Speaker 1: This is Masters in Business with Barry Ridholds on Bloomberg Radio.
Speaker 1: This week on Masters in Business, I have a special guest.
Speaker 1: His name is Dr Robert Johnson. He is currently the
Speaker 1: President of the American College of Finance. In his previous job,
Speaker 1: he was a senior person at the cf A Institute,
Speaker 1: where he pretty much was in charge of the Chartered
Speaker 1: Financial Analyst Test. You can only take one part per year,
Speaker 1: pass part one, and you have to wait a year
Speaker 1: to pass part two, and then ultimately take the third
Speaker 1: part in the third year. It has about a fifty
Speaker 1: fail rate and a lot of people look at it
Speaker 1: as a um really a most challenging exam they'll ever
Speaker 1: encounter in their career in finance. We discuss all sorts
Speaker 1: of things, everything from the value of value investing to
Speaker 1: the impact of the FED on the investment process. UH,
Speaker 1: if you are at all interested in how people become
Speaker 1: certified to actually be c f A s and what
Speaker 1: the value of those those letters are to either a
Speaker 1: company or an investment bank or or an analyst, I
Speaker 1: think you'll find this conversation quite interesting. Bob is really
Speaker 1: an interesting guy to talk to. He's very knowledgeable about
Speaker 1: a lot of areas tells some great stories about Warren Buffett.
Speaker 1: One of the books he wrote, which is called Strategic
Speaker 1: Value Investing, is on Buffets reading list. Every year at
Speaker 1: Berkshire Hathaway's annual fest they have a list of suggested books.
Speaker 1: His book has been on that list for quite some time. Anyway,
Speaker 1: I found him to be just a genuine, fascinating, interesting guy,
Speaker 1: and I think you'll enjoy the conversation. So, with no
Speaker 1: further ado, my conversation with Dr Robert Johnson. This is
Speaker 1: Masters in Business with Barry Ridholts on Bloomberg Radio. My
Speaker 1: special guest this week is Dr Robert Johnson. Let me
Speaker 1: just give you the short version of his curriculum VITA.
Speaker 1: He is currently President and CEO at the American College
Speaker 1: of Financial Services UH. He has been the recipient of
Speaker 1: the Alfred C. Morley Distinguished Service Award when he was
Speaker 1: one of the senior folks at the c f A Institute.
Speaker 1: He has won the RFK Memorial Student Award for teaching achievement.
Speaker 1: Serves on the editorial board of the Journal of Portfolio Management.
Speaker 1: He really helped to develop and refine the Chartered Financial
Speaker 1: Analyst test. Will get to that later. Today. He is
Speaker 1: the author of numerous books, including Invest with the FED,
Speaker 1: Strategic Value Investing, and Tools and Techniques of Investment Planning.
Speaker 1: Dr Robert Johnson, Welcome to Bloomberg. Thank you very It's
Speaker 1: terrific to be here. I'm thrilled to have you. We
Speaker 1: met previously on Tom Keene Show, and I found it fascinating.
Speaker 1: What are unique niche in the world of finance that
Speaker 1: you occupy sort of one foot in the world of
Speaker 1: academia and one foot in the world of actually helping
Speaker 1: um people become chartered financial analysts. So so let's talk
Speaker 1: a little bit about your background. When people when you
Speaker 1: first meet people and they say, hey, Bob, what do
Speaker 1: you do for a living? How do you answer that question, Barry,
Speaker 1: I tell him I'm a pracademic. A pracademic, and that's
Speaker 1: the word that I hope sometime comes into lexicon, the
Speaker 1: popular lexicon. I hope it's in Wikipedia someday, maybe even
Speaker 1: in Websters. But basically, a procademic is somebody who operates
Speaker 1: both in the world of the practitioner and in the
Speaker 1: world of academia. And unfortunately, I don't think that those
Speaker 1: circles if you look at it in a Van Diagram
Speaker 1: sense intersect very often, and I think that if we
Speaker 1: had more of that, I think both worlds would benefit.
Speaker 1: So that's that's fascinating. One of the questions I wanted
Speaker 1: to ask you was you've sort of gone back and
Speaker 1: forth between being a practitioner and being an academic. How
Speaker 1: does one make that transition in either direction? How do
Speaker 1: you go from a practitioner to an academic and vice versa. Well,
Speaker 1: I think if you stay close to the edge of
Speaker 1: each that it isn't much of a transition. When I
Speaker 1: was a finance professor at Creighton University, I also ran
Speaker 1: a money management firm. I had about fifty million dollars
Speaker 1: under management of private wealth, and I was a much
Speaker 1: better teacher because I was actually managing money. And I
Speaker 1: think the same is true in reverse. I think that
Speaker 1: folks who practice, if they look at the best in academia,
Speaker 1: can benefit greatly. So I I really don't think it's
Speaker 1: a tough transition if you if you kind of stay
Speaker 1: close to the edge. Fortunately, I think people want to
Speaker 1: operate in the center of those circles instead of where
Speaker 1: they overlap. You know, we use so much academic research
Speaker 1: in our regular practice. Whether it's the behavioral side as
Speaker 1: to how people misbehave, or just classic UM portfolio management theory.
Speaker 1: There's a lot of things to be learned from people
Speaker 1: who are spending lots of time just doing deep thought.
Speaker 1: You mentioned you were running a relatively small asset management business,
Speaker 1: but you've also been an outside director on some fairly
Speaker 1: substantial UM multibillion dollar management firms. What does the academic
Speaker 1: bring to a twenty plus billion dollar funds and how
Speaker 1: does that help you? How does being on a huge
Speaker 1: twenty billion dollar funds board help you as an educator? Well,
Speaker 1: I think it's discipline and rigor that that the academic
Speaker 1: can bring to the to the asset manager, and I
Speaker 1: think it's the best of academic research. Or instance, one
Speaker 1: of the things we looked at when I was was
Speaker 1: on the funds board that I was on was executive compensation. Well,
Speaker 1: I happen to have done my dissertation and executive compensation,
Speaker 1: and basically what my research showed was that incentive stock
Speaker 1: options change the way people worked. So I think when
Speaker 1: you bring some empirical evidence to the table that it
Speaker 1: no longer is just anecdotal that I think it really
Speaker 1: brings it to light and people can see that their
Speaker 1: substantive research behind a lot of the findings, So not
Speaker 1: just a story, but actual data that that underlines it. Look,
Speaker 1: as long as you brought it up, let's talk a
Speaker 1: little bit about executive compensation. My concern about stock options
Speaker 1: are that you're paying people for based how well the
Speaker 1: stock market does, as opposed to how much they've improved
Speaker 1: the underlying company. True of false, true the delta. What
Speaker 1: what you really would like to measure is the delta
Speaker 1: how much how how much that particular executive change the
Speaker 1: way that company operated, And too often they're just paid
Speaker 1: for a tailwind. The market goes up, the sector goes up,
Speaker 1: and your company within that sector is going to participate
Speaker 1: in both of those, whether you're great or terrible, there's
Speaker 1: going to be some overlap there exactly, and there's no
Speaker 1: pure element. It's it's it's so difficult to disentangle the effects.
Speaker 1: So let's talk about another rising tide. And in the
Speaker 1: last minute and a half we have in the segment
Speaker 1: you wrote the role of monetary policy and investment management.
Speaker 1: Uh said differently, I was always taught don't fight the Fed.
Speaker 1: What is the proper role of monetary policy? In investment management.
Speaker 1: The curious thing is that when you say don't fight
Speaker 1: the FED. Um. When I started that line of research,
Speaker 1: I was an asset manager and I noticed and this
Speaker 1: is in the late eighties. So remember in the late eighties,
Speaker 1: the people in the industry didn't know who the chairman
Speaker 1: of the FED to reserve it was. People didn't know
Speaker 1: people didn't know what the FED was. Now it's front
Speaker 1: page news. So if you put yourself back in there,
Speaker 1: I noticed that when the FED changed policy, it influenced
Speaker 1: asset prices, and so I wanted to rigorously study that
Speaker 1: and empirically study that lo and behold. I started these
Speaker 1: studies in the early nineties, and the culmination actually was
Speaker 1: the book invest with the FED that was recently just
Speaker 1: published by McGraw hill. We're gonna get to that in
Speaker 1: a little while. That's on my list of things to
Speaker 1: chat about. I'm Barry rid Helts. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My special guest this week
Speaker 1: is Dr Robert Johnson. He is the president of the
Speaker 1: American College of Financial Services. Before that, he was a
Speaker 1: very senior person at the CIFA Institute, where he had
Speaker 1: a lot to do with the Chartered Financial Analyst Test
Speaker 1: the CIFA exam Levels one, two, and three as it's
Speaker 1: known and hated. Let's talk a little bit about the
Speaker 1: institute first. What exactly is the c f A Institute
Speaker 1: c fan Stude is basically two things. The cf an
Speaker 1: Stude is the organization that rights and administers the c
Speaker 1: f A exams, and cfn Stute is also a membership organization.
Speaker 1: To maintain the c f A charter, one needs to
Speaker 1: be a member of cf A Institute, so it's a
Speaker 1: membership organization. I believe the numbers now are probably about
Speaker 1: a hundred fifty thousand people, So there's a hundred fifty
Speaker 1: thousand cf A s out there in the world. You
Speaker 1: can be a member of cf A Institute without being
Speaker 1: a c f A. Very few are the lion share
Speaker 1: of people are c f A charter holders, are cf
Speaker 1: A candidates, some cf A candidates members safe to say
Speaker 1: a hundred thousand people have gone through all three exams,
Speaker 1: past all three exams, well, I think I think it's
Speaker 1: probably more than that because the exam started in sixty three,
Speaker 1: so some of those folks have died, so I think
Speaker 1: that you've probably got over somewhere between a hundred and
Speaker 1: probably i'd a quarter and UM, what were your what
Speaker 1: was your role at the cf A Institute. You've had
Speaker 1: a number of positions within the institute. It's funny, Barry,
Speaker 1: I Uh, I'm laughing because I was at Creighton University.
Speaker 1: I was a tenured full professor of finance, last of
Speaker 1: the landed gentry in America, and c f A Institute
Speaker 1: came calling and said that they would like me to
Speaker 1: come and work on the curriculum. So I took a
Speaker 1: two year leave of absence in n and I was
Speaker 1: hired to UH to run the curriculum development process UM too.
Speaker 1: About almost two years into the process, I was promoted
Speaker 1: to being head of the c f A program, the
Speaker 1: whole thing, the curriculum, exams, administering the exams, standard setting
Speaker 1: the exams, the whole thing. So I resigned tenure at
Speaker 1: cf at Creighton University and stayed on at cf A Institute.
Speaker 1: A few years later UM, I would promoted to being
Speaker 1: in charge of all educational products they do. Cf A
Speaker 1: does some other educational They have the Certificate Investment Performance
Speaker 1: Measurement UM. They run the Financial Analyst Journal UM. A
Speaker 1: lot of professional publications, conferences and so forth. So I
Speaker 1: was in charge of all of those UM. Later on
Speaker 1: I was promoted to being Deputy CEO UM basically second
Speaker 1: in command at CFA Institute and manage the lions share
Speaker 1: of the organization reported up through to me at that time.
Speaker 1: So uh and I ended up leaving in two thousand eleven.
Speaker 1: So I was there fifteen years. Your your bio says
Speaker 1: that you have quote extensive experience with the credentialing programs UNE.
Speaker 1: Now in English, what exactly does that mean. Well, there's
Speaker 1: a profession that's known as psychometrics, and these are people
Speaker 1: who have PhDs in measurement and testing. This is the
Speaker 1: science of test ng and the science of determining who
Speaker 1: has indeed passed an examination. So what I did when
Speaker 1: I was at cf Institute was I knew we were
Speaker 1: good at finance, and we were good at investments, but
Speaker 1: I was convinced we really weren't very good at developing
Speaker 1: curriculum that was great for the distance learner. And I
Speaker 1: certainly didn't think we knew how to write exam questions
Speaker 1: like someone who studied that for a living did. So
Speaker 1: I brought psychometricians into the process and Basically what I
Speaker 1: what I believe happened is we professionalize the process of
Speaker 1: writing the exams, developing the curriculum and so forth. I
Speaker 1: love that expression, the distance learner, the person who's not
Speaker 1: just memorizing something temporarily but learning it for the long haul. Well,
Speaker 1: and the other thing Barry with the c f A
Speaker 1: program was the lion's share of the candidates now or
Speaker 1: from outside of North America, many for many of whom
Speaker 1: English is a second language. So you have to take
Speaker 1: that into account when fighting the curricular materials and writing
Speaker 1: the exams. And that's a big factor. Now, um, you know,
Speaker 1: just interest, just nomenclature and and just common terminology, no shorthand,
Speaker 1: no colloquialisms. It has to be the queen's tongue so
Speaker 1: to speak right. You have to think about the person
Speaker 1: in in Thailand or in Cambodia or in uh in
Speaker 1: Kenya who's studying this, who it isn't familiar with colloquial English. Huh,
Speaker 1: that's that's really never thought about that before. That's quite interesting.
Speaker 1: So the cf A exam has a reputation for being
Speaker 1: a killer, especially um. Two of the levels are known
Speaker 1: as being notoriously hard. The fail rate is fairly high.
Speaker 1: What what is the fail rate on the each cf
Speaker 1: A level? Gosh? Now, I believe the fail rate on
Speaker 1: level one is about six the fail rate more than half? Right,
Speaker 1: The fail rate on level two is I believe it
Speaker 1: more than half, but still more than half. Failure rate
Speaker 1: on level three is less than just you know, you
Speaker 1: don't even have to study now the entrance walk right
Speaker 1: through that. It's only like a forty eight percent fail rate?
Speaker 1: Are you could cram in like an hour? Barry every year.
Speaker 1: I used to get letters and phone calls when I
Speaker 1: was in charge of the CFA program and people said, well,
Speaker 1: you must have some mistake. I got a letter that
Speaker 1: said I failed the exam. There must be some mistake there.
Speaker 1: I have a degree from fill in your blank, Ivy
Speaker 1: League University. I've never failed any exam in my life.
Speaker 1: And something is wrong with you folks. Doesn't the Sea
Speaker 1: Institute know about the gentleman cy? And the interesting thing
Speaker 1: there is that my response and I didn't respond in
Speaker 1: these terms, but um I I did a much nicer
Speaker 1: way than this. But I used to say, you know,
Speaker 1: this is a meritocracy. We don't know who you are.
Speaker 1: We don't know your lineage. It's how you do on
Speaker 1: that exam, and it means at eight percent of the
Speaker 1: candidates did better than you. And and you know, we
Speaker 1: had people from community colleges that were passing the exam
Speaker 1: and I used to say, you know, I think you
Speaker 1: might want to write your letter to your alma mater
Speaker 1: instead of us. They're the ones that failed you. So
Speaker 1: in the last minute or so, we have left. What
Speaker 1: does this credential NG do for investors? What does it
Speaker 1: do for corporate clients, and what does it do for
Speaker 1: investment banks? I think it really ups people's game. And
Speaker 1: when somebody is hiring a c FA charter holder around
Speaker 1: the world, and this is the same whether you're in Um,
Speaker 1: you know, Lagos, Nigeria, or Miami, Florida, you've gone through
Speaker 1: the same exam. If you have the letter c f
Speaker 1: A behind your name, it means the same thing. And
Speaker 1: you've attained that that that that level. And I think
Speaker 1: that employers know that you're really getting someone who not
Speaker 1: only has mastered a body and knowledge, but really had
Speaker 1: the discipline to go through it. Because it's an arduous process.
Speaker 1: As you said, in fact Um, most of the successful
Speaker 1: people failed at least one of those exams, and it's
Speaker 1: tough when those exams are only given with level two
Speaker 1: and three are only given once a year. So you
Speaker 1: really gotta buckled down and say, now I got to
Speaker 1: redo this all over and do even more work than
Speaker 1: I did last time. And I think it's a signal
Speaker 1: to UH two investors, to clients that these are these
Speaker 1: folks are bit really best to breed. I'm Barry Ridholtz.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: special guest today is Dr Robert Johnson. He is the
Speaker 1: head of the American College of Financial Services. He used
Speaker 1: to run the entire cf A Institute Chartered Financial Analyst
Speaker 1: Testing program and the curriculum program, and is extremely knowledgeable
Speaker 1: about all things cf A related. Let's talk about a
Speaker 1: book you wrote way back when, called The Tools and
Speaker 1: Techniques of Investment Planning. What what motivated you do to
Speaker 1: pen a book of such a title. To be perfectly
Speaker 1: honest with you, I want to do I have had
Speaker 1: a relationship of professional relationship with the individual that I
Speaker 1: wrote it with, and it was an excuse for us
Speaker 1: to uh stay together. He worked with me at c
Speaker 1: FA Institute and it was an opportunity to continue working
Speaker 1: with him. His name is Tom Robinson. Tom is now
Speaker 1: the president and CEO of Double A CSB International, the
Speaker 1: accredited the Double A c s B, the accrediting agency
Speaker 1: that does uh collegiate schools of business. Oh, really, collegiate
Speaker 1: schools of business. So anybody who wants to my alamont
Speaker 1: is Stonybrook. They added a school of business recently. They
Speaker 1: had to jump through his hoops. They have to jump
Speaker 1: through those hoops recently, years ago, recently. Um, that's interesting.
Speaker 1: I don't even know such a thing. I assumed it existed.
Speaker 1: I never knew what the acronym it was. So let's
Speaker 1: talk a little bit about the details of that. What
Speaker 1: should clients expect from their relationship with their financial advisor.
Speaker 1: They should expect that that financial advisor is acting in
Speaker 1: their interest. And unfortunately, what we have now is that
Speaker 1: the landscape, I believe, is that we have what you
Speaker 1: would refer to Barry as a financial services industry and
Speaker 1: not a financial services profession. And I think you're a
Speaker 1: profession if you have three qualities, and those three qualities
Speaker 1: or knowledge that the second is that you have some experience,
Speaker 1: and the third thing that makes you a professional is
Speaker 1: that you aspire to a code of ethics. And whether
Speaker 1: you're a doctor, whether you're a lawyer or an architect,
Speaker 1: whatever your profession, a profession has to have those three elements.
Speaker 1: And I think that's why, unfortunately the financial services financial
Speaker 1: services is referred to as an industry instead of a profession.
Speaker 1: And one of the things we want to do with
Speaker 1: the American College that C. F. Anstude is doing in
Speaker 1: the investment management realm, in financial planning is we want
Speaker 1: to make financial services a profession. That's what we buyer
Speaker 1: to do. So I'm on the same side of the
Speaker 1: boat as you. I think we should have a fiduciary standard.
Speaker 1: I think the best interests of the client should be paramount.
Speaker 1: But let me, however, briefly take the other side of
Speaker 1: the argument. This is what in the we just finished
Speaker 1: a fairly robust debate about the fiduciary standard on retirement accounts.
Speaker 1: I argued against people who said we shouldn't do that.
Speaker 1: I said, there's no reason we shouldn't. But let me
Speaker 1: push back, and and here's the argument that they said, Well,
Speaker 1: if we're on the brokerag side, we have our own
Speaker 1: ethical code that we're obligated to be maintain a certain
Speaker 1: level of ethical standard. We may not have a fiduciary obligation,
Speaker 1: but we certainly have to know our clients and have
Speaker 1: only offer them suitable investments. And if we engage in
Speaker 1: any behavior that transgresses from that, we could be penalized
Speaker 1: or or I heard from the industry, what's what's wrong
Speaker 1: from with that argument? I think suitability burries a pretty
Speaker 1: low hurdle, to say the least. But I'm trying really
Speaker 1: hard to take that side of the case. It's not easy.
Speaker 1: I don't think I really don't think there's a lot
Speaker 1: of people that oppose the statement that that people in
Speaker 1: the financial services and i'll say profession here should act
Speaker 1: as a fiduciary. I don't think there are many people
Speaker 1: would argue with that. Where people are arguing is this
Speaker 1: fiduciary standard, and that that it is fairly nebulous. For instance,
Speaker 1: reasonable fees. We'll define what reasonable fees are, define how
Speaker 1: much somebody needs to know in terms of fulfilling that
Speaker 1: fiduciary standards. So let's separate that fact that we all
Speaker 1: agree that people should be a fiduciary with the fact
Speaker 1: that of course, the devil's in the details. Well, there
Speaker 1: are such things as best practices. You can could average costs,
Speaker 1: and there's always a gray line. Well, if the averages,
Speaker 1: I'm going to use a fat round number. If the
Speaker 1: average is one percent, and you think you're doing something
Speaker 1: special and you're charging one in a quarter and one
Speaker 1: and a half percent, I don't think anyone's gonna argue
Speaker 1: that that is uxurious. On the other hands, when we
Speaker 1: see nine percent and really multiples of an average one percent,
Speaker 1: that that's a pretty bright line variation. So where it
Speaker 1: gets a little challenging is okay, one percent is is standard.
Speaker 1: One in a quarter is a little high, but it's
Speaker 1: not ridiculous one and a half, especially for smaller accounts.
Speaker 1: The question becomes, shouldn't it simply be what's in the
Speaker 1: best interest of the client? Hey, here's our fee structure.
Speaker 1: Were transparent, We're gonna disclose our fees. It's all out
Speaker 1: in the open. There's no conflicts. Nobody else is paying
Speaker 1: us uh under the table, it's all here in front
Speaker 1: of you. It should be fairly easy to make the
Speaker 1: interest of the clients that that shouldn't be a challenging standard.
Speaker 1: Best interest or fiduciary should it? I think the worry is,
Speaker 1: after the fact, how are you going to judge best interest?
Speaker 1: And let me give you just uh an idea of
Speaker 1: what I mean. Most of the studies out there, and
Speaker 1: you know this, most of the studies out there show
Speaker 1: that active managers underperform the indexes over the long haul. Right,
Speaker 1: So if you take the fiduciary standard, and I know
Speaker 1: that it's not going to be taken to the limit,
Speaker 1: but if you take the fiduciary standard to the limit, gosh,
Speaker 1: isn't the best interest to put people in index funds
Speaker 1: that are virtually no cost? Now because index funds the
Speaker 1: cost has gone to zero, and the wealth of the
Speaker 1: evidence shows that at most active managers failed to beat
Speaker 1: I think, listen, that's how I manage money. But that's
Speaker 1: not what necessarily what everybody wants. Some people. If someone
Speaker 1: says to me, look, I would be bored with that
Speaker 1: and I wouldn't be able to stay with So I
Speaker 1: need something just to keep me interested. You could talk
Speaker 1: till you're blue in the face to that person. I
Speaker 1: could say, look, all the academic data says overwhelmingly your
Speaker 1: best bet is low cost. Broadly diversified global indices, you
Speaker 1: rebalance it regularly, see you next year. Investing should be boring.
Speaker 1: If a person says to me, I can't do that,
Speaker 1: that would board me out of my mind. Then I
Speaker 1: know in six months i'd be on too. The next advisor.
Speaker 1: Well me personally, I would say, well, let me save
Speaker 1: you the six months and go find another advisor now,
Speaker 1: and we'll we'll just say, hey, this isn't a great fit.
Speaker 1: But what about the advisor who understands that this guy
Speaker 1: needs a little excitement in his life and and Sunday
Speaker 1: night football doesn't get it done for him, and understands
Speaker 1: the risk he's taking. It's weird for me to make
Speaker 1: this argument because I don't believe any of it. But
Speaker 1: he understands the risk he's taking in order to try
Speaker 1: and capture alpha, that he might actually forego beta. But
Speaker 1: he needs some of his portfolite. Here. We'll take ten percent.
Speaker 1: We'll put you in this high octane slug and maybe
Speaker 1: that will keep you focused on this so we could
Speaker 1: let the bulk of your portfolio do what it's supposed
Speaker 1: to do. If a client understands and wants that, is
Speaker 1: it in his best interest to give him the medicine
Speaker 1: that he doesn't want, isn't going to take and is
Speaker 1: going to move on at a certain point, doesn't the
Speaker 1: behavior of the investor become a question. Oh, I wouldn't
Speaker 1: force it on anybody. But what I'm saying is the
Speaker 1: lay investor that comes to the advisor, I mean, the
Speaker 1: default to me would be indexing given the evidence under
Speaker 1: the fiduciary standard. So I just think that the devil's
Speaker 1: in the details. And and after the fact, if somebody
Speaker 1: put an investor in active funds that underperformed, is that
Speaker 1: active manager going to be is that is that person
Speaker 1: going to be liable? And I don't know that we
Speaker 1: know that yet. I don't think we could say after
Speaker 1: the fact that if you went active because a client
Speaker 1: requested it, and we know of active managers don't hit
Speaker 1: their benchmark, Look, we can look at it over a decade.
Speaker 1: Once you're taking cost fees, taxes. Almost nobody outperforms the
Speaker 1: indexes over a deck, you know. But I'm even saying
Speaker 1: the investor that comes, the lay investor that comes and
Speaker 1: doesn't have a predisposition toward active or passive, and the
Speaker 1: the advisor puts them in active, why did this advisor.
Speaker 1: Investor go to this advisor. There are a lot of questions,
Speaker 1: look the way, so let me I try not to
Speaker 1: talk about my practice on the air because it's too
Speaker 1: easy to just digress. But we set stuff up so
Speaker 1: that there's a three step process, and step one is, hey,
Speaker 1: are we a good fit for you? When we have
Speaker 1: a client, content or prospective client contact us, and the
Speaker 1: first thing he's doing is what's your sharp ratio? How
Speaker 1: much draw down can I expect? How much should I
Speaker 1: expect to outperform the market? You know that those are
Speaker 1: red flags that let us force us to say, listen,
Speaker 1: let we appreciate your interest, let us explain what we do.
Speaker 1: And based on what you're describing, we're not sure you're
Speaker 1: a good fit. But here's what we do, Global low
Speaker 1: cost index blah blah blah. But you were looking for
Speaker 1: a little more juice. Now let's figure out what you
Speaker 1: really want need when you canna retire, when you gonna
Speaker 1: draw down kids in college blah blah blah. And when
Speaker 1: we get to how the money is deployed. If you
Speaker 1: want to have a slug, if you want to have
Speaker 1: a sleeve of your money in a really sexy high octane,
Speaker 1: shoot the lights out when the times are good, but
Speaker 1: get she lacked when the times are bad. Sort of sleeve.
Speaker 1: We work with other third party managers. Just somebody who
Speaker 1: I know offers that there's a handful of people who
Speaker 1: were great at it, but we don't think that's the
Speaker 1: best thing for you over the long haul. We think
Speaker 1: over the long haul, hey, the market's going to give
Speaker 1: you a certain amount with the lowest cost, the lowest
Speaker 1: amount of risk, the lowest turn over, the lowest taxes,
Speaker 1: blah blah blah blah blah. So sometimes you have to
Speaker 1: look at a client who I swear this is true.
Speaker 1: I tell this to people, and nobody believes me. I
Speaker 1: got an email about five years ago from somebody who
Speaker 1: who send says to me, um, I just inherited a
Speaker 1: big slug of money, and I want to give half
Speaker 1: a million dollars to five advisors, and whoever does the best,
Speaker 1: I'm going to give ten million to. That's the money
Speaker 1: behind it, and what was the best over what time period?
Speaker 1: Over a year? So so I wrote him back and
Speaker 1: said thank you, but no thanks. But before you dismiss
Speaker 1: my dismissing of your offer, let me explain to you
Speaker 1: what you just did. You just created created um a
Speaker 1: game theory agency issue where you've incentivized five managers. They
Speaker 1: know the odds are only one in five that you're
Speaker 1: gonna they're gonna win, So you've incented them to swing
Speaker 1: for the fences. And if they lose, well, I got
Speaker 1: a year fees out of this guy, and if they win,
Speaker 1: you can't tell the difference between lat repeatable process. So
Speaker 1: no matter what, you just wasted a quarter two million dollars,
Speaker 1: and heaven forbid, you give money to the guy who
Speaker 1: did the best, and it has nothing to do with
Speaker 1: how he should manage your ten million dollars. The question
Speaker 1: you should be asking is what do I want to
Speaker 1: use this money for money as a tool? How best
Speaker 1: can I do that with the least amount of risk
Speaker 1: to myself and my family? And where what is this
Speaker 1: going to do for me over the next sixty years
Speaker 1: and beyond not who's going to shoot the lights out?
Speaker 1: So I have bragging rights at a cocktail party, but
Speaker 1: nobody you know? So I never heard from that guy again.
Speaker 1: And I swear that was the email. I remember it
Speaker 1: was a million of person or a half of whatever
Speaker 1: it was. It was some idiotic thing. When we look
Speaker 1: at the right way to manage money for clients, is
Speaker 1: that really that person, what that person wants or what
Speaker 1: that person needs is should be paramounts. So so that's
Speaker 1: the question. UM. I don't mean to go on a
Speaker 1: massive digression in the last minute we have in this section.
Speaker 1: Let me ask one short question. What is it that
Speaker 1: the industry is doing right and and what's its biggest flaw.
Speaker 1: I think that the biggest flaw is that the industry
Speaker 1: doesn't encourage enough people to invest enough. And I don't
Speaker 1: mean invest a large amount of money. I mean invest
Speaker 1: people want to speculate. You talked about that. We're in
Speaker 1: an era of four seven. People can check their account balances.
Speaker 1: We have people that are constantly moderate monitoring what they're doing,
Speaker 1: and people want this action. You know, it used to
Speaker 1: be bury when I was back when I was teaching
Speaker 1: at Creighton. I used to record on VHS tape. So
Speaker 1: that's how long ago it was Wall Street Week with
Speaker 1: Chris Verkeiser. We've gone from Wall Street Week now to
Speaker 1: Jim Kramer scream mad Money. I heard something the other
Speaker 1: day on one of the twenty four seven UM business
Speaker 1: business networks that was really interesting. There was a debate
Speaker 1: between two folks on a particular stock and they said, well,
Speaker 1: let's let's figure out over the long term. We'll come
Speaker 1: back over the long term and figure out who's right.
Speaker 1: And they said, yeah, we'll come back in six months.
Speaker 1: So six months has become the long term. I think
Speaker 1: that that is the industry I believe is not doing
Speaker 1: enough to promote investing and is you know, looking at
Speaker 1: a speculating It's funny because over the course of my career,
Speaker 1: my holding periods have gone from minutes, two months, two years,
Speaker 1: to deck. I started out as a trader and if
Speaker 1: you had to hold something for twenty minutes, it was
Speaker 1: a long time, and then it slowly moved to long
Speaker 1: long term being defined as six months to a year,
Speaker 1: and now long term is decades. So I kind of
Speaker 1: did full one eighty from my early days. But I
Speaker 1: see everybody else go in the opposite direction, the holding
Speaker 1: periods of getting shorter. Not talking about h f T
Speaker 1: s with the guys who are holding things for a nanosecond,
Speaker 1: I mean actual investors and traders. Is that your perception
Speaker 1: of this as well? It is um, you know. I
Speaker 1: think the other thing that I think the industry is
Speaker 1: doing wrong is that they tend to take something that's
Speaker 1: pretty inherently simple. Investing is really inherently simple and making
Speaker 1: it very complex. I think investment bankers are wonderful for that.
Speaker 1: They always kind of stay one step ahead of folks
Speaker 1: in terms of making something incredibly complex that's pretty simple.
Speaker 1: Think about what happened in the mortgage crisis. So there's
Speaker 1: there's a lot of money in complexity. There is money
Speaker 1: in complexity, and I think one of the things the
Speaker 1: financial advisors should do for folks is that trusted advisors
Speaker 1: should be able to cut through the complexity and go
Speaker 1: the other way. Take something that's complex and make it simple.
Speaker 1: Makes a whole lot of sense. When high was managing money,
Speaker 1: That's what I said of what I did was counseling,
Speaker 1: counseling and teaching. That's very very sounds very familiar. I'm
Speaker 1: Barry rid Hults. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. My special guest today is Dr Robert Johnson.
Speaker 1: He is the president of the American College of Financial Services.
Speaker 1: He's a former head of the Curriculum and Testing at
Speaker 1: the c f A institute, author of a number of books.
Speaker 1: Let's talk about um a couple of books you wrote
Speaker 1: that I think are really interesting. What is it that
Speaker 1: strategic value investing is and how does that differ from
Speaker 1: just good old value investment. Well, first thing I have
Speaker 1: to do is put a plug in for the book,
Speaker 1: and I put this whole segment. Last week I found
Speaker 1: out that my idol in the business, Mr Buffett, growing
Speaker 1: up in almahaa Braska. How can you not look sure,
Speaker 1: look up to Warren Buffett. Mr Buffett has put strategic
Speaker 1: value investing on his annual reading list for the Berkshire
Speaker 1: hand Hathaway Annual meeting. Oh my goodness, that's fantastic. There's
Speaker 1: a very excited There are about three dozen books. I
Speaker 1: will be in Omaha signing books along at the Berkshire
Speaker 1: Hathaway meeting. And again, for somebody who grew up in Omaha, Nebraska,
Speaker 1: that is about the pinnacle of a career in investments.
Speaker 1: So someone from Berkshire reached out to you and said,
Speaker 1: we want you at the annual meeting and come signed
Speaker 1: books and will you get a chance that there's He
Speaker 1: works with a bookstore in Omaha, and the bookstore puts
Speaker 1: a list out of books that they believe should be
Speaker 1: on the list. And how my book showed up on there,
Speaker 1: I didn't know. But one of our PR people called
Speaker 1: the Omaha bookstore that does this. The Bookworm is a
Speaker 1: name of the book, and they said that an email
Speaker 1: came from Mr Buffett personally to say, I want to
Speaker 1: put this book on the list. So you know, I've
Speaker 1: been on cloud nine since. But strategic, yeah, strategic value
Speaker 1: investing is simply there are various schools of thought and
Speaker 1: value investing. It started with Ben Graham, of course, uh
Speaker 1: the father of value investing. But strate in strategic value investing,
Speaker 1: we look at several definitions of value investing, whether that
Speaker 1: be the traditional Graham and Dodd. We look at residual income,
Speaker 1: we look at asset based approaches. We look at a
Speaker 1: lot of different approaches to value investing. And what we
Speaker 1: believe is that gives the reader the opportunity to kind
Speaker 1: of figure out where their proclivity is, what kind of
Speaker 1: style they may want to develop, because you know, value
Speaker 1: investing is a discipline. UM name your value investor, Wally White's,
Speaker 1: Warren Buffett, John Neff, they all have a little bit
Speaker 1: of a different variations on a theme. So I think
Speaker 1: that a book that describes all those different variations and
Speaker 1: shows them to people and kind of cuts through a
Speaker 1: lot of what they do, I think helps people develop
Speaker 1: their own style. Huh, that's quite interesting, So let's keep
Speaker 1: let's keep plowing away through. So you're saying that your
Speaker 1: version of strategic value investing, it's based on traditional value investing.
Speaker 1: You're just looking at certain variations on that theme, the
Speaker 1: different variations on the theme. So let's talk about another
Speaker 1: book of yours invest with the FED that came out
Speaker 1: fairly recently. Um, what does that mean? And this goes
Speaker 1: back to the old Marty's Wide comment don't fight the Fed. Yeah.
Speaker 1: The other Marty's Wide quote that I love is he
Speaker 1: said money makes the mare go if you look at
Speaker 1: it as in terms of horse racing. Basically, what we
Speaker 1: show in the book, and my co authors are Jerry
Speaker 1: Jensen of Greaton University and Luis Garcia Fijo of Florida
Speaker 1: Atlantic University. And once again this was an excuse to
Speaker 1: keep working with former colleagues. Both of those individuals worked
Speaker 1: with me on the c f A program. But basically
Speaker 1: what we did was we in a very rigorous empirical
Speaker 1: sense looked at FED policy and how different capital markets perform, stocks, bonds, commodities,
Speaker 1: real estate, and so forth. And just to give you
Speaker 1: a little flavor, when the FED was being expansive with
Speaker 1: monetary policy, the SMP on average returned fifteen point two percent.
Speaker 1: When the FED was being restrictive, the market returned the
Speaker 1: SMP returned about five point nine percent. And this was
Speaker 1: over a long time period of that's a giant, giant
Speaker 1: and it's even and that was over a time period
Speaker 1: from sixty six through two thousand thirteen. But it's even
Speaker 1: bigger than that, Barry, because if you factor in inflation,
Speaker 1: and inflation is higher in a restrictive environment than in
Speaker 1: an expansive environment, real returns were about twelve percent different.
Speaker 1: So there's something going on there. It's something that that
Speaker 1: you can't ignore. Now, is that correlation relative to the
Speaker 1: fact that when the FED is cutting it usually means
Speaker 1: that you've just had a huge revaluation in markets and
Speaker 1: you're you're getting to buy when things are fairly cheap,
Speaker 1: or does it mean something else? Well, what I think
Speaker 1: it means is that the FED both reacts to and
Speaker 1: leads markets. Um, we're not saying that one causes the other.
Speaker 1: We're not saying that the FED policy causes these returns.
Speaker 1: We're simply saying that there's this correlation and that it's
Speaker 1: something that's so dominant that you can't ignore it. And
Speaker 1: here's the other interesting thing we found. We found that commodities,
Speaker 1: the Golden Sacks Commodity Index, actually had a negative return
Speaker 1: during expansive time periods and a very high return during
Speaker 1: restrictive time periods. So you're not a big fan of commodities,
Speaker 1: I take it then. I'm not a big fan of commas,
Speaker 1: but they are a great diversifier during restrictive time periods.
Speaker 1: And if you believe that we're moving into a restrictive
Speaker 1: time period, which I believe we are, UM, I think
Speaker 1: that you may see UH commodities performed pretty well in
Speaker 1: the near term. But by the way, I've pulled up
Speaker 1: your book on Amazon and looking at UH some of
Speaker 1: the interesting comments here on invest with the FED five
Speaker 1: stars on Amazon, forty plus reviews. That's actually really really interesting.
Speaker 1: So it's not that the FED is what's driving the
Speaker 1: markets necessarily. It's when the FED is doing their cycle,
Speaker 1: when their expansionary something else is going on. When they're
Speaker 1: less expansionary, different things going on, and you could parallel
Speaker 1: their behavior in order to most advantageously position your portfolio.
Speaker 1: And what we look at two is and I always
Speaker 1: say the following, are you a golfer berry, I am not. Well,
Speaker 1: there's a famous golf pro Harvey Peanick was Ben Cranshaw's
Speaker 1: golf coach, and Harvey Peanuck had this saying that when
Speaker 1: you get a golf lesson and you get a tip,
Speaker 1: take an asper and don't take the whole bottle. And
Speaker 1: what that means is that you don't over exaggerate something.
Speaker 1: So with invest with the FED, what we suggest is
Speaker 1: that you may want to tilt your asset allocations a
Speaker 1: little bit with regard to FED policy. That doesn't mean
Speaker 1: you sell out of equities completely and go to commodities
Speaker 1: when the FED becomes restrictive. But for instance, we find
Speaker 1: when the FED is restrictive that necessity goods perform pretty well,
Speaker 1: and disc and UH and nondescrit and discretionary industries don't
Speaker 1: perform very well. For instance, don't perform very well when
Speaker 1: the FED is in a restrictive mode, but auto parts
Speaker 1: perform pretty well. Healthcare, food, basic medicines, hospitals that that's
Speaker 1: going to do well. People have to buy food and
Speaker 1: brush their teeth no matter what. If you break your leg,
Speaker 1: you're going the hospital. It doesn't matter what what's going
Speaker 1: to happen. But you can delay that purchase of a
Speaker 1: new car, you can delay that purchase of a new
Speaker 1: suit UM during UM restrictive time periods. That that makes
Speaker 1: perfect sense. What else do we know about not fighting
Speaker 1: the FED and investing with them? What else would you
Speaker 1: add to that conversation that you know, I don't want
Speaker 1: to go chapter by chapter with the book, but I
Speaker 1: thought there were some interesting things in there. Yeah. One
Speaker 1: of the interesting things I think is that real estate, Uh,
Speaker 1: real estate performs pretty well when the FED is in
Speaker 1: a restrictive period. You know, many people would think real
Speaker 1: estate doesn't perform, wouldn't perform because you're raising rates and
Speaker 1: making mortgages more expensive. Usually when the FED is tightening,
Speaker 1: it means that you later in the cycle and the
Speaker 1: economy is already heated up. One would imagine that in
Speaker 1: yours to the benefit of certainly residential real estate and
Speaker 1: perhaps commercial resident real estate as well. And of course
Speaker 1: we're looking at real estate investment trust data because you
Speaker 1: can't get date on individual residences. You can't well, what
Speaker 1: you can get is just so regional. You can't ruin
Speaker 1: any specific questions. So so let's um, let's switch gears.
Speaker 1: I know you left uh the c FA Institute in
Speaker 1: two thousand and eleven. About that time, that's when the
Speaker 1: SEC published a study that was mandated by Dodd Frank
Speaker 1: that that specifically recommended that advisors, whether you're working on
Speaker 1: retirement accounts or or discretionary investments, whether you're at a
Speaker 1: broker dealer or at a registered investment advisory, all financial
Speaker 1: advice providers should be put under the fiduciary standard. But
Speaker 1: that ended up not happening. The SEC was deadlocked and
Speaker 1: couldn't agree with that. What are your thoughts on on
Speaker 1: that fiduciary standard for everybody? Yeah? Is it? Is it realistic?
Speaker 1: Are you gonna be have people that are going to
Speaker 1: be able to qualify professionally to do that? That would
Speaker 1: be my response to that is, for instance, we can
Speaker 1: we can set a very high bar that people have
Speaker 1: to get over, but are enough people going to be
Speaker 1: able to get over that bar to serve the public.
Speaker 1: One of the things that I have concern about with
Speaker 1: the current fiduciary standard is is is it going to
Speaker 1: leave a middle market that desperately needs financial advice? Is
Speaker 1: it going to leave it under certain We've been speaking
Speaker 1: with Dr Robert Johnson, President and CEO at the American
Speaker 1: College of Financial Services. Dr Johnson, if people want to
Speaker 1: find your writings and your work, your your books are
Speaker 1: obviously online. Where else can they read anything you've written, Well,
Speaker 1: you can go to www dot the American College dot
Speaker 1: e DU and see my profile in a link to
Speaker 1: some of the writings that I've done. Well, define define
Speaker 1: middle market, mom and pop and uh so with a
Speaker 1: few thousand dollars to put in in uh in a
Speaker 1: mutual fund every once in a while. So if you
Speaker 1: go back and look at what took place post cry
Speaker 1: is this we saw? We saw Merrill Lynch Tell Brokers. Hey,
Speaker 1: if you're gonna have accounts under two D, that's up
Speaker 1: to you, but we're not paying any commission on it.
Speaker 1: Ubs Morgan Stanley, a number of other firms have similar
Speaker 1: but if not but not identical restrictions. But there's really
Speaker 1: a discouraging of taking small accounts from the big firms
Speaker 1: because it's a huge volume and there's no money in it,
Speaker 1: so and that's without the fiduciary standard. You have the
Speaker 1: fiduciary standard, is there really much of a change if
Speaker 1: those clients aren't being served today anyway? Seem I think
Speaker 1: we need to find a way to serve that market
Speaker 1: and and that comes I believe that that comes very
Speaker 1: through education. You know, the Obama administration has made this
Speaker 1: fiduciary standard a big part of what they want their
Speaker 1: legacy to be well, and I don't think that the
Speaker 1: intent is wrong, and I think the intent is is
Speaker 1: it's it's very pure. But what I think is that
Speaker 1: the realization is is that you're going to have this
Speaker 1: middle market that isn't going to be attractive, that isn't
Speaker 1: going to be profitably, be less served. And if you
Speaker 1: really want to make inroads into the retirement income crisis,
Speaker 1: which is arguably the biggest crisis in the country now
Speaker 1: Charlie Ellis has been banging the drum on this for
Speaker 1: years now, then somehow we have to encourage that market
Speaker 1: segment to be served and not discourage it. And I
Speaker 1: know that's not the intent of the fiduciary standard, but
Speaker 1: I think that's actually going to be the realization of
Speaker 1: the fiduciary standard. So the UK said, we don't care.
Speaker 1: What's then do you have if you're managing retirement accounts
Speaker 1: your fees a cap at fifty basis points? Is that
Speaker 1: a solution? I it's a possible solution. But I I
Speaker 1: think that what you are going to see, hopefully, is
Speaker 1: that ten years down the road, we're going to have
Speaker 1: seen some really creative and some really innovative people in
Speaker 1: the financial services industry come up with a solution on
Speaker 1: how to serve that market. But one of the things
Speaker 1: that we kept hearing in this fiduciary standard debates was
Speaker 1: the figure seventeen billion dollars. I'm sure you know that
Speaker 1: that was what bad financial advice was costing Americans. Okay,
Speaker 1: how much was good financial advice making Americans? Well, we
Speaker 1: don't have to worry about good financial advice. It's doing good.
Speaker 1: We have to worry about bad financial advice. By the way,
Speaker 1: someone challenged me on that seventeen billion number. They said,
Speaker 1: how how on earth did you come up with seventeen
Speaker 1: And the answer was, well, if you look in in
Speaker 1: four oh one k fourth not four o three, be
Speaker 1: just four oh one k. And IRA's they were. I
Speaker 1: want to say it was somewhere between fifteen and twenty trillion,
Speaker 1: some like huge, huge number. Assume that bad financial advice
Speaker 1: cost one percent of that, and let's assume that bad
Speaker 1: financial advice is only ten percent, right, So the seventeen
Speaker 1: trillion becomes a hundred and seventy billion, and then we're
Speaker 1: gonna take a one percent drag on returns. That's how
Speaker 1: they got to the seventeen billion. Now, I will tell
Speaker 1: you that bad financial advice is out to more than
Speaker 1: of clients out there in the world, and even worse,
Speaker 1: it costs a whole lot more than one. I think
Speaker 1: they were being really kind. I think the number is
Speaker 1: close to the fifty billion dollars, but that's just my
Speaker 1: back of the envelope calculation. The interesting thing too, though,
Speaker 1: to me, Barry, is that if you really want to
Speaker 1: solve the retirement income crisis, one of the one of
Speaker 1: the solutions that the Obama administration came up with it
Speaker 1: was this my r A accounts. Yeah, and that kind
Speaker 1: of went nowhere. I was really surprised. I thought it
Speaker 1: was an interesting idea, but the only thing you could
Speaker 1: invest in was savings bonds. Makes that makes no sense.
Speaker 1: We'll see. That's my point is that we want to
Speaker 1: encourage people to save, and we want to we we
Speaker 1: create this vehicle that's sanctioned by the government. Well it
Speaker 1: must be a good thing. Well, you know as well
Speaker 1: as I do. If you have a thirty year time
Speaker 1: arising and you're investing in savings bond, you're giving money
Speaker 1: a one giving a lot of money away. It's this
Speaker 1: goes back to a lack of appropriate understanding of Congress's
Speaker 1: own role. Look, there's no people are willing to lend
Speaker 1: Uncle Sam money at absurdly low rates. Take advantage of that.
Speaker 1: Take all of this debt, which is financed with all
Speaker 1: the short term paper seventeen trillion or now it's almost
Speaker 1: up to nineteen trillion. Take that debt rolling into a
Speaker 1: fifty year bond. There's people are dying for yield, dying
Speaker 1: for good paper. Rolling into a fifty year bond. Refinance
Speaker 1: America's debt, get it as low as possible, do another,
Speaker 1: build set of build America bonds and repave, rehearden the
Speaker 1: airports and ports, redo the electrical grid. There's so much
Speaker 1: stuff we could do if we weren't stuck in a
Speaker 1: universe of partisan gridlock and just you know, the inability
Speaker 1: to imagine what made America great in the old day
Speaker 1: seems to have everybody confounded. It's not let's make America great,
Speaker 1: it's what we have to do to just go back
Speaker 1: to normal government functions instead of paralysis. And it was interesting.
Speaker 1: I was asked one time what should we do um
Speaker 1: on financial literacy in this country? And I said, well,
Speaker 1: you should start with Congress. How about this, Why don't
Speaker 1: we make them they have their own healthcare plan, they
Speaker 1: have their own retirement plan, they have their own automatic
Speaker 1: salary increases. Why don't we take all that away and
Speaker 1: make Congress have social Security, Have Congress have Obamacare, and
Speaker 1: have Congress uh get paid the federal minimum wage. We'll
Speaker 1: see how fast things improve across all of those. If
Speaker 1: you don't like Obamacare, then fix it. You have your
Speaker 1: own Cadillac gold plated healthcare plan and your own gold
Speaker 1: plated retirement plan. No wonder, Social Security is a mess,
Speaker 1: and no wonder Medicaid is a mess. But that's me
Speaker 1: getting on my soapbox in the last minute or so
Speaker 1: that we have what should the average investor know about
Speaker 1: the Federal Reserve and how it impacts their portfolio. That
Speaker 1: if the FED is expansive in monetary policy, and the
Speaker 1: real simple way to look at that as if interest
Speaker 1: rates are falling, the stock market tends to do very well.
Speaker 1: If interest rates are rising, the stock market tends to
Speaker 1: do less well. And it's very consistent over time. So
Speaker 1: my point is not that investors necessarily need to sell
Speaker 1: out or need to make any make any transactions based
Speaker 1: on FED policy, but that you need to, in in
Speaker 1: Larry David's terms, you need to curb your enthusiasm when
Speaker 1: the when the when the FED is raising rates, that
Speaker 1: typically that isn't a very good market environment. Bob, thank
Speaker 1: you so much for doing this. I appreciate um all
Speaker 1: the time. This is really, uh an interesting conversation. It's
Speaker 1: great to be here. Thank you. It's a little wonky,
Speaker 1: it's a little in the weeds. I know there is
Speaker 1: an audience that's going to eat this up and a
Speaker 1: lot of people are going to go dr American College
Speaker 1: of What how well known is the American College of Finance?
Speaker 1: Not well enough? Not well enough known, berry um one
Speaker 1: of the things that were very well known in the
Speaker 1: domestic life insurance industry. In fact, that's the roots of
Speaker 1: the college. The college was founded in nine We are
Speaker 1: a nonprofit, accredited degree granting institution. We have the same
Speaker 1: level of accreditation as a Yale, as a Columbia. It's
Speaker 1: UH and UM. But we largely have been known in
Speaker 1: the in the domestic life insurance industry. So do you
Speaker 1: have a program where you train people to take whatever
Speaker 1: the life insurance test is to become We administer the
Speaker 1: CLU program, the Chartered Life Underwriter program. We also administer
Speaker 1: the c HFC program, that Chartered Financial Consultant program, which
Speaker 1: is very similar to the CFP. In fact, there's a
Speaker 1: lot of overlap between the CFP. We also do CFP education.
Speaker 1: By the way, we're one of the biggest providers of
Speaker 1: CFP education. We're fan, big fans of the CFP program,
Speaker 1: But our biggest program now is the Retirement Income Certified
Speaker 1: Professional Program r I c P. And what it is, Barry,
Speaker 1: is it's not the accumulation stage of retirement program. It's
Speaker 1: the draw down. It's when do you take Social Security?
Speaker 1: It's longevity annuities, It's what can your spend down be,
Speaker 1: It's how is life insurance, long term care insurance, It's
Speaker 1: all of that and that is obviously becoming increasingly important
Speaker 1: because there's this uh you know, um um, basically perfect storm.
Speaker 1: People are living longer, people are have under saved, and
Speaker 1: we have extremely low fixed income interest rates in the environment.
Speaker 1: Now it's a perfect storm for retirement income planning and
Speaker 1: in a giant baby boom demographic as the pig is
Speaker 1: almost through the python. And at the same those three
Speaker 1: things plus what is it, sixty people a day of retirement.
Speaker 1: It's ten thousand a day that retires some crazy number.
Speaker 1: It's a huge, huge, And here's the other thing that
Speaker 1: used to work. It used to work in our favor
Speaker 1: when we had pension plans. You didn't have to plan
Speaker 1: for that extreme event that you would live to be
Speaker 1: a hundred years old. You only get one draw the
Speaker 1: distribution and a defined defined contribution plan. Right, you have
Speaker 1: to plan for that worst case slash best case scenario
Speaker 1: that is that you live to be a hundred You
Speaker 1: have to plan for that. In the pension world, there
Speaker 1: was averaging, so that it's an inefficient way to do things.
Speaker 1: Defined contribution plans are much more inefficient than defined benefits
Speaker 1: are plans are societally, But of course, since we moved
Speaker 1: into this defined contribution world. We have to plan for
Speaker 1: those extreme events, and it's pretty clear most people are
Speaker 1: not either adequately planning or if they're planning, they're not
Speaker 1: adequately funding uh their retirement plans. The other thing that
Speaker 1: I'm really excited about College with respect to retirement income
Speaker 1: planning is we actually have our first cohort of PhD
Speaker 1: students that have entered their dissertation stage on retirement income planning.
Speaker 1: We're going to actually be minting PhDs in retirement income planning,
Speaker 1: so that we hope that that helps inform the industry,
Speaker 1: the profession to become better at at at retirement income planning.
Speaker 1: That is truly fascinating. So that that leads me to
Speaker 1: one of the questions we didn't get to before on
Speaker 1: the financial planning segment, what sort of changes do you
Speaker 1: see taking place for the financial planning industry over the
Speaker 1: next decade or so. I think that there are real
Speaker 1: um there's real pressure on costs, a lot more compliance costs,
Speaker 1: and I think that you're seeing that fees are going
Speaker 1: to be going down dramatically. So I think that the
Speaker 1: financial planning industry is going to have to be a
Speaker 1: whole lot more efficient and I also think they're gonna
Speaker 1: have to really raise their game with the fiduciary standard,
Speaker 1: really become better informed, really have a mastery over a
Speaker 1: wider variety of products. You know, in the current advisory world,
Speaker 1: you have some what I would call one trick ponies,
Speaker 1: somebody that has a very deep knowledge about a very
Speaker 1: small sleeve of of products. And I think what you're
Speaker 1: going to see in the future as you're going to
Speaker 1: see people that have to have a much broader um
Speaker 1: expertise across a much broader array of products. Again my
Speaker 1: own practice, we we've discovered that when you're doing corporate
Speaker 1: retirement planning, the skill set, the things you need to
Speaker 1: know about everything associated with four oh one K plan sponsors,
Speaker 1: third party administrators, custodians. We hired a full time person
Speaker 1: to just do that because it's not the sort of
Speaker 1: thing that you could kind of do well. The bulk
Speaker 1: of my practices this, but I dabble in you can't.
Speaker 1: You have to have a person who is the expert
Speaker 1: in that, who can answer any questions, who is doing
Speaker 1: it for a while. And and if you look at
Speaker 1: the nonprofit version, we work with some foundations and some charities,
Speaker 1: so things have come up on the nonprofit side. The
Speaker 1: nonprofit equivalent of the four oh one K is the
Speaker 1: four oh three B. You would think it's the same rules,
Speaker 1: but it's totally different rules and again same situation. If
Speaker 1: you want to work in that space, you need a
Speaker 1: person who's dedicated to that. Uh. We we ended up
Speaker 1: bringing in a team that only works with teachers and
Speaker 1: educators and other nonprofits because you can't you can't do
Speaker 1: it on the side. You can't dabble, you can't be well.
Speaker 1: The bulk of my clients are this, and I'm gonna
Speaker 1: work with a handful of teachers to understand all the
Speaker 1: permutations and wrinkles. It becomes a full time thing. And
Speaker 1: so we're seeing more and more specialization. I wonder if
Speaker 1: you're seeing that at all. Absolutely, And you said the
Speaker 1: key word, there's teams. You're seeing advisory teams where people
Speaker 1: work in teams and they have they each have their
Speaker 1: own expertise, and you're gonna see much more of that
Speaker 1: in the future, I believe. So there are all these
Speaker 1: resources you can get from different firms. Were essentially a
Speaker 1: vanguard dimensional fun. We work with other other asset managers,
Speaker 1: but the bulk of our holdings are Vanguard and Dimensional
Speaker 1: and Dimensional. D f A very intelligently recognized that they
Speaker 1: were sitting at this fantastic nexus where all this information
Speaker 1: was passing, and they signed up a person who only
Speaker 1: looks at firm analytics to try and figure out, what
Speaker 1: can we figure out from all the data we see
Speaker 1: from firms? What are what are small firms and big
Speaker 1: firms doing right? What are they doing wrong? What are
Speaker 1: best practices? It's really fast anything that an asset manager
Speaker 1: developed that sort of practice. And we see similar stuff
Speaker 1: from Vanguard and similar stuff from from other shops. But
Speaker 1: I find that fascinating that a person who you wouldn't
Speaker 1: imagine would have a focus on that, just because of
Speaker 1: where they sit, are capable of of gleaning great insights.
Speaker 1: And you know the history of d f A. They
Speaker 1: are academics. Well you have Eugene Farma and French. And
Speaker 1: by the way, the Booth School in Chicago is named
Speaker 1: after David Booth, the founder and CEO of Dimensional Funds.
Speaker 1: They're a fascinating shop. They're essentially a hybrid. You know,
Speaker 1: when I try and describe, well, I thought you guys
Speaker 1: do indexing, Well, this is indexing, but it's indexing based
Speaker 1: on this dimension. They were really I hate to use
Speaker 1: the phrase smart beta, but they were really a factor
Speaker 1: shop before that became the the hip phrase of the day.
Speaker 1: And see to me, they would be the ultimate and
Speaker 1: pracademics procademics. So you're taking that. I hate that word,
Speaker 1: but I love the concept. Keep pracademics. I actually, uh
Speaker 1: I I prefer academics. What would you call the other way?
Speaker 1: If you want the other way but academs? That doesn't work.
Speaker 1: It's um But the idea of saying, hey, here's what
Speaker 1: the academic data shows, it's overwhelming. It's clear. Listen, the
Speaker 1: market may not be perfectly efficient, but the odds are
Speaker 1: that you're not going to beat the market on any
Speaker 1: consistent basis over any length of time. What what is
Speaker 1: it that we know? Well, we know quality beats junk
Speaker 1: over long periods of time. Unleveraged companies are going to
Speaker 1: do better than highly debt and inconsistent, and we know
Speaker 1: that there's a small cap premium, and we know that
Speaker 1: over long periods of time. Um, sometimes the US does
Speaker 1: better than overseas. Sometimes overseas, there are all these things
Speaker 1: that are out there that you cannot argue and don't
Speaker 1: forget reversion of the main yesterday's winners or tomorrow's losers.
Speaker 1: Losers are tomorrow's winners. Uh. One of my colleagues likes
Speaker 1: to say, Hey, if something in your portfolio isn't doing poorly,
Speaker 1: you're you're doing it wrong. You should always be If
Speaker 1: you're diversified, you're gonna be sitting with something that's a
Speaker 1: dog for now and eventually, uh it will it will
Speaker 1: go from go to hero while one of your heroes
Speaker 1: will eventually go the other way. Um. How would you
Speaker 1: define the proper responsibilities and roles of the financial advisor.
Speaker 1: I think the financial advisor is a trusted advisor who
Speaker 1: has who is an educator. At least that's what I
Speaker 1: feel a really good financial advisor is is I want
Speaker 1: to educate. If I'm a financial advisor, I want to
Speaker 1: educate my clients. I want my clients to feel good
Speaker 1: about what they're doing, not simply because I say so,
Speaker 1: but because I have been able to communicate with them.
Speaker 1: Why the half I am taking is a good path? Man,
Speaker 1: you are preaching to the choir here. Let me before
Speaker 1: we get into our favorite questions in in the last
Speaker 1: twenty minutes or so we have. Let me ask one
Speaker 1: more question. We briefly talked about the suitability standard and FINRA.
Speaker 1: Uh So, FINRA is the s R O is a
Speaker 1: self regulating organization that covers the brokerage firms, all of
Speaker 1: the broker dealers that aren't our I A s that
Speaker 1: aren't covered by the SEC. They're kind of an unusual organization.
Speaker 1: What what are your thoughts on on FINRA. Is FINRA
Speaker 1: really an s R oh, because isn't a self regulatory organization?
Speaker 1: Aren't It isn't the definition of that that you're from
Speaker 1: that industry. Yes, the lions share of the board at
Speaker 1: FINRA is from outside of the industry, so it really
Speaker 1: isn't accountable to the government. It really isn't accountable to
Speaker 1: the industry, and it really isn't accountable to the public.
Speaker 1: It's really an odd situation. I would think that FINNER
Speaker 1: would work better if it operated as a true s R. So,
Speaker 1: in other words, make the board all people. If you're
Speaker 1: going to be a self regulatory industry, the self part
Speaker 1: part self evident, I would think, right, So, the the
Speaker 1: people who are from outside the financial services sector who
Speaker 1: are on the board, why, why and what is the
Speaker 1: downside other than they don't really know the industry. Well,
Speaker 1: that's the point. I think that's the bad that's the
Speaker 1: bad one. If you're going to be a self regulatory industry,
Speaker 1: I think you really need to know the industry. Now,
Speaker 1: I'm the last person, literally the last person who would
Speaker 1: ever defend FINRA. I have my longstanding views on them.
Speaker 1: I've never had an issue with them, I've never been
Speaker 1: in trouble with them. But I'm not a fan. Ah.
Speaker 1: But to take the other side, they would say, well,
Speaker 1: we want to bring diversity of thought, we want to
Speaker 1: avoid group think. We don't want to be insular. We
Speaker 1: want to bring people who are gonna bring an outside perspective.
Speaker 1: And perhaps if we make it only industry people, we're
Speaker 1: gonna miss some important things. What is it that we
Speaker 1: need to see or do or what have you. But
Speaker 1: I think it's industry people. I think to to regulate
Speaker 1: the industry, you have to know the industry. I mean,
Speaker 1: it sounds like a crazy thing to say, but I
Speaker 1: really think that's the important aspect of this, and I
Speaker 1: believe that that that finner the sec There's a couple
Speaker 1: a couple of things here. There's the ability to regulate,
Speaker 1: and there's the will to regulate. And I don't think
Speaker 1: that between the SEC and finer that the the our
Speaker 1: our legislators have given them either the ability or the
Speaker 1: will to regulate. And I think that's one of the
Speaker 1: reasons that really contributed to financial crisis. They don't have
Speaker 1: the ability to regulate nor the will to regulate. And
Speaker 1: by ability and will, I define as do you have
Speaker 1: the laws on the books and you fund the organizations
Speaker 1: to be able to UH to to UH enact those laws,
Speaker 1: to carry out those laws. And I just if you
Speaker 1: look at, for instance, the SEC budget, it is a tiny,
Speaker 1: tiny fraction of really what it should and it keeps
Speaker 1: getting sliced, or at least it had been until the
Speaker 1: financial crisis. It's even after the crisis. Though even after
Speaker 1: the crisis it was don't they capture some of the
Speaker 1: fines the issue which creates this idiotic conflict where you're
Speaker 1: incentivizing industry the regulator to find industry in order to
Speaker 1: have a but then you have but you have then
Speaker 1: you have regulatory capture where you have people that are
Speaker 1: immediately going from the SEC to work in the industry
Speaker 1: and so forth. And there's a I just I I
Speaker 1: think that if you really want to make a robust regulator,
Speaker 1: you've got to fund it. You've got to give them
Speaker 1: both the ability and the will. All right, So let's
Speaker 1: put aside all these in the in the weeds, uh stuff,
Speaker 1: which I think is really quite fascinating. Let's jump to
Speaker 1: some of my favorite questions. UM, So I didn't ask
Speaker 1: you your background. What did you do before you got
Speaker 1: involved with the financial services industry? Was this right out
Speaker 1: of college? Out out of college Berry, I graduated in
Speaker 1: nineteen eighty, and go back and look at a yield
Speaker 1: curve in nineteen eight, Um, I wanted to find a
Speaker 1: job in the investment management business. Good luck in nineteen eight,
Speaker 1: twelve and a half, it was. It was a crazy time.
Speaker 1: So um I went on and got a master's degree.
Speaker 1: I was basically delaying, and I found a really interesting
Speaker 1: when I was When I was pursuing my master's degree,
Speaker 1: I got an assistant ship and I thought, you know,
Speaker 1: this academic lifestyle is a pretty good lifestyle if you
Speaker 1: get offered a ten year like I said, the last
Speaker 1: of the So I decided to make that a career
Speaker 1: and I but but while I was getting my PhD,
Speaker 1: I started a money management company and on the side,
Speaker 1: on the side, and that was night six, so right
Speaker 1: before the crash of eighty seven, and I cut my
Speaker 1: teeth on the crash of eighty seven. And one of
Speaker 1: the things that I learned was that it's much easier
Speaker 1: to lose your own money than it is to lose
Speaker 1: other people's money. Did I take Oh yeah, No, when
Speaker 1: you when you're six, you stop at least if you
Speaker 1: have a well developed sense of ethics. When do you
Speaker 1: make an investment, it goes down. You're not happy when
Speaker 1: it's other people's money. You're like I've heard I've seen
Speaker 1: people throw up in waste paper baskets. I remember earlier
Speaker 1: in my career waking up and just being sick to
Speaker 1: my stomach over I can't believe I have clients in
Speaker 1: this and it's a disaster. Or I can't believe this
Speaker 1: group of brokers has has clients in this and it's
Speaker 1: a nightmare. Even if it's temporary, it's a horrific, horrific
Speaker 1: If you want to you want to just wretch your
Speaker 1: guts up. A friend of mine, Rob Frame, talks about
Speaker 1: his vomit indicator. He knows it's time to buy when
Speaker 1: he's getting ready to puke, when he feels that coming up.
Speaker 1: It's in very and he's tracted over decades, and he says,
Speaker 1: when I feel like throwing up because of how sick
Speaker 1: I am as to what either I or the market
Speaker 1: have onto clients, usually it's a good time to go
Speaker 1: the other way. And I remember distinctly going in that
Speaker 1: Tuesday morning. I had a lot of cash to operate.
Speaker 1: I called all my clients on Monday night, you're talking
Speaker 1: the day after Black Friday, Monday, and I went and bought.
Speaker 1: It opened and I don't know if you remember, but
Speaker 1: it opened, so went the market went down at all, Yeah, no,
Speaker 1: until they unplugged. Tim Metz wrote a great book called
Speaker 1: Black Monday, and if you read the story, I'm drawing
Speaker 1: a blank on his name. Who used to be the
Speaker 1: head of the New York Fed. This was early in
Speaker 1: the days of the Chicago futures feeds. And he went
Speaker 1: and he went into the NYC and he saw the
Speaker 1: futures feed. That's what was driving that's at least the
Speaker 1: argent story that you saw what the futures were. He
Speaker 1: had that unplugged, and the big banks decided to re
Speaker 1: establish credit with the specialists because they had caught him
Speaker 1: off for we're about to and he said, so you
Speaker 1: don't want to ever do business with the New York
Speaker 1: Stock Exchange. Was if you got off credit today, you're done.
Speaker 1: Off the record, he says it to them. And if
Speaker 1: if you're interested in the academic history of that, read
Speaker 1: Tim Mats's Black Monday. It's a wonderful, wonderful book. So
Speaker 1: you were there on Tuesday and I went in and
Speaker 1: and I remember Tuesday morning was when I felt the worst.
Speaker 1: And how does the afternoon I felt a lot better.
Speaker 1: How long did it take before you got your confirms
Speaker 1: when you bought on Tuesday morning? Well, I when I
Speaker 1: was on the phone immediately. Yeah, so I I mean
Speaker 1: I knew you got filled. I got we got filled.
Speaker 1: Could could have been one of the greatest buying opportunities
Speaker 1: in decades, to say the least. Although march O nine
Speaker 1: is looking more and more like that, the march On
Speaker 1: nine looks pretty good. So who are some of your
Speaker 1: early mentors? Well, yeah, again, not a mentor, but I
Speaker 1: looked up to buffett Um and other investors who influenced you. Yeah,
Speaker 1: you mentioned you mentioned Graham. Certainly eight um Ben Graham
Speaker 1: certainly Phil Fisher, UM, phil Fisher being who um he
Speaker 1: wrote Common Stocks and Uncommon profets and Buffett claims that
Speaker 1: he is fifteen percent Fisher and Graham is what he
Speaker 1: says his makeup. UM. One of the curious things about
Speaker 1: being in Omaha, Uh, Barry, I had a UH class
Speaker 1: that managed real money. These are undergraduate students. At the time,
Speaker 1: it was the only class in the country where students
Speaker 1: for a year long managed real money UM and UM.
Speaker 1: The class. The the term ended right around the time
Speaker 1: of the Berkshire Hathaway Annual meeting, and Mr Buffett was
Speaker 1: gracious enough to come in and talk to the class
Speaker 1: a few But I always would ask him. I said,
Speaker 1: who's going to be in town that I can co
Speaker 1: opt into coming and talking to my class. So it's
Speaker 1: not enough that Warren Buffett is coming to speak to
Speaker 1: your class. While he's there, you're twisting his arm for hey,
Speaker 1: give me some more names. Yeah, and he Bill Ruwayne
Speaker 1: from the Sequoia Fund came and talked to my class
Speaker 1: one year, UM, and he had a really a very
Speaker 1: interesting story to tell too. But let me tell you
Speaker 1: one little, one little Buffet quip that I think tells
Speaker 1: you all you need to know about Mr Buffett. I
Speaker 1: would take my students to the annual meeting. He always
Speaker 1: sent us tickets that I could take my whole class
Speaker 1: or sixteen kids. We'd go to the annual meeting, and
Speaker 1: we would pose every year for a picture. He would
Speaker 1: come over and and pose for a picture. And one
Speaker 1: year I said, Warren, I said, what right if you
Speaker 1: were teaching this class, what books would you use? And
Speaker 1: he said, let me think about that, Bob, that sounds
Speaker 1: like a Buffet response. Three days later, Barry, this is
Speaker 1: three days after the annual meeting. I get a letter
Speaker 1: in the mail, Bob, and it was handwritten Bob. I
Speaker 1: would have the students read Security Analysis by Ben Graham,
Speaker 1: The Intelligent Investor, Security annalys by Graham, and uh the
Speaker 1: Intelligent Investor by Ben Graham, and Common Stocks and Uncommon
Speaker 1: Profits by Phil Fisher. H But he remembered me, and
Speaker 1: it wasn't that he had somebody writing that down wrote it.
Speaker 1: He remembered that I had asked that question, and I
Speaker 1: was the least important person that day to Mr Buffett's
Speaker 1: annual meeting. But he remembered me, and I got it.
Speaker 1: Three days later and I hope you have that that
Speaker 1: letter it's framed. No, no doubt about that. So you
Speaker 1: mentioned three books? Any other books worth bringing up? Yeah,
Speaker 1: margin of Safety? Mr Buffett also said Seth Clarmon. He
Speaker 1: said yeah. I asked him, I said, who's the next
Speaker 1: Warren Buffett? And he said Seth Clarmon. And so I
Speaker 1: looked and Seth Clarmon wrote Margin of Safety. I had
Speaker 1: my students buried by that book. Get out of here,
Speaker 1: so we can't. We used that in class and we
Speaker 1: bought sixteen copies, me and the students. That might be
Speaker 1: the best investment those kids ever made, compounded annual the
Speaker 1: actual value of the book from press. And I had
Speaker 1: a student. I still keep in touch with some of
Speaker 1: these kids. And I had a student call me and say,
Speaker 1: I just got two grand out of that book. He says,
Speaker 1: I can buy the pdf. The pdf is on the internet,
Speaker 1: is free. You can pick it up for for nothing.
Speaker 1: I would want to save the book, but that's just me.
Speaker 1: Um are so, for better or worse? What has changed
Speaker 1: since you joined the industry? Boy? A lot's change. There's
Speaker 1: more algorithmic trading, more high frequency trading, and you know,
Speaker 1: on balance, I think that's a really bad thing. They
Speaker 1: say that it helps liquidity, but you know, I was
Speaker 1: in I was in your camp, and I have guys
Speaker 1: like who guests of the show. David Booth of d
Speaker 1: f A, Bill McNabb CEO and chairman of Van Guard
Speaker 1: both insist to me that h f T has made
Speaker 1: their costs lower. It doesn't feel that way to me,
Speaker 1: but that's what they've said. Yeah, it doesn't feel that
Speaker 1: way to me too. You know, I said earlier, I
Speaker 1: think there's constant talking heads on TV encouraging people to
Speaker 1: have investment activity, is what I'd call it. I think
Speaker 1: we've gone to more trading and less investing. Um. You know,
Speaker 1: I think that people like my sister, who's a lay investor,
Speaker 1: I think that you should have constant action. And when
Speaker 1: she calls me and says, well, you know, you haven't
Speaker 1: suggested that I do anything, And I said, well, Nancy,
Speaker 1: I have you in Berkshire, Hathaway, you've done. Just just
Speaker 1: sit and be happy. My colleague Josh Brown has a
Speaker 1: quote I love, and he says, the solution to high
Speaker 1: frequency trading is low frequency trade. So the less you trade,
Speaker 1: the less likely you are to do something. Really silly.
Speaker 1: I think we have much more informational availability to investors,
Speaker 1: and I think that's a good thing, as does everybody.
Speaker 1: The takeaway the conversation with clients are what about this? Well,
Speaker 1: who doesn't know that? Therefore that's in the stock price?
Speaker 1: The way a piece of information is gonna give you
Speaker 1: an a investing advantage if it's a unique analysis or
Speaker 1: unique piece of data, assuming it doesn't get you sent
Speaker 1: to jail. So that really eliminates a lot of the
Speaker 1: But I think, Barry, it's more what you do with
Speaker 1: that information, because Warren Buffett looks the same information I
Speaker 1: look at and he does a lot more with it
Speaker 1: than I do. And but what I always say is
Speaker 1: the great thing about investing is you don't have to
Speaker 1: have an original idea. You just have to be able
Speaker 1: to recognize a really good idea when it comes through.
Speaker 1: So the my last two questions my favorite questions. So
Speaker 1: if a millennial or someone just graduating college where to
Speaker 1: come to you and say I'm interested in the career
Speaker 1: in finance, what sort of advice would you give them?
Speaker 1: My son is a millennial. My son is twenty one,
Speaker 1: and he has a different outlook than I did, And
Speaker 1: maybe it's a Maybe it's our upbringings because um, he
Speaker 1: grew up in a an environment where he didn't want
Speaker 1: for anything. I grew up in a lower middle class environment.
Speaker 1: Um I wanted to do well. My son wants to
Speaker 1: do good. I think that this profession, the financial services profession,
Speaker 1: can afford somebody the opportunity to do both. You can
Speaker 1: really do well in terms of financially well, but you
Speaker 1: can really do good. And I think that's very appealing
Speaker 1: to millennials. You know, if you put somebody on proper
Speaker 1: financial puttings footing, sound financial footing, that's life changing. And
Speaker 1: I think that if you do that right, and you
Speaker 1: you know, you do a good job at that, you
Speaker 1: can put your head on the pillow at night and
Speaker 1: feel pretty good about what you do. And you can
Speaker 1: also live a pretty good life, to say the least.
Speaker 1: And it's how much of that wanting to do good
Speaker 1: as a function of the fact that he's twenty one
Speaker 1: and when you're young and idealistic and life has kick
Speaker 1: the hell out of you, yet you can look at
Speaker 1: the world that way. Well, I think I've gone the
Speaker 1: other way. I think I started wanting to do well
Speaker 1: and now have done well and want to do good.
Speaker 1: That seems to be a pretty traditional factor for people.
Speaker 1: Once you realize that all your material needs are met,
Speaker 1: and how fortunate you are to be born in the
Speaker 1: United States, born in the century, and being a career
Speaker 1: that pays you more than anyone has any right to
Speaker 1: expect in a given lifetime relative to the rest of
Speaker 1: the um world, you start to think, Hey, I want
Speaker 1: to give some back and just recognize how appreciative I
Speaker 1: am of the opportunities that were afforded to me that
Speaker 1: might not have been afforded to everybody you know. For instance,
Speaker 1: people may roll our eyes about somebody who sells insurance that,
Speaker 1: oh god, who would want to sell insurance? Well, my
Speaker 1: son saw an instance where his uncle, my brother in law,
Speaker 1: was tragically killed in a car accident. His family they
Speaker 1: had life insurance on him. Uh, the the the agent
Speaker 1: basically delivered a check for two million dollars. So the
Speaker 1: house is paid for, the kids, college is paid for,
Speaker 1: retirement is set up, and although it's a terrible tragedy,
Speaker 1: at least it isn't a second tragedy when everybody is
Speaker 1: set back in their lives and can't achieve what they
Speaker 1: want to achieve, and you know he saw that, and
Speaker 1: I think that's shaping what he might want to do.
Speaker 1: So you could do well by doing good in other words,
Speaker 1: And our last question, I know they're gonna kick us
Speaker 1: out of here any second. What is it that you
Speaker 1: know about investing that you wish you knew thirty years
Speaker 1: ago when you were just getting out of school, but
Speaker 1: perhaps didn't thirty years ago. Well, I I sure wish
Speaker 1: I would have seen the mortgage crisis coming. Um. You know,
Speaker 1: it's funny, Barry, how many people now claim to have
Speaker 1: saw that coming. Really annoying to those of us who
Speaker 1: saw it coming. All these people who are making that
Speaker 1: claim it is I certainly didn't see that coming. You know,
Speaker 1: the thing that I see about investments is the the
Speaker 1: complexity of investments is just crazy. Ze I remember I
Speaker 1: had a student who went to work for Solomon Brothers,
Speaker 1: and he was on the mortgage desk and he called
Speaker 1: me and he said, I would like to ask you
Speaker 1: if you'd be interested in helping us um do a
Speaker 1: little consulting in on the mortgage back desk. And he
Speaker 1: sent me everything that he had on mortgage back securities,
Speaker 1: which were nascent at the time, and I said, I,
Speaker 1: I don't understand anybody can I don't understand how anybody
Speaker 1: can value these things. I have no idea because they're
Speaker 1: so complex. Well, great, we've we've hit our target. It
Speaker 1: turned out that that was what it was, and I
Speaker 1: couldn't provide him any help. Well, long story short, I
Speaker 1: think I was right. Um, but I think Barry that
Speaker 1: the theme that I would say is that I think
Speaker 1: that the investment world has gotten unnecessarily complex. Now is
Speaker 1: it safe to say that that's a feature, not a bug.
Speaker 1: It's not an accident that it happens that way, but
Speaker 1: there's not an element of design. I don't think it's
Speaker 1: an accident that it happens. I think that the the
Speaker 1: eye banking community is a pretty um sophisticated, savvy, and
Speaker 1: very intelligent group, and I think that they can uh
Speaker 1: come up with a lot of different products, financial products
Speaker 1: that it's very that they are. They're very difficult to value,
Speaker 1: and I think that there's a thing out there that
Speaker 1: that people are unwilling to say the words I don't understand,
Speaker 1: and I think that's one of Mr. But that's one
Speaker 1: of the things I've learned from Mr Buffett is that
Speaker 1: he stays away from investments that he doesn't understand. Famously
Speaker 1: stayed away from technologies in the late nineties. Everyone said
Speaker 1: he was a dinosaur, and then a year later everything
Speaker 1: crashes on him. Um, it's the idea of your circle
Speaker 1: of competence, So not how big your circle of competence is,
Speaker 1: it's that you stay within its perimeter. So what is
Speaker 1: that one thing you would that would have helped you
Speaker 1: in your career had you known it thirty years ago. Well,
Speaker 1: I think I did know it, and I think it's
Speaker 1: that I think that you stay within that circle of competence,
Speaker 1: and I think that if I could help people, it
Speaker 1: would have been that I would have hammered on that.
Speaker 1: Don't be ashamed to say that you don't understand something.
Speaker 1: Dr Bob Johnson, this has been absolutely fascinating. Thank you
Speaker 1: for being so generous with your time. If you've enjoyed
Speaker 1: this conversation, look up an inch or down an inch
Speaker 1: on Apple iTunes and you'll see the other let's call
Speaker 1: it ninety or so uh podcast radio broadcast conversations that
Speaker 1: we've been doing. I would be remiss if I did
Speaker 1: not thank Taylor Riggs and Charlie Volmer, my uh producer
Speaker 1: and booker for the show. And Michael bat Nick, the
Speaker 1: head of research who helps me put together all of
Speaker 1: these scintillating conversations. I'm Barry Ridhults. You've been listening to
Speaker 1: Masters in Business on Bloomberg Radio.