Episode 259: Comprehensive Overview: Estimating Expected Returns

27:09No question. If you just reverse engineer it and you compute the effective cost of capital, Tesla, given reasonable projections, then you have this minuscule discount rate. I think that's – Musk has been a genius. People want to invest with Elon Musk and he's able to raise money a lot more cheaply. And he's taken advantage of that recently. He's been issuing stock and so forth. That makes perfect sense. See where GameStop finally saw the light and set the shares. Too bad they couldn't have sold him at 400 for them. Yeah. You mentioned with Aswath's site being able to calculate the current implied equity risk premium based on price levels.

27:51That implies, I think, predictability in returns. So I want to ask a little bit about that. What does the evidence say about stock, the equity risk premium being predictable from measures like that? Well, really what you mean is the future average return. Right, yes. You compute the implied equity risk premium now, and what does it tell you about the future average return? It works as well as any projection in finance, that when prices are very high and the analog that is the implied equity risk premium is very low. The next 10-year returns tend to be low. So in my view, the next 10 years returns on stocks, for that reason, are going to be low.

28:28I just don't know if they're going to be low because we're going to see 10 years of sideways motion or we're going to see a sharp drop, which then when you average it in, leads to a low average return. When you say low, are you saying broad market? Are you also, for example, looking at your DCF model or a value model, or perhaps a size tilted model, some other factor? I was talking there about the overall market, but you can do it on a case-by-case basis. The problem is on a case-by-case basis, you get all these arguments about what the future revenues and profits are going to be. For the market as a whole, those are quite predictable, so you can get a much more accurate measure of the implied equity risk premium.

29:10In one of your papers, you talked about the fact that it looks like there's statistical evidence of predictability, kind of like what we just talked about a second ago. But you also talked about how important it is to look at the historical context behind that data to interpret what looks like predictability. Can you talk a little bit about that? Yeah, this goes back to my early days. My first professorship was at the University of Arizona. And my colleague there was Vernon Smith, who later went on to win the Nobel Prize for his experimental work in financial markets. And what Vernon said, and this has always been my beef with behavioral finance, is what seems to happen in his experiments is you get the, again, a physics analogy is even empty space can suddenly pop energy into existence because of quantum fluctuations.

29:56He said that's the way his experiments would work. Suddenly, the market would kind of go haywire. It wasn't like the behaviorist said that everyone was always underreacting or overreacting or anchoring. It was suddenly something happened and it went bonkers. And that, to my view, is what the alternative to the efficient market theory is. It's not there's some behavioral deficiency. It's that periodically people do really weird things, but they're virtually entirely unpredictable. Like, do you know anyone who predicted the GameStop phenomenon? I mean, that to me was just, right, that's exactly what Vernon says can happen.

30:36And why and how, even ex-Post, it's hard to know. The late Steve Ross, who was one of the giants of financial economics, said in his view, the biggest failing of our profession wasn't that we couldn't forecast the future because that depends on getting new news and new news is always random. His problem was we can't explain the past. Even looking back at these weird things like the Tesla run up. Why did Tesla run up 10 times last year? I've studied the company for years. I really don't have a clue. Yeah. Again, this is another divergence, but you talked on one of your, the big market delusion paper, you talked about how that phenomena of seemingly crazy, but unpredictable behavior leading to what we might call exposed to bubble, that shouldn't be something that we worry about.

31:26It's just kind of part of how markets work and it's arguably even important to market function. I thought that was a fascinating point. Yeah. I think Bob Shiller's made this point on numerous occasions, that that's just the way that markets work. These narratives take off, they become viral, they infect people, and they then filter through the market. But you just don't know what causes them or when they're going to stop. So what do you say to someone, a professor, who wants the higher expected returns of equities, is worried about volatility and high prices, and there is all this randomness? What do you tell people to get them to stay in their seat and kind chill about the whole thing.

32:04I just did a little video for Cornell Capital on this. I tell them, you've got to know the present value relationship. You've got three things there. You've got the price, you've got your forecast of cash flows, and you've got the discount rate. Other than saying, well, I'm going to be able to sell this stock to a bigger fool and that's how I'm going to make money. If you believe in the present value relationship, then you're stuck. In this environment, you have to accept lower expected returns on equity. And if you're not planning for that, you're not being rational. You're praying for a miracle.

32:37So basically learn to love, learn to accept volatility and get as much data as you can around the cash flow. Yeah. I think that's the best you can do. You mentioned 6 % is what some institutions, pension funds might use as a projected expected equity risk premium. What do you think investors should be using if they're sitting down to do their personal financial plan, thinking about how much they need to save and stuff like that. What do you think people should be using for the equity risk premium today? They should be using Demotorin's implied equity risk premium or something very close to it.

33:07I mean, you don't have to buy into exactly the way that he operationalizes it, but it doesn't make much difference if you tweak it a little bit. So we're looking right now at 41.50 at about 4 % for equities over the long run going forward. For US stocks, right? Yeah. And you'd have to plan. So if I'm running a pension fund, uh-oh, I got 4 % over equities, I mean, over the T-bond, it's 5.5. So 5.5 on equities, high-grade corporate bonds, what, three? So if I'm looking at 4.5 % on my portfolio, if I'm using a 7 % rate of return, I'm either smoking something or I'm thinking that I can find some sort of alternative assets that going to give me those returns.

33:51Okay. So from Professor Cornell's suggestion, we would be looking at relying much more heavily on current market prices rather than using history as a guidepost in estimating expected returns. No matter what we decide to use as an assumption, I don't think that we can underestimate the effects of uncertainty on the realized future outcome. So we've already heard about that from multiple people throughout these conversations, but I want to hear from Professor Ken French, who had some really insightful comments on uncertainty back in episode 100. Such a great episode too. You mentioned earlier that when you're buying stocks, you're buying the rights to future cash flows or earnings and buying them at a discount based on some level of risk.

34:33I guess the investor would then expect to collect a risk premium. How confident should investors be over the long-term, say 20, 30 years? How confident should investors be that they're going to collect a positive equity risk premium? Your question's a great one. I work with a guy named Gene Fama. Gene and I have a paper on exactly this question. And the experiment we did is, I think it's really interesting. What we did is we took all of the past returns from 1963. In this case, we stopped in 2016 because we wrote the paper like in 2017. So we have data from 1963 to 2016 and we took all of the monthly returns and we just said, okay, if I think about pulling each of the returns for a sample of, let's say I'm working on 20 years.

35:25The question I'm trying to answer is over the next 20 years, what's the probability of getting a positive equity premium? And we just say, okay, let's sample from all of the past equity premiums. Every, what do I have? 240 months. I'm going to draw 240 of the prior months. I pull a ball out of this bucket that has all the months in it, look at it and say, oh, okay, that's the equity premium for the first month. I put that ball back in. I pull out another one and say, oh, there's my equity premium for the second month. I do that 240 times. And what's wonderful, I know exactly the distribution of balls in my bucket.

36:07I know exactly what the average premium was. And I know what the volatility is, what the randomness in that bucket is. And so we do that 100 ,000 times. We do 20-year samples, drawing balls out of the bucket, 240 of them, calculate the equity premium, and then 100 ,000 of those experiments. So I get to look at 100 ,000 of the equity premiums from a true distribution I'm absolutely certain of. It's the one we experienced from 1963 to 2016. It turns out if I'm looking at a 20-year horizon, I get, I got to remember the numbers here, just about 8 % of my 100 ,000 samples produce a negative equity premium.

36:55So what that says is, I go to my financial advisor. My financial advisor tells me, you know, there's this positive equity premium. What that means is the expectation. If you played this game enough, on average, you'd have a higher expected return or a higher average return if you buy equity instead of T-bills. That's what we mean by a positive equity premium. If you have enough observations, you have a positive expected return on stocks relative to T-bills. What Fama and I show is almost 8 % of the time, 8 % of the universes, if we have 100 ,000 parallel universes, if we look over the next 20 years, you will not get a positive equity premium.

37:41So people will look at that and say, aha, there is no positive expected equity premium. In fact, there is, but the realization can be quite different from the expectation. The realized return, that's the expected return plus the unexpected return. And the trouble with equity is the unexpected return, as we're living through the coronavirus right now, the unexpected return can totally dominate the expected return. Almost your complete performance over any reasonable short-run period is going to be determined by the unexpected, not the expected return. And even 20 years, 8 % of the time, you won't get a positive equity premium if the world looks exactly like it did from 63 to 2016.

38:33Okay. And finally, to really drive this point of uncertainty home, I want to hear from Professor Lubash Pastor from episode 124 with some more really brilliant, insightful comments on uncertainty. Your 2012 paper, are stocks really less volatile in the long run? Now, just for some context, our podcast listeners, we talked about leverage a while ago, maybe a year ago. We talked about it for the first time. I talked about the errors in Nalabuf research on time diversification and how young investors, it's rational for them to use leverage because it actually decreases risk over the long run. Your 2012 paper, I think, and I want to ask about that specifically too, but it kind of throws a wrench in that whole idea of stocks being less risky over longer horizons.

39:19So how in the paper, how did you arrive at this conclusion that stocks are not really less volatile in the long run like the conventional wisdom thinks it is? Yeah. So again, we have an hour, right? So as you mentioned, there's this conventional wisdom that stocks are less volatile at longer investment horizons on a per year basis. And this wisdom is based on historical data. Historically, stock volatility at the one-year horizon has been about 17 % per year. At the 30-year horizon, it's been more like 12 % per year. So historically, indeed, long horizon investors have faced less volatility per year than short horizon investors.

40:03But this result is based on historical estimates of volatility. What we argue in this paper is that investors making portfolio decisions should be looking into the future. They should care about forward-looking, not backward-looking measures of volatility. So that's the key point. We take the perspective of a forward-looking investor rather than a backward-looking historian, if you will. And a forward-looking investor cares not only about the historical estimates, but also about the uncertainty associated with those estimates. And that's key because that uncertainty drives a wedge between historical estimates based on which conventional wisdom is based on and these forward-looking estimates that we believe matter to investors.

40:49Because this uncertainty about parameter estimates is growing with the investment horizon. In fact, we show that our forward-looking measure of volatility, which matters to investors, has two components. First, historical volatility, which conventional wisdom is based on. And second, this uncertainty about the parameters, especially about the mean of the return process, about the trend around which stock prices fluctuate. And that second component is increasing with the investment horizon. The first component is decreasing. That's the conventional wisdom. The second component is increasing. And when you add them up, you actually get an increasing pattern in forward-looking volatility.

41:30So we do get long horizon investors facing more volatility than short horizon investors. And the intuition is that why is this uncertainty increasing with the investment horizon? Because just think about uncertainty about the mean, okay? If I compute historical volatilities, I'm computing volatility around a known mean. I know that the historical average was, let's say, 7 % real. I know exactly what I'm computing fluctuations around. but a forward-looking investor is computing fluctuations around an unknown mean okay and that uncertainty is compounding over time think about it this way if you compound at four percent a year and i compounded five percent a year there's very little difference one year out but there's more and more difference as we go further out and you see how if we go 20 years out 30 years out there's going to be a gigantic difference and that's why this uncertainty by the parameters matters, especially at long horizon.

42:28So as an investor looking to buy and hold stocks over a long period of time, I actually face more uncertainty than I had thought based on these historical estimates. So what are the implications then for someone managing their retirement account that has a long-term horizon? What do you think this means for their asset allocation? What I've learned from this as an investor is that I should slightly reduce my stock allocation. Stocks are simply more risky in the long run than I had thought before I wrote this paper. It doesn't mean that, for example, that target date funds are incorrect. It just means that stocks are riskier in the long run than we had thought.

43:12Take target date funds because they are so popular nowadays. Young people have more invested in stocks than old people. So there are two popular justifications for target date funds. One is based on human capital. We can talk about that. The other is based on mean reversion in returns. It's the idea that over the long run, stocks are less volatile than over the short run. And I like the human capital argument. I don't like the mean reversion argument. I think that mean reversion evidence is swamped by the uncertainty evidence that we document in our paper. So I still think it makes sense for the young to invest heavily in stocks.

43:53I think that makes perfect sense, but they should do it for the human capital reason, not for the mean reversion reason that is often put forth as well. All right. So those were some, I mean, incredible clips from some of the brightest minds in financial economics, helping us think about how to think about expected returns, how to think about the future through the lens of finance. Now, we don't have the answer for uncertainty, which is by definition very difficult to account for. It is uncertain. We do have a methodology that blends together historical data, the effects of valuation changes on historical data, and the information in current market prices to estimate expected returns.

44:38We have a fairly new document up on our website. We can link to that in the show notes that detailed our methodology. We had this thing where we kept iterating our methodology, just small improvements each time we released a new version of our expected returns document, which we update twice a year. But we decided to consolidate all of those small methodology changes into a single methodology document, which will be updated going forward. And then the expected returns updates just have the data. Anyway, so that document is now available on our website. But as a very brief overview, our methodology has two components.

45:12We've got the equilibrium cost of capital, as we call it, and we've got the market-based expected return. The equilibrium cost of capital, we use the DMS World Index from 1900 through to the most recent year, so currently 2022. We don't just take that historical average though. We take the historical average less the portion of the historical return explained by valuation changes. So we're penalizing the historical return for the portion that is explained by rising valuations over the full period. So it's like world valuations have increased a bit from 1900 to 2022. We don't count on that valuation change happening again.

45:49So we remove that from the historical portion of the return. And then for the market-based portion, we use the expected return implied by the Shiller Cape for stocks and the current yield for bonds. And we weigh those components differently for stocks and bonds based on how well the market-based metrics predict future returns. So we did regressions to look at that. The actual predictive power gets pretty fuzzy depending on the time period in the country and even the way statistical significance is defined. But since we're predicting the future anyway, we're not too fussed on specifics. Based on the regression work that we had done, we basically found that without even giving a point estimate on the numbers, that future bond returns are much more sensitive to the current yield to maturity than future stock returns are to the current Shiller CAPE, which is what we use for stock valuations.

46:41So based on that, and again, recognizing that this part gets super fuzzy, we weight the market-based return in our estimate at 75 % for bonds. So 75 % of the expected return is based on current yield to maturity. 25 % is based on historical return. And then for stocks, it's 25 % based on the current earnings yield and 75 % based on that valuation adjusted historical return. And again, we don't think that's super scientific. I mean, as much as we could be to come up with a reasonable number, but you heard some of the comments from the past guests that a lot of this is pretty fuzzy. Hey, you know, maybe 4%, 5%.

47:22We even recognize the fact that people have poked fun at me for this before that we have our expected return figure to two decimal places. That's probably not necessary either. We could round to the nearest percent probably, but I don't know. We have a methodology, so we update it. It's all quantitative, and we get our number out and we use that number, and we update it twice a year. Anyway, hopefully between those comments and my brief explanation of our methodology and for further reading the actual methodology document that gives people a lot to think about for expected returns. Love it. Well done, nice and clear.

47:58I think this will be a frequently shared segment. Cool. All right, let's go on to a quick recap of a past episode. So this time we're going to look at episode 102 with Dr. Brian Portnoy. So a bit of a backstory, which I seem to be doing more and more now. I went to the, as listeners might remember, I went to the Wellstack Conference back in 2019 in Scottsdale, Arizona, and Brian was one of the presenters and I thought he was great. At dinner that night, I happened to meet him briefly. He was at a table near our table. Someone at our table knew Brian. I very, very briefly met him. Shortly after, I just reached out because that's what I do.

48:34Since then, Brian has become a friend of ours, been on the podcast a couple of times, as well as a pretty close advisor to the team here. Brian's a good guy and a special guy, and we appreciate getting to know him. Let's get going. So Brian Portnoy joined us for episode 102 back in June of 2020. Brian authored the book, The Geometry of Wealth, How to Shape a Life of Money and Meeting. This is a book about having a healthy relationship with money with an objective of funded contentment. And he articulates that there are three components of funded contentment, which is what is our purpose? What are our priorities and goals?

49:10And what are our money decisions in areas of saving, spending, ensuring, and giving? So in summary, purpose, priorities, and decisions. Brian also discussed the shape of the financial industry today, which in his opinion is still too much. How do I beat the markets and not enough? Did I reach my goals? He also talked about the impact of recent crises such as the 08 financial crisis and COVID and how even though the world has been through many events in history, each one of them is a first for each of us. And this is a challenge for humans as we strive for a sound economic future. Lastly, we talked about his experience analyzing hedge funds for a living and whether it's reasonable to expect market-beating returns from hedge funds or actively managed mutual funds.

49:52I think you know what his answer is. And that was Brian Portnoy, episode 102. Okay, so let's go to our book review this week. And we're joined by our colleague, Matt Gore. I got to say before we go to, it's hard to overstate the impact that Brian ended up having on us. And it's just funny to think back to your backstory, if you had this chance meeting through a conference and that led to like how many podcast episodes on money and happiness and all that kind of stuff. And that whole redirection of our content to cover that stuff. And then we've done a ton of work with Brian, with our team and that finding and funding a good life paper that was downloaded however many thousands of times off of our website.

50:31That was largely reflection of work that we did with Brian, at least as a kicking off point for it. I hadn't thought about that. He really was, I guess the gateway to all of this. It was a pivotal moment when we had him on our podcast and when we started talking to Brian offline about all of the work that he'd done on these topics. In hindsight, that reach out was when he was establishing his company in this consulting space. And I think we were one of his first clients, which is kind of cool. As he said, he was kind of creating the product. He used the analogy that we were at his kitchen table, watching him create this product in real time.

51:05And he was kind of testing out different recipes on us and do you like this, do you like that? And it was all really fascinating. Yeah, Brian's a very good guy. So that's a good point. All right, let's head over to Matt on the book review. For this week's book review, I reached out to our team to see if anyone had a book they'd recommend and join us to talk about it. And this week we're joined by our longtime colleague, Matt Gore. Matt, it's good to have you on the podcast. Glad to be here. So how many years we've all worked together now? Coming up on eight years this November. Unbelievable. And Ben, you're 11, 10?

51:36No, coming up on 10. Coming up on 10. It's crazy. Matt advises many of our clients that have some of the more complicated financial situations. I think it's fair to say, Matt, you've been instrumental in developing a lot of the fantastic team members that have joined us over the years. It's great to have you join us. I appreciate that. The book you chose is called The Power of Moments, Why Certain Experiences Have Extraordinary Impact. This is written by Chip and Dan Heath. We reviewed the book, Making Numbers Count that was written by Chip Heath in episode 189. And we also referred to their book, Decisive, in episodes 38 and 92.

52:14Chip is a Stanford Business School grad and Dan is a Harvard MBA grad. And they've both been very successful authors for many years. So it's a pretty cool book, actually. And why certain experiences have extraordinary impact is exactly that. It's about moments in our lives really stand out. And so this book dives into what are the elements of these moments and how do we recall them? So Matt, why did you choose this book? Yeah. So initially I stumbled upon the book during a study group that I'm involved in, and it was a large part of their onboarding process. It's actually a mandatory read for all their new team members.

52:53And many of the other members had read the book. So I kind of, I took the hint that this is a good book to dive into. But when I was reading into it, the impact for me was just, it made me appreciate how powerful these moments are. And sometimes we're so obsessed with process and life in general. But when you take a second to step back and look, the book really makes you realize how these moments in hindsight really stand out. I also found it broadly applicable for both our professional lives and our personal lives. So it was kind of a very well-rounded book and very applicable. So I gave a brief description of someone ask you what the book's about, how do you describe it?

53:28Yeah, very similar to what you said. While the book is not a specific guide on how to create high impact moments, it outlines and dives into elements that make impactful moments and helps us realize when these moments are occurring. It's about being deliberate in your awareness of the potential for these moments and the appreciation that these moments are far more important than the process overall. Therefore, take the time in your business life to be aware when these moments can occur and ensure that you nail them for the benefit of everyone. Your customers or clients will really appreciate it, and you'll also get something out of it as well.

54:01Do you have any examples of moments come to mind? For me personally, there's a lot of points of reflection when I was reading the book, and there's a small moment for me in my personal life. And I'm saying this to highlight how somewhat meaningless a moment can be in the moment, but when you look back on it, it's very impactful. And for me, it was in my competitive hockey career growing up, I had a coach that was really hard on us, but one day he took a moment to ask how my skiing was going. I had joined our high school ski racing team, and he took that second to ask where no one really seemed interested in that other than me, because we were obviously a hockey team.

54:41And that moment really landed with me. It felt like it elevated me and made me feel proud in my skiing. So that's just a really small example of these moments. So when you think back on your hockey career, that's one moment out of that career. We're half joking here. That's one moment that actually stands out from that period. Yeah. It's wild to think of like that one coach. And, you know, we've had many coaches that had a great impact on our athletic careers. Right. But that moment where he took that moment to be more personal and kind of drawing something from my personal life into our hockey team really stood out to me for whatever reason, right?

55:24But I find it interesting. I think back to I worked many years in a butcher shop in small town Quebec. I can remember certain moments, certain experiences with customers that stand out, even though I worked there for eight or 10 years. It's just funny how those eight or 10 years, those hundreds of days that I worked there, you think about a handful of episodes that stand out, right? It's just funny how the brain packages up thousands of hours into these handful of moments when you think back. I bet you kind of think back in childhood, for example, and there's likely a handful of common moments.

55:56Like I remember you've heard me talk about my compound interest or you're collecting worms or when you learn how to drive or I think of in high school, we went a certain event skiing that really stand like going to JP, going down a certain run in JP. It's just funny how you get all these nice skied hundreds of days where you get these handful of moments that just jump out. It's so interesting to me. So Matt, you're going to talk about something I found interesting in the book, which is the peak end rule. Yeah, absolutely. So the peak end rule is when people assess an experience, they tend to forget or ignore the length.

56:31And that phenomenon is called the duration effect. Instead, we tend to rate the experience based on two key moments, which is either the best or worst moment within the experience and the ending. And so psychologists refer to that as the peak end rule. And a very common example of that is when people go traveling. So there's, you know, people ask, oh, how was your trip? And I think of an experience that I had last year or the year before on a ski trip. So it was a week long of backcountry skiing. And I always talk about this one run that we did roughly midweek. It was probably the craziest train I've ever been on, best snow conditions we've ever had.

57:08So that's all I can think about, all I can talk about. and the end. So we get helicoptered into this remote hut. And on the way out, I had the opportunity to sit in the front of the helicopter, which I've never, ever done. So those are the two points that I always bring up. Now, what's left out from that memory is the fact that we all got sick during the trip, COVID in particular. So it was very challenging to actually perform during the ski trip. But that memory of being very sick doesn't even come into play when I recount that experience. The book talked about four specific elements that can create a defining moment.

57:44It's a bit of a tool that people can use to try to create them, especially in a business setting. Maybe go through those four elements. Absolutely. So it makes a pretty helpful acronym, EPIC. So the purpose is not to create these EPIC experiences. That's just a convenient way to rearrange the four elements. So the four are elevation, pride, insight, and connection. So in elevation, these are moments that elevate or rise above routine. So an example that was in the book was a young child forgets his stuck giraffe at a hotel. And parents call the hotel, they find it, and typically that would just be shipped back to their house.

58:23What the hotel did was actually take the giraffe and take photos with the giraffe throughout the operation of the hotel and emailed them to the family while the giraffe was in transit. So they just took something very routine, returning a lost item and elevated that and made a very memorable experience. Pride, that's a moment that commemorates other people's achievements. So recognizing others, so a very small effort like my hockey coach did, it multiplies meaningful milestones. And the last is helps practice courage by preloading responses and kind of walking through scenarios. On the Multiplying Meaningful Milestones example in the book is this running program called Couch to 5k.

59:07And all that simply does is takes the goal of running a five kilometer race and breaks it down into little bite sized chunks. So, you know, walking 5k, walking and jogging one minute on one minute off. Very similar to like Fitbit users know or Apple users with the rings. So as you complete those, there is some recognition that you're achieving smaller goals towards the big goal. Insight is a moment that delivers realizations and transformations. So there's two strategies for creating insight. So the first is causing people to trip over the truth. So if you know someone is overeating, as an example, just simply asking questions about their eating patterns can help them realize like, oh, this is actually detrimental and not helping me reach my goal of losing weight.

59:56And the other is stretching for insight. So the example in the book is someone that was very good at baking. They were excellent at baking cakes. All of their friends said, you need to have your own bakery. And they kind of took a risk and started their own bakery. They didn't know if they were going to like it or not, but they stretched and said, I'm going to try this. And after a year, it didn't work out, but at least they have that knowledge now that they can do it or they could do it, but didn't like doing it. And the final is connection. So these are moments that bond us together. So groups unite when they struggle towards a meaningful goal and it often comes at a synchronized moment.

1:00:32So I think of our experience at PWL, where we would do off sites together, go find a location outside of the office and tackle a tough topic or challenge that we're having. And it just kind of breaks that script and gets everyone together on common terms. Another part that was interesting in the book was the difference between organizational or company moments and personal moments. And you and I talked about this earlier today. So why don't you share some insights there? So when we think of moments, we're very aware of these transitionary milestone periods. And the third type of experience is a pit.

1:01:09So So in a corporate setting, we need to work towards obviously mitigating hits or service failures in our various business models. But if that does occur, there's actually an opportunity to make that hit a peak. So if there's a... I had an experience recently when I was trying to return something at a big box store, their system was down. And instead of, oh, come back later and see if it will work, the employee actually made a point of calling me back, letting me know it was all ready to go, gave me a variety of options to avoid having to come back into the store. In the end, I did go back to the store, but it was a negative moment where I just wanted to simply return something, but they made it a positive one by kind of going above and beyond the bare minimum and really helped me out.

1:01:57Yeah. And the other example they gave too is a hotel, I think in California that had a popsicle hotline, But if the service wasn't good, like if the lobby was a mess or the service was lousy, you can't go and have these surprise moments, which I talked about the benefit of if your basics and your foundation isn't handled properly, right? So it is different in a corporate setting like that. Absolutely. And a lot of this seems like very common sense. One example was when you're leasing a car, someone passes away while they are currently leasing a car. It's typically an obligation of the estate to continue making those lease payments and fulfilling that obligation.

1:02:35Mercedes, however, does something very different where they, if a lessor passes away, will actually send a condolence letter to the family and offer them the opportunity to just return the vehicle with no continued payments or anything like that, which seems very, very common sense. But it's very rare in their industry, especially amongst other automotive manufacturers. Mentioning surprises that there's a stat in there. They looked at hotel reviews on TripAdvisor and they found that when guests have a, what do they call it, a delightful surprise, an astonishing 94 % of them expressed an unconditional willingness to recommend the hotel compared with only 60 % of guests who were very satisfied.

1:03:20So the power of that surprise, be it a Popsicle hotline, causes much greater reviews. Absolutely. Another thing that they mentioned in the book was a lot of companies tend to focus on their poor reviews, so the ones and threes, and how to fix those reviews and avoid any of those really, really harsh upsets. But they suggest that really time should be spent and effort should be spent on getting people that are in the sixes up to an eight or above. So I found that pretty interesting that typically look at like the worst case scenario and try to avoid any ones or twos or threes, but it's really getting those mid pack sort of neutral people up to a positive state will be far more impactful for the business.

1:04:04So what can you do to be deliberate about creating defining moments? Yeah. So I think the biggest thing is setting aside time and being very thoughtful with handling moments. It's very easy to get kind of caught up in processes and trying to optimize processes. It's a good practice, I think, every once in a while to step back for your business and kind of evaluate it critically. In the context of moments, breaking apart your, you know, if you have a process like onboarding a client or client acquisition and seeing, okay, where is that milestone moment possibly? Where is that area that we can elevate the experience and kind of maybe it's filling out documentation.

1:04:41It's not the most fun thing. Those are areas where you can pick that apart and give some further thought into how to make that a more beneficial experience for the client. All right. What was your biggest takeaway? Biggest takeaway? There's a lot of takeaways in this book. Thoroughly enjoyed it. But for me, I think it debunked. I had this notion from some prior books that to have a client experience, It had to be this epic, very grandiose, large production, possibly large cost to have any impact. I remember, I don't know what book it was, but it was a wealth management firm made their office like a theater.

1:05:23It was like very, very grandiose. And I thought, okay, well, how do you think of that? It has to be this huge thing where in reality, that's completely incorrect. It could be something extremely, extremely small to have a huge impact. So that was a big thing. But also there was a moment in this, and it's not necessarily related to our professional lives. It was more on the personal side. It was the idea of a gratitude visit. So this is a concept that was developed by Martin Seligman, and where you meet face to face with someone who did something in the past that changed your life, and you don't feel like you've properly thanked them.

1:05:56So in this instance, it was someone writing a gratitude letter for their mom. So you write the letter, you meet, he met with his mom and went over, read the letter to her. And this process obviously has a huge impact on the person receiving the thank you, but also an impact on the person writing the letter and delivering the gratitude visit that lasts like over a month. So it seems highly impactful. And I hope one day that I'll actually be able to execute on this, but it's a process that encompasses all four elements of a defining moment. And that's part of why it lasts, that the benefit lasts for a month long.

1:06:35It's really interesting. So I'm guessing bottom line, you would recommend this book. Absolutely. It's, like I said, broadly applicable for both personal and professional use, regardless of whatever industry you're working in. There's lots of inspiring examples. So like I said, it's not a step-by-step guide of, you know, do one, two, three, but the examples and ways they frame things in the book really get you thinking in how you can implement this into your everyday life and in your professional career. Yeah, I'd also recommend it. I'm a big fan of Chip and Dan Heath's books and I agree with you.

1:07:07So that was your review of The Power of Moments. Matt, thanks for coming on. Thanks for having me. Thanks, Matt. So I think the after show is going to be quick this week as my guess. One thing I wanted to recommend, I'm going to do a book review on this shortly, is Seth Godin released a new book. It's incredible in my opinion. It's called The Song of significance. So he was on a podcast that I like, which is called Conversations with Tyler. And it was an incredible interview. Tyler asked, much like you, Ben, very sharp, very short questions. So it was very punchy, quick interview, very different than Seth was also on with Tim Ferris in a much longer conversation type.

1:07:48For those who listen to Tim Ferris, they know that. But with Tyler, it's very short and crisp. And he talked about the impact that marketing can have and how in a consumer society, we're all looking for products that help tell our story. I remember you and I talked about cars and cars are part of your funding and finding a good life. And I thought Seth's answer was brilliant. He said, no matter what car you drive, whether it's a nice new car, whether it's an old junker, he says, your car is telling your story, whether you like it or not. You might say it's just, you get from point A to point B, that's part of your story.

1:08:24It might be an old rust bucket, that's part of your story. We talked about signals and other books in the past. I thought he did a great job of explaining that. Phenomenal interview, phenomenal book. Again, I'll do a review of the book in a few weeks. What have you been up to lately? I know you did some travel. Yeah, I'm on the FP Canada Projection Assumption Guidelines Committee. I added a couple of new members to the committee for this year and I was one of them. So I was in Toronto for that, which was great. PWL produces our expected returns methodology, which of course we talked about in this episode.

1:09:00FP Canada has a different methodology they've been doing for a while. So I was happy to share our approach and how it compares to what FP Canada does. And I think it'll be a very productive committee to be engaged with. So that was good. I noticed today that Angelica started advertising the CE credit programs. That's being promoted a bit more. So if you're a listener, well, if you're here, you're a listener. If you need CE credits, you can now do a quick questionnaire and get some credits. I saw a friend Jason posted on Twitter this afternoon that it'll probably get a lot busier in that store come December.

1:09:38Well, that's the thing, you know, People do their CE credits typically pretty last minute. And yeah, it'll be interesting because we're in, I mean, this is pretty inside baseball, but in Canada, there's a two-year cycle for continuing education. And so we're at the end of a cycle. And the cycle is calendar year. Yeah. Yeah. Everyone registered in that category is going to have to do all of their required credits by the end of this calendar year. So presumably people will be looking for credits. and I think we have to do the questions too if we need credits, correct? We don't get credit for producing.

1:10:15No, no. We have to do them. Update on some meetups. So we're doing a live recording at Future Proof Festival in Huntington Beach in September. So the time has been confirmed. It's Tuesday morning, September 12th. We're in the same time slot as Michael Kitsis. So sorry, Michael, but we might be drawing some of your crowd away from you since we have Hal Hirshfield joining us. So anyways, I feel bad for Michael, but he'll be okay. And we have a few people interested in a breakfast. So we're still coordinating that. Toronto meetup evening has been moved to Thursday the 21st. Thursday the 21st from Wednesday the 20th.

1:10:54So I think we have nine people coming out to that, which will be fun. So we're doing a live recording of the CFA Toronto event on the 21st. If you're interested in joining us at any of these, you can email info at rationalreminder.ca. As I mentioned a couple of times, I'm doing a short presentation at the Ottawa Book Expo on July 15th. Tickets are available at ottawabookexpo.ca. We're running out of talking sense cards, Ben. I think Angelica is working on an arrangement to get more made, but we're not certain. If you're thinking of getting cards, you might want to order them quickly. Anything else you want to mention?

1:11:29Actually, today, the day that we're recording this, which is a bit in advance of when the episode will be released, I recorded a conversation with TD Direct Investing. It's the second time I've been on their show. It's fun. I like the guys that run it. And this time we did an episode on, what do they call it? How to figure out a safe withdrawal rate for retirement. But we basically talked about the 4 % rule stuff. We talked about retirement planning in general. We talked a bit about expected returns, kind of like we talked about today, but not in as much detail. And we talked about the challenges of retirement planning.

1:12:07We talked about the problems with the 4 % rule. And then we also talked about the problems with constant dollar withdrawal rates and how flexible spending and flexible spending rules can improve retirement planning a little bit. Of course, emphasizing that all of those are kind of simple decision rules and more comprehensive financial planning is may be better, but if that's not available, some of these decision rules can be useful. Anyway, I think it was a pretty good conversation. So they'll edit that down. And then the way the TD does these events is they'll play the edited version of that conversation to a live audience.

1:12:44And then after that plays, there's a live Q and A, and then they'll post the edited interview on their YouTube channel. The live Q and A does not get posted anywhere. So if anybody wants to participate, in the live Q &A, you would have to sign up. Unfortunately, I don't know where. TD Direct Investing. But your comments are available publicly afterwards. That's great. Yeah. The pre-recorded remarks, those are all available. I'll also mention that I'm going to be very sparse in the details here, but I'm working on a project with a collaborator that is focused on investing in personal finance for Canadian professionals.

1:13:30So that's with a focus on generally people with higher incomes, though not exclusively, lots of information for people with corporations and all that kind of stuff. There was a gap in, because Rational Minders audience grew globally in a way that we just didn't expect it to, we got a lot of feedback about, even in the introduction, sensible investing and financial decision-making. Four Canadians used to be our intro. Now it's from two Canadians. So anyway, there was a gap in Canadian specific content. And so I found someone who's very passionate about that. We're going to do a, it's an audio video project, probably written content in there too, but we've made a decent amount of progress and it's going to be a pretty cool product when it's all done.

1:14:18That was cryptic enough, but it was good. Something to look forward to a bit of a tease factor going on here. Yeah. I think it's going to be great. Yeah. I'm excited about it. All right. Anything else? I don't think so. That's good. I think it's good. All right. Thanks everybody for listening.