The Derivative - YOLO is BS, and Investing as just one Dimension of Wealth with Brian Portnoy of Shaping Wealth

Episode Date: July 28, 2022

Will the real Portnoy please stand up? This week's guest may not be rating pizzas worldwide in one bite, but he is an expert at simplifying the complex world of money — we're sitting down with the one and only Brian Portnoy, Ph.D., CFA. Brian(@brianportnoy) is the founder of Shaping Wealth, a coaching and content platform inspiring financial well-being globally. He also has multiple bestselling books on the psychology of money, most notably The Geometry of Wealth (which has been published in 8 different languages.) For this interesting chat, Jeff and Brian dive into YOLOers needing to take some form of agency, where Crypto falls in the 7 dimensions of money life, behavioral conversations (rich vs. wealthy), Financial literacy, the happiness equation, investment expectations, and so much more! Plus, we get exclusive insight into how Brian is "Shaping Wealth" — SEND IT! Chapters: 00:00-01:49 = Intro 01:50-08:00 = The Real Portnoy 08:01-20:06 = Taking some form of Agency & Does Crypto fall into the 7 Dimensions of money life? 20:07-36:36 = Behavioral conversations, Rich vs Wealthy: the Geometry of Wealth & Achieving funded contentment 36:37-46:59 = Youth financial literacy & Behavioral bias with institutional investors 47:00-01:02:10 = The happiness equation, Investment expectations & Offense vs Defense investing 01:02:11-01:08:43 = Behavioral framework Follow along with Brian on Twitter @brianportnoy and for more information on Shaping Wealth, please visit shapingwealth.com Check out Brian's book, The Geometry of Wealth Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Happy Thursday. Welcome to the dog days of summer. Sports calendar's rather lacking, if you ask me. All the golf majors done, all we have is mid-season baseball and the Cubs in the gutter. We're trying to help you through these slow days with a bunch of great episodes coming up with Ben Eifert,

Surgify, Augustin LeBron, and Braj Agrawal all coming up to make it an awesome August. On to this episode where we got to sit down with fellow Chicagoan Brian Portnoy who authored a few books, How I Invest My Money, Geometry of Wealth, and The Investor's Paradox, before launching a unique business focused on helping advisors and their clients achieve funded contentment, as he calls it. We get into his non-cousin Dave Portnoy, YOLOers needing to embrace agency, how crypto deludes people into thinking it's both an investment and savings and protection, and whether behavioral finance is fluff or function. So much more. Send it. This episode is brought to you by RCM's Managed Futures Group, which will, any day now, I swear,

release their semi-annual Managed Futures rankings covering trend, ag, energy, big firms, small firms, and everything in between. Head on over to rcmaltz.com and pop in your email to get the rankings as soon as they're released. And now back to the show. All right. Hello, everybody. We're here with Brian Portnoy. Welcome, Brian. Hi. So I'm here in Roscoe Village and you're just north of me in North Center, I think, right? That's right. I'm just on the other side of Irving Park Road.

We should have done this in person. Here we are sitting in our homes and we could have been sitting across from each other live. I offered drinks if you did. You did. That's my fault. I'd rather be drinking or I'd rather be drinking with you. I don't know how to do the live pod on the Zoom, right? Could you just set up two Zooms,

I guess? Two computers next to each other? Let's figure that out for next time. Next time. Next time. So, wanted to briefly touch on your surname there and clear up that you aren't related to David Portnoy in any

shape or fashion. My Twitter bio says not Dave's cousin. Yeah, there you go. But that kind of dives into, in my mind, at least what you're touching on, what you're doing a little bit lately of like, talk about what he was doing and YOLO and trades and all that good stuff. And how it relates to kind of what you were doing. Yeah, I've never really thought about it in that regard.

But yeah, I mean, he's a bullshit artist. I don't know if I'm allowed to swear on your podcast. Yeah, go for it. But and I don't think that I am. You know, he's a he's a pump and dump guy. He's an entertainer. He's very talented in in that regard. But, you know, he he's he did a nice job building up Barstool.

And then he sold it and made some nine-figure sum and himself was YOLOing a bunch of things and, you know, talked about it. And, you know, there's a lot of young men who are very open to the Pied Piper effect. There's such a level of dislocation and anomie in our society and that has certain, I think, nefarious political implications. But also, you know, in terms of GameStop and some of this crypto nonsense, you know, you've got certain ringleaders, Pied Pipers, like the other Portnoy, the not, you know, I'm the real Portnoy. So the other Portnoy, you know, building up a fan base

by saying, hey, this stuff's on a rocket ship. You know, Elon is a much bigger example of somebody who just says things and people, some people attach to his every word. And so if you had written the book today with all of that GameStop and Portnoy and all that stuff happening, would there have been a mention? Would there have been a section of like, hey, don't fall for this BS? Well, if the book in reference is The Geometry of Wealth, no. The first book, so in the investor's paradox, it could have very well been a good example of how not to conduct yourself or maybe just a cautionary tale. Yeah. And it's weird for me because I haven't seen any like, right, there's all this behavioral stuff, FinTwit's all this behavioral stuff.

FinTwit's full of the behavior, but you don't see much that talks about that. Addressing these YOLO guys like the world's unfair. This is the only way we're going to get ahead by by risking and over over risking an amount, whether it be in crypto, whether it be in GameStop. Right. There's that kind of people have kind of pushed that aside like, well, you can't blame them. They're not going to be able to get ahead anyway. Yeah, I'm not a big fan of being a victim. You know, there are people who were born into pretty, you know, lousy circumstances and they could complain or not complain but my sense of the you know the the group that likes to play the victim card and that the only way they can escape their um their their bad lot in life is to yolo gamestop or to load up on you know solana or something it's like just stop like you just you know you're just full of shit like right just an excuse yeah like

and maybe uh you know i i i'm i think i am entering my you know old man shakes fist at clouds phase but like yeah um you know embrace agency like you know going way way you know going back to you know the reason i showed up in chic in the early 90s, which was to get a PhD in social sciences. And I taught Smith and Marx and Durkheim and Weber and all these things to undergrad. So I spent a decade thinking about structural versus agency-based causes for social phenomena. So I'm wide open for like structural problems. You know, Marx was maybe a shitty economist, but a pretty good historian and sociologist.

And so, you know, I'm all in for structural explanations and the lack of agency one has in a cruel, cold world. But, you know, these guys push it too far. It's like, just take responsibility for your stuff. Go make a living. The world's an amazing place. There's so much opportunity. And if you, with a healthy mind and body in your mid-20s,

think that the only thing you can do to get ahead is to buy crypto, then you stink. But do you think it's an ingrained, like it's become a behavioral bias, like a behavioral roadblock or it's just an excuse? I think it's an excuse. I mean, you and I could both wrap everything in fancy language and make it sound good, but it's just an excuse not to take care of your own stuff. So, speaking of crypto and like, so even if you had that excuse, you're giving that excuse, but all those poor souls that had their money in Celsius, that had their money in all this stuff, like how do you view that in terms of how you, right, at shaping wealth and like,

no, that's not the way to wealth. What are you guys doing? Well, I mean, specifically, we're not doing anything. I mean, we don't do investment counseling. I think so we do base a lot of our coaching on the seven dimensions of money life, earning, saving, spending, borrowing, giving, investing and protecting. I think investing is probably the least interesting slash easiest to solve for of those seven dimensions. So, you know, what you're talking about could be indicators of certain, you know, client behavior that advisors would want some counseling on. And in fact, we did a really fun coaching program or coaching presentation

maybe a year ago called Bitcoin Blues, which wasn't about Bitcoin. It was about FOMO. And where do we get this fear of missing out? And then JOMO, what is the joy of missing out? And that became a kind of a coaching seminar for for financial advisors jomo is like the americanized version of shaken fruit or whatever that word is schadenfreude schadenfreude yeah yeah yeah you don't want a russian jew named portnoy quoting german culture okay it's not a good, it's not a good spot. So you came Jomo? So yeah, I didn't make up Jomo. Somebody came up with Jomo, but you know, just, well, no, Jomo is the, Schadenfreude is the joy you receive from others' misery. No, Jomo is just, oh, okay. I didn't go to Lollapalooza and boy, am I happy I wasn't in that crowd. Like I could have gone,

I didn't want to go. I felt like I should have gone and like oh god it was it was 95 degrees and humid and packed and and you know the Foo Fighters canceled and it was going to be awful and whatever so but you know Jomo is just appreciating that you know you can't do everything and you can make a choice to avoid things and just sort of be present with yourself or people around you. And that's a good thing. But back to your question about crypto, there's levels. One is the herding behavior, which we can observe from a macro point of view. And that's normal. I mean, probably the most important thing we can say about humans is that we are social creatures and that we are deeply hardwired for the need to belong, to be part of a group. So when you dig into evolutionary psychology, when you dig into history, you can see that that sense of

connection with others is about as important a topic as you can get into. So in-group versus out-group dynamics and finding your tribe, so to speak, like super important and not irrational, not, not trivial, like deeply important. Probably could be argued as hard as ever in today's world, right? Well, it's, yeah, because we now have access to, we now have access to what every, you know, we, we have, we have eyes on what everybody's doing. You know, there's the old JP Morgan line that nothing corrupts your financial judgment

more than the sight of your neighbor getting rich. And the thing today, because of LinkedIn and Twitter and Snap and Facebook and TikTok is that everybody can see what everybody's doing. And I think one of the reasons that arguably society is on tilt is because we are being confronted with so much stuff. And, you know, there's headwinds and tailwinds. It's going to encourage certain positive tribal behaviors. It's going to encourage certain negative behaviors. You know, it's,

we're in it. It's really kind of hard to assess it. It's hard to imagine it going away. I don't think this genie goes back in the in the bottle. So, you know, the fact that because of the way information technology can spread instantaneously, you see things like crypto, which, you know, clearly made some negative comments in the last five minutes. It is what it is. And there could be potentially some positive things about it. But, you know, guys latch on to it and being deeply uncomfortable, physically uncomfortable with evidence or news that contradicts your priors, like that's really real. There's another level, though, that we should flag, and you're the investor, not me. I used to be an investor. And that is that you looked at some of these

platforms that were offering, what, 15% to 20% yields on cash. And it's like, come on. All right. If literally my 80-year-old mother was confronted with that and she doesn't know anything about anything, she could get sucked into that and that would be a shame. But if you are a kind of a sentient adult and you are being offered 20% yields on something and you're supposed to think that that's normal, let alone safe, then again, it gets back to our top, you know, topic of agency. Like, have you done any work? Have you done any diligence? And the answer has to be no. And go back to your seven pillars or which comps? Seven dimensions of money. Dimensions, sorry. Earning, saving, spending, borrowing, protecting, investing, giving.

So, yeah, I think, and I think what's interesting to me in light of those seven, right. It's like crypto for a lot of these young guys marks off a lot of those boxes. Like you're just saying, oh, this can be my earnings. This can be my savings. This can be my protection. Yeah. And this can be my investment. Right it's like, cool, crypto just checked off four boxes. I get all this yield. I get this protection against inflation, which is narratives all the way around. But it's just interesting to me in light of what you're doing on a day-to-day basis. A lot of that fits that profile in their mind. So they're like thinking they're doing the right thing.

I, you know, I've never thought about it in those terms, but that's, I'm going to have to do something with that. The other layer here I'd put on is that something I've been thinking about are what I call identity assets, meaning that, you know, things that we own that give us meaning and purpose and identity. And, you know, the crypto community is clearly defining their identity in part through digital currencies. Like it's meaningful to you. I mean, there's far less salacious examples. You know, you could think about a house you own or a building you own and

economically, maybe the right thing to do would be to sell it or refurbish it or do nothing, but you act differently because the building or the home has a certain meaning to you. So we do gain, we source parts of our identity through financial assets. That's, I don't think there's anything new with that. And in fact, going to the traditional behavioral finance literature, we have the so-called endowment effect, which is that the moment you own something, you value it more than the moment before you owned it. It's more meaningful to you.

So that's, you know, we've known about that for a long time. But like the kind of tip of the spear here is that for like highly volatile, controversial assets to tie your identity to them can be highly volatile. Yeah. We used to work with an RA who called it financial furniture. He'd be like, right, I have these clients in Atlanta. They have the Coca-Cola stock that's been passed down from their grandma to them, to their kids. And it's financial furniture over there in the corner. You can't sell grandma's couch. What are you doing? That's got to stay over there in the

corner. Yeah, that's exactly right. Yeah. It just, it's, you know, try to put that into an efficient frontier calculation. Like you can't, and that's maybe a pitch for, you know, for behavioral advice, because like, if you can't figure out what that is, or if you just say, well, that's irrational and at Shaping Wealth, you know, we're remote only because I've got one partner in Atlanta and then two partners in Europe, you know, on our virtual wall, there's a, you know, the word irrational with a circle and a line drawn through it. Like the concepts of rational versus irrational behavior are not something we are allowed to talk about

because they actually undermine good conversations about money and decision-making and habit. Meaning, you know, we just talk about normal. In fact- Dig into that more. So you're saying if I'm like, oh, that's irrational, why would she ever buy that? Yeah. It's not helpful. Why is she buying it? Well, not only is it unhelpful, it's harmful. It's harmful in the sense that when you pathologize normal human behavior,

you become not just kind of analytically judgmental. You can become personally critical. Irrational is a fancy word for stupid. I mean, like he's acting irrationally, i.e. he's an idiot. Like why would he do that? One of the things that, you know, we run this coaching program at Shaping Wealth, and one thing we talk about is, that empathy, which is a very complicated, multidimensional phenomenon. And so when the grandson won't sell grandma's Coca-Cola shares,

and it would be very beneficial to them financially, from a balance sheet point of view, numerically, to sell them and they won't. I mean, the advisor is not going to call that person stupid, but they might think, oh God, that's really a bad decision. And we would counsel differently, which is, well, why don't you take the time to listen to what's important to them and why they value the things that they do and have an authentic conversation that starts there and builds from that in terms of the life that they want to live and how something like grandma's Coca-Cola shares fit in versus kind of isolating this asset, calling it the, you know, the irrational piece and saying, ah, the hell with it.

It's only 5% of their portfolio and we're not going to deal with it. There's just a different door you can choose to walk through as a behavioral advisor. But you are sort of compelled to jettison the idea of irrationality. What do you say to people who'd be like, that's just a bunch of fluff, right? Like, I would, well, I'll start with what percent of advisors these days are moving towards this direction of moving towards behavioral conversations and addressing biases versus just like, Hey, here's the pie chart. You need to make sure you match up in this pie chart. I mean, I'll round up and say all of them. I mean mean the idea that an advisor is going to add value through their investments is a joke yeah i mean it is yeah well i would say like is this person sitting in racine wisconsin

the smartest person in the world to to manage my investments right that's right um and sorry for all you Racine listeners out there um I like I've been to Racine yeah nice or or Racine if you are are in a league of league of their own movie no no one cries in behavioral finance um so no I mean, look, Jeff, the clear trend that we're seeing, and of course, I'm talking my book, but I built my book in light of the trend, not the opposite, which is that there is a full blown movement among wealth management firms, from the individual independent RIA all the way to the wire houses to embrace behavior broadly defined. And I'd stress that like behavioral finance 1.0 kind of sees, you know, the use of Kahneman, Tversky and Thaler and those dudes as, you know, the source of different tools and tricks you can play to nudge people and label biases and do all that. I have a different perspective on behavioral finance 2.0, which just starts with the premise that behavior is gravity, not a tool. And by gravity, I mean that it's everywhere. There's

no not behavior. There's no not gravity. There's no not force that's putting me, keeping me in my chair right now. And so when you embrace that, like there's no step of the financial wellbeing process, there's no step of the financial planning process, the investment process that doesn't implicate some dimensions of cognition, perception, decision, habit, you name it. Then you say, well, everything's behavior. And then how do you accommodate that force? How can you maybe bend it a little bit to suit your needs or your client's needs? And so the wire houses have chief behavioral officers, which are seven figure gigs. Independent RIAs are working with us to receive coaching and content. The vast middle ground of larger independent firms, the five to $50 billion RIAs,

they're working with us. The independent broker dealer space, the 50 billion to half a trillion, trillion dollar IBDs, they're working with us. I mean, we're just getting going. So we've got smatterings here and there, but like the conversation, I have these conversations every single day with not only individual advisors, but from the top down the heads of advisor development, as well as the heads of learning and development for the firms overall. And so how to integrate behavioral insight into the entire financial planning process is the ballgame right now. And for all those groups you mentioned, what's their endgame? It's another piece to attract clients or it creates a better outcome for those clients in the end? Well, it's both.

I mean, you start with your existing clients and you try to retain them and provide an overall better experience. It's one thing to have a conversation about whether you have an optimal portfolio. It's another conversation to understand how money is fitting into a meaningful life, however you choose to define

that. The first conversation is narrow, and I think a fair bit of theater in terms of whether or not the guy in Racine or the gal in Albuquerque is building a better portfolio than the person in Fresno or Tallahassee. The second conversation requires a fair amount of contemplation and I would argue, you know, learning to really know how to have those conversations. It goes beyond being a good, a good guy and having some common sense and being ethical. There are some deep seated human tendencies that we all have, um, that are worth understanding. When we talked earlier about kind of our disposition to belong and to be connected. That has a variety of implications for money life and beyond.

So, you know, what is the payoff? Well, I mean, part of what we're, and so because we're early in our business development, you know, we're kind of mapping to the crossing the chasm type dynamic where innovators and early adopters are kind of who we're working with. And right now, we're kind of figuring out like the early majority piece as we get to bigger firms that seem to be broadly interested in what we're doing, but have to figure out specifically like how, how to work with us. You know, there's, there's an element of, well, this is the right way to be. Like if you're going to be a financial advisor, you should go beyond trying to build a good portfolio. You should go beyond just building a financial plan and you should engage in planning. So move from noun to verb on plan,

and then figure out, well, what, what is a goal, which is one of the most complicated and misunderstood, you know, ideas in, in our industry, but like, how do you form and achieve goals? How do you keep on track? How do you stick to achieve goals? How do you keep on track? How do you stick to the plan? How do you make decisions and form habits? How does all of this relate to your sense of contentment in the here and now and more broadly, how does that then create certain conversations between husband and wife, parents and children across a multi-generational stack? I mean, we're working with a very, very large private bank now, one of the largest in the world.

And they are, you know, I was going to say struggling, but they're contemplating how to have better conversations about money across three or four generations now, because they are observing that if you do the old school stuff on, you know, in the wood panel boardroom with a stack of papers and trust documents and, you know, all the portfolio stuff, it just leaves the adult children and the grandchildren numb. Yeah. They say, forget it. And so, well, how do you broaden the conversation? It's actually not obvious. I think that's why we are growing in the way that we are.

And you think a piece of that ties back into the, I hate to use the term ESG, but it's sort of ESG, right? Some of these things of like, well, I want to have control over what my money is invested in, or I keep coming back to investing. Sorry. And that's only one of the seven dimensions, but you know what I'm saying? Does that part of that whole picture? Yeah. So, you know, ESG is, is an example of something much bigger, which is, you know,

some sense of context or purpose or meaning. So, you know, I, whatever opinions I had about ESG, they're, they're, they're ill-formed, but I'm a huge fan. Right. I'll reframe. Do you, are you saying people that once they get this concept, Oh, okay. I want to full, I want to fulfill these goals in my life with my wealth. One of those goals is to feed hungry children, whatever. But if I'm doing that at the same time part of the thing that's generating the wealth to do that is taking food out of hungry children's mouths right does it get down into that granularity i don't know

the company that's taking food out of children's mouths but if there were one right would you be like okay we got to get that out of the portfolio? Yeah. I'm trying to think the best way to frame this. So let me step way back and say that I wrote this book five years ago, published four years ago, the geometry of wealth. And the main thing, page one was, well, there's a difference between being rich and being wealthy. And being rich is the quest for more, which ultimately is this hedonic treadmill that you can never really get off of. You have 10 million bucks. Well, okay. Then you want 20. You have 20, then you want 40 and you're just on it. And, you know, right. George got a jet. We need a jet. Yeah. Yeah. Um, you know,

I worked at a firm once where the lead guy had his own jet and the, his partners had to share a jet and like, they were pissed. Yeah. Right. When it, versus if you're coming from your 22 in a new place, like, hey, if we all shared a jet, that'd be awesome. Yeah, yeah, exactly. Well, if we didn't have to share a bedroom, you know, because it's so high, like before you get to a jet, how about you get your own bed? So, you know, there's, you know, the quest for being rich, which is fine. It's not as bad as I'm making it out to be. There are certain elements of more that are quite good. But then the other, you know, angle, you know, fork in the road, you know, rich versus wealthy. I coined this phrase funded contentment, this idea that true wealth is the ability to underwrite a life that's meaningful to you, however you choose to define that. And, you know, so underwrite a meaningful life that it's deliberately loaded

phase, a phrase. And one of the things, you know, so I was in your world for 15, 17 years, mutual funds, hedge funds, Morningstar, Mesereau, a bunch of firms here in Chicago, a big investment, national investment firm where I was kind of, where I did a bunch of content and behavioral coaching things, but, you know, worked on, you know, understood the investment side to it as well. When I say funded contentment is the ability to underwrite a life that's meaningful to you, the burden is defining the meaningful part. Yeah. Okay. Like what matters to you and it's your business, not mine. You know, I set out a pretty robust framework for helping people define what's meaningful to them, a bunch of mental models on that. But then once you have

some sense here in the moment, and we change and adapt over time, but here, this is what's really important to me. It's just not my goals, but it's my values and my purpose. You can then secondly, not for secondly, ask questions about, well, how do I afford those things? And in some cases, it might be that they're free or close to free and that the really good things don't really cost a lot of money. It might be that they cost a ton of money. Maybe what's important to you is supporting the environment or some other cause, or it's just supporting your family members. I mean, I'm in, you know, my wife and I are in the sandwich generation where we help our parents and we're raising our kids, and it's not easy. So funded contentment to me involves, it's not happy, but it's still fulfilling idea that we have a balance sheet that could support, you know, three generations,

our parents, ourselves, and our kids. that's not fun, but it's, but it's meaningful. Right. And so the point is it's my business. Nobody else's what my sense of a meaningful life is. I feel an obligation to certain people in my life. And it's important to me that I, that I do that. Right. And so once you define what's meaningful to you, you then figure out the money stuff. And the geometry of wealth is a model for doing that. So, you know, it's circle, triangle, square, defining purpose, setting priorities, making decisions in an iterative loop.

And that iterative loop of purpose, priorities, and decisions is my recipe for achieving funded contentment. That then I turned that book into a coaching platform called Shaping Wealth, which is the company I run with a few other people. What if my funded contentment's owning an aircraft carrier? Would I think the Secretary of Defense require a phone call? Yeah, exactly. How do we get there from here?

That's an interesting, I mean, we live in the same neighborhood. I'd like to see what's parked outside. Yeah, exactly. How do I get there? And then do you keep running into people like you as we maybe as we get older, just people are thinking about it more of like the most valuable thing that nobody can buy is time, right? So to have that like funded content would be just to have as much time as possible,

which to my brain goes like, cool, I could invest in that friend's restaurant and this private equity thing and this thing over here. But each one of them is going to take some portion of my time. Yeah. That as I'm laying out that framework of like, okay, sounds great. Maybe I make an extra 2% a year, but is that 2% worth my time? Right. Or investing in your friend's restaurant, maybe restaurants are pretty risky, but maybe you just want to support your friend and you hope you just get your money back. Or

if you support your friend, but you underperformed the market, whatever that might be to you um by you know 500 basis points might you say oh that was worth it because i got to support my friend i got like the cool factor of like you know owning a little piece of this restaurant and getting a free drink at the bar and seeing people i know um i still made some money but not as much as I would. You know, this is where, you know, expectations management and which to me is alpha, the real alpha is, is meeting or exceeding expectations. That's, that's where that, you know, fits in. But it's like dealer's choice, like whatever's, whether it's, you know, owning a restaurant or an aircraft carrier. This has kind of gone in a strange direction.

I don't know. Clearly, those drinks that we were scheduled to have with Lish have to happen sooner rather than later now. Because I got to hear what's on your mind. And here, what just popped into my mind, oddly, too, of that movie Hitch. You ever see that with it? And like, did you come up with this all after right she's the heiress in the boardroom and they're trying to give her all those papers you're talking about yeah i hadn't she's like no i just want to support my friend's art gallery like yeah and they're like no no um yeah we um the the albert brenneman that was his

that was uh what's the actor's name? Yeah, the guy from King of Queens. Yeah, exactly. That's a good show. Go check it out if you haven't seen it, listeners. Is this the beginning of a movie pod? I feel like you and I could do damage on that. Yeah. Yeah.

The vision statement for my company, I don't know who listens to your podcast, but it could be some kind of steel eyed hedge fund managers. Maybe they think all of this is woo woo, but like, I really believe it. And, you know, the vision is funded contentment for everyone. If we can help people understand wealth as a mindset as much, if not more than a number, then we can help people lead more fulfilling lives. And financial well-being is actually just a subset of a broader vision of a life well lived.

But what I'm doing with my partners is trying to take a little bit of responsibility for that one piece and effectively helping people speak the language of money. You know, money is a language in which no one is fully fluent. It's the hardest thing to talk about. The American Psychological Association does surveys on this every year. It's the most stressful, hardest to talk about thing, more than sex, money, politics, religion, divorce, you name it. And, you know, if this were just a numeracy problem, it would have been solved a long time ago.

Do you think there's a piece there that we'd need to like massively invest or make a priority to teach kids sooner, teach them in the school, like teach them that language sooner, but you're also saying like the language differs, right? There's fine. There's one language and a gazillion dialects because what matters to each person is different. Yeah. I don't think so. The problem is dire, but I don't think the way that it says dire dire in the direction that you just painted it in terms of the dialects, meaning that financial literacy, youth financial literacy and massive resources, in no small part, because in the US, at least, we've got 50 different education systems. And so you've got 50 different, you know, situations to solve. But globally, like there's a ton of data and Anna Maria Lussardi, who's the lead scholar globally on this, on financial literacy, like the data is

overwhelming and not good, like how bad people are. And it's because like in fourth grade or eighth grade, we teach people, you know, to answer the question, what is money? And we say, well, it's three things. It's a store of value. It's a unit of account. And it's the third thing. Method of exchange. Yeah. So, you know, we see it as this purely economic, numerical transaction when in fact, it's kind of a window into who we are. It's just a, you know, it triggers every important emotion that courses through us. The greed, the fear, envy, joy, hope, despair, happiness. I mean, all of those are triggered by money in one way or another. For most of us, just about every day. So I do think that there is a shared vocabulary that can be created that really already exists.

And it's an execution problem more than a conceptual problem of how to have this conversation with younger folks, you know, starting when they're 10 or 14, but certainly by the time they're 18 and just getting them up to speed on like, okay, what's at stake here? Like, what, what are we talking about? And, you know, sort of the financial literacy as part of an economics curriculum is the first step in a very wrong direction. It should be more, you know, part of the humanities, understanding money as a social institution that was created just about six or 7,000 years ago. So the human brain as it exists now, it's about 130,000 years old. Money came along like 125,000 years later.

And we've been out of sync ever since. So talking about these things is really hard, which isn't to say unsolvable. It's very solvable. It's very fixable. But you need to approach conversations about money with a particular mindset. And I could argue we've gone, we've lost ground, right? Because you have Robinhood and some of the crypto ads and things that are happening there of just like, we're pulling back the whole risk side of the brain, money brain is being

erased, right? When Robinhood throws confetti on your screen when you did a trade and whatnot. That's right. that's right that's right i mean yeah we're we're we're sort of tweaking you know some of that stuff that we prefer not you know that i think you and i would prefer does doesn't get tweaked but yeah the the confetti when you make a trade and you know like one of the big trends, and this is little to do with you or me in terms of what our day jobs are. But when you think about the demise of defined benefit plans and the rise of defined contribution and what that's done for the democratizing of money and investing and democratizing, you know know has a nice like halo around it sounds great it sounds great but we know what's happened with people's ability to navigate their 401k plans their SEP IRAs their 403b plans like it's it's it's kind of a mess it takes away the safety net

basically it's like okay now you're doing the high wire act with no net good luck yeah and you know americans americans to an extreme fault are observed with freedom uh i promise i won't get political on your podcast yeah go for it you're welcome yeah no just you know freedom i mean jesus people what what a crude understanding people have of what that means but um you know, so now we have all this freedom with our investing lives. And it's just been like this shambolic mess of people not participating, not saving, keeping money in a money market account instead of actually putting it into the market and letting it grow over time. Pulling money out when, money out when things get rough. There's all these examples of our independent, our free retirement system, freedom-based retirement system not being particularly effective.

So I'll pivot off that and say, so if we still had those pensions, those groups managing the money for us, how do groups like that avoid these behavioral biases and work within such a framework, right? Because I'm sure you would agree with me, they'll fall for the exact same problems more often than not. Yeah. And that's, you know, I learned that lesson the hard way in my due diligence days, especially in hedge fund space where nobody comes across as a moron. Like everyone seems pretty damn smart and everyone has a investment process and systems and teams and pedigrees and all the, all the things. But then you realize that most of those funds don't do particularly well.

And then you look at the institutional investors, leave aside the fund of funds. And I was certainly part of the problem for 10 years, but beyond them, and you know, that phenomenon has more or less disappeared, thankfully. I mean, there's a few survivors, but whatever. But, you know, endowments, foundations, insurance companies, OCIOs, you know, pension plans, you know, the generous thing to say is that a number of those groups can actually do a very good job in serving the specific needs of that institution. So when you think about a college endowment that has different buckets that it needs to fill, keeping the lights on, funding students, funding research, long, you know, indefinite legacy assets, things like that, you know, they, they can very

intelligently bucket things out and find appropriate investments. And, you know, some of these, you know, a lot of them do just, just fine. And you don't have to be David Swenson and Yale and that innovative to, to, to get that done. You can be, and maybe that's that's a net positive so you know there's there there's there's lots lots of good things to be said about you know the well-run institutional investors that are out there and it's like their goals have already been set by someone right so it makes it a little bit easier of like hey we don't have to come up with the goal the goal is right there on the outside of the building. Yeah. Yeah. And potentially it's possible to be a little less kind of sort of impetuous about about decision making.

Number one, it's the goals of the institution. It's not your goals. Two, it's committee-based. And so it's just not up to one person. That said, there is academic research on this, on institutional investors. And guess what? They chase returns. They chase returns every bit as much as retail investors. I'm not going to throw the GameStop, Robinhood stuff into the mix. But generally speaking, you look at the behavior of, quote unquote, smart money, sophisticated institutional money. And I haven't really had much of a window into this world for a few years. I mean, I had a window for 20 years, so I saw a lot. But I'm not fresh on the topic. You are.

But generally speaking, what I saw bottom up firsthand, I know the plural of anecdote is not data, but I have a lot of anecdotes. But then you look at the academic research and you can see that pension funds chase returns as much as like the guy next door and then you have the concept of right like we're within our framework we're having funded contentment at the endowment level but oh crap the other 10 ivs just beat us for the last three years now they beat us for the last five years in terms of endowment performance. Someone there is going to be like, this committee's out. Right. So it seems like a mismatch there of like, they're trying to just do what they need to

do for their endowment. But they're also in this never ending race of like, we want to be the top of the performance capsule for the endowments in our league, so to speak. Yeah, yeah, yeah. No, that dynamic exists. And, you know, it's like, you like, take a coach in MLB or NFL, and if they don't have the support of ownership, and they're being judged on just one season's performance, where in the longer term process in place when you know you're on the hot seat and then you have to either chase the hot performance or at minimum mimic what others are doing or the others you perceive to be playing a winning hand. How do you view, this gets back into the investment specifics, but either in your past life or in your current life in terms of how you're doing it, I've come up with this plan or I'm going through the planning. We're doing great. This one piece

of my plan isn't working. It's not giving me the contentment. It's causing me stress. And I'm thinking more of it as one of the funds in a portfolio, but whatever it might be, how do you do that? When do I get out? When do I pull the trigger? Yeah, to me- The ripcord, not the trigger. Right, right, right. So the concept of funded contentment isn't really relevant at the level of these portfolio decisions. However, I'll call it the happiness equation is, which is that happiness equals reality minus expectations. And so the thesis of the investor's paradox, which I wrote 10 years ago, is that, and that was based on roughly 4,000 manager due diligence interviews.

I got to go read that one. I didn't, I'd forgotten about that one. How dare you? How dare you? Apologies. Worst prepared host of all time. Two books. I think there's actually three, right?

Then you do one with the, what would you invest in or whatever? Yeah. Yeah. The publisher might call it how I invest my money, but let's just call it what would you invest in and make it into a game show. Right. Look, Jeff, the upside here is that you definitely owe me a drink. For sure. At least two.

No. So, yeah, the investor's paradox was based on really, you know, close to 15 years of manager due diligence, starting at Morningstar in the mutual fund space and then going to be an bad decisions and taking into account Kahneman and Tversky and other elements of social psychology, including this book, The Paradox of Choice by Barry Schwartz, which is where the name of think it's generally, I think it's directionally true, which is that an investment that meets your expectation is a good investment. And if it fails to meet your expectations, then it's a bad investment. Now, good or bad outcome, there's a lot of reflection to engage in in terms of like okay um what how do you form those initial expectations how do you memorialize them how how do you make observations fact-based or evidence-based observations over time relative to those expectations, assuming that you're not perfect at your job, how do you update those expectations? And so, you know, to your question of, you know, when do you boot something? You, you know, headline, I mean, there's a lot of work to be done. But the headline is if it's

failing your expectations, then it should probably go. Which doesn't work too well in the investor world because their expectations are nearly always way too high. Yeah. Which is why most people suck. Yeah. Because they'll see like, oh, this thing returns 12% a year. I'll probably do 14 when I invest in it. Right. And then it does 10 and they're upset. Yeah. You know, so, so Natixis, you know, big, big asset manager, they, they do a, a nice report every year about the wealth management industry and advisors and investors. And they do some sort of survey on, you know, with thousands of respondents. I've never seen the methodology, so I can't say it's robust, but they do it every

year and they talk to a lot of people and they say, well, what are your ongoing return expectations for your portfolio? And I think in the 2021 or even early 2022 version, the average retail investor, and it's not, they say high net worth. So people with, or at least mass affluent, more than a quarter million dollars in investable assets. The number was like 14%. Their forward-looking return expectations were 14%. And the number is ridiculous. It doesn't square with anything that we learn from market history. The average expectation for a financial advisor was like six or 7%. So, you know, way to go, way to be sober. But even there, you know,

granted yields, a lot has happened since that survey yields have climbed back up. So maybe you can have pretty, you know, slightly more generous expectations for the fixed income piece of your portfolio, but, you know, expecting seven plus percent returns in a zero or 1% rate environment. Okay. Well, where are you sourcing? Yeah. Yeah. Where, where are you sourcing? What must your expectations be for the punchier part of your portfolio in terms of small caps, in terms of venture, in terms of certain punchier alternatives like crypto? 7%. The point is that the data is fascinating and this is very much an expectations game. And back to my little diatribe about not playing a victim and taking some form of agency in this

world. If you're told year after year to form and settle on realistic expectations and you don't who's to blame other than you for your disappointment well yeah we'll we'll leave that one be the uh someone out there that's why you shake your fist at the sky yeah yeah i think homer simpson's dead yeah yeah abe what's his name abe the and so digging into that a little bit more in the asset allocation right in the geometry of wealth talk a little bit that's the biggest i'd like your analogy of like the restaurants right like it doesn't matter what you choose on the menu choose if you choose mexican food or pizza you basically know right you lower the dispersion inside each menu yeah yeah did i get that roughly right yeah yeah yeah i I think I hadn't thought about it,

but I think I was talking about the food court at O'Hare. There was a point where I was traveling every week for work. So it's like, I knew that food court too well. And it's like, give me, you know, the Tortoise, the Rick Bayless place off to the side versus the McDonald's. But to me, it's more important. Like, what if the one you chose is poison right and has this 70 percent drawdown so to me like the and back to your dimensions i need something i can save

that protects me that also can provide return so right there's a lot of these blended portfolios out there now like i'm putting um right i'm putting stocks with managed futures that do well in a crisis i'm putting stocks with long volatility so do well in a crisis. I'm putting stocks with long volatility. I'm just curious if you... Part of me, if I go down this path, I want the fund to content me. It's really important that I have this pretty stable piece. That's my core investment theory. Or would you say, it doesn't really matter.

As long as you know what you want, you build what you want to get there. Yeah. I don't know if we're thinking about this in the exact like i don't know how broad a range you're thinking about things um you know look we can like let's keep it like in the power alley or in the fairway you know to start in terms of stocks bonds cash maybe you know you know throw in your illiquid real estate, like your home or other real estate investments. And then you layer into hedge fund strategies, long, short, or arbitrage, or futures, trend following, momentum type stuff,

illiquid venture, angel, private equity, private debt, venture debt. The world's our oyster, there's a hundred different things to do. I think those comments I made about once you've chosen the restaurant, there's relatively little dispersion within the menu. So, you know, if I want broad exposure to global equities, do I buy the S&P 500, which isn't, you know, international, but, you know, some meaningful percentage of revenues of those companies come from overseas markets, or do I buy VT, you know, the Vanguard ETF with 19,000 securities from all over the world. To me, that's an uninteresting, not difficult problem to solve. And I should have, and we're talking now in terms of professional investors, you should have a reasonable expectation for what that equity sleeve can do. And if you built your expectations based on kind of 2009 to 2019,

then I don't know what to tell you. Like it was great. In the NASDAQ? Yeah, until it wasn't. You know, in terms of having other pieces to your portfolio that are quote unquote safe, like, you know, so short-term bonds, higher quality bonds, government, as well as just plain old cash instruments, like, okay, that's the restaurant you're in, you're in the cash instrument and you might fight for a

basis. You know, you could find a money manager in the muni space who's able to give you a little extra juice because he picks bonds better than the next guy or something something like that but like you're in the you're in the short-term muni restaurant yeah the menu is really quite narrow and like even if you i remember going back to like my morning star days when you take some of those lower volatility categories, the difference in absolute return between like a one star and a five star fund is negligible. It's like basis points. That's kind of what I was getting at in terms of asset allocation coming first. Luke Gromen, Like sure, you can be like, oh, okay,

like I am going to have a crypto allocation and I'm going to make it 35% of my total net worth. And oh, it didn't work out as I had hoped. Well, okay, I think you've made a mistake, not in choosing crypto for your asset allocation, but putting a third of your assets in it. Yeah, I was coming at more from like, most everything we just talked about, I would call like offense, right? They're there to give you a return. And very few people think about the defensive part. Like, what do you do? Well, I talked about cash and units, like how more defensive are you? Like, what are you talking about? Well, things that actually like long volatility, things that actually pay off as markets decline,

right? Things like... Yeah, but you would call long volatility a safe asset? Not safe, defensive, right? So, right, it just fits in with your whole thesis of like, I want to have this whole piece that's there for what I need it for. So to me, like, okay, I want something I can count on structurally that pays off in a down market where that's there to keep doing my saving and my spending and my giving. Yeah. I understood. Right? And it's a little counterintuitive because you say, why would... And the rest of the time it'll be performing negatively, right? So you say, what counterintuitive, why would I add something

that has a negative return? But it's just for that point, just for when you need it most, it's going to pop in there and keep you at this funded contentment it i i so i invested in long vol short vol vol arm strategies for yeah so i i understand the point um the word defensive i also is is a good offensive yeah no no but it it the yeah i'm not offended by defense, but I'm not, you know, no offense with defense. You know, defense is, there's a value judgment to that. I, you know, I think you could start more clinically and just talk about lower correlated or negatively correlated assets that, you know, help you. You know, there's also a question of, and also like, these are open-ended questions

that aren't tied to goals. So if I'm retiring and I'm 30, you know, if I'm 30 and thinking about retirement versus I'm 60 and thinking about retirement, what's offensive and what's defensive actually mean different things. So risky versus unrisky assets, like risk is flipped depending on your time horizon. So, you know, when you're 25 bonds are pretty risky because the chance that you're going to be able to grow your capital to meet your longer term needs. So that at some point you can replace your human capital with financial capital. You're taking enormous

risk with that fixed income allocation. The other thing I'd mentioned is that just from an individual manager performance, if, you know, just having seen vol funds over the years, some show up in the way that they should and others don't. Yeah, some, some had some, we had some, you know, we had some vol pieces in 07, 08, 09. And, you know, I led the diligence on an Asian-based vol, long vol and vol arb fund. And it was up like 85% in 2008. So our Asia investment book was actually like flat to up, notwithstanding all the equity exposure we had. So, you know, bully for us.

But we also had some other vol investments that were just almost by their very nature, complicated, trading oriented, and guys got upside down and didn't give you the protection that you would have wanted at those times. If it's sort of a, I don't know if index is the right word, but just sort of a straight up like, okay, I'm just going to futures. Yeah, right. The more structural in this, what we're talking about the better right the more yeah yeah if it goes here this is the structural payoff here yeah yeah yeah exactly but also that that is done very poorly this year actually because it was it's been very highly

priced and it hasn't there hasn't been a second leg down or hasn't been much fear even though we've been down yeah so a lot of that structural stuff hasn't paid off so there you go so it's harder than it looks is it is it defensive yes yes defensive but in that case some offensive defensiveness let you go here in a sec but any other other thoughts on shaping wealth? I think we touched on each of the pieces there. Yeah. No, I've enjoyed this conversation. It's, it's fun to kind of put my, I don't know if this, you know, I think for your world and your other guests and listeners, this is like, you know, probably kindergarten, me talking about investing in markets,

but like, you know, No, I love it because I mean, these guys have, they're, they're appealing to the RAs. They're appealing to the family office who eventually that end investor needs to believe in this hedge fund and how it fits into this overall piece of the puzzle for them. Yeah, yeah. So to me, you know, it's why I positioned Geometry of Wealth as a prequel to the investor's paradox, because I wrote a book about investing and I was in some ways unfulfilled with like what I came up with

because I realized there was a whole set of questions that should have come prior that I probably couldn't have gotten to had I not written the investing first piece. So the geometry of wealth is a prequel. And so I can try to boil the ocean on what does it mean to be wealthy? What's important in life? And then within that context, well, how do you set your goals? How do you think about good versus bad decision-making? How do you make good versus bad investments within that framework? You know, no, this has been amazing in terms of being able to say some things that I'm excited about with Shaping Wealth, but I'll just say that the appetite for behavioral advice, behaviorally informed investment advice, including portfolio decisions, it's just, it's ripping. I think in light of the macro picture,

which is, I was going to say fun. I shouldn't say that. It's so fascinating what's going on in the world right now. There's so many different pressures going one way or another. And then you combine that with the amount of information and choice that the everyday person, even super smart people, are having to deal with. The opportunity for financial advisors to make an enormous positive impact in the lives of their clients has, I think, never been more profound. And hopefully building something, I'm building something with my team that helps those people a little bit. I love it because I always give RAs a hard time. I'm like, come on, you don't pick investments anymore. You go golfing, right? You basically are just a relationship person.

You go golf and get the client in and then have your team do the investments or whatever. But this is even better. Like, hey, if I'm an RA now, I can take offense to that and be like, no, I'm helping them be content with their whole plan and doing all this work. It's not just about the golf. It's allowing them to be able to go out and play golf. Yeah. So, you know, look, there's nothing wrong with building a business and making a great living, but where we're seeing a lot of the juice is in coaching. So, you know, the arc has gone from, you know, from, you know, brokerage, you know, even before investing, it was just buying and selling. Blue Horseshoe loves Anacostia.

Bud Fox was a financial advisor. You move from there to the late 80s, especially into the 90s, allocation, portfolio theory, fund selection. You also had E-Trade and things like that pop up. And so now it was about allocating and investing and then financial planning, which has sort of been around for a little bit, but not that long, really didn't come into its own until the aughts and especially hasn't become this massive massive business until after the gfc and they were kind of two separate registrations even right like i'm a certified financial planner or i'm a registered investment advisor like there's yeah like that the the whole

those they and i think the normal everyday guys like isn't that the same thing well like i remember someone put out a tweet and like they just listed all of the different things you could be and like oh financial advisor financial planner wealth advisor investment advisor and and you could be a cfp you could be a sema you could be a broker dealer you could be an ria you could be a hybrid yeah you know and you know the punchline was are we at all surprised that people are not only confused but like unsatisfied with the services that you money people are giving us like they're not going to make a distinction between jeff and brian and the next guy they're

just like oh okay you guys are just you know you're just trying to make a buck off of me. We got our pod title there. You money people, right? You, yeah. You money people. Yeah, that's from my grandmother. God bless her. She's long since passed. But, you know, she was big to use the phrase, you people.

Awesome. Cool. Thanks so much for doing this. Absolutely. Thank you. Okay. Talk soon. You've been listening to The Derivative.

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