7-21-26 Why Investors Keep Chasing What's Hot

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[00:00:51]>> And welcome on the show this morning is Two Dads on Money, of course. John Penn joining me. And we've got [music] a few topics to get into this morning with you. And um um you know got to also catch up on the whole big I I don't know how to pronounce it so I'm going to screw this up. The cycllosphorin issue >> right. Right. Is that so right? Yeah. So explosive diarrhea. That's what it comes down to. Right. So well apparently this is from Taylor Farms and they [music] they are one of the world's largest producers of lettuce and vegetables and these type of things that go to main restaurants. Well, the original the the original thought was that it was just the lettuce that went to Taco Bell, >> but it was a false positive on the test and they now think it's in maybe a lot of the lettuce and and this company supplies all the lettuce for not only just Taco Bell, but KFC and and Darden restaurants like Olive Garden, etc. Uh it's also potentially at HB and Kroger's. So this morning the head of lettuce we just bought went into the garbage.

[00:01:53]>> Adds a whole new meaning to fast food.

[00:01:55]>> Yeah, exactly. Yes, it does. In and out.

[00:01:58]So changes the whole name of that burgers restaurant, too. [laughter] So anyway, uh be careful if you're eating lettuce. Um might want to just kind of hang off for a bit until they kind of figure this out because apparently it's in more of the lettuce than what everybody thought it was. Unless you're looking for a quick diet solution. Ah, >> then you know >> there's that.

[00:02:18]>> Not to implicate anybody we mentioned.

[00:02:21]>> Correct. Yeah. Looking to lose a little bit of weight, eat some lettuce.

[00:02:24]>> Ca there. [laughter] >> Exactly. Uh anyway, so talking about explosive um [laughter] you know, the tit for tat with Iran continues, but there is now a push by the Pakistanis to help uh to get a a truce back onto the table, at least a ceasefire temporarily. That's giving a little bit of a little bit of relief to the markets this morning. We're seeing markets trade up. Dow's up about 200 points this morning. S&P's up um about 30 40 points. The NASDAQ implied opens up 357. That trades going all right back into semiconductors. Saw a little bit of that yesterday. The market opened up uh sold off during the day. We actually finished negative. We'll talk about that in just a second. But uh again, we're going to see a pretty strong push this morning at least coming out of the gate on kind of these this hope that we're going to have you might be some relief, you know, with between the Iran and US get oil prices back down. Oil prices of course been on the rise. We talked about that recently. Um so we'll see what happens this morning. Um again, the question has been stickiness. You know, can this stick? uh we see these opens like yesterday that the market sells off on and you know it's it's kind of turns out to be a disappointing day but you know overall the market just kind of continues not to do a whole lot here unfortunately kind of just working through this big consolidation process but again we're all kind of just hinging on kind of one kind of one day to the next but tomorrow we will start getting some of the big earnings Google Tesla Intel are this week I think Intel's on Thursday um so we'll have some big reports this week that will potentially move the markets in one direction or the other, particularly with a lot of this concern around this whole AI trade. The uh today's daily market commentary talks about the the new Chinese technology that's just come out that's open source and what that potentially means for the AI backbone. Um you know, so we'll get some some kind of some news from Google uh tomorrow when they announce earnings and and the markets are going to start kind of processing this AI trade. So again, there is some risk here. um as we go into this week and particularly next week when we have Apple, Microsoft, Amazon all all reporting next week as well. So again, you know, markets are holding in here right now. But you know, a pick up in volatility would not be surprising here depending on and it could be either way, right? Markets go up or down uh depending on what kind of these announcements are coming from these hyperscalers in particular because of the downstream effects of what they say and then the underlying companies.

[00:05:00]This could be great for semiconductors.

[00:05:02]uh after a 20% sell-off. It could also be really bad for semiconductors after 20% selloff. Historically, uh 20% declines in semiconductors uh lead to an about an 8% gain on average. That's average now uh over the next few months. Um however, five out of the out of the recent downturns of more than 20% turned into 30% downturns. The worst was 44%. So again, there is downside risk to the semiconductors.

[00:05:30]We're getting a bounce and I'm going to show you a chart here in just a second.

[00:05:33]We are getting a bounce in semiconductors. So, just, you know, might want to monitor the risk that you're taking in your portfolio.

[00:05:39]Speaking of all that, let's get into what you need to know before the bell this morning. So, as I talked about yesterday, um, we broke the 50-day moving average and I said just be careful here, right?

[00:05:49]Because we're kind of flirting on support. Just because we broke below it doesn't necessarily mean anything. We've seen these before. Then the market turns right around and goes back up. And so we actually opened up back above the 50 and the 20-day yesterday. We were unable to hold it though. Closed back down at basically the open from uh the on Friday. So um you know we we just saw this kind of this reversal in the markets yesterday that wasn't great. The selling was kind of muted. It wasn't a drastic down day. It just kind of drifted lower all day long. just kind of, you know, kind of opened up with some m momentum and then just kind of petered out for the rest of the day. But this morning, we're going to open back up above uh those moving averages again uh you know, out of the gate. The question will be whether or not we can can kind of stick the landing so to speak on that support level. Markets are getting a little bit oversold here on a relative strength basis. Not deeply oversold by any stretch of the imagination. We are on a sell signal though that's certainly at least capping upside potential near term. And as we talked about before, we just kind of continue to to just kind of gravitate, you know, kind of along this kind of just this compression of the markets.

[00:07:00]And again, we're not really moving up a whole lot. We're not going down a little a whole lot. We're just kind of gravitating sideways here, compressing those prices. So, we're eventually going to get a breakout in one direction or the other. I know I've been saying this for a while. We just haven't gotten that breakout yet to any degree. But when it does, we'll get a more significant move.

[00:07:18]Um, you know, as we've t as we've kind of discussed, there is some risk coming up here over the next month or so when we get to August, September, that kind of midterm election cycle typically sees a pickup in volatility.

[00:07:31]More downside risk kind of becomes apparent in the markets. So again, kind of what happens here over the next few days with earnings is going to potentially set the direction of the markets. Now, I said I said we'd talk a little bit about semiconductors here because that's kind of been one of the the the bigger stories as of late. And if we take a look at the semiconductor index. So, this is the VANX semiconductor index. And you kind of see this decline. We came down kind of started approaching the 100 day moving average and had kind of working this kind of downtrend in the markets. Again, we're going to see a bit of a move higher today. What you're looking for though is you've got to very clearly defined um kind of this downtrend that that you're setting right now in the markets. So what you really need to do is see the semiconductor index kind of break that downtrend to kind of give you a signal that it's kind of res, you know, it's kind of safe to enter the water a bit. Yeah, you're going to kind of miss the low if that happens. But the risk is is that if we don't break out of that downtrend, we continue to work our way lower here towards that 100 day moving average. So again, there is some downside risk. And just because you're getting a bounce right now, doesn't mean it's an all clear. So look at your exposure in your portfolio, how much you've got going on here. We do have some risk coming up with earnings. So again, kind of measure and monitor that risk. Use use the bounce here to rebalance that risk if you need because if if reports come out weak over the next couple days, particularly if like Intel kind of kind of has a, you know, explosive diarrhea moment w [laughter] with their earnings report. um you know it's going to potentially put more pressure on the downside for sem I'm not saying that's the case but if they do that's going to put some more downward pressure. Semiconductors are oversold here and again you're on a pretty decent momentum selloff in this market. So again a a decent bounce is certainly likely but again until we kind of work through this process and kind of get a more of an all clear just kind of be careful managing your exposure accordingly. Don't take a lot of leverage risk right here. Don't kind of make a bet that semiducks are about to take off to an all-time high. could, but there is risk that we can work our way lower here as well. So again, it's kind of no man's land right now in terms of speculative risk takingaking. So just be careful. All right, that's what you need to know before the bell this morning.

[00:09:41]We'll come back, pick up with John Penn.

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[00:10:45]>> You're listening to the Real Investment Show. [music] and welcome to the show this morning.

[00:11:00]Uh, John Fan, good morning. How are you?

[00:11:02]>> Good. How are you this morning?

[00:11:03]>> Good. It's It's Tuesday. It >> is Tuesday.

[00:11:06]>> Yeah. I was going to call in sick this morning. I was going to call up and just say little under the weather this morning, John.

[00:11:11]>> Bad lettuce last night.

[00:11:12]>> Exactly. [laughter] Is that what it was? The chat is all over this lettuce. I have to so I just before we get into this I got to shout out to so lot a lot of great comments in chat this morning already about lettuce but at Jeff Seagull uh 2176 here's here's the joke of the day today what did the reverend say to his family on the way into Taco Bell >> don't eat the lettuce >> let us pray >> yes >> very good [laughter] I had I had to share that so couldn't couldn't help myself >> dead joke >> yeah good stuff >> all right what we talk about this morning John >> all right So, um, so a couple things that I that I've noticed as of late and actually it's it's very timely because there was a there was a great article in the Wall Street Journal about this and the the image of the article was this hand over the over like a like a series of matches and one of the matches just was on fire and the hand was over it and basically the title was as investors we just can't help ourselves and we just we just continuously chase >> what is hot in the market out there and this this particular article referenced referenced Bitcoin >> and it was and it you know and I I failed to realize that Bitcoin ETFs were actually launched in 2024. So it's been about 2 and a half years since those Bitcoin ETFs came out.

[00:12:31]>> Yep.

[00:12:32]>> And when they first came out it was like there was just like this like this frenzy about them. It's like we we got to invest in this. We got to invest in this. And now I really don't hear about it much anymore. Right. So, it's amazing how quickly like there'll be this fat or something that we really feel like we need to chase and then all of a sudden like two years later it's like not a big deal. But >> the the point was when when those Bitcoin ETFs came out, Bitcoin was trading at roughly about $46,000.

[00:12:59]>> And as of yesterday or as of this morning, it's a little over 66,000. So, if you would have bought those Bitcoin ETFs and held them, >> your return was, you know, give or take about 43 and a half, close to 44%.

[00:13:11]>> Right. Right. That's a really nice return over the last two and a half years. But it's interesting is that the article pointed out that so many people were chasing these that they actually lost money.

[00:13:21]>> Y there are actual return was closer to a negative negative 6% per year and it just I mean and I'm picking on Bitcoin here and this could almost relate to just about any asset class.

[00:13:32]>> It's just that that's an easy I mean that that was the article that's what it was about. It was a really good article too. I read that article. Um but no, I just I just wrote this article on Monday talking about why retail traders wind up losing.

[00:13:44]>> Yes.

[00:13:44]>> Uh you know, kind of time after time after time is simply because of that is that we allow our emotions to dictate our trading. We went through a lot of that yesterday. Um but you know what it was interesting the whole Bitcoin ETF thing was very interesting to me because you know the the Bitcoin industry was pushing for that. It was like >> let's get these ETFs out on the market and then I could buy an ETF. I can put it in my portfolio. And then we had all these people come out saying, "Oh, well, you know, get rid of bonds in your portfolio. You should have, you know, stocks and Bitcoin and and you can use the ETFs now. It's great." Well, what nobody realized was that ETFs gave Wall Street an entire platform to short Bitcoin with. So, all of a sudden, arbitrageing became really, really easy. It was difficult. See, you got to be careful what you wish for in the markets. Bitcoin was a lot safer when it didn't have a lot of Wall Street tools with it. I mean, in other words, if it was just Bitcoin, you had to go buy it. They had to put in a wallet, whatever it was. If you would have left it there, it would have actually been more stable, then when you applied and gave broad market access to Wall Street to short by giving them an instrument that they can arbitrage with, which are ETFs, >> right? Yeah. And then then you just you don't have just regular ETFs. you know the the 2x and the 3x all those leveraged versions come out >> so some well and bitcoin by itself is already you in my opinion it's a speculative asset I mean truly what is the underlying value of it >> but now you've you know be careful what's be careful what you ask for now you've actually turned something that was already speculative to begin with you know even more speculative right to your point >> right right and and again but this is the thing is you have to understand the way that you know most people think that Wall Street is just, you know, people sitting around on a trading desk, you know, they're buying a stock or selling a stock, whatever. No, they're creating product. That's how they make money.

[00:15:39]>> And then once they create that product, they figure out how to ar arbitrage, right? All those products. And how do they make more more money? Just take a look at the revenues that we saw with uh black just last week with JP Morgan, Wells Fargo, Bank of America. Where did the revenue come from? Did it come from banking activity? No. It came from trading activity. their entire profit margin came out of their trading revenue for these major banks because they have all the proprietary trading desks. So if you think they're sitting around, [laughter] you know, issuing out debit cards and making fees on that, that's not the that's not how banks make money anymore. They make money off of you and off retail trading, >> right?

[00:16:16]>> Yeah. But it it just so just I know the article was really mentioning Bitcoin specifically, but I' but I see this behavior over and over again whether as of as of late is it you know gold and silver precious metals. I mean, how many folks were chasing that last year? And my fear is that so many folks, they just kind of got sucked into that >> and actually maybe I mean, how many folks out there are listening today?

[00:16:39]None of our listeners of course, but there's a there's, you know, I think there's a a major group of investors out there that just finally said, "Okay, I'm going to go in on this. I'm going to buy into gold and silver >> because of the narrative, right?" And I think it was a lot of scare tactic scare tactics, too, that kind of drove folks to to invest in that particular area. In this year, gold and silver have had a more challenging year. Right.

[00:17:02]>> Right. And so now, so my fear is again, it's a cycle cycle all over again where we as investors, we buy high >> and it doesn't work out and our in our attention span or the amount of time that we allow an investment to work is so short that we then we just sell low.

[00:17:20]And it's this constant over and over again. And every time we do this, we tell ourselves, well, I'm never going to do that again. I'm never going to let that happen again. But then the cycle just keeps repeating itself. Look at semiconductors this year, right? We've seen a ton of fund flows into semiconductors.

[00:17:34]>> And as of late, they've been a little bit weaker, but I guess we we are starting to see some money kind of move back into that space.

[00:17:41]>> Not yet. I mean, it's it's right now you're still kind of working your way through that correctional process. Yeah.

[00:17:47]And again, a lot of it's going to depend on earnings, what happens with these semiconductors. But if earnings start to slow down rather significantly or if there's any change in demand, you know, this, you know, we're we're having another deepseek moment with Kimmy um in terms of this kind of open access Chinese, you know, kind of platform.

[00:18:05]>> But if you know, if you know, think about it this way. The whole the whole thesis behind semiconductors was is that there's going to be all this demand for semiconductors because of AI. Well, what if somebody develops an AI that requires less power and less less compute and you don't need as many semiconductors?

[00:18:21]Changes the whole dynamic of the game, right?

[00:18:24]>> And that's going to eventually happen.

[00:18:25]Um, think about how, you know, how heavy your laptop used to be, right? Just a few years ago, your laptop weighed 10, 12 pounds. Now they're down to four or five pounds, right? And, you know, things are getting smaller. We're getting faster. we're developing more and more uh you know uh better products um as we kind of go along and technology continues to advance. So, you know, in in theory, right, we're I was just looking at some numbers yesterday. We're building like just in Texas and Virginia almost 900 data centers, right? And these things are massive, right? These things are the size of three, four football fields.

[00:18:58]>> What What in the What about in the future that the data center might only need to be the size of a house, >> right? Maybe a 5,000 foot house because we've condensed the size of semiconductors. We've condensed well [clears throat] maybe we're not even using semiconductors in the future.

[00:19:13]whatever it is, right? I'm just saying is that what we continue, you know, what we do is like, you know, a computer back in the 1960s filled entire rooms and now we're down to laptops and smartphones.

[00:19:25]Think about data centers, right? All these data centers we're building. What about in the future? What about another 10 years? These things are the size of a house somewhere and still providing all the technology. So things are going to change, right? Right. And this is why we have to be adaptive in our portfolios and be careful of these narratives that oh this you know whatever it is today.

[00:19:43]It's just going to be this way forever because nothing ever works that way.

[00:19:47]Yeah. Right. You know there there is going to be as you talked about earlier there's going to be these cycles that occur and we have to make sure and navigate those cycles. And this is why you know we talk a lot here on the show when things are going through a parabolic move. We start saying, hey, you know, be a little cautious here and, you know, maybe take some profits, rebalance risk. You know, be careful.

[00:20:03]This is going to have a correction at some point. You can't have these parabolic spikes. And we get a lot of hate email from you guys.

[00:20:10]You know, it's like, oh, you know what you're talking about. This time's different because this, that, or the other thing. It's never different, right? I mean, you know, when you have a a speculative move in the markets, they always end. It's just the function of timing until they end. And and they always reverse. And and to your point, John, where people get sucked into it is in the heat. Basically, you're already well into the spike, >> right?

[00:20:31]>> And people are buying near the top because that's where all the frenzy is and then they wind up losing money >> and and you know, um selling out at the bottom. And and this is and this was kind of really the point of the article that we discussed yesterday is that doing less in your portfolio tends to work out better over time.

[00:20:48]>> Yeah. Yeah. or you by that time you get in and the move has already been made and now you're going to you're going to just be on the what I like to call the opposite side of the trade. Right.

[00:20:57]Right. You just don't want to be on the opposite side of it where it just doesn't work out in your favor.

[00:21:01]>> But I but I find that it's it's funny that I I find you when when things work out well and let's say we we enter into a more speculative area of the market and as investors we do well. It's look how smart we are, >> right? you know, and at the end of the day, we probably just got a little bit lucky. But if something doesn't work out as intended, it's I I can see that, you know, it's very easy for us to say, "Well, it didn't work out because of this," or, "Here's the reason it didn't work out." Like, there's always a reason. Well, the market took this away from me, or what have you. And I and I think I think really it's not so much the market that takes gains away from us. It's how do we react to it? It's it's our own behavior.

[00:21:41]>> Yeah. No, it's always our own behavior.

[00:21:42]And that's why, you know, we write a lot of articles. I've got, you know, I'm writing I'm kind of writing an e guide right now. Yeah. Um fairly long, right?

[00:21:51]Kind of the myth of long-term investing.

[00:21:53]>> And I'll hopefully have that book out in the next, you know, next month or so.

[00:21:56]But um you know, when you start going down to it, it's all about emotional decision-m, right? You know, loss avoidance. We we we sell stuff because we don't want to lose any more money. We heard, which is where, you know, we just kind of follow the herd, whatever everybody else is like, "Oh, everybody else is doing it. I might as well get in." So, we're just kind of following the herd generally over the cliff. Um, you know, and and just, you know, those type, you know, um, >> you know, recency bias is another one, like what worked in the past is going to continue to work in the future. None of those things ever occur. And that's really the the the most important thing you can do to your portfolio is look at a trend in something of what's going up and for whatever the reason is and say, okay, this trend is going to change. The question is when, right? How do I navigate the when that this trend is now changing and when the market expectations are changing because you know and this is one of the things about you know about Bitcoin about precious metals about stocks semiconductors whatever it is there's this narrative that gets created we talked a lot of we talk a lot on the show about narratives because this is the driver right this is the media the media comes in says oh this is what's going on and you got to get in and this time is different because of these reasons [snorts] and those narratives atives are what what creates the speculative demand for some asset class and then eventually that speculative demand is going to change and because the narrative is going to change for whatever reason and now the market's going to move in the other direction based on whatever new narrative is there but that's going to eventually end as well. So it's important just to understand that the market is driven step back for a moment the market is always driven by supply and demand by the players within the markets and you can look at the supply and demand of of you know the physical assets of semiconductors right so there's just not enough semiconductors to meet the overall demand that's a valid argument so why are semiconductors going down because the narrative pushed the prices the supply demand imbalance of the shares of semiconductors got out of balance and push those prices to a level that was beyond the underlying fundamentals in the markets. And so now prices have to correct back to reality, earnings and value values and fundamentals. So this is the part that you have that this is the hard part as an investor is you kind of got to work through that process and understand look has the thesis behind owning gold in your portfolio changed?

[00:24:20]No, it has not. So why are the p why did the prices go down? because the price of gold got too far above the underlying fundamentals of the portfolio, right?

[00:24:29]So, the market's going through that. Has that narrative has has the change in the in the narrative changed the underlying value of owning precious metals in your portfolio? No, it hasn't. But until that narrative changes back to the positive, gold prices are going to be under pressure for a while. It's also a function of the of the strength of the dollar.

[00:24:47]>> So, those are the things you have to work through within your portfolio design and construction. And this is why we talk so much about, you know, building an investment policy statement, you know, writing things down, having a plan, having a discipline, because it doesn't that doesn't guarantee you success, but having a plan and a strategy where you just ignore the other stuff, right? Just ignore all the other stuff and and stick to your investment plan, whatever that is, as long as it's a sound one. Right? Now, if you have if you have an unsound financial investment strategy, it's not going to work, right?

[00:25:17]So, make sure that you're that you're investing on good, sound philosophies and principles. You know, go study the greats and how they did it. Invest that way. You will win over time. Again, you're not going to outperform every given year. You're going to underperform, you know, more often than you would probably like. And there's going to be some years where things just don't work. Yeah. Right. That happens.

[00:25:39]That happens to everybody. Nobody Nobody wins every year. But if I can win the majority of the years, right? If I can win 70% of the time, you're going to be in really good position.

[00:25:50]>> Yeah. And and if you feel like you sometimes there there are folks that I visit with and they just get the itch. I mean, they just feel like they got to speculate or kind of try to get in on what's hot, >> you know, and this sounds so obvious, but just you kind of have, you know, some fun money. That's fine. That's normal. A lot of folks that I work with, they have a little account off to the side, and that's kind of where they run their own little market strategy. That's where they speculate.

[00:26:11]>> Hey, and if it works out, great. But if it doesn't work out as intended, it doesn't derail them, right? So, it's all it's all just about balance there. Um, but when you were talking about, you know, having a sound investment strategy and having a plan and having an investment policy statement, you know, and having an approach that works and fits your persona as an investor, you know, sometimes a question that I get too is what, you know, how how do I grade my, you know, returns over time?

[00:26:38]like and and so my my answer is you know if if we're talking about a benchmark you know at the end of the day you the client the investor you are your own benchmark you have to figure out you know what is the rate of return that you need >> for this to work you know and you know what is your time horizon is it are you using these assets now are these assets to be used in 5 10 15 20 25 30 years but in order to support your longer term goals and objectives we have to help you figure out well at the end of the day you know what is the rate of return that you need and just how much risk do you really need to take >> and if the market's up 20% this year you may not be up 20% this year >> but at the same time you may not you don't need a 20% return you don't need to be that aggressive either right so you again don't I think as investors it's all and I say this a lot and I know I sound like a little bit of a broken record but it's it's just because this this conversation comes up on a routine basis that you we we find that as investor We are always so quick to compare ourselves to that of a market index >> and it's not an applesto apples comparison. Maybe you have 20 or 30 or 40% of your portfolio in equities in a year where the markets are up really strong, you're not going to be up as high as the market.

[00:27:53]>> And another mistake I see about that where people benchmark is they keep changing their benchmark.

[00:27:57]>> Well, that's it, too.

[00:27:58]>> And and you know, last year they were benchmarking against the S&P. this year they're benchmarking against the NASDAQ, you know, and it's like, well, I didn't do as good as the NASDAQ this year.

[00:28:07]Okay. Well, you know, why did you not you're not invested anything like the NASDAQ, right? Right. Um, but this is and what I find this a lot. It's like, well, you know, last year I was large cap, now this year I'm small cap, you know, and and they keep changing, you know, the the benchmark. And look, benchmarks are important, right?

[00:28:23]Benchmarks are they they give you something to compare how your strategy is doing. So, however you invest your money, right? You have to pick a relative benchmark whatever whatever that is. I mean if you're 6040 8020 9010 7030 you know whatever your allocation model is you have to have a benchmark that compares that. In other words it's not if you are you know have a a portfolio that's I'm just making stuff up 50% stocks 30% you know bonds 20% gold as an example. you know, comparing yourself to the S&P 500 isn't a good comparison because the S&P 500 is entirely all equities. So, your equity your equity risk performance is not going to be aligned accordingly. And and so, it's kind of like thinking about, you know, I'm going to go race a Volkswagen against a Ferrari. It's just it's just not the same thing. So you need to, you know, either build a custom benchmark that matches your portfolio or build your portfolio to ma to more mirror the benchmark that you want to use, whatever that benchmark is. And that could be a rate of return. It could be a variety of things. And by the way, a benchmark doesn't mean an index either. It could be just a rate of return. I'm you know, my benchmark is 6% a year. That's that's my benchmark, right? So how did I do this year? I was at 7%. Great. I beat my benchmark. I was at 5%. Okay. you underperformed your benchmark this year. Why? What happened?

[00:29:49]Well, the market was down. This happened. The other thing because again, if you just use a a 6% rate of return, that's never going to change, right?

[00:29:55]Markets don't compound. So, you know, pick a relative benchmark that is important to your financial goal and then just focus on that. Don't worry about all this other stuff. If you underperform the benchmark one year, it's okay, right? Whatever that is, that's okay.

[00:30:12]>> Just analyze why you bench why did you underperform this year? Well, a good example this year, right? I don't have a ton of semiconductors. So, you're going to underperform the benchmark this year because you don't have right, you know, 30% weight in semiconductors or whatever. So, you know, there's going to be years under form. Just make sure that the reason the underperformance isn't a structural or foundational issue with your al with your strategy that's causing you to underperform. You're just going to underperform some years because you can't own everything. You're going to outperform some years. when in the years you outperform, a take profits, b, you know, look at your outperformance.

[00:30:48]Were you taking on excess risk to get that outperformance? If so, kind of rec re reconsider how you're doing because that risk will turn up biting you in the butt at some point down the road.

[00:30:58]>> Yeah.

[00:30:58]>> So again, those are the that's why benchmarks are important, but you shouldn't live and die by the benchmark.

[00:31:04]>> Yeah. And and so in our in the planning world when we're putting finan forward-looking financial plans, retirement plans together, we call that rate of return need or that benchmark, we call it a hurdle rate, right? What is that what is that rate of return that you need over time? And it's over time for all this to work. And there'll be some years where you're, you know, our goal, you know, is to help you, you know, exceed that hurdle rate, but with managing risk first and foremost, right?

[00:31:31]Um but that's that's the benchmark that I like to pay attention to. Uh is what what is the hurdle rate and how are you doing against that?

[00:31:38]>> Um so so hey I want to so you you wrote an article it was posted in Barrens yesterday.

[00:31:45]>> No I didn't write the article. I was interviewed by Barren.

[00:31:48]>> Okay. Got it.

[00:31:49]>> Got it.

[00:31:50]>> Got it. So so your interview Thank you.

[00:31:52]So your your interview was actually posted in Barrens yesterday morning.

[00:31:57]Yeah. Right. and where you were where and I I guess the the interview I well tell us a little bit about what the interview was about.

[00:32:03]>> It was about margin debt, right? And and so so what happened was is that Baron's re so I wrote an article on margin debt a couple of weeks ago.

[00:32:10]>> Yeah.

[00:32:11]>> And I went through the measures that mattered relative to margin debt. And so for instance looking at margin debt to GDP is pointless, right? margin debt to M2 is pointless because you're comparing margin debt which is all based on the investment markets into you know into an economic economy right just those two don't those aren't the same thing >> so we went through the measures that actually measure well the the guy got one of the journalists at Barren read the article and was like hey I want to interview interview you on this so >> so so basically we just talked about margin debt anyway they published that interview yesterday >> yeah so so there. So, those those pattern day trader rules have been relaxed to allow even if you haven't if you haven't seen the article or read the interview on Barons yet, it was on the front page yesterday. So, kudos to you.

[00:33:03]That was awesome. Um, but in there, I mean, you know, it the those pattern day trader rules have been, for lack of better words, relaxed. So now folks that have like brokerage firms are allowing investors that have an account with maybe $2,000 in it.

[00:33:22]>> So So yeah, let's let's back up and explain. So So there's been a rule for a long time called the pattern day trading rule.

[00:33:29]>> Correct. And if you're going to take out margin on your account, there were some kind of some guidelines that [clears throat] you would restrict your ability to take on margin. How many how many trades were you, you know, how often you trade was one of the things.

[00:33:45]And so, you know, the more that you traded, the more the more restrictive it was.

[00:33:50]>> Um, and there was a $25,000 minimum for the account size before you could get into margin. Well, they they've they've gotten rid of the the number of trades.

[00:34:00]They don't even look at that anymore.

[00:34:01]And they reduced the account minimum to 2,00. So now all of a sudden, you know, and this was and this was really pushed, you know, this this pattern day trading rule revision was pushed by Erade and Robin Hood and and these other firms that extend margin to retail traders.

[00:34:20]And you know, having some speed bumps in the markets are a good thing. Agree.

[00:34:25]Right. Again, as we talked about before and just as the article noted out yesterday, is that, you know, the speed at which investors can now get into the market and trade and there's, you know, no cost to doing it, etc., has led to incrementally worse returns over time for investors. And, you know, we go back, it's like, oh, commissions were terrible. No, they weren't terrible.

[00:34:48]They were a good thing because it slowed things down. The average hold time was six years because you didn't want to pay the commission. You know, speed bumps are a good thing to slow you down because you're your own worst enemy. And and this is just one study after another that shows this.

[00:35:03]>> And yes, you know, look, during bull markets, everybody's a genius. You get away with everything in a bull market.

[00:35:08]And this has been a really easy market over the last 5 years to invest in. Even 2022 was even though you had a correction, 2022 was an easy market. So, it's been the market has continued to bail you out particularly over the last five years, but even really over the last 15 years. And we've all been very lucky to have been in this bull market cycle because we've all been able to build a lot of wealth. This will end, >> right? The hard times are coming for the markets at some point to where it's not going to be so easy anymore. And this is where all the bad habits that we've created within our portfolio analysis, our structures, how we trade are all going to come back to haunt us at some point because that's just the way markets work over time. But you know, but you know, removing more and more speed bumps is allowing investors now become more and more aggressive net negative balances, right? So if you take a look at margin debt as an example, you have almost a trillion dollars of negative net net credit balances in accounts, right? So in other words, investors are heavily leveraged in the markets right now.

[00:36:12]>> And that's okay for the moment until that reverses because that leverage works in both directions.

[00:36:18]>> But you know that that pattern day trading rule revision was >> again really pushed for by the people that extend that margin. They wanted more and more people have access to margin because they create income off that, right? They get the interest income off of that margin debt that they extend. But that has a very negative downside effect to the actual people taking out margin. And look, if you're, you know, at $25,000 for a lot of people, that was all the money they had.

[00:36:44]>> That was their savings. So that's their emergency fund, >> right? And people are now like, "Okay, well at $2,000 I'm going to take out margin. I'm going to leverage that to 3,000. I'm going to trade options, whatever it is." In a lot of cases, that's all the money they have. Yeah.

[00:36:57]And so the point about that is that when the margin call comes, right, the market takes a downturn, you get a call from the brokerage firm that says you need to cover, you need to either sell stuff in your portfolio or you need to deposit more cash by 3:00 this afternoon. This is not a a a mild request. It is a demand. And at three o'clock in the afternoon, they will either liquidate your account if you they will liquidate your account if you have not deposited that cash. And for a lot of people, they if that's all the money they have to start with, they're sp they have $2,000 and that's all the money they've saved up. They've thrown it into a Robin Hood account, >> they're done. That's it. That's all their free cash balance. I mean, it's gone.

[00:37:38]>> And you know, now they're now they've set themselves back financially. And this is why, you know, you were talking about earlier about, you know, clients that have speculative accounts that they have.

[00:37:46]>> Terrible idea.

[00:37:47]>> Yeah.

[00:37:48]>> Worst idea ever. You know, because I have a lot of I have a lot of clients that we work with, too, and they they do that. They've got, you know, 50,000 or $100,000. It's like, oh, it's just that's my play money over there, >> right?

[00:37:58]>> No. Take that $100,000, multiply it by 6%, compound that out for 30 years, and tell me how much that $100,000 is worth that you just blew.

[00:38:07]>> Well, how that's not very That's not a lot of fun, though.

[00:38:09]>> It's not. Investing is not supposed to be fun. Investing is supposed to be boring.

[00:38:13]>> Yeah.

[00:38:14]>> And the more boring your investing is, the better that you'll do over time.

[00:38:17]>> Yeah. No, and I kid when I say that, but but you're absolutely right. You know, it's just that it's that emotional behavior where it's just like we feel like we just have to be doing something.

[00:38:26]>> Um, you know, sometimes that something can work out, but sometimes that something doesn't work out either, right? So, I see it too where a lot of folks kind of have some money off to the side that they have their own little strategy that they follow. you know, it's it's kind of fun to follow along with the markets, but at the end of the day, yeah, if you let that run at about 6% a year for about 30 years, you're probably going to be a lot better off, right? It's like again, it's like that >> that analogy, it's like you the more that you kind of handle that wet bar of soap, the smaller and smaller and smaller it's going to get, it's kind of very similar to from a portfolio standpoint, right?

[00:38:58]>> If you've been in prison, you know how that works.

[00:38:59]>> Yeah. And yeah, just don't don't even Well, I'm just going to leave that comment alone what I was about to say. I think you already knew what I was going to say there. Um so so so talking about like you know rates of rate of return on portfolios. So so here are there are some misconceptions that I see >> right >> as as folks as we as we kind of cross that bridge as we are nearing or we're getting into retirement and now we're we're at a point where I like to say our dollars are at critical mass. Right.

[00:39:30]>> Right.

[00:39:31]Sometimes there is a a feel that well here is this principle that I have and now I want to create a return on this where sometimes it's hey I want to I want these assets hey my hurdle rate's only you know seven or 8% a year or I need 7 to 8% off this portfolio but I don't want to touch any of my principal right you know I I don't know if the hey I don't want to touch any of my principle if that's you know a realistic comment or folks should be looking at this more from a hey how can I manage my portfolio more from a from a total return standpoint right so do you do you think that if somebody says hey I need so much per year but I don't want to I I want to avoid touching my principal do you have any thoughts around that >> there it's fine right so first of Well, let's say that you've got X amount of dollars in an account. It's like whatever I do, you know, I don't want to touch that principle, >> right?

[00:40:38]>> And and that's that's a good goal. Yeah.

[00:40:40]>> But it it it cannot be a hard and fast goal.

[00:40:43]>> Okay.

[00:40:43]>> And what and what I mean by that is that things are going to happen in the markets.

[00:40:47]>> Yeah.

[00:40:47]>> And you know the goal is look, it's kind of like defending your castle, right? So that principal balance whatever it is the in and let's clarify by the way it's a starting point. Yeah.

[00:41:01]>> Right. That principle is a starting point. There's two mistakes that that are made. So let's say that let's just say for instance I'm getting ready to retire and just round numbers. I have a million dollars in account. That's my starting principle.

[00:41:13]I do not want to erode that million dollar. So I want to defend that as much as I can. Right? So all all all of my defenses are up around that principal position because that is my nest egg. So I want to create a portfolio at that point that'll generate a rate of return that I can live off of. Here's the mistake that people make. So they invest their portfolio. The portfolio they're taking out their withdrawal rates. The portfolio is doing well because of the markets, >> right?

[00:41:39]>> If you built it right, it's now a million one, it's a million two, it's a million three. Well, they start adjusting up that principal balance to real time, which is my principal is this today. And this is what we call a high watermark.

[00:41:55]>> Yeah.

[00:41:55]>> And so then the market declines a bit and then they start freaking out, making bad decisions because their portfolio went from a million three to a million two because the market down 10% or whatever >> and they're like, "Oh my gosh, I'm losing money." So they start making bad decisions. No, the principal value was the 1 million. anything over I I build over that is cushion over my principal.

[00:42:16]So So now I can navigate market volatility a bit. I can manage my withdrawal rate. Now if I if I grown my portfolio to a million one, a million two, a million three and you know it's it's now we're now 5 years down the road. Okay. Yeah, I can now maybe go back and say, okay, I've been above a million two now for the last three years. So I'm going to move my principal up. you know, I'm going to inflation adjust my principal balance, right? So, what's been the inflation rate over the last, you know, two, three, four years, and I'm going to adjust my principal balance up by the inflation rate over that period. So, so let's say now my million's worth, you know, on an inflation adjusted basis, my million is now a million2. The value of my portfolio is a million5. And you know, so I keep I move my adjustments up to adjust for inflation so that my principal is always adjusting for inflation over time >> and creating the income I need to live off of, right?

[00:43:09]>> And you know, so so again, you know, the the the the importance is is yes, you always want to protect the principal.

[00:43:15]That's that's your your key base. That's the foundation of the house and everything that comes off of that. And this is also why John's talked about before is having another cash account just sitting in cash somewhere.

[00:43:25]>> Exactly. so that when the market does take that downturn, you can cease taking withdrawals out of that account because you don't want to when the when the portfolio is under pressure, if you're taking withdrawals out at the same time the portfolio is under pressure, you're accelerating the decline in the portfolio. So, you need to have a bucket just sitting in a money market fund. It doesn't need to be invested. It doesn't need to be anything. It needs to be in cash and it's six months or a year's worth of of income expenses. Put in T bills if you want. CDs are fine, whatever. But that's there to live on during a market compression.

[00:43:59]>> Yeah. And so that's that I think and I appreciate you phrasing it that way because that that's that's how I think about it when I when I talk about managing a portfolio and your income needs from a from like a total return standpoint >> because I think sometimes I I think you know in the interest rate environment that we're in, >> I think if somebody were to say, "Hey, John, I I need a portfolio to generate an income stream of seven or eight% a year where I don't touch my principal."

[00:44:25]I think looking at the interest rate environment that we're in, that's a real that's a challenge right now. Yeah.

[00:44:29]>> Right. So, so I like to look at this from a total return standpoint where over here you've got the this pool of assets kind of I call it the engine that's driving those returns forward, but then off to the side like Lance mentioned, you have a a here, this is where you have a separate account where you've got money set off to the side and maybe it's depending on your lifestyle and depending on what your spend is, you know, that's 6 months worth of living expenses a year, 18 months, maybe it's two years of just money set off to the side, you Maybe it's a combination of year one is in a interestbearing money market. Maybe year two you've laded some tea bills, right? But this is where you're pulling your money from on a regular basis. This pool of dollars here, kind of this working cash bucket, this is where this is what's generating the paycheck that's being sent out to you on a regular basis. But then over here, the engine as stocks pay dividends, as bonds pay interest payments, as Lance mentioned, you take profits when you're raising that cash. all those different moving pieces flow back into that bucket and then that can help replenish this account over here. Right?

[00:45:35]So if you have a good let's say two years worth of need off to the side, if markets get volatile to the downside and this comes down in value, you're not having to raise cash at an inopportune time, right? So I like to look at it from a total return standpoint.

[00:45:48]>> Yeah, that that's well well that's the way you should look at it. And and again, you know, the rebalancing becomes very important because let's say you've got a portion of your portfolio that is in fixed income, right? Right. So the appreciation from the equity side of the portfolio, you need to rebalance that back into your bond side so that you're adjusting the entire balance of the portfolio to to your bond income. The income from bonds doesn't adjust for inflation, right? Because it's just in the same income. I have a 5% coupon bond. It's going to pay me 5% every single year for 10 years. So, I've got to continually increase the size of that bond portion of the portfolio as I do the rebalancing so that my income is adjusting for inflation over time. And you know, so so there's some moving pieces that go into that asset construction to generate that living income stream, but then also pace out that you're above the rate of inflation and that you're adjusting for taxes over time.

[00:46:41]>> Right? And and then the so this the last point I have or the last misconception that ma last misconception I need more coffee is that as we get older and now we're retired well I don't want to have money in stock at all. I just want to abandon that.

[00:46:58]>> No.

[00:46:59]>> And you know I mean if folks if you're retiring and let's say if it's you know there are some folks that are retiring or working less in their late 50s early to mid60s. I mean it might be 70 years young when you retire. you know, you still may have another, you know, 20, 25, who knows, 30 years >> for that money to to work to support. I mean, I I can build a case that even when you're older and in quote unquote retirement mode, that you need to have a portion of your assets still invested in equities just to help fight inflation.

[00:47:28]>> No, I agree. Right. Yeah. No, no, you've got it's always about inflation adjustment. Yeah. Right. And this is one of the biggest mistake biggest mistakes that I see people make is they get too conservative. Right. I'm going to be 80% bonds, 20% stocks, so I don't want any risk, you know, and and then they wind up lagging their inflation adjustment over time and it starts to erode into their accounts because you need enough equity exposure to offset that inflation risk.

[00:47:52]>> Agree.

[00:47:53]>> And so again, it's just it's just kind of monitoring that. But, you know, in terms of lifespan, I'm just waiting for Elon to get Neuralink attached to his robots and so I can just upload myself into a robot and I'm good for the next, you know, thousand years.

[00:48:06]>> Be like Robocop.

[00:48:07]>> Exactly. That's That's where it's headed. [laughter] >> That's awesome.

[00:48:10]>> Andreal, which makes defense Yeah.

[00:48:12]drones and things like that. They just launched a new drone today that looks exactly like the Hunter robot from Terminator.

[00:48:19]>> Oh. So, I just watched Terminator over the last week. I was like, I need an old school movie. So, I was like, Terminator, fantastic. And it was like the year, what what did they set in? It was like the future was the year 2027.

[00:48:31]Like, [laughter] >> like your year >> almost got it right.

[00:48:34]>> So close. So close. All right, that wraps up the show for the day. Thank y'all very much. We'll be back tomorrow with Danny Ratliff for live Q&A right here on the Real Investment Show. Y'all guys have a great day. Be sure and like and subscribe to the channel. Certainly helps us a whole lot. We do appreciate it very much. And we'll see you back here tomorrow. Y'all have a great day.

[00:48:53][music] Just need Heat. Heat.

[00:49:13][music] [music] >> [music]