Peter Mallouk — Exploring the Worlds of Investing, Assets, and Quality of Life (#356)

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Hello boys and girls, ladies and germs, this is Tim Ferriss and welcome to another episode of the Tim Ferriss show.

Today's episode features Peter mallouk.

Peter is the president of creative planning one of the largest independent wealth management firms in the United States creative planning provides Wealth Management Services to clients manages more than 36 billion dollars for clients in all 50 states and abroad and has been featured as the number one independent wealth management firm in America by Baron Soca 2017.

Peter is also featured on Worth's magazines power 100 featuring the most powerful men and women in global Finance.

The only financial planner on that list and goes 2017 and 2018 creative planning was also featured in Forbes in 2016 as the number one riaa for growth over the last 10 years.

He is the co-author of unshakable alongside Tony Robbins, and that is how the introduction was initially made and we'll talk.

I'm sure more about that.

Peter welcome to the show.

Thanks for having me.

Tell him I wanted to have you on the show because we've had a number of conversations and in full disclosure.

So people know the playing field.

I am not currently clients, but I'm in a position that we have had a number of conversations about money management and I found a lot of your observations to be thought-provoking and in some cases Ray counterintuitive and I had read money Master the game which is how I initially interviewed Tony and for those who are interested my very first Instagram photo ever was of Tony Paulding my entire face, which was taken after that interview and then unshakable was published and your your name kept coming up and you do manage money for a number of my friend.

So we do not have any type of financial relationship, which I think is important for me to to make clear up front.

I do find your thinking very interesting and this is a world meaning Ants and personal finance that can be very intimidating.

Not only for people who are trying to find their way in terms of asset allocation and looking towards retirement.

But really for it for myself for friends of mine who would like to think of themselves as competent and other areas for some other areas.

This could be overwhelmingly or seem overwhelmingly complex.

So I thought we might start if it's okay with you and we can steer this in any direction you want to go but with a couple of very specific asset classes or potential Investments and how you think about them because it's this might be a way to at least get into your thought process.

And the first thing that I have on this list is gold.

I do not currently own any gold.

What are your thoughts on gold and it's a great way to Start because it's one of those hot button issues that half your listeners are not going to decide how they feel about me because answer alone.

I like gold and Bitcoin or they are definitely hot-button topic.

So it's a short that the punchline is.

I'm not a fan of gold but here here is the reasoning why so you think about investing if you look at the great investors of History, I think the one all your listeners will be familiar with this is Warren Buffett, right? What they want is they want something that pays them but if you buy a building you want to collect rent if you buy a bond you want to you want to get that the yield from that Bond if you buy a stock you want you want the dividend or at some point you want to benefit from the earnings of that company, even if it doesn't give provided dividend gold doesn't provide any income in the value of gold is that someone else will pay you more for it later miss.

That is that kind of straightforward says a very speculative element to it.

If we look at gold going all the way back to the Great Depression to today.

It's performed worse.

And every major asset class except cash, which I would you want to call Cash an asset class.

So you could have done better the us or International or Emerging Markets or with bonds and been collecting income all along the way now not only did it perform worse than all those asset classes.

It was more volatile than those asset classes.

So you're taking all this volatility risk and you're not getting the reward it if you don't have to go all the way back to the Great Depression.

If you look at the last 10 years same story one of the worst performers, I bet you're getting all of the volatility and you're not getting any income and then if you're start to look at the tax consequences, you pay a higher tax on the games and gold so you can if you have some Otis game to show for dealing with all the volatility and getting no income and hoping somebody will pay you more for it later.

When all that happened.

You're going to pay higher taxes than if you had just bought, you know, Apple stock or some other stock.

Thank you.

So if you had to take the knot strawman position, but Steel Man position meaning the strongest What do smart people or otherwise smart people per depending on how you interpret their position on gold argue the ownership for the ownership of gold.

What were the what was the most compelling even if you don't find a purse of the arguments for gold? What app? What is the most compelling smart people who are really their main argument tends to be the economic system is a house of cards or fraud a fraudulent system or manipulated system.

And I don't think it's a house of cards.

I don't think it's a fragile system.

But I agree it's manipulated the Federal Reserve exist to help manipulate the economy.

That's why it's there.

So I've always fasting with conspiracy theorist say all the federal reserve's manipulating the economy.

That's that's their whole job is to his to control inflation and to keep unemployment low and to do so by trying to manipulate the economy.

I think that's the strongest argument is that the country has an enormous amount of debt the same thing is happening across all developed country is most developed countries have a lot of dad some day that that's going to have to be paid.

The we're going to have extremely high inflation currency is going to be worthless and people will be using gold as the store of value in this as currency and you let's just say that is the case you have to just draw that to The Logical conclusion, right? So now I'm going to walk out of my front door and I'm going to go down to the local McDonald's or QuikTrip and I'm going to pull out my gold and I'm going to buy I'm going to go to the grocery store with that.

I'm going to I'm going to go to the the gas station with that.

What's going to happen? I remember being an Oklahoma sing some prospective clients and we were talking about this scenario and he said I see now what do you think is going to happen if The whole economic system has collapsed fuel stocks are worthless bonds are worthless the dollars worthless and we're dealing with gold because what got my plan right there and he was pointing across the room at his gun rack.

That's basically the world we would be living and I don't think we'd be too worried about what our currency is.

If I would tell you that the the people making the case against me would consider that to be night.

Yeah.

It is very difficult to shave off a small fragment of gold to buy your six-pack at 7-Eleven the you may be better off like you said getting stockpiling guns cigarettes and tampons and other things that you might be able to trade if if if that's the thesis but I don't take us too far down that the gold Rabbit Hole Bitcoin.

You mentioned Decor might as well talk about that.

Your friends that we have in common are very big proponents of this.

And so they also I should say just just as a sign out there.

They also have tremendous informational Advantage.

I think of Bitcoin is interesting because it gets muddled with other things.

So first you we have blockchain technology which backs it up and a lot has been written about this.

There are some very big real companies like IBM and Accenture investing in this Walmart at using using it for inventory tracking that technology is real to it.

But what you hear people say, as you know, blockchains a real thing and you're an idiot, if you don't like Bitcoin mommy the TV is a real thing glad it's invented but that doesn't mean everything that comes out of it is going to work right? It's at that doesn't mean that every product that comes out of its going to work.

So blockchains just a technology.

That allows cryptocurrencies to work.

Now.

There are several thousand cryptocurrencies.

And Bitcoin is one of them and even the people that are really into cryptocurrencies as part of the future many of them will acknowledge that Bitcoin is not the one that probably has the best profile to be the winter going forward but none the less it has a very big following was the first one to utilize blockchain technology.

I believe and could clearly that the first can a breakout one but there's a difference between that you're The Cutting Edge in the bleeding edge mini you have apple today if iPhone today, but before apple and iPhone, there was Blackberry Inn in palm of those were bleeding edge.

They came out their wonderful things that someone could have said this technology is amazing know you're an idiot if you think Paul and are blackberries not going to rule the world, but someone else took the concept and bait it better before Google.

There was excite an AOL.

I'd like us If someone else came along and improved upon the technology and made it better and I think that's what we're going to see here blockchain technology.

That's the real thing that's going to change the way the world works much the way, you know, the internet did and I think we're going to be from centralized database has to not it's a decentralized databases and I think probably some cryptocurrency of these two thousand and however many other hundreds or thousands are going to be the future probably at 1 or maybe a few of them will wind up being used but the odds it is going to be Bitcoin is very very low and so I any investment in Bitcoin is to me purely speculative again, there's no income coming from or just betting that someone else is going to pay more for it later and that this is going to be the cryptocurrency or one of the cryptocurrencies.

That's that prevails.

I think that's not an investment.

You doesn't mean someone can't buy it, but it it has much more speculative album.

To me, then you're being part of it up an Investor's portfolio.

That's where you anticipate in the future the investment having worked out a lot of money investing or in some cases speculating.

But let's just for the for the moment assume that they're playing more single-deck gamma Blackjack where they can actually apply a system of some type rather not they're not entirely playing roulette and those those people in my experience generally have had advantages whether those are informational analytical behavioral that if some type of advantage that allows them an unfair Competitive Edge to some extent so it could be that they know the creators of say in the case of cryptocurrencies different cryptocurrencies.

It could be that say like a John R.

They just have an incredible domain expertise and level of access that allows them to work with a energy and you can go down the line and find people in almost any sector that have these advantages in the world in which you play in creative planning or personally we can make it personal.

What do you feel your superpowers are or you or your differentiators? What are your advantages or systems that allow you to approach things differently has I think anymore really Public Market investing superpowers.

I think you can go out of the public markets and you can develop a very big competitive Advantage is as someone who's involved in Investments over example, I do think that someone buying private real estate can be better at that than someone else is buying a private real estate substantially, so, I think when you get to the public markets, I'll tell you how I feel about you investing in general.

And then what I think mean we would do that we would think would add value and make us different and I think is are the reasons for success.

I think when you look at the public markets you were talking about people having a special knowledge and inside knowledge.

And the thing about the stock market is that that doesn't exist with the stock market price of the stock market and the bond market.

There is nobody that has that inside or knowledge, but some people have it but if they use it, it's called insider trading and you can go to jail for that.

And so, you know what the advice would be not to do that.

So the the kid in his garage and in Malaysia has the same information as the top Analyst at Goldman Sachs because all the information is public right so that we're all sharing this information in the markets become incredibly efficient, especially once we got in the high-speed internet right once everyone started to get information at the same time.

There used to be a time where you some people wrap performing the market and someone uncovered it was because they were getting issues of money magazine or value line before they came out they were seeing him at the printing press or when they're being delivered to the magazine standing with even that doesn't exist anymore.

We're all getting the information in real time.

And so if you think about a company like McDonald's you'll hear Auntie with the financial video when Market goes down.

Well everyone selling there's never a time where everyone selling for every seller.

There's a buyer.

Right? So if McDonald's has 30 million people sell the stock today, that means 30 million people bought it and there are really really bright people on both sides of that trade and there are really really really stupid people on both sides of that trait and they're all sharing the same information.

That's Collective wisdom eventually gets the price of where it's supposed to be and I might there be somebody who can Beat the system.

I mean the statistics say that's very very difficult to be more than 85% of people trading these large stocks which make up the huge majority of the market that are professionals underperform index over long periods of time, which means underperforming somebody just buying the 500 stocks and literally doing nothing.

If you do that, you're beating the overwhelming majority of professionals Because by the time you pay the taxes and the transaction cost you make all the behavioral mistakes human beings are going to make you're probably going to you're going to have that dragged that friction that causes under performance.

And so I think this is a space where a lot of successful people and you interview the most successful people that they are you're interviewing LeBron LeBron's telling you why he's better than everybody else in the apart of it as it starts out a physical but it is certainly that's in the very small minority of it 90% of it is what he's doing to make it happen.

So very successful people then go to the public markets and go Clearly there must be people that are better that this then that others clear that I can find.

This guy that can trade in and beat the market and that's really just not the case.

So we do to try to improve upon things is people have a lot of fear when it comes to investing.

I think it starts when you're very very young.

Some people have a fear of losing their money or some people think they understand certain things but they don't understand market.

So they have a fear of investing all together some people spend all their money.

I want thing.

I've noticed from this profession is very very few people have a very healthy attitude about money, you know that it's okay to earn it and there's a smart way to save it and invest it and it's okay to spend it.

It's okay to feel good with it not spend too much and not spend too little even when you look at the financial Guru.

Some of them are telling people don't go to Starbucks in the morning.

That's what that's a waste of money that you know, that's silly but we try to do as we try to make sure that we can keep people engaged in the port.

Only after they hit their goals.

So let's take the stock market for an example.

If if somebody in one of your listeners invest today the odds the markets going to be positive a year from now is about 75% just positive three out of four years, which means one of the four years it's it's not positive.

But if we look at the market over 5 years, it's positive well over ninety percent of the time in over 10 years.

It's positive more than 98% of the time.

It's the one of the longer we can stretch this out.

The more probable a certain outcome is so if you have somebody has short-term nides, they shouldn't be in the market because no matter how good we are someone can fly into a building and everything changes tomorrow in the stocks are going to go down.

It doesn't matter how good our analysis is anything.

You're going to need your 1 year 3 or 5 4 years from now those should be in things like bonds where we expect the lower return but we have a high probability that money is going to be there for us and that longer-term would be stocks in the very long-term might be alternative Investments and to do that you really The Noah person and what's their tax bracket in what state do they live at in and do they have outside income sources like Social Security or pension a rental income and how much fluctuation can they handle it when you know all of those things and how much money they need and when they need it you can start to match the asset classes to their needs and then they're more likely to stay on that roller coaster.

The roller coaster works out great and I won't have a good time unless you try to get off of it in the middle of the ride.

And so I think if you've got a process to match people's Investments their needs you're more likely to have a good outcome because most people they screw things up themselves.

I give you take someone who invested before 2008 you'll hear a lot of people go.

I'm not going in fast, cuz I lost my money all my money there.

Then those of us that are older have a friend's to say it'll never invest because they lost everything in the tech bubble or after 9/11.

Well, if you're a long-term investor and you were Diversified is basically impossible to have last lost money if you put all your money in Worst investor of the last nine years and you put all of your money into the market the day before the O 809 crash today.

You've more than doubled your money.

I mean the S&P 500 has more than doubled since that we can do that the day before 9/11 the day before the tech bubble.

You you have to go out of your way to have lost money, but people find a way to do it by making behavioral mistakes are working with advisors that make the behavior of the steaks on their behalf.

To dig into a couple of questions related to to what you just said and maybe is a baseline in and you could help me do this also, but there are there different reasons for our motivations for participating in markets.

You could you could you could aim to get rich using the markets.

In other words.

You could be aiming to be a Paul Tudor Jones work someone like that where you come in with a handful of dollars and that is how you make your fortune in the same way that someone might make their Fortune building a tech startup to exit or IPO Princeton.

NJ II would be staying say preserving wealth using the markets in some fashion and then you might have in third place or not in third place, but third option being becoming incrementally richer using markets but not counting on it for that.

The bulk of your principal right the the way you approach things would seem to depend very heavily on which which category you fall in but to come at 2, and I'm just talking through Also to clarify man thinking on some of this.

How would you then if you have and if it's it's if it's how do you assess? Let's just say someone's considering creative planning and Max from wife or how do you if if the argument can be made that you have to assess over the very long-term, how can one separate the good the bad the ugly in the excellent in terms of wealth management? Over a shorter time Horizon does that does that make sense? Because because one might be inclined to say.

Alright, I'm going to take my 600 units of capital split into 20 units and give it to five different wealth managers and see how they do over a three-year period of time or whatever the.

Of time might be in that says but if each each of those wealth managers the saying you have to actually stick what's up with us for the long-term, then you end up in a bit of a pickle from a decision-making standpoint.

So how should the investor think about that scenario? I think I would start with just a defining a money manager vs.

Wealth manager.

So let's say that somebody is they believe that they can beat the market by stock-picking or Market timing.

So Market timing being you put your money in the market.

You think it's going to go down you take it out you put it back in or you you want somebody who's going to trade stocks and try to beat the market.

That would be a money.

You might say okay.

I'm going to go higher in a money manager a to buy my large cap value stocks and money manager be to buy my bonds and money in Searcy to buy my International small stocks and you might have them all manage in the same space and compare them and to do this you have to believe that these managers are going to add value by after fees and taxes trading stocks in a way where they beat their respective benchmarks.

Now in alternate that we're all that wealth managers wealth managers really sitting with a client and looking out at the universe of money managers and deciding with the client.

Okay, where are we going to put our stocks where we going to put our bonds where we going to put our International stocks? And so the wealth manager is helping with all of the portfolio allocation.

They might manage all of in-house they might Outsource it and they might also give advice on other things whether it's tax or insurance or risk manager, whatever that they'll they'll look at a bigger piece and that's more of what a wealth manager would do.

Within those worlds, you have a very big debate between passive management and active management.

So active management would be your Paul Tudor Jones hedge fund managers mutual fund managers centrally manage account manager is where you're paying somebody to try to beat a respective index.

So an international manager would be trying to beat the international index a large-cap US manager would be trying to beat the S&P 500 Index, which is just your 500 the biggest companies in the in the country.

I think that what you're seeing in the marketplace is more and more money is moving to from it managers to pass it managers meaning instead of trying to hire somebody to beat the S&P 500.

I'm going to buy the S&P 500 and the question doesn't become which manager am I going to pick to trade these it becomes which wealth manager am I going to hire to help me determine? How much should be in large-cap US stocks in the first place versus International stocks vs bonds vs Real Estate and so we would be in the group where wealth managers.

Looking at everything.

We don't believe that we we pay somebody to trade stocks.

They're going to do better than S&P 500.

So we're going to buy the index there and we're going to buy it and several other spaces and we're going to pick our battles on where we think we can create a performance or what the industry calls Alpha and we would look at alternative Investments for that.

We think you can you can do that in private markets where everybody doesn't have the same information and wear if we look at a management team and their education their credentials their experience.

We feel we can extrapolate that they might actually be better than another team.

So if you look at alternative asset classes would be things like private Equity private lending private real estate things that fall in that category is like that I think they're where we would try to get that are alpha for the clients was Socrates alternative than for it for a second in the alternative Investments.

What's what are the alternative options? Is that that you were you like to go fishing or at least exploring? Is it a shortlist as it's real estate investment trusts private Equity master limited Partnerships.

What type of alternative options do you feel or are most viable is a question I get a lot and I thought I always correlate.

It's a public markets so you can buy a publicly traded stock, which should be like Nike or Google you can lend money to Corporation or government.

That would be a a bond if you load money the federal government.

It's a treasury if you loan it to a county year estate.

It's a municipal Bond if you wanted to Astron Corporation, it's a corporate bond if you want it to one that's not doing so great.

It's a high-yield bond or a junk bond.

And of course this publicly traded real estate, you know, so someone can go online open a custodial account at a place like your TD Ameritrade Schwab or Fidelity and Type in a couple things and five minutes later own a portfolio of all those things each of those things has a private alternative meaning they're not trading on the public markets and they follow a different set of rules that have less regulated usually have to be an accredited investor with a million or more to be able to access those some of them require that you're a qualified purchaser with 5 billion or more to get into them.

But instead of publicly traded stock you can invest in private Equity.

So there might be a fund that one fun.

We use bought Dunkin Donuts and then took a national and sold it and that was one of dozens of companies they owned.

So that's what private Equity does the private lending lends money to business is private businesses that are growing and then there's private real estate where you not have somebody raising money and buying apartment complexes are commercial buildings all over the place and alternative Investments.

The advantage is we do expect you'll probably do better than the Black version of that investment and part of its the illiquidity premium meaning the money is tied up for a while.

So if you can put your money in a private real estate find you can't just exit the next day because the gal you gave the money to his running around buying building.

She can't sell the building cuz you feel like taking the money out and going on vacation same thing.

When you go into private Equity or private lending, you're making a commitment to give these funds your money for 5 years 10 years or more so they can go buy all these businesses or by all these properties and then sell them all and then the fun closes.

Those are the most common alternative Investments and we do think they're you're the type of company that's running those and their experience.

We think that matters and we think that gives us an edge from a performance perspective now basically anything that's not publicly traded and alternative investment Sophia one of your listeners owns a duplex that they're running out.

Well, that's an alternative investment.

There are funds like life settlement funds.

Buy life insurance policies.

I think these are kind of interesting.

There's there's this whole Market that started and it started in a terrible way.

I mean back in the 80s, you know, people were buying life insurance policies from young men that were sick with AIDS and the what I like about the happy ending to that story is of course, they came up with a cure for that and the all the people that had thought they were buying these policies were going to cash in when the going bankrupt.

So I like the way that story ends ends.

But what happened is some states started regulating this space and say look if you want to sell a life insurance policy or buy life insurance policy have to go through a regulated process and wants that happen.

If some actuaries came into the space and and private firms giving a space and started buying policies and about 3/4 of people over the age of 70.

They wind up surrendering their life insurance policy.

They go back to wherever they bought the policy and go I don't need this anymore and the insurance company goes great.

I will give you the surrender.

Call you back.

So someone might have a 3 million-dollar policy that that was going to pay their family.

But now they're 70 and their their house is paid for their kids are out of college.

They don't need them.

They don't need that anymore.

But they want their hundred thousand cash value back cuz they can enjoy it over the next 10 years or Twenty Years of their life.

Well instead these life settlement funds, long ago.

He will buy that policy from you and they might pay five ten or twelve times more you are the funds be used as playing about 12 times more for that policies.

They might give that guy 1.

2 million dollars for that policy.

So that guy's thrilled, you know, they're running off with their money.

They're getting way more than they were to get from the insurance company, but now the fund owns, you know, maybe a thousand plus life insurance policies and they're going to collect all those death benefits and they distribute it to the people that invested in the fund.

So that's also an alternate investment has nothing to do with stocks bonds real estate, but it's a little different people like Investments like that because they don't behave the way.

The stock market or the bond market does they don't care who's the president? They don't care what what's going on with tariffs or who tweets? What this is Actuarial science as far as how these how this fund is going to do.

There's a fun that buys music royalties.

So it might buy the like a catalog or songs from different artists and then own the future royalties in your performance is dependent on do people still download those songs five years from now 20 years from now, but the alternative investment space is very interesting governed by a little bit different set of rules.

And I think that's where higher net worth people can get an edge plus Beyond just going with needs-based investing in real estate a few times and then I'd like to touch on that because this is a an asset class if we can look at it a certain degree of comfort.

Rightly or wrongly because it is very tangible and some people would would would argue that real estate is a better investment than the stock market or they may be intuitively in Raleigh feel that is the case.

What is your perspective on on real estate? And I know that that that is a broad term, but maybe you could expand on your you're thinking as it relates to real estate real estate as an investment as particularly.

It's if it's Diversified I do think that in the private side expertise makes a very very big difference, but I will also tell you real estate in my experience as a tremendously over rated investment and I have some clients that are extremely wealthy from running real estate, but I also have some that went bankrupt with their private real estate and I'm going to give you a couple reasons.

I think it's overrated.

I think it's misunderstood.

I think one of things is if you look at a business look at how Big business works.

If you are one of the Fortune 100 companies, I'd rather own the company than the building that they rent and so would they, you know, most of these big companies they sell off their real estate because they feel it will drag down the rate of return When a private Equity Firm goes and buys a business that has a hundred million of Revenue.

They don't want to buy the building.

They're very happy for the owner to keep the building and pay that owner rent because they think the real estate is going to hurt their rate of return.

So if you really look at the very big sophisticated money, they'd rather own the business that's in the property than the property that the business is in a second.

I think real estate magnifies wins and losses it.

So you're going to see a disproportionate amount of winter.

So let's say that you're Going to go buy a duplex and it's $100,000 and that doesn't exist where you live but where I live at.

So you're going to buy $100,000 duplex and you just put down $10,000 and you borrow 90,000 from the bank and let's say that you rent out the duplex in the real estate markets good interest rates are low and now you're duplexes worth $110,000 and you sell it.

Your gain is a hundred percent, right you put $10,000 in and now you're selling it if you're paying off your loan if you have a $10,000 profit, so you doubled your $10,000 investment that use of Leverage magnifies gains and makes people think the investment is better than it is.

Now.

The reason you see a tremendous amount of bankruptcies in real estate is it works in Reverse? Right? We we saw that a no 8 or 9 during the most devastating example of this and US History where you know, you put 10,000 and you bought a 90000 And you want $100,000 duplex in the market crashes in your hundred-thousand-dollar duplex is worth $90,012 hundred percent of your investment when you sell right so your magnifying the wins and losses and you can do that with anything but people are very comfortable doing it with real estate.

So for example, I could take a portfolio with $100,000 and I can go borrow against the portfolio that I could borrow 50 Grand if I wanted to against the portfolio to invest that money and I have a $150,000 portfolio with a $50,000 loan.

Most people would go my God.

That's risky.

I mean, I'm not going to borrow money against my portfolio to buy more stocks, but that's basically what we're doing when were using leverage in real estate.

We're really counting on the value of real estate to hold and then.

I would say the thing about real estate is unless you are tremendously Diversified Real Estate is an investment where everything is okay until it isn't okay.

I mean when it goes bad at it will go It can go bad very very quickly.

So in the community that I'm in theirs was a family became extremely wealthy with shopping malls and then all the sudden those weren't in favor and it's story doesn't end.

So well, it's the same thing with how neighborhoods that you might have been too when you were growing up.

If you look at the complexion of them today, some of them holed up in some of them all of the real estate may as well be worthless.

I mean and so I think I think it's it's a deceptive investment there that you feel this security because you can see it and you can touch it a lot of people get rich in it because of Leverage we tend to ignore the people go bankrupt and we tend to not look at those parts of town that didn't turn out so well that were pretty good parts of town 10 or 20 years earlier so I can I like it.

I bet come across like I'm not I just think it's overrated.

We we own a lot of real estate for a client's private and public at creative planning.

I personally own private and public real estate.

I like it as an asset class, but People really need to focus on diversification and understanding where it fits in if you own a public real estate fund and you on this s stock fund your expectation should be that 20 years later.

You've made more owning the company's than owning the buildings that they read thank you for that.

I want to ask about another asset class.

So that may make me immediately seem like a complete idiot will see probably not the only thing in this conversation to make me look like an idiot, but we'll I'll just start telling those up on one side, but good for similar reasons the tangibility the What's your personal concrete nature of this class? I want to ask about it.

And then the jointly with real estate will lead to a follow-up question after you artwork in investing in art.

What it what are your thoughts? Does it have a place? Is it overrated underrated? How should one stay? How do you encourage people to think about that? And how do you think about it? Why didn't you look at things like that or Collectibles or cars not about a car you would just go by to drive around but the cars that are more collectible oriented to me.

Those are like collecting coins were counting on there being a market place that exists for it.

And I think we have a centuries-old legacy of that being the case with art and so I don't consider that a fad by any means by any means and there are funds that specialize in owning art.

We wouldn't use them with our clients because we really want things that produce income.

2B I consider there a lot of ways to make money and I thought I'd rather make money in a way where that I've got to the hammock there the safety-net there to back up into I like that if I owned by their stocks or real estate that if things declined for a prolonged.

Of time, I can still collect money.

I can still collect if the housing market goes down.

I own some duplexes or even keep them running.

I'm still going to collect the rent.

Where is if I've invested in art in the market turns against me for a decade or two and I want to sell something.

I'm not going to make any money in the meantime, but for someone who I like that kind of investment if you also have a passion that goes with it.

So if somebody likes are they have enough money and I mean a lot of money millions of dollars to where you're moving you don't need this money to be financially independent if it works out fantastic if it doesn't work out it's not going to kill you.

The collectible markets can work but they have a little bit more speculative elements to them.

I'm going to turn this into a bit of a guy personalized therapy session bring up real estate and art is that they coincide with or have similarities to for me early stage Tech investing in the sense that one of the primary bugs which is illiquidity has turned out to be a a huge feature and benefit for me given my Psychological weaknesses and propensity to Impulse cell or Panic cell does that make sense? So I able to guard against my lesser behaviors by having certain assets like early stage Tech which I do not recommend Everyone by any stretch the imagination because I've done a tremendous amount of upfront due diligence and Analysis or had Superior information have made Investments and then been completely prevented to my benefit and most cases from selling those assets until they get to a certain escape velocity and the similarly if if I buy real estate I do own real estate the fees and complexity involved on some level with unwinding those versus going to a brokerage account.

Just hitting sell on my public Equity that I might own.

Guards against one of my most financially self-defeating behaviors, which is panic selling.

So it's a bunch of different territory, but I'm curious to know when things that broadly speaking don't make Financial sense if we were computers looking at asset classes and so on and so forth actually make sense for individual clients because of their Frailty and being human or weaknesses like those that I outlined and ended the answer might be there's a better way to prevent me from making stupid mistakes, but I'd love to hear any and all thoughts you have on that brain vomit that I just threw up on you.

I'm so glad you asked a question, but I would say that, you know earlier I was talking about I think that the things that the rails people are exactly what you talked about their behavioral and those really tend to come from uncertainty if you do.

Know what's going on uncertainty leads to fear if you go to a doctor and then and you have something that's they think might be terminal but they're not sure.

I mean you're going to be scared out of your mind are the doctors try to figure something out.

You're not going to feel good.

The more uncertainty.

There is the more fear you're going to have and I think that's what you're talking about with your experience of the markets as if you're uncertain about outcomes that makes you scared.

And then what are you do you you might sell because it's so easy to sell and what what helps alleviate uncertainty is education are the more informed you are the more you understand how the Investments you're in working and what their time Horizon is like and how frequently Corrections and bear markets are and how rapid things can go down.

But how rapid they come back no more educated.

You become the more certainty you get the less fear.

You have the more likely you are to stick with the plan but despite all of that.

Even the wealthiest people are the most educated people get scared and down markets of me saying it today.

We speak in a little bit freaky Los Angeles this later that the Dallas probably about four thousand points off of its hi and that freaks some people out and I have to record against just for contacts in late December or December 21st, 2018.

Well, I just last week saw someone who is running a state pension in an interview say he felt like he was paying a premium for alternative Investments.

We could be blissfully unaware of how poor the Investments for two handed down cycle.

And I think there's something to that I remember in the 08009 prices we meet with all of our clients to do a complete review on top of all of the things we're doing throughout the year and we we go through everything on their net worth and then we rerun the plan make sure we're on the same page.

And here we go through every update all of their Investments were showing them, you know, this investment in stocks is down this investment in and you're publicly traded real estate is down and your bonds are up or whatever it is and then we get to their house and they say all might my house is the same.

Value and then we get to that duplex.

They all that they ran out of a cow.

That's the same value in that painting in my house.

It's the same value.

Of course.

It's not the same value, right if they wanted to go sell the house or the duplex for the art that actually have to take a bigger discount and most the time then the public markets be there was literally no buyers for any of that.

You weren't going to go sell a million dollar coin collection in the in the middle of all that and so the not having it updated every second of every hour of every business day allows people to be blissfully unaware and not make those behavioral mistakes.

And so I actually do think that's a positive even when we have our high net-worth clients that I've Alternatives.

I like the Alternatives because I think they're going to get a little bit better return.

I think they may have a little less volatility.

But I also think is speaks directly to what you brought up if it brings them peace and that it's not priced every single day.

And so every single time the markets Trend down, they don't have to be reminded that that they have their see the public real estate down in their account, but they're not seeing the private real estate down cuz it's not repriced everyday and it really does help people not make a long-term mistakes is Safeway from looking at long-term avoiding mitigating against long-term mistakes supposed to get all stock buy short-term mistakes the considering how the luck tonight.

I am too involved in vest in public markets and one could argue stupidly.

So I've read a tremendous amount.

So I am it's it's not that I'm uninformed as it relates to the trending overtime of say the equity Market, but what catches me and you noted in some of our exchanges part of this conversation that in my podcast with Howard marks in legendary investor that I brought up fear of losing money and It just it seems to me and maybe you can talk some sense into me, but that's on one hand you can argue or one could argue is that it's not timing the market but time in the market that makes the difference right and that the time to get started is now on the other hand.

I couldn't one also argue that it while it's very possible.

If not, very difficult.

If not impossible to time the market.

It is very very possible to miss time the market Not By Design but by accident and if you come in at the top of the market, I know you talked about like the day before 9/11 etcetera the the recovery time in some cases isn't necessarily trivial right city.

Is there a right and then just follow me or there's going to be a little long but if if they're there are smart people and maybe this is just like the guy with the sandwich board on the corner saying the end is near is Adventure.

Got to be right.

So, who knows? Maybe I'll just one of those cases but you have some pretty smart people who historically hold a lot in cash for when there's blood in the streets.

At least.

That's my understanding like a Seth.

Klarman or others.

My inclination would be if you tell me that the markets are down one out of every four years is to wait for the canary in the coal mine or some type of indicator.

Maybe it's obvious.

Maybe it isn't that we are down and then hold onto cash until that point to to invest when the market is initially at its all-time low for that.

Of time, but lower than it should be so to speak in this is going to come off as terribly naive for a lot of folks.

But the end of the reason I bring this up is that it seems to me that this is me, talking out my ass a little bit but the function of investing is to ultimately on some level improve your quality of life.

You invest in vehicles are assets that cause you heartburn and anxiety to the extent of trouble sleeping.

Even if they have a really high our our whatever it is a bad investment from the standpoint of quality-of-life.

It's creating a lot of additional stress.

So I have no trouble sleeping with my money is a cash even though it's getting slowly eaten by inflation like termites.

So if if in an Ideal World, I'll be able to wait until everyone thinks that we're going to Mad Max and then dump money into the market much like Howard marks Did in the last say 15 weeks or so 2008 right place putting in 500 million a week into distress Dad.

How should I think about this or how would you add to that? I know that's a ton that I just threw out your butt if you could do your best.

Well, I would say that I would start with I would agree completely but nothing is worth losing sleep.

I mean money is just something that enables us to do other things.

That's presumably we want to be happy.

So there's no sense in being miserable investing it so we can supposedly do you have something else so I'm not a believer that if somebody comes in and they have enough money where they could be independent for the rest of their lives living off Bond income and they tell me Peter I'm you know 70 and you're not going to be able to make me comfortable at I'm going to lose sleep with my portfolio goes down 5% I'm not going to talk that person in the stocks are real estate ER or alternative Investments that they should be in bonds because they have all I need they're not telling me their goal is to have the biggest pile of money ever or to be like the greatest Steward of their money ever for the Next Generation.

They're telling me I want to be happy with what I have.

I don't need to hit a even a double let alone a homerun and I want to sleep at night sleeping at night trumps everything.

Do you have to Absolutely be comfortable with with what you're what you're doing.

Now.

You're so young that I would work on somebody like you and say well let us wait a second because we've got a couple choices here.

What is that? You get comfortable with investing which means you're going to get very me to get more educated about how public markets work so we can make you more comfortable so you can have more certainty about it so you can be a long-term investor because you are going to be invested for many many many decades and it's extremely likely, you know, that's really going to work out for you only have two other choices one is to own cash, which is a complete disaster.

I mean that's not real sure not really would be an option and the third is to add tremendous complexity to your life.

So you say I'm going to buy all these different properties and all these different are our thing and you're going to wake up one day and you're going to own a whole bunch of all this crap that's got your net worth statement.

I can tell you the cycles and I've learned this from my clients that I change my behavior because of it.

You know that if people start accumulate wealth Will come to them with deals and then get excited that either these deals are coming to me one Indian client translated an Indian sing to me.

He said that his dad and told him that the saying money pulls money and he didn't know what it meant until he had money and then all the sudden people were coming in with deals that seemed great and it became easier and easier to make money.

I'm sure that's the case for you.

And so you wind up doing all these deals you find yourself in real estate and venture capital and private deals and you're growing growing growing and then a friend dies and another friend dies and then you go.

Oh my God, look at what he look at the survivors are dealing with here.

What a mess the says and you start to unwind all of these things.

So you spend the first 20 years of being rich accumulating all this stuff and then you'll spend the next 20 years.

If you're like, at least the clients.

I've I've observed trying to get out of one thing after another to simplify your life somewhere along the way you'll wind up with 20 different tax forms and all the stuff that you don't have to do because you chose not to get it.

Located and I think that was just use one education from you.

Obviously you highlighted its time in the market right at me.

Like I know how our Mark said that Warren Buffett said that that's a very obvious thing.

You don't expect that you're going to go to the store and pay less for a Coke or less for a candy bar 30 years from now then today, you know, you probably think the candy bar is going to cost triple but somehow you have this fear that the stock is is not going to Triple.

Right? And of course those two go together your part of the stock market returns, the dividend part of its earnings and part is just inflation.

I mean so weak we know we're going to go to McDonald's 30 years from now and the Happy Meals going to cost more in the value meals going to cost more but we're scared to own the Diversified stock portfolio.

And if your Diversified yeah, we should feel very comfortable.

So you might get here in Austin.

It's a great restaurant town.

But you know the world moves quickly you don't back in the seventies or eighties of a restaurant open and it wasn't very good.

Someone would go all the others.

Start my clothes in a few years if you go to a restaurant now and it's not very good.

You wouldn't be surprised if it was closed in 6 months.

I mean the world just moves really fast now and if I said hey Tim, I want you to pick 5 restaurants in town that you think are amazing and you had to put all your money in them in that they're going to be here 30 years from now, you might think twice I mean, it doesn't matter what the restaurant is.

I definitely think twice especially the rest rights, but if I were to say look, you could own the restaurant index.

So we're no longer betting on you know, which five restaurants are going to be here 30 years from now or you could you could lose your money or just betting that there are going to be restaurants here and they're going to be charging more and making more than they do today.

You'll be much more comfortable with that and that's very much like Diversified stock market investing and so when the more you Learn about that and when you're going to need the money in that hay if you're in the stock market is down probably that those private Investments you have that aren't repricing everyday many of those are down as well.

You can start to build at least some some portfolio to that you could start to get educated on you go through your first correction you go through your ear first bear market and then if you're young and you're really smart, you can really tell the very smart investors.

They like down markets, right? Because if you're accumulating you don't want the market to go up you you want the market to be up later when you need to take money out.

But if you're accumulating you would like it to be down you want to be buying everything when it's on a discount.

So my clients that are sophisticated there are accumulating now, they love this down from they feel like they're buying more and more on sale or clients and have a lot of bond exposure.

They can sell some of their bonds and buy stocks.

They love that down Market because they see it for what it is.

Which is an opportunity.

Quick question their do, you know any people you think are really smart to do not dollar cost average and on the way down in that camp, but who instead sit on the sidelines waiting for some indicators that that is not a bottom.

I'm not saying they predict the absolute bottom or the relative bottom during that.

Of time, but you do, you know, anyone you consider smart who does not set a dollar cost averaging on the way down is as well as a way to I think you put it in the acquisition fee is now I think it's a loser's game.

I heard John Bogle Vanguard and indexing say that isn't in tight as entire life.

He never found somebody that was able to do that effectively.

He's never found the guy who sold what it was high and then bought when it was low.

I've been at the snout 20 years we have over 30,000 clients many of them have self-directed accounts.

I can tell you I've never seen it done seen somebody go.

The markets I now and sell and then feel comfortable buying when when it's low I've seen people who are invested and they stay invested and then they are more aggressive about adding to the portfolio when it's down III consider that much milk me how much smarter approach the guy who goes today off because there aren't easy.

I'm going to go to the sidelines if the car gets cut in half that that guy usually doesn't have the intestinal fortitude to go in, you know, there's all these other reasons that things are horrible and now that narrative that cause them to exit in the first place is reinforced right so that they have even more reason to stay on the sidelines and they usually don't get back back in time.

You know, you would ask a question earlier about well, why don't I wait for that one in four years for that pull back and we can use the last 10 years as an example.

I mean the market can go From Dell 7000 to 26,000 like it did without having a bear Market in them anywhere in the middle of it for you to invest in right? So this year we have a night of the year ends today on the 21st of December in 2018.

The market would be down but it's nowhere near where it was 9 years ago.

If you had gone to the sidelines and note 9 and said I'm going to accumulate cash until the market pulls back again.

You would have waited ten years for the next real big opportunity.

So now the markets pulled back but not back to where it was.

And I think this is the risk that people that are trying to time don't understand which is the risk of being out of the market is greater than the risk of being in.

So let's say you have a million dollars and you go into the market today one of three things can happen the market can go up where high-fiving, you know, I have a great time while happy sideways and you're going to earn a couple percent.

That's not the end of the world.

We're getting are dividends.

Nor the market could go down.

Okay, the worst thing there is you collect dividends and then the market comes back, right? So we we've had dozens of bear markets, you know, many many many more Corrections that happened on average once a year when the market drops used on average about 13 and a half percent or so.

They've all ended the same way the other markets eventually recover.

So you collect your dividend you wait, that's your worst case scenario as an investor If instead you're in cash.

Well if the market goes down, we're not getting the dividend and you're probably going to want to stay in cash if the market goes sideways or not collecting the dividend is the market goes up.

We may suffer permanent loss of opportunity.

So the Dow goes from 20 2000 230.

You may never the market may never pulled back to that 22.

It may never come back to that level that entry point that you have been afforded the opportunity today when you're on the sideline you are risking the market getting away from you when you're in it can't get away from you.

It can't Burley downtrend with you along with it, but you can't miss that opportunity which is why anybody that is looking at the odds of investing they're going to be invested sooner rather than later.

And when you say that the word diversify or diversification has come up a number of times so far.

Am I am I accurate and saying you have a diversified public portfolio to maintain or incrementally increase net worth while searching for Alpha primarily through alternative Investments.

Is that the general approach and then I have a question about what diversification means but is that is that a fair? Synopsis of generally what you are advocating with your clients.

Yeah.

Well somebody else by being extremely disciplined placing tax trades being aggressive buyers only asset classes that match up with their needs and diversification to me means you try to reduce dramatically company risk and Industry risk when you're an investor in the stock market, let's start with that.

You got three big risks what is company risk? So you buy a stock and it turns out to be Enron and Worldcom or Lehman Brothers are Polaroid or whatever.

It just goes to zero that's company risk theirs industry risk, you know, if you were in the mortgage-backed Securities Market in 08 or if you were part of the internet craze of the internet bubble, I mean Industries go away sometimes and never recover and then there's Market risk, and if you if you're very Diversified you're across a bunch of companies a bunch of Industries if there's a leavening Brothers, And there if there's an industry and they're like not doing well, you're going to survive and the market risk.

It's a temporary rescue the market will go down and then it should come back up and we can diversify the market risk further by owning other markets like real estate in bonds and then we can get extremely Diversified by going into the alternative investment space and that would be an investment approach.

You said something a little earlier that people have different purposes.

He know some people are there trying to hit a homerun and some people are trying to invest I would say investing is what I just described it in the markets.

You have to approach investing saying this is not going to do as well as my day job is what I'm sitting with a business owner or whether the guy owns a restaurant or the gal owns a consulting firm.

I tell him what you're making 30% on your money with your job or more you are not going to make that in the market.

Don't come to me if you think that's what's going to happen.

Right? That's that's just not what happens.

When you invest this way for the long run now, you can make a business out of investing in these markets so you could for example be a real estate developer.

And yeah, you're going to do much better than or just somebody who's buying a Diversified Real Estate portfolio.

But now you're in this full-time right? Same thing with Ray dalio on the on the stock side.

If you want to buy into the idea that maybe he can win over time it would be because it's a full-time.

It's a full-time job that might use that a different approach that a typical a disciplined investor would use so I think you have to come into a portfolio like someone like you is going I've got my day job.

I'm doing all these things and taking all these risks in using my time to make a lot of money and I'm going to invest in a way we all do better than cash, but I'll never make what I'm making with my time and effort and name and everything else, but but I'm going to do better than this then cash.

I would you better than bonds by by having a disciplined Diversified approach Diversified in this case cuz people often think Diversified A lot of stuff if you buy a lot of stuff and if anyone is professional out there, obviously, I'm mostly talking on my ass right now.

But if everything is correlated, even though they are different words or different asset classes, then you may not be truly Diversified.

See if you look at save David Swensen or some of these other guys, they might talk about us stocks International stocks emerging-market wreaths long-term us treasuries and treasure and tips right or something like that.

Right 59 correlated bats pipe something like that.

What is Diversified mean to you? What are the characteristics of a diversified portfolio in is it possible to over diversify where you're just spraying and praying it would be in innocence? Yeah, I think people think.

That's not necessarily the case may be all for money managers are trading US Stocks.

You'd have been better off with one wealth manager who owns four different asset classes, right? So sometimes the first find money managers doesn't do it.

You might buy five duplexes in Nashville on the same block while you're not that Diversified you have the rest of the neighborhood and of the city and of the state, I'd rather own five different properties in five different states to get a little bit more Diversified certain classes are correlated.

You real estate's about 85% correlated stocks in the US markets, you know, 89% correlated to Int