2861: Magic Beans by JL Collins on True Financial Success & Index Fund Investing

[00:00:00] [SPEAKER_00]: Have you ever noticed how a calm mind can really set the stage for a good night's sleep?

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[00:00:40] [SPEAKER_00]: This is Optimal Finance Daily, Magic Beans by JL Collins of jlcollinsnh.com.

[00:00:49] [SPEAKER_00]: And I'm your host and personal finance enthusiast, Dianna Merriam.

[00:00:53] [SPEAKER_00]: We're going to get right to today's post as we optimize your life.

[00:01:01] [SPEAKER_00]: Magic Beans by JL Collins of jlcollinsnh.com.

[00:01:08] [SPEAKER_00]: For supposedly rational creatures, we humans seem irrationally drawn to magic beans.

[00:01:15] [SPEAKER_00]: Being a geezer, I've been around long enough to see quite a few flavors come and go.

[00:01:21] [SPEAKER_00]: What they all have in common is that by the time you start reading about them everywhere,

[00:01:26] [SPEAKER_00]: the end is near. Let's see.

[00:01:30] [SPEAKER_00]: I remember growth stocks were all the rage a while back. Why any management worth its salt

[00:01:37] [SPEAKER_00]: should be able to plow profits back into the business and reach even greater heights.

[00:01:42] [SPEAKER_00]: Value stocks that pay dividends? Clearly run by managements with no vision,

[00:01:49] [SPEAKER_00]: so lacking in ability that they could think of nothing better to do with profits

[00:01:53] [SPEAKER_00]: than to pay them out. You want growth. Find companies with forward thinking,

[00:01:59] [SPEAKER_00]: what a wonderful phrase, leaders skilled in deploying capital.

[00:02:04] [SPEAKER_00]: Growth stocks. You couldn't go to a party without some guy telling you about his latest

[00:02:10] [SPEAKER_00]: killing. Left everything in the dust. Until they didn't. I remember actively managed funds.

[00:02:18] [SPEAKER_00]: The investment world is littered with the remains of once-superstar fund managers.

[00:02:24] [SPEAKER_00]: I remember houses. Oops, strike a nerve. Yup, stocks and bonds went up and down,

[00:02:31] [SPEAKER_00]: but houses? Houses could only go up. See, people will always need a place to live, right?

[00:02:38] [SPEAKER_00]: Seemed to make sense at the time. Why banks and how could they ever be wrong

[00:02:42] [SPEAKER_00]: would even loan you money on all your equity. You could cash out profits and still live in

[00:02:49] [SPEAKER_00]: place. What could possibly go awry? I'm sure glad I learned how to lose money in real estate

[00:02:55] [SPEAKER_00]: back in the 80s and before it was fashionable. Saved me a bundle in avoiding the latest tobacco.

[00:03:02] [SPEAKER_00]: I remember gold. How could I not? Every time I turned on the TV, opened the paper,

[00:03:09] [SPEAKER_00]: or listened to the radio, people were spending huge sums of advertising money

[00:03:13] [SPEAKER_00]: to tell me that I too could get rich buying, preferably from them, gold. It is, after all,

[00:03:22] [SPEAKER_00]: the one true store of value through human history. There was even one place that offered

[00:03:27] [SPEAKER_00]: to sell it to you and then for a fee store it for you as well. You never even had to see

[00:03:34] [SPEAKER_00]: the stuff. Think about that for a moment. I remember reading about tulip bulbs. And now?

[00:03:43] [SPEAKER_00]: Now it seems everywhere I turn the new flavor of bean is dividend investing, or even more

[00:03:50] [SPEAKER_00]: impressively, the dividend aristocrats. I actually made some money last year riding

[00:03:56] [SPEAKER_00]: the div stock wave. Hmm, with all this new popularity I should be taking my chips off

[00:04:02] [SPEAKER_00]: the table soon. No better sign than the end is near for them. So no magic beans in the

[00:04:08] [SPEAKER_00]: dividend aristocrats, but they likely won't be as poisonous as some of the other beans.

[00:04:14] [SPEAKER_00]: You'll just lag behind the market over the next decade. In fact, here's a bet that will

[00:04:20] [SPEAKER_00]: likely make you more money. Within five years, you'll be reading about how growth stocks are the

[00:04:26] [SPEAKER_00]: sure path to prosperity and value dividend stocks are for losers who can't do this simple

[00:04:33] [SPEAKER_00]: work of analyzing the good stocks. This will be wrong too. What is poisonous in the dividend

[00:04:40] [SPEAKER_00]: aristocrats post is this quote, for a great primer on valuing stocks, check out the intelligent

[00:04:48] [SPEAKER_00]: investor by Warren Buffett's mentor, Benjamin Graham, read it and then get to work combing

[00:04:54] [SPEAKER_00]: the aristocrats for bargains. End quote. It's a great book and by all means take the time

[00:05:01] [SPEAKER_00]: to read it. But remember when Graham wrote it, index funds would not be invented for several more

[00:05:08] [SPEAKER_00]: decades and mutual funds were few and far between. Analyzing and choosing individual

[00:05:14] [SPEAKER_00]: stocks was the only option. But now, thank you Jack Bogle, we have index funds. With these,

[00:05:22] [SPEAKER_00]: we can own the entire market and outperform over time all but the rarest of professional

[00:05:28] [SPEAKER_00]: money managers. This idea that if you read a few books and study what Warren Buffett has done,

[00:05:35] [SPEAKER_00]: you too will outperform the market is to steal a phrase from Sean's dad,

[00:05:41] [SPEAKER_00]: horse hockey, dangerous horse hockey at that. People have been trying for decades and yet

[00:05:47] [SPEAKER_00]: there's still only one Warren. Think about it this way. Remember Muhammad Ali,

[00:05:54] [SPEAKER_00]: the Warren Buffett of boxing in his day. You and I could have followed his training regimen,

[00:05:59] [SPEAKER_00]: maybe even engaged Angelo Dundee to show us the ropes. We could have gotten in top shape,

[00:06:06] [SPEAKER_00]: done all our homework, learned the sweet science. And after all that effort, would you climb

[00:06:12] [SPEAKER_00]: in the ring with Joe Frazier or George Foreman or Sonny Liston? Not me. I'm no Ali

[00:06:19] [SPEAKER_00]: or Warren. Neither are you. Unless of course you are, which in case, welcome back.

[00:06:25] [SPEAKER_00]: You know what Warren Buffett recommends for individual investors? Broad-based index funds.

[00:06:31] [SPEAKER_00]: Graham, were he still alive, would too. A little humility goes a long way in saving your

[00:06:38] [SPEAKER_00]: ass and your stash. Addendum. At various points in this blog, I suggest only about 20%

[00:06:46] [SPEAKER_00]: of active managers outperform the index. That's being a bit generous. This is a ballpark figure

[00:06:53] [SPEAKER_00]: based on the many articles I've come across on this over the years. In fact, you can Google

[00:06:58] [SPEAKER_00]: this question and find several falling around this percentage. I'm not sure why they vary.

[00:07:05] [SPEAKER_00]: Some look at different timeframes, some at different metrics, some factor in costs,

[00:07:09] [SPEAKER_00]: some don't. Clearly it's easy to get lucky and outperform the shorter the time you need to do it.

[00:07:20] [SPEAKER_00]: You just listen to the post titled Magic Beans by JL Collins of jlcollinsnh.com,

[00:07:28] [SPEAKER_00]: and I'll be right back with my commentary. Buy low, sell high. Buy low, sell high. It's a

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[00:08:32] [SPEAKER_00]: I think the reason why it can be so easy to get caught up in investing trends is because we

[00:08:38] [SPEAKER_00]: think the goal of investing is to beat the market. That's why I want to repeat a sentence

[00:08:44] [SPEAKER_00]: from this post where JL says, quote, we can own the entire market and outperform over time

[00:08:52] [SPEAKER_00]: all but the rarest of professional money managers, end quote. The reality is that almost no one beats

[00:08:59] [SPEAKER_00]: the market with any consistency over the long run. So by not trying to beat the market,

[00:09:06] [SPEAKER_00]: you end up performing better than everyone else who is playing an unwinnable game.

[00:09:12] [SPEAKER_00]: But the best part is this, you don't even need to beat the market to reach your financial

[00:09:16] [SPEAKER_00]: goals. You will get there more easily and more reliably with way less effort if you simply match

[00:09:25] [SPEAKER_00]: the market by buying low fee total market index funds. Don't choose which stocks to buy,

[00:09:31] [SPEAKER_00]: just buy all of them. Don't stress about buying low and selling high, also known as

[00:09:38] [SPEAKER_00]: timing the market. Just consistently buy and hold until you reach your financial goals and

[00:09:44] [SPEAKER_00]: draw down on that portfolio. Investing trends make investing look way more complicated than

[00:09:51] [SPEAKER_00]: it needs to be. But as JL demonstrates in his widely read book, there really is a simple path

[00:09:58] [SPEAKER_00]: to wealth. But that should do it for another edition of Optimal Finance Daily. I'll be

[00:10:04] [SPEAKER_00]: back tomorrow as usual, so I'll see you there for the Wednesday show where your optimal life

[00:10:09] [SPEAKER_00]: awaits.