Jerry Seinfeld’s Perfect Investing Analogy

Tyler Linsten Investing, Personal Finance

Although, he (probably) didn’t realize it. 


Screenshot via YouTube

Netflix is out with a new Jerry Seinfeld stand-up special. I loved it. Is there anyone else is the world who can pull off “clean” comedy like Jerry? I don’t think so.

Little did he know, Seinfeld made a wonderful investing analogy for the “active vs. passive” debate where investors battle over whether it’s best to own index funds or to try to pick winning individual stocks. When talking about his own anxiety at the prospect of making small talk with random members of the audience, or the public at large, he states:

“I can talk to all of you, but I can’t talk to any of you.”

Do you see the parallel? Applied to the decision of active or passive, Seinfeld’s analogy works like this: “I can invest in all of the stocks, but I can’t invest in any of them.” It’s such a clean statement that, frankly, I’m steamed to have not thought of myself.

It’s incredibly hard to pick winning individual stocks, just as it’s hard to begin a conversation with a single stranger. So much can go wrong. What’s easy, though, for Jerry and for most investors, is addressing the individuals as a group (whether they’re people or stocks). When you have a the microphone and an audience, just as an investor has a single basket of thousands of stocks, it’s much easier to control the narrative and keep your emotions in check.

Trying to get a single person to laugh on the street is a volatile situation. How many times in a row could you bomb before realizing comedy wasn’t the right profession, and quitting altogether? Maybe you actually had what it takes for a promising career, but hit some bad luck on the street. Put in front of an audience, however, just one person of the group not laughing won’t sink a career. And, you guessed it, when you own an index fund, one company going bankrupt won’t ruin your portfolio. How many times could you make a bad stock pick before exiting the market while potentially missing out on a lifetime of gains? The downside is staggering.

Be like Jerry: Succeed by talking to (and investing in) all of them. Who knows, you may end up amassing more Porsches than him someday.

Find the Time

Tyler Linsten Personal Finance

Considering we have the 4th of July holiday coming up, you might find yourself with some free time. Maybe it’s an hour or an entire day. Either way, there are certain “financial hygiene” tasks only you can tackle and you should do them at least yearly. I wanted to find a way to write a similar post for a while now, but The New York Times beat me to it. It’s so good — simple, actionable, and quick to digest.

(I’ll add that checking your Social Security estimates and verifying your earnings history at ssa.gov is another very quick task that should be completed yearly)

This will motivate me to write my own version, but Ron Lieber at NYT has presented a great take on a topic of which most people struggle to find a starting point.

Find the time!

Fine, Let’s Talk About Trump

Tyler Linsten Investing

The embargo ends.


I’ve avoided him on this blog for the most part, but Donald J. Trump is the 800-pound gorilla in the room universe right now. There’s no sense in being “apolitical” if politics are at the forefront of what’s making markets and to a certain extent, humanity, move right now (whether forward or backward). Thankfully, my point you’ll discover here is one of optimism so no matter who you support I believe the conclusion is something to think about.

*** INFLAMMATORY POLITICAL MUDSLINGING TO FOLLOW ***

Let me be crystal clear: I believe Trump as President is a negative development for mankind. I see no reason to believe anything Donald Trump has said or done is going to be materially helpful at moving America (or the world) forward, let alone your investment portfolio.

Fact: The reason any investment portfolio has steadily grown over past years/decades/centuries is that the world continued to move forward economically and socially. Long-term investors count on the slow churn of higher GDP, increased standards of living and extended longevity, which allow the noise of news and behavioral impulses to be ignored because asset prices continue to increase. Free trade and immigration, among other institutions — key drivers of economic growth — are currently under attack, bringing into question the sustainability of the economic tailwind we’ve enjoyed for centuries. That’s pretty bad.  

*** END OF INFLAMMATORY POLITICAL MUDSLINGING ***

The good news: There’s a silver lining.

Put the “fate of humanity” topic aside – the big question in the financial world has been, “if Trump is so bad, why have markets gone up and not imploded?” The answer is two-pronged.

First, checks and balances have provided a baseline stability. It may be that the Constitution was handed down by an alien existence far more advanced than we are, because it’s so perfect. The power of the Presidency is held in check and no single branch of government can easily tank the country. No matter how sinister a single President’s gameplan, or how evil his alleged foreign captors may be, the Constitution provides for a way out. Has there ever been a more important document ever drafted? I don’t think so.

Second, the big reason markets haven’t imploded: Discounted cash flows. Yes, I heard you say “WTF?” from here. Seriously, though, we only need to go to Finance 101 to come to this conclusion. Hang with me on this one. The key takeaway: Markets steadily rising after Election Day make sense when using second-level thinking instead of the “Trump bad, market go down” first-level (shallow) reaction.

Markets are collectively smarter than you or I, and their wisdom is usually realized after the fact. Sometimes they slowly digest and gradually adjust to news and developments within the economy. The simple conclusion I have reached is that markets are pricing in the fact, realized on November 8th, 2016, that somebody other than a bought-and-paid-for, lifelong politician can ascend to the Presidency, which far outweighs the near-term negativity from Trump’s reign as President. The better-than-previously-expected future is more than offsetting the present downside, or, put differently: Markets think this “More Future Outsiders as President” factor is more valuable than whatever damage is expected to be caused in the next four years of Trump.

The bedrock formula in investing says that the price of a security (or stock market) is simply the sum of the present value of future cash flows. This means that the primary driver of today’s prices is the future. Cash flows coming in the near future are valuable to pricing the current value of a security, but the vast majority of what moves the needle is all of the things expected to happen in the medium- to long-term. This is why individual stocks are so concerned with updated earnings outlooks and future growth. For instance, Tesla Inc. has no profits today, but its shares have massive value because expectations for the future are very high.

Apply this concept to the economy as a whole and you’ll see my point. It’s not Donald Trump, per se, that moved the market higher, it was the adjustment required to price in the fact that the status quo had been changed: Our President doesn’t have to rise to power from the cesspool that is modern politics. The cash flows of the future economy (and thus stock market) are now expected to be higher because there is the heightened probability of a competent outsider being elected, one who presumably changes the status quo.

It’s important to state this is only my theory. I simply believe when it comes to future economic growth, money cannot control elections and public policy forever and any development suggesting an increased probability this might be reversed will see positive reactions. I believe we’re seeing this right now. The candidate pool for President just got a whole lot larger, which is a net positive to you, me and our portfolios.

There you have it. In conclusion: Trump — bad. Outsider Presidents in the future — very good.

Christmas in May

Tyler Linsten Investing, Personal Finance

Well, technically it was in April, but we can still celebrate the good news this month. 


Vanguard is at it again, quickly following up Christmas in February. They have announced another round of cuts to expense ratios and shareholders win again. Here’s a look at the new rates for this round, there’s a good chance you own a handful of these if you’re a client:

Cheers!

Mr. Money’s Misguided Mustache

Tyler Linsten Investing, Personal Finance

A few weeks ago, the unofficial king of the do-it-yourself, financial-independence/retire-early investing crowd, Pete Adeney, AKA Mr. Money Mustache, updated his post on his Lending Club “experiment.”

I’ve been a vocal critic of Pete’s because I feel the influence he commands with his blog has led him to be a bit slimy. Long story short, Pete sets up affiliate marketing relationships with the products he recommends and in turn he makes a shitload of money from his blog ($400,000 per year) when people sign up for these products or view ads. My beef with him got started after Lending Club was revealed to have acted to defraud its investors (they lied about the loans they sold to institutional investors and also had disclosure issues regarding loans purchased by the CEO’s family) but Pete kept on recommending Lending Club and he kept on raking in the dough from his referrals.

As a certain someone might say in a tweet: “Not very nice!” I think he has a responsibility – regulated advisor or not – to behave better than this.

Here’s a blurb on why Pete is only just now deciding to ditch Lending Club:

You can read the post, but in short Pete saw his account value go down slightly (about 1%!) so he’s sounding the alarm and ditching the account. OK…? Given his reluctance to tell his followers to sell after “alleged” fraudulent activity(!) at Lending Club, it was already safe to say that if you’re getting your financial advice from internet blog posts created by a hobbyist with massive conflicts of interest, you might want to change your mind and diversify your advice sources. This update further proves my point.

But it’s a little worse.

Here’s further proof Pete just doesn’t really get what it’s like to own a portfolio of loans (the “fixed” part is only fixed until somebody decides not to pay), even if there is broad-based diversification:

The balance dropped! Oh no. With regard to fluctuation, “interest bearing loans aren’t supposed to do this” is an unbelievably naive statement. Fixed income products have to be repriced when interest rates (and other factors) change, otherwise arbitrage opportunities are available. The idea that Lending Club provides a simple “set it and forget it” super stable money making machine is just not accurate. (There is a secondary market for these loans and I suspect many investors are in for a shock if they attempt to liquidate early, as we’ll see below)

It’s one thing to say “well, I don’t want to face any losses so I’m cutting and running,” but that isn’t what Pete is doing. He’s implying that something is wrong with the way these loans are working and that’s just not the case. Delinquencies are rising and his balances should naturally take a hit. That’s not hard to understand. Interest rates, in general, are up, which naturally puts pressure on fixed income products, too.

Allan Roth wrote a great article featured at CBS News, and this passage might help:

In summary, rising delinquencies – as Pete has experienced – bring a delayed hit to Lending Club account balances since they’re not “marked to market” until they’re officially dead. Pete’s portfolio is now seeing those defaults, he thinks the system is broken (or something?), and it’s also a bit of another knock on Lending Club for promoting a snazzy, continuously updated rate of return when in reality some of the underlying loans are effectively zombies and negative returns could be just around the corner.

So what’s the deal, Pete?

The “losses” shown are basically a 1% downtick in account value. Not to defend Lending Club, but I’d love to know how this is any different than an emotional investor selling at the first sign of a paper loss. Or is there something more to the updated opinion? Unfortunately, Pete is not just a regular investor dinking around with alternative assets. He’s an influencer with a massive, money-minting megaphone and he’s dangerous to his readers. He should have backed out months ago and now he’s blaming factors he seems to not understand are 100% inherent in fixed income investing.

Conclusion: I think it’s still safe to say that following the advice of online mustaches is a task best done skeptically.

Pete, you’re out of your element.