TDI Podcast: The Digestion Phase (#935)

26:55As clients move closer to retirement, they generally like predictability in what they're doing. So I think it's a story of, you know, a client, for example, needs$10 ,000 a month and you have securities in the portfolio that are generating that quarterly or semi-annually, then I think that can be attractive to a certain type of investor. So I think the retiree or the pre-retiree, I think income appeals to. I think that would be the one. The second is the people We're running into a lot of people, Andrew Who still have a lot of money in cash Which really surprises me And I'm not talking about high-yield savings accounts I'm talking about passbook savings or checking I can tell you stories I can tell you stories about people with cash When I say cash, I mean cash In the walls, in the closets, in the safe Under the mattress And then, you know, I walked Let me tell you a quick story Just not to interrupt this because I want this to confirm this.

27:53I was with a client. This client's up a little bit north. I've known them for 30 years. They invite me over to have lunch. I said, sure, I'm coming. You know, I know the family forever. So I go up there and we spend some time having lunch at their house. And the wife starts bringing out these passbooks. And passbooks are savings accounts statements, little baby statements. And I said, well, how much is in that account? Well, not much, 320. I'm like, oh, okay. What's in, how much is in this account? That's a smaller account. That's 250. I'm like, uh-huh. What's in this account? That account's got$475 ,000.

28:24I'm like, wait a second. You know, there's like seven of these. We ended up like$2.2 million just sitting in low-bearing interest rate accounts. I said, what are you doing? Do you realize you can make like$75 ,000 or$80 ,000 a year on that, and you're probably making seven? Yes. So there's a lot of that going on. And why is that? What's the mentality that's holding people back from even making a reasonably sensible, horizontal move into higher yielding CDs slash money markets, treasuries? I don't know if it's apathy. You know, Andrew, that's a really good question. I think, you know, a lot of it, there's some personality part that way people are wired.

29:09You know, I think after you've had cash, it's just me. I'm not a psychologist or anything. Haven't going to school for it. But the sense I get is the more cash you have just sitting at the bank and the longer you have it, the tougher it is to part with it. Cotton hardens. It's like a, it's like concrete. It hardens. It sits there. You can't get rid of it. Yes. So what, so what do you, how are you, I mean, I know that we're talking to people a lot about laddering, very simple, you know, one to two year ladders, maybe even one year, not, not going out that far on treasuries, getting, you know, round number four, four and a quarter, 3.8, depending on what you're doing.

29:50But you're talking a little bit different. You're not talking necessarily about that, right? You're talking about higher yielding income securities. Correct. So we produce what we call a model income portfolio. And on here, we have 35 securities. We call them income securities because they're different types, but the premise is the same. These are all publicly traded. They trade in the markets. The yields in our portfolio go from 5 to 13. And then the payout streams are different. Some are monthly, some are quarterly, some are semi-annually. And so it's interesting when you put them together in a portfolio, the stream of income and the payment schedule that you can generate.

30:34But that's the idea is that in the second bucket of people who have cash at the bank, we know these people, Andrew, aren't going from cash to stocks. That's not going to happen. So you need some sort of intermediate way to get them returns, at least to keep up with inflation, if not to best inflation, but certainly to improve on the point, whatever they're getting in interest at the bank. And so that's the idea. It's an intermediate on-ramp into getting higher returns, but still stay, you know, relatively low volatility. Let's put it that way. So is this a standalone concept? I mean, what should people be doing right now if they're concerned about, and rightfully so, some people are concerned about valuations.

31:23We're in nosebleed territory for some things. We'll get to that in a second when we get into our stock discussion, because I want to talk about that. But is this something that could be a standalone? Is people be looking at ways in which to enhance their income right now in terms of, in light of the fact that interest rates are relatively low and they could be, I don't know, they're going to go a little lower, a little higher, whatever it is over time. But is this a standalone or is this something to be used to enhance other parts of their portfolio allocation? Yeah, I think you're right. I think it could be both.

31:55And I think it depends on the size of the account and how many they have. So as an example, Andrew, as you know, people retire. The average person is going to have multiple accounts. So let's say that they have three of the accounts that are sheltered retirement accounts and one of them that's a brokerage account, which is taxable after tax. Now, if that client retires and let's say they're early 60s and they're 62, well, then they may not have Social Security kick in for three to five years. And so where do you get the income from? Well, you probably don't want to take it out of the three accounts that are tax deferred because then any income you take is going to be ordinary income.

32:34And let's say it's simple. Let's say they only need$50 ,000 a year. You know, I pull it out of my retirement account, all$50 ,000 is going to hit my 1040. However, if I have this brokerage account and I have it set up in a way, let's say I've got a million bucks in there and I need$50 ,000 a year, a client could decide to turn all$1 million into an income generating portfolio. It could probably generate $70 ,000,$75 ,000 a year. And that would be steady income. And then that could be distributed to them and off they go. And they could conceivably have the other three accounts invested 100 % in equities and continue to have them grow.

33:19And even in a downturn, they're still going to get their income that they need monthly or annually and still being able to participate in the capital markets on the upside. And so there's a lot of ways you can sort of structure it, but a lot of it is circumstance dependent, or it can just be part of a normally diversified portfolio. Well, we've been doing a lot. We've historically have followed income securities, but a lot of our life has been done with high yield company bonds. And for a lot of our life, Andrew, we've been getting yields of eight, nine, sometimes 10. I remember back when we first started our hedge fund in 2016, we're buying high yield securities at 15, 16 % yield to maturities.

34:04But now there's six. Which, by the way, just to clarify that, I think people should understand this. That's a little abnormal, right? In terms of the differential between the spread of a treasury and a high yield. High yield is supposed to be, there's a reason it's called high yield. It's low quality, right? And it's companies that are not the same, clearly not the same stature of a government, of maybe a bank. And they're looking for money and they're willing to pay a little bit more. But right now, there is such a desire for people to, they're chasing yield that is bringing down the yields. And it's compressing the differential, right?

34:48It's depressing the spread between high quality and low quality. Correct. Yes. So how do you then, how do you mentally go from, hey, I bought 10, 12, 15 % bonds to now I'm like, I'm buying six and it's the same company? Well, that was years ago. I was in 2016. So at least there's some time differential between the two. So it was gradual. A few years ago, we were getting eight. So it came down gradually. But now we're in sixes. We're kind of locked into sixes. Even if you're looking for opportunity, you know, even if you add on duration, you extend the maturities, you're still looking at something with a six in front of it, which is OK, but not fantastic.

35:30And so and as we know, with bonds, when you buy them, your income is fixed, which is the good news. And then also your return is fixed, which is the bad news. But when you buy income securities, you have the opportunity to win in a couple of ways. One, the income that you're receiving can go up. A lot of these securities we're looking at, one of the things that we're looking at is income increases over time. The other way that you can make money is you can get appreciation. We've got a lot of these income securities that we've purchased over time that have appreciated double digits or more. And not or more, but double digits or more significantly than just low double digits.

36:14Let me put it that way. And so you do have an opportunity to do well if you select well and things go your way. So those would be the other reasons that we like these securities at this point in the cycle instead of just, you know, regular corporate bonds. So where are we in the cycle? I mean, a lot of people talk about, oh, you know, let's frame it as a baseball game. I don't want to do that. For you, I would do football, by the way. But no, I'm not doing that either. But where are we in the cycle? If we think about the idea of a cycle being peak to trough, recovery to peak again, to slow down to trough, et cetera, where are we right now?

36:52And where are we? Are we closer to the climb to the peak? We peaked to the coming down. Are we, I don't know, somehow troughing? And where are we? You know, that's a good question. And I'm probably not the best guest to ask. anything macro. But I'm going to respond to that. But when I say it's cycle, I just meant kind of where we are as far as interest rates go. We know interest rates are sort of flat now. We anticipate they're going to go down, but we don't sort of expect them to go up. And so at this point in the cycle, what I meant is I think income securities have a really positive backdrop Just because the economy itself is holding in there really strong.

37:36Quiddity is good. Interest rates should be going lower. And you have a White House that really wants to stimulate growth in the economy. Those are really good backdrops for income type securities. And so I expect them to do very well. And back to your question on the macro, we're really a micro shock here. We almost spend no time thinking about politics or currencies or interest rates. What we really do pay attention to in a fanatical way, Andrew, is the micro. So every quarter, we spend a lot of time listening to transcripts, following what companies are reporting, who's delivering, who's not delivering.

38:19We really want to keep our ears to the ground to find out how CEOs are responding. And more importantly, what businesses are actually strengthening at this point in the business cycle and which businesses are actually getting weak. And so we spend a lot more time on the micro than we do the macro. But the economic environment right now, Andrew, I would say, I would say it's definitely bifurcated. It feels different on Main Street than it does on Wall Street. That much I will say. Wall Street's in party time. Main Street is questioning. Yes. And there's different Main Streets too, by the way. Right?

39:01I'm serious. There's Main Street, you know, Florida, Fort Lauderdale, Miami. There's Main Street, Wisconsin. And many of those things are a lot different. I talked to somebody just a couple of days ago about Nashville and how the restaurants and the entire entertainment complex in Nashville is really suffering. And that is something that's a big concern. and we were discussing why that was or actually theorizing why that was because it wasn't clear what's going on exactly. But, you know, then again, we talked about food costs and we talked about the people are just exhausted from paying higher prices.

39:38And, you know, there's a point of no return when it comes to levels. And then the restaurants are unable to really lower prices because beef prices are at an all-time high. Liquor prices are going up like crazy. I mean, I get there's no inflation out there, right? But prices are going up in some places. Let's kind of move away from that for a second, though. But let's talk about the earnings, the earnings that you watch and you look at and is part and parcel of your entire stock picking process. Talk to me about the Q3 earnings and the last earnings we've seen from some of these major companies that you picked up on.

40:21So there's a couple of themes that run through the earnings winners and the earnings losers. And a couple of things I would say, let's start with the losers. I think anything or most things consumer related right now are really struggling. So if you look at apparel, you look at retailers. Even if you look at, you know, a lot of the retail stores, you know, Target, Chipotle just reported a weak report. Starbucks had some issues. Any place counting on the consumer outside of travel, because the consumer is still spending on travel and experiences. But outside of that, those areas are really having a hard time.

41:13We know that healthcare right now is an industry struggling. I think it looks like real estate. I know a lot of people are talking about the real estate, you know, turnaround. And maybe, and this is commercial, not residential, by the way. And maybe commercial has bottomed, but commercial is still scraping bottom. I don't think there's going to be a V there. So those areas we know are struggling. I think it looks like consumer packaged goods and everything you buy at the grocery store, you think if the consumer was struggling, they'd be spending at the grocery store. And the consumer packaged goods companies, you know, the beverage companies, the big food companies, you think they would be doing better, but they're not.

41:57They're having issues as well. And I think that's they've got some separate issues other than macro. I think they've got some industry specific issues. So those are all the areas that we've watched that are struggling. now. But the winners this season, there have been some winners. The industrials have been doing very well. You look at GE and a couple of its offshoots, they've been doing very well. FinTech. So not only financial industry, usually when you think of financials, you're thinking of banks or insurance companies, which are doing fine. But FinTech, financial technology companies, are doing very well is a thing that we picked up on.

42:41Technology companies, you know, Roblox is a company that we follow. And those companies are doing very well right now. Digital companies, we know anything AI related, the data center is still doing very well in the data center. We know AI, we know data transformation. Those businesses are doing very well. And anything involving, you know, AI, data center, powering the data center, those things are still going gangbusters and doing very well. So those are the areas in digital ad sales as we, I don't know if I mentioned that earlier, you know, the metas, Google had a strong quarter because of ad sales.

43:28Some of the smaller companies, AppLovin's that we follow. So they've had app loving for, I cannot even tell you how many, how many hundreds of percents. That's been unbelievable. Yes. So companies like that, Palantir, you know, an AI software. So those have been some of the winners. No real surprises on the winners list. But those are the winners and the losers from the third quarter. So, and the consumer itself, we're finding them because we wove that into the discussion. We talked about a little bit, you know, about the areas, the sectors that are doing, having problems. But that all rings to me as the consumer is the big issue there.

44:16Yes. And you mentioned it earlier, Andrew. It makes sense. You know, if you think about this inflation we've had the last, pretty much since COVID, you know, at first it was the supply chains. We racked it up to, we said it was going to be transitory, but you know, we had six, seven, 8 % inflation for a few years in a row and inflation may have come down to two or 3 % wherever we are now, but it's on top of a four year stack that has grown and not come down with prices. And you're right. You know, housing prices are up for the consumer. You can forget about refinancing and taking cash out. That's a mugs game.

44:55Car payments, the average car payment today is a thousand dollars a month. And you go to the grocery store, you know, you don't see as many sales as you used to. And it doesn't take you many bags of groceries to get to a hundred bucks. Right. Right. So the consumer is weak. AI is strong. Productivity from AI is creating possibly weaker consumers eventually because less people will be working. It's an interesting situation. AI itself, there are a lot of areas of that that you mentioned, like the power consumption, the power consumption, the requirements of fueling the data warehouses, the AI, the chips and all that.

45:42you've been talking about moving away from some of the momentum driven stocks, right? So is there something that's coming up in your research that's saying something about that? No, I didn't mention anything. We haven't mentioned much about the momentum driven stocks. I thought I recently read something about that, what you wrote, but maybe. Yeah, there's a reason. So that's a good that you mentioned it. I would say, Andrew, I would break the momentum into two categories. I think there's the momentum in buying the shares because the business is so good, the public is just now realizing it. And so let's put Palantir in that group.

46:26You can put Applovin in that group. It's not just the stock has run up. In a lot of cases, the earnings and the fundamentals has outrun the stock price. You can probably throw NVIDIA in there. So that's the one group. Then there's another group that you would consider like meme stocks. And they have momentum. You'll see if you pull up a short list of the most shorted stocks this year, those are probably the ones the last 45 days that have run up the most. And I don't know, you can call that a trash rally or whatever you want to call it. That's a group that has momentum. It was probably built on something else.

47:03And so that latter group, yeah, I would be very cautious about. But the first group, you know, I would dig deeper to see if this could be a big winner over the next three to four years as AI rallies, you know, really gains pace. And, you know, you talk about the trash stocks, you talk about the Momo, the FOMO, the whatever they call the meme stocks. You know, it's interesting. I saw the other day a guy named Anthony Pompliano. You don't have to comment about this, but I don't know if you even know him. He's, oh, I just bought Opendoor for my portfolio. I'm thinking, and Opendoor is like a$2 stock, by the way.

47:38Opendoor was the company that was, basically what it did was, I don't know, automatic payment of your house, right? I mean, exactly. They'd buy your house, right? Sight unseen kind of thing. But what's interesting is that doesn't matter. It doesn't matter what they do. He comes out and he says, hey, I just bought Opendoor for my portfolio. I tweeted back and said, listen, how much did you buy? Why don't you give us the weight of this particular transaction, number one? Number two, is this your first transaction or do you actually have holdings behind this and you're just mentioning it today so you can pump the rest of your stuff?

48:12Which, why not, right? I mean, he didn't say I bought an initial, I just, I bought Open Door for my portfolio today. He can have a huge position behind it and all of a sudden bought three shares today. And that's a true statement. Yes, good point So beware of these kinds of pump and dump So, but this happens all the time But investors seem to, you know, grab it anyway I guess it's just part and parcel of right now We have a little bit of a euphoric atmosphere going on With this foamy, frothy kind of market That doesn't mean that necessarily it's going to drop It's going to be panicked out or something bad is going to happen But we did see some of the IPOs that came out Whether it was Figma, whether it was there was a couple others this week.

48:56There was fly. You know, they came out pretty strong and then they dropped like a rock. Yes. So that's something to consider. And these are the mistakes that people make sometimes, but you have, you have a bunch of common mistakes that you talk about that high net worth investors make. Can you go through some of those with me? Yes. Andrew, do me a favor. I'm going to pull up. Can I put you on? Can I pause? Can we pause one second? We can pause. Okay, I'm going to pause this. Hang on a second. I'm going to pause the... I'll put the pause button. Here we go. And we are back. And that pause was brought to you by Left Brain Research.

49:41So, yeah, we left off with the common mistakes that high net worth investors make, which, by the way, I'm certain that many of these are applicable to non-high net worth people as well. So let's go through some of those. Yes, they are. The first one is neglecting tax planning. And we know that, you know, taxes take up a much bigger chunk of our nest egg than even, you know, returns can. You know, if we have a great year for a person and we produce double digit returns, that pales in comparison to if you're in the highest tax bracket and you're getting 37 percent, you know, taken from you. So it is a really big deal.

50:24So the tax planning is important. You know, a lot of our clients are corporate executives and a lot of them work at publicly traded companies. So there's a lot of things that can go wrong with these clients, especially as they exercise stock options, restricted stock units, vest. And some of these things are self-inflicted. If you're in the fourth quarter at the end of the year and you have company stock that you've purchased, you need to really be careful about doing a transaction because you could be inadvertently putting yourself in a higher tax bracket right at the end of the year and turn around Q1 and really face a bunch of regret.

51:02So I think tax planning is one of them. And even simple stuff, Andrew, we talked about people that have cash in their account. Some of these people do have cash in low yielding accounts. And I don't know if people realize, but even that small interest that's generated, it is taxable as ordinary income. And because it's not a lot, even something simple, A lot of investors will benefit from just switching to a high yield tax free money market and getting probably the same rate of interest, but it'll be tax free. So just being smart from a tax perspective, we think is really important. So that would be number one.

51:44OK, what do we got next? Lifestyle creep, believe it or not. I know this may not seem like a, you know, financial, but it actually is. We see lifestyle creep in two places. One is during your working years when you're building your net worth, you know, as you get those bonuses and you get raises instead, you know, you have a couple of choices. You can either spend them all and buy a bigger house, bigger car, bigger boat, better vacation, or you could save more and invest more. And so you have to be careful about the lifestyle creep and starting to spend more, especially unnecessarily. But we also see it, Andrew, I see it a lot in retirement.

52:27You know, I can't tell you how many times I've built a model for some client. And they're like, oh, yeah, I'm spending, pick the number,$10 ,000 a month,$12 ,000 a month or whatever. We're never going to go over that. And we've been doing that for 10 years or something. Finally, they get into retirement and stop working. And, you know, the spending just kind of creeps up there and it never goes down. And a lot of spending I've seen has surprised me because it's from clients who you had not seen that level of spending from in the last however many amount of years. And then once retirement happens, you know, sometimes you can see spending go the wrong way.

53:08And so that would be another really big issue for investors. OK, what do we got next? so it would be a lot of um you know a lot of do-it-yourself stuff we see a lot of things where we're talking to people who aren't clients but they're talking about become clients and you're reviewing kind of what they've done over the years and it's amazing kind of how many people have acted as their own advisor and really you know you see some incredible mistakes uh that people are making. And so I would say if somebody is out there doing it themselves, I would encourage people to really talk to a professional, you know, like yourself or another advisor, especially as you get closer to retirement.

53:52A lot of those mistakes, you know, that people make can be irreversible. And some things are, you know, really easy not to do. And people are doing them anyway. So I would say this all the time and I'll tell you, this is, this is just my way of trying to simplify that. And people have heard me a hundred times say this. I'm going to say it again. It's not about whether you can actually functionally do something like buy a stock or sell a stock or, you know, do your own tax return. That's not the point. It's a matter of perspective. It's why I don't do my own haircuts. not because I can't hold a scissor, cut some hair, but I can't get that back right, and I'm going to do it with three different mirrors and probably screw it up royally.

54:31And it's a matter of perspective is why I can't do it. Emotionally, I can't do it. So that's why I hand the scissors to somebody else when it comes to those kinds of decisions. So just think about that when it comes to your finances. So I agree with that. We're limited on time. So let's go with maybe one more that you want to pick from that pile. Yes, I would just say not having a real plan and a real distribution strategy. You know, I think most people during their working years know that they want to kind of retire early. They don't want to have to work to age 65 if they don't have to. So, you know, clearly you want to do some work up front to find out, you know, am I on pace?

55:10Do I have enough? Do I need to make some changes? But then, you know, once you get into retirement, you need to have a strategy on distribution because it matters. You know, if you retire at 60, that's a very different distribution strategy than if you retire at 65. You know, the taxes are different. The way you would source the income and take it is completely different. And the way that I have my accounts aligned would be completely different. So I would say not having a real plan and not having a distribution strategy. I guess it goes along with doing it yourself, because if you have an advisor, these are things your advisor will be doing for you.

55:48But they really could change your outcome and how successfully you retire based off of how well you do your planning and your distribution. Yep. Well, we hit the goldmine here. You know, we ran from issues of what kind of stocks are hot and not, the consumer, the environment, how to do things in terms of understanding. More about, you know, the idea of looking at sectors that are benefiting, giving some names there, and also some common mistakes. So there, I mean, I think, what more could people ask? I think they got it. What more could people ask? Nolan Langford, tell us where everybody can find you.

56:32leftbrainwealthmanagement.com is where they can find us. And we're on the socials. You can find us on YouTube. You can find us on Facebook. You can find us on LinkedIn. It's leftbrainwealthmanagement. That's perfect. Thank you. That's awesome. Thanks so much. Thank you, Andrew. Enjoy the summer. Thank you. Hey, you too. And that's a wrap of this episode of the Disciplined Investor Podcast. Lots more coming. Lots more great people we have next week coming on. Danielle Park. Danielle Park. She's coming on. We got Jack Schwager, Brian Shannon. Who do we also got? Let me give you some foreshadowing.

57:05We're going to get in September. Peter Schiff is going to be on here. We got Fumihide Osaka. Very interesting discussion about the power modules and a specialized vehicle for transporting. Well, not vehicle, but a tool for minimizing the electrical and energy use when AI is used. Pat Cabuso is coming on from briefing. It's a long list of people that we have coming on the show. So make sure to go over to YouTube, Amazon Music, Spotify, Apple Podcasts. Make sure to subscribe. Make sure to leave a comment as well. And make sure to listen every single week. You're going to learn something. Thanks for joining me this week.

57:49Thanks for joining me every week. I will see you again really soon.

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59:28We'll be right back.