Investing Insights with Carl Richards: Simplifying Your Approach to Financial Success

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2:21Love this podcast because it crushes your dreams of getting rich quick. They actually got me into reading stats for anything. You're tuned in to the Investing for Beginners podcast. Led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Starts now.

2:50All right, folks. Welcome to Investing for Beginners podcast. Today, we are excited to have Carl Richards join us today. Carl is an author. He's also a certified financial planner and an all-around good guy. We're going to talk about his new book, which will be out in October and also some other fun financial investing stuff. So, Carl, thank you for joining us today. I appreciate you taking time out of your day to come talk to us and our listeners. Super excited to be here, Dave and Andrew. Really excited for this conversation. Yeah. So if I could jump in, Carl, we are a stock market show, investing show.

3:26People come here sometimes wanting the ideas about what's happening in the market today, what are on the headlines and things like that. What is your take on the whole focus on what's going on today in the markets? well yeah i'm actually quite curious about your perspective on this why why do we think it matters right you mean what what what where how did we because i feel that right you know what i mean like it seems like it's really important right there's i i don't know there's lots of people on tv waving their hands yeah and they they appear to be in really nice suits and there's flashing signs behind them.

4:10Like everything about it appears like it should be really important. Yeah. Like I need to check it off my to-do list or something. Or like it's America's greatest spectator sport. You know, like it's – so, I mean, sort of like to answer your question more directly, I understand why we get sort of enticed and intrigued by the financial pornography industry that's been built up around it or the financial entertainment industry. It's sort of a little bit like a circus. You know, like it's a circus. Like that's fun. But the dilemma comes because we occasionally think it's actually, rather than entertainment, we think it's actionable information.

5:04And that what it means to be a great investor is to be up to date on the... Now, there's a type of investing that's closer to speculating. And people who do it, speculators actually aren't really worried about being called that. Like it's not a derogatory term. But if you think you're investing, but you're actually speculating, those are two very entirely different activities with different outcomes and different skill sets. So I'm super fascinated by it because it seems like everywhere you go, you know, when the financial pornography network is on and the TV in your dentist's office, that's really fascinating.

5:44So anyway, I think that's my take on it is the reality is if I'm a long-term investor and I care about meeting my investment goals, that stuff doesn't matter at all. In fact, acting on it will cause me problems for sure. Yeah, we are totally with you there. So what is the thing to focus on rather than the immediate in front of us? Yeah. So let's just, I think it's really important to unpack this a bit because it, again, I understand and get caught up in it myself. And so it feels like what you should do, your job as an investor, and even if you go deeper, like your job as the steward of money, your job to help fund your kid's education or retirement, like these are really, really important things.

6:36and you think what it means to do it right, that it would be irresponsible not to pay attention to the news. Like that's a very understandable feeling. But what's going on there is this endless debate about whether we should take a plane, a train, or an automobile on a trip. And we're going to spend all our time debating about that. And then we might even get more specific, like which kind of car should we take or which kind of train or which kind of plane. And we're going to debate that endlessly. And what we haven't done is taken the time to figure out where we're going. So the first thing we do to unwind, I often call it the financial pornography detox program, to unwind from that.

7:25And again, that doesn't mean we can't view it as entertainment. It's important to talk with my friends about it. It's important for my job. but our investment decisions should be kept sort of separate in a separate container. And those should be based, like the ultimate question is, why are you investing the way you're investing? The correct answer, I've asked that question probably hundreds of times on planes and, and, you know, at conferences. And you get answers like, well, I saw it on Forbes or my buddy at the club told me about it. The only right answer to why you're invested this way, The only reasonable answer is this portfolio was intentionally designed to help me meet my goals with the least amount of risk.

8:11That's boring. It doesn't sound as much fun. But if you care about long-term success, like, sorry, last bit on this rant, because this is you asked, you opened the can of worms with like the greatest question ever. Like this is, you know, Warren Buffett, like, okay, you want to be a great investor. Great. Well, let's think like, what could we learn from the people who've been great? Oh, okay. Buffett's probably in that group. He said, the hallmark of our investment success is benign neglect bordering on sloth. Right? And so it turns out it's a lot of hard work to get to the point where you can confidently do nothing.

8:55And what that looks like is what are the goals? What are we trying to achieve? Outperforming the market is not a goal, a financial goal. Like being able to afford that trip in seven years is a financial goal. Being able to save for a house, being able to fund the kid's education. Those are financial goals. So if we have a goal, then we can back in based on how long, how far out that goal is. We can back into based on how far that goal, how far out that goal is and how comfortable we are with this thing we call risk, which is really just how much does the market, how much does our portfolio move up and down?

9:29we can back into, okay, well then what does a portfolio look like? That's how you then get to the point where you're like, oh, I don't have to pay attention to that stuff. I already thought about it. I knew scary markets were going to come because I used the weighty evidence of history to build this portfolio and there's been scary markets in the past. So you could be surprised about when or why they came, but you're not surprised that they came, right? And then so then you hear your friends talk about it. I had this experience last bit. I had this experience a little while ago. I was at the gym and somebody was like, oh my gosh, so scary.

10:03Market scary. And I was literally like, I couldn't even tell you within any potential range that would be reasonable what had happened because I realized I hadn't been paying attention for at least three years. Like I had no idea because the portfolio is going to do, we need to if it's going to compound we need to leave it alone instead of like planting a tree and pulling it up every week to see if the roots are growing do you think people get mixed up on the whole risk thing I mean we like to think we're going to buy something and it's just going to go up and to the right forever reality is kind of not that way and obviously you get volatility but is that a tripping point and is that something that Do you try to help educate people on sort of the way the market moves?

11:01Yeah. I mean, look, I think a lot of, and I don't mean to be like, get off my lawn, old man approach to this. Like, I don't mean to be ranty. Like I totally get it. And I get the fun of it and I get the excitement of vibe investing. And I would have to admit to participating here and there around the edges for fun, right? Like I get it. But there is a thing, there is actually a science around building portfolios. And the shorthand for me is like, if we're invested like adults, the conversation about risk is different than if we're investing based on feelings and stories. If we're investing based on data and evidence, it's different than investing on feelings and stories.

11:51And the conversation at risk is different. So if you're investing based on feelings and stories, you know, like a quick little research bit, like I typed it in Google, did you do some research? Oh, yeah, I spent 15 minutes looking at it. My friend told me about it. Well, when something goes down, you don't have any framework to make the decision. Because theoretically, if you liked an investment at$100 a share and you had a rationale for liking it, theoretically, you should like it twice as much at$50 a share. Right? Like, unless something's changed about your thesis around that investment. But if you don't have a thesis to go back to and say, which part of this was wrong?

12:37Like, is the company not doing as well? Is there some macro trend that I had thought of? If you don't have that, then you are just floating in the wind. And then what you do is you do what all of us do. And like deep empathetic hug, right? When we are hardwired, when something causes us pain, we're hardwired to run away from it. When something gives us pleasure, we're hardwired to get as much as we can. And that translates in the stock market to exactly the opposite of what you want to be doing, right? Like you don't want to get more of what's given you recent pleasure. In other words, buy high.

13:16And you don't want to run away from something that's given you recent pain if you view it that way. In other words, sell low. Like that's not, that's the opposite of what your mother told you to do in terms of investing. You buy low and then possibly never sell, but hopefully sell high. So that's what we're left with if we're just investing on story and myth. Headlines, friends, TikTok. Again, there's nothing wrong with it. It's just like that's what you're left with. You've got to decide how are the vibes today. If you're invested like an adult, if you're invested like an adult, then you understand that volatility is normal.

13:54You're broadly diversified. You've pulled in the literature, what we refer to as is you've pulled all the non-systematic risk out of the system. and all you've got left is the systemic or systematic risk. And that's just called stock market goes up, stock market goes down. But over time, it goes up. So when it goes down, you can start thinking, oh, it's on sale. Unless you think the whole system is going to fail, and that's a whole different discussion. You can think, oh, it's on sale. Like that's where buy the dip comes from, right? So now you have some rationale for decision making. You can dollar cost average.

14:38You can rebalance, which are structural ways to force yourself to buy low, relatively low, and sell relatively high. Rebalancing is a way to force yourself to do that, a non-emotional way. So you end up looking really smart just because you're invested like an adult and you automate things. And you look back 10 years from now and you're like, I think it's always funny. Like, I invest$500 a month on the 15th. why do you invest$500 a month or why are you investing today? Well, because it's the 15th. You're like, there's no, not because the market did something, but because it's the 15th, I, I, $500 goes in on the 15th.

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17:37Join at functionhealth.com slash beginners and use gift code beginners 25. What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. I love that. So why do you think we as humans want to complicate things? Like the hallmark of your sketches is making things simple to understand, but we humans crave complexity for some reason. So why do you think that is? And how does that get in our way? yeah i i think that is that the da vinci quote simplicity is the ultimate sign of sophistication and i i think we sometimes confuse okay so for investing what i think it is is this feels really important and and then we make this leap in our mind that anything important is probably complex.

18:37And then we go look around and we get reinforcement for that decision because the people on TV are using big words and there's lots of spreadsheets and it looks very complicated and everybody says it's very complicated. And the nuance and the edge cases and, but, and so it's just a gnat, I think. And I kind of think as humans, we crave simplicity, I think. But we sort of get confused sometimes with simplistic and elegant simplicity. And elegant simplicity is the simplicity that lives on the other side of complexity. Like you've considered all these things. You've thought about all these things.

19:21And you've arrived at the spot where you're like, you know what? Turns out the only thing that matters is you buy really good stuff and you hold on to it for a long time. Like you get Warren Buffett saying benign neglect, born against law. You get him saying, I try to buy when everybody, I try to be fearful when everybody else is greedy and greedy when everybody else is fearful. That's really simple. Almost folksy. You know what I mean? Well, that's hard-earned simplicity. And so you can either decide that you want to rely on other people's hard-earned simplicity, or you can go through all of the experience yourself, which both are valid options, and realize at the end, I should just dollar cost average into a really diverse portfolio.

19:59And if I want more, if I feel like I need more growth, I should focus on my own ability to generate income to save rather than try to get to be a better investor. Because it turns out 85 % of the people who try this professionally don't beat a diversified portfolio of low-cost investments. So I'm better off figuring out how can I make a little bit more money and throw it into that simple portfolio than I am trying to be better at the portfolio, unless it's my life's mission, right? Like I'm going to run a hedge fund. I don't care what anybody says. Okay. You're in for a 20, 30 year apprenticeship.

20:35And I'm not, I'm not discouraging anybody from doing that. I think that's an exciting path. You just have to know it's, it's, it's, it's the real deal. Indeed. It is the real deal and it's, it's a hard place to go. So I want to get your take on, this is something that's always interesting and fun to talk about. I want to talk about the B word budgeting. Why is that such an evil word in the finance world? Like why do people get so scared or afraid of it? Do you think, what do you think like non finance? I'm just going to say like normal humans. What do you think they think of when they hear budgeting?

21:11Like what are your friends who are not in the space? When you say budgeting, what do you do? Do people like, what did they think? Uh, when I worked in the banking world, when I, when I mentioned the B word, they were, they instantly thought it was restrictive. I can't do what I want. I won't have any money to do anything. And my life as like fun will cease to exist in my life. That's right. Like it's, it's adjacent to flossing. You're right. Yeah. Very, very much so. But you almost kind of have more evidence that flossing is helpful than you do for budgeting. Like flossing is maybe even thought of more highly.

21:50I think to me, in that camp, I don't like budgeting either. At least I really didn't. And what changed, one thing that changed for me is when I stopped thinking of it. Because I think we've all been trained like budgeting is about restrictive. It's about saying no. It's about that rubber band on your wrist that you have to flip every time you think about buying a latte. Like, none of that sounds fun. Like, why would anybody sign up for that? But as soon as I started seeing, and this only happened a couple years ago, where, because I'm like, all I care about is creative projects. And so, like, I always was like, the people with their talk of money gets in the way of my creative process.

22:39Like, leave me alone, right? Like, filthy, like that artist problem. And what changed for me was when I realized like all I really care about in life from like a work perspective is doing the next project. You know, it's like I just want to earn permission to do the next project. Like the goal of the current project is just can I do it again? And that permission comes in the form of trust of readers, etc. But it also, I stumbled upon this. I was like, wait, it comes in the form of profit. Like profit equals permission. So I like, as you would imagine, I drew that down on a piece of paper. I was like, profit equals permission.

23:21As soon as I started seeing that, and on a personal level, profit equals free, profit equal, like, but having a little bit more than you spend equals freedom, right? It equals choice. I can make decisions. Like, wow, who doesn't like that? You know? And so then I have, there's actually a essay and sketch in the book called Cash Flow Love. So when I started thinking about it, instead of like budgeting, I started thinking about it as cash flow, like money flows into my life. I have a choice on how it's going to flow next. There's lots of energy in those words, flow, right? Like currency, there's a current, like that's very exciting to me.

24:01Suddenly I'm like, oh, interesting. So then my like weekly meeting with my CFO or my annual report of my spending, my weekly, or sorry, monthly report of my spending became exciting to me because I was like, what choices do I get to make? What, do I have permission to do the next project? Do I have permission to go on that trip? What, how can we use, if you can just flip that switch, it's not, budgeting is just a tool for awareness and freedom. It's not the other stuff. And I think you can get a lot of that, you know, doing a very lightweight version of budgeting. I'm not going to lie. Running a small business has been stressful lately, swamped in paperwork, different state agencies, and, you know, got all these expenses to track and everything.

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26:49Do you think the complexity, some people might look at a budget and think of like a million dots on the whiteboard. Is that a big hurdle that people can get past? I remember, Andrew, how many times I went to set up my budget and my budgeting software and just the idea of categories. Like I bet your listeners can all relate to this. Like how many, how much time have you spent on categories? And finally I was like, okay, there's only, I don't care. There's going to be only seven. Right. I don't know what they were, but I was like, there can only be seven categories. Because like, at what level? Subcategories of subcategories of subcategories.

27:28How much money did we spend on, you know, not the kids, not kids' education, not kids' musical education, but the banjo store? You know, like, I don't care. So yeah, I think that's part of the problem is just what if you did nothing more than inflow and outflow? Like what if you literally just had, and again, I'm not suggesting this, go as deep as you want. If you're into it, amen, like fire away. Like it's no problem. In fact, the more, maybe the more the better. But I think there is a, there's definitely a point of diminishing returns. The value you will get by once a week, and I know that even sounds like a lot, but once a week, if you just simply said, we made this much, and I literally mean you could go, like, here's what I would do.