Episode #168: Brian Livingston, “What’s True Is That We Have To Adapt To Modern Markets”
Guest: Brian Livingston spent two decades as an investigative journalist revealing the secrets of the computer industry, and has now turned his attention to the investment industry. He is the CEO of MuscularPortfolios.com, author of Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk, and actively writes columns for MarketWatch.com and StockCharts.com.
Date Recorded: 7/19/19
To listen to Episode #168 on iTunes, click here
To listen to Episode #168 on Stitcher, click here
To listen to Episode #168 on Pocket Casts, click here
To listen to Episode #168 on Google Play, click here
To stream Episode #168, click here
Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159
Interested in sponsoring an episode? Email Justin at email@example.com
Summary: In episode 168 we welcome Brian Livingston. Brian discusses his background and eventual transition into the world of investing out of a need to invest the money he had from the proceeds of selling his email newsletter.
Meb then asks Brian to get into what made sense to him when he started to look at investment opportunities. Brian discusses the benefit tilting portfolios to the momentum factor.
The pair then gets into the psychological difficulty of investing. Brian then goes on to talk about behavioral pain points, the evidence that people tend to liquidate after experiencing 20% downturns, and what people can do to improve the chances of avoiding pain points. He goes on to explain the mechanics of his process and “Muscular Portfolios.”
Next, Meb and Brian get into the issues of investors looking different than the “market.” Brian talks about the disruption it causes households and savers, and what he suggests people do to be successful.
As the conversation winds down, Brian and Meb discuss the context of one of Brian’s recent columns on the investment costs reflected in the bid/ask spread, as well as taxes and investing.
All this and more in episode 168, including thoughts on chasing performance, and Brian’s most memorable investment.
Links from the Episode:
- 0:50 – Welcome to our guest, Brian Livingston
- 3:03 – Where Brian’s interest in investing started after his career writing about PCs
- 6:38 – The Great Depression: A Diary (Roth, Ledbetter)
- 7:26 – What first made sense to Brian in investing
- 8:59 – Creation of MuscularPortfolios.com
- 11:20 – Evolution of Brian’s investment philosophy
- 17:06 – How to make investors be uncomfortable with buy and hold
- 20:50 – Mechanics of implementing these ideas
- 22:23 – A Quantitative Approach to Tactical Asset Allocation (Faber)
- 25:26 – Biggest struggles and brush back when people read Brian’s book
- 28:26 – Brian’s take on international markets
- 29:55 – Questioning the way fees are assessed on portfolios
- 34:59 – Advice for people who are uncomfortable looking different from others
- 40:54 – The focus of his columns recently
- 45:04 – Taxes and investing
- 48:49 – How low will the S&P 500 go? Buffett and Shiller know
- 52:11 – Problem with chasing performance
- 58:24 – Most memorable investment
- 1:02:51 – Best places to follow Brian; MuscularPortfolios.com
Transcript of Episode 168:
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. 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 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.
Meb: Welcome, friends, podcast listeners we have a great show for you today. Our guest for over two decades worked as an investigative journalist revealing the secrets of the computer industry has now turned his attention to the investment industry. He’s recently written an awesome book, author of “Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk.” Actually writes columns for MarketWatch, StockCharts and runs muscularportfolios.com. Mark Hulbert, one of our favourite writers said, “I know no book for general investment audience that is more thoroughly researched and backed up by hard data.” That’s a great compliment from Mark. Welcome the show, Brian Livingston.
Brian: Nice to be here, Meb.
Meb: Brian, we got you live in-office. You live somewhere in the Pacific Northwest [crosstalk 00:01:35].
Brian: Seattle Washington.
Meb: I went to is it Hood Canal? Is that a place?
Brian: That’s a lovely place in the northwestern part of Washington State, yeah.
Meb: So we came up to Seattle did a few days and the restaurants and bars there and went to the canal area. It’s awesome there’s like an oyster place, Hama Oysters. We went crabbing on a boat. Crab pinched one of our friends, couldn’t get it off. She screamed for hours it seemed like. Beautiful weather, it’s gorgeous.
Brian: Lovely. I’ve been spending more of my time in New York City in Los Angeles though lately.
Meb: Oh man. Well, different sites to see here I imagine different visitors, but great place. Well good, next time we come down we’ll get you out on a surfboard, take you out to the beach. This is gonna be a lot of fun today you have…this is not your first book.
Brian: Oh no, no, I wrote 12 books, the first 11 were all about the secrets of Microsoft Windows. So we had “Windows 3 Secrets,” “Windows 3.1, Secrets,” “Windows 95 Secrets,” it went on and on. And then I got tired of writing about Microsoft. So my 12th book is “Muscular Portfolios,” which is the secrets of investing for just ordinary people.
Meb: So it’s interesting because I wish you were in here yesterday because I feel like it’s 2019, computers rarely have problems anymore. I had the blue screen of death, Microsoft, for like four hours. I could use you to help me out with some secrets. But every time I go out of town and the power goes out it just totally fries my computer.
Brian: Yes. Well, Microsoft would tell you just reinstall everything and you’ll be fine.
Meb: Oh my god, nightmare.
Brian: That’s their answer to everything.
Meb: Send me a floppy disk. All right, so really successful, these books. And at what point did you become interested in investing? Was it always a hobby, always a big interest? Was it something that you’ve been doing forever? Or was it more just as all these massive cash flows from all the books started flowing in, said, “I gotta do something with this.” How did you start getting the investing bug?
Brian: In the computer industry, I wrote the weekly column on Microsoft Windows for “InfoWorld” magazine for 12 years. That was 1991 through 2003. They were one of the biggest weekly magazines in the computer industry. Huge, gigantic 300-page, 400-page magazine that came out every week. They finally succumbed to the dot-com crash. So all the computer magazines started losing their advertisers in 2001, 2002. And they finally let everybody go in 2003. I sort of saw this coming. So I had started my own newsletter, the “Windows Secrets” newsletter in February 2003. They let everyone go and started just running wire service copy in April 2003.
Meb: The depths of the internet depression probably.
Brian: Oh, yes, computer advertising just dried up became less than half of what it had been before. And that was just devastating for a lot of magazines. But I wrote for “PC World,” which still exists, I wrote for “CNET,” which still exists. So some places were able to come through it. Fortunately, my email newsletter rose from zero subscribers in 2003 to more than 400,000 subscribers in 2010, I sold that to an acquirer called iNet Interactive. Then I had the responsibility to invest all of that money. What I found was that the investing lore that I had heard about over the years was all false. There were all these theories, like modern portfolio theory, there was the efficient markets theory. That’s all untrue. It’s all been unproven years ago. It’s been debunked for decades.
The winners of the Nobel Prize in economics in the 21st century have all debunked what the winners in the 20th century got their prizes for. So people like Harry Markowitz, who wrote that you just draw this curve, and that shows the best portfolio to hold for all time, it’s just absolutely not true. What’s true is that we have to adapt to modern markets. What is unfortunate for most of the average individuals who invest is that they can’t stand losses in their life savings of more than 20%, 25% at the most.
Well, that’s no good, because the S&P 500 loses more than 30% every 10 years on the average. People have forgotten because we have one of the longest bull markets in history, how bad it gets. It’s only 10 years ago that it looked like all of the major banks in the Western banking system, were going to go belly up. They were insolvent, they had less money than they needed just to pay off all of their liabilities. That’s no good. And of course, the Federal Reserve came in, the European Central Bank came in and flooded those banks with money and saved them.
But we were very, very close to a total wipeout of the Western economic system. People had no cash in these banks. If that had gone down, you would have had another Great Depression. Well, at the point like that, the average investor isn’t thinking, oh, I’ll put more money into the stock market. The average investor is thinking, I better get my money out now and save my family’s savings before we get totally wiped out.
Meb: I think there’s some really great instructive books that were written in the Great Depression. There was one written by a lawyer. Justin, you’ll have to look up the name of it. I think it’s called like “The Great Depression: A Diary.” It kind of walks in real-time through the Great Depression with investing insights in the mood of the day. And people forget, I mean, stocks lost well over 80% during the Great Depression, which is a lot more than 20%. But it’s just a reminder that as people say, quoted securities, Munger always says, “If you can’t handle those going down by half, you probably shouldn’t be in stocks.” But stocks alone, it’s hard.
Then you’re talking about the banks, it’s timely because there’s been big news out of over the pond, Deutsche Bank announcing they’re gonna lay off 20,000 people. There seemed a lot of the 2009 history is still rhyming even to this day, which is crazy. A lot of European banks just look like absolute walking zombies at this point. Okay. So instead of putting all your money into Microsoft stock, you said, okay, I need to understand this investing space. You took a look around said all right, this doesn’t seem right. Or this doesn’t seem like something that makes a lot of sense to me. What did start of make sense? Or did you start to learn through experimentation? What was the process like?
Brian: Well, if I had to experiment, it would take 1,000 years for me to try everything out. So I didn’t have that much time. What I found is that academics, professors of economics used to believe that the things that went up the most in the market, we’re small-cap stocks and value stocks. Since that became very widely accepted, and everyone thinks small-cap stocks deliver more than large caps and value stocks deliver more than growth stocks, it has stopped working. That really wasn’t a very good rule because those trends come and go.
What the academics found is that they had to add one more factor, we had to add momentum. What they found is that whatever has gone up the most, in the past 3 to 12 months, that has a statistical tendency to continue going up for another 30 days. It doesn’t last very long. It’s not something you can set and forget. You have to look every month, determine what has been going up in the last 12 months, and tilt your portfolio more towards that. It’s a very gradual thing.
After I found these 21st-century findings, I realised that individual investors had almost no way to take advantage of this. I set up muscularportfolios.com, which has absolutely free tables that show you which index funds have done the best in the last few months, and which ones you should put your money into. You just check that website once a month, you can make one change in your portfolio, it takes 15 minutes and you’re done. There’s no research, there’s no calculations, you don’t have to build your own spreadsheets, it’s all done for you. This is the first website that gives away Wall Street’s buy and sell signals absolutely free.
I’m very sure that more and more websites will start doing this in the future. It’s a reality today that you don’t need to pay anybody anything just for stock picking. All the information is out there for free. You can use index funds and do a lot better than most of the hedge funds that say, “Oh, we know what stocks are going to go up.” It’s just too hard to pick which stocks are going to go up and avoid paying high fees for that kind of experience. It’s better to just use momentum to pick the index funds for you.
Meb: So people, for some reason still love paying fees because they do, they pay them, this is the evidence, they love paying them. I struggle a lot with this, I just wonder if people either just don’t know better or it’s just the effort of moving. But you touched on a point that I think is very accurate. We give some time to this in a recent talk where we say, look, we exist in a world of 2019, I was talking to some CFAs in Louisville and Grand Rapids and Cleveland. And I said, “Look, we exist today in 2019…” There’s some young people in the crowd. I said, “Older people in the crowd, you guys don’t have to worry about this.” With younger people, I say, “We live in a world where investing is now free,” what you just said, where you could buy a portfolio. You go onto Vanguard, you don’t have to pay commissions for market cap-weighted indices, for the most part, you can get them for nearly no fee. And in that world, investing by definition become somewhat of a commodity. And so putting together a lot of what people would call lazy portfolios or “coffee can” portfolios, buy-and-hold of those asset allocation portfolios, you don’t have to pay anyone to do that.
Now, what you’re talking about is becoming interesting, because you seem to believe that there is a better way in your book, which I have here, and I love because there’s a lot of pictures. It’s over 400 pages. But it’s more of a coffee table book with a lot of great graphs and designs. What was sort of the evolution from most people who have this asset allocation and get to this momentum, sort of understanding? Was it part of the challenge of living through some of these drawdowns? Did ’08 stamp some memory in your head? What was kind of the evolutionary process?
Brian: Well, I’ve lived through this for many, many years. I’m an old, gray-haired guy now. But that can be good because you’ve actually seen what happens in a bear market. The emotional climate in a bear market is just terrible. It looks like the whole world is falling apart, it looks like the market will never go back up. As a matter of fact, just in the global finance natural crisis in 2008, 2009, the Iceland Stock Exchange lost 99% of its value. This is not something that you just read about in fairy tales, this actually happens. The Iceland Stock Exchange was very concentrated in four major banks which were very heavily involved in mortgage financing. And of course, they got over their heads and they lost their shirts.
Meb: Everyone had changed from being a fisherman to a derivatives currency trader.
Brian: Well, basically the whole economy was sucking in money from Europe for these cheap mortgage-based loans. I lived through the crash of 1987. I was assistant IT manager for the New York headquarters of UBS Securities from 1986 to 1988. When the crash for 1987 came, the brokers were the quietest that I had ever heard on the trading floor. In 1987, a Bloomberg terminal was not capable of showing a loss in the Dow of more than 99.99 points. So all the brokers were just looking at their screens. Nobody knew what was going on. They knew it was down but they didn’t know how bad and no one would pick up the phone.
In those days, you had to call your broker and make trades, but nobody would answer because they knew that the person on the other end of the line wanted to sell everything. And they weren’t going to buy it because they didn’t know how far the knife was going to drop. And of course, the Dow was down 22% in one day in the crash of 1987. What people forget is that that crash was not a single-day event. The market went down for two and a half months, climaxing in that huge drop finally at the end. But you can see it coming, not very many people knew what to do.
The evolution after the crash of 1987 was toward index funds, the Vanguard Group and Jack Bogle, who was a brilliant man, and we lost him earlier this year, he had set aside funds that were going to track benchmarks of the market. He had proven that getting the market return with very low fees would produce more money for the average investor than paying high fees for some kind of stock-picking guru. The index fund movement caught on and many economists and professors and advisors started developing what they called “lazy portfolios.” You have 8, 9, 10, 12 different kinds of lazy portfolios. Marketwatch.com has tracked eight of them for almost two decades.
These lazy portfolios consist of 5 or 10 different index funds held in a specific percentage, and you never change that percentage. No matter what the market is doing, you keep that exact percentage of those 5 or 10 funds all the time. What MarketWatch statistics show is that all of the lazy portfolios underperform the S&P 500 two, three percentage points or more, over the years. Two or three percentage points annualized, you’re losing out because you don’t have the ability to shift or tilt your portfolio towards those assets that have momentum.
Even worse is the fact that when the global financial crisis came, those portfolios, which underperformed in the market, crashed almost as hard as the S&P 500 itself. So in the book “Muscular Portfolios,” we show using MarketWatch statistics, using statistics from my plan IQ. And using statistics from the quant simulator that the lazy portfolios all were down more than one-third of your money, even losing one half of your money. That is not what individual investors are able to tolerate. People pay these high fees because they think someone is going to save them from these bear markets. They think someone will save them from their crashes.
People are not very comfortable crunching numbers. Eleven out of every 10 Americans hate math. Well, they don’t want to go and make a spreadsheet, they don’t want to go and figure out these formulas by themselves. They want someone to do it for them. Now, what we found is that you can step away from lazy portfolios, you don’t have to stick with the same percentage all of the time and watch your money crash in the next bear market. You can use a muscular portfolio, which simply adds one more simple rule. You simply watch the momentum and tilt your portfolio towards those assets that are going up, tilt your portfolio out of those assets that are going down.
How do you tell which assets are going up? It’s the ones that went up the most in the last 12 months. It’s very, very, very simple. The professors who won the Nobel Prize in economics in 2003, Eugene Fama won the Nobel Prize for showing that markets obey factors. His partner, Kenneth French, has written dozens of white papers and studies with him. And they say in one of their recent papers, “Strategies that do not include momentum, perform poorly.”
So we’re just showing people how they can use that in their personal lives, can individual investors actually use the momentum factor to keep themselves out of crashes and keep themselves in the assets that are going up? The book shows that they can. I’m glad you like it, the idea that it’s a secret to investing book disguised as a coffee table book was very important to us. That you can look through the book and you can get the whole message in 60 minutes. You just look at the pictures, read the captions, flip through the book, page after page, and in 60 minutes, you’re done.
Meb: I think you highlighted on probably the biggest issue in all of investing, which is people want upside but they don’t want the downside. Which of course, as we know, is the ultimate goal but really hard. And I think the thing that surprised so many people about 2008 was that for so long everyone has bet on diversification [inaudible 00:17:25] assets to save their hide. And really, it’s worked for a really long time. But 2008 came around, it was the first time really since the Great Depression where pretty much everything went down. Bonds helped some but not really.
And so you had all these asset classes decline. I mean, some were far worse than stocks, I think REITs went down over 70%, commodities in the same vein. And the challenge was nobody was managing money in 2009 that was also managing money in 1929. If they were they probably didn’t have any clients. So it was a surprise to a lot of people that hadn’t studied history. And the biggest challenge with the buy-and-hold allocation is those bear markets because everything happens at once. So it’s not just that your portfolio is losing money, but it’s also that you’re going through a recession probably in that case, you’re almost going through a Great Depression. You may lose your job, money’s down, there’s terrible geopolitical news. It’s really hard to just watch and do nothing.
Brian: Yes, exactly. People have what is called a behavioural pain point. Charles Rotblut who is vice president of the American Association of Individual Investors, the AAII, has done studies showing why the average investor underperforms the market by 2% or 3% a year. He makes a thought experiment showing what if an individual was invested in the S&P 500, but on December 31, every time the S&P was down 20%, that person liquidated their stocks and just went into cash. Then 12 months later, they got back into the S&P 500. That’s actually faster than a lot of people get back into the market.
I know people 5 years after 2009, they were telling me “Is it still safe to get back into the market?” Well, it’s never safe to be in the market. It’s a risky market. The S&P 500 went down more than 40% in the dot-com crash of 2002 alone. The S&P went down more than 50% in the global financial crisis of 2008-2009. And these severe crashes happen every 10 years on the average. Well, if people are getting into the market, and they’re getting out when it’s a bear market, they’re locking in their losses, they’re permanently impairing their capital.
That’s what we have to protect people from. People have to learn, you don’t have to be in the market all the time, you don’t have to be in the S&P 500 all of the time. And you don’t need market timing. Many, many studies have shown that it’s extremely difficult to pick the top of the market, pick the bottom of the market. Market timing is sort of an illusion. Some people may do it very, very well but how would you know who is going to do it very well in the coming bear market?
What I prefer to see is asset rotation. You just tilt your portfolio more towards those assets that have been going up lately, and you tilt your portfolio out of those assets that have been going down. The people in Iceland wouldn’t have had to lose all of their money in the stock market. The people in the United States and Canada wouldn’t have had to lose more than half of their life savings in the market. It’s just a matter of, yes, you have to pay attention, you have to look at a website once a month, you have to make one change, selling one ETF and buying a better one about nine times a year. It’s not something that you even have to do every month. It’s something that with a very gradual rotation of your assets into the more stronger assets, you will be fine.
Meb: So talk to me a little bit about the mechanics. How does something like this work? So okay, someone, they go to your site or they wanna implement some of these ideas. What do you think is the best way to go about it? You have a universe of funds, what’s the actual way to implement this?
Brian: The lazy portfolios, all lost more than a third of your money. We wanted to show people how to construct a portfolio that would never lose more than 20% or 25% of your money at the worst, even in the most severe and bear market.
Meb: And by the way, you mentioned a lot of people lost probably more than a half. One solution should just be like the endowments and only report your net asset value once a year. That way you don’t ever see the maximum drawdown. But I don’t think people are gonna open their account statements just once a year or be a private equity fund that smooths it. Okay, so let’s hear about how do you go about putting this to work?
Brian: Your crashes are always going to look smaller if you don’t report your revenue more than once a year. It always looks worse if you have a monthly drawdown or you use daily closes to show how badly you really did. What we found, not by me making original research or doing original testing, but by finding what other people had done out there already that had years of real-world experience is there are portfolios that will never lose more than 20% or at the worst 25% even in the most severe crash. Two of them are by people that you may have heard of, one is Bevin Faber [SP]. He developed a white paper that was published on the Social Sciences Research Network in February 2013. That became the most downloaded white paper in history from SSRN.
Meb: Gonna have to correct you though, it was originally published in 2007, maybe 2006. It originally came out of “The Journal of Wealth Management,” we also tossed it up there, that would have been the updates. We updated maybe every five years or so with new history and what’s going on in the world.
Brian: Well, the 2013 white paper puts the 2006 white paper to shame. The 2013 white paper expanded the possible index funds you could invest in to 13. That means you now have coverage of commodities, you have coverage of precious metals, you have exposure to real estate investment trusts, you have exposure to different kinds of bonds and international exposure. So that particular mixture of assets, because we started this research project calling it Goldilocks Investing, investment strategies that are not too risky, not to tam, just great gains. So using Goldilocks as our model, we want investing that’s going to give us the returns we need but is not going to subject us to crashes ever. We found that the 13 index funds that were laid out in the 2013 white paper should be called the Papa Bear portfolio, that’s really the boss portfolio of them all.
Meb: What does that look like now today, probably U.S. stocks, real estate, maybe bonds?
Brian: Well, it changes. The great thing is that it doesn’t change every day. You can go for weeks with the same three ETFs, the same three index funds. You don’t have to watch the market every day. If you want to, that’s fine. But some people watch sport. Other people watch game shows. The market is just a fantasy sports team that we like to watch just because we like the numbers.
Another portfolio we found, which is called the Mama Bear portfolio in the book, was developed by Steve LeCompte. He is the CEO of the CXO Advisory Group in Virginia. He has discovered nine asset classes that are sufficient to do his formula. You don’t need the 13 ETFs, you can limit your selection to just the 9 ETFs. He uses a different formula instead of the asset classes that have gone up the most over the last 3, 6 months, 12 months, he uses a formula that is based on the index funds’ 5-month performance.
That’s very simple. It’s so easy, you could do it with a pencil and paper, just adding up these numbers by yourself. We take away the need for you to use pencil and paper just by going to the website and seeing these free tables. So that selection of nine index funds, you hold the top three, you look at it once a month, you make a tilt in your portfolio if necessary. Some months, there’s no change at all because it’s just the same rankings as the previous month.
Meb: What are the biggest struggles for people or criticisms when you present them with this book or some of these ideas? What’s the biggest brushback?
Brian: People think there’s a secret formula, that is a trap. There isn’t a secret formula. It’s all laid out. It’s all completely visible. It’s been published on the internet. Most people, however, are not going to spend years and years researching and reading 100 academic white papers. The information is all there. As a matter of fact, one person did a meta-study of all of the white papers and found there were more than 300 studies showing a momentum factor in stocks and bonds, commodities, real estate, and other asset classes.
We are going to have a bear market. A bear market always starts when the economy looks great. So you have low unemployment, you have high economic growth, well, it can’t get any better. Once everybody has put their money in because they think everything is so great, that’s when there isn’t very much cash left on the sidelines to keep coming in. You don’t have any buying pressure anymore, you have people starting to take profits. As soon as they take profits, the market goes down. As soon as people see that, more people take their money out and that makes the money go down further. Finally, you have a crash.
We know that the market goes down more than 30% every 10 years on the average. That is coming because the good times can’t keep getting better and better and better all of the time. As we know from the ratios that you publish for different countries, the U.S. has very high valuation compared with other countries in the developing world and the emerging markets. Those countries are going to have better prospects in the future than the U.S. market. As a matter of fact, many signs show that the expected return for the S&P 500 is zero for the next 5 years, for the next 10 years. It’s just so rich right now that it’s not going to get any better. There’s a point where people are going to say, “I’m taking my money out, I’m getting out while they’re getting is good.”
A lot of people will wait until the very bottom and then they’ll sell, that will lock in their losses, and they will then avoid the big bounce that comes in the market in the first few months of the recovery after the bottom of the bear. It’s really a deadly cycle. We really need to reach individual investors and stop them from putting all of their money in when the market looks exciting and taking all of their money out when the market looks scary. That is just a formula for poor performance.
Meb: Yeah, the emotions that get wrapped up in investing is really what creeps in and causes a lot of the fractures and problems. We often tell people having an automated or systematic plan, I often say it doesn’t even matter what the plan is but as long as you have one. The worst thing you do is not have one and then you get emotional and do all sorts of crazy stuff. And like you mentioned, I mean, I can’t tell you how many people I’ve talked to that come to us and say, “I sold stocks in 2009 and have not reinvested since.”
You look around the world too and imagine having published this book and done the website, you get feedback probably from all over the world, it’s a different perspective abroad than it is often in the U.S. because a lot of the countries…we’re picking on Iceland, but there’s others that have been down as much or worse. Greece, Cyprus, certainly, but even countries like Brazil and Russia, a lot of Europe. The reality of bear markets and struggles are much more recent in the U.S., which seems like a far and distant memory.
Brian: Oh yes. Well, the good news is that there are things that go up in a crash. During the 2008-2009 financial crisis, treasury bonds went up, precious metals went up, and commodities went up for about half of the time that you had this horrible bear market in 2008-2009. When you have a ranking system that just gradually moves your portfolio into those asset classes that are the strongest, you gradually tiptoe out of equities and get out of the S&P 500, get out of developed markets and emerging markets, and you tiptoe into treasury bonds, precious metals, commodities, even real estate investment trusts go up sometimes when the market is going down.
This is not a hard formula, it’s not a secret anymore. This is something that we just should share with as many people as possible. The value of stock picking is going into the can, it’s dropped to zero. People can’t use their brains to pick stocks. Stocks just move too randomly for anyone to be very good at saying, “These 20 stocks are going to do the best out of the S&P 500 in the coming year.” The stock-picking skill is now free, you can get it on muscularportfolios.com, you can get it at other websites that are going to rise up and to continue this movement. What you should pay for is you should pay for professional advice. If you need a will, you should pay someone to really look at your family situation and make you a will. If you need a generation skipping trust, you should pay someone for that kind of thing.
It’s perfectly okay to pay maybe one-half of a percentage point for handholding. Mark Hulbert tells the story of you can pay 1% of your life savings a year and go out on the street and find somebody who will hold a lot more than just your hand. There’s no reason to pay anybody 1%, 2%, 3% of your life savings, save that money. If a doctor saves your life on the operating table, you don’t give them 1%, 2%, 3% of your life savings. You pay them through Medicare, or you pay them through your insurance, or you pay them thousands of dollars, whatever it is that you think your life is worth. But they don’t get 3% of your life savings for the rest of your life. There’s absolutely no reason for that model to continue to exist.
Meb: Rick Ferri talks a lot about this and I think you’ll probably see this transition happen eventually. I don’t think anyone on the asset management investment financial planning side are gonna do it really willingly. But if you look at doctors, lawyers, they all are per hour sort of project-based rather than AUM based, and some of them charge $1,000 or more an hour. But believe me, we pay more to our legal friends than almost anything.
Brian: People pay more to their vet than they will pay for good sound financial advice that isn’t stock picking but is how do you manage your estate? How do you manage your affairs?
Meb: Yeah, and to be clear, that advice is also worth its weight in gold because most people just don’t do it or they ignore it in the first place. But we love the financial advisors, I just think that I agree with you, I don’t think the traditional asset allocation model, which is now a commodity and free, is something that people should be paying a percent for. The way we’ve always framed it, we say, you know what, if you had to take a briefcase full of $10,000, $20,000, $50,000 every year and take it to your financial advisor and pay them with hundred dollar bills, probably wouldn’t do it. But the fact that it gets skimmed off the top is a really intelligent way that the asset management industry designed it so that people never see it. And forget about people that charge 1%, there’s plenty that charge 2%, 3% a year.
Brian: Well, the people who are in hedge funds that are charging 2% of your assets plus 20% of the gains, that is a 6% haircut from your investments in the stock market. People don’t understand these numbers. If you search on 3% fee, marketwatch.com, you may run into my column a few weeks ago showing that a 3% fee over a 30 year period will leave you with an account that’s less than half of what you would have after 30 years if you did not pay that 3% fee. People can manage their own wealth.
If you can buy an airplane ticket on the web, and you have that much computer savvy, you can manage your own money on the web. It’s just like saying, “I want to go from L.A. to New York on this date at this time,” that’s all the skill that’s necessary for people to manage their own money now. You don’t need to pay a fee to anyone for that. If you absolutely have to have someone managing your money because you’re sailing around the world for 365 days, yes, get somebody who is a fee-only financial advisor. The fee-only advisors pledge never to take a kickback from any fund or any investment for recommending it to you.
That is a big problem with the industry that the U.S. is the only developed country that doesn’t require financial advisors to have a fiduciary responsibility to put the investor’s interest first. The fee-only advisors do make that pledge, they are fiduciaries. So for less than half of a percentage point a year, you could get someone who could manage your muscular portfolio for you because it’s so simple, it’s so easy to do. So go trekking across the Yukon for a year, whatever. And when you come back, somebody will have run your portfolio, the Muscular Portfolios way, exactly how you would have done it if you were sitting in front of your computer at home.
Meb: It’s funny I have a buddy who actually just did that. He canoed the Yukon for a month across Alaska. He also has two children and a wife. But he was telling me these stories and brought a drone with him, and incredible footage. It looked pretty awesome. Very, very, very remote, as you can imagine, but beautiful country, a lot of mosquitoes.
Brian: I think I’d rather go on a cruise with my lovely wife and my lovely zero children, and not just send drone pictures of the fun I’m having in the Yukon.
Meb: A month is a long time. So you talked to a lot of individual investors, you get feedback from your writing and books. The biggest challenge that we see with people who aren’t doing buy and hold, and forget about just buy and hold in the S&P, is people don’t like to look different. They don’t mind looking different when they look different in a good way. They mind looking different when different is zigging when the market is zagging.
So S&P, we find our self July 2019 up, I don’t know, 20% year to date or something. What is your advice, or what do you say to people when they struggle with whether it’s on a weekly or monthly basis that people love looking at this stuff, and zigging and zagging and struggle with an approach that isn’t just, “Hey, I’m putting all my money in SPY?” What’s your advice to them? How do you talk them off the ledge?
Brian: Financial advisors are getting interested in muscular portfolios because they solve a huge problem. As you yourself have said many times, when a client is working with a financial advisor, and the money is beating the S&P 500, the client says, “Oh, you’re a genius.” Then their account starts underperforming the S&P 500 and they say “You’re an idiot.” Then it goes up and they say, “You’re a genius.” And then it underperforms and they say, “You’re an idiot.” So this cycle of back and forth, back and forth is very destructive for households that are trying to save money, for people who are trying to work with professionals in the financial services industry.
The thing that I’ve found is that there is very little you can do to beat the S&P 500 when you’re in a bull market. The S&P, the U.S. economy are just very strong, they have a tendency to be among the best performing asset classes in the world. So what we can say about muscular portfolios to take people’s angst out of their mind is that a muscular portfolio is almost guaranteed to underperform the S&P 500 during a bull market. Just forget about beating the S&P 500, just watch your money grow. If your money grows at two-thirds the rate of the S&P 500 during a bull market, and then you lose half of what the S&P 500 loses during a bear market, you beat the S&P 500 over that complete bull market-bear market cycle. And that’s what people want.
If you have a bear market-bull market cycle on the average every seven or eight years, all of us are going to be experiencing that whole cycle three, four, five, six times during our working careers. If you know you are never going to beat the S&P 500 during a bull market, just let your portfolio underperform. Think of the pressure that takes off of you to try to beat the market. Think of the pressure that takes off of the financial advisor who can honestly say to people to have the diversification you need, and to have the momentum that tilts your portfolio the right way every month, you are going to lag the market when it’s the strongest asset class out there and you’re gonna beat the market because your portfolio won’t be crashing. That’s really what people want. They just need to have that patience and stop watching the clock, stop watching the Dow, stop watching the market every day. Get off of that treadmill and you’ll be much happier.
Meb: Easy to say, hard to do.
Brian: Yes, well, not everybody is going to do that and that’s the great thing. I don’t think muscular portfolios will become overgrazed. I don’t think muscular portfolios will become overused. Like a lot of other things, portfolio insurance got overused and it fell apart during the financial crisis. A lot of other systems of investing, like just buy tech stocks, that fell apart in 2001, 2002. If you are willing to do something that’s different than other people are doing, you can have great results. If you chase the market while it’s on the way up, you are then susceptible to the crash that always follows a long bull market. You just want to watch your money grow.
And it’s actually easy to a portfolio that never loses more than 25%. Using diversification and momentum, you now don’t have to suffer these 30%, 40%, 50% crashes that the S&P 500 does every 10 years. You have three different asset classes at all times. And this is the math part. So forgive me while we go into a little bit of math. But if you have three different ETFs in your portfolio, how can your portfolio possibly do any better than the number one of the three? It’s mathematically impossible. Each month, you have three different assets, you have three different ETFs, one of them will go up some, one of them will go up a little bit more, the third one will go up a little bit more than that. You’re going to get the average of those three that month. You can’t beat the strongest asset in your portfolio.
If you sit there and you beat yourself up saying, “Why didn’t I put all my money into the one that was going to be the top of this month?” congratulations, you just realised that you are not psychic. And the fact is that no one on Wall Street is psychic. There are no experts who can predict the future. That has been shown again and again and again. Not a single economist predicted that interest rates on the 10-year treasury were going to be as low as they are today. That was a total surprise. They all predicted that it would be the same or higher, they were wrong. No one predicted the crash of 1987. No one predicted the financial crisis. No one predicted Lehman Brothers going bankrupt. All of these things are so random that we just can’t put ourselves at the mercy of people who claim they have a crystal ball. They don’t, they can’t see the future, and we have to protect ourselves.
Meb: The future is uncertain.
Brian: Well, that’s a hard thing to guess.
Meb: I had a good buddy just got hypnotized. I’ve never been hypnotized. I was trying to think of something I could get hypnotized for, maybe to use my phone less. I think my phone…
Brian: Your phone is already hypnotizing you.
Meb: I know, I know. It’s getting me hypnotized not to use my phone. So it’s like a reverse hypnotism. You write a monthly column, how often do you put pen to paper these days?
Brian: I write about three columns a week. The one that I really want people to get is the monthly one, the Muscular Portfolios newsletter. The other columns that I write are a column for marketwatch.com, which comes out every couple of weeks, and a column for stockcharts.com, which comes out on Tuesdays and Thursdays twice a week.
Meb: What have you been writing about? What’s been on your brain lately?
Brian: Well, I think that people do not realise how big expenses can be in the market. My column for MarketWatch about the bid-ask spread, this is something that very, very few individual investors understand. If you buy an index fund, it might cost you $101 per share and then if you turned around and sold it, you’d only get $100 per share for it. That’s a 1% spread. This is charged on every stock in every stock exchange. This is charged on every ETF of every kind. Now, for ETFs that are very popular, the spread might be only one penny. So you’d buy it for $50, and then when you sold it, you’d get $49.99. That’s a reasonable spread. And so in the book “Muscular Portfolios,” we show only very popular ETFs that have spreads that are way below one-tenth of 1%, maybe one-hundredth of 1%. So you never have to worry about that.
On our website, we also use the spreads to show you whether a flash crash is occurring. A flash crash is something where the prices have suddenly gone insane for about an hour. You can watch the market opening up. If there was a huge rush of sell orders during the weekend because of something that some politician said or something that the economist said, you have this giant wave of sell orders coming in. That can set off a flash crash where, all of a sudden, prices have dropped down to half of what they were supposed to be and they recover after the first hour because the market has normalised.
Well, if you look at the tables that we show of the best ETFs to hold, we give you the bid-ask spread. If it’s over 1%, none of those ETFs should have a spread over 1%. That means that you have a flash crash. Just wait until you see that the spreads are down where they should be around one-tenth of 1% or less. That keeps you out of flash crashes. You don’t have to watch TV. You don’t have to call somebody in Wall Street. You can protect yourself from flash crashes right there.
So I wrote about the fact that some stocks, the tiniest stocks in the S&P 500 have bid-ask spreads that can be 3%, 4%, 5%, 6%. You have the Russell 1000, which is the large-cap stocks, you have the Russell 2000, which is the small-cap stocks. But there’s a size of stocks that are smaller than small-cap stocks, they’re called micro-cap stocks. The Russell Index has about 600 of them. Sometimes they don’t even trade once a day, they have volume that’s less than a million dollars a day.
You could go in there and you could pay $106 a share for one of these micro-cap stocks, but when you turned around and sold it, you would only get $100. You’d lose a 6% haircut just trading that one stock in and out. So people don’t realise this, they need to look at what is causing them to really get in and out of these tiny little stocks. The more popular exchange-traded funds are really the way to go. They have very, very small spreads, you’re not paying 6% to get in and out, you’re paying a tenth of 1% or less for these popular ETFs that we list in the book.
Meb: So you got the combined effects of commissions and bid-ask spread, which are very real costs. And I think the simple advice to listeners, of course, also is to always use limit orders. If you are using market orders, it is really…you’re leaving your future to chance. So even if the ETFs are liquid or not liquid, always use limit order. And first 30 minutes of the day is probably also best avoided. You somewhat are leading to a third major cost that I think a lot of people ignore, which is a big benefit to the ETFs structure too which is also taxes.
And most people, they think in terms of expense ratio, and that’s the one thing they may notice if they noticed at all. Bid-ask spread commissions, maybe. If I had to put them in order, I’d probably say expense ratio, commissions, bid-ask, taxes, and no one almost ever thinks about taxes. They just see their tax return come April every year and somewhat ignore it, as evidenced by the fact that mutual funds are still five times the size of ETFs despite the fact that ETFs are vastly more tax efficient. Do you think that’s just because people don’t see it? They don’t think about it?
Brian: Well, there are two kinds of people, people who have to worry about taxes and people who do not. When people have 401(k) plans or these other retirement plans that the tax is deferred, people with 401(k) who are nearing retirement, 90% of their life savings are in that 401(k). They don’t have to pay any taxes until that money is withdrawn when they’re in retirement. That is a good thing for them, their money grows faster because they’re not subtracting some money out of the account every year for taxes. Other people are in a more fortunate situation that they have enough money that they have to pay taxes.
What we found is that using the Papa Bear portfolio, even if you’re in the highest tax bracket in the United States, the nine transactions that you would do each year to keep that Papa Bear portfolio tilted toward the strongest asset classes would make you more money than the S&P 500. As long as you’re willing to be patient and wait for the whole bear-bull market cycle to complete, which was about eight years. You will beat the market over the complete bear-bull market cycle because you won’t crash 50% when the market is crashing.
People who are following the Mama Bear portfolio, if you have the very highest tax bracket you’re paying in the 30% or higher to the federal government, that would be a deterrent. You would have lower crashes, you would have less risk, but you would make about as much money as the S&P 500 after you pay taxes. The good thing is that only about one half of 1% of households in the United States are in the highest tax bracket. If you’re in the lowest 2 tax brackets, if you’re making about $75,000 a year or less, long-term capital gains are taxed at zero in the United States.
So people who are middle-class, people who have the standard deduction or people who itemize their deductions on their taxes, they can hold exchange-traded funds for long periods of time. And when it comes around that they need to get out of the asset classes that are going down and get into the asset classes that are going up, they won’t have to pay any long-term capital gains at all. That’s something that people should think about if they don’t have all of their money in a tax-deferred fund like an IRA or 401(k).
Meb: And that’s always a big one, too. I mean, we’re always surprised at the amount of people that do not maximise the tax-exempt accounts. And that’s just a very basic first step when you’re investing. Listeners, if you’re not maximising your 401(k), a lot of employees match the contributions, just don’t put it all in your employer stock. We see that time and time again.
Brian: Yes, it’s risky because if your stock goes bankrupt like Enron, you lose your salary, and you also lose your account.
Meb: And your job.
Brian: And your job.
Meb: Everything else. Although you have the flip side where your local examples, you put all your money in Microsoft and Amazon, you did okay, too. But not good advice, only in hindsight.
Brian: Everyone can tell us what happened in the past. No one can tell us what’s happening in the future.
Meb: So we got a few more minutes. Is there anything that you’ve been writing about or you’re thinking about as you look towards the horizon that’s particularly interesting on your mind or that you think is something to chat about?
Brian: One of the columns I wrote for MarketWatch a couple of months ago keeps coming back. And it really tickles me because if you search on “Buffett’s Formula is Working,” if you know where to look at marketwatch.com, I showed that Warren Buffett, who is really recognised by everyone as being one of the greatest investors of our time, a really smart, really wise person who does pick companies that are going to grow and going to go up, Warren Buffett underperforms the bull market and he’s underperformed the last two bull markets by quite a substantial amount.
He makes all of his outrageous earnings and his outrageous gains by doing better than the S&P 500 when it’s crashing. If Warren Buffett can’t beat the bull market from 2002 to 2007, and Warren Buffett can’t beat the bull market from 2009 to 2019, why do you think that you have to? You don’t. Individual investors need to be liberated from this pressure that we see on TV, we see in the papers, “Beat the market, beat the market,” it’s just a trap. It’s just a game to get your money.
Forget about the S&P 500, you’ll never beat the S&P 500 in a bull market because if Warren Buffett doesn’t do it, you can’t do it. Just make sure that your portfolio is cushioned against these crashes. That’s what people want, people want their money to go up. And they know the market goes down and when the market goes down, they don’t wanna go down all the way with it, and they don’t have to. Now there’s free, easy, simple methods to keep your money from crashing. And be like Warren Buffett, underperform the S&P on the way up and outperform the S&P on the way down, and overall, you will beat the market over that complete cycle.
Meb: Our listeners are probably tired of us drilling this in but the example you give is so accurate where he’s underperformed something like 8 of the last 10 years too. Where how many people if they bought a mutual fund or an ETF or hired a manager that underperformed two out of three years, three out of four would continue with that manager? No one would. And even on the professional level, I say this to institutions all the time, over and over again, they evaluate their managers on two to three years.
Brian: Oh, sure, people have a very strong bias toward what a strategy has done in the last one, two, three years. That is proven to be a trap. It’s a complete waste of time and money. Because the institutions that fire their outside managers after one, two, or three years of underperformance, the fired managers outperform the managers of the institutions brought-in in the next three years. It’s just what we call reversion to the average. You will have a period of underperformance and then you have a period of outperformance, that produces your average return.
People who can’t wait for a complete bear-bull market cycle are going to make this mistake over and over again. What we learn from history is that people learn nothing from history. We should wise up. Let’s just use the modern information that was developed by the Nobel Prize winners in the 21st century. Forget about all that junk we learned back in the ’50s, ’60s, ’70s, ’80s.
Meb: I think the stat was that Buffett in late ’90s underperformed NASDAQ in one year by like 150 percentage points or something. But it’s funny, the institutions that we always chat with, we had a fairly famous investor call in once who was talking about our funds and said, “Meb, what’s your best fund?” I said, “Oh, geez.” I said like, “What do you mean? What timeframe, what…?” He’s like, “No, no, no, I’m not some new…like, you know, risk-adjusted, like, what’s your best fund [inaudible 00:52:35]?” I go, “I assume you’re asking me that because you wanna avoid it and you wanna invest in the one that’s had the worst performance the last three to five years.” He said, “Why would I wanna do that?” I said, “Oh, goodness, I don’t even know how to deal with this conversation.”
But people love chasing performance. And over and over and over and over again, it’ll be interesting to see if and when the cycle ever ends of S&P dominance. It’s a decade going on now. What most people don’t know but foreign stocks have…I think they’ve been outperforming or in-line since 2015, there’s been some fits and starts. The majority of the S&P outperforms really came up to 2015, although it’s having a monster year this year. Anyway, it’ll be interesting to see how people react and behave if and when the tides change.
Brian: Chasing performance is a serious problem that individual investors have to resist. Chasing performance means looking at what strategy did the best over the last 12 months, and then deciding to put all of your money into that strategy for the next 12 months. Mark Hulbert founded “The Hulbert Financial Digest,” he ran it for 33 years. He showed that if you picked the newsletter that did the best in the last 12 months, and you followed it for the next 12 months, you actually lost something like 20% a year because the performances that were really, really great in the past 12 months were going to revert to the average and they were going to actually have losses because now their strategy is kind of returning back to normal.
What we found from the winners of the Nobel Prize in the 21st century is that your momentum effect only lasts for 30 days. You can’t just set your portfolio on automatic and say this worked 12 months ago, now I’ll do it for the next 12 months, you really need to check once a month. That’s another reason why everyone won’t do muscular portfolios and they won’t become overused, they require discipline. You have to look on the 1st of the month, or the 15th, or whatever you decide is the best time for you, when you get paid, you want to add to your 401(k), whatever it is. You have to pay a little bit of attention but you don’t have to watch the market every day. There’s this sweet spot right in the middle, doing something once a year is a formula for losing a lot of money. Doing something once a month is a formula for watching your money gradually grow.
Meb: It’s hard for people, so many people want to cheer for something. And so many people are, as we know with the behavioural literature, when they buy something, whether it’s a coffee cup or a car or whatever it is, they become emotionally wedded to it and value it more than before they owned it. And so it’s a challenge with asset classes too because you got people that are gold bugs. I imagine a lot of the people you chat with in AI or there are dividend guys and girls, or hey, I’m…whatever it may be. It’s hard for people to be asset class agnostic. And that’s something that I think is really important because if you look at the history of asset classes, every asset is great sometimes and horrible other times.
Brian: Sure, a doctor said one time that it takes 50 years to get a bad idea out of medicine and 100 years to get a good idea in. The things that we all heard about in the 1980s and 1990s just weren’t principles that were going to last. It’s not small-cap stocks that always outperform, and it’s not always value stocks that outperform. Growth stocks have beaten value stocks for the entire century from 2000 to the present day. You just can’t go by these rules that got very popular in the 20th century and think that they’re going to last forever. The academics are just using the data that they had available to them. They obviously couldn’t know in 1990 what the markets were going to look like in 2000, 2010, 2019.
Now we can see that by upgrading your portfolio, by making gradual tilts, you can protect yourself from crashes and do very, very well. A sailor of a sailboat who didn’t know how to tack the portfolio would do very poorly. And an investor who doesn’t know how to tilt a portfolio is also going to be at the mercy of the winds of the market. So it’s just a simple skill. We would never go out in a sailboat without understanding how to guide it, even against the wind, the wind is never going to blow the right way that we wanna go.
And investors need to know how to use gradual asset rotation. They can stay out of stocks that are crashing and they can stay in asset classes that are going up, whether that’s bonds, whether that’s precious metals, whether that’s commodities, whether that’s real estate investment trusts. There are other places to put your money. But you have to pay attention once a month, that’s the cost, see what is going up and tilt your portfolio that way. It does have a cost.
Meb: Well crypto…when are we adding crypto to the model?
Brian: Well, people should have learned by now that Bitcoin went from over $19,000 a coin to under $5,000 a coin. It’s not a store of value. When I make a purchase from somebody in Europe, and they use a credit card, am I investing in the credit card? No, I’m using the credit card as a tool. I’m just using credit card as a means of exchange. Bitcoin has a fantastic potential to reduce the cost of me buying things from people in other countries. The Bitcoin transaction doesn’t have to cost me 3% like a credit card, it can be a very, very low transaction cost, but it’s not a store of value. It’s not a store of value any more than I pick up the phone and I make a call to someone. Am I investing in the phone? No, it’s just a device to get me what I want in the transaction. Bitcoin is not going to be something that anyone is going to be able to invest in and expect it to keep going up forever.
Meb: Looking back over your career, what’s been your most memorable investment, good, bad, something in between?
Brian: My wife and I, when we got married in 1984, we were young and foolish. All of our credit cards were billed up to the max. And so we combined our credit cards and now we had joint credit cards that are all were maxed out. So we got jobs in New York City in 1984, we started paying down our credit cards. We knew that we didn’t want to be paying interest on these balances. And finally, after two years, we’d paid off all of our credit cards. Then we had extra money coming in from our two paychecks, so I put $500 into the Fidelity overseas fund.
This was my first investment. I opened an account with Fidelity. I saw that the Fidelity overseas fund at that time had heavily invested in Japan. Japan was very exciting. The property of the Imperial Palace in Japan was supposedly worth more than all of the real estate in California combined. So I put $500 into the Fidelity overseas fund and forgot about it. Two weeks later, I opened “The New York Times” and I just looked, oh, what’s the Fidelity overseas fund doing? My $500 had turned into $600 in 2 weeks. They say you should hope that your first investment loses money because if you make money, you’ll think you know something.
So naturally, I was calculating, well, if I made 20% in 2 weeks, this is how much I’ll make in one year. And the Fidelity overseas fund did do pretty well for a while. But then I decided to get smart, I decided to get the “Hulbert Financial Digest.” I subscribed to every investment newsletter that was advertised in “The Wall Street Journal” and [inaudible 00:59:56]. They all came, I paid $40, $50, $60, whatever it was for each of these newsletters. And after I got the first one, I cancelled them all except for one.
I started using the Dick Fabian “Telephone Switch” newsletter, which showed you how to buy mutual funds that had no load. They weren’t charging you 3%, 4%, 5% to get in the door, you were paying 0% and using…that was like very early index funds. They were mutual funds that were following the market and had active management but had very, very low fees, which is really a secret. And the “Hulbert Financial Digest” showed that Dick Fabian’s newsletter was the best performing newsletter in that period that I was following it.
What’s happened with the Vanguard Group and Jack Bogle is showing that we can make the costs of investing even lower. We can get index funds, I think the total market index that Vanguard is offering, which has every single stock in the United States, it’s about 3,600 stocks, the expense ratio is three-hundredths or four-hundredths percentage point a year, that’s just astonishing. The individual investors now have this revolutionary period of time in which you don’t have to pay money to invest. In the 1970s, 1980s, it would cost you 2% just to buy shares of IBM and turn around and sell them. You would have a 2% haircut just on the simplest transactions of stock.
Now, the S&P 500 index fund called SPY, it has gone for years with a bid-ask spread that is only one penny per share. It’s just an absolutely revolutionary time for investors. And they just need to know, here’s how to make your money grow. Forget about the S&P 500, just make your money grow. And you don’t have to worry about it. Don’t have fights with your families about why you lost all this money. Just watch your money grow gradually.
Meb: The muscular portfolio idea would have kept all the Japanese investors out of a really long, painful decline starting in about 1990. That was when that really kicked in the bubble on the Japanese stocks. But Fabian, by the way, it’s interesting you referenced because they were really early adopters of momentum and trend too.
Brian: Yes, Dick Fabian, the father had a newsletter that used momentum to decide which no-load mutual funds to get into. Around 1999, 2000, he turned his newsletter over to his son, Douglas Fabian, who has a completely different system, and one that I stopped following around 2000. Which was a great time to get out of the market because you had the dot-com crash and then 2001, 2002 didn’t look so good.
Meb: Newsletters are a jungle of information, some incredibly useful and interesting and entertaining, some dangerous would be to say the least. But Mark certainly was one of the best at wading through that for many decades. Really awesome service he had. All right, Brian, we talked about it already, but where are the best places to follow you, keep up with your writing, your doings your goings-on?
Brian: People should go to muscularportfolios.com. I would like them to put in an email address and get the free email newsletter. It’s just once a month and we never spam, we never let anybody else have your email addresses. That I usually put into the newsletter any MarketWatch column I wrote, any StockCharts column I wrote. So you can just see the links click them, go to them. And of course, you can always use a search engine to look for Brian Livingston at marketwatch.com or stockcharts.com.
Meb: AltaVista, Ask Jeeves. I’m trying to remember all the old school search engines.
Meb: Yeah, bing.com [crosstalk 01:03:36]
Brian: I hear there’s a big one in Mountain View, California.
Meb: Yeah, I’ve heard of those guys.
Brian: I forget the name.
Meb: Brian, it’s been so much fun. Thanks for joining us today.
Brian: Really great to be here, Meb.
Meb; Listeners, we’ll add all the show note links, articles, links to Brian’s pieces on MarketWatch, of course, a link to the book, pick up a copy it’s a lot of fun. Shoot us some firstname.lastname@example.org. And leave us a review on iTunes. I promise we’ll read them. Thanks for listening, friends, and good investing.