolio had grown to over $1.3 million. So amazing. He did it. He really did it. But I just think that they make it, it's sort of like maybe how people push back against the self-help and the like the physical fitness stuff because they make it look so easy and it, it's doable by like the 1% by the people that are like extraordinary, that are extraordinary, that are able to do it.

Well, and the blogs get a little preachy. I am all for the idea of young people taking control their finances and seeking financial independence. I think that's the best part about this. I don't think you can you can put them in the wrong for that. But there was a story and market watch this week, and they talked about when Flair goes wrong. Before we go there, can we just, can we end it with going wrong? Because I just want to say one more thing. Hey, it's your show. Sorry, I had two coffees this morning. You wouldn't know. You wouldn't know. All right. When I need my caffeine fix, I just go for a diet, diet Pepsi. How's that? All right. So, Mr. Money Mustache, somebody sent us this. He wrote, it is absolutely possible and in fact,

very easy to make a chunk of money less through your lifetime. There is no magic or unusual risk or hope involved. It's just plain math. Let's say you want to be able to spend $40,000 per year for life, whatever, whatever. And then he says, if you start with a million dollar nest egg, at a 4% withdrawal rate, you will very likely never went out of money. And he's right. So I did the math on this. And if you start with a million dollars and you spend, this is making it too clean. But let's say that you spend $3,300 a month. And then, so you take the money out, you spend, and then your portfolio grows by 4% a year on a monthly basis. After 55 years, your portfolio will be $835,000.

So starting with a million, after 55 years, your portfolio will be worth $835,000, and you will have pulled out $2.2 million, which is nothing. Is this assuming that spending grows with inflation or not? I'm assuming that you take your monthly money out, your $40,000 broken into 12 months. You take that out, and then after that, your portfolio grows by 4% a year divided into months. So no inflation adjustment, nothing like that. So the math is right, but the big point is this. Do you want to live on $40,000 a year? Well, I think the other point is a steady state of 4% a year looks great in a spreadsheet, but the sequence of return risk is huge in that,

especially over a 55 year period where the 4% rule has been tested over, I don't know, 30, 35 year periods, over 50, 60 years. That is a little different and it's never really been, it's tried before, to be, to be honest. And I think my worry for this crowd, I think the best thing for these people is they've cut back so much that if they do run into a problem, that they can just, they've already, they already know how to cut back. So it's not like it's that big of a deal. But a lot of this stuff has really come out during a nine or 10 year bull market. Wait, when did the bull market start again? Now show Japan. Yes. So I think that's, that's part of the reason why it maybe it seems a little easier for people is because the stock market,

has been doing so well. And a lot of these are assuming a hundred percent stock market portfolio, which I suppose can work, but it's not for everyone, especially if we have a, not just a bare market or a correction, but a prolonged. So let me ask you a question. How could this go wrong? How could this go wrong? I was teeing you up. So they had an interesting one in MarketWatch, and it was about this, they had profiled four or five different people who had just something out of the blue happen. And one of them was this woman who was in early 20s that she wanted to retire at 35, but then she decided to move it up to 27 and she was going to be a freelancer she wanted to do a rental property she does a podcast of course like us everyone has a podcast she wanted to have an Etsy store

all these things and the takeaway was the rental property became too complicated to manage she found she hated freelancing she wasn't able to access her pension yet which i don't know how you even have a pension at age 27 she didn't sell as much as she wanted to an Etsy and her and her boyfriend broke up and so the kicker was now she's living with her parents until she finds a new full-time job so I actually thought this was good to look at the other side of this and show people who try to do this but fail because I think when we look at just the success stories, in a lot of ways, there's a lot of survivorship bias there. And I think a lot of people, again, I think it's just more about expectations and showing how hard it can be. I think maybe that's your point that this is not as easy as a blog post makes it out. Yeah, that's all. And the people that have successfully done this, why would I be mad at that? That's like an amazing thing. And that people are, you know, are accomplishing their dreams and now they're like living a great life. That's, that's freaking awesome. I just think it's a lot harder than it sounds, that's all. I'm letting you handle all the hate mail from the fire crowd on this one. I got nothing to do this.

I got nothing. I'm washed my hands with it. I do not have any hate. I do not have any hate. I wish I was that disciplined with any aspect of my life. Okay. Speaking of how much you spend in retirement, this was a survey this week, according to the Bureau of Labor Statistics.

And they found, this is based on 2016 figures. And they fed older households, those defined as someone who's 65 or older, so didn't exactly hit the fire crowd. But they spent an average of 45,000. and change a year, roughly $3,800 a month. That's about $1,000 less than the monthly average spent by all U.S. households. And so I looked at this to figure out, well, okay, if we do this 4% rule where you take 4% of your portfolio account that is your spending, what does this look like?

And I took Social Security payment. So I went to our resident social security expert on Staff Bill Sweet. He said the average Social Security payment for anyone is roughly $1,300 a month. So taking away that $1,300 from $3,800, and I did kind of a 4% rule on that. that and it works out to a portfolio value of in the sort of $800,000 range to get that monthly spending, which not very many people have. So obviously, this is a kind of thing that can be skewed by averages where you have people who spend a ton of money. But it was interesting that the average spend came to roughly 40, $40,000, which is around that 4% of a million,

which is kind of surprising to me. Yeah. So what's the takeaway? The takeaway is, I'm guessing, a large number of people. I'm guessing if you did a median versus an average here, it would be a lot different because there's no way that many people. What is it? Five percent of all households are millionaires. So to have the average, if Social Security isn't a huge part of it for you, I'm guessing a lot of people are spending way, way less than the average in retirement. Yeah. That would be my guess because they don't have the financial means to do so. So there was a survey within an article in the New York Times last week, almost a decade ago, protecting older investors, AARP said 63% of the people it had surveyed had received an invitation

like the one my aunt found in her mailbox. And among that group, 57% had received five or more within the previous three years. And the invitation that Ron Lieber's aunt received in her mailbox was one for a steak dinner. Didn't we just talk about this week's go of people going to get dinner for investment advice? I can't believe that this still works. But But so this was a really good article. And honestly, it wasn't as bad as I thought it was going to be, but the way that they do these sales pitches, like they didn't, so the biggest thing here was that they lied about the performance of the S&P 500 by showing just the price return and not dividends.

But it's almost like they didn't have to make that lie, right? Didn't it, that was kind of like the takeaway I got from this is that, like, they could just show like what an annuity is and how it works without trying to compare it to the stock market. Well, there was, yeah, there was two parts of the article that I thought were particularly amazing. So they showed the index annuity beating stocks without dividends. So I asked, quote, I asked Stephen D. Schwartz, vice president of investor relations for the company, why the chart doesn't show the returns for the S&P 500 with reinvested dividends. He said it was because the point of the chart is to show the lack of volatility of an equity index annuity compared with

the S&P 500, which obviously dividends reinvested don't change the look of a chart to show that stocks are volatile. So that's a totally, yeah, they're still going to be volatile. Totally bullshit answer. And here's the chaser, if that was the shot. In any event, Mr. Schwartz said, Mr. Hallaby, who is the financial guy, Mr. Hallaby should not be using that chart because the company has discounted the annuity at the picks. All right. Discounted or discontinued? Wow. Got it. Get that over. Got me. Nope. That's all right. I'm not ashamed. Don't cut it. All right. The thing that, like, I am by no means an expert.

on annuities. I've definitely done some research into the space. I've never sold them personally. But I feel like you haven't lived until you've sold a single premium indexed annuity. Or immediate annuity. Damn it. I've never once read a story about annuities that made them come off in a good light. And obviously, I'm sure there are perfectly good people out there who are selling them. But it just seems like the incentive structure around these things is just like a beacon light for bad actors. And it seems like you see these kind of stories all they time in this space because there are these huge commissions. And in the fact that Lieber made it sound like they're kind of preying on old people who are worried about their finances and

maybe easier to take advantage of. Well, I think we just spoke about this, like with annuities, that an annuity is simply an insurance product to hedge against the risk of you outliving your money. But you should not have an annuity instead of investments. Put on your old insurance cap, is it possible to have a Vanguard of annuities where someone could come in and make an easy to understand, low cost, no crazy penalties to get out of it, some sort of product that people can understand in the annuity space, or is that more or less? I know Vanguard has a managed payouts fund that I've looked at. It might exist already. I just don't know the space well enough, but I think the problem or the challenge with something like that is distribution. And you have to

pay people to sell them. Yeah. Yeah. It was interesting. too how so Lieber after going to this event wanted to ask the guy some questions and went to his office the next day and the guy totally clamped up like not a not a good look for this guy at all right right it was just i don't know i i would love to hear like a good story about an annuity where someone buys it it lasts them for their lifetime they can spend as much money as they need or want and maybe here here's our multi trillion dollar idea michael we need an annuity for the crowd. Oh, wow.

Because longevity risk is their biggest need, right? Yeah. Can we make an annuity for 30-year-old people? Not bad, bad, not bad. All right. Did you see Forbes came out with the list, or I don't know if it was Forbes, that's where this article is, the world's highest paid TV hosts, and Judge Judy Shindling made $147 million last year.

Every time I read these lists, I see her on there. I'm thinking, who watches it? Like, who watches that show up? Maybe. You've never watched it? I don't know. I don't care. The only time I've ever seen it is when they used to make fun of it on the suit. It's pretty compelling. Okay. I mean, maybe it's all the old people watch that before they go off to

their steak dinners to learn about annuities. Let's stick with this annuities for a second. The greatest tweet that I saw this week, or maybe the greatest is a bit much. The best tweet I saw this week is from this guy, Greg Swan. He said, this is a real billboard I saw today. And it's a giant billboard from Prudential. Robots can't take your job if you're already retired. Okay. Wow. Okay. So again, this works for annuities and the fire crowd. We've got a lot of synergies going on here. All right. Let's move on to listener questions for the week.

So I see amongst new grads that work in finance industry that there is a general sentiment that more hours worked equates to some leveler of prestige. The extreme example would be like 80 hour work weeks in investment banking. Maybe it's just me experiencing this. But regardless, I'd like to hear what you think about the balance of in office hours and out of office hours and how it can contribute to a career in finance. Hmm. Well, I think that we are very fortunate in our roles that we have a pretty good work-life balance in terms of like getting into the office and getting home and spending time with the kids. I probably do a lot more work at home than my wife would appreciate. Like usually on Sunday mornings, I'm out of the house early and in a coffee shop preparing for the show and doing whatever other stuff I got to do. But it's also sort of hard like with Twitter and the internet. I feel like we're always, I'm always kind of on a little bit. I definitely my personality type would never work for the investment banking side of things. I just, I just couldn't do it. There's no, there's no way that would work for me.

I'm not like that type A personality. I can't even listen to you for 30 minutes on a podcast without getting distracted. This is fair. Have you read the book Young Money by Kevin Roos? I believe he's at the New York Times now. Oh, I know that, I remember that article, though, that he did. He profiled five or six young people and followed them around to their investment banking careers. And it just sounds awful. I mean, it was 3 a.m. nights and weekends and doing 180 deck

PowerPoint presentations. And a lot of it was just not work for the sake. It was like work for the sake of work. It wasn't even getting anything done. It was just like a hazing ritual where you had to go through it just because everyone else. Yeah, that would not work for my personality either. The first guy ever worked for in the industry when I had an internship, my senior year in college, was for an investment analyst. And he said his first three years out of like an Ivy League school, he did investment banking like everyone else. This is in the early 2000s, late 90s, I guess.

And he said in his first two years as an investment banker, he had three days off in the whole two years. I just don't see the point of trading your life for that. And what's a point of money if you have no time to spend it? Yeah, exactly. I mean, for people who want to go that route, I guess more power to them. But I think for us, yeah, it's a little different. Because a lot of the stuff we do out of the office, I think, is stuff that we enjoy.

And so the in versus out of office stuff, a lot of it kind of meshes together. So it's hard to say from our experience. But working so much, I don't see why anyone needs to work in an office more than 40, 45 hours a week. I just, it doesn't make sense to me. Lawyers have to. In the office setting. Okay. Well, because they need those billable hours.

Let's move on to recommendations. What do you got this week? Somebody recommended us the show Warrior. which is on Netflix, it's Danish, and it is six episodes, which is perfect for me. Subtitles? Subtitles, which I don't mind. Or dub voices. No, subtitles.

I don't really like dub voices. I did dark with dubbed voices and it was weird. The problem with subtitles is you can't look at your phone the whole time. Okay, go on. So is this good or bad otherwise? It has a full endorsement for me. It's not amazing, but it's certainly good enough to get to receive a full endorsement. It was sort of similar to Sons of Anarchy in that it was about a biker gang, but Sons of Anarchy was like silly. This is more serious.

Okay. Sons of Anarchy was really depressing too, I thought. Yeah, it was. But this receives a full recommendation, full endorsement. And I am 100 pages into only yesterday, an informal history of the 1920s by Frederick Lewis Allen. And you've read this book and Morgan recommended this book a while. spoke a while ago. And he is an amazing writer. Like, just the writing style is so good and such a good book. Yeah. Frederick Ullis Allen. Someone told me that he's like one of the best

finance writers of all time. And I'm like, I've never heard of this guy before. And I started reading some of his books and they're all really good. Yeah. So I'm only a third of the way in, but I'm ready to give that a full endorsement. All right. Any more? You good? I'm good. So I took my four-year-old daughter to see the new updated Grinch last week. And I mean, I have kind of a different sliding scale for children's movies because they're not the same as the regular movies I like, but I enjoyed it. I thought it was okay. My daughter loved it. It was under an hour and a half, which is great because sitting in a theater with a four-year-old is really tough. We went there on a weekday afternoon, and we're literally the only two people in the theater. And my daughter,

Libby got up, made me change seats with her like 12 times just because the theater was wide open. So we, like, we sat on all over the theater, but I liked The Grinch. They kind of changed it around. Actually, they had Farrell Williams as the narrator, which was kind of different. And they actually changed up some of the rhymes from Dr. Seuss, which I don't know if I really liked that much that they, they didn't use his actual words from the book. But I kind of liked it. And book I was finishing this week called Normal Accidents by Charles Perrault. And actually, in a roundabout way, you kind of put me down this one because this was my favorite passage from Deep Survival by Lawrence Gonzalez, which you put me on to,

which I thought was probably one of the best books I've read in the last few years. And this is from Deep Survival. He said, Perot's normal accidents first published in 1984 is a work of seminal importance because of its unusual thesis. That in certain kinds of systems, large accidents, though rare, are both inevitable and normal. And the accidents are characteristics of the system itself, he says. His book was even more controversial because he found that efforts to make those systems safer, especially by technological means, made the systems more complex and therefore more prone to accidents,

which I thought was one of the most perfect explanations of financial. Marshall Marcus I've ever heard. Yeah, it's perfect. I think I wrote a piece called Normal Accidents. Yeah, I just love the name in like the way that he described complex system. So reading that, for some reason that, that idea has always stuck with me. And I think I was looking for some new books and I decided to give this one a shot again, written in 1984. But it was great because it looked at accidents in, one of my favorite chapters was like maritime accidents with tankers. And I want to read you a few pieces from this. So they talked about tankers in like the 70s and 80s. And I'm guessing the technology is a little better these days. But apparently if these things hit, there's

There's no way to maneuver around them because they're so big and hard to move. And so he said that collisions between even modest tankers can be frightful. Two ships of a Liberian registry, a U.S. and a Greek tanker collided in the Indian Ocean 23 miles from the coast. The explosion rocked buildings 40 miles inland, which is nuts. Another one, let's see, in the 1970s, one freighter was in the wrong lane to try to save time. She hit another tanker which exploded, breaking windows in houses five miles away. So there's a bunch of really crazy stuff like that about how they try to make hands. Hold on. That sounds ridiculous. I'm going to say pics or it didn't happen. All right. I'm going to look it up. He's got a 45 pages worth of bibliography here. So I'll let you go through that. You know, I was just thinking about that because that reminds me. I wish I bought this book. And maybe I'm sure I'll read at some point. But I would say like at least 50% of the books that I read come from recommendations from within other books. I totally agree. Yes. It's almost like if I like this enough and the author likes it enough

to explain it and I understand it, I'm into. That's a good one. Okay, I think that's it. Send you to recommendations, thoughts, Animal Spirits, Pod at gmail.com. Next week, we're going to do another talk your book segment. If you missed that this week, we talk to Will Ryan at Granite shares about commodities. Next week, we're going to be talking with BlackRock and I shares about investing internationally in foreign markets and their multifactory ETF. Send us to thoughts on those. Talk to you next week. I don't know.