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Speaker 1: Hi, I'm Jerry Boyer. Welcome to Meeting of Minds podcast.

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Speaker 1: Today we're talking with Ted Hicks of Hicks and Associates

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Speaker 1: about his book Evidence Based Investing. Ted, welcome to the program.

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Speaker 2: Thank you, Jerry. It's an honor to be on with you.

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Speaker 1: So tell us what the evidence has told you about investing.

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Speaker 2: Well. I would say the evidence tells me that what

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Speaker 2: is commonly taught in this industry is wrong. And that's

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Speaker 2: kind of the whole point of the book is to

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Speaker 2: try to help the reader to challenge some of what

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Speaker 2: wall Street says, some of what academia says, that maybe

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Speaker 2: we need to look at things just a little bit

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Speaker 2: differently because what's I think called hotal hold on for

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Speaker 2: dear life may not always be appropriate.

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Speaker 1: Interesting in the book we mentioned academia. The dominant financial

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Speaker 1: ideology in academia is a modern portfolio. Tell me what's

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Speaker 1: wrong with modern portfolio theory?

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Speaker 2: I would argue that modern portfolio theory is massively flawed

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Speaker 2: because the assumptions that go into it. I try to

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Speaker 2: give credit because I'm not trying to beat up on Markowitz,

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Speaker 2: but his theory was written to get a PhD. And

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Speaker 2: I don't think he realized that he would reshape finance

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Speaker 2: or shape and maybe not even reshape, but shape the

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Speaker 2: financial industry for the next fifty years. In order to

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Speaker 2: get his math to work, he has to assume the

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Speaker 2: correlations are constants. Correlations are not constant. The markets are

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Speaker 2: always moving, and you could easily argue that today the

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Speaker 2: markets are far more interrelated than they were when he

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Speaker 2: wrote that paper in nineteen fifty two. So the theory,

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Speaker 2: it's great in theory, but it doesn't work in real life.

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Speaker 1: Yeah, And I mean he wasn't getting a doctor in finance,

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Speaker 1: he was getting a doctorate in economics. Milton Friedman was

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Speaker 1: on doctoral review committee and said that this is neither

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Speaker 1: math nor e can exactly So I don't know how

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Speaker 1: we voted in the end. I guess he voted for it,

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Speaker 1: but Uncle Milton was pretty skeptical about the whole thing.

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Speaker 1: And yet it's gotten hardwired into the finance departments, and

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Speaker 1: not just the finance departments. If you sit for a

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Speaker 1: CFA exam, that you're getting modern portfolio theory. It is

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Speaker 1: considered a safe harbor for fiduciary duty, even though it

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Speaker 1: has not held up well.

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Speaker 2: It hasn't and I would argue that one of the

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Speaker 2: biggest problems that I have seen in the industry is

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Speaker 2: that there's a lot of us that hold ourselves out

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Speaker 2: to be full comprehensive financial planners, and so the same

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Speaker 2: is true in the CFP curriculum. You sit through the

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Speaker 2: CFP curriculum and you learn to be a generalist, one

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Speaker 2: of the criteria or one of the building blocks, if

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Speaker 2: you will, of the CFP Board's concept the financial planning

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Speaker 2: is investment investment planning. So investment planning is just one

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Speaker 2: sixth of the studies, if you will, for the CFP,

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Speaker 2: But I would I've long argued that it's not equally weighted.

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Speaker 2: Investment planning is very, very important, and to the content

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Speaker 2: that they deliver, it's no different than all of the

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Speaker 2: other content. It's just modern portfolio theory and diversification. And again,

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Speaker 2: don't get me wrong, I'm not saying that you shouldn't

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Speaker 2: be diversified. You should be diversified, but just not you

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Speaker 2: should not be thinking diversification is gonna save you if

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Speaker 2: the proverbial pooh hits.

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Speaker 1: The fan well, and diversification is the kind of offspring

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Speaker 1: of modern portfolio theory, correct, right, Because diversification basically tries

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Speaker 1: to find the efficient frontier. If you think of risk

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Speaker 1: as volatility, diversification at least theoretically decreases volatility. So the

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Speaker 1: free lunch of diversification is same return but with less volatility.

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Speaker 2: Right.

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Speaker 1: Of course, again Friedman said, there is no free lunch.

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Speaker 1: And the thing is if the assets are highly correlated,

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Speaker 1: the diversification doesn't really diversify, right, and then you don't

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Speaker 1: get that free lunch. You just get returns.

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Speaker 2: Right. And so I don't have the book behind me,

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Speaker 2: it's at the house Hod Pedsil. His book is it's

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Speaker 2: a massive tome, and his book is a lot of

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Speaker 2: stuff in his book, but his book is another example

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Speaker 2: of why I wrote mine. My book was designed to

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Speaker 2: be kind of an introductionist, designed to be a It's

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Speaker 2: not a massive theoretical treatise. It is just, hey, maybe

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Speaker 2: you should think about this, and it's designed to be

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Speaker 2: approachable so that the average American can read it. Actually,

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Speaker 2: before we had our book launch party, my wife came

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Speaker 2: to me. She had decided to read the book, and

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Speaker 2: I'm like, well, of course i'd like you to read

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Speaker 2: the book on it, but I'm not going to force

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Speaker 2: it on you, and she had this look of shock

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Speaker 2: on her face after she read it. She's like, I

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Speaker 2: actually understood it. But in Petzel's book, Petzel talked about

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Speaker 2: I think it was in one of the African nations

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Speaker 2: that they did an optimization study on crops and they

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Speaker 2: entered all kinds of data into a optimization tool, no

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Speaker 2: different than what you would use to create data efficient frontier,

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Speaker 2: And the concept was that they were trying to determine

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Speaker 2: what's the optimal mixture of crops that this African nation

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Speaker 2: should should plant. And it came back that eighty percent

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Speaker 2: of the nation should be planted with cucumbers. Like, what

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Speaker 2: doesn't make sense? And so they go back and they

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Speaker 2: adjusted the data and they you know, you eventually and

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Speaker 2: there's no different than what happens in an acid allocation tool.

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Speaker 2: You know, when I first started using these tools that

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Speaker 2: I don't really use them anymore. But twenty five years ago,

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Speaker 2: you go in and it sets it says twenty percent

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Speaker 2: is the cap on real estate. Well, I was taught

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Speaker 2: that's because of you know, various reasons that you shouldn't

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Speaker 2: put everything in real estate because it's you know, ill liquid,

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Speaker 2: et cetera. All Right, Fine, Well, guess what the tool

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Speaker 2: said every single time you ran a scenario, It said

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Speaker 2: twenty percent to real estate. Well, I don't know that.

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Speaker 2: I like that, so I'm gonna cap it at ten.

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Speaker 2: So what do you think it's at cap it at ten? Yeah,

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Speaker 2: it's just the science breaks down in reality. That's the problem. Yeah.

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Speaker 1: And one of the things that occurs to me in

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Speaker 1: terms of the efficient frontier and diversification, et cetera, is

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Speaker 1: that all of that was done before. My friend Brian

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Speaker 1: Westbury calls it abundant reserves. Before the FED was the

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Speaker 1: largest investor in the universe. Right, So an eight or

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Speaker 1: nine trillion dollar FED means it's the biggest single decision

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Speaker 1: maker invest So when the FED is easy or believed

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Speaker 1: to be easing, what does that mean? It drives up

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Speaker 1: the price of bonds, and it drives up the price

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Speaker 1: of stocks. When the FED is believed to be in

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Speaker 1: tightening mode, what does that do? That drives down the

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Speaker 1: price of stocks, and it drives down the price of bonds.

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Speaker 1: So when you have a central bank that's intervening in

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Speaker 1: dramatic ways, which we've had since the Great Recession, all

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Speaker 1: of a sudden, historically uncorrelated assets become highly correlated assets,

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Speaker 1: at which point the whole thing blows up. But everyone's

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Speaker 1: still out there acting like rules that were written down

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Speaker 1: in the nineteen fifties and practice in the sixties and seventies,

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Speaker 1: eighties and nineties when the FED was you know, half

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Speaker 1: a trillion or even smaller balance sheet still apply when

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Speaker 1: the FED is the single biggest actor in markets.

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Speaker 2: We add on to that, Jerry, that we used to

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Speaker 2: be able to measure stock ownership in terms of years.

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Speaker 2: Now stock ownership is measured in months. The turnover in

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Speaker 2: the industry and the stock market is just it's phenomenal.

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Speaker 2: And I like to tell clients this is, you know,

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Speaker 2: don't do this, but on your way home from the office,

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Speaker 2: you could trade in your account at a stoplight, right,

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Speaker 2: you know, So the ease of accessing information, the speed

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Speaker 2: at which you can execute is also grotesquely different than

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Speaker 2: what was prevalent in Marcowitz's day. And the same thing,

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Speaker 2: you know, I wrote about Benjamin Graham and his massive

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Speaker 2: work The Intelligent Investor. People don't realize, you know, they

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Speaker 2: kind of worship that book in Benjamin Graham, but you know,

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Speaker 2: he changed his allocation recommendations too, why wouldn't we be

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Speaker 2: doing the same thing. And again, the argument is, especially

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Speaker 2: for somebody who is in charge of managing other people's money,

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Speaker 2: I have a responsibility. I have a solemn responsibility to

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Speaker 2: be monitoring that and to stewarding that, shepherding that if

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Speaker 2: you will, and you just blind hope that it's all

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Speaker 2: going to work out in the end, I think is

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Speaker 2: absolutely foolish. And so if the evidence is saying, maybe

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Speaker 2: we should be a little less aggressive right here, maybe

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Speaker 2: we should be a little less aggressive, And there's no

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Speaker 2: reason for you to sit down and say, well, hey,

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Speaker 2: I just turned sixty, so I should be less aggressive

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Speaker 2: now right Well, no, that might be really, really stupid.

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Speaker 2: And the end verse is also true. You know, I'm young,

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Speaker 2: I'm only thirty. I should be aggressive. Well maybe not

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Speaker 2: in this environment. It's silly to be aggressive in this environment.

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Speaker 1: Well, it seems to me that life cycle investing as

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Speaker 1: an automatic setting, as a robotic setting, essentially decreases the

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Speaker 1: amount of knowledge available to the decision maker. The only

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Speaker 1: thing that matters when it comes to your macroeconomic asset

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Speaker 1: allocation is when your birthday was and whether we're in

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Speaker 1: a bubble or or maybe it's like twenty twenty and

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Speaker 1: the market's crashed. Oh no, stay out of stocks. Yeah,

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Speaker 1: Or maybe it's nineteen ninety nine and the market's in

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Speaker 1: kind of bubble valuation. But you're young, so pile in

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Speaker 1: to pets dot com. You know, it's essentially you're lobotomizing

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Speaker 1: yourself by ignoring market conditions. There's an overlap between life

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Speaker 1: conditions and market conditions, and to have life conditions driving

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Speaker 1: that allocation is to ignore the real world, right.

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Speaker 2: And that's an excellent point, and something I try to

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Speaker 2: talk about in my book is that is we're ignorant

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Speaker 2: if we are not recognizing the fact that there's been

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Speaker 2: long periods of market negative market environments in the United

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Speaker 2: States and in any country you know elsewhere. And so

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Speaker 2: the term that I use in the book is the

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Speaker 2: birthday lottery. If you didn't win the birthday lottery, such

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Speaker 2: as your peak earning years and your first several years

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Speaker 2: of your retirement are right in the middle of a

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Speaker 2: sweet bull market, you might be in a world a hurt.

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Speaker 2: And again, the reality, Jerry, is that this industry, it

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Speaker 2: is very easy to get in the industry and become

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Speaker 2: a financial advisor. And you're managing money people people's money.

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Speaker 2: The bar is relatively low, but we have a responsibility

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Speaker 2: to manage it with excellence. And the average retail and

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Speaker 2: financial advisor is not trained on how to actually manage money.

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Speaker 2: They're trained on these theories, but nobody, very few people,

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Speaker 2: I would argue, question those theories. And Jerry, you know

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Speaker 2: this Acts seventeen eleven is one of my favorite verses

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Speaker 2: in Scripture. The believers in Berea were more noble than

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Speaker 2: the fessl and icons for the search scripture.

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Speaker 1: Daily to see if these things were true?

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Speaker 2: Right, right? I want to be a noble Berean who

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Speaker 2: is searching the academic research to see if what Markowitz

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Speaker 2: said is true. Well, no, no, it is not.

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Speaker 1: True, right, And I think if you search the scriptures daily,

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Speaker 1: you'll also find that Markowitz's the view isn't true because

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Speaker 1: it has a really distorted view of human nature.

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Speaker 2: Right, Yeah, yeah, totally agree.

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Speaker 1: What else did the evidence teach you that kind of

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Speaker 1: varies from what people generally hear in the marketplace.

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Speaker 2: Well, that's a good question. I guess. The main thing

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Speaker 2: is from my standpoint is I believe strongly that a

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Speaker 2: more active approach to actually managing wealth makes sense. Just

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Speaker 2: that buy and hold mentality and diversify and stay invested

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Speaker 2: for the long haul. Well, it doesn't make sense, you

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Speaker 2: know now. Again, Don't get me wrong, I'm not advocating

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Speaker 2: that people try to start day trading and things of that.

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Speaker 2: That's not what I'm saying. But a lot of folks

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Speaker 2: in this industry and the media, they like to worship

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Speaker 2: at Warren Buffett's feet. Warren Buffett is quite comfortable sitting

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Speaker 2: in cash. Maybe there's a reason for that. And I'm

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Speaker 2: not saying you should go to cash when Warren Buffett goes.

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Speaker 2: That's not what I'm saying, but it's just maybe we

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Speaker 2: need to question these assumptions and make some decisions ourselves

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Speaker 2: instead of just doing whatever Wall Street says, because you

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Speaker 2: could easily argue there is a massive conflict of interest

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Speaker 2: when you're listening to the typical Wall Street firm.

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Speaker 1: Yeah.

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Speaker 2: Yeah.

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Speaker 1: The Buffet situation is interesting because he's active, right, he

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Speaker 1: speaks highly about modern portfolio theory but doesn't practice it.

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Speaker 2: Right.

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Speaker 1: That's kind of fascinating to me. And the other thing

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Speaker 1: is I just saw analysis recently were someone because at

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Speaker 1: one point he was the just man right in the world.

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Speaker 1: And this person made the point that the main way

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Speaker 1: he became and he isn't now by far, the main

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Speaker 1: way he became the richest man in the world was

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Speaker 1: just by living long. In other words, if you get

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Speaker 1: to whatever, if you get to ten billion net worth

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Speaker 1: and you're at sixty, you might retire and golf and

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Speaker 1: just live off that ten billion. But if you stay

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Speaker 1: in the market for another, say, thirty years, right, and

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Speaker 1: that thing keeps compounding. You know, when he reached retirement age,

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Speaker 1: he wasn't the richest man in the world yet, right,

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Speaker 1: So part of it, he even talks about the snowball effect.

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Speaker 1: He got in early and he stayed late, so he

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Speaker 1: has a longer run rate. That doesn't make him the

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Speaker 1: best investor in terms of annual returns. He tends to

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Speaker 1: beat the market in terms of annual returns, but his

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Speaker 1: real secret sauce is just being in the market from

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Speaker 1: age twenty to age ninety. That that that goes a

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Speaker 1: long way.

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Speaker 2: I would argue that in addition to that, he has

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Speaker 2: also been on record to say that if you remove

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Speaker 2: his big winners, he's no better than average.

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Speaker 1: There if he lucked out a few times.

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Speaker 2: I wouldn't call it luck entirely. But the reality is

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Speaker 2: this goes back to the concept of diversification. Right. Is

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Speaker 2: diversification important? Well, Yes, at a certain level, diversification is important.

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Speaker 2: And one of the cliches in this industry that has

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Speaker 2: said all the time is that wealth is created through

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Speaker 2: asset concentration, but it is preserved through diversification. And I

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Speaker 2: would say, no, that's not entirely true. It's half half true.

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Speaker 2: And so one of the reasons Warren Buffett has done

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Speaker 2: really well is because he's gotten entirely not entirely that's

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Speaker 2: a stretch. He's gotten very concentrated in some very big winners.

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Speaker 2: And that's kind of the point is compound your gains,

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Speaker 2: compound your winners, and starve your losers. And that means

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Speaker 2: you need to be paying attention to what's working and

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Speaker 2: what's not working.

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Speaker 1: Yes, I think another point you make in the book

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Speaker 1: that's very helpful is that tax planning is a whole

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Speaker 1: lot more important than most clients treated as being. So

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Speaker 1: you can make allocation decisions to squeeze out, you know,

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Speaker 1: to beat the market by fifty basis points. WHOA, that's amazing,

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Speaker 1: and leave behind one hundred and fifty basis points of

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Speaker 1: tax savings. If you're like, if you're integrating that, so

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Speaker 1: I think that's also really important factor.

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Speaker 2: Yeah, I think taxes are an interesting component to the conversation.

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Speaker 2: At the moment, the majority of the money that we

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Speaker 2: manage is inside of qualified accounts, so it's largely irrelevant.

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Speaker 2: But and it also goes back to what state are

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Speaker 2: you living in, and you're living in a high tax state,

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Speaker 2: we need to factor that in as well, and maybe

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Speaker 2: we need to change them. And one of the last

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Speaker 2: chapters of the book is it's titled It's not about

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Speaker 2: beating the market, because it really isn't. Yes, mister Klin,

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Speaker 2: if you want to outperform the S and P. Five hundred,

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Speaker 2: you can certainly try that. And if that's your benchmark,

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Speaker 2: well then there's no reason to hire me or anybody else.

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Speaker 2: Just throw your money and an S and P five

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Speaker 2: hundred ETF and just know what you're getting with that.

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Speaker 2: You're getting fifty percent draw downs every once in a while.

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Speaker 2: If that's what you want, knock yourself out. But it's

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Speaker 2: not about beating the market. It's about you could argue

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Speaker 2: beating inflation, right, and it's about getting to where you're

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Speaker 2: trying to go, but doing it with a lower degree

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Speaker 2: of anxiety. And I talk about Richard Taylor in the

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Speaker 2: book as well. He was the one that got the

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Speaker 2: Nobel Prize for behavioral finance research. There's a large part

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Speaker 2: of it. As people get closer and closer to retirement,

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Speaker 2: their excitement about retirement actually goes down. In their anxiety

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Speaker 2: about retirement goes up because if I tell the boss

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Speaker 2: I'm retiring, that's it. I may not be able to

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Speaker 2: make any more money. Are we sure their anxiety goes up, Well,

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Speaker 2: we have to have a plan of how we're actually

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Speaker 2: going to preserve the wealth. And no, you can't just

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Speaker 2: stick it all in bonds and say well that's wealth preservation. No,

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Speaker 2: that's we're in a We're no longer in a secular

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Speaker 2: bull market for bonds. That is that was true in

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Speaker 2: the last forty years.

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Speaker 1: And that's another one that's killed me to see that

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Speaker 1: all these people just like put you in sixty percent

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Speaker 1: bonds because you're you know, because you're you know, near

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Speaker 1: retirement age. Even though there was a two standard deviation

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Speaker 1: bond bubble, you know, at the height of the FED

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Speaker 1: was buying bonds with both fists, driving down to near

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Speaker 1: zero interest rates. And then I think the kind of

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Speaker 1: robotic advisor community was just oh, it's your fifty eighth birthday,

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Speaker 1: more bonds, you know, and not paying any attention to

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Speaker 1: what those And I even talked about this, and you've

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Speaker 1: heard me on some of the Kingdom Advisors quarterly calls

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Speaker 1: and at the annual conference, etc. Saying, wait a minute,

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Speaker 1: these bonds are really dangerous. You've got clients who've never

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Speaker 1: seen a capital loss in the bond market who are

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Speaker 1: about to see huge capital losses in the bond market

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Speaker 1: when the FED raised interest rates, and you know, I

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Speaker 1: mean that was really painful for clients, and it was avoidable,

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Speaker 1: it was foreseeable if people would just not be unthinking

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Speaker 1: about it.

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Speaker 2: This is going to potentially sound a little harsh, but

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Speaker 2: I hope you and all the listeners would give a

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Speaker 2: little grace here. To be successful in the retail financial

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Speaker 2: advisory business, all you need to do is know just

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Speaker 2: a little bit more than the other person on the

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Speaker 2: other side of the desk. And it's not that hard. Yep,

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Speaker 2: it's not that hard. The average American knows very very

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Speaker 2: little about this stuff, and they and two many people

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Speaker 2: do not question well anything. They're political leaders, they're financial advisor,

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Speaker 2: they don't question their doctors. They don't question you know,

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Speaker 2: And I would argue that's a very dangerous way to live.

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Speaker 2: Now you asked earlier, what else have I learned about evidence?

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Speaker 2: Gauzian statistics doesn't apply here? Right? So one of the

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Speaker 2: he's a professor over at Duke, pretty big name. I

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Speaker 2: won't mention him, but he posted the other day about

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Speaker 2: I think it was gold had a ten standard deviation

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Speaker 2: move recently, and my comment was, well, yeah, ten standard

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Speaker 2: deviation move will kind of I mean, shouldn't that indicate

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Speaker 2: that it's not going to fit in a Gaussian statistical model.

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Speaker 2: You're not going to get a ten standard deviation move

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Speaker 2: on the other side of that to balance that out.

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Speaker 2: That doesn't work. But again, most people are shallow thinkers.

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Speaker 2: They're not thinking a little bit deeper. And again one

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Speaker 2: of my life versus this classians three twenty three. Whatever

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Speaker 2: you do, work out it with all your heart, working

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Speaker 2: under the Lord, not in the man.

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Speaker 1: Yeah. So yeah, Gaussian based on a normal distribution, which

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Speaker 1: is a random distribution, but that's not how the universe works.

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Speaker 2: No, it is not. It's economics doesn't work that way.

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Speaker 2: Stock market doesn't have work that way. But again, the

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Speaker 2: average individual in the industry is just you know, take

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Speaker 2: it at face value. I mean, how can this be wrong.

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Speaker 2: We've been talking about modern portfolio theory for fifty years.

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Speaker 2: Wasn't that part of the problem. Modern portfolio theory is

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Speaker 2: what's seventy years old? Now it's not modern anymore.

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Speaker 1: That's true, that's true. Yeah, Well, it's hardwired into the

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Speaker 1: exams and people feel safe with it. They feel safe,

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Speaker 1: except now people don't feel safe with what's in Ivy

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Speaker 1: League university. So maybe there's a chance to shatter that consensus.

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Speaker 1: It's not settled science anymore. Maybe it had been all right?

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Speaker 1: Ted Hicks, author of Evidence Based Investing. Anything you want

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Speaker 1: to leave us with before we go.

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Speaker 2: I would say, I appreciate you being, uh, you know,

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Speaker 2: offering me an opportunity to come and chat. And I've

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Speaker 2: always appreciated the wisdom that you have expounded on over

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Speaker 2: the years, and that's an honor to say with you.

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Speaker 1: And with you as well and for and also with

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Speaker 1: all of you who've been listening to us today. On

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Speaker 1: Meaning of Mine's podcast,