WRFH/Radio Free Hillsdale 101.7 FM - Wall Street Weekly: The Ultimate Holiday Gift Guide

Episode Date: December 1, 2023

Join Patrick and George as they discuss the gift that is secretly on every person's wish list—Financial Freedom.

Welcome to Wall Street Weekly, a show where your host, George and Patrick, cut through the financial jargon to keep you educated and informed about the markets that affect our lives. Enjoy the show. You're listening to the highly informing, overperforming radio show on Radio Free Hillsdale 101.7 FM. My name is George Ackler. Joined as always by the man in the captain's chair next to me, Patrick Scott. Patrick, welcome to the program. Thank you, George. I believe I would be the co-captain. that not? A co-pilot, co-captain, it doesn't really matter. We're not one for titles on this show.

That's true. Do you have any idea why we started with Christmas music today? I believe it's because we are approaching the most wonderful time of the year. Well, the most wonderful time is relative. What that means is we're going to be off the air for about four or five weeks. Shame. Meaning this will be our last major episode during that time. Actually, our last episode whatsoever during that time. So we decided with Christmas, we should come out with the trendy things. that all the influencers do coming out with a gift guide. A gift guide. The Wall Street Weekly Gift Guide. When I say gift guide, we can't really get too specific because this program is for entertainment purposes. Only anything we say on here is not financial advice. You should always

contact a trusted financial representative before making any decisions. But there are a few things that we think our listening audience should be mindful of as we approach Christmas, maybe more importantly, the first of the year. On to a more current event, in the news this week we saw, unfortunately, the passing of legendary investor and partner to Warren Buffett, Charlie Munger. I actually had the opportunity to see him in person this May at the Berkshire Hathaway annual meeting. And just what a cool guy, I think, even if you're not an investor that's not a passion of yours, there's a lot you can learn about life in general, and that's what he's teaching us. We actually talked about that in a past episode probably four or five weeks ago. That was the episode on Munger's

psychology of human misjudgments. Yeah, and even if you concede that Buffett was the mastermind behind a lot of the investments at Berkshire Hathaway, I think in a lot of ways more important was Munger's ability to master the human psyche and avoid the firm making emotional decisions. Yeah, when I heard that he died, one article that I read had a cool line in there about him that said no one played second fiddle better than Charlie Munger, which I think is really cool. Just his humility throughout his whole life, you know, being a famous figure, but totally unwilling to take all the spotlight for himself. Yeah, and especially in a industry like investing, I think it's really unusual, you know, there's probably never going to be a movie made about Charlie Munger just because he wasn't flashy. He wasn't this Wall Street banker doing all these crazy things.

He was just living a life like you were me. although we'll have a more comprehensive look at Charlie Munger a little later in the spring semester, just a little background on him. I had Patrick look into some of the things that were important in his life that made him the uniquely great investor that he was. Yep. Charlie Munger was born in Omaha, Nebraska, which is actually where Berkshire Hathaway is located today. It's where they do their annual shareholder meetings. And as a teenager, he actually worked at Buffett and son, which was Warren Buffett's grandfather. store. It's funny because I don't think they even figured that out until later. No. Anyways, Munger studied mathematics at the University of Michigan and then he served in the U.S. Army

Air Corps in World War II. He was actually ordered to study meteorology in the Army Air Corps, which is an interesting job. But after the war, he attended Harvard Law School. Graduating from Harvard, he worked in real estate law for a time, but he left it soon after for a career in investing. He met and talked about investing with Warren Buffett once over lunch. And then the friendship continued until the end. He ran a few investment firms of his own. And then he was also the chairman of Westcoe Financial Corporation, which was acquired by Berkshire Hathaway Holdings.

And that was all in the 60s, I believe, and so that's how he got connected with Buffett on a professional business level. So he started at Berkshire Hathaway in the early 60s. That's when that partnership started. And Westco Financial was one of the big components of Berkshire Hathaway. Also interesting to note about Charlie is that he didn't start until around 40 when he started almost a new chapter in his career after a legal career. I think is cool that you don't have to have it all figured out when you're 20 or when you're 30 even. The fact that he was able to jump careers that late from being a no name,

albeit probably a pretty good real estate lawyer to the legend we know him today. Yep. And so as Berkshire Hathaway grew in revenue, so did his giving. He was a very philanthropic individual like Warren Buffett. He has donated tens of millions of dollars, a truly compassionate heart with that man. He donated a lot of money to education and a lot of things like that. Every year he, of course, participated in the Berkshire Hathaway shareholder meetings. George, you saw him there. How much did he talk?

He actually talked more than I expected, but his words just hold, I think, a different level of weight. You know when he opens his mouth when he says something, that it's going to be pretty important. It might be a hot take. It might be an unpopular opinion. I think the coolest thing is you can see Buffett and Munger's partnership. It is truly like one of the greatest partnerships I've ever seen. And it's going to be interesting to see how Berkshire continues forward without Charlie. In his statement, after his death, Warren Buffett said, Berkshire Hathaway could not have been built to his present status without Charlie's inspiration, wisdom, and participation. So a huge loss not only for Berger Hathaway, but obviously also for Warren Buffett. And I think it should serve as a model for all of us

that you want something said like that in your passing is that there's something that you help build, whether that's a family or a business, a friend group that couldn't have been there without you. And I think that's a really cool thing that shows the human side of these people that we tend to put on pedestals. Right now, I want to take a few minutes to reflect on one of the last interviews that he ever did, which was with CNBC. Hopefully you'll begin to see that hit his advice. while sage for the investing world is potentially much more consequential just for life in general. The first thing he recommends in this interview is never sell anything you wouldn't buy yourself. He says the safest way to try to get what you want is to try to deserve what you want.

It's such a simple idea. It's the golden rule. You want to deliver to the world what you would buy if you were on the other end. Interestingly enough, I've actually heard stories where Munger has given this advice in the case of relationships or friendships, that to be a good friend or to be a good spouse, you have to be deserving of what you want. In a similar way, I think this goes against a lot of people in the investing world who are willing to make a profit, no matter at the expense of who, whereas Munger really took an approach to things that he wanted to win, but he wanted to do it the right way.

Sometimes this even came with brutal honesty, as there were times where they would state that they're not buying back Berkshire Hathaway stock because they believe it's at an elevated valuation. That's something that you won't generally see out of fund managers. But I personally believe that a big part of Berkshire Hathaway's success over the past six and counting decades has been this brutal honesty that leads investors to trust them on a deep level. The second piece of advice he gave during this interview was to never work for anyone that you don't respect and admire. He says you particularly want to avoid working directly under someone you don't admire and don't want to be like. it's dangerous. We're all subject to control to some extent by authority figures, particularly

authority figures who are rewarding us. I think he states this generally for two reasons. The first one is that life is too short to spend it working for someone that you don't admire. But I think the second more important takeaway is that you don't want to become like someone that you don't admire, and we're all influenced by authority. Going back to our investing example, I think following the wrong authority is one of the, if not the biggest mistake that young investors make, is taking investment advice from people who have different incentives or different goals than they do. Well, it can work in the short term. Generally, you're going to become like the person that you don't admire or become disappointed by them, none of which are preferable cases. And piggybacking off of number two is number three,

where he states that you should work with only people that you enjoy. I've found that intense interest in any subject is indispensable if you're really going to excel. I could force myself to be fairly good in a lot of things, but I couldn't excel in anything which I didn't have an intense interest or enjoy. If at all feasible, you want to maneuver yourself into doing something in which you have an intense interest alongside people whose company you enjoy. It's no accident that Charlie Munger worked until he was 99 until weeks before his death. It's because it didn't really seem like work to him. And maybe it's too optimistic to think that you're going to be able to fully avoid conflict in the workplace, but on the aggregate, your work is where you spend such a large portion of your life.

Do it with people that you love. I could go on, but for the sake of time, I'll stop here. But now let's talk about our gift guide, which isn't going to be your normal gift guide. We're just going to be talking about some accounts that have important deadlines or reset phases at the end of the year rolling into next year. I just want to make really clear that this isn't a comprehensive list. We're not trying to speak about the pros and cons of any of these investment products. We just want to bring them to our audience's attention as they are really important and I think easy to forget about. But before we get into these different kinds of investment accounts, we should probably clarify some basics. When I put my money into a retirement account, I still have

to do something with it. You know, it's not like I just drop it in and it grows 12% every year. You know, you have to do investments within the account, whether that's individual stocks, mutual funds, or exchange traded funds, and the like. Dovetailing off of that, not to panic. Most companies do have a default setting that if you put your money in, if there's a box you check, it's just going to give you the default investments. To Patrick's point, it is a little more involved than I think what we traditionally think may be like a pension plan or something like that, where you're guaranteed a fixed amount of money once you retire. The first one I want to bring up has two separate components. The 401K is an employee sponsored retirement plan.

So you have a contribution limit from the government. So it's 22,500 for employees or 30,000 for employees age 50 and older. But the thing that people like to think about year end is a lot of companies have matches in place. They'll match part of whatever you put into that account. A lot of people try to take advantage of that, try to max that out every year. Right. Something like 1.5% or 3% or does it go up to a specific? specific dollar amount and then stop there? I think a lot of companies at 3% is pretty common.

Okay. And I'm guessing that would be for the whole 22,500 if you want to put that in. Obviously, it's going to be different from place to place. Okay. And then you also get a tax benefit with that. You don't have to pay taxes when the money enters your 401K. So those contributions are made with pre-tax dollars. Now, on to Roth IRA or traditional IRAs.

With these, there's a combined limit that's $6,500. for those under age 50 and 7500 for those 50 and older, and you can do one or the other or Mick 2 for that. So that's the maximum amount that you can put in one year, in specifically 2023? Yep, in 2023. The traditional IRA is like a 401k with a little bit more flexibility. So you put money in pre-tax and defer taxes until you withdraw it.

And some of the benefit of that is if you're at a lower tax bracket when you retire. You'll be paying a lower effective tax rate than if you would on the way in. But a lot of people, if they're not getting taxed very much right now, they'll use a Roth IRA. And essentially what that's going to do is you're going to put your money in after you've paid taxes, but you don't accrue any taxes on what you gain. Okay. I've heard that Roths are good for people for when you're not making a lot of money, and then traditional IRAs or 401Ks are better when you are making more money.

Is that correct? Can you explain that? Again, it's hard to say good or not because obviously we're not trying to give financial advice. But a lot of people choose something like a Roth if you think you're going to be in a higher tax bracket in the future, but they'll choose a traditional IRA if they think they're going to be in a lower tax bracket in the future. Okay, that's right. Yeah. You also have two education plans that have maximum yearly contributions that covered old ESA, which is less common than the 529. Covered old ESA, the benefit of that is you can choose a wide variety of investments.

It's not super restrictive. and it's like a Roth IRA from a tax perspective, so you're going to pay taxes on the way in, but you don't have to pay when you withdraw for qualified educational expenses for your children. Okay, so it's basically a Roth IRA that has to be spent on your kids' education. Exactly, and you have $2,000 per child per year

that you can put into this, which slowly phases out after a couple starts making $190,000 a year or an individual starts making $95,000 a year. Okay, so what about the $529? The $529 is actually very similar to the Coverdale, except states often limit the investments that you can make in the $529. I think a big reason is there's a much higher contribution limit in that, so they want to make sure you're not using it as like a speculative account.

And there are ways that if your kid doesn't go to college, you can get the money out. I think they're just trying to get people not to manipulate it for tax purposes if they're doing a lot of active trading and stuff. Okay. So what kind of things do they restrict? A lot of times they limit it to specific mutual funds, like less risky mutual funds, bond funds, that sort of thing.

Again, we're not experts on this, so if you're interested, always talk to financial advisor. Patrick, if you're anything like me, there's one thing that's on your Christmas list as we continue with Wall Street Weekly's gift guide on Radio Free Hillsdale 101.7 FM. And what do you think that is, Patrick? you know because you want it.

Flannel shirts. No, you don't want flannel shirts, Patrick. No, Mrs. Scott. What Patrick really wants is stock in the company that makes his favorite flannel shirts. Stocks are the gift that keeps on giving. Even if the investment goes to zero, it's not like any other widget that you would buy,

wouldn't go to zero. Those flannel shirts, they're going to end up decrepit in some landfill someday. Unless they're really good flannel shirts. Okay, unless you're buying your kids really good flannel shirts, they're going to be worth nothing at the end. Do you know what doesn't always go to zero?

That's right. I heard you through the radio, stocks. They can go to zero, right? They can go to zero, but just like your flannel shirt. But the flannel shirt isn't going to appreciate an value. There's not going to be like a collectible flannel shirt. That's true. It's at least plausible that if you get Jr.,

$100 worth of stocks or bonds today, it's going to be worth much more than that in 30 years. You're gifting him a hobby that promotes good habits. Rather than getting Junior an Xbox, who can complain when he actually uses it, I believe that the better gift is choosing to buy shares in the company that owns things like Xbox or other video games, the company that owns Xbox if you're curious is Microsoft.

So look out for your kid's future and give him or her what she or he really wants, stocks or bonds. There's pride in owning part of a company. Picture this, little junior is at school and all his buddies are bragging about their new Nike shoes. Little do they know that junior owns Nike, the ultimate trump card, your kid is guaranteed to get nicknames like the middle school magnate or the cafeteria capitalist. Yes, in all seriousness, from a tax standpoint and from a

learning standpoint, learning to invest from a young age, is in my opinion actually very valuable. So first of all, the tax rate is going to be almost zero in many cases. As always, you want to double check me on that, because I'm not exactly sure if you have to not file a dependent for that. But more importantly, if your child doesn't end up being an investing prodigy like me or Patrick, they learn early and lose out on small amounts of money. We often don't learn lessons until we feel pain. But I think that's actually a good thing when you learn lessons when you're young and you can carry them for a lifetime. So, for example, when I was younger, losing $60 on a stock hurt and it would teach me very valuable lessons about, I don't know, diversification or what to look for in a company.

Psychology of human misjudgment. Yeah, psychology of human misjudgment. Exactly. But I was able to learn from the experience and I have the knowledge for the rest of my life that I can take with me. So when I'm actually earning real money at a job, I'm not losing thousands of dollars as opposed to tens of dollars. And then speaking of knowledge, after not being convinced by stocks or bonds, you're still looking for the gift to give your loved ones. I think knowledge is always a good thing. Buffett and Munger would argue that the most important thing is to invest in yourself. There's an interesting quote about this.

It's if you invest in yourself, that's the one thing that people can't take away from you. Like you can have everything else taken away from you. But if you work to better yourself, that's going to be something that lasts a lifetime. Books and experiences will always be winners. Even if he or she doesn't know it yet, Junior doesn't want Pokemon cards. They want perspective. Also, if your kid is going to be taking care of you when you're older, you have a serious vested interest in his ability to handle finances and investment.

Allow me to draw another picture for you listeners. Junior is a real cute kid, but he complains a lot when he doesn't get what he wants. So, because you are a very responsible parent who just doesn't want to get your kid vocally transgressing your eardrums with a decibel rate of an F-22 Raptor fighter jet, that's 140 decibels, by the way. You buy him an Xbox for his eighth birthday since he's been begging for it for 10 whole minutes. Junior loves his Madden 37 and he plays for hours every day, nonstop. You may start to wonder if he'll make millions in his videos. video games tournaments if he trains hard enough, but then you see that his record and

madden face of the franchise is just abysmal. Anyways, you bought him the Xbox instead of his stock for Christmas, so now he is spending all of his time on the Xbox instead of homework. You worked on Wall Street for 30 years, and so you want to pass on some of your sage investing wisdom, but Junior is on level 3, and he ain't stopping until he hears the bell. The years pass, and Junior eventually gets a job as an adult, but he still moonlights as a Twitch gamer with three subscribers, one of whom is his mother, and the other two are Nigerian prince is asking for money.

and he would be crazy to think that Junior is into investing, though he did dabble in at once. After a tip from one of his newfound Xbox friends about the rebirth of Dogecoin, he threw his entire piggy bank into the cryptocurrency and lost it all when a Wall Street Journal article revealed that Dogecoin was a fiat currency. That was the end of the road for Junior's investing. More years passed and you contract paralysis of the legs from a side effect of your old people medicine. Now it's all up to Junior, only he can save the day. But your condition deteriorates further, and in all your senile wisdom you hand all your your money over to your son for him to manage.

Junior buys you your medicine and pays the bills, but he takes 50% cut to buy the new virtual reality video game, Barbie 14, Adventures in the Slums of New York City. Inflation cuts away at the remaining funds, and after a price hike on your medicine, the money has disappeared. All $40 billion. With no money left to take care of you, and five more levels of Barbie 14 to complete for tonight's 11-s subscriber Twitch stream, Junior says goodbye. This is what happens when you buy your 8-year-old and Xbox instead of stocks.

is no slippery slope here. All I can say is, wow. You know, there's just some things in life that are put so beautifully that it just tugs at the heartstrings. And it's so true, even though this hasn't happened to me or you, we have no experience parenting and should not be giving unsolicited advice over the airwaves. I think that's a pretty logical, maybe even observable series of events that happens when you get your kids what they actually want. Absolutely. And I took this from, you know, universal principles that, you know, we could see happening at any day. In all seriousness, I think the most important thing as we wrap up this gift guide is consider investing in the future this Christmas, whether that be actually investing like we've talked

about. And I know we've used the words like stocks and bonds and some of that stuff interchangeably, you know, mutual funds, ETFs. It doesn't matter. It could even be experiences taking your family on vacation or giving them things that'll help you get closer together. I think if there's ever a chance to give someone something that could be a hobby or a passion that lasts a lifetime. I think that's a really cool thing and like Munger and Buffett say always invest in yourself. For the next four weeks as we mentioned before the airwaves are going to go silent with George and Patrick's voice. A time of morning. But have no fear because tune in on Friday, January 19th, when we air our first new episode of spring semester, will in theory,

have five weeks to prepare, so it should be really good, in theory. Pressure's on now that you've said that on the airways, George. Wow. Might even try to make it a 44-minute episode or maybe a dual episode. Who knows? Who knows what we'll do with all that time? And from the bottom of our hearts, we want to wish you and your family. A very Merry Christmas and a Happy New Year. Thanks for tuning in to Wall Street Weekly on Radio Free Hillsdale 101.7 FM.