[00:03:08] Rebecca Hotsko: So you are well qualified to talk about the topics that we’re going to cover today. And the first one that I want to cover with you is behavioral finance, because I know this is something that you really like researching. And so to just kind of frame the conversation today, can you explain what behavioral finance is and how it’s different from mainstream traditional financial theory?

[00:03:32] Colin Slabach: So it really boils down to, well, let me, let me take a step back. It starts with utility theory, which is this absolute beautiful model from an academic researcher standpoint because there’s really only four assumptions. And the first one is that you can rank goods. So if you have an apple or an orange, I like apples over oranges.

[00:03:54] Colin Slabach: But then if you put a banana in there, I can pick the banana or the apple or the orange. I would pick the banana so I [00:04:00] can rank goods. Very basic assumption. People can choose the preference of their goods, and then more goods are better. You want more options, definitely want more options. And then there’s a mix of goods, so you want more choices of those goods.

[00:04:12] Colin Slabach: And then the, the preferences are consistent. The specific point in. So you, you have consistent preferences and this is the only four basic assumptions of utility theory and it really creates these amazing different models that we can do with supply and demand curve and, and all these other various aspects.

[00:04:31] Colin Slabach: And when I say Utility theory, I’m just talking about life satisfaction or the things that are driving your life satisfaction. But behavioral finance really came about because a couple of psychologists said, these are not actually completely accurate. And part of the reason is, is we actually have a two selves.

[00:04:49] Colin Slabach: We, we have two selves. The, the first one is very much kind of a people pleaser, immediate junk conclusion type self with a lot of energy. And then our [00:05:00] other self is more long-term thinking. And that’s really where the difference comes around is willpower. And then just various other factors like cognitive overload.

[00:05:09] Colin Slabach: And really it violates those assumptions, and that’s where behavioral finances come about. And we’re just applying these various failures to different aspects of, say, the market or personal finance. I think it’s 

[00:05:23] Rebecca Hotsko: really interesting because the more I learned about behavioral finance, the more or the less I started to believe that markets are truly efficient.

[00:05:31] Rebecca Hotsko: Because growing up in with economic background and then doing my cfa, I was kind of a bogle head coming out of it. I believed in market efficiency, but then when you start to learn about the way that the behavioral aspects can like impact markets, It really changed my views and kind of my thinking behind it.

[00:05:49] Rebecca Hotsko: And so I guess I’m going to ask you, what do you think or how behavioral finance impacts markets and investors’ 

[00:05:58] Colin Slabach: decisions? [00:06:00] Definitely. I think we see this screaming, I dot want to say perhaps Mark inefficiency with ftx. It’s like, well now we’re at hindsight bias. We’re, oh man. Now that we look back, it’s like, oh, there was a lot of issues.

[00:06:13] Colin Slabach: How were they able to raise all of that money? Cause all of these issues, and really there wasn’t a lot of things in place behind that. Well, if you look back, it’s like 1602 in Amsterdam. When the first stock market came about, it only took like three or four years until there was a market bottle. And if you look on the surface, we can all kind of laugh at them and say, oh, it was Tula bulbs.

[00:06:36] Colin Slabach: It was just, it was Tula bulb. But then you fast forward today and I’m like, oh, okay. Well, you know, we bet on cryptocurrency and these various other aspects. And I’m not saying that there isn’t a use for cryptocurrency and there’s definitely use for the blockchain, but it’s like, okay guys, are we really that different?

[00:06:56] Colin Slabach: And it really boils down to our, our human behavior and are [00:07:00] biology. And so I would say markets may be efficient in some aspects that a lot of consumers won’t be able to take advantage of the anomalies, but someone who really dedicates a tremendous amount of time can perhaps take advantage of these market anomalies.

[00:07:17] Colin Slabach: Now, that’s not to say there’s other factors that a consumer could not do to improve their returns outside of just being a passive investor. But yeah, it’s, it’s very difficult to take advantage of these anomalies even though we do most know most of them exist. I want to back 

[00:07:33] Rebecca Hotsko: up a little bit and can you talk about what are some of those major anomalies and that persistent markets and the behavioral reasons behind why they 

[00:07:43] Colin Slabach: are there?

[00:07:45] Colin Slabach: One that has been kind of put on blast lately over the past 10, 15 years has been the, the small firm effect. So firms that are much smaller tend to outperform. Now [00:08:00] there’s kind of, well they should outperform because they’re riskier, they’re more volatile. But then even if you adjust for all of those different factors, it seems like they do provide outperformance.

[00:08:11] Colin Slabach: One of the, the things that that comes to mind is Peter Lynch, the Magellan Fund. He was primarily investing in these small cap funds. Now, he did take a little bit more of an active investor type approach with investing in these, but it’s kind of been put on blast as of late because the, the mega cap has performed so well over the past.

[00:08:32] Colin Slabach: I guess we would say that 10, 15 year range versus the small cap firms have, have not performed at that level. But it’s, it’s interesting because you would also say now that the rise of venture capital and private equity, we’re seeing firms who are tremendously successful. I call ’em the, the tech ish firms.

[00:08:50] Colin Slabach: They don’t necessarily have to be specifically all in tech, but like Airbnb for example, it didn’t go public until it was already a large cap at like 47 billion. [00:09:00] So I think that’s been one that’s been put on blast, but I also think it perhaps is going to come back quite a. And really I find it’s just perhaps low expectations and it’s a lot easier to go from being a $500 million company to a $1 billion company than to go from a $10 billion company to a 20 billion.

[00:09:20] Colin Slabach: We’ve, we’ve tested that and I think some screening examples that are anomalies of that are Google Your Apples of the world. They really have, they were able to double more efficiently and more effectively than small cap companies. But that’s one of the anomalies. A second major anomaly is the January effect.

[00:09:39] Colin Slabach: So this has been a pretty persistent one for, for quite a while, where stocks who have underperformed throughout the year, specifically in the fourth quarter, tend to perform better in January. And the guy who came up with this was, was rather funny because he wrote. This article, I, I want to say hopefully took advantage of it for multiple years [00:10:00] because he did get superior rates of return if he did, and I personally would’ve not ever written the article and would’ve worked maybe in January and then gone on vacation to wherever for the, for the rest of the 11 months out of the year and just focused on the buying aspect of January.

[00:10:15] Colin Slabach: But he found, Stocks that tend to underperform throughout the year, specifically in q4, tend to do better in January, and this is because of the tax lost harvesting and rebalancing. And that’s really where, where it comes out. If you’re a fund that rebalances in January or your tax lost harvesting, You’re going to be selling in December, you’re going to be repurchasing in January.

[00:10:39] Colin Slabach: And since the stock market, in essence, is the supply and demand, it’s kind of been a persistent anomaly, but it’s, it’s shrunk a lot just since the article, and it almost happened overnight. And that really boils down to game theory. If there’s alpha to be obtained, we’re going to continue to obtain that alpha in the market until it ceases to exist or becomes [00:11:00] tremendously.

[00:11:01] Colin Slabach: So that’s kind of a, another major one. And there are institutional investors that are, are focused on that. So it kind of cuts out the, the little man in essence where if you’re not, not really focused on that, a third one is momentum. So momentum, I would say, has been pretty consistent for quite a while.

[00:11:19] Colin Slabach: Momentum is more on the short term where news comes out. The stock either jumps to the upside or it jumps to the downside, and then it trends down afterwards if it dropped down, or it trends upward after that. And part of that is believed to be the dissemination of information so that these high speed algorithmic traders who once the information has come out immediately reacts.

[00:11:45] Colin Slabach: But then everyone else catches up to it and I consider that to be kind of hard to, to take advantage of, and it is become a lot more muddled over multiple years. I would say an interesting one is when you have an AI or various aspects who [00:12:00] are high speed trading, they can misinterpret the information and then there may be a huge opportunity of perhaps misinterpreting information.

[00:12:09] Colin Slabach: One of the ones that I, I saw recently was, I believe it was Alibaba, came out with their earnings and their earnings were way lower because they used the equity method. A lot of their equity investments had. And so the earnings looked really bad and I think the algorithms saw that and then dropped the share price even more.

[00:12:28] Colin Slabach: And then it was like, oh wait, guys, this wasn’t aspa. That was their equity investments. And it, it really came down to the having to sort that one out. But that’s again, getting more into high speed trading. And if you’re just an average show investor, That’s not something I would be partaking in. Those are the people who, who do perhaps day trade for a living, which I think is a lot harder than most people take into aspects.

[00:12:53] Colin Slabach: And if someone’s trying to sell you a course on day trading or, or various other things, my guess is they’re not as successful of a day trader as you would [00:13:00] think. because if you’re a very successful day trader, you’re not going to be wasting your time creating a course in that. The fourth anomaly that I highly recommend perhaps looking into is more of the value securities, and this gets more at the behavioral aspect of the anomaly of overconfidence bias, or we’re too optimistic and someone you have a very low bar.

[00:13:23] Colin Slabach: It’s nice to be able to just step over that low bar at low expectations. And so these are your kind of low PE stocks. Now again, for the past 12 years, those have been rather underperforming versus your, your high swinging, high value securities. I don’t think that’s because low value is dead or it’s, it’s gone away and we’ve become better at assessing the value of the securities.

[00:13:48] Colin Slabach: I just think with the interest rates dropping a lot of cash flowing into the market, it really drove up the evaluations of other securities. When we see like Netflix and Facebook [00:14:00] have plummeted recently due to this kind of more resetting of the valuation as they were before. Five is reversals. I think the oil sector is the, the screaming example of a reversal.

[00:14:12] Colin Slabach: I think at one point they only made up about 2% of the s and p 500. Now I think they’re up to five. And this is just a general trend of you look at that market return quilt and typically the ones who perform the best are not typically at the top again, and there’s a lot of variation. So this is the reversals.

[00:14:30] Colin Slabach: So the ones who underperform are perhaps going to perform better in the future. I think banks is another one. Oil and banks are the two big screaming sectors that I would say have experienced virtually, perhaps no returns in the past five years and low returns over the past 10. And then you’ve got, I think China is another interesting one that has been absolutely abused.

[00:14:52] Colin Slabach: Their GDP has gone up a tremendous amount, whether you believe their factors and their numbers are exact or if it’s way less. But [00:15:00] yeah, over the past 15, 20 years, we haven’t really seen virtually any appreciation in their market. But the GDP has climbed up substantially. Now, there’s definitely additional risks associated with investing in China, but I think there’s, they’re very well fit for.

[00:15:16] Colin Slabach: Six was, I just kind of put a fun one in is as we approached the Super Bowl, there was someone who I’m sure was a, a data mining aspect, but said that if the A F C wins will enter a bear market and if the N F C wins will enter a bull market. And so that was kind of a funny one. In 1978, it was discovered and fast forwarding today, so in 20 22, 41 out of 55 times, this was actually correct.

[00:15:44] Colin Slabach: So we entered a, the prediction of the A ffc, N F C was actually correct, but it was discovered in 1978 and since it was discovered only 29 outta 43, so about 67% of the time it was. Just an interesting one. I, [00:16:00] I always am very skeptical of these kind of data mining. You look, blast out a million different correlations and you’ll definitely come back with one.

[00:16:09] Colin Slabach: One of them was I think a Turkish cheese sales. So the Turkish cheese sales were extremely correlated with the market. I think they had above a 0.9 correlation in predicting the stock market if the Turkish cheese sales were way up. Well, it really boiled down to someone went on a fishing expedition and then they finally found the fish that they wanted, and it hasn’t been persistent ever since.

[00:16:31] Colin Slabach: So this whole data mining aspect, I always like to compare it to. If you flip a coin 10, The likelihood of it being heads is very low, but if you repeat that a million different times, you’re probably going to couple. They’re going to be 10 and they’re all going to be heads. And you gotta be careful with what people say when they, they say these various different things because you can look historically, but doesn’t mean it’s going to actually predict anything.

[00:16:55] Rebecca Hotsko: It is so interesting. You mentioned so many great ones there and it’s [00:17:00] interesting because even though they’re widely known about and exploited by, you mentioned like a lot of big firms and if it’s a trading firm, they exploit these opportunities, but yet they still largely, most of them, still largely persist into markets.

[00:17:17] Rebecca Hotsko: Although some premiums have dwindled over the years and they go through periods of underperformance, like small cap and value. But I guess I’m just wondering, while we know these exist, why do you think it is so hard for the average retail investor to kind of profit from some of these, even though we know about the January effect and the value in small cap effect?

[00:17:37] Rebecca Hotsko: Why do you think it’s still so hard? 

[00:17:39] Colin Slabach: It’s because there’s people who are working 60, 70 hours a week who are really focused on this, and they’re making a lot of money. They’ve got advanced degrees. Not that I’m saying that that’s necessarily an indicator, but they’re trying to exploit this and they’re doing actually a pretty good job.

[00:17:56] Colin Slabach: And the more that they’re exploiting it, the more efficient markets are becoming. [00:18:00] And. If you have your nine to five job, and even if you spend two hours a night afterwards, what is the likelihood that you’re going to be able to dedicate enough time? I say there’s, you don’t have to be specifically a completely passive investor.

[00:18:13] Colin Slabach: You can be definitely a little more active, definitely perhaps considering the the S Schiller PD ratio and looking at various other factors and tilting your portfolio. But when it comes to to buying individual securities, you have to be aware that there are a lot of people who are working very hard and are already pricing these various things.

[00:18:32] Colin Slabach: In. Doesn’t mean that you can, it doesn’t mean that you don’t know more about something that Wall Street may not, perhaps you’re in, say, the pharmaceuticals industry and you know something more that’s not insider trading, but you know something more than than other individual. But I’d also caution that it’s really, I would say, one of two sides.

[00:18:52] Colin Slabach: You either want to be more looking at it full-time, and I would even say more than full-time, you’re working 60 hours a week at it, or you want to be the opposite and be [00:19:00] leaning much more passive in focusing on other things like maximizing income, being very efficient. I think there’s a lot of different opportunities in someone’s personal life that they can increase a tremendous amount of efficiencies there and unlock perhaps higher earnings potential, reducing their tax bills and various other things that I think would probably add more benefit to their life than if they really tried to compete with these, these big wigs on Wall Street.

[00:19:25] Colin Slabach: Not to say that they couldn’t, but they, they didn’t take care of all of these other efficiencies before taking that. 

[00:19:33] Rebecca Hotsko: I think that is a good point. And the one comment you made about Alibaba and how some firms or their models would overreact to statements, the earnings when they come out. That’s so interesting to me because as the world, I think lots of large institutions are moving more quant based.

[00:19:51] Rebecca Hotsko: If there is kind of that learning curve where things like that happens and there is still opportunities then for investors to find when it doesn’t [00:20:00] make sense when they see those over reactions in the market because it was done by a model and not someone doing the analysis behind it. And so I think that’s so fascinating, but I kind of want to talk about the main behavioral biases that investors can fall victim to.

[00:20:17] Rebecca Hotsko: You mentioned one over confide. So I’m wondering if you can talk about the top mistakes in these biases that investors make, and how does that impact investors’ outcomes and returns? 

[00:20:31] Colin Slabach: The screaming one that always really bothers me is the overconfidence bias. It’s prolific in young men and it spawns from their biological need to mate, and they’re strictly very, very overconfidence.

[00:20:47] Colin Slabach: So fortunately it doesn’t happen nearly as often or as prolific in young self-identifying women. So that’s a a fortunate thing. It’s actually better to be a young female [00:21:00] investor than it is a young male, and part of it comes from trading. They just trade too much. They become more confident. Definitely if you’re trading a lot, that is a sign, especially if you’re a, a young man.

[00:21:12] Colin Slabach: I would say definitely look out for that from the aspect and realize you may not know as much as you think you do and that’s okay, but definitely try and consider what are different aspects that you can, you can see, well, how did I perform versus the s and p 500 because I thought I knew something. But it turns out everyone else on Wall Street already knew that ahead of time.

[00:21:34] Colin Slabach: Another thing that I, I find a tremendous issue with older individuals, and I’ve taken a lot of flack for it recently because the market has gone down, is the under participation in stocks. So while young men are overconfident in trading more and are more aggressive in their investing strategy, the other side is on average, people are very risk averse and they’re not participating in stocks.

[00:21:58] Colin Slabach: Stock, or what I like to [00:22:00] look at it more is, is business ownership is one of the best ways to grow your wealth over a long period of time. And as you’re young, it’s a fantastic way to grow your wealth. I personally am ecstatic that the market has, I wouldn’t say ecstatic. I’m saddened for my older clients and and older investors who are five years before retirement, five years after.

[00:22:21] Colin Slabach: They have a tremendous amount of risk. But for these young people, this is a fantastic opportu. It’s a wonderful opportunity, especially if you have the skills, especially if you’ve accumulated it to, to start saving because the market has gone down and while your portfolios have gone down, there’s a huge opportunity to buy in at a lower amount and really focus on those the next 20 years of returns, which will, will hopefully set you up full retirement.

[00:22:48] Colin Slabach: Another big concern. So definitely the overconfidence specifically in younger men, the under participation in stocks, the hurting effect. I thought FTX was a huge [00:23:00] aspect of the hurting effect, people investing into that cryptocurrency as well. I think there’s a lot of hurting effects. The GameStop.

[00:23:08] Colin Slabach: GameStop. I think there were some incredibly smart people who were exploiting a short squeeze. And then I think there were a tremendous amount of other people who were like, wow, I gotta get in on this. And they were just focused on the hurting effect. They didn’t even know what a short squeeze was, or perhaps they knew a little bit and maybe read a one article or or two on it.

[00:23:25] Colin Slabach: So definitely look out for the hurting effect. I would say there’s a, a saying when someone gets shot in the neighborhood by a house, this home prices have probably just plummeted and the, the police are now more in that neighborhood and they’re going to be monitoring it more. Well, people are fleeing in fear, so Warren Buffett’s saying, be fearful when others are greedy and then be greedy when others are fearful is a definitely a, a good saying.

[00:23:48] Colin Slabach: But it’s the opposite of what most people do. Most people are selling high and buying low, and they’re following everyone else. They’re just following the. Another one is optimism [00:24:00] bias. So there was a, I think it was Prudential, it was this kind of obscure commercial that no one really understood, I think, besides some of us.

[00:24:08] Colin Slabach: But it was with a Harvard psychologist and he had people put up a little sticky notes and they were green and red, and he said, in the past, tell us major life events that happened to you that were positive and negative. Perhaps it was a death of someone they loved. Perhaps it was a switching of a career or a job change.

[00:24:26] Colin Slabach: That was a great decision. Maybe it was meeting their spouse. All of these things. And if you look at the historic perspective, there was a good mix of red and green, and then when they looked in the future aspect, there was way more green than red. There was a tremendous amount of green. And even the further out, someone got the more green there.

[00:24:45] Colin Slabach: So people perhaps had some issue. It’s like, well, I know there’s going to be this negative event that’s coming and I’m going to put that up there. But there was a tremendous amount of grade and the further out, the more optimistic they became. That that persists in our personal [00:25:00] lives. It persists in the market.

[00:25:01] Colin Slabach: We are overly optimistic about the future. There’s some neurotic individuals. Once you hit a certain level of neuroticism, you tend to look more pessimistic about the future. But for the most aspects of their life is we’re, we are optimist. And for most individuals, so that’s a important thing to look out for.

[00:25:20] Colin Slabach: There are negative events that are coming and they will happen in your life, and you need to be prepared for them, and you need to be able to adapt to those situations. I would say one of the, the number one places that sell life insurance, do you know who sells? Like one of the most life insurance here?

[00:25:35] Colin Slabach: At least in the United States. So funeral homes sell tremendous amounts of life insurance. You’re no longer overly optimistic when you’re at a funeral. And that kind of gets to the, the recency bias as well, which also persists in the market. We value the recent information a lot more, and we now become, we’re now pessimistic about the future.

[00:25:55] Colin Slabach: Oh my gosh, I don’t have life insurance. Maybe sometimes it’s a reality [00:26:00] check, but then in other times, we now went from this overly optimistic to this overly pessimistic in the short term that that tends to wear off. But that’s where a tremendous amount of life insurance is happening. It’s a big one here in the United States, funeral homes selling lots and lots of life insurance.

[00:26:17] Rebecca Hotsko: That’s so funny. And the one about the optimism that got me thinking, because as investors, one of the biases is it goes with kind of overconfidence. And when you’re stock picking, if you’re very optimistic about a company, you might over extrapolate their growth expectations or you might justify paying a bit too high because you’re just really excited about the company and.

[00:26:40] Rebecca Hotsko: That’s why I think these things are just so fascinating to learn about, because once you’re aware of it, you can keep yourself in check and hopefully use that to just be self-critical and say, are my, is my model actually realistic? Are my growth rates realistic? Am I being over optimistic and certain things like that?

[00:26:58] Rebecca Hotsko: So that was super interesting. [00:27:00] 

[00:27:00] Colin Slabach: I always like to say Tesla is a screaming example of what they’ve been able to accomplish is nothing short of a miracle. I mean, it’s just to enter a, to build a car is difficult. To enter a market where most automotive manufacturers make their money off of financing and then after car parts, to be able to enter that market and then disrupt it and make those vehicles electric, which is incredibly hard.

[00:27:27] Colin Slabach: They’ve managed to do nothing short of a miracle. I mean, it’s just absolutely fantastic. They’ve accelerated all the other manufacturers to really get after it and create lectured vehicles and change our admissions structure. And I think it’s fantastic. But the evaluation that they had a couple of years ago was just like, oh my gosh.

[00:27:49] Colin Slabach: Like I get it that they have to grow at a 50% revenue, a hundred percent revenue year over year. They have. They 100% have to, based on this evaluation after they’ve already accomplished [00:28:00] all of these amazing things. Yeah. I mean they, they were worth more than like all the other auto manufacturers combined.

[00:28:06] Colin Slabach: Yes. They deserve a premium, perhaps maybe a couple of auto manufacturers, but I don’t know about all of them. So, yeah, it’s just kind of an interesting act of over optimism. And I thought another one was interesting with Zillow was completely getting into the buying of the homes market and they kept saying that they wanted to be the the start to end user.

[00:28:26] Colin Slabach: They wanted to help you with your bank loan, they wanted to do a home inspections, everything. And I’m like, guys, you are going to disrupt all the big banks, all of these industries. It just seems like you’re being overconfident and over optimistic. And they got a crazy evaluation for it. They’ve completely dropped out of that.

[00:28:42] Colin Slabach: And I’m not saying Zillow’s not a fantastic app, but it just seems like these companies and these managements go through these and the more that they seem more erratic, the higher these evaluations tend to be. And it’s like, okay, well we all hate oil because it’s the emissions and all of these things, but then we all [00:29:00] drive to work and do all of these other things.

[00:29:02] Colin Slabach: It’s like, yeah, well you kind of need these oil companies around. And I would love it if we could just turn the, the light switch off for, for all these oil companies and switch completely to clean energy, but it’s not going to happen overnight. And so just these various other things. Obviously banks is another one I think people have.

[00:29:19] Colin Slabach: The bank is coming from my house. Coming from my house. We hate the banks, but at the end of the day, I don’t think the bank wants your house. I think they want to charge you a high interest rate, but they don’t want you to not be able to pay it off. They would rather just have the amount on the, the loan pay down.

[00:29:34] Colin Slabach: And so we kind of ostracize these different groups and I, I don’t want to say they’re going to help perform, but I kind of think they will. And it’s just because they’ve been beaten down and we are just too pessimistic about certain areas. And then we’re too optimistic about other ones. And really there should be this margin that we, we’ve fallen for for most c.

[00:29:54] Colin Slabach: You kind 

[00:29:54] Rebecca Hotsko: of talked about how behavioral biases can influence [00:30:00] crazes, like the run up in crypto or the tulip craze, and I’m wondering on the flip side of that, how it can also impact recessions and market downturns. Do investors then overreact on the downside as 

[00:30:13] Colin Slabach: well? Definitely. Definitely. There’s typically, I wouldn’t say hallways, but there’s a lot of times an over.

[00:30:20] Colin Slabach: So you’ve gone from being way overvalued to now undervalued by how much is, is kind of a relative comparison. I think the 2008, we definitely saw a little little period of quite a bit of undervalued securities that were going to come out of this and do incredibly well. And that’s part of the runup that we’ve experienced was we now went from an undervalued back to being overvalued again.

[00:30:45] Colin Slabach: But it’s typically the back to back. Like you can make some really key decisions in your life and you can drastically outperform the market just because you were, you were buying in when things were looking so bad, and then you were perhaps a little more [00:31:00] cautious at the very top. And that’s really, I think where it boils down to, well, how do you measure that?

[00:31:05] Colin Slabach: I’d love to do that. I, I, how do I measure that? And I really think the Schiller PE ratio, so those who aren’t familiar with the Schiller PE ratio, it examines the earnings over a 10 year period. And the 10 years is assuming that that is one economic cycle. And there’s a lot of things that have to be worked out throughout the earnings and economic cycle.

[00:31:25] Colin Slabach: And over a 10 year period, if you have a low Scher P ratio and you can actually look it up on his website if you have a lower scher P ratio, I would start tilting more towards stocks and if there’s a, a higher scher P ratio, I perhaps would either start hedging a little bit, maybe some longer term, put options if you want to stay invested or perhaps taking a little bit money off the table and investing more in bonds.

[00:31:51] Colin Slabach: In other securities, it’s people. I just have this huge aversion to cash because they love stocks and how fantastic they are. But also realize [00:32:00] that there is a lot of value in having perhaps stocks or some type of tips. I was like, say cash is still trash when you can buy tips and eyeballs. I don’t like cash in the essence of that, but I, I do like the inflation adjusted version of cash

[00:32:17] Colin Slabach: This is a much more attractive. So, I think it’s Ray Dalio says that cash may not be trash anymore. I would say cash is still trash because you’re losing your purchasing power. But if at least you’re maintaining your purchasing power with tips or eyeballs, then it’s definitely not trash. It’s more of a, a cushion going forward.

[00:32:35] Rebecca Hotsko: It’s so interesting thinking about the market over the past, I don’t know, last six months or even year, how it didn’t go down maybe as much as I expected at least. And so it leaves me wondering if, and I think this is largely expected by a lot of people in the financial community, where we’re going to see more earnings downgrades in the next couple quarters in 2023.

[00:32:58] Rebecca Hotsko: And then I think the last time [00:33:00] I looked at the Schiller Cape ratio or Schiller, Still was like it’s come down, but it’s still above the historically normal or average level. And so it is interesting because historically that has rang true. If you look at every time it’s well over the average, it tends to come down.

[00:33:17] Rebecca Hotsko: And so, I mean, it’s not guaranteed, but it’s a pattern that sometimes can’t 

[00:33:23] Colin Slabach: be ignore. Definitely, definitely. I would not rule out that there is more pain to come because of that in the sense that we definitely have a potential of more pain to come. It’ll be interesting to see. I think a lot of evaluations in these major tech companies have come down quite a bit.

[00:33:44] Colin Slabach: A lot of restructuring has happened. We could have this soft landing and I think if there’s a soft landing, it’s going to persist longer than people an. I think the United States prefers more hard landing. We, we tend to be more boom and bust than most places, [00:34:00] whereas places perhaps like Japan would rather have a longer drawn out issue.

[00:34:04] Colin Slabach: But yeah, I, I think we’re, have a lot of macro economic issues that are happening and then we do have some, some various other micro issues. And just to have such a strong dollar is, is going to be difficult going forward. But I think it’s still a great time to buy stocks. I think even if you are a young person and you okay, Sam, say I’m wrong, I’m completely wrong, and you just keep buying stocks.

[00:34:29] Colin Slabach: And it drops another 20% and you’re in your thirties and then it goes down 35% and you just keep buying and you just keep buying. You’re going to come out of this pretty well, because they’re going to go back up and they’re going to go up rather quickly. I always say one of the, one of the big misconceptions about the stock market is the fact that things go up over time, where that’s absolutely true.

[00:34:54] Colin Slabach: A lot of the times things tend to act very sporadically and they can happen almost [00:35:00] overnight. It’s very scary. The problem is like if you miss out on those few days where the market just shoots way up, your returns are going to be way lower. And if you could time that, that’s fantastic, but the problem is it’s so random and it’s just like what is causing this spike in X stock to go up seven or 8% over the past week when it hasn’t done anything for the past two years?

[00:35:24] Colin Slabach: Oh, now look, it’s up 20% in the past month, whereas it hasn’t gone up in the past five years. And it’s kind of interesting that we do discuss about long-term investing, but a lot of things do happen overnight, but then it’s impossible to tell what those overnights are going to be. So, yeah, it’s, it’s a very interesting aspect, but the likelihood of you losing out of money over a 10-year period in the stock market, investing in US securities is relatively low.

[00:35:52] Colin Slabach: If you have a very large, diversified basket of stocks, and I’m not saying you have to go the full s and p 500, but if you have 10, [00:36:00] 15, 20 securities over time, it, it’s going to definitely a solid chance of either being at the same level after 10 years or. And if you’re buying at the lower rate, your, your dollar costs averaging in based on when you get paid and you’re putting it in, the likelihood that the stock goes even up more, your, your portfolio is up, is even going to be greater.

[00:36:21] Colin Slabach: And it’s 

[00:36:21] Rebecca Hotsko: so interesting how you pointed out the January effect earlier in thinking about that now heading into January, where I’m assuming there’s going to be lots of people and big institutions capitalizing on the losses, but at the same time, With the expectation of earnings revisions, and I think there’s 50 basis points more of fed hikes priced into the market right now.

[00:36:45] Rebecca Hotsko: So with those expectations, maybe we could see another mini rally in the first month, but then who knows? Like things could get worse. And so understanding these biases and anomalies again are just so interesting because it could be a [00:37:00] fake little rally and then you can think that, oh, that might’ve just been the January 

[00:37:04] Colin Slabach: effect.

[00:37:05] Colin Slabach: You bring up a fantastic point is there’s three types of people that are, I would say, I don’t want to pick on C N B C or Fox News or anyone. There’s three types of people that are, that are going on there. And there’s the one who says, we are going to enter a rally. We are done with this. We’re heading for the next level.

[00:37:24] Colin Slabach: Then there’s the other one that’s like, oh, we’re going to hit a mild recession. Things are going to kind of stagnate. We’ve priced in the mild recession. Maybe we’ll have a a little decline or maybe a little upside, but then we’re going to come out of this or we’re going to do fantastic. And then there’s the other person who’s the doomsday person, and it’s like, oh my gosh, we’re going to go down another 30, 40%.

[00:37:45] Colin Slabach: It. I always laugh because they’ve hedged their bets. No matter what happens, they have someone who can come on and say, I was right. They have someone that can come on and say I was right. And it’s not, they make a good story. Always. The pessimist always gets the [00:38:00] most news because we are risk averse. So when, if I went on and said there’s 30% market decline, I would be trending more than the other two, but one when I’m wrong, it would be the other two and it would be the the one who’s.

[00:38:13] Colin Slabach: And if you get enough people and they get two predictions, right? It’s like, oh, this is our guru type scenario. It’s like, well, they got, they got lucky twice. There was a, I don’t want to, don’t want to say the fund, but there was these funds and they would have like 25, 50 different funds. And then as the funds did underperformed, they would start rolling them into other funds and the highest performing ones would do the best and they would just keep having those.

[00:38:40] Colin Slabach: And those are the ones I got advertised to. And those were the ones would flow in the assets and they would just absorb these underperforming farms. Well, these highest performing funds over the past 10, 15 years would actually underperform because they were sector tilted or, or whatever. And the reversal came, the reverse came.

[00:38:57] Colin Slabach: So then the ones, oh, we need to introduce a [00:39:00] commodities fund because commodities are booming and the commodities fund will do okay for a little while and maybe it starts absorbing these other funds. And so it was just this huge prolific thing. I always like to say Jordan Belford, Jordan Belford, the Wall Wolf of Wall Street Ponzi scheme guy is, he would pick various stocks and he would get you, if you had a hundred people.

[00:39:19] Colin Slabach: And the stock market, actually during the time period he was doing it, there was a lot of upside. So you could have thrown a dart at the board and you, you could have picked a winner and it was so, it looked really good. Now, right now, I would say if you, you threw a dart at the board, you probably got a loser.

[00:39:35] Colin Slabach: It’s probably gone down over the past six months. Here. You’ve probably caught a U loser. Maybe, maybe it’s performed, but during the time period that he did it, there was a lot of winners. So if he had a hundred people and picked a hundred different stocks, it seemed like 80% of them were winners, and it just was like, fantastic.

[00:39:53] Colin Slabach: And it says, oh, I picked a blue chip winner for this rich person. And then you would find the ones that won the most. And in a [00:40:00] period where the market’s just going up quite rapidly, you probably have a 30% winners. And then if you do it again, and then you have a, a 15% of those winners win again. Now, if you call me up, you have made me so much money and I am so happy with George Belford or one of his team members, and now he pitches this company I’ve never heard of.

[00:40:20] Colin Slabach: These were all blue chip stocks before, and now he pitches me something that I’ve never heard. Oh my gosh, this is a huge opportunity for me. And then I don’t look at the commission rates because the commission’s rates for someone who’s made me so much money, I don’t care as much. And that’s where they made all of their money was those 15% or the 10 maybe was eight, 9% on those commission rates that went through the roof on the people that they had gotten right twice.

[00:40:44] Colin Slabach: And of course they were absolutely bogus. And then the amount of money I’m willing to invest with this person who’s picking these winner. And that’s really human nature. If I have a track record of success, you probably think I’m going to continue to be successful before in the. [00:41:00] 

[00:41:00] Rebecca Hotsko: That is so interesting. I know I just had a chat with Larry Swe a little while ago and he taught, he writes about that so much where it relates to fund managers and assessing your own performance where people go with the fund manager based on their past performance, but there’s no evidence.

[00:41:15] Rebecca Hotsko: Typically those that perform good in the past, they don’t continue to perform well. And so it’s really interesting understanding those things. And then on the recency bias. So you talked about that and I just want to bring that in the context of today and how, I guess the challenges with maybe a lot of people did super well with their stock picks in their portfolio over over the past decade.

[00:41:38] Rebecca Hotsko: Over past few years. And can you talk a little bit then about how recency bias plays in and what might be some challenges that they face now investing in this new decade? 

[00:41:50] Colin Slabach: I think we are going through a paradigm shift. So we, we focus on this high flying tech evaluation, change the world type [00:42:00] aspect, and it was cheap money.

[00:42:02] Colin Slabach: Cheap money from the, the federal government printing money, but then also from the aspect of just really low interest rates. Kudos to everyone who locked in during the pandemic. Four home prices spiked at a 30 year 2.8% mortgage. I am so jealous of you. Congratulations. I don’t think we’re going to see that for, I don’t know ever.

[00:42:23] Colin Slabach: It may not happen. I’ll probably old have a lot of gray hair next time it happens, but we probably won’t see this persistent mortgage rate of, of 70% forever, but I don’t think we’re going to see 2.8 for a very long time. So we are entering a paradigm shift. That’s one thing to realize is there is a major shift coming, is in the process.

[00:42:44] Colin Slabach: The other aspect of it is the past year has been rough all around for a lot of different groups, whether you’re in bonds, whether you’re in stocks. But there will be opportunity and it’s a good time. Now, [00:43:00] I, I know you may have thought you were overconfident in your stock picking ability, and you perhaps now you took on way too much risk and it worked out.

[00:43:09] Colin Slabach: Now it’s time to, to reevaluate and say, okay, perhaps I don’t know as much as I thought I knew, and perhaps becoming more of a passive based investor is more for me. I don’t have the time to dedicate to this, but I can focus on increasing my income elsewhere and try and increase my ability to invest. I would say that retirees have accumulated one eighth of the world’s wealth, and most millionaires have been made in their 401ks, in their, their 4 0 3 plans.

[00:43:40] Colin Slabach: All of these retirement based assets that they’ve been extremely efficient in, and they saw the opportunity and it just, it takes, it takes quite a while. But it’s always difficult because we always idolize the person who won. So right now, the people who are overly pessimistic and have now made a bunch of money be betting on pessimism, [00:44:00] we, we’ve looked at them and like said, wow, they’re so smart.

[00:44:02] Colin Slabach: They’re geniuses. And then the people who are high flying, the Kathy Woods and, and the Ark investments. Wow. She is, she is an absolute genius. The reality is the pessimist has merit. There is merits from being a pessimist. And then also I think Kathy Woods has some fantastic points of various things that she’s said, but they’re not overly genius on both aspects.

[00:44:27] Colin Slabach: I think they’re more human than you originally thought, and I think people need to be aware that they are more human and stock picking is a very difficult, it’s a very difficult game. And the problem with it is the recent events are not indicative of what your tenure average is going to be. So whether you’re wa NYU in the past year or two years is not indicative of what you’re going to be in 10 years.

[00:44:52] Colin Slabach: And in 10 years, if, let’s say you’re 35 now in 10 years, you’re 45. And now situations have gotten a [00:45:00] lot different. Your, your personal situation has changed dramatically. So understanding your limitations and really looking at understanding your limitations is very, very important, especially if you’re a young male, realizing that you do have limitations.

[00:45:16] Colin Slabach: You are not a stock picking guru or you’re not a complete idiot. If you’ve invested in these various things and things have fallen apart. If things have fallen apart, it’s perhaps time to reevaluate and realize that you can lean into. And, and double in on investing in stocks and various other assets.

[00:45:35] Colin Slabach: And then the other aspect is if you have won and you’re, you’ve been a big winner as of late, realizing that you are still human, don’t let it go to your head. Things happen. There’s a lot of randomness. Our minds don’t perceive randomness very well. We like to create a story for everything. And I don’t think there was hardly anyone that perceived a Covid 19 pandemic.

[00:45:56] Colin Slabach: It’s like, well, if we don’t model in randomness, I don’t know how many [00:46:00] people in the fund managers or elsewhere were like, we have to be very concerned about a global pandemic. I I, I would love to have met the guy who was like, I’m very concerned about a global pandemic. I’m going to start hedging my portfolio because of that.

[00:46:13] Colin Slabach: I just, if it just doesn’t seem the government, everything is, was blindsided. So you have to assume that there’s a lot of things that are going to happen that we don’t know what’s going to happen. So it’s the unknown unknowns of the. 

[00:46:25] Rebecca Hotsko: That’s so interesting that you pointed that out in the power of narratives. I loved looking into that during the pandemic because if you look back on history, it’s every significant downturn had a really horrendous narrative attached to it, and at every points in those times, I bet everyone was thinking the same thing.

[00:46:44] Rebecca Hotsko: This time is different, and this is the worst thing they’ve ever experienced in their relative lifetime and in their experie. And so it’s just interesting how we can look back on history and see just the power of narratives and how it can really swing those [00:47:00] overreactions and perhaps under reactions at times as well.

[00:47:04] Colin Slabach: 100%. And I would also add to that is we create a narrative about super successful people. We create this narratives about just, oh man, what was I thinking? Why didn’t I get onto that train? That that person is an absolute genius. We don’t value luck. So I would say Netflix is the prime example. I don’t think Netflix should exist.

[00:47:27] Colin Slabach: I personally don’t think Netflix should be around at all. And the narrative behind it is Blockbuster had. If you look back at Blockbuster should have adopted the model. They should have adopted the model that Netflix had. They could have, you could have physically gotten into the store, dropped off your movie, picked up another one.

[00:47:47] Colin Slabach: They were unwilling to adopt and change their model, and they had distribution. They had everything better, and they actually almost caught up. Carlyon bought massive, massive swaths of the stock and was [00:48:00] planning on catching up to Netflix. And the, the problem was the, the economic downturn of the 2008 financial crisis, blockbuster had more debt.

[00:48:09] Colin Slabach: They couldn’t service all of this debt. They couldn’t get on the train of innovation, but they really, there was multiple steps that Blockbuster could have done to absolutely prevent this from happening and prevent this like massive thing. But we always look at it and it’s like, oh my gosh. Netflix was a genius.

[00:48:25] Colin Slabach: We, we should have got on the Netflix train forever ago, but we don’t look at the failures and the stock market is that we have a very survivorship bias in the stock market. It’s like, oh my gosh, that guy in the garage, why did we not see this coming? And it’s like, you’re right. You didn’t see it coming.

[00:48:40] Colin Slabach: But so did the massive incumbent that was there. They didn’t see it coming either, and they got really complacent. And that’s why the complacency at this other company, I would say almost had just as much of an effect. I think Walmart, Walmart, I think could have adopted a very Amazon based model and could have saw [00:49:00] massive amounts of success.

[00:49:01] Colin Slabach: eBay perhaps could have been way more successful than it currently is if they had adopted some type of model. It just seems like Amazon came just screaming through, and I just thought there was going to be more competitors for their, their market share. But it really was like Amazon delivered. Walmart had in physical locations, they had everything.

[00:49:22] Colin Slabach: And I, I, I’m just curious and we always like to, I think you’ll either, you are either a, a hero as a company, then you, you stay around long enough to become the enemy. And I think that’s happening with Amazon is they were the hero for a long time, and now they’ve slowly become this enemy company of this big uh, conglomerate type scenario that Walmart went through way back in the day.

[00:49:43] Colin Slabach: But we really value these massively successful people. In hindsight, we always look back, it’s like ftx. It’s like, oh gosh, that was, what were we thinking? But when we praise someone, it’s like, oh my gosh, we didn’t really value the, the randomness that really takes place. [00:50:00] The, the prime example is I’ve met someone who’s won the lottery, so they won the lottery.

[00:50:03] Colin Slabach: Fantastic. Not as much as you think, but it was a good amount of money. It was like, like $5 million plus. Fantastic. So happy for the person you won the lottery. Congratulations. You got incredibly lucky. There was no skill involved with that. Most people could see that that person got lucky. Most people can see that there was a complete randomness, but the, the guy who bought up the, the swaths of farmland in Illinois, that now is going under real estate development and has gone up 20 fold in value over the past 10 years.

[00:50:35] Colin Slabach: Oh, he was so smart. That was, that was such a skill play. And then the other aspect of it is people like to brag. They don’t like to tell you about their losers. I would say if you want to, you want to talk to an individual investor and immediately they start talking about all of their winners. I’m assuming they’re probably not a good investor.

[00:50:53] Colin Slabach: But if someone’s like, oh, I was an idiot. I bought in X and it went down to to Y, and it’s [00:51:00] just done nothing but tank and here’s my five losers. But I’m doing really successful because I have a tremendous amount of winners is the the other side. So we either like to take the extreme approach of either belittling someone for a situation that perhaps a lot of it was out of their control, or we like to just say, oh wow, this entrepreneur is an absolute genius.

[00:51:20] Colin Slabach: They’re so smart. They saw this coming and at some point if you look back and you’re like, yeah, I don’t think they saw that coming. There was a tremendous amount of luck in the, the aspect of what actually happened. It’s so interesting 

[00:51:34] Rebecca Hotsko: because everything seems obvious in hindsight, and we can look back and really, it’s only then when we look back and you realize that you made a mistake by following the herd, or you have you wish that you got in earlier, but I think that was such a great way to end today’s episode.

[00:51:51] Rebecca Hotsko: But before I let you go today, where can the audience go to connect with you and learn more about you and your work?

[00:51:57] Colin Slabach: So right now I’m at NYU, so you can go onto NYU if you just Google NYU Masters’ in Financial Planning, you can connect with, we’ve got LinkedIn page there. You can follow everything that would come up with any research or anything that I come out with.

[00:52:15] Colin Slabach: You’ll, see it on their website, but then you’ll also see it, the, the general social media type elements. I don’t, I wouldn’t say I’m I’m not on TikTok or Instagram or anything, but you can follow the, the LinkedIn page if you want to just kind of get a general update or you can follow the, the NYU’s website.

[00:52:32] Colin Slabach: We have a tremendous amount of information and we’re very excited. We, we’ve seen a lot of success in the New York metropolitan area with the launch of the program. And we’re hoping to continue to grow the, the masters in financial planning and serve the, primarily, I would say it’s millennials who serving the boomers.

[00:52:49] Colin Slabach: If you’re interested in financial planning, a lot of it is serving the the boomers, but as they continue to age, a lot of them, fortunately millennials, if you have wealthier parents, there’s going to be a massive transition of wealth to the millennial generation. It is already started, but it’s just going to get more and more, especially if also if you’re in the non-for-profit field, there’s going to be massive amounts of funding coming their way.

[00:53:12] Colin Slabach: There’s a lot of wealth tied up in these 401k 4 0 3 and there’s going to be a lot of direct donations. And then also for millennials, they’re going to have a, hopefully a nice inheritance coming here in the next 20 years on average. 

[00:53:26] Rebecca Hotsko: That is such a good point. You bring up, I actually had another guest bring up that point, that historic wealth transfer that’s going to happen, which is just super interesting to think about the implications that will have for millennials and like you mentioned so many other organizations as well.

[00:53:41] Rebecca Hotsko: But I want to thank you again so much for coming on today, Colin, this was great. 

[00:53:45] Colin Slabach: Thank you Apprecite it. 

[00:53:48] Rebecca Hotsko: Alright. I hope you enjoyed today’s episode. Make sure to follow the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I would really appreciate it if you left a rating or review.

[00:54:03] Rebecca Hotsko: This really helps support us and is the best way to help new people discover the show. And if you haven’t already, make sure to sign up for our free newsletter. We study markets which goes out daily and will help you understand what’s going on in the markets in just a few minutes. So with that all said, I will see you again next time.

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