Why We Invest in the First Place | Brandon Averill, Justin Dyer | AWM Insights #94
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Episode Summary
Why risk your hard-earned money? What if you don’t invest because you’re too scared to take any risk?
Every person has different priorities and investing money to meet those priorities is crucial to not just our happiness but the legacy we leave behind. Just making money for the sake of making money won’t lead to a satisfying investment experience.
Successful investors put themselves in position to weather downturns so they can capture long-term returns. This allows you to be conservative where you need certainty and aggressive where you need growth. You can tilt the odds in your favor to achieve desired long-term results by adjusting your strategy, optimization, and continuous planning.
Episode Highlights
(0:30) Why even take your hard-earned money and put it at risk by investing?
(1:25) Investors that don’t understand the why behind their investing strategy will not have a good investing experience.
(2:30) Invest to maximize the odds of achieving your unique priorities.
(2:53) The reason you invest is to take the capital you have today, optimize it, and invest with the odds in your favor to meet the priorities most important to you.
(3:33) No one will ever be laying on their deathbed remembering how they beat the S&P 500 every year. They will remember the impact their money made on the lives of those they care about.
(4:40) Everyone has priorities and money should be grown to meet those priorities.
(5:34) We need money to grow. If not, purchasing power is lost every year.
(6:50) Warren Buffett’s is no doubt a great investor but the key to creating his billions was actually time.
(7:39) Chasing past performance or active management with a good story doesn’t end well for investors. It usually means future poor performance.
(8:30) Short-term sound bites make for great media but are rarely right. These market predictors are almost never held accountable if they’re wrong.
(9:50) Psychology of Money by Morgan Housel tells a great story about how being lucky but lacking investment strategy can literally ruin lives.
(11:28) Headlines make for great entertainment, but shouldn’t drive your strategy. Pushing the odds in your favor for success will keep winning over the long-term.
(12:00) Be conservative where you need certainty so you can be aggressive where you need growth. This is how you give yourself the greatest chance of success.
(12:30) No one can predict the future but you can put yourself in position to achieve success over the long term.
(13:50) Private markets have gained a ton of press but they should always be integrated as just one part of your long term strategy.
(14:55) A protective reserve provides the financial security to take compensated risk and target higher expected returns.
(15:56) Wall Street firms are creating private market products to sell to investors as an asset gathering tool.
(17:25) Private markets are not a panacea of great returns. There will be good years and bad years, the key is to stay the course for the long term.
(18:20) Plan for the plan to not go according to the plan. Adjustments are necessary and part of any good process.
(18:20) Financial structure, including a protective reserve in place, allows the power of the markets to grow your wealth over the long-term. The power of the markets has been one of the greatest wealth drivers in human history.
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+ Read the Transcript
Brandon Averill (00:00):
Well, Justin, it's good to get back into this week's episode. Last week we definitely spent some time on talking about why we're here. Why are we even talking about money? Why do people care about money? We're going to get a little more granular, but still not go all the way down, and we're going to talk a little bit today just about why we invest in the first place.
Brandon Averill (00:21):
Future episodes we'll get into how you invest in all those good things, but I think some people skip right over this step and never even consider the fundamentals of why in the world would we even take this hard-earned money that we slaved away at our jobs for, that we've taken the sacrifice to earn and then take it and actually go invest it somewhere? Why would we do that?
Justin Dyer (00:46):
Yeah, I mean, obviously we think everything we're talking about here are great topics, but this one, I think, especially so. You could even say kind of reverse psychology here is also true where people get so scared about investing that they potentially don't invest, and don't really invest when they should for the reasons why we're going to get into, meet their goals, make money, et cetera.
Justin Dyer (01:17):
I also think there's a little bit of kind of a shortcut that people take or disservice to their selves where, by not asking this question, they're not going to get the returns they deserve, they're not going to have a good experience, they're going to get scared, whatever. So I'm kind of circling around this, but to answer your question directly, I mean, first and foremost, it's to make money I would suppose.
Justin Dyer (01:46):
Again, I think, like I alluded to, that's somewhat of a perversion. That is definitely an outcome of the process, but that should not be the sole why, at least from our standpoint. Plenty of people and plenty of market participants are doing it solely to make money. Plenty of people go to Vegas solely to try and make money as well. Those are generally not good singular motivators in my opinion to just hang your hat on for this topic.
Justin Dyer (02:17):
Really, I'm sure everyone kind of knows this, but I think this is an important topic to unpack a little bit today and even over the future, but really why we think you should invest our true north is so you maximize the odds of success to meet your unique priorities. Those priorities could be so diverse, so wide ranging or not, really simple. "Hey, I want to retire at 40." Somebody who's really aggressive just sick of working, whatever the case may be.
Justin Dyer (02:50):
But the reason you invest is to take your capital of the day, your entire financial capital, financial structure as we call it, including your human capital, figure out how to optimize that and invest it to increase the odds of paying for your future priorities. I mean, and if you think about that's a really, really powerful process or a thought experiment, if you will, to go through because there's somewhat of a quip that's used in our industry where on your deathbed, you're not going to be looking back kind of really at anything, but certainly at your investment portfolio and say, "Oh, I had a great life. I beat the S&P 500 each year."
Justin Dyer (03:37):
No, that's absolutely ridiculous. You want to look back at your life and hopefully in many cases we're dealing with multi-generational wealth, so look back at your life and say, "Hey, I'm leaving something to the next generation. I'm making an impact because of the way in which we approached managing wealth." And then conversely at the life you've lived, so that's your legacy, at the life you've lived, "Hey, we were able to put our kids through college. We were able to fund a charity each and every year."
Justin Dyer (04:09):
Whatever it is, right? Again, it's such a wide-ranging set of priorities or goals that people can have, but really that's where we focus and where we get really excited and where it's incredible to see the power of financial markets, capital markets over time really help support this whole endeavor.
Brandon Averill (04:30):
Yeah. I think that's a great point and I think even to simplify it, right, everybody needs their money to grow because everybody has priorities to pay for and I think sometimes this gets confused because a lot of people are fortunate enough to have so much money that seemingly everything's taken care of. But even in that case, most oftentimes you have priorities, whether that's to pass money onto the next generation or leave it all to charity, you still want that money to at least maintain its purchasing power.
Brandon Averill (05:05):
And so I think that's, you've hit on this a couple times, it's also, I think, worth noting that everybody is so incredibly different, right? And we all have different priorities that drive different ways of investing and why we would invest and how the allocations come out, but at the very basic understanding is what you hit on.
Brandon Averill (05:28):
The idea here, why we put our capital at risk, the hard earned money that we've strived for is because we need it to grow and we either need it to grow maybe very low. We don't need it to grow a whole lot because we just need it to maintain purchasing power.
Brandon Averill (05:43):
I'm sure we'll get into inflation on one of these future episodes. It's certainly a hot topic right now, but we need it to grow that much. Or we've got some big priorities in the future and maybe we really need this money to grow for the future. And so we'll get into what all that means and how you do that effectively.
Brandon Averill (06:04): But I think when you start to think about investing and why we actually invest, okay, it's to make money, but if it's to meet those priorities over the long-term, then it's not necessarily about making really good investment decisions and hitting the hot stock or even hitting some big venture capital deal. It's more about consistently not screwing up. Right?
Justin Dyer (06:26):
Yeah.
Brandon Averill (06:26):
It's about being around for the long-term. We've all heard the term compound interest. Compound interest only works if you're around for a long time. This is actually the key to Warren Buffett's wealth. I think a lot of people think he just made some fantastic investment and that's true. He's made some really good investments, but really what's made Warren and Charlie Munger, they've gone on record many times. What's made them successful, what's made his net worth grow over time is that they've stuck around, that actually been able to consistently chip away and consistently build and allow that compounding effect.
Justin Dyer (07:03):
Yeah. And a different way of presenting that is focus on risk management. So, your capital can, your money can be compounded over time consistently at good rates of return. They don't have to be the best rates of return and chances are, and what the data shows rather is, chasing the best rates of return each and every year generally leads you to a poor rate of return ironically. You just chasing your tail.
Justin Dyer (07:32):
We talked about that in the past, but the data shows chasing past performance, generally doesn't lead to good performance. Going to active management because it seems like they have a good story to tell, or there's sexy stocks that have performed well, not a good way of necessarily managing risk and building this compounded wealth over time. And that's not easy. I mean there a headline this morning as we were kind of preparing for this.
Justin Dyer (08:02):
A hedge fund manager, Kyle Bass goes on record, say, "There's no way the stock market goes up this year. No way at all." And I mean, hey, he could be right. I'm not highlighting this statement that I'm saying he's wrong at all. He could be right. I think, well, first of all, no one can accurately predict the future and these guys with their big egos come out and make these definitive statements and are never called on it, unfortunately. I wish there was some website that did some great tracking to say, "What did this guy say a year ago? Was he right?"
Justin Dyer (08:38):
But what I'm getting at is that short-term sound bites like that are everywhere. You can see the flip side of the coin too. Like, "Ah, 2020, it's going to be the roaring twenties all over again." Or you see the negative comments from someone like Kyle Bass. And, I don't want to say that doesn't matter. Yes, pay attention to what's going on in the markets. We certainly do.
Justin Dyer (09:01):
But going back, taking that step back that long-term view, focusing on your priorities, focusing on risk management, making sure your wealth compounds time and time again, year over year, it's not going to happen perfectly every year in the equity markets. It's at risk, right? I mean, that does mean things will go up, things will go down. It just cannot perpetually go straight up.
Justin Dyer (09:23):
But it's important to tune out those sound bites and not get caught up in these flashy things because generally speaking, it's just not a sound investment philosophy to chase sound bites really, I guess at the end of the day is what I'm saying.
Brandon Averill (09:38):
Yeah. And I think the proclamation by Kyle just reminds me, I mean we refer to it a lot, but Psychology of Money, the book written by Morgan Housel, he tells a story of these two guys, Jesse Livermore and Bernard Sandler. And Jesse was, he was this guy, he was an investor and he did really well in 1929. He's a huge investor and everything, the world's falling apart and he tells a story basically he came home, his wife, his kids, they were distraught. They thought they just lost everything. He walks through the door, big smile on his face and, "What's going on? What's wrong?" and they're like, "Wow, you're a stock guy. The market's imploding." He's like, "Oh, I was short the market." The guy's net worth went from like a hundred million to four billion in today's dollars overnight and just happy go lucky guy.
Brandon Averill (10:37):
Bernard Sandler, on the other side of the coin, this guy had, during the boom had kind of built up his real estate empire in New York, et cetera. Ended up over leveraging himself. Cards come crashing down. He disappears never to be heard again. Presumably probably took his life and you think, "Wow, Jesse, what a genius." Like, "Bernard, what a moron."
Brandon Averill (11:03):
But at the end of the day, he goes on to tell the story a little bit further and what ends up happening. It goes to Jesse's head. The guy starts thinking he's a genius. He can predict markets. He just got darn lucky in 1929. He goes on to blow his entire fortune. And unfortunately his fate ends up exactly the same as Bernard. And I think it just comes back.
Brandon Averill (11:25):
Headlines are great, but at the end of the day, right, the whole... Neither one of those two guys in that example Morgan was referring to ended up wealthy and it's because they didn't put themselves in a position to stick around for the long-term. And I thought you hit on this. Great you talked about being conservative.
Brandon Averill (11:44):
It's not even necessarily being conservative. It's really just about putting yourself in the best position possible to maximize your wealth over the long-term because if you do certain things, if you make sure your financial structure, most importantly, your protective reserve that we've talked about in the past and will continue to talk about, if you set that up appropriately, you're conservative where you need to be conservative so that you can be aggressive and growth-oriented where you need to be growth-oriented in order to achieve your individualized personalized priorities, right?
Brandon Averill (12:18):
So I think this is the other nuance, right? It's really having a good understanding going back to last week of what is the plan and making sure that you're allowing yourself the opportunity for that plan to develop and for things to happen because one thing we do know for certain about the future is we know nothing about the future, right? We have no idea what's coming. We couldn't have predicted the Coronavirus. We couldn't have predicted terrorists attacks. We couldn't have predicted any of this type of stuff. So what the most successful investors over long periods of time do is they actually put themselves in the position to weather those storms so they can win over the long-term.
Justin Dyer (13:01):
Yeah. And I think going back to the structure comment is important and protective reserve. So a big, let me relate it to a big topic in the financial press, at least is the increasing, ever increasing, let's say accelerating interest in private markets, which we love private markets. So, what we talk about kind of broadly doesn't necessarily always talk about how we actually invest in money, which is what we want to explain with this podcast.
Justin Dyer (13:33):
Love private markets as an allocation for when appropriate and it has to be qualified very much so. What is a appropriate financial structure in which in portfolio size, in which you invest in private markets. Different topic. However, there is this renewed interest. Many platforms are coming out with access to private investments, really kind of this democratization of the private markets, as they say.
Justin Dyer (14:03):
There's a piece in the Financial Times today, actually talking about this and really what just smacked me kind of right in my forehead. I'm like, "I can't even believe this is a thing that financial professionals are talking about that." And that's the liquidity nature of this. And that's where the danger lies in private markets and that's where people really got get caught over their skis in private markets. And people really potentially can be caught out in that without approach or without taking that into account. And it's just, it's mind boggling that professional investors actually make those statements or are talking about clients and their private assets like that.
Justin Dyer (14:49):
Going back to financial structure, if you and your protective reserve, you can be conservative where you need to be conservative with your protective reserve, where our portfolios are built completely custom. That protective reserve is scaled to your needs. And then you have all these excess assets if we're participating in private more markets where they're at risk and they're at risk with the expectation that they will be held for the long-term. This is public markets, public equity and private equity.
Justin Dyer (15:21):
So liquidity should never even be clear or close to a concern with your investments in the private markets if your financial structure or your portfolios properly constructed. But I think what, unfortunately, what happens in our industry is the sound bites, going back to the sound bites where all of a sudden private markets are kind of the hot topic. I shouldn't say all of a sudden. They always have been, but certainly again, escalating.
Justin Dyer (15:51):
And guess what? These big money management firms, the wire houses, the guys on Wall Street see that, and they say, "Oh, if we can create a platform, create a product, whatever it is, where we are giving access to private investments, guess what we're going to raise money like it's just raining down on us," and so they're doing it to make money for themselves and there's that conflict there where it's an asset gathering tool. It's a new marketing gamut.
Justin Dyer (16:22):
And you see this time and time again in the financial services industry, unfortunately where, in the financial crisis, 08, 09 coming out of that were these total return funds, multi-asset strategies where they're like, "Hey, we can create these funds, these vehicles that will not go down when the equity market goes down. And guess what? Tons of money flowed into them and then they performed pretty terribly. They didn't meet expectations and you would've been better off just as a long-term investor participating in the equity markets with your risk capital, et cetera, et cetera.
Justin Dyer (16:54):
And so again, love the private markets, but it just drives me nuts when the industry, you can see it go and say, "Oh, this is a great new asset gathering tool," as opposed to, "No, we need to be really thoughtful around this. How do we build a portfolio? How do we gain access to this in a high probability way where we want to be participating over the long-term in that systematic fashion?" Because we know there are going to be bad years. It's not like, oh, private markets are this panacea to returns going forward, but that's kind of how they're being sold.
Justin Dyer (17:32):
Anyway, long rant on it. Certain hot topic in the news today. So, I mean, I'll stop there, but it is. The structure of your portfolio is incredibly important.
Brandon Averill (17:42):
Yeah. I think that's a great place maybe to start to sum it up a little bit, Justin, I mean, I think what we'd like to leave you with is, I think about three things really when we're summing up this topic and the first is that, really more than achieving those big returns, we should actually value that financial structure and it being absolutely unbreakable, right? Unsinkable.
Brandon Averill (18:05):
And what does that mean? It means that it'll allow us to get the biggest returns, because we're going to be around for the longest if we put our structure in place that way. The second is that, while planning's important, you guys know we're planners. We've focused on this. We also got a plan for the plan to not go according to the plan, we know that's going to happen.
Brandon Averill (18:27):
And so, this is where that structure and having that protective reserve in place... A lot of people would say, "Hey, that's overly conservative." If you look at some of our clients' portfolios, the protective reserve is fairly large, but it's not about being conservative. It just goes, which is, most people think about avoiding a certain level of risk, a productive reserve just raises those odds of success because it's allowing you again to be around for the long-term.
Brandon Averill (18:58):
And then the third piece would be to have that long term optimism. The power of the markets are incredible. It is absolutely been one of the greatest and even than just the public stock market has been one of the greatest wealth drivers in human history. You want to participate in this. You need your money to grow. That's why we're investing in the first place. You need to make money and you want to participate in this growth engine, but the only way that you get to participate in this growth engine with any reasonable certainty of success is to be there for the super long-term, and so again, it comes back to the financial structure.
Brandon Averill (19:37):
So, at the end of the day, if you focus on these three things, these are what's going to ultimately help you to answer that question, why are you investing money? It's to grow your money, to meet your priorities and these three things will help you do that the most effective way it possible.
Brandon Averill (19:52):
So we're going to leave it there, but we're excited about next week. Next week we're actually going to get into some of the meat here. It's great. We know we need to invest our money. We know we want it to grow. We know we need to make money. The next question goes, "Okay guys, how do we actually invest this money?" And we'll break it down. There's actually only two main ways that you're going to invest money. You're going to either own something. You're going to buy something and own it, or you're going to actually take your money and lend it to somebody else and let them pay you back plus interest.
Brandon Averill (20:21):
So those are the high level areas. There's a, as you can imagine, a sea of opportunity underneath those two high level categories, and we're going to dig into them, but we're going to end this week. So head over to AWMinsight.com. Make sure you subscribe. You'll get notifications that these are coming out. Give place to kind of keep in touch with us, give us feedback. And with that until next time own your wealth, make an impact and always be a pro.