Episode #75: Michael McDaniel, Riskalyze, “One Of The Biggest Conditions That Will Lead To Success Is Simply Being Invested”

October 11, 2017

Episode #75: Michael McDaniel, Riskalyze, “One Of The Biggest Conditions That Will Lead To Success Is Simply Being Invested”

Guest: Michael McDaniel is the CIO and co-founder of Riskalyze. In 2005, he founded McDaniel Wealth Management, an investment advisory firm with a unique perspective on risk management. More recently, the firm has completed a transition from the brokerage/hybrid model to becoming a fee-only registered advisory firm. Mike co-founded and served as a Senior Advisor to Riskalyze in 2011. In 2013, he became Chief Investment Officer, overseeing all product decisions that are affected by investment philosophy, all market-driven communications and product direction.

Date Recorded: 10/06/17 | Run-Time: 56:11

Summary: This special episode is recorded at the Riskalyze Fearless Investment Summit in Lake Tahoe. Per usual, we start with Mike’s origin story, but it’s not long before the guys dive into investments. Meb asks about Mike’s investment framework – how does he think about the world as a practitioner.

Mike tells us he tries to let the market do as much as possible. One of the biggest things that will lead to success is simply being investing. And because our emotions can trip us up so much, by quantifying risk and then having a better idea of what to expect, we stand a better chance of success.

This concept is what lead to the Riskalyze Risk Number. Meb asks for an overview of what this number is and how it works. Mike gives us a great overview of its background and how Riskalyze seeks to quantify risk on a scale of 0-100. (Basically “cash” to a “single stock.”) The conversation morphs into how the Risk Number has been further refined over the years, including the amount of historical data included.

Next, Meb brings up something Mike once said in an interview, about the two reasons why investing is broken. He asks him to expound. Mike tells us these factors are 1) the psychological pitfalls facing the mom ‘n pop investor, and 2) the complex nature of the investing environment (so many products available to the investor).

It’s not long before Meb brings up a current reality facing advisors: With asset allocation being largely commoditized with a low fee attached, where is the main “value add” for advisors these days?

Mike believes that the advisor’s role is to be the behavioral coach. He has multiple stories about the power of using data and analytics to keeping the investor invested. This leads into the most common mistakes Mike sees that many investors continue to make.

It’s not long before Meb turns the mic over to the audience (remember, this was recorded in front of a live audience in Lake Tahoe). You’ll hear:

Have Riskalyze numbers proven to be helpful when facing an SEC audit?
What will be the impetus that gets advisors to enter into the 401k space?
Most investors have traditionally relied on bonds to be a stabilizing effect on portfolios, but is the market we’re in likely to play that role? Given this, how does Riskalyze think about alternative asset classes?
In a world of low expected returns, how does an advisors balance business risk versus the client’s investment risk?

There’s plenty more in this episode, including Meb’s discussion of the impact of fees on various global asset allocations… home country bias… the challenges of trend-following… and of course, Mike’s most memorable trade. It turns out, he has two, the latter of which is what led to the creation of the Riskalyze concept.

Sponsor: Roofstock – Build long-term wealth and passive income with Roofstock, the leading online marketplace for buying and selling leased single-family rental homes.

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Jeff at jr@cambriainvestments.com

Links from the Episode:

1:57 – Welcoming Mike live at the Riskalyze conference
2:42 – Mike’s origin story
3:38 – Mike’s investment framework
5:04 –The Riskalyze Risk Number
8:50 – How the development of the risk number has been refined
9:26 – Blog post, accuracy they’ve had
10:34 – Investing being Broken
11:54 – Importance of the advisor value add
11:59 – Sherman podcast Episode (The Meb Faber Show)
14:40 – What are the mistakes that investors continue to make
18:29 – Latest from Meb Faber
19:01 – The reality of how much personal money most investment managers have in their own funds
21:25 – Roofstock Sponsor
22:33 – What is Mike most excited about these days
24:25 – Any new entrepreneurial ideas that Mike is brainstorming; Bachelor Box and Riskalyze Expert Forum
29:27 – Audience Q&A
29:40 – Through SEC audits, have the Riskalyze numbers held up
32:17 – What are ways that advisors can take back the 401k space
34:37 – How does Riskalyze protect a portfolio when bonds go through a period of underperformance
38:26 – How do investment firms try to differentiate themselves without creating too much risk for their clients
42:04 – Meb’s 17 Million Dollar Fintech Ideas
42:30 – Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies – Faber
46:05 – Top three trends we are seeing
47:30 – Mike’s most memorable investment or trade
53:36 – Favorite fishing spot
55:39 – How to find Mike – Riskalyze Blog

Transcript of Episode 75:

Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the Co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Sponsor: Today’s episode is brought to you by Roofstock, the leading online marketplace for buying and selling leased single-family homes. Are you interested in adding rental real estate to your portfolio? A recent white paper called ”The Rate of Return on Everything,” examined global asset class returns all the way back to 1870 and concluded that residential real estate, not equity, has been the best long run investment over the course of modern history.

Roofstock offers quality pre-screened single-family rental homes located in some of the best real estate markets in the country, with quality tenants already in place paying rent. And now, you can find all of this without ever leaving your own home. Roofstock is making what used to be an incredibly long and difficult researching and buying process, fast and simple. That’s because they do lots of the work for you by vetting properties, tenants, and property management companies, so you can have all the info you need to find the right investment for you. Generating great income from rental properties has never been simpler. To learn more, visit roofstock.com/meb. Again, that’s roofstock.com/meb. And now, onto the show.

Meb: Hello, podcast listeners. We are very excited to be here today in sunny Incline Village Nevada, Lake Tahoe. One of my old homes. This feels like homecoming to me. So I’m super excited to have Mike McDaniel here. Welcome to the show.

Mike: Thanks for having me.

Meb: It feels a little funny to say, “Welcome to the show,” because we’re at your conference. This is the “Riskalyze Fearless Investment Summit.” We’re just following up on Joe Theismann and a bunch of other great speakers. But it’s almost criminal to be here indoors right now, so we’ll keep this short. But for those who don’t know, who are listening in virtually, we’re doing this in front of a live audience recording in Tahoe.

Mike is the CIO and founder of Riskalyze, but also is a practitioner and manages his own wealth management shop. Will you give us, like, a quick one-minute overview for the people listening in on the pod on kinda your origin story and how you got to be here?

Mike: Yeah. My origin story is pretty quick. I started off, out of college, wanting to be an entrepreneur and I thought hardware stores are probably be where I’d hit the landmine. So I spent four to six months managing a hardware store with my finance background. And that was actually my financial adviser that told me I was an idiot for being in hardware and told me I needed to get my licence and go after advising other folks. And I started off in a wirehouse space, went into the independent space, and now I own an IRA here in just over the hill in California.

Meb: So it’s going kinda like the old expression, it’s like, “Not only a client, the founder of Riskalyze, but also a practitioner and user, too.”

Mike: Yeah. It sounds cliche, but we often say, “Riskalyze is built by advisers for advisers.”

Meb: So it’s, kind of, funny to listen, too, about the hardware because you, at least, realized that way before, I mean, Amazon came and it’s just dominating every retail store on the planet. All right, so let’s talk a little bit…let’s talk about your investment framework in general, how you think about investing, and you can tie in some of the ideas that led you to start Riskalyze as well, but just how you think about the world of investing? What’s your approach as a practitioner with with these clients?

Mike: Yeah. My approach is easy. I try to let the market do as much of the work as possible. And I firmly believe that one of the biggest aspects or conditions that will lead to success is simply just being invested, right? So, at the same time, I know that humans have just a very bad propensity to gauge or, I guess, overcome the emotional pitfalls of investing. And I believe that the easiest way to overcome that is to quantify the risk, understand it, set expectations, and that empowers you to invest fearlessly, is how we put that.

So my investment philosophy is, how can I get you basically as invested as I can, knowing that some day that you know what’s gonna hit the fan, and I don’t want you to sell, right? In fact, I would like to try to talk you into taking whatever cash or money you’ve got on the sidelines and adding more. So I wanna figure out that based of the point right before you become a stupid investor. And I wanna invest you right up to that point. And I do that, you know, with a core foundation of investments. And then I have a satellite approach, depending on the client’s, you know, needs obviously and what their, kind of, what tickles their fancy.

Meb: And so this, kind of, led to the development of the Riskalyze risk number, and then maybe, you know, the audience here is already familiar, maybe give the listeners on the pod just a real quick overview of what that is because, to me, the beauty of it is that it took a pain point for a lot of advisers, and I know you guys have over something, like, 20,000 advisers that use this and turned it into almost one, a legion, but something that they could at least talk to the clients on behavioural level.

And we talk a lot about psychology on this podcast in keeping all of us from doing dumber things that we are already trying to do. And so a real quick overview with that and then we’ll kinda get into some other offshoots.

Mike: Yeah. Basically, where Riskalyze started in my head, this is probably going back to 2006, you know. So the company started in 2011, but in 2006, we knew that there was some intellectual property and this behavioural finance field known as…we refer to it as ADAM, Amount Driven Asset Management. The amounts that are at risk make all the difference, right? Humans are horrible about converting percentages, you know, we can say, ”Hey, you’re gonna lose 8%.” And they have a very tough time understanding what that actually means. They’ll nod like they do, but they don’t. But using amounts that are specific to the investor is paramount.

So here we are in Nevada, right? If you go into the casino, if you’re like me and my brothers and friends that I gamble with, and we, you know, we like to play 21 or Texas Hold’em, in this case, a blackjack table. When you walk into a casino, if you’re normal, you’re gonna walk around and you’re going to look for one or two things. One is the table that’s having a hell of a good time, right? Or, you’re gonna look for what is the minimum bet? The odds at every one of those table are the exact same, but the amount you’re placing at risk is the variable.

And so we wanted to address that and attack that head on because we knew in a typical process between an adviser and a client, you get to bubble in whether your client is conservative, moderate, or my favorite, moderately conservative, or aggressive.

Meb: What about moderately aggressive?

Mike: Yeah, I love that one.

Meb: Conservatively aggressive.

Mike: I love that one. So, you know, not to go off too much on a tangent but we’re, you know, about five minutes in. It’s about time to derail. I have, I don’t know how many years worth, 10 years worth of agendas that I’ve saved with meeting with my clients. And in so many of them, I have the word “conservative” circled.

And, you know, it goes something like this, so, you know, “Would you consider yourself a speculative investor or a conservative investor?” That’s how I frame the question. And 9 times out of 10, they’re gonna say, “Yeah, I’m definitely, I’m a conservative investor.” Okay, great. So years later, now we have Riskalyze, we can quantify how much risk the investor wants, what their risk preference is. The clients that were unhappy that they weren’t beating the market and told me they were conservative had a different definition of conservative, right?

I’m a risk number 33. So conservative to me is a 33 or maybe even below. I think of a client, Gary, and, I think, I had six years worth of agendas that had “conservative” circled as his goal. In his mind, conservative was, “I just don’t wanna take any more risk in the stock market.” Stock markets are risk number 78. So no wonder he wasn’t thrilled every year. I was having to express myself like, “Here’s, you know, we’re crushing it for a conservative account. We’re up, you know, 14% in 2013.” And he’d say, “Yeah. But my neighbour in the market, they’re up 33%.”

Meb: Oh, Mr. FOMO. So to just give the listeners some perspective, the risk number goes 0 to 100 and gives us some data points. So, if, S&P 500 is 78, what’s 100? Is that just, like, one stock?

Mike: Yeah, Twitter stock or a very high vault, you know.

Meb: And zero would be something like T-bills, or no?

Mike: Yeah. I will say T-bills are probably a 10-ish.

Meb: Okay, so cash.

Mike: So we don’t ever do zero, but a cash would be it. It would be a one.

Meb: And so a 60-40 would be what?

Mike: Roughly a 50.

Meb: Okay, okay, okay. Great. It was fun talking to you about this last night over a beer because you said originally you started doing some of this work in Excel. You know, and then over the years it, kind of, developed. Kind of, give us a little bit of perspective on how that number has changed over the years, or how the development of the risk number has been, kind of, refined.

Mike: We spent 2011, 2012 refining that. And we really wanted to go to the market in 2013 with something that had already been more than tested, that had been battle-tested and it worked. So from 2013 to now, we haven’t had to meddle with it much. We’ve got a great blog post that goes into the accuracy that we’ve had with our…it’s a six-month range. It’s a downside that range that we indexed to the risk number, and we’ve had a phenomenal success with that. So it’s one of those if it’s not broke, don’t fix it, but that’s probably the quickest way to answer that.

Meb: And so how much historical data is it looking at? Is it six months or is there more that goes into the model? Or what…

Mike: Yeah, a great question. So when we look at the calculation of the risk number, we were taking in three core components. There’s a volatility component, a correlation component, and then we’ve got to figure out where we wanna set the mean of that distribution, and that’s the return component. And when we look at the data that we’re collecting and using for the standard deviation and correlation, we wanna have a conservative view on it. What I mean by that is if you look at the traditional software or analytic tool, they’re gonna go back and do a one, three, or five-year trailing, typically.

And for us, right now, that would only include data from very…we call it “easy markets.” And so we actually go back to collect our data for volatility and correlation to January 1st, 2008, because we want to include the hell that was 2008, you know, correlations went to one, volatility spiked. We want that data in our risk number.

Meb: I saw a recent article that you were talking to someone where you talked about investing being broken. And you said there is two main reasons why, and you may not remember…

Mike: No, absolutely.

Meb: I don’t know if you already do…

Mike: Absolutely. This is what drives Riskalyze. We truly believe and we’re building a, you know, a movement to overcome this. But there’s two reasons that we think that investing is broken. And we think about this through the mainstream investor through what I lovingly refer to as a “mom and pop investor.” Number one is, the psychological pitfalls that all of us have as humans. We’ve got to overcome that. The second is, the complex nature of the investing, you know, environment.

So you look at one asset manager who’s here this weekend, First Trust. First Trust is a unit investment trust, exchange traded funds, mutual funds, separately managed accounts. So I think about my mom going to meet with an adviser and having them, you know, explain to them or try to explain to them UITs, and ETFs and mutual funds. My mom is brilliant, but she’s not getting five minutes into that before her eyes glaze over and she does not understand where this conversation is going.

And so that’s when we look at overcoming the two, you know, two areas of investing that are broken, we believe in psychology, and so we overcome that with quantifying, again, the risk number and quantifying some things, setting the expectations so we can be behavioural coaches, and then just make it easy to understand.

Meb: And one of the nice thing you guys do is it’s not just quantifying in percentages, it’s also quantifying in dollar amounts, right? And so a lot of people…we had on the podcast last week an adviser who was talking and he said, ”I have a couple that came in, you know, and they said, ‘We have a moderate portfolio or whatnot.”’ And he said, ”I talked to them individually. And the husband was super aggressive, couldn’t take on as much risk as possible and the wife said, ‘I don’t want to lose.'” He’s like, “How much are you comfortable loosing?” And she said, ”Zero.” I mean, not $100, not $1,000, not $10,000. Zero.

And so, you know, despite the fact that the two would average out to being in the middle, it’s complicated. And so, we’ve seen, you know, Vanguard talks a lot about this with their studies where they say the benefits of a financial adviser, one of the biggest ones is the behavioural coaching, you know, and keeping people from doing the dumb stuff. And advisers aren’t necessarily always immune to, you know, the 2008s of the world, or certain market events can be challenging as well.

In this world that’s evolving, where one could make the argument that a diversified asset allocation is becoming a commodity, meaning, the Vanguards of the world and a lot of the few pressures, advisers can go out and buy that portfolio. I think, ETF.com does the cheapest portfolio in the world. A diversified portfolio is now down to, like, five basis points. So it’s essentially almost free. And a lot of people don’t know this and particularly with ETFs, there’s a lot of ETFs out there that also do short lending.

And so there’s many, many ETFs that actually…the good guys do. They return the short lending to the investor. So there’s actually a lot of ETFs out there that have a negative expense ratio, which is really cool to think about. So, all of a sudden, we live in this world where you could buy the global portfolio for, let’s call it 10 basis points, but really, it might even be 0 or free once you take in the short lending.

And there’s been a lot of talk of this, so you may be sick of it. But let’s talk a little bit about the adviser value add in a world where potentially the portfolio construction process is the least value add. You know, what the other areas…how have you seen this, kind of, over the past 10 years, really evolve, and we have opinions on it but I would love to hear what you guys think.

Mike: Yeah, absolutely. We wholeheartedly believe that adviser’s key role is to be the behavioural coach. And, yes, expenses are important, but so is talking someone off of a ledge at the wrong time or any time. I’ve got, you know, multiple stories with my own practice, and we hear from advisers all the time. The power that using data analytics in an easy to understand format can have on keeping that investor invested. And so there’s gonna be, I think, a considerably larger amount of focus, practice management, etc. with advisers focusing on just that, how to be a coach.

Meb: And so…but I looked up a wonderful article you guys used to do called, ”The Worst Portfolios in the World,” or something like that from the wirehouses. The domain doesn’t work anymore. So you guys don’t talk about it as much.

Mike: [Inaudible 00:14:47].

Meb: But you guys are probably like, okay, Cupid does with dating, you guys probably have so much into analytics and into what advisers are doing, and investors, and in your own personal experience, what are the, kind of, the mistakes that you think…and this is mostly probably aimed at individual investors, but what are the mistakes they continue to make that are the most obvious? I’m sure that selling at the bottom, and getting FOMO at the top, but what are, kind of, like, what do you continue to see these days?

Mike: Yeah. That’s a great question. I love answering this question because we have data to support it. And I have multiple…I’ll tell it in a story both of myself and an adviser that uses Riskalyze. So he calls me up and he goes, “Mike, you know, I’ve heard you talk. I’ve read some of your stuff. I love what you guys do. I subscribe to Riskalyze. I threw all my client portfolios in there. There’s something wrong.” I said, ”Okay, explain it to me.” So he says, ”All of my clients’ risk numbers, all their portfolios, I should say, are clustered around a 65 on the risk scale. There’s just no way. I know I’ve got little old ladies. I’ve got college kids. There’s something wrong.”

So I ruminated on that for a couple days. Like, what could he be talking about? Like, how…you know, does he just have a weird portfolio composition? Like, you know, I got permission. I went in and looked at some of his portfolios, racked my brain, three days. Finally, it hit me. The same thing I was doing in my practice. My risk number was at 34. And I would anchor my clients at a 34. If they told me they were aggressive, I might them get up to a 50 because, to me, 50 is like driving in the dark with your eyes closed. I couldn’t deal with it.

Well, it turns out, every investor, to your point of the couple with different risk numbers or risk preferences, everybody is different. And so when you quantify that, you’re able to see that an investor, that, again, going back to semantics and quantifying the investor that may say they’re conservative, may want just as much risk as the market has. So what we see is the propensity for advisers to invest their clients like they would want to invest, right? And there are some fiduciary aspect to that, I believe.

So I don’t think it’s a necessarily bad thing but the data can show and it helps explain to the adviser, “Okay, that’s why Gary wasn’t thrilled that we had a 22% return in ’13. He wanted a 33% and he could stomach it,” right? So there’s a big difference there. And, I think, that’s one of the things that, at least, for me, from an adviser’s perspective is extremely important. Now, from the investor’s perspective? That would lead me to believe that, as an investor that’s interviewing an adviser, you might wanna ask what your adviser’s risk number is.

Meb: That’s a great point and, you know, thinking about…then we used to always tell investors, too, we said, you know, it’s not out of the question to ask your adviser how they invest their own money, you know, because a lot of people…I remember talking to a famous investor once and he says, “Meb,” or he’s giving a speech, and he was saying to the audience, he says, you know, “I am going big. I’m making a huge allocation to gold,” or whatever it was. I think, it was gold, but let’s just use gold.

And, you know, I pulled him aside afterwards, we were chatting, I said, “Oh, you know, like, that’s amazing. Like, gold, you’re super bullish. Like, how much, like…when you say huge, is that like half your portfolio?” He’s like, “Oh, no. I’m moving from like a two percent position to like four percent,” you know. But to him that was huge and he keeps like a quarter in cash.

Mike: Yeah. Going back to, you know, subjective terms that we use, you know, and then we have a president who likes to use one, right?

Meb: Huge.

Mike: Huge. Absolutely. So when we look at…we’re huge fans and I’m not just saying that. When we have new employees that are, you know, we’re a fintech company. We have employees, team members of Riskalyze that come in and we give them, kind of, an indoctrination into the industry. So I do a couple of spiels, etc. And then I give them resources and it’s actually your blog is one of those resources. And, when I have somebody that comes…

Meb: It’s the resource where you say, “When you have insomnia on a Friday night and you wanna go to bed, go read this blog.”

Mike: “If you want to learn about, you know, finance in a way that’s basically no BS, Meb is your guy.” And, I mean, there’s only two or three people that I’ll list there because I don’t want getting out if I, you know, send them off to a Bernie Madoff or whatever. So you’re one of those, for sure. And what I love on that question of yours is that, I have folks all the time ask us because we have, I don’t know, 20,000 strategists in the system. And they go to conferences and they hear, they’re talking ahead, get up there and say, you know, “I’m going huge in this.” Or, “We’re taking this big bet.” And then they go, “What do you think?” And I said, “Ask him where his money is invested.” Like, I don’t know, many people have the stones to say, “Here’s how I’ve invested,” and you’re one of them.

Meb: There’s a great stat when we talk about skin in the game, and Morningstar does studies about mutual fund managers in the percent and how much they have invested in their own fund. And there’s, on the like balanced asset allocation funds, it’s something like 60% have nothing invested in their own fund. This is the PM. And 70% have less than 100 grand. So it’s like, “Why would I ever buy this fund if you’re sitting here telling me that you don’t even own any,” you know?

And so it’s actually been…that would be an interesting study for you guys, if you haven’t already done it to say, “All right. We’re going to take all of our advisers and look at their risk score and compare it to their clients’ risk score and see if it lines up.” It probably makes sense.

Mike: Yeah, the one thing it’s…I guess, an obstacle to that, is the risk score is calculated using real dollars, right? So the advisers got to go in and say, “My portfolio is worth X,” and then go through the process and they come up with a risk score. That’s one thing. The second is, when you look at investing, and this is true to myself, the hardest portfolio for me to manage is my own portfolio.

And I can remember 10 years ago, you know, coming home and I couldn’t tell anybody else because I’m a financial adviser but I told my wife, “Hey, I just tried to trade in and out of this stock and got my ass handed to me.” And she’s like, looks at me like, you know, “You don’t do that for your clients, do you?” I said, ”God, no. I’d never do that for my clients.” And she looks at me dead in the face and she goes, ”Then why the hell are you doing it for yourself?”

Meb: Mike, sounds like you need a financial adviser.

Mike: Exactly. So, I think, there’s actually a business there frankly.

Meb: Well, it’s, you know, it’s funny to think because I’ve set up automated investing for my own portfolio. And it’s when you think about it and you think about all the clients, it seems to me a trend that I don’t know why many people would go back to doing things the old way. You talk about the wirehouse to IRA model. You don’t see people swimming upstream that much going from independent IRA to wirehouse, right? You don’t see people going from a two to three percent mutual fund selling it, you know, buying a TBT [inaudible 00:21:09] ahdnsaying, “You know what? I’m gonna buy that really expense mutual.”

I mean, there are exceptions. We have a lot of friends that run high fee ETFs, mutual funds, hedge funds, and are probably worth it. But in general, for a broad base, kind of, commentary, I think, in general that’s the trend.

Sponsor: Let’s pause for a moment to hear again from our sponsor. Today’s episode is brought to you by Roofstock, the leading online marketplace for buying and selling leased single-family rental homes. I actually interviewed Roofstock’s founders, Gary and Gregor, back in episode 63. And I was genuinely impressed with how these guys were radically simplifying rental real estate investing.

The process used to be incredibly time intensive. First, you gotta do identify a market, look at tons of homes, then do some due diligence, make some offers, negotiate the price and finally buy. And then, you had to find a property manager to handle leasing and operations for you. What a nightmare. I’ve always been gun-shy about rental real estate investing due to these various operational headaches that can come with it. But Roofstock has changed all that.

Every one of these properties comes leased up and pre-certified by the Roofstock team. They even connect you with vetted property managers who handle all the day-to-day headaches for you. To browse properties all over the country, including locally here in Los Angeles and even my hometown in western Salem, and learn more about how to generate real estate income with peace of mind, visit roofstock.com/meb. Again, that’s roofstock.com/meb. And now, back to the show.

Meb: Let me ask you, what are you most excited about these days? You know, you guys had some interesting developments with the company, you’re talking about scenarios, I don’t want to lead the questions. So that may be something. But what else are you working on that you’re excited about?

Mike: Yeah, I would say that my biggest excitement right now after going through the pain of starting our own company 401(k). And, as an adviser that frankly has given up on 401(k)s…the last 401(k) I took into my practice has got to be over 10 years ago. They were just there. They’re [inaudible 00:23:00]. They’re so difficult on so many different levels. You know, you’ve got to find a TPA and then a little bit of technology, got to find a fiduciary or a manager. You’ve got to find…just too many different things you got to plug and play, or try to plug and play. They don’t talk to each other, etc. It’s intimidating, and at the end of the day, you probably get paid half of what you get paid in your normal business.

So I abandoned 401(k)s 10 years ago in my practice. And what we, you know, we look around this room and the audience, we need advisers to be in the 401(k) space talking about the impact of behavioural coaching on, again, mainstream investors. That’s where they invest. You know, as advisers, that’s likely how we’re going to suggest. When we see a younger, new investor and they say, “What should I be doing?” Well, if you’re getting a match at work, you’re probably nuts to tell them to invest anywhere else until they hit that match.

Meb: This is a great description for some of the best business ideas is, like, frustration arbitrage. Like, what’s an area that just generates so much frustration that there has to be a good business model there? I mean, I just went through renting a car again at one of the traditional…I mean, how is it still that miserable and bad and hard? There was a Bay Area start-up that was great called Silver Car but I was driving to Tahoe so I needed a SUV, and, you know, it’s such a miserable experience.

So, by the way, audience, we’re going to ask you guys some Q&As. So start to think about some in a minute. I’m gonna ask one more question and then we’ll kick it over to you guys.

As an entrepreneur that’s essentially started a few different companies, a failed hardware store, do you have any ideas kicking around that you’re thinking about these days? I mean, Riskalyze, you guys are continuing innovate, etc. What good terrible ideas have you been brainstorming on lately?

Mike: Yeah. I don’t know whether to go with the funnier or more obscure.

Meb: Both. We’ve got time.

Mike: So, yeah. So I’ve got, and, I think, this is…it somewhat exists and probably to explain the whole thing, my wife’s gonna be rolling her eyes when she listens to this, it’s a bachelor box. The bachelor box is taking new, innovative or not so innovative products to the market. Think Amazon. And having someone put together a box that is designed for bachelors and then going, you know, proving that as a success story, you know, we’re talking cigars, whisky, you name it.

Meb: Okay. So wait. Let me clarify this. Is this meant for, like, a bachelor party? Is this meant for a gift box every month, kind of, like a Birchbox but for men?

Mike: It’s a Birchbox for men, effectively. And, I think, there are bunch of different aspects of it. But having focused effectively, products companies paying for placement in there.

Meb: I think, it’s a good idea, you know. So one of my…I mean, my wife also kills me because I subscribe to about a dozen of these boxes and I’ve invested in a couple because it’s such a wonderful business model. It’s recurring revenue, right? And most people forget that they’ve even subscribed to a lot of these, but then it’s a pleasant surprise. It checks the behavioural box, have you paid for it ahead of time? So you don’t see the payment and you get something in the mail. There’s one that’s kinda tangential. It’s not designed towards men exactly, but it’s called “Bespoke Post,” which is a pretty good box. And then there’s a great website called “Uncrate.” Have you heard of this?

Mike: I have. I have.

Meb: That’s a great one. So both of those are pretty cool, but you better reserve the domain before this podcast goes live because someone else will run with it. All right. So was that the funnier or obscure? Let’s hear the other one.

Mike: No, the other one is a little bit more practice, you know, for advisers or more even just investors, and, I think, this occurred to me when I was on a fishing trip. I was going fly fishing. I had a truck full of guys. None of us ever got away from the office. Each one of the guys in this truck were phenomenal individuals in their field.

Two of the guys were in the steel business. And listening to them on the way up their talk and they could see around corners in the steel. I mean, just they could see around it. They see what China was doing and buying stuff in Japan, and the guys that were buying places up in Oregon. They could see around corners. These are guys with boots on the ground. They could see around corners.

And I was just sitting there going, how can I capitalize on? What stocks could I own? What sectors, you know, are gonna be affected positively or negatively with this, right? The guy sitting behind me, I’m driving, the guy sitting behind me is a…this is now 2007, right? So real estates, to say is hot is an understatement. He’s a special loan, basically, bad loan guy. And he’s at banks. There’s no such thing as a bad loan right now.

The guy is, kind of, at a…there’s a low point in his career from a revenue standpoint because nobody was defaulting on loans. And he’s sitting there going, “Reversion to the mean is a bitch.” And he’s sitting back and he goes, you know, he studied, and he studied, and he studied. It can’t happen. It can’t continue like this, right?

So I’ve got two guys talking steel. I’ve got a guy talking banking. And in both of those instances, they were spot on, right? So take the wisdom of the crowd approach but find individuals that really know their field. And, you know, publish easy to understand content, stock ideas, etc., long and short, I think there’s something there.

Meb: It’s going to be the Riskalyze expert forum maybe? I don’t know. Yeah, I mean, it’s interesting. Curating and trying to find, kind of, the best ideas from the noise is something we struggle with on a daily basis, and we talk about it a lot on the podcast with more and more podcasts coming out, more and more blog posts and news. How do you find the stuff that’s actually really useful? I think, as a business model, that’s gonna be a huge area for the next, you know, few decades.

And whether it’s super siloed area, talking about artificial intelligence, or whether it’s in focusing on…one of the ideas that I’d love someone to do that we would subscribe to…if you think about advisers, all right, how many funds come out on a daily basis? And how hard is it to keep up with all of these funds? And where actually ETFs get so much press, where we actually saw that there’s been more mutual funds this year that have advanced than ETFs. And particularly in the alternative space, so hard to keep up with, and understand, and separate the good from the bad.

We always say we would love to subscribe to a professional publication that really looked at, focused on the liquid [inaudible 00:29:06] space, made recommendations, but really went into a deep dives. So I say, ”Hey, you want to go into managed futures, here’s the 50 funds that do it. Here’s why these 10 are terrible, you should never think about giving them money.” And because most advisers are like, I want that resource, and it’s really hard.

Morningstar does a decent job, but anyway feel free to take and run with that idea, anyone. All right, Q&A. We got little time. Does anybody here in the audience got any questions for the CIOs up here?

Mike: Softballs only.

Meb: Because if you don’t, I’m just going to ask Mike my own questions. Well, you guys are marinate on it a second. This is a quiet…okay. Yes?

Participant: So yesterday, we came to one of your breakout sessions where you were talking about compliance. With your 22,00 reps, have you had a deep dive SEC audit where the adviser was deeply entranced in the Riskalyze and they use the models as a way of proving that they make good advice to investors?

Meb: And let me kind of re-state the question so that the listeners on the podcast can hear it. Question was, kind of, about compliance and advisers that are using the Riskalyze numbers that have been through SEC audits…by the way, we just finished one. We love the SEC, if you’re listening. The SEC audits, you know, have the Riskalyze numbers proven to be helpful or useful as a part of that audit. Have you had any feedback there?

Mike: We, actually we have. So mostly anecdotal, which is a good thing for us because anything else is probably going to be bad news, I guess. But the anecdotal stories are from advisers that say, “Hey, SEC came in.” Or, I just had one with state [inaudible 00:30:34] that came in and, you know, they asked, “What is your process?” They’ve got a full list of questions and it was, you know, the way that this adviser answered the question to me was, “When I told them I had a process and I mentioned your name, we skipped to the next question.” It’s, kind of, like, they check the box and they’re off and running.

So, I think, it’s one of our biggest opportunities and obstacles early on is that when I speak at conferences, or we’re asked to speak at conferences on behalf of broker dealers or IRAs, it’s a coin toss as to whether or not we’ve been invited there by their compliance department or the sales side of the house, which is extremely unique. Usually, they’re pitted against each other. And we’ve got this unique relationship as a compliance tool, so to speak, because we quantify and we have a process that can help you document that process, and we also help you retain your clients because they’ve got a great behavioural coach.

Meb: I mean, the challenge that, I think, we face, but then, I think, probably almost every adviser in the country faces, is almost all of the 99.9% of them want to be compliant. They wanna be doing the right thing. And the challenge is it’s just such a massive amount of information, and it’s not like there’s a simple playbook that the SEC gives you that says, “This is what you have to do to be,” you know, and certain things help, of course, but giving this, kind of, sleep at night from an adviser standpoint that you’re matching up expectations.

So it’s similar to relationships, you know, if your wife, or husband, or parents, or children, the worst possible thing that can happen is a mismatch between expectations and reality and getting surprised. And so that’s probably where a lot of the, you know, compliance problems arise where grandma who wanted a conservative or aggressive portfolio and got the opposite, and I think, that’s one of the reasons it really helps. More questions. Yes?

Participant: So I’m a huge fan of the podcast. Some of your guests on the past one in particular I used to work with and, you know, has a mantra of, “Don’t take past events and extrapolate them forever into the future.” And, you know, what Mike said about the 401(k) business, I’m a very big 401(k) enthusiast, you know, it resonates with me very well because, you know, Mike is not alone. There’s a lot of advisers that feel the exact same way.

And my question, you know, for both you guys, you know, what’s going to be the big impetus that gets advisers that have similar mindset with Mike to think about strategic partners into pushing the easy buttons for that type of business so that they’re not saying no to a [inaudible 00:32:53] business?

Meb: So, the question came in, that basically, you know, the 401(k) business has been a just a dumpster fire, just a horrible, terrible, frustrating world. You know, what are ways advisers can think of entering and trying to cross that bridge and to, you know, maybe making a part of their business?

Mike: I hope and I expect that we’re going to be a part of this. Our partnership with InvestWell, we think, is just going to be an enormous opportunity for advisers to basically take back that space and we think that there’s…

Meb: And wait, what does that look like? For the listeners that may not have heard the…

Mike: Yeah. To take back that space is that many advisers just have given up on 401(k)s, they don’t want to advise 401(k) plans, so that the employer and the participants…and it’s because it is such a pain to do that and you’re not getting paid much in the process. The allure, what I refer to as a fantasy of the robo-adviser, which is, I just put this button on my website, and people trip and their cheque book falls into my account and it gets automatically managed by somebody. I do think is a fantasy.

However, it’s in the 401(k) space that I think we’re going to, we’re actually going to get to that allure. We’re going to be able to deliver and execute on that in the 401(k) space before we’re going to do that to the general investing public.

Meb: And why is that?

Mike: The technology is there. And, traditionally, it’s the 401(k) and especially the newer 401(k)s are going to have a younger participation. Younger in age invest a little bit more, I guess, eager to be served from a technology aspect than the typical trust account that, you know, whale that typical advisers maybe hunting right now.

Meb: Any more questions?

Participant: So, 1966, [inaudible 00:34:38] where they were last year and where people got killed in the 60-40 portfolio from 1966 to ’82 was not only those equities were volatile, but more importantly, it’s the bond market that killed it. So most safety board portfolios are depending on the bonds, I mean, as a catalyst that provides the stability in that portfolio, [inaudible 00:34:59] number 33, 34, or 40, right? But we’re now not in the [inaudible 00:35:05] market. We’re in the 25-year up cycle of interests rates.

What is Riskalyze doing in looking at a portion of the portfolios that’s supposed to be the stability aspect? What are some of the options that they’re looking at?

Meb: So, the question was, if you look back historically, particularly for the 60-40 portfolio, the ’70s really stunk, and almost everything did awful in the ’70s, and bonds didn’t help. And so thinking of a world where potentially, bond rates go up, and bonds don’t help potential equity bare, how does Riskalyze think about either alternatives or other asset classes that may diversify that sort of portfolio? Or, how do you think about the scenario where, you know, you may have a low-risk portfolio but they both stink it up for a decade?

Mike: Yeah, it’s absolutely one of the probably top two pain points that we have and we hear from advisers, myself included. Number one, you have to start with the fact that cash is paying nothing or negative, right? And so you’ve got this feeling, especially the older generation where they are the ones that don’t like to lease or rent, right? They don’t want their money sitting at zero interest rates. So they’re saying, “Put this to work.” Right?

Invariably, if they’re in a 60-40, they should have a, you know, “low risk number or conservative portfolio,” so they typically look to bonds. And so one of the things that we empower advisers to do with our technology is put in a capital market assumption on interest rates. So, 20 years, you know, rising, that’s a gutsy call. You can put that into Riskalyze and show how that would impact the portfolio that’s heavy in, or has exposure to a fixed income, and obviously, you know, show right alongside of that, a portfolio, that’s maybe using…it’s either a strategic bond fund or an alternative that wouldn’t fill in that gap.

But you’re exactly right, I think, that’s why there’s more folks looking at managed futures as an example. You look at managed futures, this will probably take us down another road, but we have a lot of advisers that said, “I’d never thought I’d be in or would ever look to sell an annuity, but I can’t think of any other way, you know, that I can combat the rising interest rate environment.”

Participant: [Inaudible 00:37:13], you have interest, positives, correlation, fixed income [inaudible 00:37:23].

Mike: Yes. So, you can definitely throw in ideas and then see how they’ll fare. So, for example, if you throw in a long term treasury bond in a portfolio, we call it 40%, and then in another account you throw in a floating rate fund at 40%, not that I would recommend that, but you can stress test those and see the impact between the two portfolios. So that’s one of the most impactful pieces of Riskalyze is that, and my term that I use is, “We make the math the bad cop.”

So you’re not telling grandma not to own a bond because of, you know, some preconceived notion you have, it’s because we’re at a low and interest rates. There’s almost only one way for interest rates to go, whether it’s fast or slow, I don’t know. But let’s assume some, you know, some impact that’s, you know, some rising interest rate environment that’s going to have some impact on the portfolio. Let’s view the world through that lens, and not make the mistake of just trusting, to Stephen’s point, just trusting that whatever happened in the past is going to happen in the future.

Meb: I got two more questions I’m going to ask, so if there’s any more that…we got to wind down and on time here, sadly. Yeah?

Participant: The big elephant in the room is [inaudible 00:38:31] the increasing systematized foreign investment, you know, [inaudible 00:38:34] advisers, the standardized portfolios is fully [inaudible 00:38:39] as everybody has their own flavor on it, but that [Inaudible 00:38:43] about the same. The issue is that when…[inaudible 00:38:49] a scenario, where interest rates go on 30-year up cycle.

We are positioning the standard to…we’re setting above the failure, and yet, we’re all judged based on [Inaudible 00:39:06] various standards. [Inaudible 00:39:09] How do you guys see you’re really different? How do you position something like that when doing so increase your business risk?

Meb: Let me try to rephrase the question and see if it makes sense. You know, in a world of potentially low expected returns where, you know, almost every investment shop comes out and says U.S. equities, you got to tamper down your expectations, bonds, you know what you’re going to get, so that historical return that we have enjoyed in the U.S. and a lot of investors if you read the surveys that expect 10% returns per year, or even most, every pension fund in the country expects 8%. How do you deal with that? Is that, kind of, the final question? Or how, what are your solutions?

Participant: So that’s the framing.

Meb: Okay, that’s the framing.

Participant: The question is really about how to balance the business risks that you face as a financial adviser against financial risk that your clients face and that mismatch of time horizon between when a client is ongoing with trusting you and your portfolios actually [inaudible 00:40:22] better returns?

Meb: You got that? You want to go first.

Mike: Yeah, I got that. And so the way I look at it is, because I see this. If every adviser is chasing the same benchmark and has the same flavor ice cream, if everybody has just chocolate ice cream and you want to be a little bit different, that gives you business risk, right? From a compliance standpoint, and from a, “Hey, I took a risk in differentiating myself and I may pay for it if this risk doesn’t pay off.”

And, I think, in both instances, I think, number one you have to have conviction, you have to be doing it in the best interest of the client from a fiduciary standpoint. But the extent that you’re going to differentiate yourself from the other, the regular 60-40 type portfolio or 100% equity portfolio, to the extent that you’re not gonna be taking the, you know, the cool aid of passive investing and just holding it, is the extent that you need to have analytics that can prove why you would have made that decision.

And I’m a firm believer that, you know, in my practice, I have a very unique approach, I think, in the sense that I take bets on what I call my satellite positions. And my bets could be individual stocks, they could be sector ETFs. I want to try to add something that’s a little bit different and that frankly keeps me involved, it keeps me excited, it keeps my sword sharp. We talked about business ideas earlier.

I think, that there are so many ways that an adviser or a firm can differentiate themselves in this field. So we talk about no cost ETFs. What about a portfolio that’s 100% equities? Right? There’s no expense ratio in equities.

Meb: That was one of our, we did a blog post called “17 Million Dollar,” and had parenthesis, terrible, “17 (Terrible) Million Dollar Fintech Ideas.” You guys are welcome to steal them. That was one of them. And we can expand on that on the follow up podcast. You know, our approach and thoughts on this is pretty nuance. We’ve talked a lot about this. And so thinking about the global market portfolio, you just went out and bought the world, and thinking about how other advisers do asset allocation.

You know, we did a book on this that, kind of, showed that it didn’t really matter what your asset allocation was over 10, 30, 40 years. It matters over the next year. But in general, if you have some U.S. stocks, some foreign bonds, some real estate, and mix it all together, you pretty much end up in the same place.

We took, I think, it was 15 asset allocation, suggested strategies from Buffet, Ray Dalio, Mohamed El-Erian, everyone, and compared them back to 1972, and the delta…if you exclude the permanent portfolio, because that’s not really fair, because it has 50% in cash and bonds, those 15 portfolios only differed in performance by one percentage points per year, right? And they had hugely different allocations. Some at 25% in gold, some had 0, because the market environment, it’s, kind of, waxed and waned, you had inflation in the ’70s, disinflation in the ’80s and ’90s, and growth, but they varied hugely in any one decade.

On top of that, let me comment, I don’t actually think a lot of advisers have huge biases to the global market portfolio whether they know it or not. And a good example is, the average investor in the U.S., of their equity portion, puts 70% in the U.S. And we saw the presentation earlier from First Trust, you know, the U.S. is half of the world market cap. It’s only a quarter of the world GDP. But most U.S. investors put 70% in U.S. stocks and that could be fine. It’s been great since ’08, ’09, but that is an active bet, whether you know it or not.

You’re making an active bet that the U.S. is gonna outperform. So diversified…and my first argument is most U.S. investors don’t already have the market portfolio. Now, the way that we do it, my answer to this question and this is personal, is that, you know, we say, look, there’s nothing wrong with buying or investing. It’s great. We tilt away from market cap to value and momentum, so evidence based, academic, peer review, literature, sort of ideas. And, historically that’s a great way to invest. The challenge with buy and hold is you’re, kind of, left your own devices and clients are saying you’re not doing anything.

And historically the drawdown happens at the same time that there’s a recession, geopolitical news, people are losing their jobs, it all happens at once, think of ’08, ’09, 2000 and 2003 is a little different but most bare markets. And so my investment philosophy has always been trend-following. However trend-following has its, if I you had to say, “Meb, desert or island. What would you take?” I would say, “I’d take trend-following.” But that has its own psychological challenges. It’s hard to follow, too. And it’s hard to follow not…usually because of the bare market draw-downs, it’s hard to follow because you look different, and often that means you look worse.

And so most trend-following strategies, depending on the flavor, have performed poorly relative the S&Ps, since the bottom in ’09. So you got to deal with FOMO, you got to deal with challenges of people. So what we’ve done is, kind of, what we call holistic. We put half in the global asset allocation market portfolio to give you a fundamental anchor of what’s going on in the world. And then half in what we call this momentum in trend side. That way, people were never always invested in a binary outcome one way or the other. That’s how we do it.

On top of that, we think that a lot of the world is much, much cheaper on the equity side than the U.S. is. The U.S. bond market is actually not that bad, ironically, because a lot of the developed markets have really low yields, some being negative, and mostly arbitrary there has been an emerging but that’s been a phenomenal run. Anyway, there is a lot of different flavors you can do, and it really comes back to your philosophy as an adviser, but also what your clients can get them on board to behave well. That’s the most important things. So that could be 90% in T-bills and 10% in the theorem. Who knows? Any more questions before I got my last two?

Participant: [Inaudible 00:46:01] top three trends would be.

Meb: Top three trends? Okay. So the question is, is the question top three indicators or top three trends we see in the world?

Participant: Indicators.

Meb: Oh, so, I actually don’t think the indicator really matters. If you look at the trend-following funds, you put them all on a screen. They basically all do the same thing with the caveat that this is…so this is for the long term trend followers, some maybe breakouts, some maybe volatilities, some maybe moving average crossovers, whatever. In general, they’re going to pick up the big moves and still get whipsawed on the side to side. That’s my generic. I think, there’s a lot of parameter stability. So if you pick something like Paul Tudor Jones says, “My starting point is always 200 at moving average,” something as simple as that.

And we’ve written a lot on this, but for why it works, and the reasons that could be helpful. So I don’t think the exact metric matters, and actually you could diversify across metrics. So I use three. So they are not binary all in or out, and a 1987 comes around and you’re either the hero or the goat. But, I think, that is, you know, the challenge with trend-following for a lot of people is the same as buy and hold is that it’s hard to stick to. You know, when that trend, when you got to sell real estate in ’07, and it’s so hard to, and you don’t want to because real estate is just printing money, or you got to buy, you know, and at the time when you don’t want to buy.

Anyway, so I actually, I don’t really have a preference. So they’re all wonderful to me. It’s like children. They’re all wonderful. All right. So we only have a limit. We’ve already gotten past our time, so I’m gonna have to wind this down to two questions. We’re going to have you back on the podcast to get really deep on some other stuff.

Personally, your most memorable investment or trade. Now, this can be good, it can be bad. You’re not allowed to say children if you have them, you’re not allowed to say your wife. Other than that, with an eye towards financial, what has been your most memorable investment?

Mike: I have to say my most memorable investment was…actually, can I do two of them?

Meb: Yeah. Sure.

Mike: Because they have the same trend, not to use an overused word, but my first stockbroker. So I’m in high school, I got a job, I got some cash and I walk into a…

Meb: So this is like Dean Witter?

Mike: Yes. And so I walk in the…

Meb: [Inaudible 00:48:14]

Mike: It was actually I think a pain weber, but it might have been a Dean Witter. I walk into the office. I kid you not, here’s this high school kid who wants to invest. And it’s like a car lot. So I walk in and this older guy, begrudgingly, you know, like, “Fine, I’ll talk to this kid,” right? So I go in there, I’ve got like, 200 bucks. And then like I’m going to do like, 50 bucks a month, right? I’m sure, you know, this is 25 years ago. But I tell the guy I’m conservative, I’m conservative, I’m conservative. I’m sitting at his desk and I’m not kidding. He’s behind me putting into a coffee cup. I thought, “Well, this guy is cool. This guy is cool.”

Anyway, he invests me in a growth fund. And this is now ’98, ’99. The markets had a pretty good tear. But there is a month when I got a statement on the wrong day to get a statement and my portfolio is down. And I got the hell out of there. Right? And if you look at that market and you pull back, it was a blip on a phenomenal screen. But for me, I had told the guy, “I don’t want to lose any money. I’m a conservative investor.” What did he think? “You’re 18, you got umpteen years ahead of you, like, roll the dice baby.” So, fast forward three or four years where I don’t learn my lesson the first time…

Meb: You said the Janus Internet Fund is conservative. If you have 30 years…wait, did I spoil the story?

Mike: You did.

Meb: Oh, man, I was gonna go with the Jacobs. Or, was it the Ryan Jacobs Internet fund? There was like two or three really famous one but the Janus…

Mike: So that the first one was not that fun. The second time around, I didn’t learn my lesson, I have an adviser. Same story, my wife is in the room with me this time. This is my life savings now, right? I have a finance degree and I’m trusting this guy with my money. I’m conservative, I’m conservative. I want to invest. I want to use this as a down payment on my home. Same thing, he invests me the Janus Technology Fund, right? You know what year that was. So that goes the hell in a hand basket and I get out again.

That was actually the catalyst for Riskalyze starting. Like, if nobody is going to listen to me, I’m going to do it myself, right? So I started quantifying it in a spreadsheet which now, you know, has turned into the risk number.

Meb: And this is, kind of, like, I mean, as advisers, it would be wonderful to have…I mean, I think it’s a totally reasonable idea to have the young people to come in and say, “Look, here’s the right thing for you to probably do with your portfolio but, 20%, we’re going to let you burn this to the ground.” I’m not going to say it that way. But why don’t you try to learn? Maybe this will be your play account because it’s so hard as an investor to write that lesson on paper, “Hey, look the stock market dropped 80% in the ’30s.” All right. Got it.

But to actually live through it, the pain of losing money is almost impossible to replicate the psychological pain of it versus actually going through it. So trying to figure out a way to get people to lose money while they don’t have any and they’re young seems like a worthwhile intuition.

Mike: And I was going to say the same thing. Now we’ve had a number of folks that want to work at Riskalyze that have come to me, or they’re on a different team inside of Riskalyze, or want to become one of my analysts. And I’ll say, you know, “How do you have your own money invested?” And they’re like, “I don’t invest yet.” Right? And I say, “Well, there’s no chance I’m going to have you on my team if you’ve never had money at risk. You have no business being an on my team.” And I think it’s that whole skin in the game concept. Reading books is one thing.

You know, I can remember feeling like a rockstar, this is in high school or even in college where Yahoo! had launched, like, this, you know, basic paper trade an account, right. Everybody was paper trading. You know, and in my…

Meb: There was also the Marketocracy. Do you remember that website?

Mike: I think I do.

Meb: Then they eventually launched a mutual fund on it. And this was a site where you can go and put in your portfolio, and then the idea which, I think, is a totally, it sounds like a reasonable idea, which was you could find the best portfolio managers anywhere. And, you know, it could be this kid in Iowa, it could be this professor in South Carolina. And they didn’t have to be professional money managers, but it ended up, again, being a horrible…the fund actually still exists.

Mike: Yeah. In this case there is no money at risk, right? It’s pretend money. And so you have always…I can’t tell you how many times I’ve heard this as an adviser where, you know, a guy says, ”Hey, I’m thinking of maybe taking 100,000 and do my own, you know, out of my $200 million portfolio because I’ve been crushing in my Yahoo! account.” And I go, ”Your Yahoo! account?” They’re like, “Yeah, you put in trades and if you would have bought, and if you would have sold, and this and that. I’m doing well. So I think I’d like to try my hand in it.” Invariably, you know, I’ll absolutely…if it’s not going to hurt them and derail them I’d say, “Absolutely, take 10,000, take 100,000, let’s frankly educate you at how hard this is.” Right?

Meb: Or another way you could do it, where you set it up and let them trade. But every time they trade, you take the opposite side.

Mike: That would work. That would work.

Meb: Yeah. But we spend a lot of time thinking about the behavioural ways to help people become better investors and there’s not a lot of easy solutions. And a lot of the ones that we come up with even as kiddingly as that one are tough. So, was that both of them? Yeah. We covered both.

Mike: Yeah.

Meb: Okay. Good. And it’s funny because, you know, almost everyone and their most memorable trade is a nasty loser. It’s, like, that’s the one that’s seared in your brain, where, for me, I was trading biotech options and losing all my money. So, those are the things. Remember, the trouble with a lot of really young investors today, for example, is not having been through a bare market, you know, and having the expectations we talked about earlier being not aligned. All right. Last question. Favorite fishing spot near here that you can disclose.

Mike: You want me to announce that to all?

Meb: Not your secret pool, but where do you go? Where in the sea areas here in Tahoe?

Mike: Yeah, my favorite place, probably just like a stock pick is where I caught my largest fish and that’s on the lower Truckee, right below Boca and Stampede reservoir. There’s a spot there I call the cave and it is pristine. It’s easy to get to and…

Meb: And what were you using? Do you remember? What was like? Was it Rainbow?

Mike: I do remember I took a client with me who wanted to get into the fly fishing and then this is a short story. But he was right next to me all day, right? And I’m teaching him. It’s like having a 10 year-old with me. Tying his flies for him, and, you know, the whole nine yards. He finally makes his way maybe half a mile up the river and, boom, I land this fish. And I remember like lifting it out of the river, like, I wanted to have like somebody to cheer with me because it was such a great event. And looking around, it was just me and this fish.

Meb: Well, it’s probably a good thing because it’s like going golfing with your boss. Like, you’re supposed to lose.

Mike: That’s true.

Meb: You were there with your client, you gotta let him catch that.

Mike: That’s true. That’s true. But you also trust…you learn how much they trust you because, you know, the fishing stories and all of it. When we get back to the truck and I’m, like, “It was this big.” And he looked at me, like, ”I don’t know.”

Meb: The beauty of iPhones now you can get some evidence. Good. Well, you’d have to take me some time.

Mike: I’d love to.

Meb: I love to fly fish. And we hopefully will show you up, and not vice versa. Just kidding.

Mike: No comment.

Meb: There is a… No, I’m fairly terrible. But I actually was reading a really funny article from Yvon Chouinard, the Patagonia founder. And he’s like a lot of probably people who think about, old enough in the asset management business where you spend so many years, like, studying and reading hundreds of books and really come back to almost a simple philosophy.

It runs like, “I only use one fly. And it doesn’t matter where I am, it doesn’t matter what fish I’m fishing for.” And it’s like a partridge peasant tale or something like that. He say, “All I do is change the size and I have just as much success as I have on that, as I do anything else.” I thought that’s really just great metaphor. All right. Mike, where can people find you if they want to follow you, you writing, your work? Everything that’s going on.

Mike: Probably the easiest place is the Riskalyze blog at this time. I’ve been told that I have too big of a mouth to be on Twitter or social media with the company. So, I try to honor that.

Meb: Good. We’ll add all this to the show notes. Mike, thanks so much for sitting in today.

Mike: Thank you.

Meb: And we always end this with, thanks for listening, friends, and good investing.

RELATED ARTICLESMORE FROM AUTHOR

Shareholder Yield 2nd Edition!

Podcast Update!

What If You Owned No US Stocks?

RELATED ARTICLES MORE FROM AUTHOR