107: Victor Haghani – True Costs of Trading and Investment Biases

Victor Haghani 0:00 - 0:36

I was born in New York City, and I lived out in Queens for a while in Manhattan and Queens as a baby. Then I was living in eastern Pennsylvania on the Delaware river in Matamoras, a small town on the Delaware just next to Port Jervis. Then I lived in Iran for a while. My dad, who was from Iran, thought it would be really good to go there in 1976 in case there'd be a revolution. We could see what that was going to be like. And then we landed in London from there in 1979, where I stayed and went to university, then came back to the States to work at Solomon Brothers, as you mentioned.

Aundefined 0:38 - 1:00

Do you think money takes up more life space than it should? On this show, we discuss with and share stories from artists, authors, entrepreneurs, and advisors about how they mindfully minimize the time and energy spent thinking about money. Join your host, Jonathan Dio, and learn how to put money in its place and get more out of life.

Jonathan DeYoe 1:03 - 1:57

Hey, welcome back. On this episode of the Mindful Money Podcast, I'm chatting with Victor Hagani. Victor started his career in 1984 at Salomon Brothers, where he became a managing director in the bond arbitrage group run by John Meriwether. In 93, Victor was a co founding partner of long term Capital Management. He more recently founded Elm wealth in 2011 to help clients, including his own family, sustainably manage and preserve their wealth with a thoughtful, research based, cost effective approach that covers not just investment management, but also the broader decisions about wealth and finances. In his public appearances, he shares the unique perspective on active versus passive investing. And the reason I wanted him on the show was because of the recent book the missing a guide to better Financial decisions, published by Wiley. It was named the best book of 2023 by the Economist. There it is. Victor, welcome to the Mindful Money podcast.

Victor Haghani 1:57 - 2:00

Thank you very much, Jonathan. Great to be here.

Jonathan DeYoe 2:00 - 2:06

I'm excited for the conversation. I love the book. First, where do you call home? Tell the audience where you're connecting from.

Victor Haghani 2:07 - 2:17

So I'm connecting from Jackson Hole, Wyoming. It's snowing outside. I was skiing a little bit this morning. I'm my partner in business, James, out here visiting. It's a beautiful place.

Jonathan DeYoe 2:18 - 2:26

I love Jackson. I've never skied. I've been there during the summer, but I ski at Kirkwood. I love skiing. We'll have to hit the slope someday together. That's great. Where'd you grow up?

Victor Haghani 2:26 - 3:27

I was born in New York City, and I lived out in Queens for a while in Manhattan and Queens as a baby. Then I was living in eastern Pennsylvania on the Delaware river in Matamoras, a small town on the Delaware just next to Port Jervis. Then I lived in Iran for a while. My dad, who was from Iran, thought it would be really good to go there in 1976 in case there'd be a revolution. We could see what that was going to be like. And then we landed in London from there in 1979, where I stayed and went to university, then came back to the States to work at Solomon Brothers, as you mentioned. And then in 1993, when I was joining my partners to start LTCM, the hedge fund, my wife and I moved to London and we got the London office started there. And then I stayed in London until about five or six years ago when I relocated out here to Jackson Hole. With spending also spending some time in New York and Philadelphia along the way, moving around a bit. We all move around.

Jonathan DeYoe 3:28 - 3:34

So go back to the very beginning as a kid. Like, what kind of lessons did you learn about money growing up?

Victor Haghani 3:34 - 4:59

Well, my grandfather was a very active stock trader and he took on my mother's side and he would take my mother in where they had the ticker tape that you read about in some of these older finance books. They would be looking at the ticker tape. And so he was a pretty active investor in the securities market, in the public markets. My mom has been like that. I mean, I keep trying to get my mom to trade less, but ever since we got to zero commissions, she just thinks that the money grows, that it's just out there for anybody that just wants to buy and sell. Like she's trading Nvidia around and all of that. But most of her money is in low cost, diversified ETF's. But on the side she's pretty active. My dad was a very savvy businessman, very intelligent. But what's really interesting, right, he never, he was born in 1913, he was never exposed to modern finance, right? Like these ideas of modern finance, he never came across them. They came out in the late fifties, right? Late fifties, they sort of got more, but it probably took until the seventies and eighties until a lot of people started to become aware of them. But it's really hard to imagine what it was like before the 1950s when these ideas about diversification, market portfolios, risk and return, all of these things were really not things that people thought about.

Jonathan DeYoe 4:59 - 5:16

I have to say that when I read your bio, I had this sort of gut reaction to the fact that you're the founder of long term capital management. So it's kind of the cautionary tale of hubris and failure in our industry. Right. So what was your role there, and what do you think happened from the inside?

Victor Haghani 5:17 - 7:49

Well, I forget exactly how many partners we were to begin with, but I was one of the founding partners. I worked at Solomon Brothers in the ARB group after being in research to begin with at Solomon, I was one of the younger partners of those founding partners. I was one of the younger ones. But LTCM was very much a consensus operated business, that we were all very close to each other in our thought processes, very strong friendships, and we kind of ran it on a very consensus sort of basis, you know, as opposed to what we see today, where you have these multi strat funds where they really silo each person like there was. We were all working together there. I was the first partner in London. Later I was joined by a friend and partner, Hans Hofschmidt, and we ran the London office. So I was in charge of coming up with ideas primarily in european fixed income, but also, over time, in some european equity relative value trades as well. So that's what I did there. And I was on the different committees, the risk committee and executive committee and those things. Yeah, I think that what went wrong, I mean, really is we had very large positions, not larger than other people were running on cap. They were not secret positions. I mean, I think a lot of the ideas about what happened at LTCM that were written shortly after LTCM collapsed, primarily the book by Roger Lowenstein, didn't have the luxury of perspective. I mean, it was written exactly within a year after LTCM had its problems. He was not able to talk to any of the central partners or principals in the experience because the consortium of banks that invested in the fund forbid any of the partners to speak, any partners that were there to speak to the press. So. But, yeah, I mean, the trades sort of hit a very big hiccup, and then it sort of had a bit of a self fulfilling problem to it where once we were down 30, 40% and we were out there trying to raise money, that then everybody knew there was a problem. But it made sense that people in the marketplace position themselves in a way that would protect themselves or even benefit from further decline in those things. So the trades, most of the trades were sound and eventually kind of bounced back, but we weren't able to hold on to them due to the. Them just being too big, I guess. So, not really so unusual. I mean, it's not an unusual situation where investors that use leverage to isolate certain characteristics that they want often run into trouble. I mean, it's part of the it's like an occupational hazard of that type of investing.

Jonathan DeYoe 7:50 - 8:02

Yeah. So explain the arc. Like, how do you get from that kind of really concrete investing to this kind of investing? Because it's what you're doing today and what you recommend for clients, and all this is completely different than that. So explain that arc.

Victor Haghani 8:02 - 11:39

Yeah, so, well, at Solomon Brothers and then at LTCM, my job was to try to produce alpha, was to try to find non systematic risks and returns that would be really attractive for people to own. And basically, it was a bit. I was. My job, my employment was trying to beat the market. And the capital that we used to do that was primarily institutional capital, Solomon Brothers capital to begin with. And then at LTCM, it was primarily institutional capital that we were using to do that. However, at LTCM, we also used a lot of our own personal family capital for each one as well. So after LTCM, I realized that not really thought much about how to invest for my family. When I was at Solomon, I was busy. We had compliance restrictions, and a lot of my compensation was given to me in the form of Solomon stock. So I already had a lot of risk. So at Solomon, I didnt think much about investing. Then I go to LTCM, and again, I didnt think about investing all that much other than, oh, here's this fund, I know what's going on in it. I don't have to pay fees. Other people really love our fund and want to get in. We're closed, so I'm going to invest most of my family's savings in the fund. And that was just the way I thought about it. I didn't think about it more deeply than that. After LTCM, I realized I've got to think about this more comprehensively. And I got off in probably an expected direction, which is, oh, well, okay, now I'm going to be investing for myself. I'll invest with other smart people, hedge funds, private equity, venture capital, angel, whatever. So I started to do that for three, four, five years. And then, like, a light went off where I realized that I didn't want to do that anymore, that it was taking too much of my time. I didn't think I had an edge. It was super tax inefficient, it was super risk inefficient, that the only way to make alpha is to be concentrated and to take and, or to use leverage. And so that I was taking all of this risk and the risks were very subtle sometimes. So going into the financial crisis, there were a bunch of tail risks that were in some of the investments that I had, which were not apparent in normal times, there were some investments that I had that should have made money from a credit crisis. And they made money to begin with at the credit crisis. But then when the credit crisis got too big, then they started to lose money. It was like, what? How did that happen? So this whole experience really just pushed me to like, going back to basics and saying, I just, I don't want to ever be forced to sell anything. I want to be as diversified as possible. I don't need to make huge returns. The market provides ample returns relative to the risks we have to take. And that really led me to want to be very diversified using index funds. But I realized that I couldn't be totally passive. I couldn't just say, okay, I'm closing my eyes, here's my money, I'll never look at it again. I just buy these index funds because by the time I was doing this, I had seen too much. I seen the late eighties in Japan, when the pE of the Japanese stock market was at 100, and Japanese stocks represented 60% of all global stocks in the world. So if I was just a passive investor, I would have had to have 60% of my equity exposure in japanese equities at that time. And I was like, no, I wouldn't want to do that. I wanted to have a way of navigating investing based on a simple set of rules that would at least provide some guardrails to my investing over time. So diversification, cost, tax, efficiency, those were all really important things.

Jonathan DeYoe 11:39 - 12:08

Yeah, real important. It's interesting to see when somebody goes deep into the sort of the private investing world and then comes back to, why don't we do public and let's do indices and keep it cheaper and be tax efficient. I love that story. So I know that you or James have told this other story a thousand times, but can you retell it to our audience? Tell us the story of the book's foundational story, that story of 120,000 missing billionaires. I love the story. I had never thought about it that way before. So tell us that story.

Victor Haghani 12:08 - 14:39

Sure. So the jumping off point of our book is to notice that very little wealth in America today, in the world in general, we would say this is the case, but in America, where we have the information, very little of large family fortunes can trace that wealth back to early 20th century american family fortunes. And that's surprising, because since 1900, a dollar invested in the US stock market would have grown into $100,000. And so a family that had, say, a million dollars back then, a million dollars would have grown into $100 billion. If they invested it in the stock market, if they invested it in a combination of stocks and a little bit of bonds, would have. Could still get pretty close to that. Now, a family in 1900, if I look at my family, for instance, and I look at, say, my great great grandfather was like 30 years old in 1900, and I can see how many children he had that are now out there today, how many different families there are. And on average, somebody who is 40 or 50 years old that had a million or more dollars back then, should have had maybe 16 to 32 family pods today. So you could see that money, even if you were spending and paying taxes out of that wealth from back then, if you had been able to invest reasonably well, that those families would have generated many families today with more than a billion dollars each. And we don't see them. When we look at the wealthy families in America today, in general, very few of them. There should have been 16,000, depending on how you do the numbers, thousands and thousands of them. And that's not including the families that became wealthy in the 1910s and the 1920s and the 1930s. And it's not including the fact that so many of these people would have also been earning money themselves. Like we're almost making the assumption that you had a family in 1900, they invested in the stock market, and then nobody else that they gave birth to ever worked again. It's like, yeah, but of course they did. There was also work. So it's really perplexing and informative of how difficult it is to make good, sound financial decisions over many, many decades, that it's really hard to do that. And people don't think about those decisions with, you know. And if people don't think about those decisions with a sensible framework in general, because we don't teach it, there's not enough education and focus on it, for sure.

Jonathan DeYoe 14:39 - 15:13

So there's. You talk about, I only want to spend time on two of these, but you talk about four things that lead to the billionaire's non existence. Right? You talk about consumption, taxes, fees and bias. We could talk about consumption and taxes, but let's talk about fees and bias. I understand the importance of sort of good consumption habits and the importance of tax management, but I wanted to spend most of our time talking about the other two. So regarding bias, you reference a study, trading is hazardous to your wealth by Brad Barber and Terry O'Dean. Terry Odin's out of Berkeley, by the way. That's where I am. Can you summarize what that study says about behavior.

Victor Haghani 15:14 - 17:26

Sure. So Barbara and Odin, they got a bunch of brokerage account records. I think it was from Schwab, but they don't say who it was. But they got tens of thousands of brokerage account records, and they saw how different people managed their brokerage account assets. And what they found was that the more that people traded, the more over time they underperformed the stock market. So they found that in general, that relatively active stock picking investors underperform the stock market by, like 6% a year, just which is like all of the stock market extra return relative to bonds. Right. You know, we have these other studies that are amazing, which look at the difference between fund returns and investor returns, right? So it's like, okay, here's some fund. The classic case that people are talking about these days is Cathie Wood's arc. If you had invested in Cathie Woods Ark ETF when it came out and you kept your money in there until today, you would have made five or six times your money. However, investors have lost a lot of money on the Ark ETF because once it started to go up a lot, once it was up tenfold, then a lot of people put their money in. Then when it went down, some people took their money out, and now it's way below its highest point. I don't know. It's maybe just 20% now of its peak price. So the investor returns, there are big losses, whereas the fund return is this big positive and in a much smaller way. This happens across all of these mutual funds out there when we look at them. So there's a company called Dalbar that has studied this, and they find that fund returns tend to be a couple of percent higher on average than investor returns. And that's a really big problem. And we think that comes from return chasing. Well, what fund has done really well the past year? I'm going to put my money there. What fund do I have that hasn't been doing so well? Take that out. And as if. As though what's happened over the last few years is going to repeat itself, people are making those decisions like that rather than either just staying in a very diversified way in the market or using some other, more expected return oriented framework.

Jonathan DeYoe 17:26 - 18:01

So does this. I know that, like the. I guess the classic study of it's important to be in the market, but it's important not to overthink. It was the sharp and Markowitz, 94% of your return comes from your asset allocation or being your exposure to stocks. And then six or 7% comes from trading and stock picking and market timing. How come we can't retain that information? How come that normal humans, it's impossible for us to remember that unless there's a guide or we're professionals or. It's just. It seems very difficult, even though we've known this for 60 years, that we keep making the same mistakes over and over and over again.

Victor Haghani 18:01 - 21:08

Yeah. So I think this is a really great little parable for the whole thing. We did this experiment some years ago where we gave young, financially trained people an opportunity to play a game where they could flip on a coin that we programmed to have a 60% chance of landing on heads. And we told them that this coin, we've programmed it, when you press the button, it has a 60% chance of landing on heads. And you can bet money on that. When we gave each player dollar 25, and we said, okay, after a half an hour, whatever you've grown that money to will pay you what you're left with, up to a maximum of dollar 250. So a ten x of the 25, they were like youngish people, so it still meant something to them. And what we found was that people didn't play that game very well. They didn't play it sensibly. Like, a real sensible way to play it would just be to bet on heads every time, and to bet maybe 10% to 20% of your bankroll on heads every time. Really simple, if you think about it. Intuitive. So, but for whatever reason, they didn't do that. They did a lot of other things. They doubled down. Sometimes they bet on tails. They did all these things, and they didn't do very well in many cases. After we did the experiment, we were sitting around and we talked to the participants, and we said, like, this is how you should have played it. And if you played it like this, you would have had a 90% chance of making $250 instead of what you did. Like, 30% of them, or 25%, went bust. Amazing. Well, if we let those people play the game again for a half an hour, for sure, almost all of them would have done it, like, really sensibly for the next half an hour, like they learned something, and then for the next half an hour, it would have. And we talked to them and we let some of them play, and they did. Like a lot of people went back to play the game, not for money, but just to see how they would have done. And we could see that they did that. So I just think that there's something really hard about being disciplined for long periods of time, you know that to be disciplined for a decade, for multiple decades, it's so difficult. It's such a long time in a human scale that it's just very hard to stick to anything as a human being for these really long periods of time, even though you know what it is. So, like, if you could do all of your investing, if you could compress all of your investing down to a couple of days, you would invest pretty sensibly once you knew what to do. But then when you take those lessons and you're set free in the world and your life, and life is moving on, it's really hard. So it's interesting, but I think that things are all moving in a good direction. I mean, compared to 50 years ago, the investment things are so much better, but they still have so much further to improve. But there are so much better than they were 50 years ago for all investors, for all members of society. Overall, things are so much better, even though there's still a lot to do. I don't know what percentage of the way towards where we ultimately want to get to we are, but we're really moving along nicely thanks to a small number of people like John Bogle and some of the academic, etcetera.

Jonathan DeYoe 21:08 - 22:23

There's this interesting experience I had. I saw Ken French, and Ken French was doing French, Fama, Fama, French, the four factor model. I saw Ken French speak once and he said, anything less than 20 years of data isn't data. Anything less than, and so every day we open up the paper, we yahoo news, we listen to tv, there's a radio, and they're talking about the data of today or the last ten minutes or the last week or this month. But anything less than 20 years is meaningless in terms of how its effect on long term. That I think is, there's a lesson there that I think you and I understand. And I think that if people understood it, they wouldn't have to pay us like they wouldn't have, they wouldn't have to pay anything to have someone do it because they would have their own stability. But here's, I'm getting around to this question selfishly. I'm very curious what you think about mindfulness, because the old economists told us that we're rational actors. The new economists, behavioral economists, say not quite rational actors like we're very behavioral biases are important, but they don't give us a tool that we can use to overcome the biases. But what do you think about mindfulness as a tool? Generally to overcome some innate biases, to be aware of the biases.

Victor Haghani 22:23 - 23:18

Absolutely. Well, I mean, yeah, it's so funny that you asked that question. I had no idea it was coming. But right at the beginning, when our conversation started, I was going to say, like, wow, mindful money. I love that mindfulness is such an important perspective to have and an approach to have towards life. And it's something. I never even heard of mindfulness until I was, like, in my forties or something. But I think that mindfulness, when it comes to financial decisions and when it comes to many other aspects of our lives, is a really valuable perspective to bring to it mindfulness, to be able to speak to ourselves, to be able to step outside of ourselves and to look at what we're doing and what we're thinking, to understand our mood. Like, sometimes you're just feeling down, and you have to ask yourself, why am I feeling down? Why am I feeling like this? Why am I feeling antsy? And, yeah, I think that's a very, very valuable and central kind of perspective and idea.

Jonathan DeYoe 23:18 - 23:18

Great.

Victor Haghani 23:18 - 23:19

And tool.

Jonathan DeYoe 23:19 - 23:42

Yeah. Thank you. So I was just curious what you thought on it. So I like, in the book, you refer to our biases as a way that we fleece ourselves and how financial costs, commission, fees, and spread are the way that the. That we're being fleeced by the financial services industry. Maybe you know these numbers, maybe you don't. I have to ask, what's the average total cost for a do it yourself investor? Do you know what that is?

Victor Haghani 23:42 - 23:48

No, I don't. I mean, I would hope it's really a do it yourself investor. I would hope it's low, but I don't know.

Jonathan DeYoe 23:48 - 24:29

Yeah, I think once you factor in, there's very low commissions for trading now, but they usually have. I've seen, you know, I'm sure you've seen them, too. Someone brings you a portfolio, they ask you to look at it. It's filled with american funds, and funds that charge 1.3% internal costs. Right. And those don't include trading costs within the fund, and they don't trude. They don't include all kinds of stuff. Right. Spread all that stuff. So I have this feeling that the average total cost is, like, 2% ish. I don't know. I don't know the number either, but it's. I think it's probably unfortunately high. The thing that I'm curious about is how do you incorporate the cost of bad behavior? I mean, we talked about Terry Odin, 6%, but you can't just add that onto the cost of doing yourself. So how do you include that when you think about costs, bad behavior?

Victor Haghani 24:29 - 26:40

I think that the one of the things that we try to talk about in the book is that, look, it is not. It's impossible or incredibly difficult to try to be rational in every aspect of your life at every moment in your day. And our feeling is, don't try to do that. Just try to stop and think about the consequential financial decisions or other big consequential decisions in your life. Just put your focus on those things. Try to identify which are the big consequential ones, and try to be rational there. And don't worry about being rational with all the rest of the stuff. Like, am I going to. Does it make sense for me to leave my car here on the street where I might get a ticket, while the expected value of the ticket is a 20% chance of a ticket? It's dollar 80. That $16, is that cheaper than putting it in the parking lot? Like, just do whatever the hell you want. Just do it. Whatever makes you happy. Like, don't sweat what you're ordering at the restaurant. Go whatever you like. Order it. Don't try to be super rational about the whole thing, but with the big decisions, try to do that. So I think that when you know that you have these. When we know that we have these weaknesses, that we extrapolate too much from small data sets, as you pointed out, where we get anchored on things, where we have this fallacy of control, like, that we can predict things that are random, that we are exceptional, that everybody is an above average, or almost everybody is an above average number. Like, we know those things. We've read about them, we're aware of them, and so we have to be on guard. And for these big decisions, we have to stop, as Kahneman and Tversky say, get into that slow thinking mode with those big decisions. So I think that's. And by reserving the slow thinking for those things and not sweating the small stuff, it's really good. Let yourself go wild on all the small stuff. Just live it up. And take the diet coke out of the minibar in the hotel for $6 if you feel like it or whatever. I don't know. But for the big stuff, stop and really think about what you're doing and avail yourself of what's out there. Now, we just have such great. When it comes to financial stuff, there are great options for people these days, for sure.

Jonathan DeYoe 26:40 - 27:11

This will lead to something. So what do you think of those vanguard, Russell, morning sneeze that advisors use, and I've used it in the past, to say the best thing I can do for you is offer you behavioral advice. The thing that's the most value that I advise you keep you on plan when you want to move off plan. So, a, do you think that's the highest value an advisor can provide? And b, do you agree with those studies that says that the value of behavioral advice is worth more than the average fee, which is like 1% ish?

Victor Haghani 27:11 - 27:26

Well, I think it's really valuable. I think it might be worth more than 1%. There's no way you should pay 1% for it just because it's worth more, right? I mean, Google search is worth a lot, but we don't pay anything for it, really. Or pay a little bit.

Jonathan DeYoe 27:26 - 27:27

Well, it used to be worth a lot.

Victor Haghani 27:27 - 28:41

I think. That's right. I think there is some real value in sensible, aligned, logical, rational advisors helping people to stay the course, to think rational. There's tremendous value there. I don't think the cost should be very high for that. But it depends, you know, like, if you're an advisor and you have a client and you have to intervene with that client all the time, that's expensive, you know, that is. And depending on the size of the client's account, sure. You know, 1% make a lot. You know, could be even a loss for the advisor. Right. Like if you had, depending on, again, the size and how much intervention. So I shouldn't say that you shouldn't pay 1%. I would say that if you require so much intervention that you need to pay advisor, you know, a few percent, you should try to change yourself. But anyway, I think advisor, tremendous value like that. Advisor Alpha, I think maybe Vanguard coined that term. And I think astute. I think it's really astute. But, you know, in general, that those interventions should cost less than a percent.

Jonathan DeYoe 28:41 - 28:41

Yeah.

Victor Haghani 28:41 - 29:09

And, you know, like technology, I mean, there's all these different ways of trying to make it happen. Right. Like, think about betterment. You know, that it's like once you sign up and everything, it's a little bit hard. You know, you're sort of. It's putting these guardrails on you and it's just making it that much more difficult for you to rothschild the path, you know? And so in general, if there's a human there that you have to call and explain why you want to do this, I think that, you know, that's even more valuable. But, yeah, I agree with you. Long, long. So it's perfect.

Jonathan DeYoe 29:09 - 29:54

I struggle with this. And I actually had a conversation with a sort of a new three years intuit advisor just the other day, and she was doing like, so much for her clients because she felt guilty for charging the 1% and she was doing things that were not beneficial for the clients, but she felt like she had to or to deserve the 1% fee. Financial advice is a market. There are many, many, many people out there happy to pay 1% fees. There's also a huge number of people that are like, I'm never going to pay 1%. So my question is this, what is good financial advice? Like, what are the elements of good? What do people need? What is the important stuff that we can provide them? Because I think we both agree it's not performance do that. It's something else. What is it that.

Victor Haghani 29:54 - 31:30

Well, I think it's always the case that instruction by is very powerful. So, you know, I think that there's that showing clients through your own example, you know, how you feel. It makes sense to invest, conveying a sense of humility about markets, a sense of respect for markets, the different. There are just a few golden rules of investing out there. You know, I think that by just keep a very simple message and a simple focus, I think we can do the most benefit for people who are not financial experts or who are not spending their lives thinking about financial matters. Unfortunately, the siren song of other advisors or other investment managers is very strong and is very compelling. And so it's hard, you know, I think it's really, really hard. You know, as the journalist Jason Zweig has said, that the message of sensible investing is concise. It's brief and, you know, it's repetitive and boring, you know, so it's like, how can you be a journalist trying, like, if you're a journalist and you're trying to talk about sensible things, it's really hard. You just run out of, it's like, be diversified, be tax efficient, be cost efficient, you know, whatever challenging is challenging because it's just so simple and there are so many distractions out there. You know, it's Warren Buffett and Charlie Munger, you know, and this and that, and, you know, it's just bitcoin tripling. You know, these things are all so enticing to people and distracting, and it's hard to keep the attention of people on sensible investing.

Jonathan DeYoe 31:30 - 32:23

I think you said the words, I forgot the first one, but there are two h's there. Humility, like you have to and respect. Not two h, one h, one r humility for markets, humility with the face market and respect for markets. And I think that that's, that's everything. But we teach none of that. We have, and we kind of have a moment in the US, at least today, where people hate markets, they hate wealth, they hate money. And it's like, it's really weird to me. I have so much respect for markets and so much humility in the markets. I just, I kind of trust them. I think they're the most rational things working and I, people disagree. But that trust, it's well rewarded if you can keep it, right? So there's a ton of noise out there. I want to hear from your, and you have a very unique perspective that I want to hear from. So I want to, can you simplify this for the average consumer? What is one thing that average person should focus on that will lead to better financial outcomes?

Victor Haghani 32:23 - 34:46

You know, that we just talked about it. I think that you can't get return without taking risk, but you can have risk without getting return. And so realizing that if somebody turns up and says, I think this was something that Matt Levine from Bloomberg said, like, if somebody says, here's a 20% investment return with virtually no risk, you should know that that clock is broken, that there's something wrong there. That's not the way that markets work, that there's got to be some other explanation going on there. Like, there is a lot of risk. There's not that return, or that the return is really a compensation for like working the coffee machine or something, you know, or fraud. So there's this relationship between return and risk and that be accepting of that. We can't break away from that sort of relationship in general that we can't do that. And so, you know, I think if people accept that, but that has to do with the efficiency of markets. I mean, this is the most competitive game, the most competitive sport on the planet is like stock picking. There's no more competitive. There's nothing out there that has more at stake than that. And so every time that you pick a stock, right, or every time that you own a portfolio that's kind of not the market portfolio, there's somebody that's saying, no, I have the opposite belief to you, and that person is likely smarter than you are or more informed than you are. And even if they're not, now you're just taking risk without, like, even if it's like, okay, you know, that person is as smart as I am. Well, you're both, now you both are doing this thing and you both are taking more risk than if you both had a diversified portfolio. So even, like, at the average or higher level of astuteness, you still are taking risk that you, now you're taking this idiosyncratic risk that you're, that there's no reason you're getting compensated for because the other guy is taking the same idiot, you know, is taking this extra risk, too. It's just so, and then there's transactions cost, you know, depending on how you're doing it, there's transactions cost, there's fees, there's less tax efficiency. So the whole thing is just like, the more deeply that you go into it, the more it's like, just keep it simple. You know, let the market, you know, carry you. Keep your eyes open to what's happening out there, what long term expected returns look like, but, you know, and go, you know, try to avoid being overly cut, being overly concentrated in things.

Jonathan DeYoe 34:46 - 35:14

I think that, and you're talking about the, the person who thinks they're smart and they can do it themselves. Right. It reminds me of the, and I think I have the right one here, the Dunning Kruger effect, where it's actually the people that are smart and who think they're smart that are wrong are the most wrong most often. Like, it's because they think they're smart that they make mistakes, which I think is. Love that. So that was the thing to do. Now, what is one thing that maybe this average person or couple has been told to focus on, usually by someone trying to sell them something that they should?

Victor Haghani 35:14 - 35:58

I think it's this, that the recent past is a guide to what's going to happen in the future. You know, return chasing that this is hot. You know, go get into what's hot. It's going to still be hot. You know, it might be, but in general, there's just no real predictive power to that sort of thing. And very often, you know, it's the case that the thing that has been hot offers a lower long term return as well. And so I think that this return chasing is really something to avoid as much as you can, to not be chasing returns, to not be driving with sort of looking in the rearview mirror or whatever, or looking behind you as you're driving forward. You got to look forward and not just say, oh, this is what happened. This is the way the road went. I'll just do that some more.

Jonathan DeYoe 35:58 - 36:00

Right, right. Love it.

Victor Haghani 36:00 - 36:04

That's how you drive off a cliff and people do.

Jonathan DeYoe 36:05 - 36:11

So, Victor, just before we wrap up, I like to come back to the personal a little bit. What was the last thing you changed your mind about?

Victor Haghani 36:12 - 36:30

Oh, my goodness. The last thing I changed my mind. Oh, boy. There's so many there, I think I feel like there's so many. Last thing that I changed my mind. Well, you got me on that one. How about just give me one more second. There was, there must be something really good that I changed. I mean, I'm sure I changed my mind about something recently.

Jonathan DeYoe 36:30 - 36:38

It doesn't have to be a big thing. I mean, somebody once said I was going to put, I was going to put raisins in my cereal and I decided not to, which is fine. Like, it's.

Victor Haghani 36:38 - 37:54

I mean, I guess, you know, something that I changed my mind about recently was being, I think I was more worried about sort of human environmental problems on our earth where, you know, we're just, we're growing so fast, population is growing and we're just consuming more and more and more, and this is going to take us off a cliff. I think I was very. I was more worried about that. And I've kind of changed my mind as I've noticed how, and become more aware of how much fertility rates in developed parts of the world have been falling, have fallen. And, you know, I kind of have this belief, which I think a lot of demographers are coming to as well, that the population is not going to just keep on going up, but we're going to kind of top out as more and more of the world becomes, you know, more, becomes richer, gets more higher standards of living, more education, more emancipation of women and all members of society. So, yeah, I think I've just become a little bit. I think I've been changing my mind about being so worried about that, you know, over time. But, yeah, there's some others that I'll think about once we finish the conversation. I'll be thinking about that. I guess I'm going to be thinking about that tonight. In any case, it's a really good question.

Jonathan DeYoe 37:54 - 38:07

The paradox of intention. Once you're asked, you try to figure it out. You can't remember. So I sort of agree with the second part. Like, I agree that demography is suggesting that we top out. I still think we're doing a lot of damage to the environment, though. I'm still a little worried about that. Or still.

Victor Haghani 38:07 - 38:20

Yeah, I think I've just. I think we are and there's problems, but I'm just feeling a little bit better at it because of seeing kind of hopefully where we're headed and how technology is going. So. Yeah, it's not really, it's not a change mind.

Jonathan DeYoe 38:21 - 38:29

It's a moderating factor. Right. So I want to how do people connect with you? Where do they find the book? If someone's, hey, I'd like to talk to this guy more. Where do I find you?

Victor Haghani 38:29 - 39:23

Sure. Thank you. So our website is elmwealth.com. Our book, the Missing Billionaires, a guide to better financial decisions, is on Amazon and all the other places that you would find it. And actually today audible released a new audio version of the book that I've narrated. So we had an older version of the audiobook that a professional narrator narrated. He had an excellent voice, excellent diction, very expressive. But, you know, he kind of, you know, I think that the version that I've narrated is better because we modified the text. We don't read out tables. We have a PDF for things. And so anyway, so there's an audible version of the book that is decent. And then, you know, the print and of course, a Kindle version as well. But elf.com, you know, to read more of our research, you can sign up to our blog. And yeah, I hope you get the book and like, it feels great.

Jonathan DeYoe 39:23 - 39:35

It's a great book. I recommend it. It's very interesting read. It's, I'm kind of wonky, so I dig that kind of stuff. But I just want to say, victor, thanks for coming on. I've enjoyed the conversation and I hope we stay in touch. I think there's a lot of lot in common there.

Victor Haghani 39:35 - 39:41

Yeah, absolutely, Jonathan, me too. And Berkeley, that's a great, that's a further inducement. I love California.

Aundefined 39:51 - 40:18

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