Ashby Daniels Challenges Conventional Wisdom (Rewind) (EP.155)

0:28We all need to make smart decisions with our money. I had about a year ago with my good friend Ashby Daniels, who is the author of two wonderful books, as well as a newsletter called Money Visuals that is written for other financial advisors to use as their own with their clients and prospects. So if you're a financial advisor, you absolutely have to check out Money Visuals. If you're not a financial advisor, you can still go to Money Visuals, see a lot of great content that reinforces great investment philosophy, great investment behavior. And in this conversation, we get into a lot of those topics.

1:02We talk about what investors get wrong and challenge common misconceptions about risk and investment success. As always, you can get all the information discussed in this conversation by visiting thelongterminvestor.com. And while you're there, be sure to subscribe to my newsletter so that you hear from me every other week. And you can hit reply to any of those messages. It goes right to my inbox, personal responses every time to your questions, your feedback, your ideas. I love hearing from you. So please go ahead, sign up for that newsletter, and then we can keep that dialogue going beyond the podcast.

1:38But now without further ado, here is my conversation with Ashby Daniels.

1:47Welcome to the long-term investor, Ashby Daniels. Welcome to the show. Excited to be here, Peter. Well, every time you and I talk, we always have a time limit set aside, and then we just keep going and going. We think so similarly, and hopefully we can playfully push on each other's thoughts a little bit today. But I also do worry a touch about the listener's attention span. So we will try to condense what is one of normally our great conversations. You do such great work over at Money Visuals. You've published a couple books in the past that are also wonderful. One of the things that I am most interested in talking to you today about, though, is just challenging some of the conventional wisdom that people see out there in the world.

2:30So my first question to you is, what is it that people generally get wrong? That's a loaded question because it's a lot of things. One of my favorite quotes comes from Nick Murray, who's kind of like the advisor's advisor. And that is that if most people were right, most people would be rich. And since most people aren't rich, you get the idea. And so the idea that conventional wisdom, the problem with it is that it represents the masses. And in most cases, that information or that opinion is, I would say, pushed forward by the media's version of what it takes to earn clicks and additional advertising.

3:06So I would say there's a whole host of things that conventional wisdom gets wrong, which by default feeds into what investors get wrong. And so we can start wherever you'd like to go on that one, but we can kind of take one and go down the list and just kind of talk about it as we go. Well, why don't we focus in on the investors themselves? Most of the people listening to us are going to be investors. And I think one of the things that I notice and that you and I have talked about in the past is that people always find reasons, external reasons to blame their performance on other than themselves.

3:45Maybe you could talk a little bit about that. First and foremost, the thing that you hear more than anything else is that the market is the reason for their losses. And I find that to be a very counterintuitive thought process, primarily because if you think about what's occurred in the life of investors, in the life of the average 65-year-old, the market is up about 100 times. And that doesn't even include dividends, which is an enormous omission. but just the price of the S &P. Anytime I talk about the market, I'm referencing the S &P, although there's a whole wide world of investment options that should be included in a portfolio.

4:22But just for ease of describing the idea, the market 65 years ago was at about 40, and today it stands just over 4 ,000. So the market, just the price is up 100x. I find it very difficult to understand how anybody could have lost money by investing in the market when 100x return is what occurred. Again, not including dividends. If you think about it, what did an investor have to do in order to earn that? And the answer is nothing except for own it in perpetuity. You just have to sit there. But that's not what we as investors do because I would say that's not what we are told to do. as investors, because the media is generally speaking, and this is kind of like one thing that I come back to over and over again, and that is that the idea that the media doesn't exist to make us successful investors.

5:17While that seems very obvious to say that, most people take a lot of their news or they take a lot of their ideas for investment options and what they should be doing with their money from the news. Well, the news isn't in the business of making you a successful investor. The news is in the business of selling advertising. The best way to sell advertising is to get more eyeballs. The best way to get more eyeballs is to tell you why the world is going to hell in a handbasket. And so it's very counterintuitive, but the only thing you have to do to earn the market returns is to own the market and then just not sell.

5:48And so while that seems abundantly simple, because as is obvious, it seems abundantly simple to just hold, but that runs counter to psychology. It runs counter to our desire to protect ourselves. It runs counter to everything that we hear in the day-to-day news cycle. But that doesn't deny, you can't deny the truth of the statement that the market's up 100x in the last 65 years. And yet, most people don't earn that return. Yeah, which is really too bad. And I think a lot of what you and I have become so comfortable with over the time is the fact that, yes, markets will fall over, I would say, brief periods.

6:29but even if they're falling for a year and a half, that feels like an eternity. And yesterday I was making a presentation and I had one of those classic charts that shows how the S &P 500 is making money over decades and then all the news items of crazy stuff that was happening. And you even see something as recent as the pandemic. It was a 33 % drop in the S &P 500, but it is a mere blip when you zoom out. Now, I also pointed to stuff like the great financial crisis or the bursting of the tech bubble. And you can see, yeah, those last a little longer. They look more severe. But I think understanding that the average return that we're always talking about is hard enough to earn.

7:11I'm not always sure why people are trying to beat that average return. I think a lot of people think of success as beating the market, whereas if perhaps they were more focused on goals, they might have different outcomes. What do you think about that? Well, I think goals are important, but I also think it's important to keep these things in context. So the last 16 to 18 months is a great example of this. The market started out just almost 4 ,900, almost up to 4 ,900. It's languished around 4 ,000 for the last quite some time, 16 to 18 months. And one thing that I think gets missed is that we think we have to be able to predict these things and that protecting ourselves from these types of events is important when in fact it's not.

7:55In fact, I would say that something I come back to, kind of an aphorism I come back to over and over again, is that years of poor returns are great years for investing. And you look at what's happened over the last 16 months, go back to the last two flat decades, and we're only talking about 16 months so far, but you look at the last two flat decades, there's a great statement. I don't know where I got it from, but I picked it up years ago, which was the only people who made money is in the 80s and the 90s were the people who dollar cost average to the 70s. The same could be said for the people who started dollar cost averaging in the early 2000s.

8:29Those people, it felt like an eternity. I mean, from 2000 to 2009 felt like an eternity. But since the bottom of 2009, the market's up 6x. So if you would have just dollar cost averaged through those periods of time, you ended up coming out the other side very, very good if you just kept buying. And so, yes, goals are important, but it's also important to have the proper expectations that times like this happen. We know, I call it a crisis of expectations. We know that on average, every, say, three or four years, sometimes five years, and sometimes it's a decade like the last decade. But if we have the expectation that every three or four years you're going to run into a bear market, you can't be surprised.

9:12And if surprise is the mother of all panic, then just don't be surprised. You know this is going to happen. You know that bear markets are coming. You know that there's going to be periods where the market doesn't go anywhere. I mean, in my opinion, sometimes the flat market is the most frustrating market of all because it doesn't, it just feels like, are you get your statement? It's up one month, it's down one month, it's up one month, down one month. That's maybe even more frustrating than bear markets because the bear market, you just kind of grin and bear. But with flat markets, it just is perpetually frustrating because you feel like you're putting money in and it's not even doing anything.

9:44You know, it's funny. I've been talking a lot about the bear market, how long will it last? What are good expectations going forward? And I remember, I don't know, sometime during the second half of 2022, where people would ask me, is now a good time to invest? Is this risky? And I said, no, you know, where we are now, it doesn't feel risky. It just feels annoying. And so I think to your point, you know, bear market, once you're in it, you're like, okay, this is happening. This is what hopefully least somebody has told you was undoubtedly going to happen at some point in your lifetime, multiple times in your lifetime.

10:17And now it's happening and now it's really annoying, but I know that it will end. And that's kind of the one common thread with all crises, which seem uniquely scary in their own way, is that they all do eventually come to an end. I think it's interesting to think of risk, though. There's so many different definitions. How do you think about defining risk? So I love that question because I think it's something that so many people get wrong, even advisors, maybe most of all advisors, because we talk about, well, you need to take more risk. Well, is it risk? I think we have to properly define risk.

10:47And so let's start with how most people define risk, and that is as volatility. This is pretty straightforward. Everything says, well, it's volatile, so it's risky. Well, maybe not. Let's talk more about that. So the way I define risk is one of two things, and that is, first and foremost, the probability of complete and total loss. So meaning whatever you have goes to zero. The first thing I'll say about that definition is it has never happened in the history of the market. We just talked about the fact that the S &P over the last 65 years is up 100x, not including dividends. So the probability of complete and total loss is something that's never happened, and yet it's something that gets talked about a lot.

11:25So that's definition number one. Definition number two is any decision that moves you further from rather than closer to your goals. Now, this is one that surprises a lot of people because if you think of it as any decision that moves you further from rather than closer to your goals, think about this. If you take just the, and this is something I think we'll maybe get into later, which is the counterintuitive idea of compound interest. But if equities we know over, say, the last 100 years have earned about a 10 % annual rate of return, if instead I would have owned bonds and that bond return is 5 % over the last 100 years, well, by choosing to own bonds rather than owning equities, albeit equities certainly have sometimes dramatic declines, but let's just say that they still earn their 10%.

12:12By choosing to own bonds, I'm actually introducing risk to my portfolio. I'm not saying you are introducing risk literally. I'm just saying that if by the definition of any decision that moves you further from rather than closer to your goals, obviously any reduction in permanent return is by design or by default introducing risk to the portfolio, because now you have to either work longer or you have to save more. So I'm often asked like, okay, well, what does your portfolio look like? I'm a big fan of the idea of don't tell me what to do with my money. Show me what you do with yours. I'm a big fan of that idea.

12:48Well, I own 100 % equities, not a single bond in my portfolio. And a lot of people are like, well, that's foolish. To me, it's just being supremely logical. Why would I own anything that's going to reduce my return? Now, I'm not saying I'm shooting for the moon. I'm an index investor. I'm not saying I'm trying to maximize alpha or anything else. I think that's a foolish pursuit, which we can discuss as well. But the idea that I just view it as if I just say, okay, I earned an average return of 10%, and I'm not saying I will, but let's say I missed the mark and it's eight. That's a better margin of safety than saying, I want to own any amount of assets I introduced in my portfolio that say have an average historical return of 5%, that's almost by very definition going to reduce my long-term return, which means I have to work longer or save more.

13:39So it's just kind of unwiring or rather I should say rewiring of the way in which we view things. And oh, by the way, let's to talk about risk again for a second. The idea that an asset class that has gone up 100 times in the last 65 years to consider that to be risky is just insane. Please explain where the risk is. The risk was not born of the market. It was born of the investor. The only way you lost money is selling at an inopportune time. And now this speaks to faith in the future and all these other things. The reason that people bail out at inopportune times is because they get scared. And I'm not saying you shouldn't be scared.

14:16I'm just saying we should be more rational. I absolutely love that. And anybody watching us on YouTube can see my head has been down the whole time taking notes, which, again, we talk regularly and I never have a notepad. I'm usually walking or driving or on the move, so I don't have the privilege of doing that. But I really do like this idea that you're talking about, that decisions that move you further from your goals. And people do add bonds to reduce volatility. and if that's going to help you stay the course, that can be very useful. And all else equal, if you have two portfolios with the same average return and one is less volatile, sure, choose the less volatile one, it's gonna compound better, but you're right.

14:57Investing, because it's all about beating inflation over the long run, you invest to grow your savings at a rate greater than inflation without taking undue risk. And when you're highly diversified, that chance of permanent loss that you mentioned at the front end, very, very small, if not zero. You never want to say anything zero, but basically so. It has a historic probability of zero. We can't say what the future holds, but it has a historic probability of zero. And I'd say if the stock market goes to zero, we all have a lot bigger problems to worry about. Something is way off with the world, unlike anything that has ever happened.

15:32And the other thing is that you mentioned, okay, so we're investing to beat inflation. If you add bonds, that is going to lower your return, which means you have to save more or work longer or spend less. But also when you look at real returns, so returns net of inflation, the volatility of long-term real returns in stocks is far less than the volatility of real returns in bonds. So if eliminating short-term volatility is of interest, again, I think it is important for people to sleep at night. I, like you, am also at 100 % stocks. My human capital is the closest thing to a bond that I own. And for those listening, my human capital being my earnings potential, my future income that I'll earn, the future income that my wife will earn, that's really our bonds at this point.

16:17But it's really a great point that you make that over the long term, that can be a much, much riskier decision if we are talking about moving further away from your goals or making it harder to outpace inflation over long periods of time, Which kind of makes me wonder, Ashby, how you just think about success in general. So I'm kind of mentioning how I see the first principle reason that somebody should be investing. But how do you think people should be defining success? I think success is very straightforward. Now, it still runs counter to Wall Street or our industry in general, which is, generally speaking, some attempt to beat the market.

16:57I've yet to see significant evidence that this is a very strong possibility outside of a few very serious exceptions to the rule, such as Warren Buffett, Peter Lynch, Bill Miller. It's very rare, but those exceptions, they prove it's possible, but they don't prove it's likely, which is two very different things. So I think success is extremely straightforward, and that is the probability that you reach your financial goals or you accomplish whatever your financial objectives are. I can't imagine any other version of success that holds a candle to that idea. I mean, at the end of the day, each of us have some kind of life's purpose.

17:38You know, in my case, it's my family first and foremost, providing for them, caring for them, hopefully raising good children, things like that. That's my success. That's my purpose. But from a financial perspective, being able to provide for them, and both, I mean, in the near term and in the long term, obviously, whether it's from an insurance in case I don't make it or whether it's from invest, I like the idea of insuring for what can go wrong so you can invest for what can go right. So success is very straightforward, which is the accomplishment of your financial and life objectives. I don't think it gets any simpler than that.

18:16You know, I had an episode not too long ago, I was starting to scroll and look for it as you were talking episode 87, how to measure the success of your portfolio. And I suggest that you should not just have this portfolio based benchmark that for me, a portfolio based benchmark simply allows you to better understand your investments, which are the vehicle for helping you achieve your goals. But you also need that goals based benchmark to help measure your progress towards the goals, which I think, like you're saying, is really what matters most. And ultimately, when you get overly focused on a portfolio-based benchmark, you start trying to beat it.

18:56I think one of the real common misconceptions that I deal with, for lack of a better word, in day-to-day work with clients and speaking with others within the industry is this idea that benchmarks were designed to be beaten, where that just really wasn't ever the case. And whenever we quote market stats, like you, Ashby, just keep talking about 100x price gain over the last 65 years. All you had to do was own it. You could have bought it at terrible times as long as you owned it. And yet, the second you deviate from that portfolio, your performance is going to be different. And yes, everybody wants to be above the benchmark, that would be wonderful.

19:34But that's not really what a benchmark is all about. And I think this idea of the pursuit of average is something that we've discussed before. Average can be a word that sounds not that great, but if you get that market return, you're probably beating 90 % of investors. Don't you agree? Couldn't agree more. So as a baseball fan, I know you're a baseball fan. So this is an idea. I like this kind of thought process. So Jose Cruz Jr. is considered by baseball continuum to be the most average baseball player that there is, which by this definition means, let's just say as a hitter, if the MLB Major League Baseball average is, say, 250 year over year over year, he hit 250 year over year over year, generally speaking.

20:19Now, it doesn't mean he's a bad baseball player. I'm sure he made plenty of money playing baseball, hitting 250 a year. I would do that if I could. But let's just say over a 10-year span, you would assume, okay, well, if he's the average baseball player, then over that period of time, he's also going to be the average baseball player over a 10-year period, which is interesting. But it doesn't work that way in investing. If you are average one year, let's just say that puts you at the 50th percentile. Okay, so 50, which by the way, isn't even true, which is ironic, but let's just say it puts you at the 50th percentile.

20:52Over a 10-year period, just by being average year over year over year, it's counterintuitive that that will put you in the top 10 % of all investors over that 10-year period. And it's just absolutely wild to think that that is possible. And oh, by the way, I think Spider just came out with the idea that over the 30 years, I want to say that the S &P 500 ETF index fund outperformed 98 % of alternatives of active investors and the like. you can do pretty well by doing average. Yeah. And I think in general, Ashby, you and I both agree. Oftentimes it's more a matter of just trying not to make mistakes.

21:33You know, the best way to be smart is not be stupid. One of my favorite quotes. Yes. Munger, right? Yes. And so, you know, in general, if people are going to have what we're going to call an average return, even though the average return outpaces is most investors, most professional investors, are there any other things, if we're trying to avoid mistakes, any other thoughts that you have on how to best not lose money? I think the best way to not lose money is to know where one of Munger's other great quotes is, tell me where I'm gonna die so I'll never go there. And so look for the failure of other people.

22:08You know, it's easy to look at the success and try to replicate success. It's a whole lot easier to make sure you don't follow in paths of failure. The idea that any of us are going to replicate the performance of a Buffett or a Munger or a Peter Lynch or Bill Miller, you can name a huge number of other people, that's virtually impossible. But we can learn where people have died, so to speak, and don't go there. So one is, and oh, by the way, you can learn this by listening to these very same investors. It's a whole lot easier to learn and replicate temperament and behavior than it is to learn and replicate investing results.

22:48I mean, you look at, as an example of that, and I want to come back to actually answer the question, but you look at The Intelligent Investor, kind of the Bible of many investors, there's five editions of that book, and none of the five have the same formulas. So even if you were going to try to replicate somebody's investing results based on formulas or what have you, you're probably not. I don't think Warren Buffett would follow the same exact philosophy he followed getting started if he was starting today. He just wouldn't because it doesn't work. It's a different world. But kind of the foibles, if that is pronounced correctly, of investors are common, which is listening to forecasts, believing that you're going to choose the best investments, following media pundits, leverage, all these things, basically anything other than just sitting on your hands.

23:38It sounds ridiculous to say it that way, but pretty much anything other than sitting on your hands, you very well may be making a mistake. That's probably a bigger mistake. Once you identify a portfolio that is good enough, and I purposefully use the words good enough, not optimal, not anything else, because first of all, optimal is a joke. Optimal, you can only know in arrears. You cannot know what is optimal until the future gets here. Thereby, you can't know what it is today. And so the idea is to find a portfolio or invest in a portfolio that is just good enough. The idea of owning index funds, I want to say it was Jack Bogle who said, are there better portfolios?

24:17Yes, but there are infinitely that are worse. And so the idea of owning a portfolio of index funds, yeah, sure, you could do better, but you could do a whole lot worse. And oh, by the way, if owning an index fund portfolio is going to keep you from making any of these other mistakes, again, good enough. If you can own a good enough portfolio for a long, long time, you will do just fine, almost for sure, as long as you just kind of sit on your hands. And here's the thing, Ashby, it's easy for us to say, sit on your hands, do nothing, it's basically impossible for the media to do that. Because if all they do is say, hey, do nothing, no one's going to buy a subscription, no one's going to tune into their segment or their show.

25:02And yet, it really is the right advice. 99.9 % of the time, which is counterintuitive, because so often in life, when we want better results, we have to work harder, or be smarter. You have to do something. You can't just sit around and have good fortune come your way all the time. And so I think it is very counterintuitive. And people who are tuning into things like this, tuning into experts, listening to forecasts, following the news, what they don't realize is that what it requires to beat the market is really one of two things. One being that you have better information than everybody else in the world.

25:41And Ashby, you had made reference to, there's a handful of people who have beaten the market. And in many cases, they had truly unique information to just them that nobody else had. And that's one piece. The other is that you're better at interpreting information than everybody in the world, collectively, because markets are setting prices. They're pretty darn good at setting prices. And here's the thing. I feel like a lot of the times, whether it's in a podcast or in a blog article and Ashby, your work at Money Visuals, which don't let me forget to talk about that at the end of the episode. But a lot of it is stay the course.