6:44PM May 27, 2022
Hi, everyone. Welcome Kristin. Hello, Karen. Hello, Tammy and of course, Hello Chris. Let me just make sure that I have Chris pinned for the record a What's up, Chris? Good to see you Chris just got back from from Panama. I think where you went you went by yourself because the
Yeah, I was well I went with I met up with six friends out there. Okay. You know so this thing called the canal
was pretty cool.
And yeah, just a couple of nights away from the family and background back in California now. So doing doing doing the regular thing here.
Awesome. Awesome. Having me on by the way. Oh, the pleasure. The pleasure is is ours. And I'm personally excited for this conversation. So I would love to set the stage for Tammy and Karen and Kristen. Because Chris is he's originally an internet friend. I was telling my father in law the other day that about 50% of my friends started as internet friends. So we exchange manager usually on Twitter. Sign up to the DMS do a zoom. A lot of us travel a lot and meet up in person and that's exactly how my friendship with with Chris has, has evolved but um, Chris is a man of many, many unique talents. His story is quite relatable to to us to myself and many, many folks in the community where Chris was in. He was on a steady, steady, high paying career trajectory as a hedge fund, investor and trader. We're about the same age, same phase of life, similar kids or a similar age. And Chris had this kind of moment and this you know, instead of me talking about it, we should definitely ask him about it. Because this moment is like am I just what I'm going to do for the rest of my life. And you know, like many people who have spent 20 years accumulating a series of skills he was he is a specialist in a very, very kind of specific part of the market which is trading options for Farage fun. So what makes part of Christmas stories so interesting is that, you know, he he did one a lot of people want to do but don't have the courage to do it. My words, not his. He kind of walked away from kind of the golden handcuffs and deferred stock and all the stuff that comes with staying on a very very prestigious career path and kind of said what makes me come alive what brings me joy, how can I spend more time with my kids and so on. So that's one phenomenally interesting stream of things to discuss the press thing with Chris is one of his many superpowers is this ability to distill really complicated concepts into very understandable things, particularly when it comes to investing and trading and markets. And so I wanted to bring Chris on it was planned before, you know, before this massive bear market, but I wanted to bring Chris on to talk about talking about markets and investing and kind of the the mindsets and the principles and so on. He has a whole series that he's writing about this topic, but also leave it open because I know that his story of walking away from, you know, an exciting high profile, high compensated job into kind of the unknown, would be compelling as well. And the last thing I'd say is that Chris has done a remark I think I looked the other day, maybe two months ago, and quaint Chris is more Twitter followers than me not that it's a competition. But he started seven years after me and and Chris's newsletter I didn't see I haven't seen the latest count but it's kind of become this must read in certain parts of the internet. So another incredible story of someone who just said like, this is what I'm interested in. I'm gonna write about it. I'm gonna talk about it. And the right people find him right and from that, so it's a really beautiful story of kind of an organic journey of kind of, I don't like the phrase in this context, but building an audience. So with that, Chris, I've talked a lot. Welcome. Thank you. And just I love Tell tell us a little bit about us a little bit. About about your story. Tell us about, you know, your career and kind of where you are today. And then we're going to pivot into the investing side.
Yeah, thank you. So, I'll start. I grew up I grew up out in New Jersey. And you know, kind of very like Kay Kay mentioned, and we're sort of like kindred spirits. You know, born from immigrants that moved here in the 70s. And, you know, massive, massive emphasis on education growing up and, you know, I was just kind of like, got the whip crack on me and you know, what ticket school and the whole thing was, you're on this path, to get a good job and be be in a better position than your parents very sort of typical archetype story there. And so I kind of followed that and when I graduated from college, I got a job working for a large options trading firm on the floor of the American Stock Exchange, and I spent the next 12 years running around New York on the different floors of the exchanges, wearing one of those crazy jackets with the holes in the back of it and yelling and screaming and being on TV and all that stuff. And then and then after that 12 years in New York, I moved to San Francisco to kind of do the same work that I was doing, but off of the change trading floors and I moved upstairs, where I was a portfolio manager at a hedge fund. I did that for nine years. And probably around 20, maybe around 2017. I discovered reveries. And a lot of the things that Kay was writing about in his departure from the world of finance are extremely resonant to me. So I looked around myself that do I really want to do this for another 20 years? I just thought I'd like to have a second life. I don't want to do the same thing forever. And what I did was extremely narrow. So I started so I eventually started writing online. And something that has always been very important to me has been educating and trying to teach others in ways that are understandable trying to minimize jargon as much as I can and really meet people where they are so and I had done I had taught in a professional context of helping to train people. But the other reason I felt like this is because it's kind of an interesting side. of going into a business where the average person was really smarter than me. I was surrounded by some incredibly talented people, people that I joke around about as they were their X Men, the kinds of people that are recruited when they're 14 years old. And it was harder for me to learn everything that they were that we were supposed to learn. I felt like I was always uphill, the runt in some way. And in that sense, I felt that I could be you know, if you want to learn to play basketball, having LeBron teachers probably not going to be a great idea because he has no idea where you are and what it feels like to be human. So I felt that by I had an opportunity to try to educate people. And the other thing that was interesting is trading is not investing in trading as a business. It's a super narrow thing to do with your life. And I was a terrible investor. As a matter of fact, I really wasn't even an investor. I didn't start even thinking about investing until probably around 2016 2017. So here I am, and like, you know, I was making you know, a lot of w two income and all that and I would just I never question what my family told me which was, don't throw money away on rent and all that I rent I rent today, by the way, but I would just buy a home and then every couple of years, I'd be like, well, I got more money, so I'll just trade off and I just kept buying, like buying and selling houses. And I woke up one day I'm like, I hate building a house. I I would like to rent and not deal with owning a house. And then well what do you do with your money as well, I probably need to figure out this whole investing stuff. So I knew so little about investing. It's really quite embarrassing.
I didn't really have much in the way investments this last 10 year bull market. I didn't really get to enjoy much of that because I was had more cash than makes them make sense. So around 2016 2017 I started to the reason I went to the internet in the first place actually, it wasn't as much as much as I love K It wasn't the CPL. I went there because I was trying to learn about investing. And it seemed it seemed that blogs and Twitter were great places. So I started lurking on Twitter and trying to understand different different aspects. of investing. And I realized how little I knew, and which was good because I approach the entire idea of learning about investing with total beginner's mind. I set aside any kind of ego that I might have had from the fact that I was a trader and recognize the trading and investing are really different things. So today, that is I'm continuing that exploration into investing. I do a little bit more investing now. A lot more investing now than I used to, but I'm also trying to bridge what I learned from trading by what are the conventional things people are told about investing and trying to find both the bridges and where things might not necessarily make sense, and then trying to make it a little easier for people to understand and that's what I'm kind of working on today is ways to try to help other people learn about investing. This is relatively new, so this is really fun for me, because I'm kind of workshopping my ability to explain anything here and if anything is not clear in our conversation like please number one thing always is just don't ever feel like there's a bad question or anything like that, like we really like I could. You would last us about how stupid I was about investing. So it's like there is just zero judgment whatsoever about a person's understanding. I'm right now working with a sixth grader and a ninth grader, like trying to teach them and it's like, it's amazing to me how they ask questions that are so you know, that other people might be embarrassed to ask but the reality is, I don't think even adults know the answers necessarily to the questions that they're asking. We just think we know or it's just something that we've read, but the reality is, this stuff is just hard. And it's it's it can be abstract, and we want to dealing with things like risk and dealing with decision making. Ultimately, investing is about decision making. It's a big laboratory for decision making. And that's why I am drawn to it. Because at the end of the day, we just all want to make better decisions. We want to have better outcomes in our lives, not just in money, but in everything. So that is my long winded introduction. And
yeah, that's awesome. Thank you, Chris. I want to share with you all because, you know, I think that I think one of the themes that we see we hear across this yp community is the like imposter syndrome. It's like oh, like I want to write this thing but I don't you know, I'm not the best writer I want to start this thing but I'm you know, I've never done this before and there's so many people that are better than me. And I just love you know this what's what's one thing what's kind of like a little dirty little secret about Wall Street, where Wall Street is such a ginormous industry people wise and influence wise, but they're the actual number of people who understand investing on Wall Street is actually not that high. Because there's so many ancillary functions of Wall Street as one thing like trading and we can get into it. It's probably not as relevant to the conversation today. But trading is you know, buying and selling things. And executing and it's more of an execution and risk management mindset versus like, I want to send my kids to college in 20 years, what should I do? Right? They're two very different things to be a trader and to be an investor. So I just want you to all just know that that behind you know, just because someone says that they're on Wall Street, what they might what might be obfuscated, is that they actually know very little about investing or might even more extreme might not even have the confidence to invest. So let's start you gave me a great leeway, a sixth grader and a ninth grader. So they want to learn about investing. And they meet with, you know, Uncle Chris or Mr. Chris for the first time. And they say like, what's, what is the next three months is going to look like Mr. Chris, you're going to teach us about investing. What's the outline? Like at the highest level, like what what are you going to teach them in the next you know, three months, let's say?
Yeah, so the first the first things the first thing that I would teach them is so first of all, I'll just, I'm going to excuse one thing we don't I don't cover I don't really deal with personal finance stuff. I consider personal finance stuff like you know, don't have an 80% credit card debt but that is a basic financial hygiene. You know, there's other personal finance stuff like mortgages, and, you know, I've written about car leases and car leases are kind of complicated, and when you go to the car dealership, they're not trying to help you understand they're trying to make a buck. So I try to demystify some things like that, but it's not really what I'm focused on. And even with that, where I really start with somebody from the beginning, is the difference between savings and investing in the first place. What is the difference between savings and investing? And what's important to realize is, savings is investing is money that you expect there's a chance that you could lose some of that money. Therefore, it does not make sense to invest money that you need in the next year. If you if you if you have an obligation coming up in the next year or whatever it is, education costs out you know, a down payment, whatever it is, you don't really want to be investing that money. There is no such thing as a short thing. I mean, other than you can put your money in the US government in a T bill, but even a long term government bond. That's no short thing that you're going to get back in one year. What you put into it so the very first thing is separating savings from investing. And that's useful because it focuses you immediately on time and time in horizon. So as soon as you need that, so they understand that, okay, I'm not going to spend this money or invest this money because I'm saving it for something that is coming in the future as adults. One of the things we save for that if not concrete is going to be obviously with the reserve fund. You know, if you lose your job or whatever it is, you need to have want to have some number of months savings so that you like one way but a child obviously doesn't think about that. But still they might be saving for something videogame they want whatever it is they're saving. Let's leave saving behind now we're in investing the very first lesson of investing is understanding how that's the number one thing is compounding is incredibly unintuitive. And it's important because, first of all, just for example, if a person earns 6% instead of 7% per year on their investing over the course of 30 years, you will end up with 30% less money, it actually works pretty close to that number of years times the difference in the percentage so 66% versus 7% is a 1% difference over 30 years cost you about 30% on your total net nest egg that you will have at the end of three years. If the math kind of works like that is somewhere between 25 and 30% or most numbers. So that's the first thing it's so huge so the reason that's important is because it's hard to it is hard to generate an extra 1% A year of returns. But what's easier is to cut your your cut your fees so that broker or financial advisor that you're paying 1% or one and a half percent I just my uncle just passed away recently and his children have been parented. You know, some nest egg there and they're asking me to help them and I look at what they've got going on and there's a financial advisor that's charging them on one and a half percent to manage their money. So it's very tricky. It's a 30 year relationship that that this financial advisor had with their father, very delicate but again to the day have to show them a picture. This is what this is going to cost you. You're 40 years old today, and by the time you're 70 this is what it's going to cost you and I know that this was a relationship but it's not a financial advisor is getting paid one and a half percent is going to do everything you can to make to be your friend so it's not really a friend. So that's the first thing like understanding compounding. From compounding. I would go into the kids it's talking so for them I'm again I meet them where they are. They're interested in stocks. So they're looking at
for example, Tesla stocks like that, right? Whatever is whatever is the fancy name of us they're interested in that or active or they had Activision because they liked video games. So I will talk to them about stocks a little bit, but it's not my belief that we should be focusing on trading individual stocks. We have no we have no particular insight into that you would not you would not wake up tomorrow and think that you have any advantage in picking who's going to win the Warriors Match Game is that point spread the right points right for that game. There are many, many smart people whose entire livelihood depends on that one spread being right to the half of investing is the same way. There's so many smart people and so many smart computers. And, you know, you can look at statistics and things like how many people have gotten a CFA or an MBA in the last 30 years, investing in single stocks was a much easier endeavor before we were born, but today it is the most competitive things on the planet. So I want to get them away from thinking that they can know better than what the market is saying about the stock price. And instead, the focus is not on returns, but it's on risk. You focus on risk first, because when we aggregate assets, they do tend to behave in somewhat more predictable ways. We can't know what's going to happen but we know some of the properties of what's going to happen. So for example, we just take the entire class of investments notice stocks, equity, equities are taken their residual there. From the most basic point of view their residual claims on a company A company can borrow money, but it can also raise equity and then if you have equity of an actual ownership in the in the shares. Now if the company runs upon hard times the equity it is completely possible that a single stock can go to zero. Now, that sounds crazy. Except for that is the most common lived experience. Most stocks that have ever existed don't exist. They went out of business. So people will say something like and this is I believe this too when I first looked at stocks a stocks go up over time. Actually, stock indices have went up overnight. The stock in a basket of stocks are not the same. Because the basket of stocks is actually an algorithm. It's actually a set of rules. The basket of the rules say that we take something like the s&p 500 Most people have heard of the s&p 500 is a basket of stocks that is the largest 500 companies in the United States largest by market cap. So the rule is if you are no longer in the top 500 largest companies in their in their rebalances they're going to sell you and they're going to buy another company that is in the top 500. Now, that index cannot go to zero, just by its construction. It cannot go to zero so we know that its properties are all that automatically differently, different. As a matter of fact, if you step back and think about what that is, that is a basket of stocks of survivors, and no matter anytime you are looking at what's in that basket, you are looking at a basket of survivors. Now that baskets composition will change over time, but the price of the basket is based upon what's in the basket, stuff that fold out in the basket, you don't have to worry about it. So the very first thing to understand about stocks is that they don't necessarily all go up in fact they go to zero all the time. It's quite common. So you want to you don't want to have that that's a lot of work. You don't want to have the chance of losing all your money. So we put our money into indices that will track track markers. Now, indices have properties as well. I think you'll find it a little surprising, but if you are invested in an index and looking at others, a great blogger really writes fantastic. Fairly introductory investing material and it's really great I learned a lot from that. His recent post was about what happens when the stock market is is a is dropping like it is today. And people have the urge. People want to panic and
the issue with that is you want to go into your investments in the first place understanding that it's possible once it's like if you go out to sea on a ship you realize it could be some lifeboat on the ship with a little bit late and after the lifeboats are once the ship is sinking, you get up, get the right vote before you go on the ship. So that's the same thing or awareness of how these indexes are Nick wrote that. You look back in history and say, okay, the stock market drops 10% roughly every other year. Every four to five years, it drops 30% And once a generation to call once every 20 years it's dropped about 50% That sounds crazy. But if we look at what's happened, we had the.com bust in 2000 we had the GFC and 2008. And the stock market went down almost 50 45% When COVID was first kind of came kind of came on the scene. So these are these are real possibilities. So understanding I like to say that the s&p 500 Today stocks in general are on the expensive side even though they've come down they they're you know they probably need to come down more to be not expensive, but good quality. It doesn't mean you can't invest in stocks, it means that you need to go into it eyes wide open with what the proposition is. So I like to say that stocks are things that work today based on where they're priced today. If you buy a basket of stocks, it's going to earn you about it's implied from the marketplace and it will bring you about 4% a year. If something is trading at a multiple 25. So it makes $1 of earnings and it's trading for $25. It's trading 25 times earnings. But you can think of that is if I bought that stock for $25 today, next year, I expect to make $1. That dollar isn't for free temperature and then of course you still own a $25 asset. So you can think of that as I'm hurting a 4% yield. That's roughly how stocks are priced today to the proposition is this. I'm earning 4% a year on something that moves about 16% a year in stereo vision is about 16% a year. So I'm buying something today that brings me 4% But I should not be surprised in any scenario where if I'm down 15% A year from fourth down well for a twin. So any result between down to a percent and up 20% should not be surprising in any way. So you're down to pretend you shouldn't be surprised that is one of the properties of this investment. So historically speaking, if you ask somebody how much you expect to earn by owning stocks, they'll say, Well, I expected eight to 11% a year, which is about what it's been historically. That's true, but that things have not been always as expensive as they are today. So if I had to look at it, if I had to say what's the next 100 years look like unless stocks reset at a lower price, I would be really surprised. We're going to earn 8% on stocks.
So pause you there, Chris, to clarify a few things. So I'm learning a ton so so thank you. What one thing to that I think people forget or don't realize when they when they buy Starbucks stock is that they basically let's say you own 1% of Starbucks. Every time now we need a lot of money to own 1% of Starbucks. But just to keep that example simple. Every clear. Say Starbucks has profits every year cash profits from selling coffee, none of its employees and real estate. Then, you know, I'm looking at Karen and Karen owned that 1% character we get 1% of those profits. Right and so if you paid in Chris's example, if you paid $25 for that 1% of Starbucks, and then you get $1 being the earnings, your share of the earnings, that would mean you would get 4% a 4% return on your money. And so that's the math and I think people forget this because because what happens it gets really confusing with companies like Amazon that have negative profits. We're like, Well, I'm not getting any cash from Amazon. But what am I what my stock price is going up. So that is that's the that's something to just we should talk about that as well. But the claim of a stock is you own a little piece of a company and whatever cash that they generate while you are owner of that stock. After they pay all their debts, you aren't really seeing me ask, well, what are dividends? Dividends are just, again, Starbucks, let's use our Starbucks example. Right? They made $1. Now they have the option to basically pay that dollar back to the shareholder so you get the cash, or they can keep it inside the company. And let's just say they just kept it in the bank account. Right for tax reasons. You still own 25 You still own that dollar. You have a claim on that dollar and whatever so you know, they could reinvest it. They could go liquidate and then you would get that dollar in a bankruptcy court. So you still own it. It is just the mechanism by which they remit the cash that you're entitled to. But you actually get it paid out.
To clarify that I told you, I have found a lot of confusion around dividends as matter of fact, I would argue that there's an entire industry around trying to get people to buy stocks that pay dividends because they are just nothing wrong with dividend stocks, but there's nothing inherently good about them either. So the there is this sort of salesman thing going on where people are trying to sell like dividend darling investors. And what they're doing is they're really preying on a misunderstanding of people think that unless they get the dividend, they're not getting any return. That's incorrect. Because just as Kay said, that company when it receives a dividend, good, there's a number of things you can do that you hate, or try and pay out a dividend. That's actually a fairly inefficient thing to do. Not a great thing for an investor in the sense that it's very tax inefficient. Remember, corporation is taxed on the earnings earnings, corporate tax, and then it pays a dividend out and you get taxed on the dividend and that dividend is considered a short term game. So a dividend is actually not an ideal way for you to get your money back from the investment. The other things and kind of clarify that Berkshire Hathaway which is run by you know, one of the smartest, Warren Buffett capital allocators in the world has never paid a dividend does not understand that dividends are highly tax inefficient. That doesn't meet what so what does a company do? Earnings if it doesn't pay a dividend? It can. The two major things that you're going to see is they're either going to reinvest back into the business. That's a great sign and that is basically what Amazon did. Amazon never really showed any earnings because they put every dollar they need into cap x. So if they are internally compounding capital, they're finding investment projects that have high rate of return. Why would I give the cash back to my investors? Who are stuck sticking into a stock market to earn 4% A year or even 8% a year when they're when Amazon can reinvest that dollar in a warehouse in the return rate of return on that might be 25 or 30%. And then by the time that trickles back down to the investor after their fixed costs, and all that, maybe that looks like 11 or 12%. So would you rather get 11 or 12% on your dollar reinvested or is that getting that dollar back tomorrow that in order to so the dividend feels like a security blanket but the reality is $1 is more likely being reinvested if it's not going to be back to you. And here's the other thing where they just buy back their own share buyback of their own shares, and again, and the dividend are mathematically I mean, I don't have to go into why but they're mathematically exactly in both cases. That stocks cash falls. And in a given case, basically, the stock price will fall. And in the buyback scenario, the amount of shares outstanding will fall and we'll both scenarios the market cap is exactly the same. So, again, when its company makes earnings, you are receiving those earnings either through a dividend which will be taxed. A buyback, a buyback will give you a larger group of like there's less shares that means your existing shares you own a larger percentage of the company than you did yesterday. And the third one is a reinvest back in the company. So don't get fooled by the narrative around dividends is there is literally a grift out there trying to get people to buy dividend stocks that don't understand how this actually works.
Out. So I'd love to maybe continue one more down the path of like the nine year olds like we talked about. Compounding you talked about a risk of an index versus an individual stock. Where would you go next?
Oh, yeah. So so the next thing I will talk about so you investing no invest? Investing is, like I said before, equities have certain properties to them and equity in existing property. You don't necessarily you almost certainly unless you're very young. You really don't want to take all your money into stocks because if you lost half of the network in one year, which we said can happen. They want the generation that might that's probably not an outcome. Anyone is okay with. So do you want to diversify and to diversify? You want to buy it as you can? There's lots of ways to diversify. You can diversify away from stock within stocks. There's diversification there's you can buy small cap stocks and buy large cap stocks. You can buy stocks in various sectors. various sectors have different activities to the overall economy. Go a utility does not you know your PGD does not have that much sensitivity the economy the way an energy company might, you know, you're gonna buy a lot of gasoline on an improving and everyone's traveling. Energy companies are going to do really well in that scenario, utility company is going to be doing so you can diversify within stock, you're gonna diversify across asset classes and stocks are an asset class. There is there's things like modernities there's things like there's bonds and then there's features on you can buy, oh, you can there's all kinds of different commodities and bonds, and they are in different geographies. You can be diversified across geography. You can be diversified across the way I actually think properties of the investment. I'm interested in finding investments that are uncorrelated with basically investments that act in a different way. So you can buy, well cash kind of is like that cash is a great example of that. Because cash is insensitive to what's happening with stock, uncorrelated stock prices and stock prices go up and your cash. They're just the same. And you can think of a diversified go to doing what they had you know, 20% of your money to cash and 30% stocks, 30% bonds, and then 20% of commodities in any given year, it is very unlikely that they're all going to be the same thing. So what you can do is you can rebalance and that will sort of smooth your return over time. So hey, maybe this year, we see that commodity prices are up a lot. That's the big story right now is inflation going on. We have supply constraints and we have a war going on in Europe. So why the price is moving right now. Well, the stock market is down 20% This year, something like that. But commodity prices are up about the cement. So what happens if you started at the beginning of the year with, let's say, let's just say your equal weighted so you have 25 cents in each one. Well, you're 25 cent 25 cent exposure to stocks now just 20 cents because you lost 20 pretended value and your commodity your exposure to commodities is no 30 cents. You could say hey, I'm gonna rebalance everything back to my initial weight so I can sell the commodities I can sell five you know one six, but my commodities to get me from 30, back down to 25. And with that one six, I put them in stocks and take my allocation backup for 25. And notice what you did, you sold things at a profit and you bought things that had sold off you're sort of put averaging the things that have went down, and you've taken your profits on the things that I've learned. So diversification is this opportunity to create a portfolio where things do move in different ways and then you just come up with a system for rebalancing in between them, or you can the other alternatives will find a font that that's that was refined those so you can kind of try to set it and forget it
is something like a wealth because I would imagine people I hear this and I understand many of these concepts are like I'm way too fucking lazy and busy to do this. myself to track like commodities. But you also said you pay someone to do it. You mean a huge chunk of money. So what's the what is someone who has the money to invest? Understands enough to like know, the big picture, but doesn't have the time or necessarily the expertise to figure out the allocation and rebalance it and it's not and it's not like an electro, you know, a multimillionaire, you know, someone with, you know, a 401k and some savings and a house right? Yeah.
So, it's, um, right now, probably, if you didn't want to do it yourself, I would guess an advisor, it's probably the best way to go. By the way, the advisors that are charging these fees. There is a host of advisors today, and I know Kay knows a number of do not charge fees like that and sort of come into the future. You know, what I'm talking about these high fees 1%, one and a half percent. These are legacy cost structures just like everything else. This is being disintermediated every time an uncle dies passes away, that fee is going lower, because people are going to look at the alternative so that the luxury Black Hawk like black car service to Uber Black and like that, that difference right there. Yeah, it's all going. It is all getting cheaper technology is enabled that and so the advisor if you're if you feel if you recognize you need to invest, and you feel like well being the advisor is a totally legit way to go about it. You just want to find one that is not charging very high fees, and understands these principles. And then a matter of fact, I think we can probably come up with a list of people that are at least worth a conversation with that or websites by advisors that I think you have a pretty good job. At least from reading them, they appear to get it. So that would be so there's that and then there's this sort of like in the middle DIY, where you don't give it to an advisor. You try to do it yourself or you try to minimize the brain damage that comes along with it and the overhead. That is that's technol I think technology is playing a large role here. There's a for example, I mean, maybe it's a little bit advanced but it's trying to not be there's a there's a there's a software I started using called composer, which is composer allows a person to construct a portfolio and tell it so that it would automatically rebalance a every month or every six months or whatever you want it and you can say you could pick a number of ETFs which are just like mutual funds. You can pick and pick a diversified basket of ETFs and say hey, just rebalance these every month. Or every six months. And it will it will do it programmatically and you just set it up it's it doesn't require normally this kind of stuff would require the ability to code versus not require the ability to code it requires. It's they call it the drag and drop coding like our you know, get kids and they do Scratch programming. It looks basically like that. It's drag and drop. It's super easy. There are canned. There can strategies already there's people subscribe to his strategy. You could subscribe to one and edit it if you wanted to go that far, but you don't have to. So that's why I believe that technology can lead us here where you can get an advisor to hands on for you. But just you don't want to code and you don't want to have a spreadsheet you don't have to have that either. There's always going to be middleware. That's kind of in progress. This is all like internet's only 20 years old. And, you know, we're kind of I think this is all happening right now. And I'm happy to guide anybody any of this stuff. I'm happy to talk to anybody like
this. Let's open it up to q&a. We've got a small enough group where you could just zoom and raise and ask your question or if you want to ask it just drop it into the chat. vydra Go for it
going on. This is super helpful. Thank you, Chris. And this kind of piggybacking off of Kate's question in the chat about robo advisors, but listening to you is reminding me or at least I'm building some kind of spectrum in my head of on one side of it. There's day trading on the opposite side of it. There's passive investing. And I hear all this cool stuff, right, but probably 99% of us don't want to become the quote unquote, day trader. So where's that kind of 8020 threshold in your mind for majority of people who don't care, right and they probably need to care to turn agree, but they've also don't want to bite off more than they can chew on this. So just curious, like your thoughts on that?
Yeah, so my, I think it's picking I think it's picking a number of funds that are missing. Right? And when I say diversification is a very tricky topic, because real estate, stocks, commodities, they, they, they're all different, but there are times when they all act the same because they are sort of all it's close to the same risk factor which is at the end of the day, the Economy. Economy needs to grow. You know, again, going back to the stocks always go up thing that is a very US centric point of view. It's not true globally, to Japan. Is that a 25 year last generation that you know, the bubble that was in Japan that ended around 1990. That was a larger bubble than how things kind of got in the United States by a lot by probably two acts. And the aftermath of that has been absolutely destructive to their roads of capital. Right. So what was a 25 year setback? So I think people today if they thought the stock market was going to go up for 25 years, it would just completely destroy people's mindsets. I mean, I don't think people think about even a possibility. We have to remember us is like one race, that there's massive survivor in a world that's in many, many countries. So diversification is really important because we don't we don't really know don't really know we can't count on things just going up. But we can count on. We can count on something. Doing relatively better. There's always going to be something relatively better. So spreading your bets is probably your best bet. And then from there, it just coming down to rebalance it. We can get into diversification and like there's some diversification and the nature of payouts. For example, if we think about a bond the bond is something that a bond looks like an inversion of stock is that I'm going to give you money and you're probably going to give me a couple percent back and sometimes it isn't all the money. Like it's a very but it should be really really rare that ever happened on shoot me really safe but corporate bond isn't necessarily that safe. So it has a certain distribution. It's like I'm gonna make a little bit make a little bit every now and then I'm gonna get a pair on the stock market is I'm gonna get impaired way more often, but I'm being paid a bit more for that. So we think about these as propositions that's actually how I think of asset classes. What is the proposition that this is offering provided by the money angel investor in a private company or a venture capital fund? I understand that proposition there is going to be a lot of possible reward, but I may end up with a donor. So I need to size that appropriately. So that an investor that does not go to advisor needs to get under their understanding the principle and Foundation and the principle of sizing you don't want to have half your money in ventricle broken. So but the older you know, this goes back to the Talmud. The whole strategy I'm going to put like 25% for different things, is actually very robust. There's not a lot of science behind it, but it turns out it's one of the most robust things you can do. Simplicity is often a lot better in diversification. Simplicity, is really, really good. And, you know, a portfolio of 200 stocks. Yes, it's super diversified, but it's not diversified against that which affects markets are still exposed. So thinking deeply about the equation, that's something that's something I'm working on trying to help people understand better because owning children stocks is only diversified in one bucket of assets. But we care when I say diversification, I mean, across all your buckets, not just stocked
up. And so to double click on that, to your diversification, and I'll be more poignant with this question. Is it better in your opinion for the novice investor to handle the diversification themselves versus letting a robo advisor do that for them?
I think that is the trick with a robo advisor if you look very closely, they are not stupid. They're kind of like, Hey, we're going to buy these ETFs and we're going to buy some bonds and their idea is a bit old 6040 or something along those lines. 6040 is an overfit strategy to what happened the last 30 years and stock and bond correlations have been inverse. Which has allowed that strategy look at your wealth over time because when stocks zig and zag that was not historically the case before that, and of course, Wall Street is a kind of mentioned that Wall Street is not really full of investors. It's full of lots of other functions. One primary function and that's the truth about Wall Street, it is airlines. And, on surprisingly, it's going to mean REALLY hard into things that have worked because that's an easy sales pitch. Look at this chart. It goes from the lower left to the upper right. And they're gonna push that 6040 is just just investing in stocks and bonds only does not feel like a lot of diversification.
What would be the additional asset classes that are available to a more novice investor outside? Anyone Christmas exploited? Stocks and bonds? Yeah.
So so there's written there's real estate there's, there's real estate, there's commodities in there, going international and all of these classes because that that is that adds diversification. But again, international stocks have a pretty high they have a pretty high correlation and select United States. So it's not it's worth diversifying that way. It is definitely worth it. The benefits and the diversification are worth it. But it's not a it's not a silver bullet. Until 911 happens. That's, that's reality. At the end of the day, you're going to filter those out. And then you can kind of get into strategies. So things like trends, strategies, and you can think of that as diversifying. Across the way things work. So strategy diversification, is another form of diversification. So, then you get into various trading strategies and you can diversify across those that kind of gets into another rabbit hole of competition. But we could talk about that, but that's not the place for so I would say and then the major asset class, international, international, as well as us large cap stocks arguing international exposure and a lot of the revenue of the largest stocks, you know, just come from abroad. That's giving you foreign exchange exposure. And you're getting that also investing investing abroad. I would more I would I would be investing abroad. One caveat to it, anybody investing abroad is. The great thing about US stock indices is that the large ones are super diversified across sectors. It's a little tricky when you look abroad, because they can tend to be concentrated. So if you invest in a European stock index, you got to look closely at that index. Thank you, thanks. So almost like easy solutions for different sectors when they are a little bit more difficult when you get outside the United States. So it does require a little bit more, a little bit more research.
Other questions? Oh, yes, he should go ahead.
Oh, so you have given us a lot of information. And at least, if there are some parts of this that we don't understand, or maybe one would like to know more about what would you suggest in terms of like learning like the fundamentals and such like a book or resource, a podcast, something that we could do to learn more of these things? Yeah,
I would be I would be happy to. So I sent those boys that I'm teaching I sent them to start up their investing library. I would be happy to share that list. And I had lots of resources on my site, when people to blogs and books and maybe I can I can put together a list of all of these things and give it the cage fair to everyone. Thank you so much.
Okay, Karen, go ahead.
I just have a quick question. First of all, thank you. This is such good information because you're going through all the things that I read and little bits and pieces and you're saying, Well, this is not why this works. This is and it's very logical, and it makes a lot of sense. And I'm a mom. Yeah. Okay. So I really love how you got deeper into what you're teaching and saying, you know, explain why it doesn't. There's nothing that doesn't work. It's just a snap what people are touting things to be and there's so many examples here. I didn't. But I did have a question about you mentioned something that just probably think I misheard it. When you were talking about diversification. One of the things you said is cash, you're basically taking your money out of the investment and leaving it in cash. Is that what you meant? Yes,
or just whatever or just whatever portion but like today, you started out you got a big pile of cash and you don't have any investments. It's just don't allocate all of your money.
And then another question I have is regarding foreign exchange. Is that is that a highly volatile area to explore? How is that is that included in your diversification? And if not, or if so, you know, a little bit
yeah. So so first of all, you get you if you buy a foreign stock or foreign index or a foreign ADR, which is a foreign stock just traded in the United States, you are getting the currency exposure to that so you can in other words, just to make that point, perfectly clear. If I buy buy buy a, let's say buying index on Canadian stocks, if the shares if the ordinary Canadian shares, let's say I'm a Canadian investor, shares don't go up in price and price that year at all. The return to a Canadian investor is zero. nominated in Canadian dollars in the United States, it was sinking in shares did not go up. That's not go up in any way. But let's say the Canadian currency appreciated relative to the dollar let's say the Canadian currency in one year went up 6% versus the dollar, your profit you will make 6% Because as a US investor, that did not the that that fund in your terms has appreciated. So you are still getting FX exposure as a when you invest in somewhere foreign so even though the Canadian doesn't feel that exposure, you get a new action. So that would probably be my I feel like the ways to invest in foreign exchange is either owning a piece of real estate, or investing or investing. Or you could you could go and look at some multinational United States and say, Hey, this I don't I can't think in my head but this company earns most of its you know what the casino companies are kind of like that. They can they might earn a lot of their revenue, actually, in China, for example, that it's a little so you can say okay, I'm gonna invest in that I get exposure to China a little tricky, because not clear whether that be hedged. Before any changes, that they hedge the exposure you're actually not getting. Now you're getting exposure to the Chinese economy. Because you know what they do better, maybe more training people who gamble in the casinos there, but you might not get the currency exposure necessarily, because maybe the corporate Corporation is hedging that exposure so as to know for sure if you invest in a US company whether you're getting FX exposure you kind of have to see
thank you so much. Yeah.
What Chris we're at the hour. You are so good at explaining things. At the demystify these things. One thing that I just wanted to point out, I do this often. There's a subreddit called elf. I've explained it like I'm five and anytime there's a concept that I don't understand this the first place I go because the responses get uploaded. So if you heard something here you like dividend stocks. If you do read, you know, into Google Reddit, EMI five expected like on five dividends, it will probably explain they'll probably be a bunch of posts that are related to like what's actually happening with a dividend or what actually, you know, how does diversification actually work or correlation or some of the terms that stock buybacks you know, that might be an interesting one given given the conversation that we had today, so, but I want you I could, I can imagine a lot of you feeling like wow, I've actually learned so much but I'm actually more confused, because I know too much now. Then, you know, an hour ago and to that I'll say you're never worse off because you know too much. So, so so so just remember that you know the if there are few a 20s it is you know finding a low cost financial advisor and where a lot of the questions like if there was a question that arose from this conversation, asking about, how do you treat international diversification? Do you have commodities? Right. And just hearing what they say, you know, a lot of them will say we don't know, because they probably just mimic 6040. And so right there, you will know, like, Oh, I remember that thing that Chris said that that might not be full diversification. And if three financial advisors tell you that they don't have commodities, and maybe you're like, Oh, this is either you know, this game is rigged or crystal that's when you'd have to make that you know, your own your own assessment there but kind of use these as a building block. And I can assure you that while it seems pretty complicated it's no different than GTD or notion or like once you spend a little time at it, it's the jargon is used to make it sound more complicated, but in reality, it's less complicated. There are a few kind of first principles that are really important to understand company equity
issues 100 scores, and then once you kind of understand those, which by the way, you could do that we'll get your arms to be like, you know, foreign stocks. I'm going to just hope that you get you started. And definitely sign up. I'll share Chris's resources in the Slack channel. Newsletter is incredible. Twitter is just as smart. So I highly, highly recommend all Thanks, everyone. Thanks, Chris.
By the way, anybody if anybody wants to ask a question, I'm always available. Okay, so just just make that clear to everyone but
drop in your email and our private slack. Absolutely. Absolutely. Awesome. Chris. I'll call you on WhatsApp. Cool. Yep. All right. Hi, everyone.