Episode #76: Phil DeMuth, Conservative Wealth Management, “Nothing In My Global Outlook Is Telling Me It’s Time To Pull Up The Anchor And Set Sail”

Episode #76: Phil DeMuth, Conservative Wealth Management, “Nothing In My Global Outlook Is Telling Me It’s Time To Pull Up The Anchor And Set Sail”

 

 

Guest: Phil DeMuth is Managing Director at Conservative Wealth Management. A psychologist and investment advisor, Phil has written for the Wall Street Journal, Barron’s, Forbes, the Journal of Financial Planning, Human Behavior and Psychology Today, and is the author of nine books on investing, most co-authored with his pal, economist Ben Stein.

Date Recorded: 10/11/17     |     Run-Time: 1:31:48

Summary: We start with Phil’s background. It’s a fun recap, involving Phil’s clinical psychology roots, his move to LA to be a screenwriter, his experiences in the Dot Com boom with friend, Ben Stein, which led to the writing of his first investment book, which eventually resulted in his managing money.

Meb dives into investing, asking for an overview of the framework Phil uses with clients. Phil seeks to construct a portfolio that matches each individual’s situation, so it’s largely bespoke. That said, in general, he starts with a global market portfolio, then adds various factors – for example small value, or momentum, or low beta… Then he’ll add bonds, some alternatives, gold, and so on – again, all relative to the individual’s needs and goals.

This leads into a great conversation on the idea of a person’s “personal beta.” This dovetails into the concept of a person’s human capital. Meb believes that adjusting a portfolio to reflect a person’s human capital is something advisors do well, giving them an advantage over robos. Phil thinks there are ways the robos can catch up here.

Next up, the guys discuss the various types of investing clients – doctors, engineers, celebrities, and so on – and whether any specific type is better or worse suited for investing. Meb’s opinion is that many doctors and engineers can be challenging clients because they’re brilliant and love to tinker. They can also have some hubris – an element of “I can do better than buy-and-hold”.

Phil agrees that doctors and engineers should be excellent investors. They’re so smart that they can do it all; yet in practice, they tend to stumble. This leads the guys to the takeaway that, in investing, there’s not a linear correlation between time/effort and returns. Phil notes the correlation could even be negative!

Next up, Meb asks how the world looks to Phil today. Phil tells us “Everything looks expensive. It’s just a question of what looks more expensive than others.” That said “Nothing in my global outlook is telling me it’s time to pull up the anchor and set sail,” even though there seems to be 10 articles each day claiming the sky is falling.

This dovetails into an interesting conversation about how nearly no one believes there will be strong U.S. equity returns over the next decade or so. But what is the psychological impact of everyone believing that? Especially in light of how terrible humans tend to be at these kinds of predictions.

From this, Meb brings up alternatives. Phil has been delving deeper into alts since ’08, when all his assets sank together. Phil tells us he’s been looking for alts that have have zero correlation to the stock market, reasonable expenses, and should have positive expected returns.

Meb switches to psychology, asking about the most insidious behavioral issues facing investors, and how to protect against them. The guys discuss our shortcomings, including a trick Phil uses with his clients that tends to help them avoid some of the damage.

Meb transitions to Phil’s newest book, which is one of Meb’s favorites: The Overtaxed Investor: Slash Your Tax Bill & Be A Tax Alpha Dog. The guys discuss how implementing effective tax strategies in investing is one of the biggest, yet underused, sources of alpha around. Phil notes that any savings in this area goes straight to the bottom line.

Meb asks for specific tax strategies. You’ll want to listen to this section, which dives into some of the details of parking the right kind of assets into the right kind of accounts. This dovetails into an idea Meb loves: (and the topic of a soon-to-be-released whited paper) avoiding dividends.

Phil tells us he hated the taxes he was paying on dividends and capital gains, so he got rid of everything issuing him dividends and distributions, and instead, sought quality investments that wouldn’t pay a dividend. He goes on to say how dividends are great for retirees who are intentionally spending the money, but if you’re earlier in your working career, and the government is taking 30% of your income via taxes, that’s not good at all! So, Phil wondered how he could get the dividend benefit, without the dividend.

It was this idea that led Meb to do his own research on the topic (the subject of the forthcoming white paper). So Meb thanks Phil for the inspiration, then takes the handoff and discusses what he found through his own research. If you’re a dividend investor, you won’t want to miss Meb’s conclusion.

There’s way more in this great episode: additional tax tips… ETNs… tax loss harvesting… donating stocks with huge capital gains to charities rather than donating cash… wills… how Meb wants a Viking funeral (yes, you read that right)… Meb’s unexpected bill from the IRS… And of course, Phil’s most memorable trade – it involves an investment that turned out to be somewhat less liquid than Phil had anticipated.

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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.

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Meb: Welcome, podcast listeners. I am back from Lake Tahoe and today we have a great show with you with one of the most prolific writers in investing. He’s written for “The Wall Street Journal”, “Barron’s”, “Forbes”, “Journal of Financial Planning”, human behaviour on “Psychology Today”. He has written nine books?

Phil: Yes, something like that.

Meb: Written nine books on investing, many co-authored with his friend, economist Ben Stein. He’s also the founder of Conservative Wealth Management where he works with high net worth clients. On top of all that he has a PhD in Clinical Psychology, welcome to the show Phil DeMuth.

Phil: Fabulous to be here. I’m thrilled to be on the best of all possible podcasts.

Meb: So I’ve known Phil for a handful of years and he’s a local-ish here to LA, to the Manhattan Beach studio. So he’s in studio and we catch up every once in a while but, you know, I think for context, Phil, we like to start, get a little origin story. I want to hear how you went from the beaches of Santa Barbara to getting a PhD to now being a money manager and author. What’s the kind of origin story?

Phil: Well, I was a clinical psychologist for many years and that was a lot of fun but I found that I had just as much interest in money as I did in psychology, and I would often get sidetracked by asking patients not about their sex lives but about their financial lives. And this became more and more interesting to me…

Meb: Much more interesting.

Phil: …so and at the time I inherited a little bit of money when my mother passed away by a very little bit so this immediately plunged me into the world of morningstar.com. I learned about how to pick five star mutual funds and that was a great way to riches until it wasn’t, and so the whole thing seemed to be much deeper and more complicated than I thought. So this is always a side interest. But then I also realised that I had a burning desire to be a writer and that’s what brought me out to Los Angeles, and I spent a few years labouring away in the vineyards of Hollywood, a terrible, terrible idea, terrible business but it taught me great humility. So that great humility has never left me.

Meb: We often, you know, like and I have a lot of friends in that world and it’s just as competitive as like investment banking but worse pay and much more random. You know, the outcomes are, you know, there’s a lot more just kind of luck and relationship based, of course, but really hard, but it’s fascinating to me. That and the restaurant world are kind of my two nightmares, investing in movies and investing in restaurants, but it’s endlessly fascinating and there has to be big money there or else, you know, no one would do it. But you know, as you were chatting with Jeff before the show started, it’s a fascinating world. So all right, so you started writing, at what point did you transition to writing about investing?

Phil: Well, one of my pals out here was Ben Stein who’s an economist and an actor or something of a humourist himself, and he and I would have lunch all the time and would obsessively discuss the stock market. This is during the dotcom boom, and we’re both kind of effortlessly getting rich on a very micro-scale as we watched our stocks just go up every day. It was a great life, you just check, you know, Yahoo finance every five minutes and you were richer than you were before. So it was all good until about 2000.

Meb: But by the way, that is probably a pretty timely feeling for a lot of people right now in your, what, eight, nine bull market or however you look at it, but the U.S. stock market’s been going up. All right, so just keep going.

Phil: Well, and by the way, that’s one of the things that terrifies me because I do find myself looking at portfolio performance just as I was doing in 1999 and although now I’m smart enough to know that this is not necessarily real, what I’m looking at. So this…

Meb: That would be a great like…okay, you know how OkCupid, the dating site, publishes all these analytics, it would be great if we could somehow reach out. Schwab, if you’re listening, Fidelity, Interactive Brokers. I don’t know who the most forward thinking kind of brokerages but, say, all right, can we get a median, an average number of times account is checked per day per month across your universe and then…because I know better men can do it because we’ve chatted about this but to be able to do it back to, you know, say, the ’90s…maybe Schwab could do it. We’ll reach out, see if they can come up with a stat. It would obviously be very coincidental, right? It would be exactly probably what we’d expect. I don’t know how… Anyway, post-podcast, we’ll reach out, see if we can get some of those stats, but go ahead

Phil: It’s a great metric and I’m sure you’re right, it’s completely cyclical with the market. So Ben and I are having lunch and then the whole stock market, you know, falls apart, it’s 2000, 2003, and we’re both kind of there, you know, licking our wounds. And Ben says to me, “You know, this idea that you cannot time the market, you can’t time the market, there’s something kind of fishy about this because you can seem to be able to…it makes sense to be able to buy things when they’re cheap and sell things when they’re expensive in many, many domains in life. You know, if you’re buying milk at the grocery store or gas at the gas pump, you have some sense of when gas is expensive or cheap, and yet in the stock market, the most efficient and liquid market, transparent market around, they say, “Oh, you can’t time the market. Well, that’s like saying you have no way of knowing if stocks are cheap or expensive.”

Meb: Well, the funny thing about that is almost every person who admits that you can make a fundamental analysis of a business, so a lemonade stand, also almost always agrees that you can do it for a house or a car or a stock, and almost universally those people say you can’t do it for an entire market, which has always been strange to me, right? They say you can value the lemonade stand. I’ll tell you that’s expensive or, “No, that house in Vancouver should be worth $1 million instead of $2 million.” That’s crazy. Or, “Hey, why would you ever buy this stock at 300 times earnings?” You know, that all makes sense to them, but when you apply it to the stock market, it’s been so, you know, just accepted for so long that I think people… And it’s hard, it’s probably hard for a lot of reasons, but anyway, keep going, sorry to interrupt.

Phil: So I said, “Well, let’s look into this.” So as a psychologist, I’d had some graduate course work in statistics. So I said, “Well, let me just get a data series and let’s see if that’s true.” So I went to, I think it was Global Financial Data, I got their total returns data file on the S&P 500 and said, “Let’s find out if this is the case.” So I took a look at, like, I think it was an average 15 year moving average of things like price to earnings ratios, price to sales, price to book value, and as well as just price itself, and wanted to see if there was any way you could time the market just using these kind of simple metrics, long-wave metrics. And sure enough, it seemed to make a huge difference. If you bought at periods when the market was very highly valued by all these metrics, and they all tend to cluster together anyway, your long term investment returns were very poor. But if you bought during financial crises of one kind or another, the Great Depression, anytime when the metrics were all depressed, your long-term returns were very good. So Ben said, “Let’s write this up. This is a book.” So I said, “Well, I don’t know any publishers,” and he says, “Well, let me see what I can do.” He sends off one email and we have a book contract in 10 minutes.

So we set to work writing this up and so suddenly I had like a little book out, “Yes, You Can Time the Market”, a sort of long-wave financial market timing and I thought, “Well, if I’m doing this and I’m investing my own money,” I said to myself, “it would be no work at all for me to just take on other people on the same investing journey that I’m going on. So I’ll just put up a website, put up my phone number, and if anybody calls and says, ‘Phil, we’d like you to invest money,’ I can do that just as easily as doing it for myself,” he said. So then suddenly I was off and running as an investment advisor.

Meb: And so fast forward, man. When did that book come out, ’04?

Phil: That was 2004, yes.

Meb: Man, fast forward 10, 15 years, you have 9 books, a multi-hundred million dollar investment business as a solo practitioner and it’s… Phil, I’m gonna get your compliment particularly later as we get through this interview as being one of my favourite writers, but so I figured we’d start with one of your more recent books. And a lot of them have similar themes, but then we can talk a little bit more about kind of timing the market ideas and everything else interspersed. But one of your more recent books I really like, “The Affluent Investor”, came out a few years ago. Great overview on investing, talks about portfolio fundamentals, talks about psychology, which by the way as a side note, my brother who did hid PhD in Psychology and it took him like, I mean like 10 or 15 years, and he was one of the reasons that I took time out from grad school and worked because he’s like, “Meb, take a year off before you go back to grad school because it may be a long slog,” and so that unintentionally pushed me into money management because I took a year off, and this would have been in 2000 and 2001, and then it was too much fun and next thing you know, I forgot about biotech and became an investor. Anyway… But I have a big interest in psychology as well. So all right, so you talk about personal finance, taxes, retirement, everything else. Give us kind of like an overview of your framework for how you approach investing. How do you think about it? That’s a broad question but what’s… If someone came to you and said, “Phil, what’s your general kind of approach in how you put it all together?”

Phil: Well, I suppose everybody says this, but I really do try to do it is I try to really construct a portfolio that matches the person’s life situation, you know, the industry they work in, their preexisting holdings, all of that, what we call the risk tolerance, stuff like that. So I really try to customise it. It’s bespoke to a higher degree, I’m not just putting everybody in a 60/40 silo. But that said, I do have certain legal blocks that I tend to work with. So I suppose I start with just the global market portfolio and then I tilt that in particular directions. So I would be inclined to do long-only factor-based investing for, you know, small value stocks, for momentum stocks and for low beta, low volatility stocks, and do that all over the world. I would titrate that with bonds to whatever extent necessary, and I would also cut in some alternatives, some gold and some liquid alternatives from companies like AQR Capital that seem to do a pretty good job in that space. So it’s a mixture of those things, and then it gets customised if they’re very high net worth, if they’re very concerned about taxes, I get into zero dividend stocks and stuff like that, but basically…

Meb: Don’t you worry, we’re gonna come back to that. But you know, talking about taking this from kind of theory to application, one of the nice things… Like, so if I just ask you a description, you know, it’s pretty broad, but then one of the nice things about your books is you get very, very specific on ideas and concepts, and we’ll get to those in a minute, but… So let’s talk a little bit about a high net worth guy walks through your door. And by the way, one of my favourite things about your website is you have a minimum for financial planning wealth management, but you say, “Look, if you have less than this, I’ve posted the global market portfolio using ETFs, go do it on your own, have at it, it’s free,” and that’s pretty awesome. You don’t see a lot of people kind of advocating this no-cost portfolio for younger, or may not even be younger, but people with less money, but by the way…

Phil: There’s a company called Cambria Investments that has one which is like that.

Meb: Yeah, yeah, but we charge, and we watch or we don’t on the ETF but, yeah. So the global market portfolio, let’s say if someone walks through your door, and we’ll talk a little bit more about the kind of planning, concepts, ideas and how you may skew it, but in one of the ideas I also wanna talk about, so your company’s name is Conservative Wealth Management. We had on the podcast last week a guy who was talking, he says, “You know what’s interesting is,” and the company was Riskalyze, and they have 20,000 financial advisor clients and he said, “in general we found that a lot of the advisors, their own risk tolerance, you know, so some would be really conservative personally or really aggressive personally would skew what their clients ended up doing and so it ended up being a little self-selection bias.” Anyway, it’s less of a question, more of a comment, but think about designing these portfolios. How do you kind of go about it? So you evaluate the net worth, risk appetite, draw-down threshold, return expectations. Is there kind of a template you start from or is it automatically kind of getting customised from the get-go?

Phil: Well, it depends on where their human capital is centered. In other words, a person who’s in financial services has a very high beta career. Their income, their whole life is going to be closely tied to the performance of global financial markets in most cases so you want to dial back on that kind of a sector. The secret sauce I think is that I think I do it all through beta for the most part. I just look at what is the beta of this person’s human capital, and then depending on what that is… For example, I have a friend who’s a bankruptcy attorney and he has like 100% negative beta in his life. He can invest incredibly aggressively because his human capital is thriving. In the middle of the worst recession, he’s just like buying a new Ferrari.

Meb: And human capital is something that I think that current financial advisors do really well that a lot of the automated solutions don’t do a good job of yet. You know, and thinking about project careers and say this person is in a kind of future-proof career is this sort of thing versus this guy who his job is gonna be automated and going to be done by robot in five years, you know, or… Well, thinking about human capital is something that I think financial advisors do a great job of that most of the platforms don’t do a great job of yet. And that’s actually a really fascinating insight that you just mentioned on the kind of negative correlation, but keep going, didn’t mean to interrupt.

Phil: It could all be automated because once I enter a…if I go to robo-site and enter what I do for a living, that matches up with a federal job number description, and once we know that, we could probably infer a certain amount about…I mean it wouldn’t be as good as actually talking to somebody and finding out exactly, you know, if they work for the post office or if they’re a college professor or what, but even the robo advisors can make headway there so I’ll probably be out of business in a few years too.

Meb: Okay, but it’s funny because, you know, as far as temperament of investors and, you know, you list on your website the different kind of types that, you know, may work with, are there any that you think are particularly predisposed to not, and we’re just broad generalisations here, but investors who may be kind of their own worst enemy or struggle with a plan or others that actually are kind of well suited for investing? Because I have my comments on this but as far as, you know, doctors, lawyers, engineers, exact scientists, athletes, what’s…any kind of thoughts as far as your experience?

Phil: Right, well, my experience is somewhat limited because my clients are self-selected. They’re invariably people that have read the books or articles or heard me talk someplace, so they said, for some crazy reason, “We sort of like the way this guy sounds, let’s go this way,” so we already have sort of a similar temperament. And I imagine there are a lot of people out there, celebrities, athletes that just basically want to get rich and who don’t darken my door with their queries.

Meb: But it’s funny though, you know, I mean, and I can say this because I’m an engineer, but historically a lot of our individual clients that have been doctors and engineers have been really challenging, and we can talk about psychology, but super brilliant, bright but they love to tinker, the engineers do, so they’re always trying to mess with the portfolio. The doctors usually have a little bit of, I have a lot doctor friends, a little bit of hubris because they’re so smart, and so there’s an element of, you know, I can do better than this, you know, buy and hold or whatever it may be. I mean, probably I couldn’t even get into celebrities and athletes because they tend to be the worst.

Phil: But you see doctors and engineers both should be terrific investors, if you think about it, because they’re both extremely smart, they can get the big picture, they’re used to making consequential decisions, risk analysis. They can sort of do it all, supposedly, but in practice they tend to stumble.

Meb: Well, you know, it’s like…it reminds me that so many careers, the harder you work, there’s a linear exponential outcome related to that. So if you’re a doctor, the more you study, engineer, probably the more time you spend testing and designing coming up with the ideas, you know, usually the better you get. And in investing, it’s not necessarily the case. I mean, sure, if you’re in a small niche or 40 years ago, you know, doing security analysis, the harder you work, but for the broad population, the more time you spend on investing, it’s not necessarily a linear outcome.

Phil: It could be a negative outcome. You’d be better off playing golf for the most part.

Meb: Yeah. Which is another thing for me that the more time I spend, there’s no improved outcome. I’m an awful golfer but I’d love to go. It’s kind of like an outdoor happy hour for me. Okay, so let’s talk about a little bit about the world today. You design these portfolios, but how does the world look to you right now? Are your clients asking about Bitcoin? Is there anything you know in particular… We talked with Rob Arnott, and he has this great concept of over-rebalancing, so kind of tilting portfolios. Are you kind of consistently updating theory, as in looking at new funds? Kind of what’s the world look like to you today?

Phil: Well, to me, everything sort of looks expensive and so it’s just a question of what looks more expensive than others. Every quarter, I look at all the funds that I own, all the different asset classes, and this will come as a great shock to you, but I put them in sort of a grudge match with each other depending on momentum, trend and valuation, and I have different measures for all these things. And so I will tend to tactically tweak my allocation to all these things depending on how they look. But then I also, you know, take a look at sort of the global macro picture, and I have a few metrics that I look at for that, and nothing in my global outlook is telling me it’s time to pull up the anchor on the ark and set sail. I’ve been fully invested, in fact I’ve been over invested, you know, ever since the financial crash and it’s been…you know, it seems like it would’ve been an easy time to be an investment manager, you know, since 2009, but actually it’s been somewhat difficult because every day you read, you know, 20 articles about how the sky’s about to fall.

Meb: We tend to be pretty quantitative about the valuation metrics, you know, and we just send out a quarterly valuation updates to The Idea Farm, and we’ve been saying this kind of same message for the last handful of years, which is the U.S. is expensive, but most of the world is reasonable to…a lot of the world is actually really cheap. And there’s not a whole lot of countries that are…probably not even really any that are in bubble territory, which is usually pretty rare. Usually you have something going bananas and some sort of crisis, but right now it doesn’t seem like there’s that many thing. And so I took to Twitter, and so you only tweet about every three months, but every day…I get them when you do, but I took to Twitter because I had a question. I said, “You know, I spend so much time with valuation and almost every big money manager,” so AQR, you mentioned GMO, Research Affiliates, go on down the line, I like put about 20 of them on there, including Vanguard and Jack Bogle say you should expect lower U.S. stock returns. And in some cases…you know, and that number goes all the way down from, I don’t know, let’s call it 7% nominal all the way down to like -4 or whatever GMO has, right? So everyone is saying that.

So I took to Twitter and I said, “Actually, can anyone name a single shop that is expecting higher than historical returns?” So I mean, if you think about it, it should be almost 50/50 given, you know, just the way the world works, higher than expected returns over the next 3 to 10 years for U.S. stocks, which would be about 6.7% real or 10%-ish nominal returns and I couldn’t find a single one. Out of 30,000 people we queried, you know, not a single person could find… And so that’s the only thing that gives me pause is like is there anything we’re missing? Is there something that outside of valuation is causing the world to be, you know, for U.S. stocks, to actually not be that expensive? I don’t know. It’s something that I, anyway, that I was thinking about yesterday. I don’t have any good answers, but as the psychologist, you know, I don’t know if you put your hat on and have conversations with clients or the decades of studies you’ve done on market history, any thoughts on that?

Phil: No, that’s a perfect description of the environment that we’re in. Virtually everybody expects low returns going forward. Nobody thinks, oh, the returns, I mean, maybe [inaudible 00:23:10] does, but nobody seems to think, oh, we’re in for a bountiful return, retirees have nothing to worry about because the market is gonna go up, up, up and it’s gonna fill the pension funds and the IRAs and everybody is gonna be in great shape. But the thing is it is not given to human beings to know the future. And human beings tend to have a pretty terrible ability to make these kinds of predictions. Somebody could invent a flying car tomorrow or, you know, cold fusion or some kind of breakthrough invention that will radically change life for the good. I’m not betting on it necessarily, but we just don’t know the range of possible when it comes to the future.

Meb: It’s the beauty of the job we do. It’s endlessly fascinating. I don’t have any answers. I mean, the thing, if I had to summarise it, this would be kind of my guess, is that everyone knows the U.S. stocks are expensive, but given that bonds only yield a couple of percent, they don’t really know what else to do, so a lot of people just continue to own U.S. stocks. So if you look at the percent that investors have allocated to stocks over the last 70 years, you know, it’s really high. And that in and of itself is a great contrary indicator over time, but I don’t know what the… Like you mentioned, all the indicators and economic indicators are strong, you know, whether it’s ISM or, you know, all these other things, nothing is really signalling warning signs other than valuation, in my mind. Maybe there’s some more. Anyway… But I think there’s a lot of opportunity in form. But that’s kind of the beauty of the global market portfolio in general is you end up owning the world, and as a good starting point. You also do a little bit, I think, you mentioned in alternatives.

Phil: Yes. I took an interest in this especially after 2008, wishing I had been more diversified than I was at the time. Again, I assumed that if I own all these, you know, I owned stocks in emerging markets, and I owned stocks in foreign developed markets, stocks in the United States, and I owned real estate investment trust, all these things, and they all just sank together like a stone. I thought, hmm, I could have been a little more diversified, I wish I had done a little more there. So that started me on this quest to find liquid alternatives that I could put clients in. And that’s been a longstanding hobby. I’ve had some disappointments along the way, but I have, I think in the last few years, I’ve finally come to a suite of funds that I tend to allot on.

Meb: Is there any particular area? Does it tend towards, you know, is it long/short equity or managed futures or Bitcoin?

Phil: Yes, all of the above.

Meb: All of the above?

Phil: Not Bitcoin.

Meb: I just saw that today the, I think it’s Sweden, has an exchange traded Bitcoin and now an Ethereum product where I love, I am a casual observer, but love watching the fund innovation that comes out. I even saw today that Shiller was launching with Barclays a single stock CAPE ratio fund in Canada. Anyway… So but here’s…my biggest problem is keeping up with all of these. And I’ve been trying to get someone to write a newsletter for years on focusing on liquid alts just so I could pay them and read it, you know, because there are so many of these and I would love to read these little profiles of all these funds and say, “Hey, no, no, no, you should never invest in this one because it’s a terrible idea methodology.” Anyway… Maybe we can talk someone into doing it. But, so, a couple category, any favourites, any that you’re thinking is kind of evolved or…

Phil: Well, again, the magic that we’re looking for with these alternative investments is we want zero correlation to the stock market. Because you see in most hedge funds have about a, you know, 0.6, 0.7 correlation to the stock market so you’re paying a lot of money for a very thin slice of diversification. So I’m really looking for that diversification. So that’s just an immediate screen. It’s gotta have a very, very low correlation. It has to have somewhat reasonable expenses, and it should have it positive expected returns, and if it has positive actual returns then I really like it.

Meb: Yeah, that’s gravy. All right. Let’s put on your psychology hat. You know, my background is in biotech, and I love thinking about trying to… We just saw the recent Nobel went to Thaler who, you know, has written a great book called “Nudge” and talking a lot about psychology and, you know, how we can muck up our decisions, but also kind of be aware of them so that we’re aware of our plumbing and programming so we don’t do it. So you talk a lot about behavioural problems. I mean, overconfidence, overtrading, yada-yada, we can go on. What are some of the most insidious ones and what do you kind of think about and as from a not only a psychologist but also a practitioner, kind of, is there anything you implement as well to try to keep your clients from being their own worst enemy?

Phil: Well, what’s the worst thing a person can do? Typically it’s to sell out at the needier of a market crash, which is of course exactly when everybody wants to sell because it’s just too painful to hang on to stocks at that point. So here is this, a trick, a technique that I use when talking to clients at such a time, is I will listen to all of their concerns endlessly, I will do as much hand-holding as I can, and I will point out the, you know, problems with selling at that time, it doesn’t really solve any problems, it just creates a new problem of when are you gonna get back into the market, which of course is possible to figure out then. But typically they say, “You know, Phil, I really do wanna sell everything,” and I’ll say, “Okay, let’s sell half,” and they tend to go along with that, not realising that I’ve kind of snuck in the idea of half. So I am very loath to let anybody completely liquefy themselves at those times.

Meb: That’s an interesting one because we’ve talked about it in the podcast about this before where so many investors wanna think only in binary terms, so I’m in or I’m out. And I have family members, I used to talk to them about this, my father is so bad about this where he had a position in silver and would just stress about it day in, day out, and maybe he liked to stress about it, I don’t know, but he stressed about it and say, “I don’t know if I should hold it or I should just keep it in or, you know, go sell it,” or what. I said just, “Why don’t you sell a quarter or come up with a plan to sell it 10% each month or each quarter for the next 5 years?” But I think part of the reason that people don’t wanna do that is because they secretly like to gamble. They secretly… And I don’t know what the psychological, you know, reason for this is but they want something to cheer for or because it’s boring to be average and it’s boring to kinda sell a quarter every year or something like that. I don’t know. Any thoughts on that? I mean…

Phil: No, people love to gamble and, no, it’s very… When they say they wanna sell all, what they’re really saying is, “I want the pain to stop, I don’t want to be lying awake at night.” And that does tend to lead to this all or nothing thinking, which is not the smart way of proceeding. Much better to say, “Let’s sell 10% this month and then reconvene next month and maybe sell 10% then.” They don’t wanna be rational about it, they just wanna be done.

Meb: And that’s kind of like, you know, as we’ve been managing money for over a decade now, you know, and started to implement a lot more concepts that are not necessarily what can be considered to be the most optimal but rather it’s the most optimal for people to stick with it. And usually that often means dialling down the volatility and risks to lower than it should be given their requirements, right? You know, a lot a lot of people, it’s hard to tell a young person, “Yeah, you just go ahead and be 100% in stocks,” you know, because the compliance with that is probably pretty low. Any other major kind of behavioural, if you had to rank them, you know, ones that you think are particularly insidious or that pop up with your clients or yourself that you’ve experienced as well?

Phil: Well, I experience all of them.

Meb: Yeah, me too.

Phil: The only reason that I can invest it all is because I have made every single possible mistake. If somebody wrote a book of investment mistakes, I would be in every single channel.

Meb: That’s number 10, it’s a great idea for you and maybe a little cathartic. I’m gonna go through and talk about all my worst mistakes. That might be a good idea, Jeff, a good blog post us. Deputy Jeff’s ongoing weekly option trading snafus. Interesting.

Phil: I subscribe to a service to give me these reports over the phone once a week, you know, back in the day. I mean, what an idiot.

Meb: But look, hey man, the newsletter research business is a multi-hundred million dollar business and we have friends in that world and I think there’s a full spectrum of, just like the investment business, just like everything really, a full spectrum of high quality down to very poor quality. And I think most people, here’s the challenge, I think most people would love to invest correctly, and there’s such an education gap which is such a shame I think, on it’s a lot to know and a lot to be aware of. So we had William Bernstein on and he gave us an estimate, what percentage of people do you think could or should be managing their own portfolios?

Phil: Well, first Willie Bernstein, a great hero of mine. Love William Bernstein. That was a great podcast, by the way.

Meb: So you already know what he said.

Phil: I don’t remember what he said but it would be, unfortunately, it would be a fairly low number. And as you we were talking earlier, you were mentioning how it’s an area… People can put a lot of time and effort into investing and have very little to show for it and even have negative returns to show for it. So it’s a tough path to go down. Especially, then you have Wall Street with its big supermarket of financial products, you know, there’s a siren luring you towards the rocks at every point. So it’s a very tough business to do by yourself, unless you’re willing to just be completely passive, you know, I’m gonna buy a few index funds and I’m just never gonna look at it again. But that’s tough because you do tend to look at it and, “Oh, it’s going up, oh, I like that. And what about this fund? Here, this one’s going up even more, why didn’t I buy this one instead?” So it’s a real trap.

Meb: Yeah. You actually likened it…I mean, I had a quote from talking about Wall Street in general, you said, “If your account statement is from a name brand Wall Street firm, I can surmise you are ensnared in one of their Venus flytraps. You’re anesthetised,” I can’t ever pronounce words when I’m reading them, “but a sticky sweet promise of money while the pod closes around you and now your fortune is slowly being digested for their benefit. That’s how the fame is played.” Which is actually used to have a Venus flytrap, it’s a really hard plant to keep alive, by the way. Anyway…

Phil: Doesn’t it grab your hand at night while you’re sleeping and try to…

Meb: Yeah, I know. I’m bad at plants in general. My green thumb is black I think. We just had to get rid of all…we had to take all of our plants out of our house just because we got termite fumigated. So how did…it’s good news because you end up cleaning out the house but bad news because I had to move. I was trying to watch the Broncos and my wife was like, “We gotta move all our plants now,” and I’m like, “Oh my God, you have got to be kidding me.”

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Meb: I wanna transition to your newest book, and listeners of the podcasts, if you hear the name of this book, don’t turn this off because this is probably the most useful and this is one of my…Phil, this is one of my favourite books I’ve read in investing. And the reason why is because it’s infinitely useful. So we spend most of our time on this podcast talking about investments and how to construct your portfolio and best practices and things not to do. But one of the biggest determinants of final return is avoiding taxes. And you know, so you’d written “The Overtaxed Investor: Slash Your Tax Bill & Be a Tax Alpha Dog”. And I highly recommend everyone listening to this, buy this book because it’s very specific and it talks about all of these concepts and ideas and things you can put into practice. So let’s talk about this. What was the motivation for writing this and then we can start to talk about some of the various tax tips and ideas for investors can put into place. So what caused you to write your 9th book?

Phil: Well, I had my own taxes were completely impenetrable because we had a little family business that issued some K-1s and it was filed in six states. It never made me any money, except for the attorneys and the accountants, but it made my taxes impossible to understand. We got rid of the family business and suddenly I could just look at my naked little tax form and I said, “Wait a minute, what are all these taxes I’m paying on dividends and capital gains? Where is this all coming from?” So that caused me to take a very, very hard look at my investment practices. And I realised that just as for years I’ve been preaching about, you know, keeping investing expenses low, expense ratios on mutual funds, ETFs, stuff like that, I realised that there was now a similar crusade to be launched about keeping investing taxes low. Because, you know, in California if you’re a high bracket earner you can pay 33% of your dividends every year just straight to the Franchise Tax Board in the U.S. Treasury. So this is a huge area. And it’s also, it’s a free lunch. If I can in, other things equal, save you money on your taxes, that all goes straight to your bottom line. So this is a great area of focus for advisors, I think.

Meb: And this is one of the biggest, I think, advisor alphas. You know, we talk a lot about advisors and I’ve kind of made the comment that asset allocation, which is what many advisors focus on, is probably one of the least important relative to these other buckets like behavioural coaching we talked about, but tax alpha and…I mean, it takes me at least a week or two a year to do, I mean, like full time to do my taxes. It’s such a nightmare, but if you can do the little tricks and make sure you optimise, I mean, it’s probably by far the biggest amount of alpha that an individual or even, you know, a company can add. And so, let’s talk about a few. So what are kind of the some of the biggest tax tips you can name for investors they can kind of take away from optimising their investments.

Phil: Well, I suppose the biggest one for most people, that most people fail to do properly, is they should fund their retirement accounts to the max every year, and ideally fund the right kind, a Roth or a traditional IRA or a 401(k). People don’t tend to do it because they prefer to have spending money right now, which is nice to have, but it’s even nicer to have when you’re 85 years old and standing in the bread line someplace. So it’s very important to do that. It’s a real tax benefit built into the tax code, everybody should do it. That’s just basic. Beyond that, I think there are some clever things people can do with parking the right kind of assets and the right kind of accounts so to the extent to which you have tax deferred accounts and/or tax free accounts versus taxable accounts, you wanna park the right kinds of investments in each of those. You wanna park your tax intensive assets like bonds or real estate investment trusts or a lot of liquid alternatives tend to work better in IRA accounts, and 401(k) qualified accounts, and your accounts that you just wanna just grow to the sky, like a Roth account, you should go for broke packing your best, highest growth investment ideas. And taxable accounts, you need to invest that in a way that’s very tax sensitive because the tax man has his hand out every year and is gonna be reaching into your pocket for his cut.

Meb: So there’s a couple of…I mean, a lot of these are kind of basic one-to-one ideas but they make a huge impact. I mean, one, that many investors aren’t aware of is, I mean, simply mutual funds that have high turnover. And a lot of people don’t even know this, I mean, you can invest in a mutual fund that may be down on the year and end up having a huge tax bill because of its turnover and gains that it’s had and withdrawals and everything else goes on in it.

Phil: Done that. I’ve had that happen to me, yes indeed. I know it well.

Meb: I need to give you a compliment, Phil, because I don’t know if it was subliminal or it kind of put a bug in my brain and then I forgot about it and rethought about it months later because I read this book… I’ve been trying to get Phil on the podcast, by the way, for like a year. And Phil said, “All right. Well, let’s come on when the tax…” You know, Trump has just got elected.” He said prior elections that, “I’ll come on when the tax situation is more clear.” And so three months go by and I say, “Phil, it doesn’t look like it’s getting cleared,” he says, “I know, but let’s maybe wait a bit.” And then three months goes by, three months goes by, so I said, “Phil, you just come on the podcast and we’ll do another one once it’s clear, if and when it ever gets anymore clear.” So I’d read your book and loved it and first thought was, man, I need to get my own house in order. Second thought is I read this chapter on it was you sitting down with Ben, I think in Warren Buffett, having a lunch conversation or a meeting, but this concept of zero dividends. You wanna talk a little bit about that because it’s been an area that we’ve now written a paper on, it’s not out yet but we’re almost done, that echoes a lot of these sentiments. You wanna kind of roll that idea and I’ll chime in as we kinda talk about it?

Phil: Right. Well, this is what I came to first, really, with my own account, I looked at my taxable account and said, “What are all these dividends and capital gains I’m getting from mutual funds and whatnot? It’s time to clean house a little bit.” So to the extent to which I could, I got rid of anything that was issuing me a dividend cheque or, you know, yearend distributions of any kind and I said. “Well, now what? I’ve got to buy something that’s not gonna pay a dividend.” But then that’s sort of…

Meb: And that’s crazy to me. All the retirees listening to this are, if they’re still listening at this point, we’re starting to talk about taxes, but everyone listening to this says, “Whoa, wait a second, Phil, wait a second, Meb, I mean dividends is like the most time honoured investment approach on the planet, and you’re saying that maybe you should be avoiding them,” and that’s pretty…that’s probably one of the top five investment, like if you had to have like investment commandments, you know, that’s probably top five, dividend investing, yield investing, that people love because they want those quarterly cheques, right? But you’re saying maybe that’s not ideal.

Phil: Well, and they’re right. I mean, I’ve even written a book about dividend investing, proposing it. And dividends are fabulous. I love them as a value investor and I love them for retirees. To the extent to which you’re gonna be spending the money, dividends are great. But if you’re still in your working career and you’ve got 20 years before retirement, and the government’s just taking a third of your dividends every year, that’s not so great. So in that respect it put me back in the position of saying, “Okay, so how can I get the benefits like dividend investors get without getting the dividend?” So it put me in a very strange niche in the investment universe. So the first place I turned to was to my para-guru, Warren Buffett. And I realised that one of the ways that he’s been able to get so phenomenally wealthy is by owning Berkshire Hathaway stock which famously, I want to say it’s never paid a dividend because the first year he owned it, it paid a ten cent dividend. He immediately got rid of that, and it’s never paid a dividend since. Even though if they chose to pay a dividend, it would be a, you know, a five or a six figure sum for as far as I can tell.

Meb: It is a great quote because he says, you know, “We never paid a dividend. Just kidding.” He was like, “Let me correct that. We paid one once but I think I must’ve been in the bathroom when the board decided to issue dividends.”

Phil: Right. So Berkshire Hathaway, of course, is a holding company and he owns many, many businesses that do themselves pay dividends and he gets some taxed, he gets taxed somewhat on that. But still the net tax, the flow-through tax to me is nil. So then I said, “Well, what are other companies like Berkshire Hathaway that are out there?” And by the way, there are many people that they would just say, “Berkshire Hathaway full stop.” I know a lot of people whose entire net worth is Berkshire Hathaway and they seem to be doing just fine in the world. But to me, that seems a little bit under diversified even as fabulous as the company as it is. So I started looking for other companies like Berkshire Hathaway and conservatively run insurers that have big investment portfolios on the side. I started looking at hedge funds that were offered through some kind of vehicle, like Third Point or Greenlight Capital. So that was another way I went to look. And then finally it sort of put me back in the position that I thought I would never be in, of being an individual stock picker, the one thing that I never claimed to know anything about and suddenly I’m doing it.

So my take on this whole thing has been to try to construct a somewhat diversified portfolio of zero dividend stocks to the extent to which I can, given that I’m not a company analyst. I’m trying to sort of just look back at a business, say, “Is this business likely to be here in the next 20 years? Does it have some kind of runway ahead of it? Does it seem to be solidly run? Is it profitable? Is it of quality business?” And they have an ongoing use for new capital. So they aren’t gonna be tempted to pay it back to me where I have to pay taxes on it. So I’m looking for businesses like this and then I make investments in them.

Meb: And so, there’s very little in the academic literature about this, you know. You and I discuss, there’s a couple papers, I wanna say by some folks at AQR, maybe Chicago, but not a lot in there. And so we started fiddling around with this.

Phil: What’s the answer, tell me?

Meb: Well, we’ll go down the rabbit hole. So the first thought was, okay, what if I could just invest in the S&P but not take any dividends, what’s the difference for a taxable investor? And so you can go look up actual taxes… And this obviously gets very complicated quick with different tax brackets and so you make some simplifications, right? But if you said, okay, since the ’70s, if you’re low tax, high tax bracket, liquidation, no liquidation, in general you could save up to about a percent return per year in the S&P but not paying that dividend tax every year, right? Now, in some cases it doesn’t matter if it’s in a, you know, IRA, or it doesn’t matter if it’s, you know, certain accounts but if it’s a taxable account and you’re a high net, this is particularly insidious for high net worth investors, you could save about a percent a year. So then that started us going down the path of saying, “Well, what if…” So then it went to, okay, what about all these high dividend investors? Because we all know that dividend and stocks outperform, and then high dividend yielders outperform that, and typically growers and payers outperform non-payers and come as you don’t pay dividends, in general, that’s kind of the… But I said, “Well, that’s in a tax exempt world. What about taxable?”

And so, if dividends outperform by about a percent or two per year, what about after tax? And so, we kind of went through that study and then said, “Well, actually what are dividends at their core? It’s really just a tilt towards value.” And so I said, “Well, what if…” And then we looked at value and value does…value as a factor does better than dividends, at least historically, but what if we could replicate value… There is an idea, is could we replicate dividends with stocks that don’t pay a dividend? And that’s hard until you say, “Well, what are we really getting at?” and that’s value. And if you look at value and start to cut off the universe of, “We’re gonna avoid the top quartile of high yield, then the top 50, then top 75, then all of dividend and stocks…” It’s actually tough in the U.S. because many stocks pay a dividend, right? Until you get down to like the rest of 3000.

Anyway, the answer was, the long winded aside was that your thoughts and theories are all correct, and that if you use value or approaches that avoid the highest yielding, even just the, you know, top quarter or half of the dividend universe, a taxable investor is much better off investing in those sort of strategies than investing in the high dividend ones.

Phil: Fascinating.

Meb: Yeah.

Phil: Music to my years.

Meb: Yeah, right. So now, again taxes doesn’t matter as much, but it’s really interesting because you start to look at a lot of these, whether it’s robo portfolios or asset allocation ideas, it kind of turns some things on its head, particularly for younger investors, and again, it gets more nuanced for retirees, but I think you’re on to something.

Phil: Well, it’s interesting. I kind of was feeling my way through this universe and how I’ve tended to diversify it is I have a lot of zero dividend portfolios in what I would call low beta stocks, these insurers and things like that. And then I’ve also, because I’m, out of regret, I’m a whore for performance or something, I’ve also picked a few technology stocks that look to me like, you know, the exact opposite of anything Warren Buffett would ever buy. So I also own a few things, you know, like Alibaba or Baidu or even Amazon, and on the few that, again, these seem to be companies that might be around for a long time, they can grow, they can reinvest their earnings, and they will probably tend to do well in times when the insurers are not doing well, and the insurers will probably tend to do well in times when these things are all having hard times. So I kind of have a bipolar portfolio of these kinds of investments. When I started offering it to clients, I said…

Meb: Please tell me you didn’t call it the zero dividend portfolio because we were thinking of the marketing world, you got your psychology hat back on, I mean, there are hundreds of dividend ETFs and income ETFs, and there are hundreds if not thousands of mutual funds, then however many have hundreds of billions invested in those sort of strategies and so it’s so ingrained. I feel like we probably, we’ve filed for a couple of these ideas, but trying to think of the right name so that… It’s gonna be like the least popular concept ever. So did you actually say, “I got this great idea”?

Phil: Yes. I said, we call them zeros. It’s sort of like the mark of Zorro.

Meb: You’re worse than I am on the marketing side.

Phil: So I told clients, “Look, here’s what’s gonna happen…”

Meb: What’s funny is, going back to your email, you actually went on the…you said, you were talking about zeros and you link to a paper, I thought you were talking about zero coupon bonds. And these academic papers are so long and they’re complex, they’re written for, I think, other academics and no one else. So I spent about half the time looking in that paper for zero coupon bonds and trying to find what you’re talking about. Zero dividend payers, it all makes sense now. Okay, keep going. So you’re talking to your clients.

Phil: And I say, “Look, this portfolio is going to underperform in the market, that’s the only thing I’ll promise you. You’re gonna underperform them, the S&P 500 by 2 percentage points a year, but in the long run you’ll thank me for it because you’re gonna make it all back after tax.”

Meb: Well, the good news, I don’t think it’s gonna underperform.

Phil: No, it’s outperformed. So my clients all think I’m some kind of genius, but I’m not. I’m kind of just stumbling through. And here’s one virtue of it and that is that, when I make a mistake, it doesn’t tend to be a big mistake. Because if it’s a mistake, you know, if I see the stocks down 3%, I sell it. Good riddance, I’ve got other ideas. So the portfolio tends to be a portfolio of winners even though in the short run I can make mistakes along the way.

Meb: And that’s the beauty of it. If you can just match the S&P or the Russell or whatever your benchmark is, then on an after-tax basis, everything else is gravy. And so we found… And it gets complicated because, you know, obviously the value factor is backwards looking and it may not work as much as it used to, but I mean, you’re talking about getting up to one, two, three, four percentage point of performance versus some of these other highly taxable. Because you go back, by the way historically, I mean, dividends have been taxed at all sorts of different rates, zero, personal income, which at one point was, like, the highest was like, what, 80%, 90%, or something crazy? Who knows? Fast forward three months, what the, if any tax stuff will get passed, if it does, well, I’ll be back on, but it’s kind of like all you gotta do is match and anything else is gravy. But I don’t know any…I really don’t know almost anyone else talking about this or doing this. Do you?

Phil: I don’t so far. It seems to me like it should be a growth area because there’s actually money on the table to be had for somebody that can put this in a bottle.

Meb: What we talked about, and it’s interesting because like as a lot of these automated solutions start to transition to individual positions as well, this is one that Betterment, Vanguard, Schwab, Wealth Fund, if you’re listening, you know, to where you could build these portfolios that are, you know, totally different depending on a person’s age and time frame and, like you mentioned, tax location. So whereas in the taxable side of the portfolio, you may be investing in value, zeros, we’ve gotta come up with a better name, but when the tax is empty, you could be messing in high dividends and it would end up balancing, you know. One of the things that we talked a lot about was the old…one of the things that dividends really have a good job of is a good brand, and it was the old Coke versus Pepsi sort of concept, where the older listeners of this podcast, there was Pepsi, we used to have taste tests and have commercials where they would blind taste test and give people Coke and Pepsi, and almost universally people preferred Pepsi. And then, Coke said that’s not true, so they went and did it and found that also people preferred Pepsi, you know. But people, when told what they were, preferred Coke because of whatever, they associated with the colours or the polar bears or whatever it may be, and I think dividends have a lot of that same… By the way, we mentioned this on the podcast and we got about 10 responses from people saying, “No, no, the test was flawed, by the way, because Pepsi is sweeter. Malcolm Gladwell just proved this,” whatever.

My point is I think dividends have a great brand and so a lot of people can associate with it. And behaviourally speaking, it makes a lot of sense for retirees too if it keeps them, you know, from behaving correctly. I wonder what other, like, type of brands there are in investing that cause people to invest sub-optimally. Are there anything that’s like off the top of your head? I would think home country bias would be a big one, where people think of their own. Do you see that a lot with your investors where they want to be invested most in the U.S. or when they come to you with portfolios?

Phil: But of course. And since this is, you know, true confessions, my portfolios are not global weighted. They are over weighted towards the U.S, versus the global market, or they do tend to be much more weighted towards the foreign stocks compared to anybody else that I talk to. And I always hear complaints about this.

Meb: It’s funny, you know, and we talked… So I just did a podcast yesterday with a fellow in China, and our Asian friends are probably the worst as far as if you look at the statistics, just on a math basis on the overweight they do their own markets. I mean, everyone’s bad, Aussies are bad, Italians are bad, everyone’s bad about it. But it’s fascinating because it makes sense, you know, the same way that I cheer for the Broncos and everything else, but it can lead to some sub-optimal outcomes, but Jack Bogle says, “You don’t even need foreign at all really.” So it’s interesting. But I mean, I’m just brainstorming. I’m trying to think of what other good brands or, you know, time honoured investment troops truths are that are not, you know, necessarily true.

Phil: Well, zero dividend stocks deservedly have a bad reputation because they, unmasked, they’re probably not as good unless you apply a tax screen. And even there, I’m thinking you probably should be…there are probably other things you should be thinking about than just buying all of them but maybe not. Maybe buying all of them is the answer.

Meb: You’re frustrating me because you’re giving me ideas for like 10 more offshoots to this white paper. So I’m gonna give you the white paper and we can turn it into your 10th book. You can write the Zero Dividend Portfolio and it will sell five copies.

Phil: It’s completely under research. Even the papers that are out that discuss it are not right there to talk about the performance of non-dividend paying stocks. They’re talking about something else and this just happens to be a sidelight or something they stumbled upon.

Meb: Yeah, because I had started reading all your various posts in “Forbes”, in your blog and elsewhere because I remember trying to read the paper, and just my eyes rolling back in my head. But found that in your book, you teased out some of the charts that I couldn’t even find or probably didn’t even read, so, but…

Phil: I probably made them up.

Meb: …very buried in exhibit 75C, you were able to do it. And so listeners, seriously, check out Phil’s book, “The Overtaxed Investor” because it has some concepts here… And, you know, there’s some structures that Wall Street has made that also avoid dividends and income, so like an exchange traded note. Now, these have become very unpopular for two reasons. One is they’re a credit liability to the issuer and so when Lehman imploded, people gave up exchange traded notes forever. And the other part is you typically have to pay the bank for the swap which can be, for the…which can be expensive on its own, you know. So you’re already getting hit 50, 100 basis points for what you’re trying to replicate. But the cool news is it doesn’t pay any dividends or anything. I think Fisher ceded to exchange traded notes on equities for this reason. He put like $800 million, and I can’t remember what ETF shop, we’ll link to it in the show notes, but kind of not directly this concept, but did it as a note so that it wouldn’t be paying income.

Phil: I have not looked into that. I’ll be fascinated to find out how it happened.

Meb: Yeah, but so just thinking about structures, I mean, hedge funds notoriously are very tax inefficient.

Phil: Well, but hedge fund is the right structure. You wanna have an LP of zero dividend paying stocks because that way, you get a pass through of all the capital losses.

Meb: That’s another thing that, you know, the tax harvesting, you know, is an area that, you know, making sure that…you know, ETFs are pretty good at it, but again they can’t pass through the losses, right? They can defer, you can avoid, and that’s kind of up to the advisor or individual to make sure that their holistic portfolio is tax efficient. So what else is in this tax book? We went down to zero, you talk a lot about all sorts of other ideas. There’s one quote you had, I’m looking at your tax tips, it’s not a quote, but there’s some obvious ones that I think most people are familiar with, draw down your accounts in the correct order after you retire, don’t give cash to charities, donate, appreciate assets. I feel like a lot of people don’t do that.

Phil: Very smart, very rich people don’t do that. It’s time to give to charity, so they reach for their chequebook, and where they’ve got all these huge capital gains sitting on their taxable account. So I consider that a great public service to be able to donate [crosstalk 01:00:24]

Meb: Is it usually just because they don’t know about it or is it they just mentally compartmentalise?

Phil: Both. In some cases, they don’t know and in some cases they just think, well, here’s the chequebook. That’s how I’ve always done it, is by opening my chequebook.

Meb: Interesting. It’s funny because so many of these I’m guilty of as well. We were donating I think the profits from this last book we did, and I hadn’t even thought about donating shares. Anyway, all right. So you got another one, you say, “Call your estate attorney because the old will you drafted during the Coolidge Administration is wrong.” What do you mean wrong?

Phil: Well, it’s probably not suited for the present environment. Most people don’t really need much in the way of a will.

Meb: Okay. So let’s say someone wants to get a will or they need to update it, what’s the best way? Do they go online filling out themselves, they get a estate attorney, what’s the ballpark cost? I don’t have one, so tell me too. I don’t…I just don’t…

Phil: But you’re with a new child in place. This is the perfect time.

Meb: Shame me. All right. So what do I do, do I go online?

Phil: No.

Meb: How do I find someone to draft a will for me?

Phil: By talking to your friends that are similarly situated, that have a probate attorney that they love. But of course, the other problem now is that with everything up in the air, is Trump gonna eliminate the estate tax? If he does, what’s gonna happen to the capital gains step-up at death? There are a lot of scenarios there where eliminating the estate tax might not be a good thing for a lot of high net worth people who are not ultra high net worth. So you know, in your case, or in the case of a person who needs a will, I would put something together, some kind of a flexible document, and then review it after something does or doesn’t happen politically.

Meb: But the correct kind of line of events is talk to your financial advisor, get them to recommend a probate attorney?

Phil: That would be great.

Meb: What if they don’t have an advisor, where do they go?

Phil: They go to their rich friends, their prosperous friends.

Meb: I said, all I wanted to do and write into my will, I told my wife this the other night and just kind of watched her stare at me in disbelief for about 20 seconds, I said, “The first thing is if I kick the bucket, I want like a Viking funeral where you push me out onto a lake, you know, and then they shoot the arrow and then it burns in the middle of the lake. And I said, but then I’m gonna establish like a fund, and so I’m gonna nominate 5 friends or 10, and they all have to take archery lessons, and then…so they all get their own flaming arrows, and they get five and whoever hits it gets another bucket of money which then they have to do the Richard Pryor…” What was the movie where he had to spend all the money? “Brewster’s Millions”. Then they had to go… And she just sat there and just like, “What is wrong with you? What is wrong with you?”

Phil: [crosstalk 01:03:12]

Meb: She’s like, “No one’s gonna let you do that on a lake.” I said, “Okay, sub-clause B, you have to put this first pot of money to buy a lake somewhere, you know, and this is gonna be in some country that allows you to have Viking funerals on their lake.”

Phil: Put this all in writing. Get the court to ratify it. It sounds like a good plan.

Meb: So I am gonna ask you afterwards to give me a good probate attorney and put this into…and who won’t also certify me as being insane and say, “This person needs to be locked up somewhere.” Here’s another tax tip that I didn’t even understand, so, “Use the God-given statutory tax shelters laid out before you like a land of dreams.” What in the world does that mean?

Phil: Well, I was listening to the CPA guru Robert Keebler give a talk, and he’s a big tax guy. And he was doing a report on taxes, it was on estate taxes, and he went to his shelves and he pulled out all of the files from people that had an estate tax problem. And he looked at them and he realised that every one of these people that had an estate tax problem had one way or another been involved in maximising the value of statutory tax shelters in one way or another. And from this perspective, having an estate tax problem is a good thing. These are people that had too much money and they needed to do something about it. This is a problem we’d all like to have. And so the statutory tax shelters, there’s a chapter on this in the book that sort of runs through them, but they start out with things that are as basic as funding your IRA every year. The IRA is a statutory tax shelter. But then it can go into things like oil and gas investments, real estate, sort of correct management of accounts. You want to play all the angles in your favour so you keep as much money for you and give as little of it to the Treasury Department as you can.

Meb: Just talking to you, so many things keep always popping into my head when you talk about taxes. So when my father passed a handful of years ago, we had a family farm. So I immediately started having to learn an enormous amount about taxes, but not just various taxes, but also, and of course he didn’t have a will, so no Viking funeral for him, but so all these various taxes where not only was it, you know, federal but also then what is Kansas tax law. And then we find out, oh wait, if the farm is more than 50% of the estate, it like doesn’t get taxed at all, but then it gets set up as a family farm and it’s a huge difference and so it creates all these different incentives, and literally the farm was half of the estate, so we’re like 48%, we’re like, “Man, can we get it to 51%? Can we find some appraisers that are…”

Phil: Plant some soy beans.

Meb: Yeah, and so find some appraisers that are particularly incentivised to give us a high appraisal. But then like we couldn’t get it there so then we wanted the lowest appraisal as possible. IRS, if you’re listening, ignore. A low appraisal as possible so then we don’t have… But this is just so funny. It is so complicated. I can’t think… I mean, probably return on my investment for the time I spend on taxes is so… Why is this system so complicated?

Phil: It is a complete mess, it’s just astonishing. The guy I like to read here is John Cochrane or Cochrane, he’s up at Stanford, but he writes very intelligently about the tax code. And his idea for tax simplification is basically that we need to divorce the idea of using the tax code for political purposes to redistribute income because everybody has some particular goal about some subgroup they think needs to be specially subsidised. And instead focus just on making the tax code raise the money. And ideally he would…I think he wants to do it through a consumption tax, which is a pretty simple way of doing it. And then have the political discussion about, “Okay, well, who are we gonna subsidise? Are we gonna subsidise people that buy real estate? Are we gonna subsidise people that buy stock or subsidise poor people? All those discussions can be a separate issue, but let’s raise the money first and then decide how to handle it.”

Meb: A couple of points. So one is it’s funny, and I’m a political independent,, but I remember looking back at a lot of these, Ross Perot used to have a bunch of great charts on his website. I’ll have to look it up [inaudible 01:07:29] the show notes if he still does. But everyone who’s older remembers Ross Perot’s charts when he was running for president. But he had all these great charts as well. I mean, one of them was like, tax is a percentage of GDP. And I remember thinking it doesn’t vary that much, like it was always around, I think, 20%. It doesn’t matter if it’s Republican or Democrat, it doesn’t matter where the taxes came from. Like that was the spending and income of the government in general, ballpark. But it’s not like it was 50% or 5%. Like it was always around 20%. So I was like that’s so fascinating to me that regardless of outcome… But taxes, which sound like such a boring topic… I mean, if you read the history, tax history books and economic history in the U.S… What’s the guy’s name? Is it Steele Gordon? Again, show notes. But when they intro your book, you talked about…I mean, you were like, when the U.S. went from 1% to 2% tax, like it created a revolution and a war, you know. People started going crazy. And then I think you talked about, was it Louis XIV in France or someone, you know? And so these… And that’s back when it was only 1% or 2%, and now that it’s many dozens of percents. I totally forgot where I was going with this.

Phil: Well, we’ve gotten used to living in a very heavily taxed society. And one of the ideas about taxes is that they should at least be numerous and small rather than single and big. And we’ve really gotten the numerous part down. You can’t move without being taxed.

Meb: I remember reading one of Jim Rogers old books where he talked about the sugar farmers in the U.S. and the subsidies they get. He’s like, look, we would be better off telling them all to close down, and then just buying them all a Porsche every year and then, you know, allowing it to be a free market because it’s not a free market. And you know, I experienced that as a farmer. I mean, we get a lot of subsidies, and I get there’s reasons, but there’s so many convoluted interests, and if you watch something like the “House of Cards”, you’re like, “This can’t be really what it’s like,” and then you read the newspaper, and you’re like, “Oh, my God, this is so…”

Phil: Well, it’s very beneficial for a small family farmer such as yourself.

Meb: Well, we’re probably the world’s worst family farmer. It’s funny, we talked about on the podcast when we had a combine burn down like a year or two ago. I’m like, “Who does this happen to?” And then I got these e-mails from listeners, they were like, “Hey, I was on a combine when it burned down,” and I was like, “Really? Does this thing actually happen?” It’s like it wasn’t some sort of weird arson. Funny to think about, but yeah, it’s an endless source of pressure. I just got…the IRS sent me an email or sent me a letter the other day, it’s like, “You owe $2000 because this, this, and this is wrong,” and I spent like an hour or two going through it, I’m like I can’t even figure it out. And so if I’m gonna spend 10 more hours on it, it’s gonna be worth my time just to pay it, just like the frustration arbitrage of the IRS. Like I can’t even figure out if it’s wrong or not.

Phil: That’s the world we live in.

Meb: Yeah. Well, and you talk about a lot of other ideas in the book. I remember you talking about… Was it… You were talking about charities and how many charities pay their, this is a total tangent, pay their like a million dollar salary to the chair, to the person that’s running the charity. Was that you talking about this?

Phil: Yeah, running a charity turns out to be a great business. This is something I’m thinking of looking into, in fact this might even be a book.

Meb: A tenth?

Phil: It could be a book. But the idea of having a private foundation, you can just run with that forever tax-wise because you have almost no oversight. The only way anybody’s going to investigate your corrupt private foundation is if you are unlucky enough to get in the headlines, or if you piss somebody off and they call up the state attorney general’s office and say, “This guy is, you know, bamboozling us through this so-called charity.” But it’s just amazing how many really awful charities there are out there, and they have a wonderful tax structure wrapped around them, so I’m surprised… I suppose I shouldn’t be surprised. I should be surprised there are not more bad charities.

Meb: I mean that’s a pretty good salary, a million bucks. I think a lot about some of those structures. I mean we had looked into…I know the U.S. Virgin Islands as well as Puerto Rico, economic incentive structures, and the U.S. Virgin Islands got a little more, a higher bar, but Puerto Rico was still…I mean, and who knows, they may expand those at this point, the amount of flight and all the tragedy going on there, but we said, “Well, also sort of have to start making some money before we move our office down to Puerto Rico,” but I don’t think a financial company can move there. I think a research or publishing, but I don’t… So maybe we move The Idea Farm to Puerto Rico, it’s the one…

Phil: Well, the whole idea was to try to get hedge funds to move there, so there’s probably a way.

Meb: Oh, because, well, there was two levels. There was the personal level, so you could avoid capital gains and dividend taxes. I’m totally [crosstalk 01:12:21]

Phil: Yeah, stuff like that.

Meb: And then there was the corporate level. In the corporate, you didn’t have to live there. The personal, you did have to live there most of the year, whatever it was. Anyway, it means you can see how [inaudible 01:12:31] it was such a tragedy in Puerto Rico. And so the thing about charity is it’s cool now that you have these kind of quant websites, I think maybe Charity Navigator, GiveWell that will examine like what percentage of these charities spend on operations versus actually donations. And some of the political ones that are started by celebrities, I mean, my God, they’re some of the worst. They don’t like distribute any of the money, they just spend it on fundraisers and everything else. So who knows? But okay, I had been lost track of my nine pages of what we’re even talking about at this point. So what have you learned over the past decade? You’ve written a lot of books, what’s kind of been the biggest things you’ve changed your mind about or kind of thoughts and experiences, working with clients? What have you really learned through pain?

Phil: I’ve been greatly confirmed in knowing that everything I always thought was right. Actually that’s not true.

Meb: You know, I thought you were gonna follow that up by saying, “I didn’t know a lot but I was right.”

Phil: The books have been an important part of my own self-education so that I came into the field of finance really as a lateral, shovel pass from psychology. I sort of have felt the need to educate myself, so it’s been…I’m an autodidact and I’ve been sort of going through that process. I think that the luckiest day of my life was the day that I read “Bogle On Mutual Funds” and I got out of the glamorous world of performance chasing, and that was a very sobering experience and it caused me to look at things more statistically, more rationally. And after I read that book about 5 times, I finally understood it and that was my life changing moment back in the ’90s. Since then it’s mostly been tweaks on one thing or another. I tend to get too excited about something at any given time. Oh, alternatives, these are gonna be great. You know, I have no need to worry about other markets doing ever again, I’m just gonna have these beautiful portfolios that match up every year. So I get too excited about them from time to time, but then I somehow manage to pull myself back and the train goes forward.

Meb: What’s got you most excited these days you’re thinking about? I mean it seems like you always have a topic or an idea or a concept you’re working on. What’s been the summertime project or going into end of 2017? Anything on the brain?

Phil: Well, continuing to try to research zero dividend stocks and figure out which ones are the best ones to buy for the long run and which ones, if any, I should be particularly avoiding. That’s been…that’s a constant preoccupation of mine. And lately I’ve also been interested in charities. I think the state of philanthropy in the United States is a national disgrace, it’s a national scandal. I don’t know why, it’s not on the front page of “The New York Times” every day.

Meb: Meaning how they’re run or like how much people contribute? What do you mean by disgrace?

Phil: Meaning that in sum total, if you took all the money that was given to charities over the last 10 years and you asked yourself, has any social good been accomplished with this money? It’s not clear whether the answer to that is yes.

Meb: There’s another website that tries to quantify… Oh man, what is the name of it? We’ll have to add it to the show notes. It tries to quantify the greatest amount of good that can be done per dollar. So it’s like, you know, buying mosquito nets in Africa as a higher return on investment. And there’s, God, I can’t remember the name of it.

Phil: Well, the GiveWell site is terrific. It was started by some hedge funders trying to just give away some money on their own, that way we’ll just research charities the way we research businesses, and they will come up with some and then we’ll all be happy. And then again even their story is a scandalous story because they started doing this and they’ve been looking for years and years and years at charity after charity and they’ve come up with a list of maybe, you know, 5 or 10 charities that they like, and then sometimes even some of those get knocked off the list. So if you think about the tens of thousands of charities out there, and the ones that actually make any kind of a cut, it’s a very sad story.

Meb: We had on another psychologist talking about, and this is an area we can talk about maybe for a minute before starting to wind down, she was talking about, you know, we all focus so much on money management and investing and saving money, but she says, “Really most people spend very little time optimising on how to then spend it.” So whether it’s their own personal life, you know, buying… And she gives like maybe five suggestions. Have you read this book called “Happy Money”? It’s a…

Phil: I’ve heard of it, but I have not read it.

Meb: Good, I’ll send you a copy.

Phil: What’s the answer?

Meb: Well, the answer is it’s a lot of common sense stuff, but going back to the behavioural nudges, it’s common sense stuff kind of just like, hey, here’s how to be in shape. You eat less and you work out more, you know? But how many people do that? So the same thing with money. You know, save more, spend less, But it’s like spend money on experiences, not things, you know, so that really shiny car or a purchase may seem drool-worthy, but fast forward a few months and you’re like, eh, whatever. But you know, that trip to Africa you’ve always wanted to do with your family that you pay for ahead of time is another one that you, you know, pay for purchases so you have a long lead time to be able to kind of fantasise about it. And there’s a handful of other ones. So they’re kind of common sense, but again it’s like how do people… Do people actually do it? And trying to set up systems to make sure that you do is a little more challenging. To be thoughtful about it. Giving money is a big one. So people get, you know, a lot of emotional benefit from spending money on others.

Phil: But that’s the problem too because it’s very easy if I write a cheque or I give money to somebody, I feel great about it, but I don’t deserve to feel great about it because the question is how much good am I actually doing with that money, so that’s why I wanna try to nudge people away from just the feel-good moment. And that’s what charities pander to. And if I ran a charity I’d do the same thing. I’d have baby seals and orphans, or you can turn the page, I would do all that because that’s where the money is. That’s how the money comes in the door that pays my salary. But selling a feel-good experience is not the same thing as actually doing good in the world. So that’s essential.

Meb: And so would you say the recommendation to the end person is to you either need to spend a lot of time picking a charity that’s actually implementing what you believe them to be doing? Or is it rather, no, you need to personally be involved and either be managing or doing some of the, you know, involvement and charity work? Like what’s the kind of conclusion for what people should do?

Phil: I think getting personally involved is a terrible idea. Most charities say, “Oh yes, get involved.” They don’t want you to get involved, they want your cheque. The only reason they want you to get involved is so you’ll take out your chequebook. If you say, “I wanna just hang out for five hours a week here,” I mean they have to find something for you to do, it’s a mess. They want your money and legitimately so, you’re just getting in the…you’re gumming up the works, you know, hanging out at the office. The best thing you can do is probably to just give money directly to people. I think GiveWell’s top charity is called GiveDirectly. It just takes your money. It costs…I think 7% of the money goes to overhead, and the rest of it all just is given to people in Africa who are poor. And it doesn’t make any assumptions about, “Oh, this is what you need for the money. This is how we think you should live.” It just says, “Here’s the money, now you’re no longer poor, have a good life.” It’s a great idea, it’s very efficient.

Meb: Interesting. You know, and because one of the things I struggle with, for example, is picking a charity for me is almost like picking a mutual fund or, you know, going to a grocery store and you just have infinite selection. You’re like, oh my God. I mean there’s 500 shampoos, like I just want a shampoo. Like give me… And so this is why a lot of the curation sites, you know, we’ve talked a lot about Wirecutter by I think “The New York Times” on this podcast where like…and actually before we were chatting, I was like, I just want the best 30 inch TV. Can you just… And I don’t even care if it’s the best, I just don’t want the bottom two quartiles, you know. So just can someone just please tell me the best. And it’s the same thing with investments and talking about liquid alts, the same thing about charities, and so curation to me is going to be one of the biggest areas in the next 20, 30 years. And I think there’s still a huge human element to it. We talked about it with struggling with podcasts. But my problem with charities…so for example, in Puerto Rico, this huge tragedy and of course also in Houston, etc., but then, okay, then you have this kind of paralysis of like, “How can I get involved? What can I do?” and it’s, you know, then becomes this infinite spiral of like, “How do I find the best charity or even the best 10?” Is the Red Cross good or should I focus on…” You know, because then you read some article that’s like, “No, no, the Red Cross has been a disaster,” you know? And so it’s a really hard thing that I actually personally struggle with.

Phil: Well, catastrophes are extremely difficult because that’s what motivates people to give. If there’s some catastrophe on the front page you say, “Well, I wanna send money to Puerto Rico right now,” but in fact, it’s almost impossible to do that in any way that’s helpful. Whether it’s, you know, a clothing drive, a church, or all these different ways, it almost never does any good to the immediate problem that you wanna solve. And in fact, I know of cases where…specific big charities will find a catastrophe, they’ll fly people in, they’ll fly in a team of videographers to come in and take photographs of them on the site, and they leave immediately once they have the footage because they just want to show that they’re there because it’s fundraising.

Meb: A moral signalling or another. I was thinking like…so I was trying to put together a lot of these ideas on a personal level because I was thinking about this a while ago and I said, “All right, I wanna check all the boxes for me personally and maybe experiment on doing it on a micro level.” So I said, “What if I dedicate X amount of money, I’m gonna put $20 in an envelope and I’m gonna write on it just like, ‘Open me,’ or something. And then on the inside of the album say, ‘Hey, you know, you’ve been given this $20, and go spend it on something cool, but also pass it along and maybe buy someone a cup of coffee. Do something cool for someone else,'” and maybe it has to be more than $20 because of inflation. So to me like, look, that’s not going to obviously change the world, but it would seem to be kind of an interesting micro-gifting, little burst of happiness idea that at least could, on a daily level, improve some people’s lives, if only for an hour or two or three, and it would feel good for me to give it.

Now the only problem is that I was like, ,well I could never see the results of it, so then I was like, well, maybe we should set up an anonymous Instagram account, this is ruining the whole idea now because it’s no longer anonymous, and come up with a good hashtag. And I could never come up with a good hashtag. I was like, you know, share the love, take and spread, something that where you could actually follow people and see kind of what they did for other people. And anyway… So that was an idea that I was…I spent a lot time thinking about this, and I have, much like my fintech ideas, I have lots of really terrible ideas. So listeners, if you any good ideas there, shoot me an email because to me that would check a lot of the boxes on giving to someone, improving their day to day existence, then them going to the exercise of giving to someone else and maybe creating a daisy chain of interesting just little very micro-happiness.

Phil: Well, what it shows is how incredibly difficult it is to spend a dollar doing good. It’s not easy to do.

Meb: Interesting. Well, you know, and Jeff and I, we’ve talked a lot about it too with this last book we did where we told the authors they could give away, you know, their portion of writing to charity and we only got like three of the people responded. So those three charities are going to get all of the donations because people…but because I think a lot of people struggle with the same concept. Interesting. I don’t know. Listeners, if you got any good ideas, let me know. All right, what else can we segue into before we totally run out of time? This might be the longest podcast yet. Let’s go like another 5, 10 minutes. But the highest rated are the longest running so, Phil, let’s chat for a few more. Let’s make the longest ever. What’s been your most memorable investment? Good or bad? You can offer both. First thing that comes to mind.

Phil: Oh, my goodness. First thing that comes to mind is a real estate unit investment trust that I bought through my stockbroker back…this would have been in the early ’90s, I think, and then I had to buy a…then I bought a house and I needed money for the down payment and so I said, “Well, you need to sell this, Jason. Just wire it over to the bank for the down payment.” And he said, “Oh, it’s not a liquid investment. It can’t be sold.” I said, “Well, it can be sold for some price,” and it was, but that was one of my early investment educational opportunities.

Meb: Give me a couple, I’m the world’s worst at this question, so cabby out ahead of time, give me a couple… You read any good books lately? Anything that’s impressed you? Any ideas, concepts, that are summertime reads? It can be fiction, it can be nonfiction, it can be about anything.

Phil: Yeah, I’m reading all the time. I seldom can even tell you the name of what I’m reading because I’m just turning the pages, Kindle, audio books, physical books. I’m just reading a reading idiot.

Meb: Nothing stands out as like, “Oh my God, this is the best book I’ve read in the last year.” It could be a movie.

Phil: I’m just reading a book on the relationship, on the friendship between David Hume and Adam Smith, and it’s been very interesting to me. David Hume was a philosopher. They were good friends, but Hume was a bit older than Adam Smith, and David Hume did almost all of his important writing before he was 25 years old. He didn’t really write anything of much interest after that. But a lot of the ideas that we find in “The Wealth of Nations” that we credit to Smith, back to Adam Smith, actually derive from perhaps, not uncredited, but they were ideas that were also floated earlier by Hume, like for instance the idea that the wealth of a country does not consist in the amount of gold it has in its treasury but in the productivity of its citizens. That’s a revolutionary…that’s a world changing idea that’s changed the world for the better, that insight. And it really, I think, goes back to David Hume. I don’t know where Hume got it, but that was news to me. But I’m always reading lots of everything. And because I’m in financial services, when I do read about financial services, I tend to turn the pages pretty fast at this point because I’ve seen like…I feel like I’ve seen a lot of this stuff before.

Meb: I have a whole stack of books on my bookshelf which is Patrick O’Shaughnessy, who has a podcast, but he has a book club and he sends out a couple recommendations. So I must have 30 or 40 books. Every time I just end up buying them, but it’s this massive stack. And for whatever reason, this summer, I don’t know why, like I go through cycles of just not being motivated to read or not excited about anything so that’s why I was looking for ideas. I ended up buying like the last decade’s worth of… What’s the science fiction? Is it… It’s not Booker Prize. Whatever the science fiction award for best book, there’s two of them, Hugo and Nebula, that’s what it is. Anyway, so I was trying, I was like, you know, there’s got to be some good old ones. I was going to try to watch the old “Blade Runner” this week before watching the new one. I haven’t seen either yet so I’ve got nothing to offer though. With psychology, any favourite behavioural psychology books?

Phil: I’m not a fan of behavioural psychology.

Meb: Why not?

Phil: Well, I think there is… In the field of behavioural psychology, we find much that is new and much that is true, but what is true is not new, and what is new is not true. That’s somebody else’s quote. So I think that the field could really use a shakeout. I’m not sure that giving yet another Nobel Prize to it is gonna cause that. I think it’s gonna more entrench the trends that are already apparent. I don’t know of anybody that’s made a dime, I could be wrong, as a behavioural hedge fund. Do they make money? I haven’t heard about it.

Meb: Well, Thaler technically… I mean, it’s, again, it’s all in the narrative again, right? So I could say that Cambria is a behavioural shop and say that…

Phil: No, it’s not.

Meb: Well, no, but I could say that. I could say that it’s taking advantage of others’ behavioural issues through a long PowerPoint and say, “Our value funds are…” You know, it’s an argument that could be made. Anyway… But it’s all about the narrative. But, no, Thaler actually, I mean he lends his name to, I don’t know how involved he is, Fuller & Thaler, I think it’s a multi…I think they’re over a billion…I think it’s a multi-billion dollar money manager. So they wrap it in that behavioural lens and they’ve been doing it for a long time. I don’t know how involved he is, or if it’s just kind of a figurehead. Anyway… So maybe. But mine tends to be more on the biology side. One of my favourite books we always talk about is a Olivia Judson’s “Dr. Tatiana’s Sex Advice to All Creation”. Have you read that?

Phil: Yes.

Meb: I love it. We’re trying to get her on the podcast. Jeff is failing miserably. But Olivia, if you’re listening, that’s one of my favourites. It’s more on the kind of the actual evolutionary biology than psychology.

Phil: I heard about it from you, as a matter of fact.

Meb: [crosstalk 01:30:00]

Phil: It was a find. It pays to listen to this podcast.

Meb: Yeah. But it’s funny because you say, “Oh, man, I see that behaviour in my friends and myself or that little bug or mole or cat,” or whatever it would be. Anyway… Listeners, if you have any particularly good books you read this summer, I could use some on my travels coming up. What do you have planned for the rest of the year? Any plans?

Phil: Well, I just seem to be working like a dog trying to keep my clients happy. They’ve got me on a short leash, so I’m a hardworking guy.

Meb: Phil, where can people find more information about you if they want to read your writings, your every-six-months tweets, your blog posts, where do they go?

Phil: I have a website, phildemuth.com, that’s probably got as good a summation of everything that they could possibly want and more, too much information.

Meb: And you guys, seriously, go read “The Overtaxed Investor”, one of my favourite books, as well as those other eight books. We’ll have to go into the archives and… Maybe that’s what I’ll do the rest of the year, just go speed read all of your other books.

Phil: Put you to sleep.

Meb: Phil, it’s been a blast. Thanks for coming in today.

Phil: Thanks for having me. It’s great to be here.

Meb: Listeners, thanks for listening. Send us feedback, questions for the mailbag, at feedback@themebfabershow.com. If you got any questions for Phil, shoot him straight his way at his website. As a reminder, you can find the show notes. We’re gonna have a lot for this episode and other episodes at mebfaber.com/podcast. Try the show on iTunes. If you’re enjoying this podcast, please leave a review. For the listeners that sent us the roasted peanuts and surfing poster and a handwritten note with a wax seal, I’ve not seen one of those in years, thank you from Jeff and Meb and the rest of the camera crew. Those peanuts we’re gone in the first week. Anyway, thanks for listening, friends, and good investing.

 

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