My Worst Investment Ever Podcast

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing [https://amzn.to/4ebG33x]. In this series, they discuss Chapter 37: Sell in May and Go Away: Financial Astrology and Chapter 38: Chasing Spectacular Fund Performance. LEARNING: Calendars don’t drive returns. Winners ignore hot funds.   > “For you to believe in a strategy, there should be some economically logical reason for it to persist, so you can be confident it isn’t just some random outcome.” > Larry Swedroe   In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing [https://amzn.to/4ebG33x]. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners [https://buckinghamwealthpartners.com/] to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks [https://myworstinvestmentever.com/ep645-larry-swedroe-beware-of-idiosyncratic-risks/]. Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 37: Sell in May and Go Away: Financial Astrology and Chapter 38: Chasing Spectacular Fund Performance. CHAPTER 37: SELL IN MAY AND GO AWAY: FINANCIAL ASTROLOGY In chapter 37, Larry explains why the idea of selling stocks in May and switching to cash, then buying back in November, is not a sound strategy. What financial advisers insist on repeating, in Larry’s view, is: “Sell in May, go to cash, and reinvest in November.” It makes sense and is even logical. And, as the adage has it, numbers don’t lie. Figures, backed by reliable data, show that stocks gain more from November through April (a 5.7% average premium) than from May through October (a 2.6% average premium). So why not time the market? BUSTING THE MYTH Larry dismantles this advice, revealing that the ‘Sell in May’ strategy, despite its apparent logic, is a myth. He points out that stocks still outperform cash even during the May to October period, with stocks beating T-bills by 2.6% annually. Selling stocks prematurely leads to missed gains, and the strategy of switching investments underperforms a simple buy-and-hold approach. In fact, a ‘Sell in May’ strategy yielded an average annual return of 8.3% from 1926 to 2023, while simply holding the S&P 500 returned 10.2%—a significant 1.9% yearly gap. Larry adds that Taxes and fees make the strategy worse. Trading converts long-term gains (lower tax) into short-term gains (higher tax). Transaction costs always pile up. Additionally, this strategy is rarely effective. Before 2022, the last “win” was 2011. A single outlier (2022’s bear market) does not make a strategy worthwhile. THE FATAL FLAW According to Larry, one of the fundamental rules of finance is that expected return and risk are positively correlated. So if stocks actually do worse than cash between May and October, they’d need to be less risky for these six months, which is absurd because volatility doesn’t take summer vacations. WHY DO PEOPLE BELIEVE IN THIS FLAWED STRATEGY? Larry notes four reasons why people still believe in this flawed investment strategy: * Recency bias: Media hypes the strategy after rare wins (like 2022). * Pattern-seeking: Humans confuse coincidence with cause. * “Free lunch” fantasy: Active investors crave simple shortcuts. THE PROPER INVESTMENT TO FOLLOW Larry’s advice is to: * Ignore the noise. Calendars don’t drive returns. * Stay invested. Missing just 10 best days in 30 years slashes returns by 50%. * Focus on what matters: Diversification, low costs, and tax efficiency. Bottom line: The “Sell in May” strategy is a form of financial astrology. It confuses seasonal patterns with strategy. The market’s not a magic 8-ball. Stop gambling on folklore—and start compounding. CHAPTER 38: CHASING SPECTACULAR FUND PERFORMANCE In chapter 38, Larry explains why chasing spectacular performance is not a prudent investment strategy. He starts the article by highlighting that 2020 was a phenomenal year for hot funds. During that year, 18 US stock funds posted gains of over 100%, attracting $19 billion in investor dollars in pursuit of recent performance. Their prior records seemed unstoppable—17 of 18 had reigned supreme over markets for three straight years. THE BRUTAL REALITY A landmark Morningstar study [http://www.evidenceinvestor.com/what-happens-after-fund-managers-crush-it] by Jeffrey Ptak looked into equity funds that gained more than 100% in a calendar year. He found that of the 123 stock funds that gained at least 100% between 1990 and 2016, just 24 made money in the three years following their phenomenal return. More adversely, the average fund subsequently lost around 17% each year. Ptak also found that funds that failed in the years before their big gain were far more likely to earn more money during the years after that big year, compared to money that had been profitable during the period preceding their big gain. WHY DO HOT FUNDS IMPLODE? There are a few reasons why hot funds could implode. One is overvalued bets. For instance, the 2020 superstars held stocks trading at 3x the valuation of the Nasdaq 100. Another reason is the reversion to the mean. Extreme returns are statistical outliers, not a result of skill. Lastly, the crowd effect. Inflows surge after gains, forcing managers to buy at high prices. THE INDEX FUND QUIETLY WINS Larry observes that while speculators chased fireworks, Fidelity’s Total Market Index (FSKAX) returned 20.8% in 2020, beating 80% of active funds in its category. It did this with a 0.01% fee, 1/100th the cost of typical active funds. In conclusion, Larry reminds investors that the race to spectacular returns is a marathon, not a sprint. Winners ignore the fireworks. FURTHER READING 1. Jeffrey Ptak, “What Happens After Fund Managers Crush It? [http://www.evidenceinvestor.com/what-happens-after-fund-managers-crush-it]” The Evidence Based Investor, January 18, 2001. DID YOU MISS OUT ON THE PREVIOUS CHAPTERS? CHECK THEM OUT: PART I: HOW MARKETS WORK: HOW SECURITY PRICES ARE DETERMINED AND WHY IT’S SO DIFFICULT TO OUTPERFORM * Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds [https://myworstinvestmentever.com/enrich-your-future-01-the-determinants-of-the-risk-and-return-of-stocks-and-bonds/] * Enrich Your Future 02: How Markets Set Prices [https://myworstinvestmentever.com/enrich-your-future-02-how-markets-set-prices/] * Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers [https://myworstinvestmentever.com/enrich-your-future-03-persistence-of-performance-athletes-versus-investment-managers/] * Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? [https://myworstinvestmentever.com/enrich-your-future-04-why-is-persistent-outperformance-so-hard-to-find/] * Enrich Your Future 05: Great Companies Do Not Make High-Return Investments [https://myworstinvestmentever.com/enrich-your-future-05-great-companies-do-not-make-high-return-investments/] * Enrich Your Future 06: Market Efficiency and the Case of Pete Rose [https://myworstinvestmentever.com/enrich-your-future-06-market-efficiency-and-the-case-of-pete-rose/] * Enrich Your Future 07: The Value of Security Analysis [https://myworstinvestmentever.com/enrich-your-future-07-the-value-of-security-analysis/] * Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return [https://myworstinvestmentever.com/enrich-your-future-08-high-economic-growth-doesnt-always-mean-high-stock-market-return/] * Enrich Your Future 09: The Fed Model and the Money Illusion [https://myworstinvestmentever.com/enrich-your-future-09-the-fed-model-and-the-money-illusion/] PART II: STRATEGIC PORTFOLIO DECISIONS * Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t [https://myworstinvestmentever.com/enrich-your-future-10-you-wont-beat-the-market-even-the-best-funds-dont/] * Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill [https://myworstinvestmentever.com/enrich-your-future-11-long-term-outperformance-is-not-always-evidence-of-skill/] * Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play [https://myworstinvestmentever.com/enrich-your-future-12-when-confronted-with-a-losers-game-do-not-play/] * Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance [https://myworstinvestmentever.com/enrich-your-future-13-past-performance-is-not-a-predictor-of-future-performance/] * Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon [https://myworstinvestmentever.com/enrich-your-future-14-stocks-are-risky-no-matter-how-long-the-horizon/] * Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe [https://myworstinvestmentever.com/enrich-your-future-15-individual-stocks-are-riskier-than-you-believe/] * Enrich Your Future 16: The Estimated Return Is Not Inevitable [https://myworstinvestmentever.com/enrich-your-future-16-the-estimated-return-is-not-inevitable/] * Enrich Your Future 17: Take a Portfolio Approach to Your Investments [https://myworstinvestmentever.com/enrich-your-future-17-take-a-portfolio-approach-to-your-investments/] * Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans [https://myworstinvestmentever.com/enrich-your-future-18-build-a-portfolio-that-can-withstand-the-black-swans/] * Enrich Your Future 19: The Gold Illusion: Why Investing in Gold May Not Be Safe [https://myworstinvestmentever.com/enrich-your-future-19-the-gold-illusion-why-investing-in-gold-may-not-be-safe/] * Enrich Your Future 20: Passive Investing Is the Key to Prudent Wealth Management [https://myworstinvestmentever.com/enrich-your-future-20-passive-investing-is-the-key-to-prudent-wealth-management/] PART III: BEHAVIORAL FINANCE: WE HAVE MET THE ENEMY AND HE IS US * Enrich Your Future 21: Think You Can Beat the Market? Think Again [https://myworstinvestmentever.com/enrich-your-future-21-think-you-can-beat-the-market-think-again/] * Enrich Your Future 22: Some Risks Are Not Worth Taking [https://myworstinvestmentever.com/enrich-your-future-22-some-risks-are-not-worth-taking/] * Enrich Your Future 23: Seeing Through the Frame: Making Better Investment Decisions [https://myworstinvestmentever.com/enrich-your-future-23-seeing-through-the-frame-making-better-investment-decisions/] * Enrich Your Future 24: Why Smart People Do Dumb Things [https://myworstinvestmentever.com/enrich-your-future-24-why-smart-people-do-dumb-things/] * Enrich Your Future 25: Stock Crashes Happen—Be Prepared [https://myworstinvestmentever.com/enrich-your-future-25-stock-crashes-happen-be-prepared/] * Enrich Your Future 26: Should You Invest Now or Spread It Out? [https://myworstinvestmentever.com/enrich-your-future-26-should-you-invest-now-or-spread-it-out/] * Enrich Your Future 27: Pascal’s Wager: Betting on Consequences Over Probabilities [https://myworstinvestmentever.com/enrich-your-future-27-pascals-wager-betting-on-consequences-over-probabilities/] * Enrich Your Future 28 & 29: How to Outsmart Your Investing Biases [https://myworstinvestmentever.com/enrich-your-future-28-29-how-to-outsmart-your-investing-biases/] * Enrich Your Future 30: The Hidden Cost of Chasing Dividend Stocks [https://myworstinvestmentever.com/enrich-your-future-30-the-hidden-cost-of-chasing-dividend-stocks/] * Enrich Your Future 31: Risk vs. Uncertainty: The Investor’s Blind Spot [https://myworstinvestmentever.com/enrich-your-future-31-risk-vs-uncertainty-the-investors-blind-spot/] Part IV: Playing the Winner’s Game in Life and Investing * Enrich Your Future 32: Trying to Beat the Market Is a Fool’s Errand [https://myworstinvestmentever.com/enrich-your-future-32-trying-to-beat-the-market-is-a-fools-errand/] * Enrich Your Future 33: The Market Doesn’t Care How Smart You Are [https://myworstinvestmentever.com/enrich-your-future-33-the-market-doesnt-care-how-smart-you-are/] * Enrich Your Future 34: Embrace the Bear: Why Market Crashes Are Your Silent Ally [https://myworstinvestmentever.com/enrich-your-future-34-embrace-the-bear-why-market-crashes-are-your-silent-ally/] * Enrich Your Future 35: Market Gurus Are Just Expensive Entertainers [https://myworstinvestmentever.com/enrich-your-future-35-market-gurus-are-just-expensive-entertainers/] * Enrich Your Future 36: The Madness of Crowded Trades [https://myworstinvestmentever.com/enrich-your-future-36-the-madness-of-crowded-trades/] ABOUT LARRY SWEDROE Larry Swedroe [https://www.linkedin.com/in/larry-swedroe-18778267/] was head of financial and economic research at Buckingham Wealth Partners [https://buckinghamwealthpartners.com/]. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need [https://amzn.to/3HC9QnZ].” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect [https://alphaarchitect.com/blog/], Advisor Perspectives [https://www.advisorperspectives.com/search?q=Larry+Swedroe], and Wealth Management [https://www.wealthmanagement.com/search/node/Larry%20Swedroe].   [spp-transcript]   CONNECT WITH LARRY SWEDROE * LinkedIn [https://www.linkedin.com/in/larry-swedroe-18778267/] * X [https://twitter.com/larryswedroe] * Website [https://buckinghamwealthpartners.com/] * Books [https://amzn.to/3JfpUgx] ANDREW’S BOOKS * How to Start Building Your Wealth Investing in the Stock Market [https://amzn.to/3qrfHjX] * My Worst Investment Ever [https://amzn.to/2PDApAo] * 9 Valuation Mistakes and How to Avoid Them [https://amzn.to/3v6ip1Y] * Transform Your Business with Dr.Deming’s 14 Points [https://amzn.to/3emBO8M] ANDREW’S ONLINE PROGRAMS * Valuation Master Class [https://valuationmasterclass.com/] * The Become a Better Investor Community [https://astotz.kartra.com/page/become-a-better-investor-community] * How to Start Building Your Wealth Investing in the Stock Market [https://academy.astotz.com/courses/how-to-start-building-your-wealth-investing-in-the-stock-market] * Finance Made Ridiculously Simple [https://academy.astotz.com/courses/finance-made-ridiculously-simple] * FVMR Investing: Quantamental Investing Across the World [https://academy.astotz.com/courses/fvmr-investing-quantamental-investing-across-the-world] * Become a Great Presenter and Increase Your Influence [https://academy.astotz.com/courses/gp] * Transform Your Business with Dr. Deming’s 14 Points [https://academy.astotz.com/courses/transformyourbusiness] * Achieve Your Goals [https://academy.astotz.com/courses/achieve-your-goals] CONNECT WITH ANDREW...

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing [https://amzn.to/4ebG33x]. In this series, they discuss Chapter 36: Fashions and Investment Folly. LEARNING: Do not be swayed by herd mentality.   > “Markets can remain irrational longer than you can remain solvent. So do not bet against bubbles, because they can get bigger and bigger, totally irrational eventually, like a rubber band that gets stretched too far, it snaps back, and all those fake gains that weren’t fundamentally based get erased and investors get wiped out.” > Larry Swedroe   In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing [https://amzn.to/4ebG33x]. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners [https://buckinghamwealthpartners.com/] to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks [https://myworstinvestmentever.com/ep645-larry-swedroe-beware-of-idiosyncratic-risks/]. Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 36: Fashions and Investment Folly. CHAPTER 36: FASHIONS AND INVESTMENT FOLLY In this chapter, Larry explains why investors allow themselves to be influenced by the herd mentality or the madness of crowds. PERFECTLY RATIONAL PEOPLE CAN BE INFLUENCED BY A HERD MENTALITY When it comes to investing, otherwise perfectly rational people can be influenced by a herd mentality. The potential for significant financial rewards plays on the human emotions of greed and envy. In investing, as in fashion, fluctuations in attitudes often spread widely without any apparent logic. Larry notes that one of the most remarkable statistics about the world of investing is that there are many more mutual funds than stocks, and there are also more hedge fund managers than stocks. There are also thousands of separate account managers. The question is: Why are there so many managers and so many funds? EFFECTS OF RECENCY BIAS According to Larry, there are several explanations for the high number of managers and funds. The first is the all-too-human tendency to fall subject to “recency.” This is the tendency to give too much weight to recent experience while ignoring the lessons of long-term historical evidence. Larry says that investors subject to recency bias [https://myworstinvestmentever.com/blog/swedroe-stotz-discuss-15-common-investment-mistakes/] make the mistake of extrapolating the most recent past into the future, almost as if it is preordained that the recent trend will continue. The result is that whenever a hot sector emerges, investors rush to jump on the bandwagon, and money flows into that sector. Inevitably, the fad (fashion) passes and ends badly. The bubble inevitably bursts. INVESTMENT ADS CREATE DEMAND WHERE THERE IS NONE Another reason, Larry notes, is that the advertising machines of Wall Street’s investment firms are great at developing products to meet demand. The record indicates they are even great at creating demand where none should exist. The internet became the greatest craze of all, and internet funds were designed to exploit the demand. Investors lost more fortunes in the craze. The latest fashions include cloud computing, electric vehicles, and artificial intelligence. However, this trend, at least for mutual funds, has changed, and there are now fewer funds than there were at the height of the internet frenzy. This is a result of many poor performers being either merged out of existence (to erase their track record) or closed due to a lack of sufficient funds to keep them operational. INCONSISTENT PERFORMANCE BY ACTIVE MANAGERS Another reason for the proliferation of funds is that Wall Street machines recognize active managers’ track records as inconsistent (and often poor) performance. Thus, a family of funds may create several funds in the same category, hoping that at least one will be randomly hot at any given time. HOW TO BEAT HERD MENTALITY To overcome herd mentality, Larry advises investors to craft a comprehensive investment plan that factors in their risk tolerance. By building a globally diversified portfolio and sticking to this plan, investors can navigate the market’s noise and emotional triggers, such as greed and envy during bull markets and fear and panic during bear markets. He also adds that investors will benefit more from using passively managed funds to implement the plan; this is the only way to ensure they do not underperform the market. Minimizing this risk gives them the best chance to achieve their goals. If investors adopt the winner’s game of passive investing, they will no longer have to spend time searching for that hot fund. They can spend time on far more critical issues. FURTHER READING 1. Charles MacKay, Extraordinary Popular Delusions and the Madness [https://amzn.to/4n7Kvok] 2. Quoted in Edward Chancellor, Devil Take the Hindmost [https://amzn.to/3HFHtYv], (Farrar, Straus and Giroux, 1999). DID YOU MISS OUT ON THE PREVIOUS CHAPTERS? CHECK THEM OUT: PART I: HOW MARKETS WORK: HOW SECURITY PRICES ARE DETERMINED AND WHY IT’S SO DIFFICULT TO OUTPERFORM * Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds [https://myworstinvestmentever.com/enrich-your-future-01-the-determinants-of-the-risk-and-return-of-stocks-and-bonds/] * Enrich Your Future 02: How Markets Set Prices [https://myworstinvestmentever.com/enrich-your-future-02-how-markets-set-prices/] * Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers [https://myworstinvestmentever.com/enrich-your-future-03-persistence-of-performance-athletes-versus-investment-managers/] * Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? [https://myworstinvestmentever.com/enrich-your-future-04-why-is-persistent-outperformance-so-hard-to-find/] * Enrich Your Future 05: Great Companies Do Not Make High-Return Investments [https://myworstinvestmentever.com/enrich-your-future-05-great-companies-do-not-make-high-return-investments/] * Enrich Your Future 06: Market Efficiency and the Case of Pete Rose [https://myworstinvestmentever.com/enrich-your-future-06-market-efficiency-and-the-case-of-pete-rose/] * Enrich Your Future 07: The Value of Security Analysis [https://myworstinvestmentever.com/enrich-your-future-07-the-value-of-security-analysis/] * Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return [https://myworstinvestmentever.com/enrich-your-future-08-high-economic-growth-doesnt-always-mean-high-stock-market-return/] * Enrich Your Future 09: The Fed Model and the Money Illusion [https://myworstinvestmentever.com/enrich-your-future-09-the-fed-model-and-the-money-illusion/] PART II: STRATEGIC PORTFOLIO DECISIONS * Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t [https://myworstinvestmentever.com/enrich-your-future-10-you-wont-beat-the-market-even-the-best-funds-dont/] * Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill [https://myworstinvestmentever.com/enrich-your-future-11-long-term-outperformance-is-not-always-evidence-of-skill/] * Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play [https://myworstinvestmentever.com/enrich-your-future-12-when-confronted-with-a-losers-game-do-not-play/] * Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance [https://myworstinvestmentever.com/enrich-your-future-13-past-performance-is-not-a-predictor-of-future-performance/] * Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon [https://myworstinvestmentever.com/enrich-your-future-14-stocks-are-risky-no-matter-how-long-the-horizon/] * Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe [https://myworstinvestmentever.com/enrich-your-future-15-individual-stocks-are-riskier-than-you-believe/] * Enrich Your Future 16: The Estimated Return Is Not Inevitable [https://myworstinvestmentever.com/enrich-your-future-16-the-estimated-return-is-not-inevitable/] * Enrich Your Future 17: Take a Portfolio Approach to Your Investments [https://myworstinvestmentever.com/enrich-your-future-17-take-a-portfolio-approach-to-your-investments/] * Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans [https://myworstinvestmentever.com/enrich-your-future-18-build-a-portfolio-that-can-withstand-the-black-swans/] * Enrich Your Future 19: The Gold Illusion: Why Investing in Gold May Not Be Safe [https://myworstinvestmentever.com/enrich-your-future-19-the-gold-illusion-why-investing-in-gold-may-not-be-safe/] * Enrich Your Future 20: Passive Investing Is the Key to Prudent Wealth Management [https://myworstinvestmentever.com/enrich-your-future-20-passive-investing-is-the-key-to-prudent-wealth-management/] PART III: BEHAVIORAL FINANCE: WE HAVE MET THE ENEMY AND HE IS US * Enrich Your Future 21: Think You Can Beat the Market? Think Again [https://myworstinvestmentever.com/enrich-your-future-21-think-you-can-beat-the-market-think-again/] * Enrich Your Future 22: Some Risks Are Not Worth Taking [https://myworstinvestmentever.com/enrich-your-future-22-some-risks-are-not-worth-taking/] * Enrich Your Future 23: Seeing Through the Frame: Making Better Investment Decisions [https://myworstinvestmentever.com/enrich-your-future-23-seeing-through-the-frame-making-better-investment-decisions/] * Enrich Your Future 24: Why Smart People Do Dumb Things [https://myworstinvestmentever.com/enrich-your-future-24-why-smart-people-do-dumb-things/] * Enrich Your Future 25: Stock Crashes Happen—Be Prepared [https://myworstinvestmentever.com/enrich-your-future-25-stock-crashes-happen-be-prepared/] * Enrich Your Future 26: Should You Invest Now or Spread It Out? [https://myworstinvestmentever.com/enrich-your-future-26-should-you-invest-now-or-spread-it-out/] * Enrich Your Future 27: Pascal’s Wager: Betting on Consequences Over Probabilities [https://myworstinvestmentever.com/enrich-your-future-27-pascals-wager-betting-on-consequences-over-probabilities/] * Enrich Your Future 28 & 29: How to Outsmart Your Investing Biases [https://myworstinvestmentever.com/enrich-your-future-28-29-how-to-outsmart-your-investing-biases/] * Enrich Your Future 30: The Hidden Cost of Chasing Dividend Stocks [https://myworstinvestmentever.com/enrich-your-future-30-the-hidden-cost-of-chasing-dividend-stocks/] * Enrich Your Future 31: Risk vs. Uncertainty: The Investor’s Blind Spot [https://myworstinvestmentever.com/enrich-your-future-31-risk-vs-uncertainty-the-investors-blind-spot/] Part IV: Playing the Winner’s Game in Life and Investing * Enrich Your Future 32: Trying to Beat the Market Is a Fool’s Errand [https://myworstinvestmentever.com/enrich-your-future-32-trying-to-beat-the-market-is-a-fools-errand/] * Enrich Your Future 33: The Market Doesn’t Care How Smart You Are [https://myworstinvestmentever.com/enrich-your-future-33-the-market-doesnt-care-how-smart-you-are/] * Enrich Your Future 34: Embrace the Bear: Why Market Crashes Are Your Silent Ally [https://myworstinvestmentever.com/enrich-your-future-34-embrace-the-bear-why-market-crashes-are-your-silent-ally/] * Enrich Your Future 35: Market Gurus Are Just Expensive Entertainers [https://myworstinvestmentever.com/enrich-your-future-35-market-gurus-are-just-expensive-entertainers/] ABOUT LARRY SWEDROE Larry Swedroe [https://www.linkedin.com/in/larry-swedroe-18778267/] was head of financial and economic research at Buckingham Wealth Partners [https://buckinghamwealthpartners.com/]. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need [https://amzn.to/3HC9QnZ].” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect [https://alphaarchitect.com/blog/], Advisor Perspectives [https://www.advisorperspectives.com/search?q=Larry+Swedroe], and Wealth Management [https://www.wealthmanagement.com/search/node/Larry%20Swedroe].   [spp-transcript]   CONNECT WITH LARRY SWEDROE * LinkedIn [https://www.linkedin.com/in/larry-swedroe-18778267/] * X [https://twitter.com/larryswedroe] * Website [https://buckinghamwealthpartners.com/] * Books [https://amzn.to/3JfpUgx] ANDREW’S BOOKS * How to Start Building Your Wealth Investing in the Stock Market [https://amzn.to/3qrfHjX] * My Worst Investment Ever [https://amzn.to/2PDApAo] * 9 Valuation Mistakes and How to Avoid Them [https://amzn.to/3v6ip1Y] * Transform Your Business with Dr.Deming’s 14 Points [https://amzn.to/3emBO8M] ANDREW’S ONLINE PROGRAMS * Valuation Master Class [https://valuationmasterclass.com/] * The Become a Better Investor Community [https://astotz.kartra.com/page/become-a-better-investor-community] * How to Start Building Your Wealth Investing in the Stock Market [https://academy.astotz.com/courses/how-to-start-building-your-wealth-investing-in-the-stock-market] * Finance Made Ridiculously Simple [https://academy.astotz.com/courses/finance-made-ridiculously-simple] * FVMR Investing: Quantamental Investing Across the World [https://academy.astotz.com/courses/fvmr-investing-quantamental-investing-across-the-world] * Become a Great Presenter and Increase Your Influence [https://academy.astotz.com/courses/gp] * Transform Your Business with Dr. Deming’s 14 Points [https://academy.astotz.com/courses/transformyourbusiness] * Achieve Your Goals [https://academy.astotz.com/courses/achieve-your-goals] CONNECT WITH ANDREW STOTZ: * astotz.com [https://www.astotz.com/] * LinkedIn [https://www.linkedin.com/in/andrewstotz/] * Facebook [https://www.facebook.com/andrewstotzpage] * Instagram [https://www.instagram.com/andstotz/] * Threads [https://www.threads.net/@andstotz] * X [https://twitter.com/Andrew_Stotz] * YouTube [https://www.youtube.com/c/andrewstotzpage] * My Worst Investment Ever Podcast [https://itunes.apple.com/us/podcast/my-worst-investment-ever-podcast/id1416554991?mt=2]

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing [https://amzn.to/4ebG33x]. In this series, they discuss Chapter 35: Mad Money. LEARNING: Investors are naive, and Cramer is an entertainer, not a financial advisor who adds value.   > “Do not confuse information with value-added information. If you know something because it was in the newspaper, everyone else knows it as well. So it has no value.” > Larry Swedroe   In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing [https://amzn.to/4ebG33x]. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners [https://buckinghamwealthpartners.com/] to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks [https://myworstinvestmentever.com/ep645-larry-swedroe-beware-of-idiosyncratic-risks/]. Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 35: Mad Money. CHAPTER 35: MAD MONEY In this chapter, Larry explains why investment advice from so-called market experts is often worthless. THE INFAMOUS JIM CRAMER Jim Cramer, a former hedge fund manager, has become one of the most recognizable faces in the investment world. He dispenses rapid-fire investment advice on the show “Mad Money [https://www.cnbc.com/mad-money/].” Since it premiered in March 2005, it has been one of CNBC’s most-watched shows. But has his advice been as successful for the investors who follow it? Larry shares a couple of research studies that answer this question. IT PAYS MORE TO INVEST IN AN S&P THAN IN CRAMER’S FUND Cramer manages a portfolio that invests in many of the stock recommendations he makes on TV. Established in August 2001 with approximately $3 million, the Action Alerts PLUS (AAP) portfolio has been the centerpiece of Cramer’s media company, TheStreet, which sells his financial advice, giving subscribers in the millions access to each trade the portfolio makes ahead of time. Jonathan Hartley and Matthew Olson, authors of the 2018 study “Jim Cramer’s Mad Money Charitable Trust Performance and Factor Attribution [https://www.pm-research.com/content/iijretire/6/1/45],” examined the AAP portfolio’s historical performance. Their study covered the period from August 1, 2001, the AAP portfolio’s inception, through December 31, 2017. The study found that the fund returned a total of 97%. During that same period, an investment in the S&P would have returned 204%. NO REAL STOCK-PICKING SKILL, JUST ENTERTAINMENT In another study, “How Mad Is Mad Money? [https://www.pm-research.com/content/iijinvest/21/2/27]”, Paul Bolster, Emery Trahan, and Anand Venkateswaran examined Cramer’s buy and sell recommendations for the period from July 28, 2005, through December 31, 2008. They also constructed a portfolio of his recommendations and compared it to a market index. The researchers came to three key conclusions: * Investors were paying attention, as the stocks he recommended had abnormal returns of almost 2% on the day following his recommendations. * The returns for the recommended stocks were both positive and significant for the day of the show and the 30 days preceding the show. So, it seems he was recommending stocks with short-term momentum. * The returns were negative and significant, at -0.33% and -2.1%, for days 2 through 5 and days 2 through 30 following the recommendation. After 30 days, the results are insignificant. There is no evidence of any stock-picking skill—Cramer’s picks are neither good nor bad. In the end, it’s just entertainment. A third study, “Is the Market Mad? Evidence from Mad Money,” conducted in 2005, found the same result as the second study: prices rise overnight, and they are quickly corrected. This means that Cramer added negative value for the people who tried to implement his advice because they drove the price up in their buying frenzy. Then the smart money comes in, and the price reverts to basically where it was before he made the recommendation. DO STOCK MARKET EXPERTS RELIABLY PROVIDE STOCK MARKET TIMING GUIDANCE? In a fourth study, CXO Advisory Group [http://www.cxoadvisory.com/gurus] set out to determine if stock market experts, whether self-proclaimed or endorsed by others (such as in the financial media), reliably provide stock market timing guidance. To find the answer, from 2005 through 2012, they collected and investigated 6,584 forecasts for the US stock market offered publicly by 68 experts (including Cramer), employing technical, fundamental, and sentiment indicators. Their collection included forecasts, all of which were publicly available on the internet, dating back to the end of 1998. They selected experts, both bulls and bears, based on web searches for public archives that contained enough forecasts spanning various market conditions to gauge their accuracy. Basically, they found there are no real experts. The distribution of their accuracy looks virtually identical to a bell curve but slightly to the left, meaning, on average, they do worse. The average accuracy was 47%, which happened to be the same score as Cramer’s. So, of all the non-expert experts, Cramer was average at being non-expert. THE MARKET IS HIGHLY EFFICIENT FOR ANY GURU According to Larry, all these studies indicate that investors are naive, Cramer is an entertainer, not a financial advisor, who adds value, and that the market is highly efficient, making it very hard to beat it. They also show that being highly intelligent (and entertaining, in Cramer’s case) is not a sufficient condition to outperform the market. The reason is simple. There are many other highly intelligent money managers whose price discovery actions work to keep the market highly efficient (meaning market prices are the best estimate we have of the right price). That makes it unlikely any active money manager will outperform on a risk-adjusted basis. The research shows that gurus’ only value is to make weathermen look good, whether it involves predicting economic growth, interest rates, currencies, or the stock market, or even picking individual stocks. IGNORE THE PROGNOSTICATORS Larry concludes that while Cramer might provide entertainment, those following his recommendations are like lambs being led to slaughter by more sophisticated institutional investors. He urges investors to keep this in mind the next time they find themselves paying attention to some guru’s latest forecast. You’re best served by ignoring it, he says. The prudent strategy, Larry adds, is to develop a well-thought-out plan and to have the discipline to adhere to it, ignoring the market noise, whether it comes from Jim Cramer or any other prognosticator. FURTHER READING 1. Michael Learmonth, “Ratings Flood for Fox, CNN [https://variety.com/2005/tv/news/ratings-flood-for-fox-cnn-1117929812/],” Variety, September 27, 2005. 2. Jonathan Hartley and Matthew Olson, “Jim Cramer’s Mad Money Charitable Trust Performance and Factor Attribution [https://www.pm-research.com/content/iijretire/6/1/45],” The Journal of Retirement (Summer 2018). 3. Paul Bolster, Emery Trahan and Anand Venkateswaran, “How Mad Is Mad Money? [https://www.pm-research.com/content/iijinvest/21/2/27]”The Journal of Investing (Summer 2012). 4. Joseph Engelberg, Caroline Sasseville and Jared Williams, “Is the Market Mad? Evidence from Mad Money,” March 22, 2006. 5. Bill Alpert, “Shorting Cramer [https://www.barrons.com/articles/SB118681265755995100],” Barron’s (August 20, 2007). 6. Jim Cramer, “Cramer vs. Cramer,” New York, May 25, 2007. 7. CXO Advisory Group, “Guru Grades,” www.cxoadvisory.com/gurus [http://www.cxoadvisory.com/gurus]. DID YOU MISS OUT ON THE PREVIOUS CHAPTERS? CHECK THEM OUT: PART I: HOW MARKETS WORK: HOW SECURITY PRICES ARE DETERMINED AND WHY IT’S SO DIFFICULT TO OUTPERFORM * Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds [https://myworstinvestmentever.com/enrich-your-future-01-the-determinants-of-the-risk-and-return-of-stocks-and-bonds/] * Enrich Your Future 02: How Markets Set Prices [https://myworstinvestmentever.com/enrich-your-future-02-how-markets-set-prices/] * Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers [https://myworstinvestmentever.com/enrich-your-future-03-persistence-of-performance-athletes-versus-investment-managers/] * Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? [https://myworstinvestmentever.com/enrich-your-future-04-why-is-persistent-outperformance-so-hard-to-find/] * Enrich Your Future 05: Great Companies Do Not Make High-Return Investments [https://myworstinvestmentever.com/enrich-your-future-05-great-companies-do-not-make-high-return-investments/] * Enrich Your Future 06: Market Efficiency and the Case of Pete Rose [https://myworstinvestmentever.com/enrich-your-future-06-market-efficiency-and-the-case-of-pete-rose/] * Enrich Your Future 07: The Value of Security Analysis [https://myworstinvestmentever.com/enrich-your-future-07-the-value-of-security-analysis/] * Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return [https://myworstinvestmentever.com/enrich-your-future-08-high-economic-growth-doesnt-always-mean-high-stock-market-return/] * Enrich Your Future 09: The Fed Model and the Money Illusion [https://myworstinvestmentever.com/enrich-your-future-09-the-fed-model-and-the-money-illusion/] PART II: STRATEGIC PORTFOLIO DECISIONS * Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t [https://myworstinvestmentever.com/enrich-your-future-10-you-wont-beat-the-market-even-the-best-funds-dont/] * Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill [https://myworstinvestmentever.com/enrich-your-future-11-long-term-outperformance-is-not-always-evidence-of-skill/] * Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play [https://myworstinvestmentever.com/enrich-your-future-12-when-confronted-with-a-losers-game-do-not-play/] * Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance [https://myworstinvestmentever.com/enrich-your-future-13-past-performance-is-not-a-predictor-of-future-performance/] * Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon [https://myworstinvestmentever.com/enrich-your-future-14-stocks-are-risky-no-matter-how-long-the-horizon/] * Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe [https://myworstinvestmentever.com/enrich-your-future-15-individual-stocks-are-riskier-than-you-believe/] * Enrich Your Future 16: The Estimated Return Is Not Inevitable [https://myworstinvestmentever.com/enrich-your-future-16-the-estimated-return-is-not-inevitable/] * Enrich Your Future 17: Take a Portfolio Approach to Your Investments [https://myworstinvestmentever.com/enrich-your-future-17-take-a-portfolio-approach-to-your-investments/] * Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans [https://myworstinvestmentever.com/enrich-your-future-18-build-a-portfolio-that-can-withstand-the-black-swans/] * Enrich Your Future 19: The Gold Illusion: Why Investing in Gold May Not Be Safe [https://myworstinvestmentever.com/enrich-your-future-19-the-gold-illusion-why-investing-in-gold-may-not-be-safe/] * Enrich Your Future 20: Passive Investing Is the Key to Prudent Wealth Management [https://myworstinvestmentever.com/enrich-your-future-20-passive-investing-is-the-key-to-prudent-wealth-management/] PART III: BEHAVIORAL FINANCE: WE HAVE MET THE ENEMY AND HE IS US * Enrich Your Future 21: Think You Can Beat the Market? Think Again [https://myworstinvestmentever.com/enrich-your-future-21-think-you-can-beat-the-market-think-again/] * Enrich Your Future 22: Some Risks Are Not Worth Taking [https://myworstinvestmentever.com/enrich-your-future-22-some-risks-are-not-worth-taking/] * Enrich Your Future 23: Seeing Through the Frame: Making Better Investment Decisions [https://myworstinvestmentever.com/enrich-your-future-23-seeing-through-the-frame-making-better-investment-decisions/] * Enrich Your Future 24: Why Smart People Do Dumb Things [https://myworstinvestmentever.com/enrich-your-future-24-why-smart-people-do-dumb-things/] * Enrich Your Future 25: Stock Crashes Happen—Be Prepared [https://myworstinvestmentever.com/enrich-your-future-25-stock-crashes-happen-be-prepared/] * Enrich Your Future 26: Should You Invest Now or Spread It Out? [https://myworstinvestmentever.com/enrich-your-future-26-should-you-invest-now-or-spread-it-out/] * Enrich Your Future 27: Pascal’s Wager: Betting on Consequences Over Probabilities [https://myworstinvestmentever.com/enrich-your-future-27-pascals-wager-betting-on-consequences-over-probabilities/] * Enrich Your Future 28 & 29: How to Outsmart Your Investing Biases [https://myworstinvestmentever.com/enrich-your-future-28-29-how-to-outsmart-your-investing-biases/] * Enrich Your Future 30: The Hidden Cost of Chasing Dividend Stocks [https://myworstinvestmentever.com/enrich-your-future-30-the-hidden-cost-of-chasing-dividend-stocks/] * Enrich Your Future 31: Risk vs. Uncertainty: The Investor’s Blind Spot [https://myworstinvestmentever.com/enrich-your-future-31-risk-vs-uncertainty-the-investors-blind-spot/] Part IV: Playing the Winner’s Game in Life and Investing * Enrich Your Future 32: Trying to Beat the Market Is a Fool’s Errand [https://myworstinvestmentever.com/enrich-your-future-32-trying-to-beat-the-market-is-a-fools-errand/] * Enrich Your Future 33: The Market Doesn’t Care How Smart You Are [https://myworstinvestmentever.com/enrich-your-future-33-the-market-doesnt-care-how-smart-you-are/] * Enrich Your Future 34: Embrace the Bear: Why Market Crashes Are Your Silent Ally [https://myworstinvestmentever.com/enrich-your-future-34-embrace-the-bear-why-market-crashes-are-your-silent-ally/] ABOUT LARRY SWEDROE Larry Swedroe [https://www.linkedin.com/in/larry-swedroe-18778267/] was head of financial and economic research at Buckingham Wealth Partners [https://buckinghamwealthpartners.com/]. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need [https://amzn.to/3HC9QnZ].” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect [https://alphaarchitect.com/blog/], Advisor Perspectives [https://www.advisorperspectives.com/search?q=Larry+Swedroe], and Wealth Management [https://www.wealthmanagement.com/search/node/Larry%20Swedroe].   [spp-transcript]   CONNECT WITH LARRY SWEDROE * LinkedIn [https://www.linkedin.com/in/larry-swedroe-18778267/] * X [https://twitter.com/larryswedroe] * Website [https://buckinghamwealthpartners.com/] * Books [https://amzn.to/3JfpUgx] ANDREW’S BOOKS * How to Start Building Your Wealth Investing in the Stock Market [https://amzn.to/3qrfHjX] * My Worst Investment Ever [https://amzn.to/2PDApAo] * 9 Valuation Mistakes and How to Avoid Them [https://amzn.to/3v6ip1Y] * Transform Your Business with... [https://amzn.to/3emBO8M]

BIO: Mike Koenigs is a serial entrepreneur with five successful exits, a 19-time bestselling author, and a top strategist for founders post-exit. STORY: Mike invested big in a SaaS startup set up for success, but infighting brought it to its knees. LEARNING: Character is bigger than charisma.   > “If you’re a shareholder, your best exit is for a big company to come and buy what they believe is money at a discount.” > Mike Koenigs   GUEST PROFILE Mike Koenigs [https://www.linkedin.com/in/MikeKoenigs/] is a serial entrepreneur with five successful exits, a 19-time bestselling author, and a top strategist for founders post-exit. He helps build powerful personal brands in just one week and pioneers Generative AI for executives, speaking at elite events like Abundance 360, MIT, and Tony Robbins’ gatherings. WORST INVESTMENT EVER Mike learned about a SaaS startup from a client with whom he had spent time and had gotten to know, like, and trust him. So, when the client introduced Mike to this deal, he got interested. The startup looked great, so he invested a substantial amount of money and then doubled down because it got even better. OFF TO A PROMISING START The basic premise was that it was a pool. The founders would find SaaS companies with customers, momentum, technology, and a bit of a moat. They had much experience and success, such as a 10x dividend to investors in three years. INFIGHTING PARALYZES EVERYTHING Unfortunately, the two founders started fighting. One of them locked the other one out of everything. They had the majority and equal shareholding, making infighting even worse. The remaining partner started emptying the coffers. Someone doing the books became a whistleblower and revealed the shenanigans going on. The partner was siphoning off money, building a house, going on big trips, using private jets everywhere, etc. It got uglier and uglier, causing the shareholders to file lawsuits, and the FTC got involved. Years have gone by, and things are still shut down. LESSONS LEARNED * Time kills deals. * Character is bigger than charisma. Crooked founders will gut you faster than any market downturn. * Put all that money into index funds and let it compound. ANDREW’S TAKEAWAYS * The only way to invest as an angel investor is to invest in 10 startups. Don’t do it if you are not prepared with the money and time to do that. ACTIONABLE ADVICE Unless you’re a full-time VC with deal flow, customer channels, or an exit mapped out, keep your money in things you can control. If you’re a shareholder, your best exit is for a big company to come and buy what they believe is money at a discount. MIKE’S RECOMMENDATIONS Mike recommends learning to build a brand that will elevate everything you touch for the rest of your life. He suggests reading his book, Your Next Act: The Six Growth Accelerators for Creating a Business You’ll Love for the Rest of Your Life [https://amzn.to/4jbYI0s], to help you build your brand. He also recommends immersing yourself in AI and learning how to use it effectively. NO.1 GOAL FOR THE NEXT 12 MONTHS Mike’s number one goal for the next 12 months is to become an international citizen. He wants to continue living his beautiful life in multiple locations and working with more entrepreneurs worldwide. PARTING WORDS   > “Go out and build your brand. You will get access to better deals faster at a discounted price.” > Mike Koenigs   [spp-transcript]   CONNECT WITH MIKE KOENIGS * LinkedIn [https://www.linkedin.com/in/MikeKoenigs/] * Facebook [https://www.facebook.com/koenigs/] * Instagram [https://www.instagram.com/MikeKoenigs] * Podcast [https://bigleappodcast.com/] * Website [https://superpoweraccelerator.com/] * Books [https://amzn.to/4jc9LGU] ANDREW’S BOOKS * How to Start Building Your Wealth Investing in the Stock Market [https://amzn.to/3qrfHjX] * My Worst Investment Ever [https://amzn.to/2PDApAo] * 9 Valuation Mistakes and How to Avoid Them [https://amzn.to/3v6ip1Y] * Transform Your Business with Dr.Deming’s 14 Points [https://amzn.to/3emBO8M] ANDREW’S ONLINE PROGRAMS * Valuation Master Class [https://valuationmasterclass.com/] * The Become a Better Investor Community [https://astotz.kartra.com/page/become-a-better-investor-community] * How to Start Building Your Wealth Investing in the Stock Market [https://academy.astotz.com/courses/how-to-start-building-your-wealth-investing-in-the-stock-market] * Finance Made Ridiculously Simple [https://academy.astotz.com/courses/finance-made-ridiculously-simple] * FVMR Investing: Quantamental Investing Across the World [https://academy.astotz.com/courses/fvmr-investing-quantamental-investing-across-the-world] * Become a Great Presenter and Increase Your Influence [https://academy.astotz.com/courses/gp] * Transform Your Business with Dr. Deming’s 14 Points [https://academy.astotz.com/courses/transformyourbusiness] * Achieve Your Goals [https://academy.astotz.com/courses/achieve-your-goals] CONNECT WITH ANDREW STOTZ: * astotz.com [https://www.astotz.com/] * LinkedIn [https://www.linkedin.com/in/andrewstotz/] * Facebook [https://www.facebook.com/andrewstotzpage] * Instagram [https://www.instagram.com/andstotz/] * Threads [https://www.threads.net/@andstotz] * X [https://twitter.com/Andrew_Stotz] * YouTube [https://www.youtube.com/c/andrewstotzpage] * My Worst Investment Ever Podcast [https://itunes.apple.com/us/podcast/my-worst-investment-ever-podcast/id1416554991?mt=2]

In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing [https://amzn.to/4ebG33x]. In this series, they discuss Chapter 34: Bear Markets: A Necessary Evil. LEARNING: Investors must view bear markets as necessary evils.   > “If stocks didn’t experience the kind of bear markets that we have, investors would be very unhappy.” > Larry Swedroe   In this episode of Enrich Your Future, Andrew and Larry Swedroe discuss Larry’s new book, Enrich Your Future: The Keys to Successful Investing [https://amzn.to/4ebG33x]. The book is a collection of stories that Larry has developed over 30 years as the head of financial and economic research at Buckingham Wealth Partners [https://buckinghamwealthpartners.com/] to help investors. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks [https://myworstinvestmentever.com/ep645-larry-swedroe-beware-of-idiosyncratic-risks/]. Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss Chapter 34: Bear Markets: A Necessary Evil. CHAPTER 34: BEAR MARKETS: A NECESSARY EVIL In this chapter, Larry explains why investors must view bear markets as necessary evils. He says that if stocks didn’t experience the kind of bear markets that we have, investors would be very unhappy. Larry further explains that the most basic finance principle is the relationship between risk and expected, but not guaranteed, return. So, the higher the risk, the higher the expected return, which means that if the risk is high, investors will apply a bigger risk premium, which will lead to the denominator in the formula of the Net Present Value. The numerator is the expected earnings. The denominator is the risk-free rate plus the risk premium. THE HIGHER THE RISK, THE HIGHER THE PREMIUMS Larry highlights historical bear markets, noting the U.S. has experienced losses exceeding 34% during the COVID crisis and 51% from 2007 to 2009. He argues that these losses are essential for investors to demand higher risk premiums. The very fact that investors have experienced such significant losses leads them to price stocks with a large risk premium. From 1926 through 2022, the S&P provided an annual risk premium over one-month Treasury bills of 8.2% and an annualized premium of 6.9%. If the losses that investors experienced had been smaller, the risk premium would also have been smaller. And the smaller the losses experienced, the smaller the premium would have been. In other words, the less risk investors perceive, the higher the price they are willing to pay for stocks. And the higher the market’s price-to-earnings ratio, the lower the future returns. STAYING THE COURSE DURING UNDERPERFORMANCE The bottom line, Larry says, is that bear markets are necessary for the creation of the large equity risk premium we have experienced. Thus, if investors want stocks to provide high expected returns, bear markets (while painful to endure) should be considered a necessary evil. However, Larry notes that it is during the periods of underperformance that investor discipline is tested. Unfortunately, the evidence suggests that most investors significantly underperform the stock market and the mutual funds they invest in. The underperformance is because investors act like generals fighting the last war. Subject to recency bias [https://myworstinvestmentever.com/isms-20-larry-swedroe-do-you-extrapolate-from-small-samples-and-trust-your-intuition/] (the tendency to overweight recent events/trends and ignore long-term evidence), they observe yesterday’s winners and jump on the bandwagon—buying high—and they observe yesterday’s losers and abandon ship—selling low. It is almost as if investors believe they can buy yesterday’s returns when they can only buy tomorrow’s. KEYS TO SUCCESSFUL INVESTING Larry shares three keys to successful investing to ensure you get the most from your investments even during bear markets. The first key is to have a well-thought-out plan that includes understanding the nature of the risks of investing. That means accepting that bear markets are inevitable and must be built into the plan. This understanding will help you feel prepared and less anxious when bear markets occur. It also means having the discipline to stay the course when it is most difficult (partly because the media will be filled with stories of economic doom and gloom). What is particularly difficult is that staying the course does not just mean buying and holding. Adhering to a plan requires that investors rebalance their portfolio, maintaining their desired asset allocation. That means that investors must buy stocks during bear markets and sell them in bull markets. The second key to successful investing, Larry suggests, is to avoid taking more risk than you have the ability, willingness, and need to take. By steering clear of excessive risk, investors are more likely to stay the course and avoid the common buy high/sell low pattern that most investors fall into. The last key is to understand that trying to time the market is a loser’s game—one that is possible to win but not prudent to try because the odds of doing so are so poor. FURTHER READING 1. 1996 Annual Report of Berkshire Hathaway [https://www.berkshirehathaway.com/1996ar/96arindx.html]. 2. 1992 Annual Report of Berkshire Hathaway. [https://www.berkshirehathaway.com/letters/1992.html] 3. 1991 Annual Report of Berkshire Hathaway. [https://www.berkshirehathaway.com/letters/1991.html] 4. 2006 Annual Report of Berkshire Hathaway. [https://www.berkshirehathaway.com/2006ar/2006ar.pdf] 5. 2004 Annual Report of Berkshire Hathaway. [https://www.berkshirehathaway.com/2004ar/2004ar.pdf] DID YOU MISS OUT ON THE PREVIOUS CHAPTERS? CHECK THEM OUT: PART I: HOW MARKETS WORK: HOW SECURITY PRICES ARE DETERMINED AND WHY IT’S SO DIFFICULT TO OUTPERFORM * Enrich Your Future 01: The Determinants of the Risk and Return of Stocks and Bonds [https://myworstinvestmentever.com/enrich-your-future-01-the-determinants-of-the-risk-and-return-of-stocks-and-bonds/] * Enrich Your Future 02: How Markets Set Prices [https://myworstinvestmentever.com/enrich-your-future-02-how-markets-set-prices/] * Enrich Your Future 03: Persistence of Performance: Athletes Versus Investment Managers [https://myworstinvestmentever.com/enrich-your-future-03-persistence-of-performance-athletes-versus-investment-managers/] * Enrich Your Future 04: Why Is Persistent Outperformance So Hard to Find? [https://myworstinvestmentever.com/enrich-your-future-04-why-is-persistent-outperformance-so-hard-to-find/] * Enrich Your Future 05: Great Companies Do Not Make High-Return Investments [https://myworstinvestmentever.com/enrich-your-future-05-great-companies-do-not-make-high-return-investments/] * Enrich Your Future 06: Market Efficiency and the Case of Pete Rose [https://myworstinvestmentever.com/enrich-your-future-06-market-efficiency-and-the-case-of-pete-rose/] * Enrich Your Future 07: The Value of Security Analysis [https://myworstinvestmentever.com/enrich-your-future-07-the-value-of-security-analysis/] * Enrich Your Future 08: High Economic Growth Doesn’t Always Mean High Stock Market Return [https://myworstinvestmentever.com/enrich-your-future-08-high-economic-growth-doesnt-always-mean-high-stock-market-return/] * Enrich Your Future 09: The Fed Model and the Money Illusion [https://myworstinvestmentever.com/enrich-your-future-09-the-fed-model-and-the-money-illusion/] PART II: STRATEGIC PORTFOLIO DECISIONS * Enrich Your Future 10: You Won’t Beat the Market Even the Best Funds Don’t [https://myworstinvestmentever.com/enrich-your-future-10-you-wont-beat-the-market-even-the-best-funds-dont/] * Enrich Your Future 11: Long-Term Outperformance Is Not Always Evidence of Skill [https://myworstinvestmentever.com/enrich-your-future-11-long-term-outperformance-is-not-always-evidence-of-skill/] * Enrich Your Future 12: When Confronted With a Loser’s Game Do Not Play [https://myworstinvestmentever.com/enrich-your-future-12-when-confronted-with-a-losers-game-do-not-play/] * Enrich Your Future 13: Past Performance Is Not a Predictor of Future Performance [https://myworstinvestmentever.com/enrich-your-future-13-past-performance-is-not-a-predictor-of-future-performance/] * Enrich Your Future 14: Stocks Are Risky No Matter How Long the Horizon [https://myworstinvestmentever.com/enrich-your-future-14-stocks-are-risky-no-matter-how-long-the-horizon/] * Enrich Your Future 15: Individual Stocks Are Riskier Than You Believe [https://myworstinvestmentever.com/enrich-your-future-15-individual-stocks-are-riskier-than-you-believe/] * Enrich Your Future 16: The Estimated Return Is Not Inevitable [https://myworstinvestmentever.com/enrich-your-future-16-the-estimated-return-is-not-inevitable/] * Enrich Your Future 17: Take a Portfolio Approach to Your Investments [https://myworstinvestmentever.com/enrich-your-future-17-take-a-portfolio-approach-to-your-investments/] * Enrich Your Future 18: Build a Portfolio That Can Withstand the Black Swans [https://myworstinvestmentever.com/enrich-your-future-18-build-a-portfolio-that-can-withstand-the-black-swans/] * Enrich Your Future 19: The Gold Illusion: Why Investing in Gold May Not Be Safe [https://myworstinvestmentever.com/enrich-your-future-19-the-gold-illusion-why-investing-in-gold-may-not-be-safe/] * Enrich Your Future 20: Passive Investing Is the Key to Prudent Wealth Management [https://myworstinvestmentever.com/enrich-your-future-20-passive-investing-is-the-key-to-prudent-wealth-management/] PART III: BEHAVIORAL FINANCE: WE HAVE MET THE ENEMY AND HE IS US * Enrich Your Future 21: Think You Can Beat the Market? Think Again [https://myworstinvestmentever.com/enrich-your-future-21-think-you-can-beat-the-market-think-again/] * Enrich Your Future 22: Some Risks Are Not Worth Taking [https://myworstinvestmentever.com/enrich-your-future-22-some-risks-are-not-worth-taking/] * Enrich Your Future 23: Seeing Through the Frame: Making Better Investment Decisions [https://myworstinvestmentever.com/enrich-your-future-23-seeing-through-the-frame-making-better-investment-decisions/] * Enrich Your Future 24: Why Smart People Do Dumb Things [https://myworstinvestmentever.com/enrich-your-future-24-why-smart-people-do-dumb-things/] * Enrich Your Future 25: Stock Crashes Happen—Be Prepared [https://myworstinvestmentever.com/enrich-your-future-25-stock-crashes-happen-be-prepared/] * Enrich Your Future 26: Should You Invest Now or Spread It Out? [https://myworstinvestmentever.com/enrich-your-future-26-should-you-invest-now-or-spread-it-out/] * Enrich Your Future 27: Pascal’s Wager: Betting on Consequences Over Probabilities [https://myworstinvestmentever.com/enrich-your-future-27-pascals-wager-betting-on-consequences-over-probabilities/] * Enrich Your Future 28 & 29: How to Outsmart Your Investing Biases [https://myworstinvestmentever.com/enrich-your-future-28-29-how-to-outsmart-your-investing-biases/] * Enrich Your Future 30: The Hidden Cost of Chasing Dividend Stocks [https://myworstinvestmentever.com/enrich-your-future-30-the-hidden-cost-of-chasing-dividend-stocks/] * Enrich Your Future 31: Risk vs. Uncertainty: The Investor’s Blind Spot [https://myworstinvestmentever.com/enrich-your-future-31-risk-vs-uncertainty-the-investors-blind-spot/] Part IV: Playing the Winner’s Game in Life and Investing * Enrich Your Future 32: Trying to Beat the Market Is a Fool’s Errand [https://myworstinvestmentever.com/enrich-your-future-32-trying-to-beat-the-market-is-a-fools-errand/] * Enrich Your Future 33: The Market Doesn’t Care How Smart You Are [https://myworstinvestmentever.com/enrich-your-future-33-the-market-doesnt-care-how-smart-you-are/] ABOUT LARRY SWEDROE Larry Swedroe [https://www.linkedin.com/in/larry-swedroe-18778267/] was head of financial and economic research at Buckingham Wealth Partners [https://buckinghamwealthpartners.com/]. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need [https://amzn.to/3HC9QnZ].” He has authored or co-authored 18 books. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets. Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect [https://alphaarchitect.com/blog/], Advisor Perspectives [https://www.advisorperspectives.com/search?q=Larry+Swedroe], and Wealth Management [https://www.wealthmanagement.com/search/node/Larry%20Swedroe].   [spp-transcript]   CONNECT WITH LARRY SWEDROE * LinkedIn [https://www.linkedin.com/in/larry-swedroe-18778267/] * X [https://twitter.com/larryswedroe] * Website [https://buckinghamwealthpartners.com/] * Books [https://amzn.to/3JfpUgx] ANDREW’S BOOKS * How to Start Building Your Wealth Investing in the Stock Market [https://amzn.to/3qrfHjX] * My Worst Investment Ever [https://amzn.to/2PDApAo] * 9 Valuation Mistakes and How to Avoid Them [https://amzn.to/3v6ip1Y] * Transform Your Business with Dr.Deming’s 14 Points [https://amzn.to/3emBO8M] ANDREW’S ONLINE PROGRAMS * Valuation Master Class [https://valuationmasterclass.com/] * The Become a Better Investor Community [https://astotz.kartra.com/page/become-a-better-investor-community] * How to Start Building Your Wealth Investing in the Stock Market [https://academy.astotz.com/courses/how-to-start-building-your-wealth-investing-in-the-stock-market] * Finance Made Ridiculously Simple [https://academy.astotz.com/courses/finance-made-ridiculously-simple] * FVMR Investing: Quantamental Investing Across the World [https://academy.astotz.com/courses/fvmr-investing-quantamental-investing-across-the-world] * Become a Great Presenter and Increase Your Influence [https://academy.astotz.com/courses/gp] * Transform Your Business with Dr. Deming’s 14 Points [https://academy.astotz.com/courses/transformyourbusiness] * Achieve Your Goals [https://academy.astotz.com/courses/achieve-your-goals] CONNECT WITH ANDREW STOTZ: * astotz.com [https://www.astotz.com/] * LinkedIn [https://www.linkedin.com/in/andrewstotz/] * Facebook [https://www.facebook.com/andrewstotzpage] * Instagram [https://www.instagram.com/andstotz/] * Threads [https://www.threads.net/@andstotz] * X [https://twitter.com/Andrew_Stotz] * YouTube [https://www.youtube.com/c/andrewstotzpage] * My Worst Investment Ever Podcast [https://itunes.apple.com/us/podcast/my-worst-investment-ever-podcast/id1416554991?mt=2]