462 | Pathfinders | JL Collins

27:25And by the time you get out to 30 years, it's less than 1%. And that's statistically zero. So the thing that our listeners might want to understand is that both things are true, right? So all you really need are these broad-based low-cost index funds that are the soul of simplicity. That doesn't mean that there aren't this huge range of incredibly complex investment instruments that are aggressively sold because they're very profitable. This is why hedge fund people are billionaires, right? These are incredibly profitable things. And you do need very smart, very technically educated people to try to wrestle with this and deal with it.

28:09All of that is true. What's not true is if it does the investor any good. You know, there's the famous story of the guy who's walking through the boatyard with his broker and the broker is saying, oh, yeah, this yacht belongs to so-and-so in my firm and this yacht belongs to so-and-so in my firm and this yacht belongs to so-and-so in this yacht here is mine. And the customer finally said, where are the customer's yachts? Right. Well, you know, being in the financial business is extraordinarily profitable for the people in the business. For the investors, not so much because they're the ones that are paying all those extraordinary fees and commissions.

28:51And the more fees and commissions you pay, the bigger a draw on your returns is going to be because that comes out of your pocket. Right. That's one of the things that makes simple, low cost index funds so powerful and why they outperform. So many examples of this. Warren Buffett famously, a hedge fund guy, that the S &P 500 index fund would outperform anything this hedge fund person did. I think it was a collection of hedge funds, actually, over the period of a decade. Well, that decade has come and gone. There were years where the hedge funds outperformed, but over the decade, they dramatically underperformed.

29:32underperformed. I mean, I frequently wonder why people buy these things. I mean, I understand why people run them, you know, because you're charging 2 % a year that you get regardless of what happens. And then if you happen to make money, then you get 20 % of whatever profit it is. And by the way, making money isn't outperforming the index. It's just making more than zero. So if the index is up 15 % and you're up 10%, you still get 20 % of that for your investor. I absolutely understand how that works for the people running hedge funds and the people working there and why they can afford to pay the huge salaries they do.

30:10I don't understand why people would buy the things. Actually, I had a guest post on my blog recently from Ben Carlson, who writes a wealth of common sense, which is a great, great blog, very insightful guy. He's a co-host of one of my favorite podcasts too, Animal Spirits. Yes, exactly. And he, at my request, he wrote about this because he has some very technical background in the area. So if anybody's interested more on that subject, you can use the search function on the blog and find it. Yeah, that's cool. We'll link to that in the show notes. And yeah, I actually want to talk about the power of index investing because you said that in passing there.

30:49And you have a section in Pathfinders on page 131 of the book that I'm looking at in the investing section where you go through 10 individual items on the power of index investing. I think this is really the crux of the investing aspect of the simple path to wealth. So it's important that we go through that for the audience. But since you brought Warren Buffett up, I wanted to read my favorite quote of his that I think ties so beautifully to what we're talking about today and what your advice. When two of my most respected people, JL Collins and Warren Buffett, both are saying the same thing, I'm fairly certain that there's some significant truth there.

31:27So the 2013 letter to shareholders, and he talks about low-cost index fund investing. He said, my money, I should add, is where my mouth is. What I advise here is essentially identical to certain instructions I've laid out in my will. My advice to the trustee could not be more simple. Put 10 % of the cash in short-term government bonds and 90 % in a very low-cost S &P 500 index fund, I suggest Vanguard's. I believe the trust's long-term results from this policy will be superior to those attained by most investors, whether pension funds, individuals, or institutions who employ high-fee managers.

32:06And I mean, JL, that has got to be music to your ears when you hear Mr. Buffett say, I mean, obviously you would pick total stock market, but I don't think we'll quibble over at the S &P 500, right? Yeah. Well, the S &P 500 index fund is what Jack Bogle himself held until his death. So another financial hero of mine. But yeah, and the important thing about this is Buffett is not talking about small amounts of money. He's talking about billions of dollars. So one of the backhanded compliments that I've gotten in my writing is, oh, J.L. Collins, it's great. The simple path of wealth is great for people who don't want to work hard enough to understand investing.

32:46Well, that's utter nonsense. It's great for everybody. And certainly Warren Buffett has worked hard enough to understand investing. And he is still recommending precisely the same thing that I recommend, which are the low cost index funds. And it doesn't matter whether you're investing a few hundred dollars or a few billion dollars. The process is the same. I gave an interview a number of years ago where the interviewer wound up with a question that she liked to ask everybody, which is, okay, you have just been given a hundred million dollars. what do you do with it? This was at the end of our interview.

33:22And I said, well, I put it in VTSAX. And she was a little surprised. And I don't know if she thought I would spend it, which I guess is how most of her guests respond. Or if I would say, oh, well, if I had that much money, here's the more exotic kinds of things I would buy. But no, whether I have the relatively modest amount of money I have, or if I had a hundred million, or if I had a hundred billion, it would be in, in low cost broad based index funds. And yeah, like Warren, I prefer a Vanguard's. Yeah, indeed. And right. You're not going to go, Oh, I have a hundred million dollars. I'm going to buy real estate in London or New York city or, or Singapore or something.

34:05Right. Like, I mean, again, there's no secret. This is how you invest. You invest your money. This is how I invest my money to people listening. This is truly, this is not some BS of just do what I say, not what I do. This is literally what we do because as JL said before, and I'm going to paraphrase it in the way that my brain kind of conceptualizes this. It's the highest likelihood of success over the longterm. It's not that this is the easy path or the brain dead path. It happens to be, but this is the highest likely. If you're just looking at it from a gambler's perspective or a poker player's perspective, like you said, 25 % of active managers might outperform in a given year, but over a 30 plus year period, that gets down to vanishingly few, well under 1%.

34:51And what would you pick if you had a 100 % chance of matching the market over 30 years and therefore getting market returns at the lowest expense ratio possible, or you had a one in 100 chance of outperforming by just needle in a haystack or through your sheer brilliance, finding somebody who can invest for you or you do it yourself, but you have a one in 100 chance, which option would any rational person pick? The only answer is matching the market. It is the only answer that makes sense from an intellectual perspective. When you look at it like that, plain and simple end of story, just from a betting perspective.

35:30Yeah, I couldn't agree more. I think the other thing that's important for people to understand is they hear, well, you know, if I invest in an index fund, it just gives me the average market return. And average is a word that kind of, you know, makes people a little crazy. I don't want average. I want better than average and blah, blah, blah. But the truth is that if you get the market return, your returns are significantly above average. You know, if you go out 30 years, as we already described, you're in the top 1 % of returns, right? And even in the first year, you're in the top 75%. So the odds are enormously in your favor by going with an index funds.

36:14And average returns in this context doesn't mean the same thing as average in normal conversations. It is considerably better than you can get doing virtually anything else short of being extraordinarily lucky. And then, you know, will be buying lottery tickets. And you had a Princess Bride reference in Pathfinders. And I think there's another one that logically comes up and I'll probably butcher it, but it's, I don't think that word means what you think it means, right? Like average in this sense is not, you're not right in the middle. You're not at 50%. You're not like 50 % of people are not doing better than you.

36:50Like you said, on just that very first year, 75%, you're in the 75th percentile. Yeah. And then it goes, your percentage of where you are in terms of investment returns goes up from there. Inconceivable.

37:06Inconceivable indeed. So let's talk, I queued this up a handful of minutes ago. Let's talk about the power of index fund investing. I know we've probably talked about some of these already, but you talk about buying single stocks and companies having life cycles. Whereas when you own an index fund, you own a little bit of all the companies that make up that index. Those are the first three. I'd love if you could go into of those? Sure. So I'll just, I do have it in front of me, but rather than skim through it, my memory is not that good. But yeah, when you buy VTSAX, which is Vanguard's total stock market index fund, and I do slightly prefer the total stock market index fund over the S &P 500 because it has a little broader reach, you own a piece of virtually every publicly traded company in the United States.

37:52And that means that everybody from the factory floor to the CEO is working to make you richer. And the other thing is, and I'm very proud of this term that I coined, the index is self-cleansing. So when I buy VTSAX, I don't ever have to worry about when I have to sell it. When you buy an individual stock, let's say you buy Tesla, well, you immediately have to be thinking, how long do I hang on to Tesla? How long is Tesla going to perform well? Well, when I own VTSAX, because it's self-cleansing, I can and intend to own it forever. What does self-cleansing mean? Well, it means that those roughly 4 ,000 stocks that I own in VTSAX, the publicly traded companies of the United States, some of them are not going to do so well.

38:39And they'll drift down to where they finally fall off the index and they will be losers. I don't have to worry about that because they will automatically go away. At the same time, new exciting companies that have, and this is our capitalist system, right? So companies fade away, but new exciting companies are created. They will get added to the index as they go public. And they, you know, any stock that goes down can only drop 100%. It sounds pretty awful until you realize the stocks on the way up can go up 100 % or 200 or 500 or 10 ,000%. So it's a rigged system, in a sense, in our favor. because our winners can grow to extraordinary percentages, whereas our losers have a limit to the downside they have.

39:26And that self-cleansing process is one of the things that makes the index fund so powerful. The other thing I'll say while I'm on this particular subject is one of the criticisms of an S &P 500 index fund or the total stock market index fund is that they are cap weighted, which means that the bigger, more successful companies represent a bigger part of the portfolio. So people recently have said, well, if you own VTSAX or the S &P 500, what you really own is a technology fund because the top companies these days tend to be technology companies. And that's true. But this is not a bug. This is a feature because just like I don't have to worry about what companies are going to go away and what companies are going to be the new exciting dominant players.

40:18I don't have to worry about what sectors will be. So right now, technology is the exciting dominant sector. It's not always been technology. You know, one of the few advantages of being an old guy is that I have a memory of, you know, it used to be energy companies. It used to be consumer staples. It used to be finance companies. and all the time I own the index, when those were the top dogs, I own those. When those faded away, I owned whatever replaced them. I have no idea how long technology will continue to be the dominant player. I have no idea what will replace it when that time comes. I don't have to worry about it because whatever it is and whenever it is, I will benefit from it.

41:03Yeah, I love that. And it does cycle. And like you said, you've probably seen this over a 50-year adult lifetime at this point, right? And you've seen these cycles come and go, and you've seen the power of index fund investing. I know it wasn't always that way for you, because obviously, when you first started investing, index funds had just, I think, literally what Mr. Bogle, at its very, very inception. But it took you a couple of decades to figure it out. But once you did. Yeah, I wish it was only two decades. Actually, I bought my first stock in 1975, which coincidentally was the year that Jack Bogle launched Vanguard and in December of that year brought out the first index fund, which was an S &P 500 index fund.

41:45I didn't know that at the time. I frequently think, would that I had known that at the time and would that I had been wise enough to embrace it because my path would have been a lot easier and a lot more lucrative if I had, but I didn't hear about index funds until a decade later, around 1985. And even then I was too slow to really appreciate the enormous advantage they offered. It took me another probably 15 years. I'm a slow learner. What can I say? Yeah. So I can't much regret the first decade because I didn't know about them. But from that point on, I did know about them and I kicked myself for being too slow on the uptake.

42:26You know, to a certain extent, it's very counterintuitive. You know, I was a stock picker in those days and I was doing okay doing that. In fact, my dirty little secret is I became financially independent as a stock picker. So you look at it and you say, well, gee, I mean, it's got to be easy to outperform the index. All I have to do is avoid the bad companies, you know, or all I have to do is focus on the good companies. And that just sounds so reasonable, at least it did to me. But the truth is that that's extraordinarily difficult to do. So anyway, I was a slow learner. But it's funny when I hear people argue against indexing now, I hear my own voice in my head because they're all the same arguments I used to make back in the day.

43:10Yeah, I hear you. And I think another thing with picking individual stocks, So clearly it doesn't negate your entire message here with the fact that you reach by basically individual stock picking. Because I think at its essence, and you say this very early in the book, you say about a little secret, right? It really is this simple. And you have three bullet points. Spend less than you earned. And my little paraphrase is you save 50 % of your income. That pretty much cures all ills. You say avoid debt. Makes a lot of mistakes. Right? You can make a whole lot of mistakes. I'm sure all things equal, you would have rather found Mr.

43:48Bogle's index fund in 1975. And been wise enough to embrace it. Well, of course. Of course. Right. So right. It's spend less than you earn, avoid debt, and invest the difference. And it really is that simple. Your financial life, I would argue, obviously, you could always add a little more. You automate it to take your brain out of it. Little things at the margin. but obviously you agree with those things too. It's just, these are the three major bullet points and it really can be that simple. You don't have to overthink it. Like you say in this section, the power of index investing, when you index invest, you don't have to think about the timing of buying at the right time and selling at the right time.

44:30I mean, JL, this is a one-way street for you, right? Absolutely. And I think you touched on a pretty important point a moment ago too, that by talking about how I achieved financial independence picking stocks, because it's important to realize that stock picking and by extension, picking actively managed funds run by stock pickers, it's not like that can't work, right? So you're not, when you're looking at that versus index funds, it's not like you're looking at something that's bad and something that's good. You're looking at two good things. One is just a lot easier and it's more powerful. and it's simpler, doesn't mean the other can't work.

45:09It will just take a whole lot more effort and time and risk to make it work. So I think that confuses people too, because I'm sure there's stock pickers out there saying, well, wait a second, I'm doing okay picking stocks. And I'm probably not going to argue with that. I did okay picking stocks. Now, of course, there's some people try to pick stocks and get killed doing it because it's a tricky thing to do. But yeah, I would have been, it's not like my life would have, financial life would have been terrible if I hadn't embraced indexing. It's just that the moment I embraced indexing, it became a lot more powerful and a lot easier.

45:44And that's the reason I really wish I'd embraced it sooner. People ask me, what's the worst financial decision you ever made? And it wasn't some of the stinky stocks I bought. And I did buy some pretty stinky stocks. It was the fact that it took me so long to embrace indexing. And that's what really cost me the most in not only returns and money, but in time and effort. Agreed. And I think what's also important, we're trying to really make a case here for, again, this long-term thinking. I think all of success personally in life comes from thinking long-term, not just, hey, can I outperform over this short period of time?

46:20Like you're saying, yeah, somebody comes up to you and says, I'm doing a pretty good job here picking stocks. And I think my argument would be, okay, that's a really small sample size, right? That might be six months, a year, even three years, five years. Like I think there's reversion to the mean and maybe below the mean ultimately, like we're saying with really the smartest people. You think about who are the people running these big actively managed mutual funds at major companies. These are the people who have succeeded in every level of academia, right? These are the Harvard and and Penn graduates.

46:55And they are now running, they're the masters of the universe. But they, yet we've said only 1 % of them basically over a 30 year period are going to outperform you and I just buying VTSAX. By the way, it's amazing how many of those people have their personal money in index funds, right? And so those people, you know, you call them masters of the universe and they become very, very wealthy, but it's important to understand they're not becoming wealthy because of their investment acumen, as Warren Buffett has, is they're becoming wealthy because of the fees they charge managing other people's money.

47:31That's an entirely different kind of thing. Yeah, agreed. Totally agreed. And one other thing I really wanted to clarify, because just being in your presence makes me basically say the word, they say VTSAX. And I think this is really important because a lot of people in our community, of course, know, love and respect you and just say VTSA. I say this in the best way possible. It's almost become like a meme. It just perpetuates itself. But I want to be really clear to our audience. And I know you have this in the book repeatedly. So you are not just, it's only VTSAX or nothing else. There are a lot of very similar broad-based low-cost index funds that are either total stock market or S &P 500 at Schwab, Fidelity, Vanguard, other places, et cetera.

48:21And I definitely, I don't know if you have any flavor to add to that. Of course, you like Vanguard. Mr. Buffett likes Vanguard. Obviously, Mr. Bogle founded Vanguard, but there are other options. Yeah, absolutely. I agree with everything you said. And a total stock market index fund, whether it's VTSAX, which is Vanguard's, or I don't know what Fidelity's ticker is or T. prices or Schwab's. But basically, if it's tracking a total stock market index fund, it's essentially the same thing. Same thing with an S &P 500 fund. It's essentially the same thing. Now, there are reasons that I prefer Vanguard, and I have a post about that.

48:59And if you want, we can talk about that. But that's not the most important thing. If you're with Fidelity, as an example, and you like Fidelity, and a lot of people who use Fidelity appear to like it, evidently their service is good, their websites, easy to use and what have you, and you're with their index fund, then you are absolutely fine with that. No problem at all. Yep. Totally agree. And I think anytime that we can cut down that paralysis factor, right? Or the friction that might get people caught up from taking action, right? So many people, I've had dozens of emails over the years, probably more than that saying, oh, I want to invest in low cost funds, but I don't have the$3 ,000 to open VTSAX.

49:47So what do I do? And I think you talk in the book repeatedly about there is an exact analog of a ETF exchange traded fund just at Vanguard VTI, right? This is, it is more or less the exact same thing. And I think last time I checked, it was somewhere around$200 a share, and you probably can even buy fractional shares for all I know. But so that lowers the barrier to entry. I know there are probably some reasons that you personally like the mutual fund better, but nevertheless, like don't let that stop you. VTI is 99.9 % the same as VTSAX for all intents and purposes. If that is the friction that's going to make you say, oh, I can't do this.

50:25It's going to take me forever to invest$3 ,000. Okay. You don't have to. Well, the bar has been lowered now to about$200. Yeah. So there, Sure. I agree with everything you said. There are differences between a mutual fund and an exchange traded fund, an ETF, but none of those differences really matter to people like us who are long-term investors. Probably the reason I prefer the mutual fund is because that's what was available when I was coming up and that's what I'm used to. But anybody who's owning VTI, the ETF or for that matter, the equivalent ETF at Fidelity or Schwab, that's fine. And it is for all intents and purposes, exactly the same portfolio.

51:06It is a total stock market or an S &P 500 index portfolio. So couldn't agree more. And there is no reason not to own the ETF version. There are differences between the two, but again, nothing that need concern us. Totally, totally agree. And I floated at the top of the episode here. You have this amazing blog post called 32 things to know about following the simple path to wealth. And we're going to, we're going to link this up in the show notes because I really want everyone to look at this. I think this is just such a beautifully succinct way to describe this entire framework of an investing life and really just the whole simple path to wealth, every aspect of it.

51:51And jail, Well, we've touched on so many of these, but really the first one is just the best encapsulation and it's investing done well is the soul of simplicity. And that is beautiful. I can't come up with a better way to describe it. It is the soul of simplicity and you don't have to look further than that. There's no secret behind the curtain. There really isn't. Well, then of course, the second point to follow that up is anyone who tells you differently is selling you something. Oh, yeah. We've certainly touched on that quite a bit. Yeah. So Brad, I appreciate you bringing up that very recent blog post.

52:25And it puts me in mind of another one that makes a different, but I think equally important point. And it's one of my personal favorites on my blog. And I wrote it in, I want to say 2015. The title is, and please link to it in the show notes, the title is Time Machine and the Future Value of Stocks. And the idea in that post is I go back to 1975, which is we talked about as the year I started investing. And I say, suppose I'm sitting around the campfire with a few of my friends and we've been smart enough or fortunate enough to learn that Jack Bogle has just created this newfangled index fund.

53:04And we're sitting there speculating, gee, I wonder how that's going to work out over the next four decades, not to 2015. And I say, well, as a matter of fact, I am just back from 2015 in my time machine, and I can tell you exactly how those 40 years have gone. And then the rest of the post is laying out all the terrible things that happened in that 40-year period. And they were legion. I mean, you know, from the Business Week headline being the death of equities to Black Monday in 87, the biggest one-day drop in history, even bigger than anything in the Depression. to the 9-11 and the tech market crash after that, to the debacle in 07-08, to war, the Iraq and Afghanistan wars, and all these terrible things, this hyperinflation in the 70s and early 80s.

53:58Anyway, the post goes through all those things. And of course, everybody's sitting around camp buyers. Holy cow, am I glad that you told us there's no way we're going to be investing in stocks over the next 40 years, that has to be a disaster. And of course, the truth is over that 40-year period, stocks returned, the S &P 500 returned almost 12 % a year, which is stunning. There is nobody who uses a formula of 12 % a year. The chart that you referenced earlier about how many years it takes to reach financial independence of what savings rate, I think uses 8 % a year, which is considered pretty aggressive.

54:35But the truth is that 40-year period with all these disasters return 12 % a year. The point isn't that we can expect 12 % going forward. The point is the market does not need a perfect world in which to go up. There is a cliche on Wall Street that says the market climbs a wall of worry. And there is always something to worry about in the world. There's always something bad going on. That's certainly true as we're recording today. There's some tragic things going on in the world. It was true during COVID when people were telling me, oh, now this is the end. The simple path isn't going to work anymore.

55:14Tragic as all those things are, the market still relentlessly goes up. Make no mistake, it's a wild and volatile ride. And it certainly was over that period of time, but it still returned on average 12 % a year, which is stunning when you think about it. So there is no perfect time to invest in the market. There's always going to be reasons not to. And the corollary is it's always a perfect time. Yeah, that is beautifully, beautifully put. And yeah, you say in your book about staying the course in a downturn, quote, this time it isn't different. And I think that's the most important thing to remember.

55:55Yeah, all these calamities have befallen humanity, but yet, like you said, 12 % per year. And that is remarkable. Yeah, the triggers are always different. I mean, 9-11 was a trigger. The pandemic was a trigger, but the way it plays out is always the same. Sometimes the market takes longer to recover. sometimes. Like for COVID, it recovered with stunning rapidity, but the pattern is always the same. Indeed, indeed. JL, my friend, this has been marvelous. I really appreciate all your time and your care and your expertise for the community. It's been just amazing over these years. Again, a personal thank you for what you've done for my own life.

56:39And I just want to say the book is really genuinely great. Like you said, you can pick it up after you've read Simple Path or even before. And it is that companion. They go hand in hand. But I think you've convinced me that this might be the place to start because, again, stories make the world go round, right? Yeah. Well, thank you, first of all, for having me. It's always, as I said at the beginning, always fun to be on the show. And I always enjoy our conversations. And I'm so pleased that particularly somebody that's as familiar with this stuff and as astute as you are, that you found value in the book and enjoyed it.

57:13So it was certainly a pleasure pulling it together for me. And it feels great to have it out in the world now. So I hope it benefits a lot of people. Yeah, I'm certain that it will. And so, right, the book came out October 31st, 2023. It's called Pathfinders, Extraordinary Stories of People Like You on the Quest for Financial Independence. And JL, obviously, I know you can find this anywhere books are sold. Is there anywhere in particular you want to send people to or just at their leisure, basically? No, not particularly. I mean, you can find it on Amazon. This is the first time that I've gone through a publisher.

57:48This is my third book. And Harriman House has great distribution. So evidently, this is going to be in bookstores and even airports and what have you. So that's kind of exciting for me. It wasn't true of my first two books. So yeah, I think it'll be pretty easy to find. All right. Sounds good, my friend. Well, until next time, thank you again. And to the audience, this is really important, fundamental information. And I think you're going to get a lot of value out of this book. So enjoy Pathfinders. Thank you for listening to today's show and for being part of the Chooseify community. If you haven't already, the best ways to get involved are first subscribe to the podcast.

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