If Investing Came With a Manual, This Would Be on the First Page

Paul Winkler: Hey, and a big welcome. This is “The Investor Coaching Show.” I am Paul Winkler, hanging out here today with Evan Barnard, CFP, EA … what else?

Evan Barnard: Grandfather.

PW: Grandfather. You got all those. Great.

That’s a really good designation. I like that.

EB: It’s constant continuing education to keep that one, to keep the grandfather designation.

PW: They don’t come with instruction manuals for grandparents either.

EB: That’s right.

PW: Yeah.

Choosing a Financial Advisor

PW: None of this stuff comes with instruction manuals. No, but you know what? Especially the stock market doesn’t, and investing.

But it has been an interesting period of time, has it not? Brian was talking about it a couple of seconds ago, our producer over in the Nashville part of our show.

EB: And he is on the right station, I might say, just from his early chat.

PW: Yeah, I think so. Yeah. And Nick’s been having a good week and he’s been having a big time, so I think we’ve got a bunch of happy people around here, so I’m excited.

EB: There you go.

PW: I’m excited for a lot of the stuff going on in the financial world, but I’m also excited for some of the stuff that I’ve been digging up lately. And I think it’s going to be really fun to talk about some of the things I’ve been talking about in the media, with markets, investing, just, good grief.

I had conversations with Bell this week. Bell Kay, the producer for, well, he’s still producing Matt’s show, right?

EB: No, that’s Chris Weber. He produces Chad Benson’s show.

PW: Is he doing Chad’s show? How did that happen? How did that happen and I didn’t know about it?

EB: They didn’t call me.

PW: I have been too busy.

EB: They didn’t call me and ask.

PW: Well, he and I were talking, and I know that because I have to talk to them after 3 p.m. every day, and I’ve done it twice this week. Come on Paul, get with it here.

But yeah, we have been talking about just interesting stuff about how investment planners and financial planners operate. And one of the things that we were talking about, I said to him, “Bell, people spend more time trying to choose a dentist and looking into a dentist than they do a financial person who’s going to handle their finances, their net worth. They do more research in there.”

And he says, “Oh, man. That is great. I have to use that.”

I said, “It is true though, isn’t it?” He says, “Yeah, most people don’t have a clue.” Why is that, Evan?

EB: 

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I think part of it is people are uncomfortable talking about money. 

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Even within families, we talk about the no-talk rule, and I think culturally, you just feel awkward if you walk up even to a friend like, “Hey, what do you think about your financial advisor?” Well, maybe they don’t have one. They’ll feel bad. I think a lot of it is just, they’re uncomfortable dealing with that subject.

Reading Disclosure Documents

PW: That’s super interesting that you put it that way because you actually sent me off in a direction that I wasn’t even thinking about.

EB: That’s my spiritual gift, Paul.

PW: It is true. And you do quite a good job.

Well, there was a book David Brooks had written, and it was about talking to people and having conversations with people. And one of the things he was talking about is being interested in people and being curious about people and how to carry on conversations. He had this one whole chapter on it, but the next chapter after that was talking about asking questions and asking good questions.

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And he said, “Why is it we don’t ask good questions like we should? It’s because of this sense of, ‘I should know this.’”

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And it’s you feeling uncomfortable that I don’t know things that I probably ought to know. And that is interesting that you went that direction because people feel like, “Well, maybe I’m less than because I don’t know these things.”

EB: Could be.

PW: And so they don’t get into it and they don’t get into anything beyond, “Well, the advisor is a nice person,” or, “The advisor goes to my church,” or, “The advisor has been in this military outfit,” or, “The advisor works for this charity or has done work for this charity.” They don’t go beyond that. Hence, Bill and I were talking about it. I said, “Hey, people need to be reading disclosure documents.”

EB: Yeah.

PW: And the SEC has come up with a simpler form of a disclosure document. But the problem is, even though it’s in layman’s terms — and I don’t think that the ADV is that complicated — they have this other disclosure document that you can go to, and the problem that I have with it is it doesn’t even talk about investment philosophy.

EB: Right.

PW: I harken back to that study that was done and it was talking about the biggest determinant of your financial success in the future is your investment portfolio.

EB: Right, yeah.

PW: Not, “Did you do a Roth IRA? Did you do a regular IRA?”

EB: Correct.

PW: It’s not that. It is the investment portfolio. And that is not even included in the disclosure document. Now, the ADV, it is.

So when you look at the ADV part two, you can get into: Is it fundamental analysis? Now, in other words, are they believing that stock picking is a good idea?

The Absurdity of Stock Picking

PW: You guys, you were talking a little bit about doing an exercise this week. Tell that story because I thought that was a good story to tell on air about a lady that had engaged in that process and everybody in the room got why it was absurd but her.

EB: Well, and she maybe did get it, I honestly don’t know. But I was out in Scottsdale. We were doing an educational event for clients with a group of people that we know for I bet about 200 investors from around the country.

And there’s an exercise that we have called “Abject Absurdity,” and it’s basically a series of questions with a participant to help them discover the absurdity of picking individual stocks. And I won’t name the stock because everything discussed in the event is confidential, so I’m just going to say Microsoft just to give it a name.

PW: And that wasn’t the stock, no?

EB: And that wasn’t it, yeah. And this person, say they knew Bill Gates and had dinner with Bill Gates, like, “Okay, well, who’s the CFO of the company?” “I don’t know.”

“Well, how many computers did they sell last year?” “I don’t know.” “What are their competitors doing in research and development?” “Well, how am I supposed to know that?”

But the more you go down that road, you realize most of the time if people are picking a stock — and it was the case with this participant — it’s because of a great story. It has nothing to do with research, due diligence, or knowledge. It’s because there’s a really good story.

PW: And how could you possibly know that the stock price is wrong? That it is actually selling for less than what it should be selling for, and that it’s going to take off in the future for some reason, if you don’t know anything?

You don’t know what the health of the CFO or anybody running the company in key positions is, you don’t even know what’s going to happen to them in the future or what the competition is doing to take them out. So it is completely absurd to think that you know better than anybody else what the true value is.

And think about it, when you buy and sell a stock, who are you buying and selling it from? You’re buying it from market makers that do nothing but trade that stock all day long.

EB: Right. And as we get to two-thirds of the way through the exercise point, you now grant the participant the belief that they do know a ton about the stock, but they don’t know anything else. Nobody else knows, just as you said.

And so you’re like, “Well, okay, well, what causes a stock to change price? New information. Well, where do we get new information? What do you watch to get new information?”

PW: News?

EB: And he was like, “Oh, the news.”

PW: Yes.

EB: Yeah. And so he’s like, “Well, so what kind of news would change the stock price?”

And here was the money quote of the whole exercise. “Well, that’s unlimited.” Yes.

PW: Yes.

EB:

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There’s an unlimited source of unknown information that’s going to change the stock price.

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PW: Exactly.

EB: You just see this light bulb go on for 200 people. I mean, it was really powerful.

Figuring Out Where the Market’s Going Next

PW: Well, I don’t know if you heard the segment. I did a little segment a couple of weeks ago, I guess it was, but I was talking about how they had done this study where they gave the Wall Street Journal to people and they had people make decisions on investing based on getting the Wall Street Journal.

Now, here was the kicker: It was the Wall Street Journal, what it was going to say in 72 hours. So literally, they gave people the Wall Street Journal and what the news was going to be in the future, three days, hence. And they still couldn’t get a good pick. And they still couldn’t make good decisions on what to do with their investments.

Matter of fact, they actually, I forgot what percentage of what it was, but it was a very high percentage of people actually lost. Oh man, I don’t remember the data. I have to pull that back up again because it’s in my head, now in my head.

But they had lost a significant amount of money, even though they had the news three days in advance. They still couldn’t pull it off.

EB: Wow.

PW: So yeah, it’s just absolutely absurd.

EB: Yup.

PW: And that was something that Rick Santelli was talking about on CNBC this week, but we talk about in the market and we talk about, well, picking individual companies, that’s kind of, it’s a big, huge waste of time. And then you go, “Well, how about figuring out where the market’s going to go, what it’s going to do next?” And it was just funny, something he said this week I thought was worth just playing here.

Rick Santelli: Everything’s grounded in politics obviously, as you pointed out. One side sees it a certain way, the other side sees it a certain way. You know the way I see it? That the market, the market is always right.

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It isn’t always right in terms of where the future is versus where it is today, but it synthesizes all the relevant data in real time, in the present moment. 

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And in my opinion, when I see the Wall Street Journal write, “Is the market underestimating what’s going on with this administration?” I say, “No, I think the market is the only sane entity in the room right now.”

PW: Isn’t that lovely? Isn’t that lovely? It’s like he gets it.

It’s funny. You just listen to that and he goes, “Oh yeah. Are they underestimating?” Is the stock market too low compared to what it should be based on what is likely to come out?

And you have people, some people that believe it’s overpriced, some people that believe it’s underpriced and it’s priced for what it is based on just the general consensus of all informed investors. And I just love that a guy from CNBC — which is a channel dedicated to telling you when to get in, get out, and which stocks to buy — makes that point about that.

EB: Yeah, for sure. Maybe they listen to “The Investor Coaching Show.”

PW: I doubt it.

Tariffs and the Market

PW: Then the other thing that they were getting into, they were talking a little bit about interest rates and direction for interest rates and what’s going to happen.

Now, again, that is a prediction, but I just thought there were a couple of interesting points being made regarding interest rates. Got a lot of people sitting there going, “Hey, what’s going to happen? Are we going to be able to refinance?”

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Because right there, listen to what he said just previously, that the market is sane, right? Market’s pricing things, it gets priced in. 

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You can’t make any predictions about things, yet this is how hard it is for somebody that knows the right answer. You know where I’m going, don’t you? Listen to this.

RS: And in my opinion, when I see the Wall Street Journal write, “Is the market underestimating what’s going on with this administration?” I say, “No, I think the market is the only sane entity in the room right now.”

PW: So that repeated, yeah.

RS: If the market, if the angst and the panic about the tariffs that we saw a couple of days ago was reflected in the market, we’d be down about 5,000 and the bond, the 10-year, would be at 6%. Instead, yields have dropped and the market’s less than a percentage point off a high. So what was that all about?

CNBC Speaker: I completely agree. Now, I would put one asterisk out there. I do think in the future, things are going to get significantly better. Animal spirits are a good thing.

PW: Right there, I just want you to get, number one, he made a really good point because people are talking about, “Well, good grief, what just happened? What’s going on?”

Remember, it was just before Sunday night, I guess it was? I think it was Sunday night, because I remember I did an interview, it was Monday, wasn’t it? With Matt. Matt Murphy and I were talking, I think that was the day.

EB: I’ve slept since then.

PW: So did I. Yeah, barely.

But Matt and I were talking a little bit about this, and it was something to do with tariffs, and I was talking about tariffs and how they worked and so on and so forth. And the prediction Sunday night was that the market was just going to drop precipitously over all of that.

And then Matt was like, “Hey, can you come on?” And I said, “Yeah, absolutely. Let’s talk a little bit about tariffs.”

So I talked about how they worked and who charged them and what was happening, how it was going to impact things as far as what people were concerned about it impacting things. And I did it in a two-column approach, is the way I approached it — that you could have the negative of tariffs, but you have also the positive of reductions in regulations on the other side of things.

EB: Yeah.

PW: And then on the other side, you have, for example, it just being used as a negotiating tool and what can you get out of it? And that could be a positive on the other side of things.

Stock Market Changes

PW: But it was predicted that the market was going to drop like a rock, and then all of a sudden you had concessions that came out. And then once the concessions came out from the other countries like Mexico in this particular instance, then all of a sudden the stock market went back up.

And I said, “Well, China is kind of like, we don’t really know where they’re going to be. We had Canada — Trudeau was putting up a little bit of a fight for a while,” and I made the comment, I said, “Well, maybe he’s on his way out and he could just want to give Trump a black eye on his way out.” And we talked a little bit about that.

Well, literally, just as my interview ended with Matt, they actually came to an agreement, so that went away. And then, of course, the market’s going up as a result of it. But you think about it, the markets should have gone down even more precipitously is what he’s saying there based on the news.

EB: Did he say 5,000 points?

PW: Yeah, he said 5,000 points. And why did that not happen? Well, I think it’s just what I just talked about, that there are all kinds of things on the positive side that would change that trajectory.

When you have both sides of the ledger, you can’t just look at one thing in isolation, and that’s where people get in trouble trying to figure out where the market’s going to go. They look at things in isolation.

But then what he talks about right there is interest rates and he gets into this thing on interest rates and says, “Hey, what would happen?” Now he’s getting into prediction mode. So just to continue …

RS: In my opinion, we’re not going to spend a lot of time under four and a half percent in a 10 and not a lot of time under four and three-quarters in a 30, so enjoy it while it lasts if you like lower interest rates.

PW: So that’s his point right there. “Well, you can’t predict the market. We don’t know what’s going to happen, but in my opinion, here’s what’s going to happen.”

EB: Right.

PW: It is really, really hard.

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Even the brightest academics have a hard time not saying that they think they know what’s going to happen next. 

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He talked about animal spirits in the part just before that, and that’s a good thing, and blah, blah, blah. And he’s saying, “Hey, enjoy it right now.” Well, we don’t know.

There may be reductions in interest rates. There could be, and you just don’t know where that’s going to go.

But it is the point that I would like to make here. It is the tendency of humans, as much as we know that we don’t have control, as much as we know philosophically or we have the head knowledge that we can’t predict the future, it is really hard for us not to try because our instincts and our emotions tend to be so strong, and they tend to drive our behavior so much.

EB: Yep. Totally.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.