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Stock Expert: Becoming Rich Is Simple, But You Won’t Do It! — Transcript

by The Diary Of A CEO · 20,162 words · 3,194 segments · language en · Watch on YouTube

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0:00Renting versus owning a home, the
0:01biggest financial decision most people
0:02make in their life. So, we're going to
0:04talk about all of the unrecoverable
0:05costs [music] of owning a home,
0:07including property taxes, maintenance
0:08costs, which is the one that I think
0:10people underestimate the most. And then
0:11there's also emergency costs. I've got a
0:13whole stack of them, as well as a 5%
0:15rule to figure out if renting is a
0:17better financial decision. We'll go
0:18through that. What else have we got?
0:19>> So, this is something that people just
0:20don't think enough about, which is the
0:22top 10 financial mistakes that I think
0:24people make. For example, tax planning
0:26opportunities. Like, there are simple
0:28things that people can do [music] to
0:29minimize the amount of tax they're
0:30paying, and we'll go through those. Ben
0:32Felix's firm manages the money of more
0:33than 3,000
0:35people, ranging from people with huge
0:37amounts of money and not so much money.
0:39His whole thesis is giving people money
0:41advice that is based on academic
0:44research. Our brains, our psychology,
0:46absolutely gets in the way of making
0:48good long-term financial decisions. And
0:49today, we're going to answer the big
0:51money questions, like what should I
0:53invest in? A lot of people believe they
0:55need to have a lot of background
0:56information before they can start
0:58investing, but I would argue that people
1:00who know just a little bit, they will be
1:01better long-term investors. There's a
1:03ton of evidence supporting that this
1:04will outperform most other investment
1:06strategies.
1:07>> And also, what is the mentality, the
1:09mindset of people that end up making
1:12money over the long term?
1:13>> Psychology is important for determining
1:14what your financial goals are. So, this
1:16is a framework that we developed to
1:18elicit higher quality goals. What would
1:20you say to young people that are
1:21thinking about their financial strategy?
1:23>> A lot of young people feel a lot of
1:24pressure to save, but there is research
1:26suggesting [music] that it's probably
1:28suboptimal for young people to save,
1:30which we'll talk more about later. And
1:31then, in a world of AI where everything
1:33is changing so quickly, what should I be
1:35doing with my money right now? Ben Felix
1:37has the answer.
1:40This is super interesting to me. My team
1:42gave me this report to show me how many
1:43of you that watch this show subscribe,
1:44and some of you have told us, according
1:46to this, that you are unsubscribed from
1:48the channel randomly. So, favor to ask
1:50all of you, please could you check right
1:52now if you've hit the subscribe button.
1:53If you are a regular viewer of this show
1:54and you like what we do here. We're
1:56approaching quite a significant landmark
1:58on this show in terms of a subscriber
1:59number. [clears throat] So, if there was
2:01simple free thing that you could do to
2:03help us, my team, everyone here, to keep
2:05this show free, to keep it improving
2:07year over year and week over week, it is
2:09just to hit that subscribe button and to
2:10double check if you've hit it. Only
2:12thing I'll ever ask of you.
2:13Do we have a deal?
2:14If you do it, I'll tell you what I'll
2:15do. I'll make sure
2:17every single week, every single month,
2:19we fight harder and harder and harder
2:20and harder to bring you the guests and
2:21conversations that you want to hear. I
2:23stayed true to that promise since the
2:24very beginning of The Diary of a CEO,
2:25and I will not let you down. Please help
2:28us. Really appreciate it. Let's get on
2:30with the show.
2:31>> [music]
2:36[music]
2:38>> Ben,
2:39there are lots of people out in the
2:41world talking about personal finance and
2:42investing and all these adjacent
2:44subjects.
2:45What is the approach you take that you
2:47think is different to lots of the other
2:51sort of finance experts that are on
2:53YouTube that are giving people advice?
2:55What I think, and the approach that I've
2:56always tried to take, is what can we
2:58take from academic literature, very
3:01smart people who spent a lot of time
3:02thinking about these things,
3:03what can we take from them and apply to
3:05making good financial decisions for a
3:07typical person? And what are the key
3:09questions that you've sought to answer
3:10for the audiences that you have? Is
3:13renting versus owning a home. So, that's
3:14always been big. Asset allocation is
3:17another big one. How much should you
3:18invest of your of your long-term money
3:20that you can afford to take some risk
3:22with.
3:23Another important question people wonder
3:24about is,
3:26why should I not do this other
3:27investment strategy that seems very
3:29attractive?
3:30And who who are we appealing to with
3:32this conversation? Is it just people
3:33that have lots of money, or is it No, I
3:35think these questions need to be
3:36answered. I mean, the the renting versus
3:38owning a home one is applicable to
3:39pretty much everyone, because that is
3:41the biggest financial decision most
3:42households will make in their lives,
3:43regardless of what their net worth is.
3:46But investing, or what should you do
3:47with your long-term investments, that's
3:49applicable to anybody.
3:50Anybody that's going to be saving for
3:51their future, whether they have $10,000
3:54or $10 million, the same principles
3:56apply.
3:57And how much of this
3:58game of investing, making money, is
4:01comes back to psychology?
4:03So, I like to say investing's been
4:04solved. We're going to use index funds.
4:06That's it. The hard part is actually
4:08doing that.
4:10Because our brains, our psychology,
4:11absolutely gets in the way of making
4:13good long-term financial decisions.
4:15Our brains are designed for survival.
4:19They're not designed to thinking about
4:20long-term abstract concepts like taking
4:23your money today, investing in the stock
4:25market, ignoring all the stuff that
4:27happens in between, and then having
4:28money left over later
4:30to to fund your retirement. That's so
4:33interesting, cuz a lot of the time
4:34people talk about tactics and
4:35strategies, but I guess underpinning
4:37your ability to execute on any of those
4:38tactics or strategies are one's own
4:40psychology. And is there academic
4:42research about the best sort of mental
4:45approach to take towards money and
4:46finance and investing? So, one of the
4:48best approaches, and it's a little bit
4:49counterintuitive, is to not look at your
4:51investments. There is a an academic
4:53paper showing that the more people look
4:56at their investments, the less risk they
4:58take, and the lower returns they earn.
5:01Because when you look at your
5:02investments every day, the stock market
5:04goes up and down. We know that. If
5:06you're looking every day at your
5:07portfolio and it's down 5%, up 6%, and
5:09going up and down all the time, that can
5:11be very stressful, and it makes it seem
5:13like the stock market is very risky.
5:15And so, people will invest less in the
5:17stock market. In reality, for for
5:20long-term investors who can invest in
5:22stocks, buy and hold for a very long
5:23period of time, that they're a lot safer
5:25than people think. Mhm. So,
5:26[clears throat] we've got some props
5:28here for some demonstrations we're going
5:30to do. Could you just give explain to me
5:31the high-level of what these things are
5:34on the table and the different
5:34frameworks we're going to go through?
5:36Sure. So, we have a bunch of things
5:38here.
5:39Uh this is one of my favorites that I
5:42bring up
5:43in a lot of my videos. So, this is the
5:45the PERMA model, which comes from
5:46positive psychology. Psychology is
5:48important for investing well, but it's
5:50also important for figuring out what
5:52your long-term investing strategy should
5:53be. We'll go through that. What else
5:54have we got here?
5:56This is the top 10 financial mistakes
5:59that I think people make. Uh this is the
6:02the three steps for investing your first
6:03$10,000. Okay. And we've got $10,000
6:06there, so you're going to talk me
6:07through how we do that as well.
6:09>> all of the We're going to talk about all
6:10of the unrecoverable costs.
6:12Got a whole stack of them
6:14that you incur when you own a home.
6:17Okay. And I I I guess this begs the
6:18question,
6:19who is Ben Felix? What is your
6:21background, and what is the education,
6:22the reference points, the experiences
6:24that you're drawing upon to give us this
6:26information today? Probably where it
6:28starts
6:29for for being relevant is I I did a
6:32degree in mechanical engineering at
6:33Northeastern University.
6:36And I say that's relevant because when I
6:38came into finance, I wanted to approach
6:41it like an engineer, and a lot of
6:43finance, a lot of financial services of
6:45of investing and wealth management is
6:47not approached like an engineer. It's
6:49approached like a I feel almost bad
6:52saying this, but it's approached like a
6:53like a car dealership, like selling
6:55selling product. So, I was disappointed
6:57in that and and had to find my find my
7:00own way. So, they haven't got my best
7:02interests at heart. In in a lot of
7:04cases, I don't think so.
7:05And I started spending a lot of time
7:07reading through academic literature so
7:08that I could be very confident and
7:10comfortable that the advice that I was
7:11giving to people was good, high-quality
7:13advice. And where is the best place to
7:16start?
7:17Is it in the psychology? Is it one of
7:18the one of these frameworks? Is it
7:19somewhere else? Is there a background
7:20understanding of the economy one needs
7:22to
7:23to get going? That is a great question.
7:25I don't think so, and I think that's
7:27where a lot of people get stuck, where
7:29they believe they need to have a lot of
7:30background information before they can
7:32start investing.
7:33Uh they may do research on specific
7:35industries, they may look at like the
7:36energy sector so they can build out an
7:38energy portfolio as one example. But
7:41investing the way that I would say is
7:43sensible for most people, which is just
7:44using low-cost index funds, capturing
7:46market returns, the the market returns
7:48have been there, and they're going to
7:49continue to be there. They should
7:51continue to be there in the long run.
7:53Uh doing that doesn't require a lot of
7:55background knowledge.
7:57I would argue that people who know just
7:59a little bit, just enough, that just
8:01know that index funds are sensible, and
8:02they have enough conviction they can
8:03stick with that, they will be better
8:05long-term investors
8:06than someone who knows enough to hurt
8:08themselves.
8:09What would you say to young people that
8:10are thinking about
8:12their financial strategy? Would you say
8:14that someone in their
8:17early 20s, 21 years old, should adopt a
8:19completely different approach to money
8:21based on what you've just shown me,
8:23versus someone that's 51 years old?
8:25It's going to be different, for sure. I
8:27I think, and this is a it's a tricky
8:29subject, but a lot of young people feel
8:30a lot of pressure to save.
8:32And that might be saving for their
8:34retirement, it might be saving to buy a
8:35home, but they feel a lot of pressure
8:37from their parents and just from society
8:39in general that they need to be saving
8:41money, and that if they're not saving
8:42money, they're being irresponsible. But
8:43again, if we come back to academic
8:45research, there is research suggesting
8:47that it it's probably suboptimal for
8:49young people to save. General point
8:52is that you should save more when you
8:53have a higher income, and save less when
8:56you have a lower income.
8:57And what that ends up meaning is that
8:59young people
9:01may not need to save, or may not need to
9:02save as much as they feel pressured to
9:04save.
9:05The reason this topic is tricky is that,
9:08well what I just said is true,
9:10it can cause bad habits.
9:12Whereas people spend all of their
9:13income, and then don't have that shift
9:16towards saving at some point, then
9:18they'll they'll end up in a difficult
9:19position later on in life.
9:22Someone who's 50,
9:23it's going to depend on their situation.
9:25If they're the person who I just
9:26mentioned who never saved,
9:28they're in a tough position, and then
9:29they are going to need to save a lot in
9:31order to have some wealth later on in
9:33life.
9:34But if they've already saved, and they
9:35have wealth, then they can focus more on
9:38some of these topics.
9:40And you've got the the 10 money mistakes
9:42people make here.
9:43Can you run me through those ones, and
9:45just let me know if any of them is
9:47particularly pertinent or interesting
9:48that we should dive deeper into? So,
9:50this this one's controversial.
9:53It's not earning enough money.
9:56A A of people feel like they
9:58don't have an option. That they're not
10:00earning enough money because that's just
10:02the way things are and there's nothing
10:04that they can do about it.
10:05I don't think that's necessarily true.
10:06Investing in your human capital, and
10:08that can be formal education, it can be
10:10getting skills, it can be becoming an
10:12entrepreneur. Those are all ways to make
10:14your your own self
10:17a more valuable asset, to increase the
10:19value of your human capital, and allow
10:20you to earn more money. So, that's
10:22that's a big one. I think people who get
10:24stuck in the
10:26in the feeling or the thought that they
10:28do not have the ability to increase
10:29their income, and that this is just the
10:31way things are, I think that could be
10:33very problematic. I've always thought of
10:35it across these sort of five buckets.
10:37The first two buckets that we attempt to
10:39fill when we're starting our careers are
10:41our knowledge and then our skills. And
10:43kind of like when knowledge is applied,
10:44it becomes a skill. And these two first
10:46buckets are so imperative because
10:48they can almost never be unfilled.
10:51Whereas the other three buckets, which
10:52is your resources, your network, and
10:54your reputation, you can have career
10:56fluctuations and earthquakes that cause
10:58those buckets to unfill. So, as like you
11:00were saying earlier on about young
11:01people, one of the things I've always
11:02thought is like when you're young, just
11:03like optimize for filling your knowledge
11:05and skills as much as you possibly can.
11:07And actually, I guess that the level of
11:08nuance there is acquiring a rare but
11:12complementary stack of knowledge and
11:14skills that the market values. And I
11:17think over the long term, you know, this
11:19doesn't apply to everybody cuz things
11:20happen in life and bad things can
11:22happen, but over the long term, I think
11:24life tends to land you pretty much in
11:27and around the value of and the rarity
11:30and the complement complementarity of
11:32those knowledge and skills as it relates
11:33to the market's demands. That's
11:35absolutely true. There's data on this,
11:37too, where we know that there is a
11:39mechanical relationship, at least
11:40historically. We can talk about the
11:42future, but historically, there has been
11:43a mechanical relationship between formal
11:46education or trade education and
11:48lifetime earnings.
11:50And we also know that certain degree
11:52types, like engineering, finance,
11:54business, some other sciences have
11:57higher lifetime earnings than other
11:58degrees.
11:59So, it's you're I think you're
12:00absolutely right. There are and the hard
12:02part is we don't know what exactly those
12:04degrees and skills that are going to be
12:05the highest paying in the future are
12:06going to be. 10 years ago, we might have
12:08said software developers. Today, we
12:09might not. But even you as an example,
12:12so you did engineering and then you did
12:14finance. And now you've added this other
12:16string to your bow, which is you know
12:17how to make content on YouTube. And that
12:20makes you as a finance expert and
12:22professional and CIO so extremely rare.
12:26It almost makes you like one of
12:28100 on planet Earth, maybe.
12:31And this is what I mean by rare and
12:33complementary skills. You could have
12:34just learned more finance. And I don't
12:36think that would have moved you up this
12:37sort of earning ladder. But because you
12:39added this really rare skill of being
12:41able to make content to your other skill
12:44stack, I'm guessing it made you money.
12:47It did. It has and I I continue to be
12:49paid well and, you know, it was
12:53Please don't, but if you were to go back
12:54and watch my old videos, which are still
12:56up, I'm so rigid and nervous and I when
13:00I was. And it took probably years of
13:02recording and we do a podcast, too, so
13:04just being in front of the camera for me
13:06to feel pretty good. I mean, I it
13:08probably took me 3 years to smile on
13:10camera. Really?
13:11>> [laughter]
13:12>> So, yes, that was a skill that I
13:13acquired through just practice, I guess.
13:16So, I say this because I really want
13:18people to think about how rare their
13:19skill stack is. It's not something we're
13:21taught. And then also, one of the things
13:22I noticed, I used to work in a a biotech
13:24company for a little while while I was
13:26in between things. And we were looking
13:28for a writer, a biotech writer.
13:30Now, the other writers that we'd hired
13:32at our other companies might have been
13:34paid, I don't know, $50,000, whatever it
13:35is. For a biotech writer, we would pay
13:38them a quarter of a million. And all the
13:40only difference is the biotech writer
13:42had like some base They didn't have to
13:44go to medical school. They just needed
13:46experience in writing about biotech.
13:48Yeah. And it 5x their earnings. So, this
13:51other point is, you might have a skill
13:52stack, but are you selling them on the
13:55right market? And even me, first part of
13:58my career was marketing. I was helping
14:00Uber and fizzy drinks company and dress
14:03seller company sell their dresses.
14:05As I just said, the second little stop I
14:08took in my career was helping biotech
14:10companies with marketing that are about
14:12to IPO.
14:13>> [laughter]
14:14>> My first contract with one of those
14:15companies was worth 8 million, 6 months'
14:17work.
14:18And I it made it was a real pivotal
14:20moment in my career where I go, it's not
14:22just the skills you have, it's like
14:23where you the market and industry where
14:25you sell those skills can wildly change
14:28your your, as you say on that card, your
14:30earning potential. Yeah. And as you say,
14:32that this is something that you don't
14:34have full control over because you could
14:36do all those things and not find work as
14:37a biotech writer, but putting yourself
14:39in that position, I think, does increase
14:40the odds. What's the second one you've
14:42got there?
14:43Second one is not saving enough.
14:48Touched on this a little bit. Young
14:49people maybe don't need to save, but at
14:51some point, you do have to start saving.
14:53And the tricky thing about saving is
14:55that wealth compounds over time.
14:57And if you're not saving enough, you're
14:58missing out on compounding and it gets a
15:00lot harder to catch up with the amount
15:02of savings you would have otherwise had
15:04if you'd started earlier.
15:06So, that's a big one. And some people
15:08will wake up when they're 50, 55, maybe
15:11even 60 and realize they haven't saved
15:13enough. But by that time,
15:15there's nothing that you can do about it
15:16or very little that you can do about it.
15:18There's a lot of parallels with health
15:19here where
15:55[laughter]
16:56[clears throat]
18:04if you eat poorly and don't exercise,
18:06you can
18:06>> that
18:07positive emotion
18:09is one big piece of it. What does that
18:10mean? It's literally enjoying what
18:12you're doing and feeling good throughout
18:13the day. Engagement,
18:15you could probably argue that we're
18:17getting some of that right now where
18:18you're doing something that you enjoy
18:20doing that's maybe a little bit
18:21challenging, but it's your skill level.
18:23It's the idea of getting into flow.
18:25I I know I get that when I do podcast
18:28interviews, when I do research, when I'm
18:29sitting down and and writing a video
18:30script. Mhm. Relationships
18:32[clears throat] is is having good,
18:33strong relationships with with people
18:36who are close to you in your life and
18:37that can be friends, it can be family
18:38members, it can be colleagues.
18:40Meaning is being part of something that
18:42is bigger than yourself.
18:44That can be a lot of different things.
18:45For some people, it's religion. For some
18:47people, it's community. For some people,
18:48it's their own business. Mhm.
18:51And accomplishment is achieving hard
18:54things. Setting goals and achieving
18:56them.
18:57You're going to look at the items of the
18:58PERMA model. You're going to look at
19:00those as categories and think about what
19:02other goals you may have that fit into
19:03those categories.
19:05That's called a categorical prompt. And
19:07again, there's evidence behind that
19:08helping people elicit more meaningful
19:10goals.
19:11So, one of the things I said is buy a
19:12Ferrari. Again, these aren't my goals, I
19:13don't care about Ferraris, but in case
19:14they want to sponsor the podcast, then I
19:16care about Ferraris.
19:17But say the Ferrari thing,
19:19do do I have to find where it sits with
19:21in terms of positive emotion,
19:22engagement, relationships, meaning,
19:24accomplishment? It would be wise to and
19:25this is why I think this framework is so
19:27important because you might realize that
19:29a Ferrari does not contribute to any of
19:30these things. It might, though.
19:32Like maybe you take it to the track and
19:33you spend hours racing it. And that
19:36would be engagement.
19:36>> engagement.
19:38Maybe you have a bunch of buddies who
19:39have Ferraris and you want to be part of
19:40that friend group.
19:42So, that's relationships. Yeah. Okay. I
19:44mean, positive emotions, but that might
19:45only last a couple of days. Yeah, what's
19:46the hedonic treadmill idea? That's
19:48exactly it. Yeah.
19:49And then accomplishment, I mean, it's
19:52not really an acco- If it was a goal
19:53that you've had since you were 5 years
19:55old, maybe that you could call that
19:56accomplishment, maybe. Okay, so I fit my
19:59my financial goals, my life goals into
20:01the PERMA model as a way to understand
20:04what my financial goals should be. Yeah.
20:07Okay. How many people in the general
20:09public do you think have actually
20:10thought about what a good life for them
20:12looks like? Not enough. Not many. I
20:14think everyone's people are so busy with
20:16their day-to-day lives. I know this is
20:18true for me and my family, too. It's
20:20really, really hard to step back and
20:22have this kind of thoughtful discussion
20:24about what you actually want your life
20:25to look like.
20:27Cuz I was just thinking about that. I
20:28was thinking I don't even know if I've
20:29got um really clearly defined life goals
20:32for myself. Like I think most of us just
20:34kind of act on how we feel. Yeah.
20:37And that can somewhat drift us towards
20:40the short-term. Like if I just
20:42Yeah, what what's going to make me feel
20:43good today?
20:44And do that every day. I don't know.
20:47Some might argue that you have to be a
20:48bit more long-term thinking.
20:50It can help. It can help, right? Cuz it
20:51it it can help you from making decisions
20:53that you might regret in the future.
20:55Mhm. Yeah, cuz when I look at this PERMA
20:57model, there's some things on here that
20:58I've optimized for, which have
20:59sacrificed the other things that I care
21:00>> That's it. That's it. Yeah. Like you
21:02might have I might have over-indexed on
21:03this, like
21:04achieving things, but might have cost me
21:06some relationships.
21:08So what's the fourth mistake people
21:10make? Yeah, so this is related to what
21:11we were just talking about, but it's
21:13it's overspending on the wrong things.
21:15Okay.
21:17When you think about what is a good life
21:18for you, and you realize if you realize
21:21that you're spending on things that are
21:22not contributing to that, which is
21:24resulting in you not being able to save
21:26toward things that would contribute to
21:28what you want your life to look like,
21:30that's probably not a great position to
21:31find yourself in.
21:32So that could be spending $12 on a an
21:35iced coffee every morning and not
21:37enjoying it, cuz you could get positive
21:39emotion out of that. But you're like
21:40rushing to work, chugging down the $12
21:42coffee every day.
21:43That's probably not contributing to a
21:45good life.
21:47Number five might be
21:50one of the bigger ones,
21:53which is not taking investment risks.
21:57And that's really the stock market has
21:59delivered these incredible long-term
22:01returns, and on expectation, it should
22:03continue delivering strong returns for
22:06investors. Not participating that in
22:08that is a huge mistake, and it's a
22:10mistake that many, many people make. A
22:12lot of people don't invest in stocks at
22:13all,
22:14and a lot of people who do invest in the
22:16stock market don't invest enough in
22:17stocks. They have very conservative
22:19portfolios. And that has a very large
22:22implicit cost. By not participating in
22:24the stock market when you could be,
22:26you're giving up a huge amount of of
22:28economic gain.
22:29How do you quantify that for the average
22:30person in terms of what kind of gain
22:33they're giving up, or the size of the
22:34gain they're giving up? Well, you can
22:35look at the historical returns on
22:37stocks,
22:38uh and you can also look at the expected
22:40returns
22:41on stocks. So let's say it's uh let's
22:43say it's 7%
22:45that we expect stocks to turn in the
22:47long run.
22:48And if you could get 2% by sitting in
22:52cash, that 5% difference is your
22:54opportunity cost of not investing in the
22:56stock market when you otherwise could
22:57be.
22:58And 5% compounded over the long term is
23:01enormous.
23:03So say I have $10,000
23:06uh and I invest it
23:09in
23:10the stock market, and I'm getting what
23:11did you say, 8%? 7 Say 7%.
23:14How much money is that?
23:17Let's have a look.
23:19So I've done $10,000, which is what we
23:22have here. Mhm. Invested in the stock
23:23market at 7% return over 40 years,
23:26that would be $150,000.
23:31Do you know what's um Do you know what's
23:33quite scary when I think about that? Is
23:34does that kind of means that today if I
23:36spend $10,000, I'm actually spending
23:39$150,000.
23:41Yes.
23:43Which makes me not want to spend any
23:44money on anything. Yeah.
23:46Cuz if you buy I don't know what cost 10
23:47What does What cost $10,000? Like a a
23:49car, small car? Yeah, maybe. Yeah.
23:51You're actually spending $150,000
23:54when you factor in the fact that if you
23:55put that $10,000 into the stock market,
23:58you could have made 7% a year, and it
23:59would have turned into $150,000. Yeah,
24:01that's that's one side of the coin.
24:03Yeah, I think you also have to think
24:04about any enjoyment or utility that you
24:07get out of that car. If that car lets
24:08you drive to a job you couldn't have
24:10otherwise done,
24:12it may have a significant economic value
24:13to you in the long run.
24:15As one example. You know, I've got a
24:17coffee here. Some people spend
24:19$10 on a cup of coffee with frappachappa
24:22toppings and all that stuff.
24:23Looking at that over the long term,
24:26in 40 years, if you'd not bought that
24:28coffee and put it into the stock market
24:30and got just 7% return,
24:32you would have had $150.
24:35So when you buy that $10 coffee, you're
24:37actually theoretically
24:39spending $150 in 40 years' time.
24:41So you better really enjoy the coffee.
24:44Is there a bit of a fear that it makes
24:45us not want to spend money on
24:46anything, and therefore we end up having
24:48a shitty life in the near term? No, I I
24:50think that's why this this framework
24:52That's why the the PERMA framework for
24:53thinking about these decisions is so
24:54important, because you do want to have
24:56positive emotion and engagement,
24:58relationships, meaning, and
24:59accomplishment. Those are all really,
25:00really important. And yes, that money
25:02could be worth more in the future, but
25:04it can also be a worth a lot today if
25:06you're optimizing on the right things.
25:09What else? Number six.
25:11It's another big one. So not taking
25:12enough risk is is important. Taking the
25:14wrong risks with your investments.
25:17So I we we just ran some numbers about a
25:197% stock market return. You can
25:22basically get that using an index fund.
25:25The problem is a lot of people don't
25:26invest in index funds.
25:28They pick individual stocks hoping to
25:31earn really high returns. They trade
25:33individual stock options. Uh they trade
25:35crypto tokens and all that kind of
25:37stuff. And a lot of those types of risks
25:39have negative expected returns, or they
25:41have high costs if you're doing a lot of
25:43trading.
25:44And that can really erode long-term
25:46investment growth.
25:49What about buying a house?
25:52Is that a good investment?
25:54I wouldn't consider buying a house to
25:55live in an investment. It's sort It's
25:58sort of is. You get an asset,
26:01but you're really you're buying an asset
26:03that funds your housing consumption. It
26:05kind of pays you a dividend that's sort
26:08of like getting rent
26:10from the house that you own.
26:12When you do the side-by-side comparison,
26:13which I think is the only way to think
26:14about this,
26:15if you compare buying a house, so that
26:18means in Canada, you'd usually save up
26:21for a 20% down payment. So you put 20%
26:23down on your house.
26:25Uh you take out a mortgage to finance
26:26the rest.
26:27You know, living in the house, you're
26:28paying your mortgage payment, you're
26:30paying for some maintenance costs,
26:31you're paying for property taxes.
26:33Alternatively, you could have rented the
26:36house. That 20% that went into buying a
26:39home could have been invested in the
26:41stock market. So again, we're back to
26:42the idea of opportunity costs.
26:44And the other important thing here is
26:45that renting typically has lower cash
26:48flow costs than owning. So these are the
26:51unrecoverable costs
26:53of owning a home.
26:55Mortgage interest.
26:56So that's when you buy a house and you
26:57borrow to to fund the purchase, you're
26:59paying interest to the bank. That's a I
27:01I call these unrecoverable costs. That's
27:03money that you're paying
27:04for the use of money in this case, and
27:06you're not going to get those dollars
27:07back. It's gone.
27:12Opportunity costs. So that's what I just
27:14mentioned. Whatever equity you have in a
27:16home
27:17is equity that you could have otherwise
27:19invested in the stock market. The
27:21capital portion, the principal, the the
27:23price of homes has increased around
27:27inflation at the rate of inflation,
27:28maybe a little bit higher historically.
27:30Stocks have far outpaced
27:32inflation. So by having money sitting in
27:35a house as opposed to invested in the
27:37stock market, you have what is called an
27:39opportunity cost.
27:40You're not earning returns you could
27:42have otherwise been earning.
27:43So that opportunity cost is one of the
27:45largest costs of owning a home.
27:49So I mean, the mortgage interest,
27:51the opportunity cost of equity,
27:54property taxes are another big
27:55unrecoverable cost. Property taxes vary
27:57depending on where you are, but it's say
27:59between 0.5% and 1%. Maybe some
28:02sometimes a little bit higher. You get
28:04utilities and some services in exchange
28:06for it, but it's again, it's an
28:06unrecoverable cost. You pay that, you've
28:08got nothing left afterwards.
28:11And then you've got maintenance costs.
28:13Oh, this is the annoying one. This is
28:14the It's It's the annoying one, and it's
28:16the one that I think people
28:17underestimate the most.
28:18>> Mhm.
28:19I started making content about renting
28:21versus owning a home years ago.
28:23I used to say 1% was a reasonable
28:25estimate of maintenance costs, and
28:26people would push back and say that's
28:27way too high. There's a bunch of
28:29academic literature on this, too, that's
28:31says it could well be over 2%. I think
28:33that's probably a more reasonable
28:34estimate.
28:35Having been a homeowner now for 6 years
28:38after renting prior to that,
28:40I'm fairly confident, at least in my
28:41case, that maintenance costs are far
28:43higher than 1 or 2% of the property
28:45value per year. Yeah, I mean, I I bought
28:47my first home a a while ago, and uh
28:51hell, I I didn't think about the
28:52gardening, and the pool pump gets
28:54broken, and then
28:56there's a crack in the the patio
28:57outside, and then the heating system
28:59breaks, and then
29:00everything just seems to break.
29:02>> And it's always breaking. It's always
29:03breaking. Every time I go back there,
29:05which is it's in a different country,
29:06I'm the first week I'm just spent
29:08looking at the things that have broken
29:09since I was last year. Like making a
29:11list of the new expenses, and it's never
29:13cheap. No. And if I was renting, that
29:16wouldn't be my problem. No. There's also
29:18like another cost here which we don't
29:19talk about, which is like the time you
29:21waste
29:23on the maintenance. Like when we think
29:27of maintenance cost, I imagine people
29:28are thinking about the fees to fix
29:30things, but actually the time I spend
29:32having phone calls and speaking to
29:34people, for me is is worth a lot more
29:36than just the costs.
29:38But anyway, yeah, maintenance cost.
29:39Yeah, the coordination is huge, and you
29:41could outsource that, but that would be
29:43expensive, and
29:45depending on how valuable your time is,
29:46it could make sense to outsource it. But
29:48I I agree with you. I do the same thing.
29:49I spend time on the phone finding which
29:51contractor is going to come in and fix
29:52this thing.
29:54And then you have to wait for them, and
29:55then maybe they're late.
29:57Yeah.
29:58So, that's maintenance costs.
30:00We have emergency cost here, which is
30:02really uh a subset of maintenance costs.
30:04So, you can have big things, like the
30:05roof needs to be redone, or the
30:07foundation cracks, whatever. Those can
30:09be very significant. And one of the
30:11challenges with those types of big costs
30:13is that you kind of have to have
30:14liquidity available to fund them.
30:17And that means that you have to have
30:18cash sitting somewhere, or at least some
30:21liquid assets sitting somewhere. So,
30:22probably not invested in the stock
30:24market, which also has an implied cost
30:26to it.
30:27Which is more opportunity cost, right?
30:28>> More more opportunity cost, exactly. And
30:29then this one's this one's interesting.
30:32And And this is one that I don't think I
30:33appreciated until I owned my own home,
30:35which is renovation spending.
30:37We talked on maintenance. When you fix
30:39something in your house,
30:40you don't just fix it to get it back to
30:42the baseline level that it was at
30:43before. Yeah.
30:44>> You make it a little bit nicer. You're
30:45right. I never did that when I was
30:47renting. So, the side-by-side. So, you
30:50run the side-by-side comparison.
30:52You account for all of those
30:52unrecoverable costs that the owner has.
30:54You account for the renter investing in
30:56the stock market and investing the cost
30:58difference, the cash flow cost
30:59difference between renting and owning
31:01each month or or whatever frequency.
31:03And what you'll find, and I've done this
31:05with projections, so looking at expected
31:08stock returns and expected real estate
31:09appreciation, you can very easily show
31:11that there is an equivalence.
31:13There is a level of rent
31:16where you are indifferent between
31:17renting and owning. I did a video years
31:19ago that has millions of views now,
31:22where I I came up with this idea called
31:23the 5% rule.
31:25So, I took some of those costs. I took
31:26property taxes, maintenance costs, and
31:29the cost of capital, which is the the
31:31opportunity cost and the cost of of
31:33borrowing.
31:35I wrapped all that up and said, "We've
31:37got roughly 1% for property taxes,
31:39roughly 1% for maintenance costs, which
31:41is probably way too low as we just
31:42talked about." And I said 3% for
31:44opportunity cost, which I think is also
31:46on the on the low end.
31:47And you put all that together and you
31:49get 5%. So, I said, "Okay, if you divide
31:53the price of a home by 5% and then
31:56divide that number by by 12, you will
31:58get the monthly rent that has equivalent
32:01that is equivalent to the unrecoverable
32:03cost of owning that home."
32:05Okay, so let's do that.
32:07So, I'm thinking of buying a $300,000
32:09house.
32:10What what's the math that I need to do
32:11to fit figure out if it's better to
32:13rent? Multiply by 5%. And then divide by
32:15by by divide that by 12.
32:17Divide it by 12. Okay. You're brave. I
32:19usually have a rule to never do math
32:21live on a podcast.
32:22>> edit, so just
32:23>> [laughter]
32:25>> Okay, the result is 1,250.
32:28There you go. 1,250 is the equivalent
32:31rent where you're roughly break even
32:33between renting and owning. So, if I
32:35could rent for 1,250 instead,
32:37>> or less, or less, I should rent.
32:40Renting is a better financial decision.
32:42So, this is an important part of this
32:43topic. We can show financial
32:45equivalence. And then just that is
32:47important. Like, we can show that there
32:48is financial equivalence between renting
32:49and owning. I've done more
32:52uh robust versions of of this analysis
32:54since then. We have PWL has a calculator
32:56on our website where you can see the the
32:58break even by putting specific numbers
32:59in instead of just doing the rough rule
33:01of thumb,
33:02cuz things will change it. For example,
33:03if your asset allocation is more
33:05conservative or more aggressive, that
33:07opportunity cost number can be
33:08different.
33:09If you're a taxable investor, meaning
33:11that you're taxed on your investment
33:13gains by investing in the stock market
33:15or the bond market, your opportunity
33:16cost decreases because the after-tax
33:19expected return on stocks and bonds
33:20decreases relative to uh homeownership.
33:235% is a very rough rule of
33:26rule of thumb. Do you think for the
33:28average young person, let's say
33:29someone's under 25 years old, they
33:32should, and they're thinking about
33:33building their wealth over the long
33:34term, do you think they should buy be
33:36buying a house
33:37as an investment, or should they be
33:39doing something else? I think for young
33:41people it's really tough, and it's tough
33:42for a couple reasons. One is because
33:44home prices are high. You have to save
33:46up a lot of money to buy a house.
33:47Another one is that it can limit your
33:49mobility. We've seen in in Toronto, in
33:52Canada, where I'm from,
33:54uh prices, condo prices in particular,
33:56have plummeted. They've fallen off of a
33:58cliff. If you bought a condo in Toronto
34:01and you get a job offer somewhere
34:03outside of Canada,
34:04what are you going to do with that condo
34:06that's that's at a big loss? Mhm.
34:08>> You're kind of stuck. Yeah. Or you're
34:10have to try to rent it out, and now
34:11you've got this this just difficult
34:13situation to deal with. And plus there
34:15are big transaction costs if you're if
34:17you're selling a place. So, for young
34:19people, I do think that homeownership
34:20can be tricky because it can limit your
34:22mobility,
34:23your your ability to go and find maybe
34:25higher-paying work. It introduces a risk
34:27that you probably don't need in your
34:29life because you may end up moving
34:31somewhere else.
34:33And then people often move up where they
34:36want a condo today, but they're going to
34:37want a house later. For my family, I I
34:39met my wife, I was renting a place. The
34:41first place we met in, the second place,
34:43the third place, and a fourth place.
34:45We're at the four different places as we
34:46were having our family. We have four
34:48kids. And so, our needs were changing
34:49over time. We needed a bigger a bigger
34:51condo, and then we had a townhouse, then
34:53we had a house. Uh but we just
34:56the lease ended and we gave notice and
34:58we left. We found a better rental that
34:59was more suitable for our needs. If we
35:01had been homeowners, the amount we would
35:02have paid in transaction costs to do
35:04that would have been insane. Or we would
35:06have had to buy the house that we were
35:07going to have forever much earlier,
35:09which would have introduced significant
35:10opportunity costs. That's one of those
35:12things that's just impossible to measure
35:13in because it's so intangible, but like
35:15the psychology of feeling like you can't
35:19easily move.
35:20And I see this a lot actually with
35:22people that apply for jobs in our
35:23company is
35:25in the interview process they'll say,
35:26"Well, I've just bought a house in
35:28insert city."
35:29And you can see this that sort of
35:30psychology is is um holding them back
35:33from taking an opportunity because
35:35they've made a an investment in a
35:36particular city.
35:38And so, they might lose, as you say,
35:40like an opportunity in New York or LA or
35:42London because
35:44mentally they feel committed to a place.
35:46Yeah. Now, the flip side of that is that
35:48if you're really sure that you wanted to
35:51stay in one place,
35:52one of the best ways to accomplish that
35:54is by Who can be sure?
35:55>> Yeah, you can't. But if if someone was
35:58really sure, maybe someone has maybe
35:59like me. I have four kids, they're all
36:01in the same school. It's very unlikely
36:03that we would move. The other big
36:05mistake I think I made is I bought a
36:06holiday home.
36:08That was a terrible Well,
36:09I shouldn't say terrible idea, but kind
36:11of a terrible idea. In part because of
36:12the same reason, in part because it
36:13means you only go you only go on holiday
36:15to one place.
36:16>> [laughter]
36:16>> Which is like defeats the point of a
36:18holiday. Yeah. And it's I have not done
36:21that, and the main reason is the mental
36:22overhead. I don't like
36:24having to think about one
36:26property. Mhm.
36:27>> [clears throat]
36:28>> I can't imagine having to think about a
36:29second one
36:30that I'm not at.
36:31>> That's a dumb idea. I don't know why I
36:32did that.
36:33I don't know why I did it, especially
36:34when you're like young. It's like
36:36the whole point is you can still walk up
36:37mountains and do things. You don't want
36:39to be sitting in a in the same house at
36:40>> Yeah.
36:41Are homeowners happier than renters?
36:44Mhm.
36:46Depends how you slice the data.
36:49If you control for property types and
36:51neighborhoods and all that kind of
36:52stuff, no,
36:54they're not. If you don't control for
36:55those things, I think owned homes do
36:57tend to be a little bit nicer and and
36:59better maintained. They do tend to be in
37:01better neighborhoods. So, uncontrolled,
37:04renters are a little bit less happy.
37:05There's a There's multiple studies on
37:07this. Statistics Canada has a really
37:09good one that does exactly that. They
37:10have controlled and uncontrolled life
37:12satisfaction differences for renters and
37:14owners. If you're a professional who is
37:16thinking about buying a house in a nice
37:18neighborhood or renting a nice house in
37:20a nice neighborhood,
37:22it's unlikely that you'll be happier in
37:24either case.
37:25If you are forced to be a renter in a
37:27not very nice neighborhood because all
37:29you can afford, you may be less happy,
37:32but it's not necessarily the renting
37:33that's making you less happy. Is there
37:35any particular group of people that you
37:36think should be buying a house? Yeah, so
37:38people who are very risk-averse, people
37:40who want to stay in one place for a very
37:42long time, because they have a family or
37:44something.
37:44>> Yep. Yeah. And you don't want to be
37:45priced out of of of the market that you
37:47live in. This did happen in in some
37:48cities in Canada in recent history. It's
37:50now reversed,
37:52but there were people who were getting
37:53priced out of their market. They've been
37:55renters for a long time, and rents went
37:57up so quickly that they they just
37:59couldn't keep pace. And it depends on
38:01your rental market. Some rental markets
38:02are controlled where that's less of an
38:04issue. So, you do have to think about
38:05things like that. But yeah, if you want
38:07to stay in one place, owning your home
38:09is is the way to do that. But it's a
38:12double-edged sword because if you
38:13realize you want to leave,
38:15you might be
38:16you might be stuck. Uh and then the
38:18other big one for who should own a home
38:20is it a taxable investors with with high
38:22tax rates. And again, that comes back to
38:24the opportunity cost, where if you're
38:26paying a lot of tax on your investments,
38:28whereas real estate tends to be tax
38:30preferred. In Canada, gains on your
38:31primary residence are tax free.
38:33US has a I believe an amount. And so,
38:36that's that's another thing to think
38:37about, where the opportunity cost
38:38changes depending on your specific tax
38:40situation. When we have these
38:41conversations about buying a house or
38:43not buying a house, one of the things I
38:44see a lot in the comment section is
38:45people um sharing their case studies of
38:48them buying a house 30 years ago, and
38:50now it went from
38:52being worth $100,000 to $600,000.
38:55And they're they're asserting that
38:57that's evidence that it's a good idea.
38:59You probably see this a lot.
39:01>> is this is the thing. This is the
39:02example. Uh and then everyone has the
39:04family member that bought a house for
39:06$70,000 and sold it for a million. I'm
39:09just going to read you the top four
39:10comments, and I'd like to get your
39:11response on them. Now, the first one is,
39:13"The not buying a house does not work in
39:15the UK as 90% of rents are higher than a
39:17mortgage cost. Also, if you want to
39:19start a family, you need a stable place
39:21to raise your children.
39:23And with renting, you can be kicked out
39:25within a few months' notice, and your
39:26whole life could be turned upside down."
39:30I personally think there are ways around
39:32that, and I as I mentioned earlier, I
39:33did rent for 6 years of my life with a
39:36wife and an increasing number of kids.
39:39The two things that I always made sure
39:41to do were to rent from professional
39:43landlords.
39:44We did have one experience renting from
39:46a a sort of mom-and-pop person who had
39:48bought a condo and rented it out.
39:50And that that wasn't great. But after
39:52that we we were very careful about
39:53vetting our landlords and only renting
39:55from professionals. And then the other
39:57thing that we did, which addresses at
39:59least in Canada, addresses one of the
40:01other points there, is we would sign
40:03long leases.
40:04If we want to stay in a house for a few
40:05years, we would sign a multi-year lease.
40:08And landlords do tend to to like that.
40:10The other point that was was in there
40:11that I think is really important is that
40:13rents are higher than mortgage payments.
40:16I think this is one of the biggest
40:17mistakes that people make when they're
40:18making the rent versus own comparison is
40:20they'll say, this is my mortgage
40:22payment, this is my rent. If the
40:24mortgage payment is lower,
40:26owning must be better.
40:27But that's not the case. As we talked
40:28about a minute ago, you have property
40:31taxes, maintenance costs, potential
40:33renovation spending that you wouldn't do
40:35otherwise, and the opportunity cost of
40:37of capital. When you add all that up,
40:39the cost of owning a home is far more
40:43than the mortgage payment.
40:44This guy here said, I bought a house,
40:46it's the best thing I ever did. It's
40:47launched my mindset in new directions.
40:49Remember that having your own space has
40:52profound psychological impact and can be
40:55life-changing for some of us
40:58that want to live in a healthy
41:00environment.
41:01What do you make of that point? If it
41:03have profound psychological impact.
41:05>> If someone believes that it does, and
41:07they've really taken the time to reflect
41:09on their life and has decided that yes,
41:11it it is in fact true that it has a had
41:13a profound psychological impact, of
41:15course that person should own a home.
41:17Of course they should. Is it
41:18Is it true for everybody?
41:21I don't think so. Don said, my
41:22experience, I purchased a house in 2013
41:25with 20% down payment deposit. My total
41:27payment including taxes, insurance, HOA
41:31home owners insurance?
41:32>> Yeah, yeah. insurance. Um is $1,800
41:36a month. As of today, the exact same
41:38house is renting for $4,000. The
41:40property value has also gone up 3x. I'm
41:43glad I bought my house.
41:44Yes. So there are cases where
41:47it a real estate allows you to use
41:49leverage very easily as as Don
41:51mentioned.
41:52And if you end up buying in a market
41:53that goes up a lot in a short period of
41:55time, it can be really really good.
41:57However, and this is what we've seen in
41:59Canada more recently, it hasn't touched
42:01other markets yet, although of course
42:02the US has had their own declines and so
42:04have other countries, but Canada is
42:06right now in one of the biggest real
42:08estate price drawdowns, when you adjust
42:10for inflation, going back to 1975.
42:13And so if you had bought, yes, 7 years
42:16ago,
42:17and then, well, and then looked at the
42:18price in 2022, you'd think, wow, I'm a
42:20genius. Of course everybody should buy.
42:22But if you had bought in, I think it's
42:242021 was the was the kind of peak, and
42:26you look at it today, you're thinking
42:28like, wow, I've ruined my life.
42:30>> [laughter]
42:31>> So yes, there are examples like that,
42:32for sure. But that that is not what
42:34people should expect every time that
42:35they purchase a home.
42:37So are you saying that the future is not
42:38going to be as
42:40like as the past? Uh for this I know the
42:43Canadian market best, but I think these
42:45it generalizes outside of Canada. Where
42:47we've seen record decreasing interest
42:50rates. So that's that's changed a little
42:51bit now, but for a period of time we had
42:52interest rates going down down down. In
42:54Canada we had a ton of immigration. I
42:56have no problem with
42:58immigrants, uh but we had levels of
43:00immigration that were just not
43:01compatible with the amount of housing
43:02that we had in in Canada, which was
43:04contributing to prices going
43:06up. We we have have housing supply just
43:08not growing uh quickly enough, which are
43:10all things that Canada is addressing
43:11now, but all that causes price cause
43:13prices to go crazy, which is I think why
43:15they've come down in such an extreme
43:17way. So I'm not I'm not saying
43:18necessarily that we're never going to
43:20see high house prices again or house
43:22prices going up at an extreme rate
43:23again, but in Canada at least, that has
43:25now normalized or at least started to
43:29normalize. I don't think it's reasonable
43:30to expect stock-like returns from real
43:34estate forever, even though we did see
43:35that for for some years.
43:37So for most people then you think, if
43:39their goal is to make money and they
43:41care about mobility, being able to get
43:43up and go if opportunity arises,
43:45a better investment decision would
43:47probably be just investing in an index
43:48fund
43:50which gives you exposure to the stock
43:51market. Yeah, though I think the
43:53mobility piece is key there, because
43:54remember, just from a wealth
43:55perspective, we can show that hey, these
43:57are pretty close to equivalent. Mhm.
43:59>> [clears throat]
43:59>> But if mobility matters to you, yeah, I
44:00think that that matters a lot. If you
44:02have unique investment opportunities,
44:04that that can be another reason where
44:05your opportunity cost is really high.
44:07Like I had an opportunity to buy equity
44:09in my company years ago,
44:11and
44:13if I had been a homeowner at the I think
44:15I actually had just bought a house, and
44:16I think I even had to reduce the amount
44:17of equity I bought because our I think
44:19our well pump broke like around the same
44:22anyway, it was a whole thing.
44:23>> isn't it?
44:24>> But that's like there's opportunity cost
44:25in the stock market, which is, you know,
44:27call it 7% or whatever, but there's
44:29other opportunity costs that can be a
44:30lot higher like in that specific
44:32situation.
44:34And the next one there is number seven.
44:37Yeah.
44:38Missing tax planning opportunities.
44:40This is something I think I think people
44:41just don't think enough about,
44:44but it's not terribly complex, but there
44:48are some simple things that people can
44:49do to minimize the amount of tax they're
44:51playing paying. For most people, it's
44:53just optimally using things like in
44:55Canada we have the RRSP and the TFSA, in
44:57the US it's the the Roth and traditional
45:00IRA and and 401Ks. Uh using those things
45:03optimally make a lot of sense. So then
45:05the rest other types of tax planning
45:08tend to get more country-specific. There
45:10tend to be lots of things for
45:11particularly for higher income people
45:12that you can do to pay a little bit less
45:14tax. And I think What about for lower
45:15income people?
45:17For lower income people, the government
45:19accounts that are provided uh are
45:21>> ISA in the UK?
45:22>> Yeah, exactly. Those are probably the
45:24best thing for people to be focusing on.
45:26But even then, I don't like people are
45:27often not using them optimally. One of
45:29the things people don't talk about
45:30enough is all the ways that rich people
45:33do things to avoid paying tax.
45:35They have like they hire people so that
45:36they don't have to pay tax. I hear about
45:38all these crazy stories of like I've
45:40started this business on the side here
45:41so I can get real estate license. And if
45:42I get a real estate license, I don't
45:44have to pay the same tax on this thing
45:45here. And I move the money around here
45:46and I flip it around there and then I
45:48don't have to pay any tax. Most people
45:50like the average people don't have any
45:52loopholes that they can they jump
45:54through. Yeah, it's true.
45:56And even one of the crazy ones I learned
45:58about when I got some money was that you
46:00can take a loan against your stocks
46:03and there's no tax on the loan.
46:05So if I have a million dollars of
46:07Facebook stock, I can go to a bank and
46:09get 500k in cash
46:13loaned against that stock without having
46:15to sell it. And then on that 500k, I
46:18have no tax to pay.
46:19And I can just hold that Facebook stock.
46:21When it goes up to 2 million, I can go
46:23back to the bank and say, give me
46:24another 500k. You could. But if it goes
46:27down, you get margin called and you have
46:28to come up with the cash to
46:30Don't they just sell? Don't they just
46:31sell the stock? They might, but then
46:33you're selling after it's
46:35come down. So it's not risk-free. But
46:36yeah, that is a thing that people do.
46:38I guess everybody could do that, right?
46:39I mean most people could, if they
46:40invested in the the S&P 500, they could
46:43go and get a loan against that
46:45investment. And that loan would be
46:47tax-free. Yep, same same rules for
46:50everybody. But I would still say that
46:52you're you're taking a lot of risk by
46:53borrowing money against risky assets
46:55like that. Mhm.
46:56Okay, so tax planning, there's nothing
46:58else to cover there in terms of the
47:00average person. Yeah, I don't think so.
47:01But it is an important thing for people
47:02to think about if thinking about what
47:04mistakes might I be making in my
47:05financial plan,
47:07they should definitely be thinking about
47:08are there tax planning opportunities
47:09that that I'm I'm missing. How would
47:10they find out?
47:12It's a tough one. A a good CPA. What's a
47:15CPA? Uh
47:16uh an accountant. A good tax
47:18professional should be able to identify
47:19tax plan planning opportunities for you.
47:21Good financial planners similarly should
47:23be able to identify good tax planning
47:25opportunities for your situation. But as
47:26you said earlier, the reality is there
47:28aren't that many things that people can
47:30be doing. And it's really things that
47:31you can figure out how to optimize once,
47:34and then you're kind of set.
47:36Much of the reason most people haven't
47:37posted content or built a personal brand
47:39is because it's hard and it's
47:41time-consuming. And we're all very very
47:43busy. And if you've never posted
47:44something before,
47:46there's so many factors in your
47:48psychology that stop you wanting to
47:50post. What people will think of you. Am
47:52I doing this right? Is the thing I'm
47:53saying absolutely stupid? All of these
47:56result in paralysis, which means you
47:58don't post and your feed goes bad.
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49:37Who does need a financial advisor?
49:40Probably a lot of people. But the
49:43financial advice profession has a lot of
49:46challenges.
49:47We're chatting about the the sales
49:50nature of the financial services
49:51industry.
49:52And I do think that's a big problem.
49:54Because if someone's has Here's Ben say,
49:56"Okay."
49:57Ben said I should have a financial
49:58advisor.
49:59And they go to a bank or they go even to
50:02some random firm,
50:04there's a good chance that they're going
50:06to be sold products they don't need.
50:09And I don't have a solution for that.
50:10Like that's a It's It's a difficult
50:12situation when that is the state of the
50:14financial advice industry. I guess to
50:17get around that one might ask their
50:18friends and family who does their
50:20financial planning and then go with a
50:22trusted referral.
50:24Yeah. But people often trust people that
50:27aren't giving them great advice. Like
50:28it's just really It's really
50:29problematic.
50:31I I think a lot of people can benefit
50:32from financial advice. It's just finding
50:34the right person. And a lot of people
50:36don't need financial advice because you
50:38do pay fees for it. What's the next one?
50:40Number eight. Yeah. Eight is It's
50:42kind of a similar discussion to what we
50:43just talked about, but it's it's missing
50:45out on estate planning. What does that
50:47mean?
50:48Figuring out how your assets are going
50:50to be distributed to the people that you
50:52want them to or the entities that you
50:54want them to
50:55when you die.
50:57This is an interesting one cuz nobody's
50:58Well, most people aren't expecting to
51:00die
51:01anytime soon. Yeah. So, they haven't
51:03really thought much about this.
51:05Yeah. And you know, some might also say,
51:07"Listen, I'm I'm not going to be here,
51:08so
51:09why should I care?"
51:11Especially people that I guess That's
51:12the my mindset of someone that doesn't
51:13have kids, but Yeah. It can cause a lot
51:15of problems. If you don't think through
51:16and plan for the way you want your
51:18estate to be distributed, you can pay a
51:19lot more tax than you otherwise would
51:21have. And your estate can go to people
51:24that you may not have wanted it to go
51:25to. You can pay more tax.
51:27If you don't have things set up
51:28properly. And again, this is going to be
51:30country specific. But yeah, there
51:32there's cases where you would pay more
51:33tax if things were not set up properly
51:35than if they were. Do you think
51:37everybody should write a will?
51:39Everybody that has any dependents should
51:42write a will. I've heard a an estate
51:43planning lawyer joke that everybody has
51:45a will.
51:46But it's the government's default will,
51:48which you may not actually agree with.
51:50It's like prenups. Yeah, kind of like
51:52that. Yeah. It's exactly like that. You
51:54could say everybody should have a will
51:55because it can help from having a big
51:57mess for other people to clean up. But
51:59for sure, if you have kids, if you have
52:00dependents, I think having a will is
52:01really important. And on that point of
52:03prenups, number nine is about who you
52:05marry.
52:07Yeah, this is this is a tough one.
52:09It's a tough one because
52:12I mean, this is front of mind for me
52:13because as you can see from these
52:14photos, I just I just uh proposed to my
52:16fiance.
52:17>> Yeah. And um I mean, this is not the
52:19ring, but cuz this is a bit extra. But
52:22um That's awesome. Oh my god, they put
52:24my face in the They didn't put my face
52:25in the box. That's creepy. But yeah, so
52:27why is this so important who you decide
52:29to marry as it relates to how rich
52:31you'll be or or won't be? Well, it's not
52:34just how rich you'll be, it's how
52:35satisfied you'll be
52:37with your life and with your marriage.
52:40Academic research has identified two
52:42spending profiles that you can
52:44categorize people into. One is
52:46tightwads.
52:47That's people who don't like to spend
52:48money.
52:49And one is spendthrifts. That's people
52:51who do like to spend money. The names
52:52are kind of funny, but that's just
52:53That's what the research calls them.
52:56And the crazy thing about this is that
52:59tightwads and spendthrifts are more
53:01likely to end up marrying each other
53:04than to marrying someone who has the
53:06same profile as them.
53:08So, two A tightwad and a spendthrift are
53:10more likely to get married than a
53:11tightwad and a tightwad or a spendthrift
53:13and a spendthrift. Why do you think that
53:14is? The the research on this talks just
53:16about kind of opposites attracting and
53:18there may be some sort of thrill to the
53:19to the differences
53:21um initially.
53:22But
53:23tightwads and spendthrifts as they go
53:25through their marriages do tend to be
53:27less satisfied
53:29in their marriages and have more marital
53:30conflict around money.
53:32And again, that's based on an academic
53:34paper. Now, that's the reasons why the
53:37marriage might not last, but in terms of
53:39how it might impact your financial
53:41success
53:42If you really want to save, if you have
53:44If you go through your goal-setting
53:46exercise and your PERMA model
53:48and you have have a vision for the life
53:50that you want to live that requires
53:51saving, and you have a spouse that wants
53:54to spend a lot of money today
53:56that can be very, very difficult. It can
53:58make it a lot harder for you to achieve
53:59your goals.
54:00I don't think it's insurmountable. I
54:02think a tightwad and a spendthrift can
54:04work. I mean, it's not like all of them
54:05end up getting divorced. But it does
54:08require a different level of
54:09coordination and communication and being
54:11on the same page. Do you have to speak
54:13to clients about this often?
54:15I It It comes up a lot. We have lots of
54:18clients who were single and end up
54:20getting in relationships and then
54:21getting married. And we have to all have
54:22all kinds of conversations about
54:24marriage contracts or prenups, um estate
54:26planning. Do you think everybody should
54:28get a prenup? Going back to what you
54:29said earlier, where you said you you If
54:31you don't write your own, the government
54:32will give you theirs. Yeah. Which just
54:34to simplify that
54:36if you don't write your own prenup
54:38then you are the default position is the
54:41government will decide through the law
54:43how your assets are divided at a time
54:46when you get when you break up. Problem
54:48is, people find prenups to be really
54:49unromantic. That's right. And they also
54:52think there's an implication that
54:54we're assuming we're going to break up,
54:55which is also not so sexy. Right. Do you
54:58think people should get them?
55:00If both partners are on the same page
55:02and comfortable with it, it's not going
55:03to cause a major rift. And if it does,
55:05maybe that's a red flag. Do you know
55:06what I mean? I wouldn't want to cause a
55:07rift. Do you know what I mean? And it's
55:09not to say that I'm just keeping all my
55:10stuff and you're keeping yours. It's
55:12just to say, "Let's agree now what would
55:14happen in the like 50% probability that
55:18this doesn't work out."
55:19>> Yeah. We've seen both. We've seen
55:20clients come up with very creative and
55:22interesting
55:24marriage contracts that have, you know,
55:25specific formulas for how things are
55:27going to work. And depending on how many
55:28kids they have, it's you know, it's kind
55:29of an interesting exercise. And in that
55:31case, it was kind of fun. And they they
55:33they were engaged in the process.
55:34And it didn't cause an issue.
55:36And we've also seen people who did not
55:37have anything in place and have had
55:40very bad divorce outcomes from a
55:42financial perspective. Oh, I had a
55:44friend go through a divorce recently.
55:45And he's a very successful person. His
55:48wife was there from the beginning. She
55:49took looked after the family while he
55:51was off gallivanting around the world
55:52building his his businesses all over the
55:54place. So, obviously she you know, they
55:57She's contributed hugely to his success.
55:59What I noticed though is
56:02it's destroyed what could have otherwise
56:05been a good relationship as they
56:07separated. They now really, really hate
56:09each other because lawyers have stood in
56:11between both sides. Yeah. And basically
56:13caused tension because that's their job.
56:15They're going to get paid more. And her
56:17lawyers are incentivized to squeeze
56:19every single penny they can out of this
56:22a separation. And so, I think he said
56:24it'd been like six or seven years since
56:26they decided to divorce. And he's still
56:28in court arguing with lawyers
56:31about how they separate. And it's just
56:33ruined their relationship. They've got
56:34two kids.
56:36You just think, "Gosh, like if you had a
56:37prenup, this would have been
56:39quick and it could have saved the
56:40relationship." Okay.
56:42Anything else to say on this this point
56:44of marriage incompatibility? The
56:46academic research on this does have a a
56:48short quiz. I don't know if we have it
56:50kicking around anywhere here. I think
56:51this is a It's called the tightwad and
56:53spendthrift quiz developed by
56:55researchers at Carnegie Mellon and the
56:57University of Michigan. Yeah. This scale
57:00measures the pain of paying, the
57:01emotional distress some people feel when
57:03spending money.
57:05Uh and here's a quick DIY version of
57:07that quiz. Question number one is you
57:09see a high-quality coat on sale for
57:11$100, which is usually $300. You need a
57:14coat and you have the money. Do you buy
57:17it? Answer A, no. $100 is still a lot of
57:19money. I'll wait for a better deal. B,
57:22yes, it's a great value. I need
57:23something. C, yes, and I might buy a
57:26scarf to match since I saved so much.
57:29Which one are you? I mean, if I need the
57:30coat, I'm B.
57:32I think I'm C.
57:34>> [laughter]
57:37>> But actually, to be fair, I just don't
57:38buy stuff, so I don't even know if I'd
57:40buy it anyway. Question two.
57:43You are at a restaurant with friends.
57:44The bill is being split evenly, but you
57:46ordered the cheapest item. How do you
57:48feel?
57:50A, physically pained. I'll likely
57:52mention that I should pay less. B, a bit
57:54annoyed, but I'll pay it to keep the
57:56peace. Or C, fine. It all will even out
57:58in the end.
58:01I'm between B and C. Really? I I might I
58:03might feel a little bit annoyed. Really?
58:05But I wouldn't I wouldn't cause a fuss
58:06about it. I'm C again. Fine, it'll even
58:08out in the end.
58:09Number three. Which statement describes
58:11you best? A, I have trouble spending
58:14money even on things I actually need. B,
58:16I balance my spending and saving pretty
58:18well. Or C, I often spend more than I
58:21intended and regret it later.
58:24I can be.
58:26You said B, which is I balance my
58:27spending and saving pretty well.
58:30Um
58:32I would say I'm C again.
58:34But again, the caveat here is I actually
58:35don't Hmm. I don't spend money on stuff
58:38anymore. I don't buy stuff anymore.
58:40>> [snorts]
58:41>> But I can spend it on like ex-
58:42travel and experiences and stuff. Yeah.
58:45Last question. When you buy something
58:47expensive, your primary emotion is A,
58:50anxiety or regret. B, satisfaction in
58:52the utility of the item. Or C,
58:54excitement and a rush.
58:57I think I'm B again.
58:59I I reckon I'm B as well there.
59:00So, scoring your results.
59:02If you're mostly A's then you're a
59:04tightwad. If you're mostly B's, you are
59:07the unconflicted. And if you're mostly
59:09C's, you are the spendthrift. So, I
59:12guess with that, you you are a
59:14unconflicted. You're in the middle. You
59:15have a healthy relationship with money
59:17where you can save when necessary, but
59:18enjoy the fruits of your labor without
59:20guilt. And I am a C, which is you feel
59:23very little pain when spending. You
59:25enjoy the moment, but you might struggle
59:26with long-term saving goals or buyer's
59:28remorse.
59:29That's so true.
59:31>> [laughter]
59:31>> Everyone should do that at home. Okay,
59:33that makes sense.
59:33>> So, we we know that that tightwads and
59:36spendthrifts are incompatible. I I do
59:38think it's an interesting concept, like
59:41how do you have that discussion with a
59:42potential partner?
59:44Or do you just observe it and kind of
59:45infer? On on a date, you can say say to
59:48your partner say, "Oh, there's this
59:49great podcast on YouTube called The
59:50Diary of a CEO. We should listen to it."
59:52Then listen to this episode. They're
59:53listening with you know right now if
59:55this you've done this. And then just
59:56play along. Play along with your
59:58partner. Are you looking for your
59:59partner to be the opposite then because
1:00:01you said opposites attract? No. They
1:00:02don't do well all the time.
1:00:04Opposites end up together, but then have
1:00:07conflict because of that. Oh, okay.
1:00:10Yeah. Mm, interesting. [clears throat]
1:00:12Yeah. I think if you're if you're a
1:00:14tightwad,
1:00:15being with the same is probably good. If
1:00:17you're a spendthrift and you end up with
1:00:18another spendthrift,
1:00:20you'd be really careful about your like
1:00:21finances. Yeah.
1:00:23I don't think my partner's a
1:00:24spendthrift. I think she's in the middle
1:00:25with like you.
1:00:26>> Yeah. Doesn't really care. Yeah. Which
1:00:28is useful.
1:00:29We we do have one more Okay. card in the
1:00:31mistakes, which is under insuring
1:00:34catastrophic risks.
1:00:37And I think that's one, particularly for
1:00:38people who are not currently financially
1:00:40independent, that's really really
1:00:42important. If if your household income
1:00:46relies on your income
1:00:48to maintain the lifestyle of the
1:00:50household, it's really important to have
1:00:52sufficient life insurance
1:00:54where if you die, your human capital,
1:00:56your ability to earn income in the
1:00:57future is replaced by the insurance.
1:01:00And also disability insurance, where if
1:01:02you lose your ability to work, you have
1:01:04insurance to replace that income. Do
1:01:06many people think about this?
1:01:08Probably not enough.
1:01:09And it's cheap. Well, disability
1:01:11insurance is not always cheap. Life
1:01:13insurance is generally pretty cheap if
1:01:14you're buying
1:01:15low-cost term life insurance, which is
1:01:17what most people need.
1:01:19You made a video called the most
1:01:20controversial paper in finance. Yeah.
1:01:23What paper was that? That was a paper we
1:01:26we didn't have it here, but that was a
1:01:27paper on life cycle asset allocation.
1:01:31What does that mean? So, it's answering
1:01:32the question of
1:01:34how should your mix of stocks and bonds
1:01:36change throughout your lifestyle?
1:01:39Conventional wisdom says that you should
1:01:41start out riskier in stocks and then
1:01:43move towards safer bonds as you get
1:01:45older.
1:01:46This paper took a huge amount of data.
1:01:49They had data from 39 countries going
1:01:51back as far as 1890, I believe. They
1:01:55sampled from that large set of data to
1:01:57simulate a million potential sort of
1:02:00hypothetical lifetimes that you could
1:02:01live through.
1:02:03And then they asked the question of in
1:02:04this simulated data,
1:02:06which asset allocation gives the best
1:02:08outcomes?
1:02:09And they tested target date funds, which
1:02:12increase the weight in bonds over time,
1:02:14and those are a lot of people have those
1:02:16through their retirement accounts.
1:02:18So, it's just one fund and it starts out
1:02:20when you're younger with more equities
1:02:21and then transitions to bonds over time.
1:02:23That's a target date fund.
1:02:25They tested, I believe, a 60/40, 60%
1:02:27stock, 40% bond asset allocation.
1:02:30They might have been some other stuff in
1:02:31there, too. They might have tested only
1:02:33domestic stocks.
1:02:35And what they find in this paper is that
1:02:37the optimal portfolio from the
1:02:39perspective of retirement consumption
1:02:42utility and and and bequest utility,
1:02:45What does that mean? It's like the
1:02:47satisfaction you get from retirement
1:02:49spending. Okay. Measured in a with a
1:02:51formula so that it can be studied.
1:02:54And then likewise for the amount of
1:02:55money that you have left over at at
1:02:56death.
1:02:57They they measure the probability of
1:02:58running out of money as well as a whole
1:03:00bunch of different metrics they look at.
1:03:02And they find that a 100% equity
1:03:04portfolio
1:03:05with
1:03:07a big chunk in international stocks
1:03:09is optimal.
1:03:11It is a a 1/3 domestic, 2/3
1:03:14international stocks. When you say
1:03:15domestic, what does that mean? That's a
1:03:17great question. So, the way they set up
1:03:19domestic in the paper is that it it can
1:03:22be any country. So, the way they do the
1:03:23simulations is that for each draw, so
1:03:26they're drawing it's on average 10 years
1:03:28of returns. We're saying we're in the
1:03:30US.
1:03:31They'll draw the US returns measured in
1:03:33US dollars for a 10-year block. That's
1:03:36the domestic return.
1:03:38And then the international block is
1:03:40going to be 10 years on average of all
1:03:42the other countries samples returns
1:03:44measured in US dollar. So, I've got the
1:03:46domestic return, the international
1:03:48return. The next block might be 10 years
1:03:51from Italy
1:03:52measured in
1:03:53whatever the Italian currency was at the
1:03:56time. And then the international portion
1:03:58is going to be all the other countries
1:03:59excluding Italy measured in Italian
1:04:01currency.
1:04:03And so, they're weaving together all
1:04:04these blocks. That's called bootstrap
1:04:05simulation. So, domestic, to answer your
1:04:07question, is whatever country you live
1:04:10in. So, the outcome or the conclusion
1:04:12from this should be that you should
1:04:13invest
1:04:15I mean, if we're following this and if
1:04:16it was 100% accurate, well, 60% in
1:04:19whatever country you live in, in the
1:04:21stocks of whatever country you live in.
1:04:2230%.
1:04:22>> 30%.
1:04:23>> Domestic. So, yeah, 1/3 domestic, 2/3
1:04:25international. Okay, so if I'm in the
1:04:27United States, one So, I get 30% of my
1:04:30capital and invest it in the
1:04:33American companies. Yeah. And then 60%
1:04:36in international stocks. Yeah. Well,
1:04:3867%, yeah. Yeah. So, that
1:04:41one important finding in the paper
1:04:43talked about in the video is that the
1:04:45the curve for how optimal the domestic
1:04:49amount is is pretty flat, if I remember
1:04:51correctly, between sort of 10% and 50%.
1:04:54So, they do say in the paper that for a
1:04:55US investor, you don't necessarily have
1:04:58to be a third domestic. Even if you're
1:05:0050 or even if you're just market cap
1:05:01weighted, which is currently around 60
1:05:03or 65%, that's probably fine. But for a
1:05:06Canadian investor
1:05:07or someone who's in a country other than
1:05:09the US, 1/3 in your domestic country
1:05:11ends up being a pretty big home country
1:05:13bias.
1:05:14In these simulations, are they saying
1:05:15that you need to invest in international
1:05:17stocks because sometimes in the
1:05:18simulations, your domestic country, your
1:05:21home country, has problems?
1:05:23Yeah. High inflation tends to be bad for
1:05:26retirement consumption where you're
1:05:27spending a lot more and for domestic
1:05:29stock returns. And international stocks
1:05:31protect against that.
1:05:33So, it diversifies you a little bit.
1:05:34Yeah, well, that's exactly what it is.
1:05:36It's a diversification. And that paper
1:05:37was it was controversial. I mean, we had
1:05:39the co-author
1:05:41on our podcast twice to talk about it,
1:05:43but it it was met with a lot of
1:05:44controversy from
1:05:46everybody, from a lot of professionals,
1:05:48from other academics. Why?
1:05:51It's an extreme finding.
1:05:54The conventional wisdom that you should
1:05:55be allocating more toward bonds
1:05:56throughout the life cycle is so
1:05:58ingrained in everyone's thinking that a
1:06:01finding like this that shows that that's
1:06:03basically wrong, of course it's going to
1:06:05be met with
1:06:06controversy. But at the very least, I
1:06:08think it's an interesting paper. It's
1:06:10telling us that stocks are a little bit
1:06:11safer
1:06:12for long-term investors than we probably
1:06:13thought.
1:06:14And bonds, which are typically
1:06:16considered safe, are actually a little
1:06:18bit riskier than we may have thought for
1:06:19long-term investors. The reason being
1:06:20that during periods of high inflation,
1:06:23bonds get absolutely decimated. What's a
1:06:25bond?
1:06:26A bond is a debt instrument. So, you're
1:06:28effectively lending money to a
1:06:30government, and you're receiving
1:06:31interest payments over time, and then
1:06:33your principal back at the end. What is
1:06:35the the most important thing we haven't
1:06:37talked about that your audience come to
1:06:38you to understand? Oh. Well,
1:06:41a lot of a lot of the things I talk
1:06:43about are financial products that you
1:06:44should not invest in. Okay, tell me some
1:06:46of those. Which I always think is fun. A
1:06:48big one that I spent quite a bit of time
1:06:50on last year, I did three videos on it,
1:06:52was on on covered calls. What's that?
1:06:54So, that's where you you own a stock and
1:06:57then you sell a call option, which is
1:06:58the option to buy the stock. You're
1:07:00selling that option to somebody else,
1:07:02which gives you a
1:07:04an option premium, and so you get some
1:07:06income from having sold the call option.
1:07:08But it also means that if the stock that
1:07:09you own appreciates sufficiently, you
1:07:11are required to sell it to the person
1:07:14who bought the call option from you
1:07:16at a at a preset price.
1:07:18So, the stock is whatever, $40, and you
1:07:21sold a call at $50. The stock goes to
1:07:23$60, you have to sell it at 50. Mhm. So,
1:07:25you're giving up a big chunk of your
1:07:27upside.
1:07:28And this plays on one of the big biases
1:07:30that investors have, which is a
1:07:30preference for income. It's the mental
1:07:33accounting bias where investors separate
1:07:35capital and income.
1:07:36And so, there's a
1:07:38huge proliferation now of covered call
1:07:40products where they do that that
1:07:42strategy that I that I just described
1:07:44inside of an ETF.
1:07:45They charge usually a
1:07:47higher fee.
1:07:48And these are being marketed really
1:07:49heavily to investors on the premise that
1:07:51you're going to get appreciation,
1:07:53capital appreciation, and you're also
1:07:54going to get income.
1:07:56But I think my my view on this and what
1:07:58I tried to explain in those videos is
1:07:59that you're giving up
1:08:01so much upside that I don't think most
1:08:03investors realize that they're giving
1:08:04up, that the implied cost of these
1:08:06products is enormous. On that point of
1:08:08fees, I've got this graph here, which I
1:08:10think is pretty pertinent to what you're
1:08:11saying.
1:08:12Because when we start investing in ETFs
1:08:14and various index funds, we often don't
1:08:17think about fees.
1:08:19You'll say, "Oh, 0.5%." You think,
1:08:21"Okay, whatever. 0.5% is fine. 1% fine."
1:08:24Small numbers.
1:08:25But when you look at that graph, you see
1:08:27how that can impact your outcome over
1:08:28time.
1:08:29Yeah.
1:08:30Fees compound. Any rate of return that
1:08:32compounds over long periods of time can
1:08:34be very impactful in dollar terms.
1:08:37Yeah. And and some people choose to keep
1:08:38their money in cash.
1:08:41Um because most of us are never educated
1:08:43on the subject of inflation and what
1:08:45inflation means. So, some of us, you
1:08:47know, we might keep $10,000 under the
1:08:49bed.
1:08:50What do you say to those people?
1:08:51Yeah, so inflation is it's everywhere.
1:08:54It's it's been around for for
1:08:56throughout history, and it's probably
1:08:58not going to go away. We have central
1:09:00bank policies in most developed
1:09:02countries that actually target a low but
1:09:03stable rate of inflation.
1:09:06And there's there are reasons for that,
1:09:07but what it means is that if you have
1:09:08money sitting under your mattress, its
1:09:10purchasing power will decrease over
1:09:12time. And that can be very damaging to
1:09:14your wealth.
1:09:15You can maybe keep pace with inflation
1:09:18using short-term government debt
1:09:20instruments, which are going to pay you
1:09:21a little bit of an interest rate.
1:09:23But again, periods of high inflation can
1:09:25cause even that to to decline in real
1:09:27value. So, one of the best ways to fight
1:09:29it fight inflation for a long-term
1:09:31investors, something we've been talking
1:09:33about, is just investing in low-cost
1:09:35index funds to avoid the fee issue.
1:09:37All right, and participate in the stock
1:09:38market, which throughout history has far
1:09:40outpaced inflation.
1:09:42One of the smartest things a business
1:09:43can do is build like a bigger company
1:09:46without actually hiring like one. But,
1:09:49the problem we all face is that most
1:09:50companies don't have every skill in
1:09:52house. So, when I look at the businesses
1:09:53seeing real success today, the
1:09:55consistent pattern with all of them is
1:09:57how quickly they move. They bring in
1:09:59specialists with skills in emerging
1:10:00areas to keep themselves ahead. Even in
1:10:02our company, we spent the last year
1:10:04pulling in talent across areas like AI
1:10:06native strategy, no-code builds, and
1:10:08product workflows. And we find this
1:10:10talent through our long-term partner
1:10:11Fiverr Pro. Their premium service only
1:10:14shows you vetted talent, so you've
1:10:15always got the safeguard that anyone you
1:10:18pull in to help you with a complex
1:10:20project has the skills that you're after
1:10:22and will deliver to the same high
1:10:24standards as your internal team. And
1:10:26most importantly, they'll keep up with
1:10:27the pace. It's a simple strategy, but it
1:10:29lets us stay agile without compromising
1:10:30on quality. So, if you need these kind
1:10:32of skills in your business, head to
1:10:33pro.fiverr.com to find pioneering talent
1:10:36to fill your business's gaps. That's
1:10:38pro.fiverr.com.
1:10:40This is something that I've made for
1:10:42you. I realized that the Diary of a CEO
1:10:44audience are strivers, whether it's in
1:10:45business or health, we all have big
1:10:47goals that we want to accomplish. And
1:10:49one of the things I've learned is that
1:10:51when you aim at the big big big goal, it
1:10:54can feel incredibly
1:10:55psychologically uncomfortable because
1:10:57it's kind of like being stood at the
1:10:59foot of Mount Everest and looking
1:11:00upwards. The way to accomplish your
1:11:02goals is by breaking them down into tiny
1:11:05small steps, and we call this in our
1:11:07team the 1%. And actually, this
1:11:08philosophy is highly responsible for
1:11:11much of our success here. So, what we've
1:11:13done is that you at home can accomplish
1:11:15any big goal that you have is we've made
1:11:17these 1% diaries, and we released these
1:11:20last year, and they all sold out. So, I
1:11:23asked my team over and over again to
1:11:24bring the diaries back, but also to
1:11:25introduce some new colors and to make
1:11:27some minor tweaks to the diary. So, now
1:11:29we have a better range for you. So, if
1:11:33you have a big goal in mind and you need
1:11:35a framework and a process and some
1:11:37motivation, then I highly recommend you
1:11:39get one of these diaries before they all
1:11:41sell out once again. And you can get
1:11:43yours at the diary.com.
1:11:46And if you want the link, the link is in
1:11:47the description below.
1:11:49Is this broadly accurate? This graph
1:11:51here shows the impact of inflation on
1:11:53cash kept under the mattress over 30
1:11:55over 20 years, and you start with
1:11:57$10,000
1:11:59in terms of purchasing power, and 20
1:12:00years later, if that cash is under the
1:12:01mattress, you have $5,336.
1:12:05It doesn't show me the inflation rate.
1:12:07Oh, and that's at 3% inflation.
1:12:10You're losing half of your money
1:12:12effectively.
1:12:13And the source here is St. James's
1:12:15Place.
1:12:17So, a lot of people who are just holding
1:12:18on to cash don't really realize that
1:12:20over a 20-year period, assuming a 3%
1:12:21inflation rate, they're halving their
1:12:22money. Uh it ties back to I don't
1:12:24remember which number it was, but it
1:12:25ties back to one of those biggest
1:12:26mistakes in in personal finance we
1:12:28talked about, which is
1:12:30uh yeah, not not investing, not taking
1:12:32the right kinds of risk with your
1:12:33investments.
1:12:34And just holding cash. Holding cash is
1:12:36is it's in its own way taking a type of
1:12:39risk.
1:12:40You you you don't have an expected
1:12:42return when you hold cash. You you in
1:12:44real terms have a negative expected
1:12:45return.
1:12:46Do you think we should all be thinking
1:12:47about retirement planning?
1:12:50I think it ties into the PERMA thinking
1:12:53and designing the life that you want to
1:12:54live, but at some point it it I mean, at
1:12:57some point we can't work anymore. It's
1:12:59rare for somebody to be able to work
1:13:00into their, you know, I don't know, 80s.
1:13:02I think that it's it's sensible to plan
1:13:05for for that. But, beyond that, a lot of
1:13:08people don't want to have to work
1:13:09forever. People might choose to work
1:13:12forever, but they might choose to do
1:13:13lower-paying work.
1:13:15Uh but the idea that you will be forced
1:13:16to work forever, I don't think is very
1:13:17attractive to anyone. So, from that
1:13:19perspective, building financial
1:13:20independence by saving and planning for
1:13:22retirement, yeah, I think it's important
1:13:23for everyone everyone to think about. Is
1:13:25there is the sort of social contract of
1:13:27retirement changing based on how the
1:13:29economy is changing? Cuz I hear a lot of
1:13:30people saying you're not going to be
1:13:31able to retire and get a pension because
1:13:33there's not enough money or you're going
1:13:35to have to work later than ever before.
1:13:37I think the onus has been put back on
1:13:39individuals.
1:13:41The pensions used to be much more common
1:13:43uh from companies and and governments.
1:13:46So,
1:13:47retirement's changed from that
1:13:48perspective, for sure. But, I I I don't
1:13:50know if we can say we're in a crisis. I
1:13:52think people have more personal
1:13:53responsibility now than they've had in
1:13:54the past, but they also have better
1:13:56tools than have historically been
1:13:58available. 30 years ago, we we were just
1:14:00starting to get low-cost index funds
1:14:02proliferating and being readily
1:14:03available to everybody. Prior to that,
1:14:05you were paying 2% or more to invest in
1:14:07a mutual fund. Mhm. So, the tools people
1:14:09have available to them are are better
1:14:11today than than they've been in the
1:14:12past,
1:14:13but it's also there's also a lot more
1:14:16responsibility people have to take for
1:14:18their own personal finances. You would
1:14:20you're naming the things that people
1:14:21shouldn't invest in.
1:14:23The first is that cool
1:14:25thing. Yeah, covered calls. Covered
1:14:27calls. What else? Another one that I
1:14:29think is really problematic is thematic
1:14:31ETFs.
1:14:32And so, that's like an AI ETF or I don't
1:14:35know, a space or energy, like any any
1:14:38specific
1:14:39uh ETF that's targeting a specific
1:14:41theme. Why?
1:14:43What tends to happen with thematic ETFs
1:14:44is that something becomes really hot.
1:14:47So, maybe it's AI, maybe it's cannabis,
1:14:49uh electric vehicles was another one.
1:14:51Sustainable energy. Yeah, asset prices
1:14:53in that theme go up because there's a
1:14:56lot of interest in it. Everybody wants
1:14:57to invest in that space.
1:15:01Asset prices go up, an index provider
1:15:04creates an index for that hot thing.
1:15:08And then an ETF gets launched, but it
1:15:09gets launched when the asset prices are
1:15:12up here. Mhm. And what tends to happen
1:15:14is the asset prices come down,
1:15:17then the returns on thematic funds tend
1:15:19to be very poor. Ah, okay.
1:15:21Yeah, I think I was guilty of that in my
1:15:22early career. It was like, "Oh my god,
1:15:24sustainable energy ETF. I believe in
1:15:25sustainable energy. I should invest in
1:15:27that."
1:15:27>> Yeah. But, you're right. They created
1:15:29that when it was hot. So, you should
1:15:31have invested, I guess you're saying,
1:15:33just invest in the FTSE 100, the S&P 500
1:15:35instead. Or technology, which is a
1:15:39broader basket.
1:15:40Technology's tough. Technology has
1:15:41performed so incredibly well,
1:15:44but it is still one sector. Okay. I have
1:15:47trouble saying you should invest in
1:15:48tech. If you had invested in tech for
1:15:50the last 20 years,
1:15:52well done.
1:15:53Should you choose to invest only in tech
1:15:55or have a big concentration in tech
1:15:56today? I think that's a lot less
1:15:58obvious.
1:15:59One would say, "Well, look at all this
1:16:00AI stuff. There's How do I invest in all
1:16:02the AI stuff?"
1:16:03A lot of it's private right now,
1:16:04although a lot of the public companies
1:16:05do own chunks of of some of these
1:16:07private companies.
1:16:08Uh we'll see how that plays out.
1:16:10But, that's another one that's been
1:16:11tough recently where a lot of investors
1:16:13are interested in investing in in in in
1:16:15investing in some of these private
1:16:16companies. Uh a lot of them AI-related,
1:16:18but SpaceX is another one.
1:16:20It's really hard for retail investors to
1:16:21get access to those types of things.
1:16:23But, there are companies who are
1:16:25creating products that say that they can
1:16:27give you access to these to these
1:16:29things. They're charging high fees. Uh
1:16:32it's not obvious that they've been able
1:16:34to buy the underlying securities that
1:16:36they're saying they have access to at
1:16:37good prices.
1:16:39But, it's just another example of
1:16:40financial companies
1:16:42preying on the the desires and biases of
1:16:45investors.
1:16:47Financial firms are very good at seeing
1:16:49what investors want, even if that thing
1:16:51is not good for them, and then creating
1:16:53a product to fulfill that desire.
1:16:57So, if if someone listening now is
1:17:00let's say they're 50 years old and
1:17:01they've got
1:17:03$20,000
1:17:05in savings in cash,
1:17:08and you had to be decisive. You don't
1:17:10know the nuance and the the detail of
1:17:11their life. You don't know their PERMA
1:17:13framework necessarily.
1:17:14But, your job was just to make the money
1:17:16in the next 10 years.
1:17:18What How do you think you'd allocate
1:17:19that? Let's say $10,000, it's easier.
1:17:21$10,000 in cash. How would you allocate
1:17:22it? That's a
1:17:24That's a tough question. I don't know if
1:17:25it's answerable. Uh especially over 10
1:17:27years, it's tough.
1:17:28What about 20 years?
1:17:31>> [laughter]
1:17:32>> If they have a long time horizon, so I I
1:17:34can tell you personally,
1:17:36I I like to invest in stocks.
1:17:38I I have a a globally diversified stock
1:17:41portfolio with a Canadian home country
1:17:42bias, kind of like what that that paper
1:17:44the controversial paper found.
1:17:46Uh we were doing that prior to that
1:17:49paper coming out.
1:17:50Uh but, I think that general concept of
1:17:52a globally diversified portfolio, maybe
1:17:54with some home country bias,
1:17:56makes a lot of sense for most people,
1:17:58including for retirees. But, there are
1:18:00so many like, what's what's his risk
1:18:02tolerance? If he's going to panic when
1:18:04the market goes down and sell
1:18:05everything, then it wasn't a very good
1:18:07idea, and he's not going to get the
1:18:08outcome but the good long-term outcome
1:18:10they may have otherwise gotten. And
1:18:11would you go all in on stocks? All at
1:18:14once?
1:18:15Yeah. Like dollar-cost averaging versus
1:18:17lump sum? Yeah, like how would you
1:18:18invest would you go 100% in stocks or
1:18:20would you even diversify that? Yeah,
1:18:22that's what I'm saying. I I think 100%
1:18:24stocks is personally
1:18:27a portfolio that I'm very comfortable
1:18:29with. And I
1:18:31I'm not I'm not old enough to be
1:18:32thinking about retirement, but it's a
1:18:33portfolio that I don't expect to change
1:18:35throughout my personal life cycle. Is
1:18:38that how you allocate your personal
1:18:39finances now? You I know you have a
1:18:41home, but otherwise, the money you do
1:18:43invest is in the stock market. Yeah, so
1:18:45I've got my home, I have my stock market
1:18:47investments, and I do have a pretty
1:18:49significant chunk of equity in the
1:18:50company that I work for.
1:18:51Yeah.
1:18:54No crypto. No crypto. Any crypto? I
1:18:56never touched it. Never touched it.
1:18:58>> That's not true. I I when I was
1:19:00researching uh Ethereum and Bitcoin,
1:19:03I remember when that was, it was a few
1:19:04years ago, I bought $1,000 of each just
1:19:07so I could feel like I was
1:19:09participating [clears throat] while I
1:19:09was learning about it.
1:19:11What do you think of Bitcoin and
1:19:12Ethereum and other cryptocurrencies?
1:19:15Uh I I think that they they solved a
1:19:17really interesting problem.
1:19:19The that premise of digital cash is
1:19:22something that the Cypherpunk community,
1:19:24the kind of libertarian community of of
1:19:26uh
1:19:27privacy-focused computer nerds, where
1:19:29they were trying to solve this problem
1:19:30for for many many years of digital cash.
1:19:33How do you create digital cash that
1:19:35doesn't require a trusted third party
1:19:37to mediate transactions? And they they
1:19:39solved that. Satoshi Nakamoto solved
1:19:41that in uh
1:19:43And that that was cool.
1:19:44And he used a bunch of different pieces,
1:19:45like you can kind of see in the paper
1:19:46how he used Adam Back's Adam Back's
1:19:48ideas that he had created to stop email
1:19:51spam. And it's just how it all came
1:19:52together. It's unbelievable, fascinating
1:19:53story. The technology was really
1:19:54interesting.
1:19:55I think it has become uh an ideological
1:20:00vehicle, where people who believe that
1:20:03the world should be a certain way
1:20:05or believe that government's role in
1:20:07money should be a certain way,
1:20:09they can invest in Bitcoin and feel
1:20:10really good about it.
1:20:12I think it's it's got that component to
1:20:13it. And then the other component that it
1:20:14has to it
1:20:16is that it's a speculative asset.
1:20:18People will buy Bitcoin because they
1:20:20think it's going to go up.
1:20:23So, it's not a good investment. Is that
1:20:24what you're saying? I I I personally
1:20:26wouldn't.
1:20:27We don't allocate to it for our clients
1:20:30at PWL.
1:20:31We manage
1:20:32quite a bit of money for quite a lot of
1:20:34people, and we've decided not to touch
1:20:36it. And I personally don't touch it, so.
1:20:39I had a phone call actually from a
1:20:40friend of mine. She she's very well
1:20:42known in the UK.
1:20:44And she was um cuz there's lots of wars
1:20:46going on everywhere, and there's the
1:20:47Strait of Hormuz is closed, and there's
1:20:49Russia-Ukraine, and there's all of this
1:20:50stuff going on. She was she was asking
1:20:52me for financial advice on what she
1:20:54should do in such a moment. I don't know
1:20:55why she's calling me.
1:20:58I just thought I'll ask you when you
1:20:59come here. But it But it's interesting
1:21:00cuz my my team found this article from
1:21:021847,
1:21:04which was in a magazine,
1:21:06and it almost sounds like today.
1:21:08The article says this,
1:21:10"Things are bad all over. It is a gloomy
1:21:12moment in history. Not in the lifetime
1:21:14of any man who reads this paper has
1:21:15there ever been so much grave and deep
1:21:18apprehension. Never has the future
1:21:20seemed so dark and incalculable.
1:21:23In France, the political cauldron
1:21:25seethes and bubbles with uncertainty.
1:21:28England and the English Empire is being
1:21:30sorely tried and exhausted in a social
1:21:32and economic struggle. The United States
1:21:35is behest with racial, industrial, and
1:21:38commercial chaos drifting, we know not
1:21:40where. Russia hangs like a storm cloud
1:21:43on the horizon of Europe, dark and
1:21:45silent. It is a solemn moment, and no
1:21:48man can feel indifference.
1:21:50Of our own troubles, no man can see the
1:21:53end." An apt description of things, very
1:21:55apt. And that was on October the 10th,
1:21:581847.
1:21:59A magazine. Now, that very much sounds
1:22:01like today. It could be today, yeah.
1:22:04So, as we zoom out on the cycles, the
1:22:06big sort of economic cycles, the
1:22:07geopolitical cycles,
1:22:09my friend that called me and said,
1:22:10"Listen, there's lots of stuff going on
1:22:11in the world. Should I be thinking about
1:22:12my money differently, my investing
1:22:13strategy? What the hell's going on?"
1:22:15What would you say to those people?
1:22:17Yeah. Well, I I
1:22:19as the clip that you read suggests or or
1:22:22tells us, the world has been through a
1:22:25lot of crazy stuff, a lot of crazy
1:22:27times, a lot of wars, a lot of turmoil,
1:22:28a lot of polit- political upheavals.
1:22:32And we've come out okay, in general.
1:22:34It's there there's been pain and
1:22:35suffering, and and not everybody's had
1:22:37good outcomes, but generally speaking,
1:22:40here we are.
1:22:41And if we think about that that from the
1:22:42perspective of financial markets,
1:22:44stock returns have been positive despite
1:22:47all the craziness going on in the world.
1:22:49There's There's lots of interesting
1:22:50charts that overlay
1:22:51news headlines about all the madness
1:22:53going on in the world on top of the
1:22:55stock chart that's just going up.
1:22:57Doesn't mean the stocks are always going
1:22:58to be up. They will go down when when
1:23:00things get crazy, like when when this
1:23:02war started, stock returns did get a
1:23:04little bit negative for a while. They've
1:23:06since come back, but there will be
1:23:07volatility in financial markets,
1:23:09volatility up and down day to day. But
1:23:12in the long run, stock returns
1:23:14they they should continue to be expected
1:23:16to be
1:23:17positive. So, for your friend, I
1:23:21I don't know how the assets are set up,
1:23:23um but someone who's globally
1:23:24diversified, exposed to the stock
1:23:26market,
1:23:27they don't have to make changes to their
1:23:28portfolios when the world's getting
1:23:30crazy. I remember what she said to me.
1:23:32She said that she was going to
1:23:34remortgage her house
1:23:36because I think she'd paid it down, and
1:23:38she was wondering what to do with that
1:23:40money.
1:23:41She was saying, "Do I just go buy
1:23:42another house, or do I invest it in the
1:23:44stock market?"
1:23:46Now, my my bias is the stock market, but
1:23:48I don't know what you What would you say
1:23:49to someone I'd want to know why she's
1:23:51mortgaging her house, but
1:23:53given there's a good reason for that, I
1:23:55would I would probably go in the stock
1:23:56market, not into real estate. Do you
1:23:58think people shouldn't remortgage their
1:23:59houses?
1:24:01It's a tough question. Leverage, kind of
1:24:04like how exposure to the stock market is
1:24:05good, borrowing money to invest in
1:24:07positive expected return assets like
1:24:09like the stock market,
1:24:11is actually kind of a good thing on
1:24:12paper.
1:24:13Borrowing money generally improves
1:24:15long-term expected outcomes.
1:24:17But it's stressful. You can You can have
1:24:20bad outcomes where you lose all of your
1:24:23money. So,
1:24:25should people borrow money to invest?
1:24:26Should people mortgage their house to
1:24:28invest? That's That's a very personal
1:24:30question. It's kind of like the
1:24:30stock-bond question. Should you invest
1:24:32in stocks or bonds? Should you invest in
1:24:34stocks with leverage
1:24:35or not? It really depends on your goals
1:24:37and your situation.
1:24:39Uh but generally speaking, if we just
1:24:41look at what what what do the data say
1:24:42about borrowing money to invest?
1:24:44It's not It's not a terrible idea.
1:24:46One of the things we haven't talked
1:24:47about is AI.
1:24:50And does AI change any of this equation?
1:24:52A lot of people are worried at the
1:24:53moment about losing their jobs.
1:24:54Anthropic released a report, who are one
1:24:56of the big AI companies, saying that
1:24:58entry-level people in particular are
1:25:00going to have a hard time. And I think
1:25:01they said they're already seeing 13% of
1:25:04entry-level jobs being disrupted because
1:25:06of these new AI and AI agents.
1:25:09I'm to be clear, not a labor economist.
1:25:12Um it's not my area of expertise.
1:25:14I do think though that we look back
1:25:16through history. I like looking at the
1:25:18history. There have been lots of
1:25:20technological revolutions that have been
1:25:23major major upheavals to the
1:25:26entire economy.
1:25:28Yes. So, ATMs. The ATMs are one of those
1:25:30fascinating examples.
1:25:32People thought that ATMs were going to
1:25:34wipe out bank tellers
1:25:37because ATMs could do everything the
1:25:38bank tellers do, but it was automated,
1:25:40and you didn't have to pay a person to
1:25:41do it. So, there was a lot of concern.
1:25:44And what what ended up happening was
1:25:47very counterintuitive.
1:25:49It's that the cost of operating a bank
1:25:51branch
1:25:52decreased because you needed fewer
1:25:55people to do all the bank teller stuff
1:25:56cuz you had the ATMs.
1:25:58And banks opened more branches
1:26:00because it cost less, and their
1:26:02customers liked that. And the end result
1:26:05was that there were actually more
1:26:07bank teller jobs
1:26:09at the end of the day.
1:26:10The cost of providing the service
1:26:12decreased, which caused it to
1:26:13proliferate more, provide that service
1:26:15to more
1:26:16people, and it expanded the market
1:26:18instead of
1:26:20shrinking it.
1:26:21Similar story with the Jevons paradox
1:26:22and um It's the same concept.
1:26:25What's that story? Where coal became
1:26:27cheaper at a time when they used coal to
1:26:29ship freight on trains, and the coal
1:26:33engine got more efficient with coal,
1:26:35coal industry panics,
1:26:36"We're screwed." But then what it meant
1:26:38is people used trains not just for
1:26:41shipping freight, but also for other
1:26:42things like travel. And people started
1:26:44traveling on trains because it got
1:26:45cheaper. So, the coal industry actually
1:26:47boomed in the end. That's it. I have
1:26:50thought a lot about this Jevons paradox
1:26:51idea. And I think it's I think it's
1:26:53going to be true for artificial
1:26:54intelligence, for sure. I there will be
1:26:56lots of other jobs created. And actually
1:26:58companies like mine, if we save money,
1:26:59we invest it in something else,
1:27:01which then would would probably create
1:27:03jobs, whatever that is. The part that I
1:27:05sometimes struggle with is the speed
1:27:08of adoption in AI. And then also, when
1:27:11you factor in robotics,
1:27:12like my car in in LA drives itself. And
1:27:15I think one of the biggest employers on
1:27:16Earth is driving in all its forms. But
1:27:19then if you look at where housing and
1:27:20supply chains, a lot of those are run by
1:27:22people all over the world. And there was
1:27:23a video that I played the other day. We
1:27:25can throw it up on the screen, which
1:27:26shows that in factories in certain parts
1:27:28of the world now, they're having their
1:27:30labor force wear cameras on their head
1:27:32showing what they're doing with their
1:27:33hands because they're robots are
1:27:35ultimately going to replace that labor
1:27:38force. And I just I I haven't I guess
1:27:40this is maybe something that happens in
1:27:42history. I haven't been able to think
1:27:43about where those people go, and what
1:27:45they then can go on to do,
1:27:48especially if it happens in short order.
1:27:50Yeah, so I I've heard you I've heard you
1:27:51ponder this in your other episodes, and
1:27:53I I I agree that the speed of this is
1:27:55likely to be different. As you've said,
1:27:57it's we're we're talking about the
1:27:59internet, so you can deploy these things
1:28:00at the snap of a finger. And that is
1:28:02different. But where do those people go?
1:28:04This is one of the interesting things. I
1:28:06don't know. We We don't know.
1:28:08And through history, we didn't know.
1:28:10Exactly. Through history, it's been the
1:28:11same sentiment, where people worry
1:28:13about, "Where are these people going to
1:28:14go?" And they might be unemployed for a
1:28:16while, and there might be hard times,
1:28:17but things have worked out.
1:28:20And so, two ways to think about it. One
1:28:21way is as a as an individual, what
1:28:23should you be doing? We talked about it
1:28:24earlier,
1:28:25uh having complementary skills that make
1:28:27you very unique, I think is important.
1:28:30Personally, content, as you mentioned,
1:28:31has been a big part of that for for me.
1:28:33Not everybody can necessarily do that,
1:28:35but finding those things that you can do
1:28:37when combined better than anybody else
1:28:39in the world, I think is very valuable.
1:28:42And then the other perspective is as an
1:28:43investor, how should we think about
1:28:45this? And there I would come back to
1:28:46again, we have seen many technological
1:28:50revolutions that have changed the world.
1:28:53They've changed financial markets,
1:28:54they've changed our culture, they've
1:28:56changed the way we interact with each
1:28:57other. The world has changed so many
1:28:59times due to technology,
1:29:00and the same cycle has repeated itself.
1:29:03Uh there there has been unemployment,
1:29:05there has been social unrest, there has
1:29:07been wealth inequality, but this happens
1:29:10every time. Are you expecting the stock
1:29:13market to collapse because there's been
1:29:15a huge overinvestment in artificial
1:29:17intelligence, and at some point the
1:29:18investors that put their money into
1:29:19these
1:29:21sort of speculative
1:29:22AI startups that raised tremendous
1:29:25amounts of capital at crazy valuations.
1:29:28At some point through history, doesn't
1:29:29the market always contract at some
1:29:30point? There's a great book by an
1:29:32economist named Carlota Perez. The book
1:29:35is Technological Revolutions and
1:29:37Financial Capital.
1:29:38And she documents this exact cycle
1:29:40throughout history and yes, that's part
1:29:42of it. Part of it is asset prices
1:29:44getting really high
1:29:46and then coming back down. Now, am I
1:29:48worried about a catastrophic market
1:29:49collapse?
1:29:51I think that's always a concern. I think
1:29:53that's part of the risk of investing in
1:29:54stocks. We never know when it's going to
1:29:56happen or what the trigger is going to
1:29:57be. So, it's not something that you can
1:29:59do anything about. You need to have an
1:30:01asset allocation that you can stick with
1:30:03even if that outcome is going to
1:30:05materialize.
1:30:06And in that book is
1:30:08does it suggest that the writing is on
1:30:09the wall for the current economy and the
1:30:12way that we're heavily investing in AI
1:30:14and data centers and you know, a couple
1:30:16of years ago everyone was investing in
1:30:17crypto
1:30:18and web 3
1:30:20and NFTs and all this stuff and all of
1:30:21the money seems to have been sucked out
1:30:23of that industry. Really honestly,
1:30:25sucked out of almost every industry and
1:30:27into AI.
1:30:29Um and you know
1:30:30>> I remember when DeFi was going to kill
1:30:32banking and finance.
1:30:33>> [laughter]
1:30:34>> And that was only a couple of years ago.
1:30:35In fact, a lot of the developers have
1:30:37moved from that industry into the AI
1:30:38industry. But I But I think I do think
1:30:40about this a lot and I've got a few
1:30:41startup friends who are getting a little
1:30:44bit nervous and are raising a lot of
1:30:46money now because they think that in the
1:30:48next couple of years, maybe in the next
1:30:4924 months, there's going to be a big
1:30:50market contraction when investors who
1:30:52invested in
1:30:54some startup idea that had a $100
1:30:55million valuation realize that they're
1:30:57losing their money and some domino
1:30:59usually falls in the market. Some
1:31:01catalyst moment means that there's a
1:31:02contraction. Stock markets go down. It
1:31:05gets really hard to raise money. Clients
1:31:07who you might be relying on now to pay
1:31:09your advertising budget start to lower
1:31:11their budgets.
1:31:13And in such a scenario, you're going to
1:31:14want to wish you'd prepared a little
1:31:16bit. Some people are. This is part of
1:31:18the cycle. The cost of capital for
1:31:21bubble companies, we'll call them. I
1:31:22don't love the term bubble, but for
1:31:23companies who are in the industry that
1:31:25becomes the focus of a technological
1:31:28revolutions and now we're talking about
1:31:30AI. The cost of capital gets really low,
1:31:32which means asset prices get really high
1:31:33and a lot of people want to invest in
1:31:35that space. But those asset prices are
1:31:37not typically sustainable
1:31:39and they do tend to come down.
1:31:41Does that mean a total market collapse
1:31:42or catastrophe or or panic for
1:31:45diversified investors? No. Oh, is the
1:31:47writing on the wall?
1:31:49I don't think we can say that. If the
1:31:50writing were on the wall, the way that I
1:31:51view financial markets is that if the
1:31:53writing were on the wall prices would
1:31:55reflect that today. Okay. If we thought
1:31:58market prices were going to drop in the
1:31:59future, they would drop today. So,
1:32:02so it happens at a time when no one is
1:32:04expecting it.
1:32:05>> That's exactly right.
1:32:06So, the writing is never on the wall.
1:32:08That's right. Some some new piece of
1:32:10information, something changes
1:32:12and that's what causes prices to come
1:32:14down. My brother said something to me.
1:32:16He's a very smart person. He's worked in
1:32:17sort of investing for the last 15 years.
1:32:19He said something to me early in my
1:32:20career. He said, "Stephen, when you go
1:32:23to invest in something, assume that the
1:32:27price you're paying for that investment,
1:32:28so say I'm investing in Facebook stock
1:32:30at $10
1:32:32is the total accumulation of everything
1:32:36everybody on the planet knows about that
1:32:37company and they've priced in everything
1:32:40the world knows about that company
1:32:41today." And he was like, "So, even if
1:32:43you think it's going to go up, that's
1:32:45also by the way priced into today's
1:32:46price. So, you better
1:32:49know something that no one else knows
1:32:52when you're thinking about buying an
1:32:53investment. I've totally butchered what
1:32:55he said. No, you You didn't You didn't.
1:32:58He is describing the concept of an
1:32:59efficient market.
1:33:01An efficient market is a market where
1:33:02prices always and this is a sort of a
1:33:04theoretical concept. It's not actually
1:33:07true. But in theory, an efficient
1:33:09market, a perfectly efficient market is
1:33:10a market where prices always fully
1:33:12reflect all available information
1:33:14including your thoughts about what the
1:33:15price Yeah. might do. Really, if you
1:33:17trade on those thoughts. So, what are
1:33:19you investing in then if it's if
1:33:21the future's already priced in and all
1:33:23the information about the company's
1:33:24already priced in, what are you
1:33:24investing in? You're investing in
1:33:26discounted future cash flows.
1:33:29Companies produce cash flows. Mhm. They
1:33:31earn They earn profits. When you invest
1:33:33in a company, you're buying those
1:33:35expected future profits at a discount.
1:33:37That That's called the discount rate.
1:33:39This is getting pretty nerdy again, but
1:33:40that's that's how it works in finance.
1:33:41What is the What is the value of a
1:33:42stock? It's its discounted future cash
1:33:44flows. Riskier stocks will tend to have
1:33:46higher discount rates. So, you buy this
1:33:48asset and now you've got this discounted
1:33:51bundle of cash flows, which you then
1:33:52hold and you receive the discount rate
1:33:54as a rate of return as you continue to
1:33:55hold
1:33:56the asset. So, a lot of people will
1:33:57invest in Tesla. They'll go, "Listen, I
1:33:59I've got a Tesla. It's amazing. I'm
1:34:00going to buy some stock."
1:34:02What is the fault in my thinking there?
1:34:05In buying Tesla stock? Because I I've
1:34:07got a Tesla. I think it's a great car
1:34:09and I think they'll do well in the
1:34:10future. So, I buy the stock. But they
1:34:12It's what we just talked about. That
1:34:13information is already included in the
1:34:15price. Every Everybody knows that it's a
1:34:17pretty good company making pretty good
1:34:18cars that are selling really well. And
1:34:20that's why it costs $10 today. Right.
1:34:22Whatever it costs today.
1:34:23>> Whatever the price is, yeah. If you look
1:34:25at
1:34:26the data on professional money managers
1:34:29who are trying to beat the market
1:34:31most of them don't.
1:34:32And the ones that do, this is a crazy
1:34:34part, the managers who do beat the
1:34:35market over a period of time
1:34:38don't tend to go on to beat the market
1:34:40in the future.
1:34:42And these are professional investors who
1:34:43are, you know, and then you can look at
1:34:44these before or after fees. The data are
1:34:46actually pretty similar. It's worse
1:34:48after fees, but the distribution is is
1:34:51pretty similar. So, what's the point in
1:34:52a money manager? Well, ones that are
1:34:54trying to beat the market by picking
1:34:55stocks and timing the market, I don't
1:34:57think that there is one.
1:35:00That's why I talk about just just buy
1:35:02index funds. Buy buy the market. Let
1:35:04Give Take the market's return. Accept
1:35:06the market's return, which has been very
1:35:07good. And then don't do anything. Don't
1:35:09check the thing. Don't check it.
1:35:11Don't Don't open the app. Lose the
1:35:12password. I said this about my my
1:35:13fiance. I said she's really good at
1:35:14investing because she always forgets the
1:35:15password. And then we 4 years later
1:35:17we'll be like, "What, babe, you should
1:35:19check your investment." And she goes, "I
1:35:20don't know the password." I go,
1:35:21"Fucking." And then we have to do the
1:35:23whole password reset thing every
1:35:24>> [laughter]
1:35:25>> And then we open it we go, "Oh, okay,
1:35:26babe, you're rich."
1:35:28It's probably good.
1:35:28>> And she goes, "Oh, amazing." And then
1:35:29she forgets the password again. And then
1:35:314 years later we take a look at again at
1:35:32her investments. I like to say you you
1:35:34want to focus on the things that you can
1:35:36control.
1:35:37Mhm. You can't control markets. You
1:35:39can't control your performance relative
1:35:41to the market. And tr- trying to
1:35:43outperform tends to make you worse off
1:35:45rather than better. But the things that
1:35:46you can control
1:35:47are a lot of the things we talked about.
1:35:48Having having an an appropriate
1:35:50financial plan, having having the right
1:35:51goals set, having an asset allocation
1:35:53that makes sense for you even if markets
1:35:55do decline.
1:35:56Having emergency savings, tax planning.
1:35:58Those are things that you can control.
1:36:00That's what people should focus on. Do
1:36:01you think women are better investors
1:36:02than men?
1:36:03I'm not super good on these data, but I
1:36:05believe what the data say are that women
1:36:08tend to be a little bit more
1:36:08risk-averse.
1:36:10Uh but they tend to be a little bit less
1:36:13overconfident.
1:36:15Which I assume gets better results, no?
1:36:16Yeah. I I think women are probably
1:36:18better investors. I'm just going to give
1:36:19I'm going to give the simple answer
1:36:20right there.
1:36:21I've just got some numbers here.
1:36:22Fidelity said that across 5.2 million
1:36:26accounts, women beat men with their
1:36:29investments. Warwick Business School,
1:36:31women outperformed men by 1.8%
1:36:33percent per year over a 3-year period.
1:36:36UC Berkeley, men traded 45% more often
1:36:40than women leading to annual returns
1:36:43that were 1.4% lower than women's. And
1:36:46Revolut, which is a big bank founded out
1:36:48in the UK
1:36:49is says that women's investments in the
1:36:51UK outperformed men's by 4%
1:36:55over men.
1:36:56I believe it. Give your money to your
1:36:57wife.
1:36:59One of those data points specified, but
1:37:01I would assume that a lot of that is
1:37:03related to overtrading. Yeah. Men tend
1:37:05to be overconfident. They tend to trade
1:37:07more. They try to pick stocks. They
1:37:08think Tesla stock's going to go up
1:37:10because they like the car.
1:37:12And we're told that the biggest gambling
1:37:13addicts in the world are men as well.
1:37:15So, it's kind of correlates. For sure it
1:37:16is, yeah.
1:37:17Ben, we have a closing tradition on this
1:37:19podcast where the last guest leaves a
1:37:20question for the next not knowing who
1:37:21they're leaving it for.
1:37:22In the diary of the CEO. And the
1:37:24question
1:37:25that has been left for you
1:37:27is
1:37:28what experiment can you propose
1:37:31whose outcome could completely
1:37:33contradict your current beliefs?
1:37:37Oh, man.
1:37:39>> [sighs]
1:37:40>> Uh
1:37:42an experiment that I could run.
1:37:45If I take my current beliefs as one of
1:37:47the big things that we talked about is
1:37:48markets being efficient and it being
1:37:50quite hard to outperform
1:37:52the market.
1:37:53Uh I mean, the best the best experiment
1:37:55that we can run is is trying to beat it.
1:37:58People have done that. But it's being
1:37:59run all the time. Isn't there a story in
1:38:01the Psychology of Money by Morgan Housel
1:38:04where like was it Warren Buffett bet
1:38:06someone? Yeah, Warren Buffett bet Ted
1:38:08Ted Seides, who we've actually had on
1:38:10our podcast.
1:38:12He bet him that
1:38:13his
1:38:15index fund portfolio, which I believe
1:38:16was just the S&P 500, could outperform
1:38:18any hedge fund portfolio that Ted
1:38:21picked.
1:38:22And they had a specific timeline. It was
1:38:2410 years, wasn't it? Something. Yeah.
1:38:26And then they were going to donate the
1:38:28an amount of money at the end of the
1:38:30period.
1:38:31And Ted lost the bet.
1:38:33Warren Warren won. But that that was one
1:38:35of those instances where the world kind
1:38:38of got to see, hey, this this index fund
1:38:40thing Buffett has been a big advocate
1:38:42for index funds.
1:38:43But that was a big example where
1:38:45I think a lot of people were exposed to
1:38:47that idea.
1:38:48Where do people find you? You know, I've
1:38:50got your YouTube channel here, Ben
1:38:52Felix, which I'll I'll link below for
1:38:53anyone that wants to continue to follow
1:38:56you on YouTube. Is there anywhere any
1:38:58any other resources that we should
1:38:59direct people to? Yeah, another place
1:39:01where I post actually a little bit more
1:39:03frequently with longer form stuff is the
1:39:05Rational Reminder podcast.
1:39:07People can check me out there. And then
1:39:09I do have some interesting tools for the
1:39:11rent versus buy calculation. We have a
1:39:13goal-setting app. I don't think it's up
1:39:15yet, though. And we've got some other
1:39:16really interesting tools on
1:39:18the PWL Capital website. PWLcapital.com.
1:39:22I'll link all of that below for anyone
1:39:23that's interested.
1:39:24And the Rational Reminder Podcast,
1:39:26rationalreminder.ca/podcast.
1:39:29And your YouTube channel will be linked
1:39:31below, as well.
1:39:32Awesome. Thank you so much, Ben. Thank
1:39:33you for doing what you do, because um
1:39:35finance is such an important part of our
1:39:37life, and I think a huge percentage of
1:39:38the population, for whatever reason,
1:39:40choose to avoid the subject altogether,
1:39:41cuz it causes a little bit of anxiety.
1:39:43But also, we just don't get taught about
1:39:45finance in school, which I think is a
1:39:46great shame. And in in my case, you
1:39:48know, it wasn't until I destroyed my
1:39:49credit rating, my credit score, um that
1:39:51I started to figure out what finance
1:39:53was. And by then,
1:39:54kind of like brushing your teeth, I'd
1:39:55done a lot of damage. And so, since
1:39:57then, from doing this podcast, and being
1:39:58the smart people like you that are good
1:39:59at demystifying complex things, and but
1:40:02also, in your case, that use academic
1:40:03research as the basis for the claims
1:40:05they're making, it has helped to turn
1:40:07the lights on for me.
1:40:09And in this domain, I think control, or
1:40:11like understanding and information is
1:40:13power. Really, like knowledge is power.
1:40:16And a lot of people are disempowered,
1:40:17because they don't have the knowledge,
1:40:18and they kind of they're on that sort of
1:40:20roller coaster of their life
1:40:21circumstance, and they don't feel like
1:40:23they have control, especially
1:40:24considering that the world feels so
1:40:25uncertain right now. So, thank you for
1:40:27doing what you do, Ben. Really, really
1:40:28appreciate it, and I hope to speak to
1:40:29you again sometime soon. Thanks so much.
1:40:31YouTube have this new crazy algorithm,
1:40:33where they know exactly what video you
1:40:35would like to watch next, based on AI
1:40:37and all of your viewing behavior. And
1:40:39the algorithm says that this video is
1:40:42the perfect video for you. It's
1:40:44different for everybody looking right
1:40:45now. Check this video out, and I bet you
1:40:47you might love it.

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