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Welcome to personal finance for
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long-term investors, where we believe
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Benjamin Franklin's advice that an
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investment in knowledge pays the best
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interest both in finances and in your
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life. Every episode teaches you personal
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finance and long-term investing in
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simple terms. Now, here's your host,
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Jesse Kramer. Welcome to Personal
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Finance for Long-Term Investors, episode
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133. My name is Jesse Kramer. By day, I
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work at a fiduciary wealth management
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firm helping clients nationwide. You can
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learn more at bestinterest.blog/work.
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The link is in the show notes. And by
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night, I write the bestinterest blog and
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I host this podcast. I also put out a
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weekly email newsletter. And all of
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those projects help busy professionals
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and retirees avoid mistakes and grow
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their wealth by hopefully simplifying
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their investing, their taxes, and their
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retirement planning. And Ruben Miller,
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Ruben Miller is going to be joining me
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today. Before introducing Reuben, we're
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going to do a quick review of the week.
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This one is from uh NC Palmat, who says
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uh five-star review. Great listen. Jesse
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is very relatable and easy to follow. I
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always leave having learned something
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new. Well, NC Palmat, thank you very
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much for those kind words. You could
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shoot me an email to jesse at
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bestinterest.blog and I'll get you
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hooked up with a supersoft podcast
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t-shirt. And you know what? After after
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sitting down and and recording this
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conversation with Reuben, I've decided
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to skip any sort of uh traditional
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opening monologue today from from me. I
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think Ruben has a lot of interesting
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thoughts to share and he's got this
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great teaching approach with how he
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shares his thoughts and I'm happy just
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to you know give the stage to him as it
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were. An introduction for Ruben for
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those of you who don't know Ruben. Ruben
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Miller is an investor, a writer, a
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teacher and also interestingly enough a
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chess master. He's the the founder and
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chief investment officer of Peltoma
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Capital Partners. He founded Peltoma in
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2023 to show people that there's a
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better way to invest. In addition to
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being a Forbes contributor, uh, Rubin is
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also the acclaimed writer of the
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Fortunes and Frictions blog, uh, and
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he's frequently quoted as well in the
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Wall Street Journal. He's a relentless
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advocate for financial literacy and a
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founding committee member of the USC,
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that's University of Southern California
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Financial Literacy Festival. And yes,
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uh, Reuben, a native of my very own
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Rochester, New York, earned a national
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chess master title at the age of 15. So
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without further ado, here is Ruben
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Miller on personal finance for long-term
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investors.
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All right, Ruben, you know, one one
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thing I I hope to lean on today is your
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experience as what I would call an
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insider in the investment management
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industry due to your experience at the
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highly regarded Dimensional Funds. And
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I'm sure listeners have heard of
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Vanguard, Fidelity, etc., but but maybe
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not Dimensional or at least fewer have
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heard of Dimensional. And I know
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personally, I know sometimes I can
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think, boy, if I've never heard of them.
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I bet they're annuity slingers, active
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management slop, something like that.
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But you and I know Dimensional is pretty
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different. So, do you mind actually just
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starting with a little bit of background
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on on Dimensional and maybe some of your
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experiences there?
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>> I think the first thing I would say is
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that I find when I talk to investors,
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there's often a misunderstanding of like
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what lane do all these people swim in?
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There are custodians like Schwab and
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Fidelity who also have funds who might
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also have financial advisors and so they
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swim in a lot of lanes.
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>> Mhm.
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>> One cool thing about dimensional fund
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advisors is there's just one lane. All
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they do is make funds and there's only
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one investment philosophy. And so when
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you think about even if you're just in
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fund land like you're at Vanguard,
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sorry, Vanguard does a few things, but
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Vanguard funds, let's talk about a
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second, there's different breeds and
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colors and tastes of Vanguard funds.
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>> Yeah,
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>> they tend to have a lowcost bent to all
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of them, but if you want to go pick
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someone a manager that's going to pick
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stocks for you, Vanguard does active
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management. If you want to go buy an
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index fund, Vanguard does passive
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management. You have to sort of know
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what you want to match it to your tastes
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and preferences. M
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>> they have it for you, but it's like a
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grocery store. You got to pick what you
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want. The cool thing about a working at
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Dimensional, which I loved those years,
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I was there from 2015 to 2022, is so
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much of wholesaling, which is selling
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funds, for me, I was selling them to
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financial advisors, is trying to get
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these products into like model
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portfolios at a financial advisor firm.
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>> Yeah.
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>> So, if you go to a financial advisor's
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office and they say, "Hey, we're looking
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for, you know, the best emerging market
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small cap manager." You're like, great.
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This is my emerging small cap fund. Is
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this Do you Do you want it? Do you want
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to buy it? Well, Dimensional is very
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different in the sense that they don't
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really like I wasn't taught to talk
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about funds that way. I don't lead with
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products. You lead with the philosophy.
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So, back in the I mean, this is now the
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50s and 60s basically early research
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coming out of the University of Chicago
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that led to the eventual creation of
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dimensional fund advisors. But basically
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these professors who started doing the
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early work in finance and security
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pricing and built these models around
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how we think assets should behave
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through time and why and economic
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intuition and rationale and things like
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that led to this belief that was almost
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antithetical to the way people had
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always invested which was find some
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smart person to pick stocks for you. And
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as we started having the computing power
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to look at how do people do that do that
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especially after fees. It's not a very
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good value proposition to charge a
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meaningful fee and try to pick stocks
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for people. It's a distribution of
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course like all things in life. It's a
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distribution. You're always going to
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find some people that look great. Now
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can you prove they're skillful and
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talented instead of lucky? That's a lot
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harder from a stat statistical
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perspective. But it's always going to be
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a distribution. So people might say but
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what about this manager? It's like maybe
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I don't know but on average active
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management has not been a great value
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proposition for investors. Dimensional
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only sells passive funds. What's
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different about Dimensional being a
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passive fund manager and what everyone
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associates with passive management which
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is index funds is index funds have a
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third party involved which is whoever
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creates the index list. So we'll use S&P
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500. That's what
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>> standard employes. They're sitting
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around a table and saying what goes on
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the list of 500 this year, this quarter,
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whatever it might be, and they change it
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through time. So the index
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reconstitutes,
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but the S&P 500 is just the largest 500
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stocks in the US. Sometimes it's like
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506, which is kind of weird, but it's
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basically the top 500, not top, sorry,
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the largest 500 company.
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>> So Dementia would ask the question sort
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of like, why is standard for got to be
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involved?
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>> Let's say I want to go own 500 stocks
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and I manage hundreds of billions of
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dollars. Why am I outsourcing this list
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to stand for just because they have the
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S&P 500? So that's basically the
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question dimensional positive was sure
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passive investing makes sense from an
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empirical data perspective. We want to
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invest that way, but I'm not sure I want
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index funds. If I want to go buy 500 or
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3,000 stocks or whatever it is, why
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don't I just go do it and then have the
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flexibility to if I want to make a
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modification, I don't have to wait for
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some committee to meet every quarter or
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6 months or year and say, "Great, the
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5004 is now 498 and these are the six
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additions and subtraction, but like why
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do I want a third party involved?" So
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index funds are really cool because
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they're going to be cheaper on average
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than dimensional because they're more
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offtheshelf. like they are literally a
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static list for a period of time that
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you're just tracking. There's really no
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humans really needed that much besides
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some small trading or whatever. But
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there's there's very it's rigid and
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there's not that much thinking that goes
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on once you create the list. Dimensional
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is going to look at this additional
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research and say, "Wow, there's certain
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ways to not only design portfolios, but
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implement day after day that we think we
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can improve on indexing." So that's the
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general dimensional spiel. They're
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they're about a trillion dollar company
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now. I mean they're a massive global
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powerhouse in the investment world. They
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have this one philosophy which is very
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unique in the investment landscape. A
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couple other companies I'd say that do
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that well would be Avantis which is a
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competitor of Dimensional sort of
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offshoot. A lot of people left
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Dimensional go create Avantis. Very
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similar in that vein. They also would
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say well we're not going to we don't
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pick stocks like we just do one thing
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and we do it really well. So if I'm
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similar on the other end, there's also
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some fun companies that are just active
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management and I love that to be honest
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because at least they stand for
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something.
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>> Sure.
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>> Something I learned at Dimensional was
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how to sort of sell against everything
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that wasn't
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>> and we would we would basically refer
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these places as grocery stores. Like you
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got something for everybody. You're kind
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of nothing to everyone, right? If you
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want to be everything to everyone. So
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like American Funds, Capital Group is a
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fantastic example of a company whose
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investment philosophy I don't care for,
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but whose sort of culture and business
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philosophy I really like. They stand for
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something and they're not trying to just
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create products that they think people
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will buy. You're not going to see
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Capital Group create index funds. They
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don't like passive management and so I
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might not want to buy their funds, but I
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at least respect the way they do
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business. I will say that many of these
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active managers have had I mean the
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tailwinds of passive management are very
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obvious to any of us in the industry and
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so like it or not it's where the
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industry has is going and has been
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going. So a place like American Funds
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Capital Group they have hedged their
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bets a little bit I'd say they have some
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partnerships with Vanguard where they
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sort of have model portfolios where you
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can get some passive get some active.
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American Century is a great example
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oldtime legacy active manager. They are
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actually the ones that have Avantis
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underneath. They basically helped launch
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Avantis within them. So it's like a
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massive fun company that's like a
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brainchild of the American Century
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complex that my good friend Eduardo
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Repetter left Dimensional Go create and
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he did it sort of with with American
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Century. So American Century hedged a
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little bit that way. So I would say
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everybody knows where the industry is
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going and has been going and so some
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fund companies sort of stepped up to bat
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and made some of these hedges. It's
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obviously great for the cash inflows at
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places like Vanguard or Dimensional
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which are heavily lowcost passive. But
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the last thing I'll say and I'll pause
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is it has its own challenges which is
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that it is seen as a fairly commoditized
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investment approach especially index
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funds. So if you're Fidelity and you
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have a Fidelity S&P 500 fund and then
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you got Vanguard who has an S&P 500
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fund, mostly what you're competing on is
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you say, "Well, what do you cost and
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what do you cost because it's basically
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the damn same thing." So the fee
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compression is very hard. I mean, I felt
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that in my career at Dimensional, which
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Dimensional would market against saying
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we're not a commodity and I would say
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they are they are very unique, but the
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world sees these passive investments
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mostly as commoditized. And so it's hard
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to know if you want to hang your hat
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professionally at a passive investment
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manager for the next 10, 20 years, which
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are decisions I had to make uh in my
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career, when you see them lower in fees
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almost every year. Yesterday, Vanguard
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announced another 52 funds lowering
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their fees. And so that makes sense.
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Definitely index funds are very
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commoditized. So there's nothing else to
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compete on. It's a fascinating dynamic
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in the industry that people, a lot of
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people probably don't appreciate that
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it's the best time ever to be a Vanguard
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investor or dimensional investor. Less
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clear if someone said, "Hey, where
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should I try to go get a job?" But I
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would say, "Oh, go work at a passive
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manager for the next 20 years." Not so
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sure.
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>> Yeah, that's really interesting. I I use
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the comparison when you say
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commoditized. I mean, I I literally use
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the comparison of a gas station where
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you say, "Is Mobile's gas any different
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than Synokco's gas?" And pardon me if
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those are like regional gas stations,
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but right, it's gasoline. It's just a
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commodity. And what are these gas
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stations, you know, how do they compete?
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Well, they compete on price and maybe
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some other amenities, but it really is
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the same product underneath the hood.
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But, but going back to dimensional just
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I could hear a couple listeners there
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saying, "So, wait a second. You know,
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they don't follow the standard and pores
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dictates of 500 stocks. They come up
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with their own." And that sounds like
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putting your finger on the scale and
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that sounds like active management. So
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do you mind just peeling back the onion
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one little layer to say like what what
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rules is dimensional following in their
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passive strategies?
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>> Great question. So passive is is my
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word. It's also the it's also the way
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Gene FMA who Nobel Prize winner that is
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associated with dimensional would
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describe how they invest it.
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>> The industry classifies dimensional as
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active.
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>> So it is worth delineating because it's
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kind of confusing. It's just people that
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don't work in the industry. But when I
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think about active management, what I'm
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really referring to is traditional
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security selection. Do you build a model
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to pick stocks and say that's a good
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stock and that's a bad stock whatever.
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That is what Dimensional does not do
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based on traditional metrics of I think
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forward earnings are going to go up and
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blah blah blah on this specific company.
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What Dimensional does do is they they
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design really thoughtful portfolios
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based on the information they have. But
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the information they have are things
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like price. They look at the stock
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market, they see price. They're going to
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design a portfolio so that you don't
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have the same amount as of Apple stock
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as you do Frontier Airlines stock.
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That's a very active decision. One's
00:12:54
obviously a much larger, more robust
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company. One's much smaller, deserves a
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smaller weight in your portfolio. But
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they're not going to say, I think Apple
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is going to outperform Frontier this
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year. That is a much harder argument to
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make. Obviously, Apple's going to be
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relatively more expensive company. It's
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big and successful and robust. And
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Frontier Airlines, I'm assuming, is a
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piece of crap company. like it's just
00:13:13
like it's a budget airline. Like doesn't
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mean the stock can't do really well, but
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I know where I'd rather be be an
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executive and work at where my comp
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would be better. I know what a better
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company is. So, Dimensional A is going
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to look at every single stock in the
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universe and because they're passive and
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they say, "Hey, look, prices are
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probably going to adjust for the
00:13:31
information we have at the time.
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Frontier is going to be cheap and
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Apple's going to be expensive." That
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makes sense to us in this world. It's
00:13:36
easy to pick when you go bet on a sports
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game. It's easy to pick the winner in a
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lot of games. much harder to beat the
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spread. That's what passive management
00:13:44
is all about, which is that I am not
00:13:46
going to try to outguess prices. That
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can lead you to buying the S&P 500. That
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could also lead you to saying 500 stocks
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in the US, but wait, there's almost
00:13:58
3,500 stocks in the US. Why wouldn't I
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want to own all of them? Why don't I
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want to own midcaps and small cap stocks
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and all that? So, dimension would start
00:14:04
with a much larger opportunity set. Then
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the sort of special sauce I would say is
00:14:09
that not all stocks are probably created
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equal that should be somewhat intuitive
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to us that if we believe that you know
00:14:17
thoughtfully taking risk we should
00:14:19
expect to get rewarded for that. If I go
00:14:22
if I have $100 and I go buy Frontier
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Airlines stock and or Apple stock let's
00:14:27
say I have two options. You're like well
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most people are gonna be like I'd rather
00:14:30
have Apple stock. That's it. That means
00:14:33
that Frontier Airlines should have a
00:14:34
higher expected return. Otherwise, why
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the heck would anybody buy,
00:14:40
>> right? I sleep way better at night
00:14:41
knowing Apple stock than I would
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Frontier Airlines or whatever budget
00:14:44
company you want to pick. So, there's
00:14:46
this research that was formalized in the
00:14:49
1992 academic paper called the
00:14:51
cross-section of expected returns, which
00:14:53
is by Gene FMA and this other gentleman
00:14:55
at Dartmouth, Ken French. And the p the
00:14:57
paper basically it's one of the most
00:14:59
cited papers in finance but it basically
00:15:00
says like expected returns are different
00:15:02
for various characteristics of stocks
00:15:05
and the three big ones would be small
00:15:08
cap stocks companies that we don't know
00:15:10
that probably struggle more in economic
00:15:12
downturns compared to large cap stocks.
00:15:14
That it's pretty intuitive to me that
00:15:15
that would have to be the case. Like it
00:15:17
wouldn't make any sense to me if someone
00:15:19
could go buy the biggest most successful
00:15:21
companies and expect the best return
00:15:23
>> and make the most money. Yeah. that that
00:15:24
doesn't really make sense. Then value
00:15:27
stocks, which is small cap versus large
00:15:29
cap is an outright measure. You say,
00:15:31
"What is the market capitalization? This
00:15:32
is a $200 million company or a $500
00:15:35
million company." Value versus growth
00:15:38
stocks. That's a relative measure. You
00:15:40
say, "What's the price of this company
00:15:42
for how much it earns each year?" Or,
00:15:44
some measure like that. You're going to
00:15:45
now have a a division, a fraction that
00:15:48
you're going to look at. So, it's a
00:15:49
relative value. It turns out that stocks
00:15:51
that have sort of depressed relative
00:15:53
prices, we call value stocks, so they
00:15:54
trade at low prices for how much they
00:15:56
earn, those have also outperformed
00:15:58
historically tends to be nobody wants to
00:16:01
work at a value stock company. If you go
00:16:03
look at a list of value stock companies,
00:16:05
it's the opposite of the growth, which
00:16:06
is Meta, Amazon, Google. Now, also tend
00:16:10
to be not the shiny companies. The big
00:16:12
shiny ones are the easiest to buy. Those
00:16:14
are the growth stocks. And over time,
00:16:15
those have underperformed. And then the
00:16:17
last third sort of data cut that I'd say
00:16:19
came on I think the paper was written in
00:16:21
2013 but it's this it's this relative
00:16:23
measure called relative profitability
00:16:25
and it's the opposite side of value.
00:16:27
It's actually by by Robert Novi Marx
00:16:29
who's at Rochester and this is the idea
00:16:31
that it's the opposite side of a coin
00:16:32
from value. If value says there's two
00:16:35
lemonade stands and you want to say you
00:16:38
look at them and they both make $100 a
00:16:40
summer. Two lemonade have the same idea
00:16:42
and you say your profits are $100 a
00:16:44
summer. The only question you have to
00:16:46
ask if they're basically the same thing
00:16:47
is great, what do you cost and what do
00:16:48
you cost? Because if one costs 70 bucks
00:16:51
to buy and one cost 30 bucks to buy, I'm
00:16:53
going to buy the $30 one lower price per
00:16:55
earnings. That's value. Profitability
00:16:58
puts that on its head and says, "Okay,
00:17:01
now I'm going to standardize the price.
00:17:05
I am going to buy a lemonade stand for
00:17:07
$100." Now, the question you ask is,
00:17:10
great, who makes more money every
00:17:12
summer? So, let's tie this all together.
00:17:14
the US market has, you know, as I said,
00:17:16
almost 3,500 stocks. Now, you say, I'm
00:17:19
going to own the whole market. I
00:17:20
obviously want a diversified portfolio.
00:17:22
I'm going to start the whole market.
00:17:23
Dimensional is going to do that. Then
00:17:25
they're going to say, okay, I want to
00:17:26
slightly overweight the small cap
00:17:28
stocks. Those have higher expected
00:17:29
returns. I believe they're riskier and
00:17:31
so I expect to do better. Now, if I just
00:17:33
like buy a t build a tiny portfolio and
00:17:36
just buy Frontier Airlines or a few
00:17:37
things like that, one could go bankrupt
00:17:39
and disrupt my entire life, right? like
00:17:42
my entire financial life could be
00:17:43
exploed by a small b like that. So what
00:17:46
you really want to do if you want to
00:17:47
capture a premium like a small cap
00:17:49
premium the expectation and historical
00:17:51
realization that small caps would do
00:17:53
better than large caps is you got to
00:17:54
basically buy all of them to accommodate
00:17:57
that some of them might go bankrupt
00:17:58
right and some of them are going to
00:17:59
shoot to the moon and you don't know
00:18:00
which but historically small caps have
00:18:03
done better I have no reason to think it
00:18:04
wouldn't be true in the future makes
00:18:06
economic sense to me so we're going to
00:18:08
overweight small caps then we're going
00:18:09
to slightly overweight value stocks and
00:18:11
the third one is going to be okay let's
00:18:13
overweight high relative profitability
00:18:15
companies. So you take this portfolio,
00:18:17
the whole market, and just sort of tilt
00:18:19
it towards these premiums. The deeper
00:18:21
you tilt, the higher, we would say,
00:18:23
expected return you can have, but the
00:18:25
more tracking error you're going to have
00:18:27
to the 6:00 news when your client sees
00:18:30
the S&P 500 did 1% today. Well, if you
00:18:32
own a bunch of small and value stocks,
00:18:33
like you don't own the S&P 500. So a
00:18:36
decision an investor, allocator, adviser
00:18:38
like us has to make is if I believe all
00:18:40
this stuff, how much do I want to tilt
00:18:42
toward these premiums knowing that the
00:18:44
tradeoff is going to be tracking error?
00:18:46
The other crazy thing that I feel so
00:18:49
many so few people grasp like how
00:18:52
vicious this is is investments are so
00:18:54
noisy over horizons that were very
00:18:57
uncomfortable with. So small value
00:19:00
stocks, they basically stunk for like 15
00:19:02
years, like the most recent 15 years.
00:19:05
Like the S&P 500 and QQQs, NAS, those
00:19:08
things have shot out the lights. Those
00:19:09
are basically the Q's are like large
00:19:11
growth stocks, high tech. They trade at
00:19:14
very high prices, often for very little
00:19:15
earnings. People are basically betting
00:19:17
on the future. They don't need to see
00:19:18
earnings today. And they smoke small
00:19:20
value stocks for a while. So when we say
00:19:23
there's a small value premium that's
00:19:26
almost a hundred years of data looking
00:19:28
for statistical significance knowing
00:19:29
that there are periods of like 10 15
00:19:31
years where you underperform. So we know
00:19:34
that ahead of time. So we have to sort
00:19:35
of set expectations to ourselves if
00:19:37
we're DIY or with our advisor has to
00:19:40
make sure we know like hey this this
00:19:42
might not work for a long time which is
00:19:43
an argument probably to not deviate too
00:19:45
much away from the market itself. So, it
00:19:47
sounds like you're saying that
00:19:48
Dimensional has a a set of rules in
00:19:51
place, right? It's these value rules and
00:19:54
small rules and profitability rules. And
00:19:56
once the rules are in place, that helps
00:19:58
define the quote unquote index, right?
00:20:01
It's not like midyear, they're saying
00:20:02
like, you know what, we decide we're not
00:20:04
going to go with value tilts anymore.
00:20:05
Like, the rules define the index. And
00:20:08
now just like, hey, S&P defines their
00:20:11
rules for 500 stocks a certain way and
00:20:13
Dimensional defines their rules for
00:20:15
these tilts a certain way and then once
00:20:17
you have the rules in place, you're just
00:20:19
passively following along. Is that more
00:20:21
or less?
00:20:21
>> It's pretty close. I would say there's
00:20:22
some day-to-day management. What they're
00:20:24
trying to say is there's going to be
00:20:26
drift in the portfolio. Let's say we buy
00:20:28
the market, we tilt a small value and
00:20:29
profitability, and now one stock that
00:20:32
was small in value is kind of becoming
00:20:34
midcap and growthy. Dimensional has the
00:20:36
ability to go trade that stock out of
00:20:38
the portfolio, especially if it's a
00:20:40
mandate. If you go buy Dimensional's
00:20:41
small cap value fund and a security
00:20:44
drifts out of that definition,
00:20:47
>> you kind of want you'd want to say,
00:20:48
well, at least you're thinking about
00:20:49
selling that thing, right? It doesn't
00:20:50
fit why what I hired you for.
00:20:52
>> Index funds don't do that. Index funds
00:20:55
don't do anything until they
00:20:56
reconstitute and the list changes. So
00:20:58
you can own securities that don't fit a
00:21:00
small value index anymore in a small
00:21:02
value index because they drifted higher,
00:21:04
you know, like uh GameStop would be the
00:21:06
perfect example. GameStop when it become
00:21:07
a meme stock, you go from small value to
00:21:09
large growth potentially overnight. But
00:21:11
if you're an index fund, you might not
00:21:13
trade, you might not reconstitute for
00:21:14
another four to six months. So dementia
00:21:16
would say having the flexibility to do
00:21:18
trading like that. Avantis similar, they
00:21:20
would say that's a big benefit. Again,
00:21:22
price matters. You and I can be like,
00:21:24
"Hey, look how look how amazing
00:21:26
adviserss we are. Like everybody should
00:21:28
hire us." No way. Not everybody should
00:21:30
hire us. Like because we would have to
00:21:31
adjust our prices, right? Like
00:21:33
everything has to have a price that
00:21:35
clears and so everything has to be a
00:21:37
good value for the price. So on for you
00:21:40
and me, obviously, if we're really good,
00:21:42
we should charge higher fees as an
00:21:44
adviser. That's going to make us not a
00:21:46
great hire for some people who maybe
00:21:47
don't have that complex of lives. For
00:21:50
investment funds, active management is
00:21:52
just hard because you're constantly
00:21:55
wanting to charge more for this
00:21:56
expertise you have on how to pick stocks
00:21:58
and the majority of active funds don't
00:22:00
outperform. For index funds versus
00:22:02
dimensional, that's a fascinating
00:22:03
conversation because I would say and my
00:22:06
friend David Booth would say who started
00:22:08
a company that they wouldn't have a
00:22:10
business if they couldn't beat index
00:22:12
funds. Why the hell would anyone buy
00:22:14
their funds which are going to be more
00:22:15
expensive because they have to pay
00:22:16
portfolio managers to trade every day?
00:22:19
they wouldn't have a business that
00:22:20
didn't beat index funds over the long
00:22:22
run. They've done a very good job of
00:22:23
beating index funds. Obviously, not
00:22:25
every single fund, but amazing track
00:22:26
record that Dimensional has and to
00:22:28
design and and implement portfolios like
00:22:30
that,
00:22:31
>> but they cost more. And so, in a handful
00:22:34
of years where the S&P 500 index does
00:22:37
amazing, even a comparable fund, maybe a
00:22:39
dimensional that owns some larger stock
00:22:40
like that, like you might easily
00:22:42
underperform for a while. So advisers
00:22:44
like us or investors have to say gosh do
00:22:45
I want to keep doing this dimensional
00:22:47
thing that's similar but has a higher
00:22:49
expense ratio every year. So that's
00:22:50
hard. It's a very competitive landscape
00:22:53
like you I'm out of it now like you and
00:22:55
I are in in the financial advisory
00:22:56
world. We get to choose which funds to
00:22:58
own for our clients. But I look at you
00:23:00
know the inner workings of these fund
00:23:01
companies. It's a tough business.
00:23:04
>> We're all long-term investors here
00:23:06
right? And we have to internalize these
00:23:08
ideas that whatever decisions we make in
00:23:10
our portfolios. Hopefully, we're making
00:23:12
them with the long-term in mind or at
00:23:15
the very least maybe what we're saying
00:23:16
maybe in equities especially, right? If
00:23:18
you want to own one-year Treasury
00:23:20
treasuries because that's what's going
00:23:22
to fund your next year of retirement. I
00:23:23
I get it. That's not a long-term
00:23:24
decision. I think it's a very prudent
00:23:26
decision, but that's not a long-term
00:23:27
decision. But especially on the equity
00:23:28
side, whatever we're choosing to do,
00:23:31
whether it's all S&P 500, whether it's a
00:23:33
50-50 mix of domestic and international,
00:23:36
whether it's tilting towards what
00:23:37
dimensional tilts towards, I mean, we
00:23:39
have to have some internal faith that
00:23:40
we're making these decisions because
00:23:42
over the next not 5 years, I would argue
00:23:44
maybe not even 10 years. I'm talking
00:23:46
over the next 20 or 30 or 40 years, we
00:23:48
think we're going to see some sort of
00:23:50
pattern play out. Here's a quick ad and
00:23:52
then we'll get back to the show. Did you
00:23:54
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bestinterest.blog.
00:24:16
Again, the web address is
00:24:17
bestinterest.blog.
00:24:20
Check it out. And I suppose let's let's
00:24:22
pivot now, Ruben, to some of the
00:24:24
individual advice that we give or or
00:24:25
just some of the things that our
00:24:27
individual listeners can take away
00:24:28
today. I think of sometimes I chat with
00:24:30
people who maybe are they're just 100%
00:24:33
in the S&P 500 index fund. It might be
00:24:35
their whole portfolio. It's certainly
00:24:36
their whole equity strategy. And it's
00:24:39
simple. It's what we would maybe
00:24:41
lovingly call a lazy portfolio. That's a
00:24:43
bogalhead lazy portfolio.
00:24:45
>> And oh, it's probably going to work out,
00:24:47
too. As long as they don't get in their
00:24:48
own way, I would say it's not a terrible
00:24:50
portfolio by any means.
00:24:51
>> Exactly. Exactly. And there is this line
00:24:54
though where you might say, "Yeah, it's
00:24:58
it's not terrible. Might be a little
00:24:59
incomplete." And at some point there's a
00:25:02
line where I I've said this before. I
00:25:04
think people are much more likely to go
00:25:05
wrong in complexity than they are in
00:25:08
simplicity. But there still comes a line
00:25:10
where something is so so so simple it
00:25:13
might have some negative ramifications.
00:25:15
So when we're talking about dimensional
00:25:17
or just when we talk about your
00:25:19
investment strategy, where do you kind
00:25:20
of draw that line to say like, hey,
00:25:22
okay, let's let's just start with that
00:25:23
example 100% S&P 500.
00:25:25
>> Yeah.
00:25:26
>> What would you say to this
00:25:27
>> hypothetical investor say, you know
00:25:29
what, you might want to make a few
00:25:30
tweaks here or there?
00:25:31
>> I'd go back to where we kind of started,
00:25:33
which is like, what is your philosophy
00:25:35
around prices? And for me, when I look
00:25:38
at prices, I say, gosh, there's a lot of
00:25:40
smart people trying to buy every stock
00:25:43
out there. There's a lot of smart people
00:25:44
trying to sell it. it comes this
00:25:45
equilibrium and that's the price we see
00:25:47
on our phone ticker app or on CNBC or
00:25:49
wherever you look at stock prices
00:25:51
there's so much information in a price
00:25:54
because it's an equilibrium of all these
00:25:56
traders millions of people every day so
00:25:59
to me a lot of people overlook like the
00:26:01
beauty in that is like prices are
00:26:03
probably pretty efficient there's a lot
00:26:04
of smart people out there incentivized
00:26:06
to make a lot of money in the stock
00:26:07
market so it's going to stress it to get
00:26:10
to a pretty fair price so okay so let's
00:26:13
say someone's with me so far and say I
00:26:14
get it. Prices are probably fair. Then
00:26:16
I'd say, okay, do you think that
00:26:19
international stock markets or small cap
00:26:23
stocks in the US move the same as the
00:26:25
S&P 500? And I can show some on the
00:26:28
charts. And the answer is they do not.
00:26:30
>> Some years small caps beat large cap,
00:26:32
some year large caps beat small cap.
00:26:33
Sometimes by wide variety, like right
00:26:34
now, this year alone, we're like not
00:26:36
even two weeks into the year. I think
00:26:38
small value stocks are up like eight or
00:26:40
nine% over the S&P 500. the large rate
00:26:42
in just just a very short period of
00:26:44
time. Again, tough 15 years before last
00:26:47
year. So, like not to read into the
00:26:48
thing I want you to know is they're just
00:26:50
different for a moment, not better, nor
00:26:51
worse, but they're just different. So,
00:26:53
now we can say we want to own stocks.
00:26:56
Stocks behave differently and prices are
00:26:58
probably pretty fair. So, I don't know
00:27:00
why someone would only own 500 of them
00:27:02
because the math works out that if you
00:27:05
buy a little bit of every stock across
00:27:06
the whole world, you should expect lower
00:27:09
volatility than an S&P 500. We can't
00:27:12
guess which stocks are better. We said
00:27:14
prices are fair. Lower volatility is
00:27:16
going to lead to higher realized returns
00:27:18
if that's how it plays out because
00:27:20
volatility erodess returns, right? Like
00:27:23
if we have a portfolio and we go up 10%
00:27:27
and then down 10%. We're not back to
00:27:30
where we started. $100 up 10 then down
00:27:32
10 goes to 99. Bigger volatility spreads
00:27:35
larger decrease over time. So volatility
00:27:37
will will erode your portfolio even if
00:27:40
it's like the same numbers and they
00:27:41
arithmetically net out. All else equal.
00:27:43
We want the same return with the lowest
00:27:45
volatility possible. I would tell you
00:27:46
you want to do that through owning all
00:27:48
13,000 stocks across the whole world. if
00:27:50
prices are generally fair than you would
00:27:52
just the S&P 500. All said, not a
00:27:55
terrible portfolio from what you and I
00:27:56
see out there, right? Like I see a lot
00:27:58
worse than that. You are betting on
00:28:00
large stocks in the US. Obviously, some
00:28:02
of them have international businesses
00:28:04
and so you might get some international
00:28:05
exposure and the US is about 65% of the
00:28:08
world and the S&P I think is about 85%
00:28:11
of the US. So you own about 50% of the
00:28:15
global stock market in those 500 stocks
00:28:17
because they're such large stocks. So
00:28:19
there's 13,000 in the world, but the top
00:28:21
500 in the US make up about half of the
00:28:24
market capitalization. So I would say
00:28:26
like if you can really hang on like
00:28:27
you're probably going to be just fine.
00:28:29
Is that really the investment journey
00:28:30
I'd want someone to sign up for though?
00:28:32
>> Yeah, that's fair. Well, let's let's
00:28:34
pivot to that then. And and I'm thinking
00:28:35
about if you could design the the
00:28:38
default investment approach for a
00:28:40
long-term investor, maybe this is your
00:28:42
own default long-term approach. Not that
00:28:45
you have to give away your your own
00:28:47
holdings or the secret sauce for for
00:28:48
Peltoma clients, but let me just ask you
00:28:51
this, like what principles would be
00:28:52
non-negotiable? I know you've already
00:28:54
covered a bunch of really good ones and
00:28:55
I don't want to make you have to to
00:28:57
restate everything, but but what do you
00:28:59
what do you do when you're designing a
00:29:01
portfolio in that way?
00:29:02
>> It's such a good question. And I'm going
00:29:04
to deflect it for a second just to say
00:29:06
that the most important part of us
00:29:10
allowing clients to realize the outcomes
00:29:12
that we've aligned on them with and to
00:29:14
to live a bigger life and get what they
00:29:16
want is that we design a journey that
00:29:19
they can stay on with us. The answer is
00:29:22
first sort of like
00:29:25
how can I build some guard rails so this
00:29:27
person stays in their seat. There's a
00:29:29
lot of ways to do it. One is going to be
00:29:30
they're probably not going to own 100%
00:29:32
stocks, right? no matter who they are
00:29:34
because that's a that's a really whippy
00:29:36
ride. So, they're probably going to own
00:29:37
some bonds or something more
00:29:38
conservative. Then, we're probably not
00:29:40
going to just put it all in one country
00:29:41
like I was saying, the US example, but
00:29:43
maybe you're an you're an international
00:29:45
investor and you live in France and you
00:29:47
want a lot of French French stocks. I
00:29:48
mean, I know Canada, there's some
00:29:50
studies about Canada, you know, that
00:29:51
average home bias in Canada is over 50%.
00:29:54
People in Canada have over 50% of their
00:29:55
stock portfolio in Canadian stocks.
00:29:57
Canada's 4% of the world. That doesn't
00:30:00
make much sense given how the world
00:30:01
looks and what prices have told us.
00:30:03
That's a very heavy home bias. So I
00:30:06
would I would first and say, "Hey, I
00:30:08
could probably use a bunch of different
00:30:10
tools. Vanguard, Dimensional, probably
00:30:12
even American funds, active management.
00:30:14
I don't even maybe like is you can stay
00:30:16
in your seat and I can get decent funds.
00:30:18
I can get you where you need to go."
00:30:21
Then we're going to start again, we're
00:30:23
going to have to pick how many stocks
00:30:24
and how many bonds. That's a decision
00:30:26
that's going to get updated every year
00:30:27
through the planning work that firms
00:30:29
like ours do, right? Like people's goals
00:30:30
change, their retirement hopes,
00:30:32
spending, things like that. So that's
00:30:34
another one of the outsized drivers of
00:30:36
your outcomes is just going to be how
00:30:37
many stocks do you own, how many bonds
00:30:38
you own because over time very different
00:30:40
expected outcomes and journeys. Then
00:30:43
this is where I sort of having a career
00:30:45
at Dimensional pivot a little bit from
00:30:47
the way I think a lot of people that
00:30:49
work at a quantity eggy place like that
00:30:51
is like I don't care that much about the
00:30:53
factors we just talked about. They make
00:30:56
sense to me. It makes economic intuition
00:30:58
that small caps should do better than
00:31:00
large caps. That said, like I've seen
00:31:02
how noisy the data is and I got to make
00:31:05
sure this client is going to stay in
00:31:06
their seat if I tell them, hey, look at
00:31:08
this super smart firm Dimensional and
00:31:10
Gene FMA and we're going to overrate
00:31:11
small caps blah blah blah and now all of
00:31:12
a sudden small caps suck for 15 years.
00:31:15
That's a pretty tough investment
00:31:16
journey. So the idea of tilting a
00:31:18
portfolio towards anything away from
00:31:20
what clients see on the six o'clock
00:31:22
news, you got to be very thoughtful that
00:31:24
if you stretch it too far and it doesn't
00:31:26
work, you've introduced this probability
00:31:28
that they might not stay on this journey
00:31:30
with you. So, what I'm always interested
00:31:33
in with clients, like I'll give you a
00:31:35
great example in a second, but I am
00:31:37
interested in ensuring that I do what I
00:31:39
can to decrease the probability that
00:31:41
they will get off the bus with me. That
00:31:44
means often I'm willing to sacrifice
00:31:47
expected returns, maybe own less value
00:31:49
stocks or something because I'm afraid
00:31:51
that the tracking error towards what
00:31:53
they see on the news or hear from their
00:31:54
friends at the country club or something
00:31:56
like that might lead them to fire me and
00:31:58
go buy an annuity from someone. That is
00:32:00
the most important thing. Here's here's
00:32:01
the interesting thing about our firm and
00:32:02
where my partner Rachel Lavine and I
00:32:04
almost disagree. Anytime a client has a
00:32:06
lump sum of cash, I've never not
00:32:09
suggested dollar cost averaging for a
00:32:11
meaningful amount of money. Yeah. So, we
00:32:12
just brought this client Northern
00:32:14
California at $6 million and first thing
00:32:17
I walked through was like, hey, I
00:32:18
suggest you dollar cost average this.
00:32:20
All the spreadsheets say don't do it. If
00:32:21
you Google it, it'll say higher return
00:32:22
if you just put it all in the market. I
00:32:24
am telling you take your lower expected
00:32:26
return because dollar cost averaging you
00:32:28
know you know if you have $6 million
00:32:30
maybe you put in a million dollar every
00:32:31
year for six years slowly get in we we
00:32:34
we wouldn't do it over six years we're
00:32:35
doing it over about two years but a
00:32:37
little bit over time as opposed to all
00:32:40
on day one if you look at the
00:32:42
spreadsheet the spreadsheet answer
00:32:44
markets go up over time so it looks like
00:32:47
most people would be better off looking
00:32:49
backward just having put it all in on
00:32:50
day one but I don't like March and April
00:32:53
of last year. I know that the stock
00:32:55
market can go down 5 to 10% in a single
00:32:58
day. I was on a trading desk in 2008. I
00:33:01
have seen a lot of crazy stuff. I do not
00:33:04
want any investor to experience what
00:33:07
I've seen the day after they just put $6
00:33:10
million in the market or whatever it
00:33:12
might be, whatever is a lot of money to
00:33:13
you. That is a journey where I've
00:33:16
increased the probability that someone
00:33:18
might get off the bus with me. With this
00:33:19
client for instance, like I have
00:33:21
embraced a lower expected return
00:33:26
because I know it increases the
00:33:27
probability that we'll at least get to
00:33:29
where I want to get to with them. My
00:33:31
partner Rachel, who's smarter than I am,
00:33:34
disagrees, not disagrees, I would say
00:33:36
she likes to push back and remind
00:33:37
clients, just so you know, you're
00:33:40
probably going to be better off if you
00:33:41
just do this all at once. She likes to
00:33:43
take, hey, why don't we coach them maybe
00:33:45
to be able to do it? I am just not
00:33:48
comfortable with that because most of
00:33:50
our investment lives are going to be
00:33:52
driven to the positive and the negative
00:33:55
by 15 or 20 days.
00:33:57
>> Mhm.
00:33:58
>> Right. Like that is it. I mean back in
00:34:00
April the S&P went up 10% in one day.
00:34:04
That is bonkers.
00:34:06
>> It's that eight sigma event you wrote
00:34:08
about, right?
00:34:09
>> Yeah. The eight sigma um on Friday,
00:34:11
silver was down 30% in one day. A metal
00:34:14
that people have probably traded for
00:34:16
thousands of years changes price 30% in
00:34:18
one day. So we have these inflection
00:34:20
points 911 COVID great financial crisis
00:34:23
tariff last March April where a handful
00:34:26
of days drive such crazy outsized
00:34:30
outcomes in our life. So, a lot of times
00:34:32
too, whether I'm trying to figure out,
00:34:33
do we dollar cost average this or do we
00:34:36
own a little bit more small caps, some
00:34:37
of these decisions to me are already
00:34:40
noisy, but also small in magnitude
00:34:42
compared to what I know is going to
00:34:44
happen in a journey with an investor,
00:34:46
which is we're going to see some crazy
00:34:47
the next 20, 30 years together. And
00:34:51
the more I can communicate that to them,
00:34:53
like we're doing, you're probably doing
00:34:54
this too, like reviews for last year
00:34:56
right now and like client returns look
00:34:58
amazing because Mark's doing really well
00:34:59
and like blah blah. And I'm just like
00:35:00
telling everybody like do not expect
00:35:02
this every year, right? This is three
00:35:04
years in a row now.
00:35:05
>> I launched my firm three years ago. So I
00:35:07
have like I couldn't have had more
00:35:09
serendipitous timing. I got to keep
00:35:11
telling people, you know, set
00:35:12
expectations that it's not always going
00:35:13
to be this way. We can't control risky
00:35:15
assets. So I went off a little tangent
00:35:17
there, but let me tie back to the the
00:35:20
comment I was making about factors,
00:35:21
which is I think it's much more
00:35:22
important people build a portfolio they
00:35:24
can stick with. You keep your fees low
00:35:26
and your diversification high. I don't
00:35:28
really need to go much beyond that. We
00:35:30
do tilt our portfolios a little bit.
00:35:32
Most of our clients don't care. They
00:35:34
they just don't care. It's just not
00:35:35
really what drives a lot of our
00:35:36
conversations. But I think you cannot
00:35:39
argue with someone who just owns the
00:35:40
market itself and really care more about
00:35:44
what's the right weight of owning the
00:35:45
market, the stocks in my portfolio
00:35:47
versus someone like bonds or real
00:35:48
estate, whatever you're going to do.
00:35:49
Like be very thoughtful about the split
00:35:50
between different profiles of risk
00:35:52
assets. But whether you tilt with DFA or
00:35:56
Avantis or something like that versus
00:35:57
Vanguard, that to me is less interesting
00:36:00
because it's so noisy and we've just
00:36:02
seen it be so noisy the last few
00:36:04
decades. So still love I love Vanguard
00:36:05
and and Dimensional Anontis like they
00:36:07
all they all are great. I'm less
00:36:09
interested by that than most people that
00:36:10
work in our industry that like this kind
00:36:11
of quantity stuff.
00:36:13
>> Going back to dollar cost averaging
00:36:14
versus lump sum. I mean it's it's at one
00:36:17
point, you know, I'm an engineer
00:36:18
originally, right? I'm a spreadsheet guy
00:36:20
and I'm show me the numbers and the
00:36:22
first time that I went through the the
00:36:23
whole lump sum math myself and I was
00:36:25
like well this is easy you always lump
00:36:26
sum but then yes it's funny like if if
00:36:30
you only think like a calculator then
00:36:32
you will come to the answers that a
00:36:34
calculator comes to when you start
00:36:35
thinking like a human who's got this
00:36:37
sometimes irrational brain in our head
00:36:39
you realize that you can make decisions
00:36:41
that appear right on paper
00:36:43
>> and maybe 70% of the time they work out
00:36:45
in reality but that other 30% of the
00:36:47
time is really really painful I Conorman
00:36:49
would call that loss aversion or some
00:36:51
version of that. Something I've adopted
00:36:53
maybe like 80% of client scenarios that
00:36:55
I've adopted is I explain to them the
00:36:57
the math of lumpsum versus dollar cost
00:36:59
averaging. Maybe they already know it
00:37:01
and I say I would propose this following
00:37:04
scenario where no matter what you're
00:37:06
going to look back 12 months from now
00:37:08
with about 50% regret because we're
00:37:11
going to lump sum 50% on day one and
00:37:13
then we're going to take the other 50%
00:37:15
and we're going to dollar cost average
00:37:16
it over
00:37:17
>> Yeah. four, a six, a 12 month time span,
00:37:20
depending on their preference. And 12
00:37:22
months from now, you'll look back and
00:37:23
either say, "Oh, I wish I just lump
00:37:25
summed it all on day one." Or you're
00:37:27
going to say, "Boy, I wish I dollar cost
00:37:29
averaged it all over 12 months or
00:37:31
whatever." You might look back 5 years
00:37:33
from now and be like, "Oh, now I see."
00:37:36
Cuz that's the other thing. It's it's
00:37:37
hard to make a decision in the stock
00:37:38
market and then only 12 or 18 months
00:37:41
later know whether it was smart or not.
00:37:43
As we said before, these these are multi
00:37:44
multi multi-year decisions. So, it's a
00:37:47
very interesting topic
00:37:48
>> and they're they're binary, right? Like
00:37:50
binary financial decisions are so
00:37:52
complex because as you described
00:37:53
perfectly,
00:37:54
>> we are going to look back and one of
00:37:56
these will have worked out better. How
00:37:58
do I work on the the art side of you're
00:38:00
in my job to communicate the behavioral
00:38:02
side of this which is that we have got
00:38:04
to be comfortable with being wrong. But
00:38:06
you just have to get comfortable with
00:38:08
it. We we just have to do the to make
00:38:10
the best decisions we can with the
00:38:11
information we have at the time. And
00:38:13
it's hard. Everybody wants everything.
00:38:16
>> Here's a quick ad and then we'll get
00:38:18
back to the show. Serious question. Why
00:38:21
do podcasters constantly ask for ratings
00:38:23
and reviews? Yes, they do help highlight
00:38:26
our shows to new listeners. They help
00:38:28
strangers find us on Apple Podcast and
00:38:30
Spotify. It's totally true and a good
00:38:32
reason to ask for ratings and reviews.
00:38:34
But I have something more important, at
00:38:36
least more important to me. I want to
00:38:38
know if you like this stuff. I want to
00:38:40
know if you like my podcast episodes, my
00:38:42
monologues, my guests, the information I
00:38:45
share with you and the stories I tell. I
00:38:46
want to improve and make your listening
00:38:48
more enjoyable in the process. So yeah,
00:38:51
I would love to read your reviews. And
00:38:53
sure, if you throw a rating in there,
00:38:54
too, that's great. If you like what I'm
00:38:56
doing, please share it with me. It's
00:38:58
such a great feeling to read your
00:39:00
feedback. I'd love to read your review
00:39:03
or see a rating on Apple Podcast or
00:39:05
Spotify. Thank you. I told myself I
00:39:08
wouldn't turn this into an interview
00:39:09
about chess, Ruben. But it is funny as
00:39:11
part of your introduction, I I mentioned
00:39:12
your chess background. You're a very
00:39:13
accomplished chess player. It's so
00:39:15
ironic that chess is this game where you
00:39:18
can always look back and say, "Oh yeah,
00:39:21
boy, knight f7 was a pretty bad move
00:39:23
there. I I miss I blundered. I missed
00:39:25
something obvious like it is so black
00:39:27
and white. You can always look back and
00:39:29
know whether you were right or wrong or
00:39:30
or maybe you know in advance that you
00:39:32
were right or wrong when you make a
00:39:33
move." But the world of investing and
00:39:36
financial planning just doesn't work out
00:39:37
that way. There there's so much about
00:39:38
the future that is unknown and there's
00:39:40
so much about the current problem quote
00:39:43
unquote that is not solvable in the
00:39:45
traditional sense. We just have to make
00:39:47
a probabilistic bet. And like all
00:39:49
probabilistic bets, you you you try to
00:39:51
make the one where the odds are in your
00:39:53
favor, the decision where the odds are
00:39:54
in your favor, but you have to accept
00:39:56
the fact that some percentage of the
00:39:58
time you'll be wrong. It's hard. It's
00:40:00
not easy. It's one of the perils of the
00:40:03
last this meme mania we've kind of gone
00:40:05
through is that you can't really assess
00:40:08
the quality of your decisions in
00:40:10
investing by your outcomes. And that's
00:40:13
sounds crazy to people, but you have to
00:40:16
assess decision quality rather than did
00:40:19
I make or lose money, right? Like you
00:40:21
can go to a poker table and be a
00:40:22
complete jackass and sweet poker is
00:40:25
similar. You're per like you're spot on
00:40:28
that chess is different. I'll give a
00:40:30
comment. It's it's probably better to
00:40:31
say like chess amongst good chess
00:40:33
players is different. Obviously, you get
00:40:36
bad feedback loop because the person
00:40:37
doesn't know how to how to make the
00:40:39
right move and show you why you made an
00:40:40
an error that that m. But if you look at
00:40:43
I wrote this post gosh probably three
00:40:44
years ago on my blog called do chess
00:40:46
players make good investors? I would
00:40:48
love to say yes. As you know like I grew
00:40:49
up where where you are now. Rochester
00:40:51
has an amazing chess center chess
00:40:53
center. I cut my teeth there. I was like
00:40:55
a young chess master traveling the
00:40:57
country and stuff. I owe it all to that
00:40:59
roster chess center. And when you play
00:41:02
chess against good players, you learn
00:41:05
very quickly. In a lot of things, you
00:41:07
have to take a lot of lessons. You get
00:41:08
you need a coach. It helps obviously at
00:41:10
some level to get a coach. But the
00:41:11
reality is if you have a quick feedback
00:41:12
loop in anything life, you know, you got
00:41:14
to change directions. And if you good
00:41:16
chess players play each other, you use
00:41:17
quick feedback loop. You goof up, you're
00:41:19
going to get taught a lesson. my article
00:41:20
that I wrote basically I just looked at
00:41:24
different sports and games like poker
00:41:26
and back gammon and scrabble and chess
00:41:29
and one way you can know how much luck
00:41:32
is involved is simply by how persistent
00:41:35
is the world champion every year back in
00:41:37
like the 1880s
00:41:40
this guy was world champion for 30 years
00:41:41
in a row Magnus Carlson was present day
00:41:45
he's been world champion he's been best
00:41:46
friend for like 10 15 years depending
00:41:48
you know tournaments are kind of weird
00:41:49
how you get labeled, but like he's by
00:41:51
far like the best player in the world
00:41:52
for 10, 15 years. There's information in
00:41:54
that. There's not that much randomness
00:41:56
in if you see that. In chess, there's no
00:41:59
randomness. All the information is on
00:42:01
the board. You might not know what to do
00:42:02
with it, but there's no dice that get
00:42:04
pulled. There's no cards that get
00:42:05
flopped, whatever. In poker, it varies a
00:42:07
little bit, but if you look at like the
00:42:09
15 years like trailing, I believe like a
00:42:11
few times the same person pops up. So,
00:42:14
you say, "Okay, there's got to be some
00:42:15
randomness or luck, but you got to be
00:42:17
pretty good at some point to be able to
00:42:19
do that." So it can't be all luck. It's
00:42:20
not like the whole world's shooting
00:42:22
dice, right? That's going to be a
00:42:23
different. So it was really interesting
00:42:25
to look at that. And then back gammon
00:42:26
has like a little bit of luck. Scrabble
00:42:28
was fascinating because Scrabble to me
00:42:30
has so much luck.
00:42:32
>> Yeah.
00:42:32
>> But it's also so hard. Like you know,
00:42:34
you see Scrabble, it's ridiculous. So it
00:42:36
was there's some persistency like maybe
00:42:38
somebody was like the last 15 years was
00:42:39
like was world champion like four times
00:42:41
and you're like okay. So they like got
00:42:43
good enough tiles and they're also just
00:42:44
dirty.
00:42:45
>> They know a lot of words I guess, right?
00:42:46
They just know words.
00:42:47
>> Yeah.
00:42:49
So the reality is like investing is so
00:42:52
noisy that like chess players probably
00:42:54
don't make good investors. They expect
00:42:57
that if they do the right thing then
00:42:59
they get the outcome that they wanted.
00:43:00
If I play a really good game of chess, I
00:43:02
will win.
00:43:04
That does not work in investing, right?
00:43:06
That's why you need a really long time
00:43:08
horizon. And like you were talking, I
00:43:09
need a I need a long time I need to be a
00:43:11
long-term investor because I need some
00:43:13
of this noise to net out. One great line
00:43:17
that my friend David Booth says is in in
00:43:19
the long run, it's all about expected
00:43:21
returns. So, design the best portfolio
00:43:24
you can and stick with it. Your expected
00:43:28
returns over long periods should be
00:43:30
similar to your realized returns. So, if
00:43:33
stocks do 8 to 10% on average per year
00:43:35
and you have a 30-year horizon, you're
00:43:37
probably going to get close to 8 to 10%
00:43:38
per year. In the short run, returns are
00:43:41
really dominated by unexpected returns.
00:43:44
It's
00:43:45
>> the stuff we don't expect to happen on
00:43:46
the one-year basis. New news that pops
00:43:48
up or whatever. We have these drastic
00:43:50
changes. I mean, last year emerging
00:43:51
market stops were up 37% last year,
00:43:54
right? Like, who would have guessed that
00:43:55
in the beginning of the year? Now, in
00:43:57
the long run, these historical returns
00:43:59
that we can analyze, it's very uncommon
00:44:02
that over even a 15-year period or
00:44:04
longer that people haven't gotten around
00:44:06
10% every 15ear period. It's just been
00:44:09
way more consistent than you would ever
00:44:11
guess. things just tend to net out where
00:44:13
that is the price for doing business. If
00:44:15
you're going to go own other people's
00:44:16
companies in a diversified way, you've
00:44:18
returned about 10% per year and that
00:44:20
tends to make sense for the risk you're
00:44:21
taking. Super noisy in the short run.
00:44:23
Short run is driven by unexpected
00:44:24
returns, but in the long run driven by a
00:44:27
well-c calibrated expected return.
00:44:29
>> That's awesome. Ruben, I feel like
00:44:31
you're more of a podcast pro than maybe
00:44:33
you let on. I Well, you're you're the
00:44:35
way you explain these thoughts is just
00:44:38
so crystal clear, at least to me. I I I
00:44:40
appreciate the way you speak. I really
00:44:42
like the way you write and and so maybe
00:44:43
can you just real quick tell the reader
00:44:45
or tell the listeners, I'm sorry, a
00:44:46
little bit about Fortunes and Frictions
00:44:49
>> and tell the listeners a little bit more
00:44:50
about Peltoma and and how they can reach
00:44:52
out to you.
00:44:53
>> Sure. Well, one of the other things
00:44:54
about investment managers like Vanguard
00:44:57
or Dimensional or things we talking
00:44:58
about is they have a lot of compliance.
00:45:01
So, if you work there,
00:45:03
>> it's very hard to also maybe have a
00:45:06
public presence. if you want to have a
00:45:07
podcast or have a blog, it's not their
00:45:09
problem. It is just there's a lot of
00:45:11
regulation. Obviously, different fund
00:45:12
companies might be more or less strict
00:45:14
on it. But when I was working at
00:45:15
Dimensional, I've always had this
00:45:17
creative itch and it was hard for me to
00:45:19
use it while working at this sort of
00:45:21
very white collar, highbrow fund
00:45:23
company. Not their fault. It was just a
00:45:25
bit of a mismatch from personalitywise
00:45:26
eventually. So, when I left, I knew I
00:45:29
wanted to do something creative and it
00:45:31
was probably going to be a blog. And so,
00:45:32
I launched Fortunes and Frictions, I
00:45:34
guess about four years ago. It's just
00:45:36
fortunat.com.
00:45:38
I tend to just frankly I write about
00:45:40
whatever the hell I want to write about.
00:45:41
That's actually the best way to describe
00:45:42
it. What I care about and so what I
00:45:44
write about tends to be some it's the
00:45:46
art and science of what we do and the
00:45:48
things that investors face. I sometimes
00:45:50
write about literature that's sort of
00:45:53
whatever whatever's on my mind. If I'm
00:45:54
reading something cool, I'll find a way
00:45:56
to tie about. I'm writing something
00:45:57
about prediction markets right now and
00:45:59
Taylor Swift and whether Taylor Swift's
00:46:01
going to get married at the end of the
00:46:02
year. just like by the end of the year
00:46:03
just dropped precipitously
00:46:06
and I noticed when I saw that I was like
00:46:08
I bet you everybody sees that and says
00:46:10
oh my gosh what happened
00:46:12
>> right like what that's where our brain
00:46:14
goes
00:46:14
>> sure
00:46:15
>> somehow in the stock market people don't
00:46:17
do that people all of a sudden think oh
00:46:19
that's a that's that's cheap now or I
00:46:21
want to sell it or buy it it's like no
00:46:22
something happened and now the price is
00:46:24
reset again and like so like I I have
00:46:27
been working on this noodling it so
00:46:28
nobody steal it but so I I I write about
00:46:31
just stuff that comes mind. I I've been
00:46:33
lucky that some, you know, prominent
00:46:36
people in our industry have cared and
00:46:38
shared it with others. And so, it's been
00:46:39
a really fun outlet for me. It's funny.
00:46:42
Podcasts are I kind of wish I'd done a
00:46:45
podcast at this point. I really love
00:46:46
writing, but podcasts are a little bit
00:46:49
you just come and shoot like we're doing
00:46:50
today and then you hit publish. Some of
00:46:52
these blogs might take me 15, 20 hours.
00:46:55
And so, and I sometimes I'm like I think
00:46:57
a podcast probably have bigger reach
00:46:58
anyway. Like I listen to more podcasts
00:47:00
than I do read blogs. I enjoy writing
00:47:03
the audience. I mean I think maybe one
00:47:05
unique thing about my blog is it's not
00:47:07
targeted to anyone. So to anyone that
00:47:10
I'm trying to get to be a client and
00:47:11
that comes across there's no ads on it.
00:47:13
Like no fault to anybody else but like
00:47:15
it's an approachable blog because you
00:47:17
can tell I'm not spamming you with
00:47:18
stuff. I'm literally like you're just
00:47:20
getting in my brain with me for a while.
00:47:21
And so that's fun. And so it's it's sort
00:47:24
of intended as a as a gift to to people
00:47:26
who maybe want to learn about investing
00:47:28
in a different way than a textbook. So a
00:47:30
lot of the things just kind of teaching
00:47:31
basic investment concepts through a lens
00:47:33
of whether it's pop culture or
00:47:34
literature or something like that. So
00:47:36
that's that part. I'm very active on
00:47:37
LinkedIn. That's sort of been my
00:47:39
platform where I also write. I'm a
00:47:42
little bit more playful on there and I
00:47:43
just kind of goof around. I always say
00:47:45
kind of treat LinkedIn like it's
00:47:46
Twitter. And as long as I'm the only one
00:47:48
doing that, which so far in our world I
00:47:50
sort of am, that works pretty well.
00:47:52
Someday people will catch on and realize
00:47:53
that's not a bad way to do it. So I'll
00:47:55
lose uh my head start, but yeah, that's
00:47:57
mostly where people can find me. Then
00:47:59
the firm Peltoma, we're a boutique raa
00:48:01
out of I live most of the year in
00:48:02
Austin, Texas. And I have a business
00:48:04
partner, Rachel Lavine. She also worked
00:48:05
at Dimensional and we have a third
00:48:07
colleague Emily Moran. She also worked
00:48:08
at Dimensional. We basically at
00:48:10
Dimensional when we were wholesalers, we
00:48:12
saw hundreds of advisory firms across
00:48:14
the US, across the world. And Rachel and
00:48:16
I just kind of said like, I kind of know
00:48:18
what firm I'd want to be a client of.
00:48:20
let's go build it. And so that's what
00:48:23
we've done. We worked for about se just
00:48:25
over 70 families and a couple
00:48:26
institutional clients. Rachel and Emily
00:48:29
are both I mean Rachel especially is
00:48:31
just a fantastic financial planner and
00:48:32
Emily is quickly rising to do so as
00:48:33
well. I focus a little bit more on the
00:48:35
investments and some of the business
00:48:37
development, but we're you know people
00:48:39
have this idea that you need this an
00:48:42
enormous firm. There's a lot of benefits
00:48:45
to big firms like I don't have
00:48:47
everything. If you want to be my client,
00:48:49
I can't prep your taxes. I got to
00:48:51
outsource trust stuff. If we need some
00:48:53
estate planning, I know how I know how
00:48:54
to do it. I know who to call like I can
00:48:55
get it done. But definitely, you know,
00:48:58
firms that wrap everything up for you.
00:48:59
I'm sure your firm has more robust
00:49:01
capacities than mine. Just to
00:49:02
trade-offs, right? Like how much how
00:49:04
much you want the person like how much
00:49:05
you want to work with Ruben or Rachel
00:49:07
versus like how much you really want
00:49:08
your tax prep tied in with your with
00:49:10
your financial planner. So, we're really
00:49:12
we're a great firm for people that want
00:49:13
to work with us, but boutiques have
00:49:15
their trade-offs. At the same time,
00:49:16
large firms have their trade-offs where
00:49:18
what you hear is always, you know, gosh,
00:49:20
I was working with Bobby last year and
00:49:22
my dad worked with him and then Bobby
00:49:23
passed me to Mary and now I don't even
00:49:24
know who my advisor is anymore. Like
00:49:26
when you come to us, everybody knows
00:49:27
kind of who your adviser is. And um it's
00:49:29
been a really fun run. It's a really
00:49:32
fantastic business. And as you know,
00:49:34
Jesse, like you get these emails from
00:49:36
people that are just like, "You've
00:49:38
changed my life. I I don't know what we
00:49:40
were thinking on hiring you before or
00:49:42
like what do we even do before you?" The
00:49:44
cool part about this job is that we get
00:49:47
to serve people meaningfully. It's not
00:49:49
rocket science. You can make a really
00:49:51
nice living and your clients love on
00:49:54
you, you know. And so for us, what I've
00:49:56
really enjoyed the last couple years
00:49:58
with our growth is that our clients are
00:50:00
really rooting for it
00:50:01
>> and that's fun. Like I'm sure, you know,
00:50:03
you have these relationship people and
00:50:04
they're really rooting for Jesse's
00:50:05
success, right?
00:50:06
>> And I see that in our clients that
00:50:08
they're excited about this this next
00:50:09
phase of where our firm goes. It's not
00:50:12
cheap to run these businesses. So like
00:50:14
it's a very premium product that we
00:50:16
deliver. And for me, I think something I
00:50:18
think about a lot as a as a business
00:50:20
owner is making sure that if someone
00:50:22
else takes a meeting with one of my
00:50:24
clients, like someone else in my firm,
00:50:25
like my clients are impressed.
00:50:27
Thankfully, Rachel and Emily are both
00:50:28
smarter than I am. So that works for us.
00:50:30
But as we grow, I do think about like
00:50:33
how do we keep wowing people with the
00:50:35
caliber of people here. like any
00:50:37
business like eventually we'll grow and
00:50:39
have some turnover something like that
00:50:41
but for now the threesome of us is
00:50:43
working really well.
00:50:44
>> Thanks for sharing that story with us
00:50:46
Ruben and thank you for sharing
00:50:47
everything with us today. Listeners we
00:50:49
will throw all the relevant links into
00:50:51
the show notes and Ruben Miller thank
00:50:53
you for joining us on Personal Finance
00:50:54
for Long-Term Investors.
00:50:56
>> Thanks so much.
00:50:57
>> Thanks for tuning in to this episode of
00:50:59
Personal Finance for Long-Term
00:51:01
Investors. If you have a question for
00:51:03
Jesse to answer on a future episode,
00:51:05
send him an email over at his blog, The
00:51:07
Bestinest. His email address is
00:51:09
00:51:12
Again, that's jessevestinterest.blog.
00:51:15
Did you enjoy the show? Subscribe, rate,
00:51:18
and review the podcast wherever you
00:51:19
listen. This helps others find the show
00:51:22
and invest in knowledge themselves. And
00:51:24
we really appreciate it. We'll catch you
00:51:26
on the next episode of Personal Finance
00:51:28
for Long-Term Investors. Personal
00:51:31
Finance for Long-Term Investors is a
00:51:33
personal podcast meant for education and
00:51:35
entertainment. It should not be taken as
00:51:37
financial advice and it's not
00:51:39
prescriptive of your financial
00:51:40
situation.
