April 8, 2021

Active Management, EMH, Expected Returns, Historical Data

Episode 144: "Buy the Dip"

April 8, 2021

Active Management, EMH, Expected Returns, Historical Data

Today’s episode doesn’t have an external guest, but Benjamin and Cameron provide fascinating information on a vast range of topics. First, the discussion centers around the book that Cameron is currently reading and what it is teaching him about social networks, the ego-driven world of social media, and the benefits of anonymity online. The hosts share some of the findings from a very insightful discussion which took place on their anonymous community board platform around people’s thoughts on the positive and negative impacts of work. Happiness and the factors that cause it are a big theme in today’s show, as is the practice of ‘buying the dip.’ If you aren’t familiar with this term, you should have a decent understanding of what it is and why you shouldn’t do it by the time you finish listening. The hosts also discuss the incident that has been called “the largest financial meltdown since 2008,” who the RR Model Portfolios are aimed at, and some of the ways people react to crises (in terms of their investments.) Tune in for a whirlwind education on some very important topics!

Key Points From This Episode:

Benjamin and Cameron share statistics which show how the podcast is growing. [0:02:53]
How the hosts find the guests that they interview on the podcast. [0:03:10]
Staggering one year stock performance numbers. [0:04:22]
Why Cameron is reading The Hidden Psychology of Social Networks, and what he is learning from it. [0:06:56]
Community boards and the arguments for and against anonymous online communities. [0:08:02]
The “epic meltdown” which makes up the news story for today’s episode. [0:10:17]
Where the value of the Rational Reminder Model Portfolios lies, who will benefit from them, and who probably won’t. [0:13:53]
Tools which make implementation easy. [0:21:00]
Data on individuals participating in 401(k) plans and a discussion around how humans deal with crises. [0:22:12]
The conversation around connection, control, competence, context that was sparked by the question of whether the goal of retiring is a good one to have. [0:26:43]
Jonathan Haidt’s Happiness Hypothesis; the importance of love and work. [0:29:34]
People don’t tend to prioritize time over money to a point where it is detrimental. [0:32:53]
What it means to ‘Buy the Dip,’ the reasons that people do it and the problems with engaging in this practice. [0:33:15]
The paper that Benjamin has produced on ‘buying the dip’ which will be out by the time you listen to this episode. [0:40:34]
Why the ‘buying the dip’ strategy has been particularly costly for Americans, and the contrast between the cases Benjamin looked at in the USA, Australia, Canada and Japan. [0:45:45]
What people don’t realize about leverage and how this impacts their decision to ‘buy the dip.’ [0:52:00]
The cards created by the University of Chicago Financial Education Initiative. [0:53:53]
Cameron asks Benjamin a question from one of the cards; coincidentally it is about happiness. [0:55:00]
The qualities that Cameron and Benjamin believe are most important in someone who is starting a business. [0:57:05]

Read The Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making for Canadians. We're hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: This weekend is the Masters Tournament on television. We were supposed to have gone to the Masters last year, but of course, it was deferred. Apparently, we're getting our tickets for next year, which hopefully will go ahead.

Ben Felix: That's pretty cool.

Cameron Passmore: Which would be pretty nice. That'd be very cool. I can't wait to me. It would have been a blast to go last year. I think the weather on ... We have Monday tickets. The weather was perfect last year on the Monday, so let's hope for a good weather on the Monday next year, but it should be good television this year.

Ben Felix: I won't be watching it, but I'm sure you'll tell me how it goes.

Cameron Passmore: I'm not sure how much I will watch, but I'll certainly catch Sunday afternoon, because that's the exciting part. The back down on Sunday. The offer we put out two weeks ago for the water bottles was a big success. It was pretty cool to hear from people because I said put a comment in the order on our Shopify site, and people did. It was really great to hear from people all over the world, of course, many in Canada and the US, but heard from the UK, Germany, and also someone in Australia reached out, which is really nice.

Ben Felix: That is cool. We know from the community survey, anyway, I think there was more Europeans in the community, which is probably representative of the podcast listenership, more Europeans than Americans, which is kind of cool. Canada being the biggest cohort, but then Europeans were next, and then Americans were after that.

Cameron Passmore: Also, some nice reviews recently. We want to give a big shout out and a bit of gratitude to Traveling Angler, MLBC 1993, Tommy Vernieri, LSwan90 and of course, Trivia Crackhead for leaving some really, really kind reviews. I tweeted out last week some podcast stats, which we actually get asked fairly often so I thought I'd give a quick update.

In March of this year, the audio downloads were just under a hundred thousand. Didn't quite make it, but last March, so March of 2020, it was 55,000 downloads. Then YouTube views, which are very little a year ago were around 25,000 this past March.

Ben Felix: If you take them together, that's well over a hundred thousand listens across YouTube and the audio. That's pretty cool.

Cameron Passmore: Yeah, it's great. It's great to know that people are listening, and you can also see that people are going back through the episodes, because even our first episode has staggering number of listens, even though I know you and I aren't the biggest fans of our early releases. Also, had a podcast creator reach out to me last week asking if we hire an agency to find our guests. Perhaps people wonder how we do it. It's actually just you and I looking around and see who's interesting and who's online, and it's easy to find interesting people. It's hard to get them sometimes to come on the podcast, but it's just you and I looking around.

Ben Felix: Yeah, I'll find a book or a paper or whatever that's interesting. A lot of times what will happen is, if I find someone that's written a paper, and then the second time I stumble upon something that they've written, then I start to think, I wonder what else they've done, go look at all the other papers that they've written. Then if there's a pretty interesting body of work, then I'll just reach out, but I find in the academic world, people tend to be very receptive when we reach out.

Cameron Passmore: I agree. Also, wanted to highlight that on May 4th, at 3:00 PM Eastern, we're going to be having our first AMA with Paul Merryman and two of his research colleagues. That's the week after our interview airs with Paul. So, he will join us. There's a lot of discussion on the community board of questions for us to ask Paul, so we thought he'd be a great person to kickoff our first AMA, and this is something that if there's enough interest, perhaps we could do it monthly going forward, or perhaps more often.

Ben Felix: If we can get our guests to do it. I think we have it actually in the form that we send to guests when they agree to come on the show. We ask if they'd be willing to participate in something like that. I think that the more of that we can get, the better. I don't know how many of the guests will actually have the time to engage in an AMA.

Cameron Passmore: Yeah. I think the last item for the intro is just some staggering one year numbers. Of course, the period is chosen from a low of last year to where we are today, but wow, the opportunity costs, if someone did not stay in their seat in their asset classes a year ago, is just jaw-dropping numbers year over year. The SPDR S&P 500 ETF up 65%. This is the one year performance numbers to, I guess, Friday, April 2nd.

Ben Felix: Yeah, Thursday. It was a holiday, right?

Cameron Passmore: Yeah. Right. Thursday night is the 1st, April 1st, so the one year numbers. Then the Vanguard total rolled ETF up 66.6%. But then you look at the Avantis US Small Cap Value ETF, AVUV, up 156.9%.

Ben Felix: Crazy, and it got hammered too, obviously when things crashed. I wanted to see for that one, if we just go from inception of that fund, how's it doing? Because it was inception the end of September, 2019. I ran from October 1st, 2019 until March 31st. In annualized terms, it's beating all the other funds that we're looking at here. It's beating SPY, it's beating VT, 29.42% annualized return from October, 2019 until March 31st, 2021. Even though it did get hammered, it's more than made up the ground that it lost at this point.

Cameron Passmore: Yeah, like the 600 basis points over the SPY.

Ben Felix: Crazy.

Cameron Passmore: Yeah. The iShares MSCI Emerging Markets up just under 67% in the last 12 months. Then the Avantis International Small Cap Value up 81% last 12 months.

Ben Felix: Also crazy.

Cameron Passmore: Crazy. Just shows how prices went down, expected returns went up, and the expected returns showed up.

Ben Felix: Showed up and realize returns.

Cameron Passmore: Realize returns showed up. These were not the expected returns. Of course, these are much higher than they expect returns, but still, it just shows you the cost if you build those strategy or it didn't rebalance into these different asset classes.

Ben Felix: Totally. We're going to talk a little bit about that in the episode. There's an interesting study. I won't get ahead of myself. We can talk about that in the episode.

Cameron Passmore: All right, so here we go.

Ben Felix: Welcome to episode 144 of the Rational Reminder Podcast.

Cameron Passmore: I thought we'd kick it off with a really neat book that was suggested to us by our marketing communications specialist, Angelica, who I think a lot of people have heard us talk about, and she recommended that Ben and I read the book called The Hidden Psychology of Social Networks. This is written by Joe Federer, who is the former head of brand strategy at Reddit. She suggested it because, especially for me, I really want to learn more about the dynamics of our community board. I just find it so fascinating how many people are engaging this community board.

This could be a neat discussion about what we're all living in this community board and why things like this and Reddit are so popular. We've talked about, in past discussions, how humans are social beings and we like to connect with people, and we also like to show the world who we are, but so many sites like Instagram and Facebook are often about showing who you are to the worlds that are very much ego-driven. This is the argument that the book makes is ego driven sites and you're not anonymous there. So, you want to show who you are, who's Ben, where's Ben traveled to, what are your kids doing? Whatever it might be, and that's fine.

I enjoy seeing a lot of my friends on Instagram, but this world of the community board is an anonymous world. Instead of being an ego-driven world, this is an Island of common interests that people have sought out and have come to, to basically engage with other people like them. They talked about in the book how there's been a lot of debate around, are anonymous places online dangerous places? Can they lead to bullying or other kinds of bad behavior? But the argument that the author makes is that there's enormous amount of positivity that can come from an anonymous environment.

Ironically, being an anonymous environment, it can actually cause a higher level of trust because you are there solely to learn. That's the only reason to come to a community board, to learn, to share, to exchange your ideas, to possibly change your mind without having to unwind your personal persona to the world. I thought that is really interesting, and that is exactly the essence of what goes on in this community board. I know a couple of weeks ago, you were sensitive about talking about the board and making sure we're not being perceived as selling.

Well, we're not selling there. We're not selling here. We're trying to give information out to the world to improve our own learning, but improve the experience of people out there.

Ben Felix: Yeah. I remember when we were talking about, what is financial advice? I didn't want to come across as ... Of the things that we sell, that is it. We sell advice, so talking about why or what it is, I guess. Yeah.

Cameron Passmore: Anyways, you end up with these environments that are free of politics, free of all kinds of different biases, be it gender or whatnot, and you're just there. He talks about how the fact that you are there, you are in this community, that becomes what they call your digital clothing, which I thought was quite interesting, and it leads to very high level of trust environment. That is exactly what goes on inside the community board. If you're into this at all, I highly recommend the book. The hidden psychology is social networks. It's a really enjoyable read.

Ben Felix: I got it because you told me. I asked you if I should actually read it or if I should just listen to what you say, and you said I should actually read it. It is sitting next to me on my desk now.

Cameron Passmore: Awesome. Onto the new story. This one I'm sure a lot of people have heard mentioned in the news. This one comes from an article that Wall Street Journal called Inside Archegos's Epic Meltdown. This has been an incredible year in finance. With the explosion of SPACs, to the whole GameStop Reddit story, and now this story, which some people are calling the largest financial meltdown since 2008. It's a pretty stunning statement about what happened. In case you haven't heard about this, this is where a former hedge fund manager, Bill Hwang, who runs his family office called Archegos Capital Management, he used to run money for others, but now he just manages money for himself.

He was a protégé of the faint hedge fund manager, Julian Robertson. He has a very strong desire to invest in a handful of stocks, a very highly concentrated portfolios, and he likes to look for stocks that are being heavily shorted. Apparently, he's had great returns for a number of years, but to get his appetite for risk fulfilled, he went out as a private family office and lined up financing from banks to increase the bet sizes. The problem became that the banks weren't all communicating with each other so I don't think they had control over how much was being borrowed, which obviously now, when you say it like that, you can see a potential disaster coming.

Anyways, one of the stock positions dropped a lot and cause a need to raise capital, which meant he had to sell up other shares to raise capital, and you could see the whole thing cascading down, but in many cases, for every $100 invested, $85 was borrowed, if that doesn't blow your mind.

Ben Felix: He was using swaps too, right? I don't think he was even holding shares. It was a heavily engineered ordeal that he had going on there.

Cameron Passmore: Yeah, and then you read things about his history that insider trading fines and whatnot, which makes you wonder, like how did he even get access to this kind of credit? One part of the article says that Archegos had exposure to at least eight stocks that lost a combined $35 billion in market value on Friday alone. It's just wild. It goes on to say Archegos collapse is the dumbest financial thing that has happened all year. Incredible, incredible story. Combination of concentrated bets, lots of leverage and someone not connecting all the dots, I guess.

Ben Felix: Yeah. You'd love to hear how that story comes out just in terms of how he was extended that much credit.

Cameron Passmore: Oh, there's so much more to this story that we don't know, but it was a pretty big story in the news.

Ben Felix: That's a big meltdown.

Cameron Passmore: Yep. Onto a few listener questions which we have not done in a while.

Ben Felix: We realized we were talking about this, you and I Cameron, that we haven't really done listener questions in a while because all of the listener questions just get absorbed into the community discussion. It kind of just hadn't connected the dots that we weren't getting emails anymore because they were happening over there. But then we also recognize that there's 3,000 people roughly participating in the community. Based on the number of downloads we're getting, we probably have, I don't know, 20,000 people that are listening.

Cameron Passmore: Oh yeah, I would think so.

Ben Felix: Then it's a fraction of people that are in the community board that are also listening. We figured we can pull some of the questions that are coming out of there and talk about them. Then all of the listener non-community members get to hear some of the good questions that are going on too. One of the big ones was whether or not the Rational Reminder model portfolios are too complicated for the average DIY investor.

This came from an article that Rob Engen wrote. Rob has been on the podcast when we talk about his family planning service every now and then. He wrote a post basically saying that we never should have published the model portfolios. We should've kept them under lock and key. His concern, which is valid, his concern is that DIY investors who don't have the expertise, knowledge, or emotional fortitude to implement these portfolios are going to try and do it. He tweeted even a screenshot of somebody on Reddit or something, basically saying something along the lines of, I've never invested before, but I'm going to try and implement these portfolios or whatever, something like that.

He's like, see it's happening. He says in his post, "It's clear that inexperienced investors are trying and failing to implement the more complicated portfolios in real life. In fact, it's possible we'll see thousands of Bender and Felix," this is Justin Bender's more complex model portfolios, "Bender and Felix investing refugees flocking back to a one ticket solution in the years to come." There's this whole discussion in the Rational Reminder community about whether or not that's true.

Cameron Passmore: What's the main reason why they would fail? Too complicated to implement? Too complicated to trade? Too hard to rebalance?

Ben Felix: I'd have to pull up Rob's post. He had a whole list of ... There were a lot of things like that. Those were the main kinds of points.

Cameron Passmore: Would they have rebalanced a year ago when things were as bad as they were. I mean, it's easy to see all the things that could go wrong.

Ben Felix: Yeah. I mean, Rob participated in the discussion about this that went on in the community. Rob participated and had lots of great points. It was a very lively productive discussion. But Rob also had some pretty funny comments about, have you been on the internet? Have you talked to people? He said something along the lines of, I, Rob, still get emails based on a blog post that I wrote in 2012 or something about Air Miles, and I still get people emailing me thinking that I am Air Miles and asking me how to recover their points or something ridiculous like that. Rob's point is really just that, for a lot of people, a portfolio like the Rational Reminder model portfolio is way too much.

Cameron Passmore: Sure.

Ben Felix: I don't disagree with him.

Cameron Passmore: No, you can't.

Ben Felix: For most people. But I think it's also important to think about the Genesis of the model portfolios. Why did we create them? I also think it's important to point out that we don't invest in those. Our portfolios are both in the dimensional funds, the same funds that we use for our clients, and in both cases, those are not, they don't resemble the Rational Reminder model portfolios. Those are designed to be the approximation of the portfolios that we use ourselves and with our clients built out of low cost ETFs because most people cannot go out and buy the same dimensional funds that we use for clients.

We decided to create those, to create those model portfolios, because in the early days of the podcast, we would talk about factor investing, which, as listeners know, has become an important part of the overall discussion and community that's grown around the podcast. But in the early days, we were talking about this stuff and we didn't really have a whole lot of practical application to tell people about. I mean, and maybe even taking a bigger step back, well, the podcast started as a way to communicate with our clients.

For them, dimensional funds are completely relevant. That's all we needed to talk about. But as the audience grew past our own client base and the people that were listening, the majority of people at this point are not our clients and they can't access dimensional funds, so we needed, or we wanted a way to say, for all this stuff that we're talking about, here's how you can actually go and do it yourself, and that just makes all of the conversations, so we have that much more relevant to the audience. I just think it's important to keep context of why they exist.

There's a lot of merit to what Rob is saying, but there's also a lot of valid pushback from within the Rational Reminder community from people saying ... I think Rob says in his post, and it's definitely hyperbole, but he says that only engineers and mathematicians can manage a portfolio like this. Then there are a lot of people from within the community saying, well, I'm not a mathematician or an engineer and I'm having no problem managing the portfolio. Then there's a whole other discussion just around the availability of information like, the idea that these should have been kept locked up and not made available to the public.

I think there's a pretty large philosophical discussion about that. We feel pretty strongly about making information available to the public so people can make their own decisions. Anyway, so I think a lot of this discussion kind of comes to a head with the idea that our community around the podcast is probably a little bit more intermediate to advanced in terms of investing knowledge and interest in personal finance. Rob's audience is probably the opposite. The opposite end of the spectrum. Most people are probably somewhere in between.

I think the big thing that people need to think about before implementing these portfolios, because I agree with Rob, you're not going to go tell your mother, although somebody in the community points out that their parents are managing this model portfolio on their own, but I'm not going to go to my mom and say, "Mom, I don't think you should be at PWL client anymore. I want you to implement this six ETF portfolio." Two of them are listed in USD so you have to make sure you do Norbert's Gambit properly. That just wouldn't ... It wouldn't work, and I think that's Rob's point.

There's a whole other piece in this, which is that a lot of people within the Rational Reminder community agreed, that while they're implementing something like the Rational Reminder portfolio on their own, and they think there are a lot of people that can do it, for the most part, when they tell people in their lives, whether it's a friend or a family member or whatever, the advice they usually give to them is to go and buy one of the single decision ETFs.

Cameron Passmore: Because I would think those people are centers of influence in their own sphere of friends.

Ben Felix: For sure, the people that are highly engaged in the community and that are listening to every podcast episode, to the extent that they are understanding the discussions and the episodes, those people are far above average in terms of investing knowledge, so I agree. They probably are centers of influence. Personally, if I did not have access to dimensional funds and I didn't have access to PWL, I would probably not be using the Rational Reminder portfolios. I personally value simplicity a lot. Even if there's an implied cost to lower expected returns by not having the additional factor exposure that you get from the small cap value funds in the model portfolio that we've created, I think I would rather live with that than have to worry about managing and rebalancing a portfolio. Now-

Cameron Passmore: I didn't see that coming.

Ben Felix: You didn't?

Cameron Passmore: I didn't.

Ben Felix: Oh.

Cameron Passmore: I thought you'd build some tool that would automatically rebalance it for you every quarter or something.

Ben Felix: Well, so that's what I was about to say, is that there are tools like Passive that exists now where it does make it very easy to do the implementation. I haven't used that personally. I don't have experience with it. It's very possible that if I tried it, I would change my mind. That is one of the points that a lot of people in the community made, is that they've built tools, where they're using a tool like Passive that makes the implementation very easy. I guess the main point I'm making about myself personally, is that I would choose the simple solution over the more complex, but optimal one.

That may end up just being using an off the shelf tool that makes a more complex implementation easier. I think the answer to the question, the question was, are the Rational Reminder model portfolios too complicated for the average DIY investor? For the average DIY investor, I would say they probably are. Most people, if you're going and telling you your friend at work or whatever about index investing, it probably doesn't make sense to tell them that they should go and sell their mutual funds from the bank and invest in the Rational Reminder model portfolio.

To add onto that whole discussion, and we mentioned this in the introduction, there's a really interesting paper from Morningstar written by David Blanchett, who is our guest in episode 137. They have data on 520,000 individuals participating in 401k plans during the calendar year 2020. This paper just came out at the end of March, 2021. They were looking at these two broad samples or three broad samples. The group of people that were in target date funds, the group of people that were in managed funds, and the group of people that were self-directing.

Self-directing was 41% of the overall sample, so a pretty good chunk. They found that, of the target date fund participants and the managed fund participants, so the people that are not managing the assets themselves, between 3% and 3.5% of them changed strategies. So, got out of the target date funds and did something else. Pretty low, I think. Then for the people that were self-directing, 13% of them changed their allocations by more than 5% during the calendar year 2020.

Cameron Passmore: Again, pretty low.

Ben Felix: Yeah, not bad, but also non-zero. That's a decent chunk of people out of 500,000. That's 13% of the 41% that are self-directed. But the nature of the allocation changes are really interesting. Most of the allocation changes were toward a more conservative portfolio, older participants with more aggressive portfolios tended to make the biggest changes. But now, this piece is pretty staggering, and it speaks to what you're talking about just with the asset class returns, Cameron, in the introduction. They estimate that the under-performance of the reallocators, so the people that changed by 5% or more, in 2020 was 750 basis points through the year relative to if they had not made changes to their portfolio.

Cameron Passmore: That's a lot.

Ben Felix: Pretty serious tracking here. It makes me think of what Ken French said in episode 100, which is that you may learn about yourself in a crisis, and maybe these people learned about themselves, and maybe they're just realizing the lower expected returns they should've been striving for all along, and it just is what it is. But you have to wonder about our ability to make decisions in times of crisis.

Cameron Passmore: What are you going to learn at the opposite event, where the markets have gone way up? You can learn you love great returns?

Ben Felix: Yeah. Well, that's the tricky part.

Cameron Passmore: Yeah. Head's I win. Tail's you lose.

Ben Felix: I've talked about this in past conversations, which is that in March of 2020, it did not seem like a crazy idea. My wife and I actually talked about getting plywood to cover up the windows if stuff got much worse than it was at that time. It was a serious conversation that we had. It wasn't laughing and joking. It was like a dead serious, real, real conversation. Then you think about rebalancing your portfolio, and it doesn't really surprise you that I'm starting to think about stuff like that, that people might make their portfolio a little bit more conservative.

It's not even just stuff like that. It's, if you've put the Rational Reminder model portfolio in place, for example, 10 years ago before ... Well, the Avantis funds didn't exist 10 years ago, but if they had, they would have gotten slaughtered for the last 10 years, along with the small cap value asset class. It's not like that happens in a bubble. It's not like value underperforms and everyone just sits back and says, oh, well, value's coming ... It's going to come back soon though. We don't have to worry. That's not what happens.

Everyone's saying no, value is dead. The world has changed, the economy's changed. It's a winner take all economy. Everything's different now. It's not so easy to just say that you're going to stick with the strategy. I thought that data just on, because we were basically talking about, at that point, the difference between V.GROW. It's not actually a target date fund, but it's a very similar concept, a single holding that you're supposed to hold basically forever. The Morningstar article's basically comparing that to self-directing your own ETF portfolio, and their evidence, which is what suggests that it was a lot easier behaviorally to stick with the target date.

Cameron Passmore: But it's still impressive that so many people did not change their portfolios through last year at 401k plans.

Ben Felix: Yeah. It's very impressive.

Cameron Passmore: Amazing. Go to the next question?

Ben Felix: Yeah. The next one I asked it in the community. Just as I was doing all the reading about goal setting and stuff like that to prepare for the last episode that we recorded together, so on goal formation and things like that, I started wondering, is it a goal to not have to work? Everybody says that their goal is to retire. That's basically what it is, is that the goal is to not have to work. I asked the community, why do you want to stop working? There was a really, really good discussion that followed. For additional context, when I asked the question, I gave the four Cs that Brian Portnoy had in The Geometry of Wealth book.

Connection, social connections being a deep source of meaning. Control, the ability to direct and define your life, being a deep source of meaning. Competence, being good at something you care about, being a deep source of meaning, and context, attachment to something bigger than yourself, being another source of meaning. Then I asked, given those four Cs, why do you want to be financially independent/not have to work? Do the four Cs resonate as fundamental to have meaningful life? Does financial independence make it easier to achieve the four Cs, and does work make it harder to achieve them?

Cameron Passmore: Those are great questions.

Ben Felix: There are 109 comments in this discussion. A lot of them are essays so I'm not gonna try and cover everything that was said. But I think, in general, everybody agreed that the four Cs do resonate as fundamental to a meaningful life, and no real surprise there, because that conclusion from Brian was based on a ton of literature. Some people want to be able to stop working, to increase the control over their lives, but they don't necessarily want to stop working. It was more of this idea that they didn't want to be beholding anyone. They didn't want somebody else's decision to affect their lives. I thought that was an interesting insight. It is pretty intuitive when you think about it.

Cameron Passmore: That's the control thing, right?

Ben Felix: Absolutely, it's control. You can definitely see how, even if you don't stop working, having independence, having financial independence gives you a tremendous amount of control. Some people, and this was a smaller subset, I think, maybe not that small, but some people want to stop working because they're not happy with their jobs or don't find their jobs to be meaningful. Again, fits into the four C framework. Most people agreed that work is generally detrimental to the four Cs, except for competence, where people thought it was important.

It kind of speaks to the idea that a lot of the people or some of the people that don't find their jobs particularly meaningful, or even find them to be a source of stress, I encourage people, if you're listening, to check out that discussion, because I couldn't possibly summarize all the things that were said, but there were a lot of really interesting sort of raw insights, and it speaks to what you were saying earlier, Cameron, about the fact that it's an anonymous community, a lot of these people, and they're even saying so in their responses like, I would never say this in real life, but because I'm anonymous, I'm more comfortable saying it.

Cameron Passmore: That's wild.

Ben Felix: Yeah. One of the other things that I've been reading is, it's a 2006 book by Jonathan Haidt, H-A-I-D-T. This is like my third time reading the book. I listened to it twice on audio book, read it once, and I've skimmed through it again recently, but he talks quite a bit about the relationship between work and happiness in the book. Now, it's important to note though, he doesn't talk about work as like the requirement to work. He's talking about work, the way he defines it is, how would you answer the question when someone asks, what do you do? That's work. It could be a lot of things.

It could be a hobby that doesn't, not necessarily working for money.

Cameron Passmore: Paycheck. Yup.

Ben Felix: Right. The book is from 2006. I don't think that the conclusions in Psychology have changed a ton since then, but just worth noting. He talks about the happiness formula, which is happiness equals biological setpoint, S, plus the conditions of your life, C, plus the voluntary activities that you do, V. H equals S plus C plus V. It is interesting, and this comes up in geometry of wealth as well. It's interesting that people do have this setpoint. Some people are more predisposed to feel happier than others.

That's just one of the things that you kind of have to deal with. He says that in the conditions of your life, which are one of the things that you have some control over, the two big pieces are love, so secure social relationships, and that can be friends. It can be a spouse or probably both to do it right. Then the other big one for the conditions of your life piece is pursuing the right goals to create states of flow and engagement.

Haidt says that you can get flown engagement from all kinds of different places, but the place where most people get it from his work. He even says that love and work for humans are like sunshine and water for plants. Based on the research at the time, which again, I don't think has changed a ton, one of the things that he said based on a couple of papers is that people can get a lot more satisfaction out of their work just by changing the way that they think about it, which is a pretty interesting insight. He says, this is a quote from Haidt.

"Love and work are crucial for human happiness, because when done well, they draw us out of ourselves and into connection with people and projects beyond ourselves."

Cameron Passmore: Yeah, for sure.

Ben Felix: I totally get the idea of not having to work and I think that's an important distinction, and that speaks to that idea of control and security. Then you also think about the conversation that we had with Ashley Whillans last week, which also got ... There's a really good discussion around that episode as well, and she talked about the importance of active leisure. It's not obvious that you can't get a lot of the same benefits from work, from active leisure activities. That's all I got really. It's just an interesting observation that these two critically important things are somewhat working against each other.

Not doing active leisure is detrimental. Not working is also detrimental. I guess it just comes down to finding some kind of balance. I guess that ends up being one of the risks in goal setting and planning, is going too extreme in either direction, although Ashley did say that she hasn't heard of anyone yet that goes too hard on the active leisure. Remember we asked her if she's seen anyone that prioritizes time over money to the point that it's detrimental, and she said, it's possible, but I haven't seen it.

Cameron Passmore: So interesting.

Ben Felix: I don't actually have an answer to the question. I don't think anybody did, but there are a lot of really insightful thoughts that people shared.

Cameron Passmore: Fascinating. The portfolio topic this week, you got to kick it off by saying where this idea came from because the subject is buy the dip.

Ben Felix: I don't remember. I remember talking to Brayden about it saying this will be really cool research to do, and he agreed, but I don't remember what actually inspired it. Maybe I just heard somebody say it. I don't know. Whenever the market declines people always start, oh, don't worry. Just buy the dip.

Cameron Passmore: Well, so many people are waiting for the dip.

Ben Felix: No, that's right, also true.

Cameron Passmore: I'll keep my powder dry.

Ben Felix: Right. Got to have dry powder to buy the dip. Maybe the name describes what it is on its own, but this idea of holding cash until markets decline and then investing. Buy the dip. Some people might do that because they're scared of investing at a peak, they're scared investing right before a crash. You could dollar cost average, sure, but why do that when you can just wait for the dip, wait for it to come down and then invest? Is how that line of thinking goes. There's also a bit of a perception that, even if you're not scared, that from an opportunistic perspective, it might make sense to keep that powder dry so that you can take advantage of a decline.

It could be motivated by either fear or greed. This idea of buying the dip. Then the third place where I see it talked about is, when markets do decline, people say, they were fully invested, good for them, and they're not planning on getting out of the market, but when markets drop people will start talking about borrowing money. I'm going to lever up now. I need to access more capital so that I can invest more in stocks because they have declined. Those are all different cases of buying the dip, but the problem with buying the dip, and I've heard people talk about this before a bit, but I have not seen any analysis, like the way that we've done it here.

Hopefully that's what we're adding to this conversation. The problem with buying the dip is that it implies that there's available capital that is undeployed for the period of time between now and when the dip actually occurs. You got to ask, what is the opportunity cost? Is the opportunity cost of waiting for the dip outweigh the benefit of buying low? We looked at six individual country stock indexes, the MSCI World Index and the MSCI World ex USA Index all from 1972, I think February, 2021.

Then we also looked at the US going back to 1926 with the CRSP 110 Index. I can tell you, we sure did not find any evidence in favor of this idea of buying the dip. It was actually surprisingly sub-optimal, more so than dollar cost averaging, which is an interesting takeaway on its own. If you're really scared about investing, dollar cost averaging, on average, is substantially better than buying the dip.

Cameron Passmore: Because of the opportunity costs.

Ben Felix: Yeah. You're on average, holding cash for longer If you're buying the dip than you are if you're dollar cost averaging. That's what it comes down to really, is that expected returns are positive every single day and you've got to go into investing with that knowledge, and it shows up in the data. The longer you hold cash on average, the worse your performance is relative to stocks.

Cameron Passmore: But there's also a behavioral side to this that I don't think you incorporated, which is a lot of people wait, wait, wait, wait, and they say, I can't take it anymore, then they buy in. They miss that opportunity cost, and there's always a chance that you may have bought in just before a dip because they just couldn't take the waiting. But you cannot put in that sort of potential behavioral bias.

Ben Felix: No, so waiting and then bailing on the strategy and buying it at a peak by accident.

Cameron Passmore: Bailing on your own strategy. You buy the dip strategy because you can't take it.

Ben Felix: No, that would be very hard to model.

Cameron Passmore: Or waiting until things look better. Well, then things look better typically the market is already risen because there's less perceived risk, right? Therefore lower expected return.

Ben Felix: Yes. That would be a failure of the buy the dip strategy, which would make things look presumably even worse.

Cameron Passmore: But to go back to your plywood example, if you're conservative or fearful in nature, leading up to a point where you're putting potentially plywood on your house with your spouse, do you really think you're going to go and buy on the dip? Because there's always that story when the dip happens.

Ben Felix: Yeah. That's a great point. This does assume a mechanical buying of the dip. Let's say it's maybe a good segue into how we set up the analysis.

Cameron Passmore: That's my point, that you've made this point mechanically. I'm just saying in the real world, going back to Rob Engen's real world, it's easier said than done to be mechanical.

Ben Felix: Yeah. It's interesting. It's interesting on both sides actually, because we assume in the analysis that you're either mechanically investing a lump sum, which is easier said than done, or you're mechanically buying the dip, which is also easier said than done.

Cameron Passmore: Or mechanically rebalancing your globally diversified portfolio of those funds that some said you might not be able to do.

Ben Felix: The way that we did this analysis is that we set up 10 year rolling periods. So, 10 year periods, compared the two strategies and then did one month step forward, compared to the next 10 year period, big overlap, so they're not independent 10 year periods. It gives us a lot more data to work with when we do the rolling periods. We did everything in USD. The cash while it was waiting to be invested was in one month US Treasury bills.

Side by side for each analysis, we start, well, we start in cash, I guess on day zero, and then on day one, the lump sum gets fully invested buy the dip. It does not get fully invested until there's a 10% drop. We did one scenario with a 10% drop and then we did a second scenario separate with a 20% drop.

Cameron Passmore: These are 10 year periods, so that drop could have happened one month in two years in, who knows how long in it was. So, you're doing one buy in that 10 year period?

Ben Felix: One buy, correct.

Cameron Passmore: So, it's the total return of that 10 year period.

Ben Felix: Is T-bills plus whatever return you get once you're invested in stocks.

Cameron Passmore: Gotcha. I want to make sure the listeners are clear. These are 10 year returns, cash or cash, then buy on the dip, and you're comparing those two.

Ben Felix: Correct. Then comparing that to a lump sum invested into stocks. The dip we defined once it's 10% and once it's 20% just to see what the effect was on the analysis. Any scenario where there is a dip, because in some cases there may not be a dip, but any scenario where there is a dip, for the second part of the simulation once the dip has been bought, the lump sum and the buy the dip strategy are both going to be fully invested in stocks.

Cameron Passmore: So, there's no multiple dips obviously.

Ben Felix: We did actually run with multiple dips. We did a lot more analysis than we actually ended up putting in the paper. Buying on multiple dips just made everything look worse as you'd expect. It was a monotonic deterioration in the result because you're holding cash for that much longer by waiting for a second.

Cameron Passmore: Okay. You mentioned this has been put into a paper. You should tell everyone about that.

Ben Felix: Yeah, well, it's a paper. It should be out, I'm hoping, by the time that the podcast is released on Thursday. If not, it will be soon after. It feels a lot like the dollar cost averaging paper, same kind of idea, just some fairly simple analysis, but I think there's some good insight in there.

Cameron Passmore: All right.

Ben Felix: Hopefully people can check it out. To evaluate the strategies, to evaluate lump sum and buying the dip side-by-side, we looked at their annualized returns for the period, their sharp ratios, their conditional value at risk, which is the average amount that an investor would have lost in the fifth percentile, so in the worst 5% of outcomes, the average loss, and then also the value at risk, which is the minimum amount that an investor would have expected the portfolio to drop in the fifth percentile 5% of the time.

That one is the fifth percentile of monthly returns each period. It implies a 95% level of confidence that the monthly portfolio returns will be above the value at risk measure. We're just trying to capture, there's this perception that you're going to avoid the catastrophic outcome. So, you're trying to capture that with the value of risk and the conditional value at risk. Then we also looked at the out-performance frequency, so the percentage of rolling time periods. We're buying the dip beets, investing a lump sum. It's not a probability. It comes out looking like a probability, it's percentage of rolling periods, but because of our independent samples, it's not really a probability.

Just an important side note. To kick off the analysis, we wanted to look at the frequency of peaks and all time highs. Oh yeah, I didn't mention that yet. One of the other ways we slice the data up is that we tested buying the dip on average throughout the full sample, but we also tested buying the dip when the market was at a peak. When the total return stock index for each country or the world reached an all time high in terms of total return.

Cameron Passmore: In that 10 year period?

Ben Felix: Just in aggregate. We took all of the months and looked at only months starting where the total return index was at an all time high. We sorted the data by that and asked, does buying the dip work better when the market's at an all time?

Cameron Passmore: Oh, I see, so that would be the signal to start then you wait for the dip from that all-time high.

Ben Felix: Yeah, correct. We looked at the full data series, but then we also looked at only months where we were starting with an all time high. One of the things we found that was interesting was that peaks, so an all time high that precedes, we defined a peak as an all time high that proceeds a decline of 10% or greater within 12 months. That only happened about less than 3% of the time across all these different indexes that we were looking at. An all time high followed by a decline of 10% or more within 12 months happened 3% of the time.

Cameron Passmore: Wow.

Ben Felix: It just speaks to how rare that occurrence is. When people say, oh, the market's at a new all time high and that's a reason for concern, the frequency of declines after peaks is actually extremely low. All time high months.

Cameron Passmore: Wow.

Ben Felix: Yeah. I thought it was very interesting too. For just all time, high months, like how often is the market hitting new all-time highs? Depends where you look, I guess, because we've got a bunch of different indexes here, but for example, for the United States, it's about 24% of the time. Yeah, using just monthly frequency. Daily returns might look different. I don't know. But 24% of months are all time highs in the US stock data, but only 1.14% of months are all-time highs followed by a drop of 10% or greater within 12 months.

Cameron Passmore: That is a staggering statistic.

Ben Felix: Kind of a new one, but you always hear this whole buy the dip conversation or that I'm waiting for the right time to invest. That always happens when the market's at new all-time highs.

Cameron Passmore: That markets are frothy.

Ben Felix: Right. When things are getting frothy. For the summary data, so for all the simulations that we ran for the 10% buy the dip strategy, and this is just what the World Index. It's a little bit different from country to country, but in the World Index, the average spread, the average amount that buying the dip trailed lump sum was 60 basis points over 10 years, so annualized 60 basis points. It was pretty meaningful. When we did dollar cost averaging, I think it was 38 basis points that you're leaving on the table.

Cameron Passmore: Per year compounded.

Ben Felix: Per year compounded.

Cameron Passmore: Wow.

Ben Felix: Then the 20% by the dip strategy, so now you're waiting longer because there are not as many dips of that magnitude, and the 20% by the dip strategy in the World Index, you're leaving 2.2% on the table. That's for the world. That was worst in the US. Actually buying the dip, and this is probably intuitive, buying the dip is the worst in the US data because they've had such strong returns. Being in cash in the US has been particularly painful.

Cameron Passmore: The cost of waiting is so expensive.

Ben Felix: It has been expensive in the US. In the 10% buy the dip case, you trailed by 1.44% on average over 10 year periods, and by 3.4% with a 20% dip over 20 year periods. Then it's maybe also interesting to point out that Australia, I didn't really dig too much into the data to figure out why this was the case. In Australia, buying the dip worked the best, and actually the 20% case for Australia was better than the 10% case. In the historical Australian stock market data, buying the dip has actually been successful post 1970. Again, I didn't do too much forensics to figure out why that was the case.

Cameron Passmore: For Canada, they're both around 1%.

Ben Felix: Yeah. For Canada, that 20% case was only slightly worse than the 10% buy the dip case. We did dig into some for the country indexes, just because it was kind of interesting to see the differences we dug into some of the details. So with the 10% buy the dip strategy in Canada, you beat investing in lump sum 40% of the time keeping in mind that these are rolling periods, so that's not a probability. It's 40% of rolling periods where there's lots of overlap. In 48% of the cases, that buy the dip outperforms lump sum, but on average, you're leaving 97 basis points on the table. You've also got a lower sharp ratio by buying the dip in Canada.

Now, you improve your value at risk and your conditional value at risk. You'd expect that because you're holding cash for most of the, or a lot of the period. It is giving you the limiting of the downside, but you're leaving a lot on the table on average by buying the dip. Then in Canada, everything to deteriorated. So, sharp ratio was worse, spread was worse in terms of annualized returns by increasing the dip to 20%. I'll just mention the US data as well, because it was also interesting. Like I said before, really hard to beat lump sums in the US, and that's just been their stock market history.

The sharp ratio decreased monotonically from lump sum to a 10% dip to 20% dip. Again, you improved foreign CVR, but at the cost of everything else. Japan was an interesting one to look at because it's sort of been the opposite, I guess, at least for quite a while now, for 30 years has been kind of the opposite of the US. Before that, it was, I guess the opposite again, where Japan didn't say anything, well in 1970s, whereas the US stock market didn't do quite as well. From 1990 to 2020, the Japanese stock markets trailed one month US Treasury bills, keeping in mind that's our alternative.

You're in US Treasury bills until you buy the dip. That unique experience in the Japanese stock market made buy the dip outperform more than 50% of the time. That was interesting. Enrolling periods again, so not independent samples. You did still leave returns on the table.

Cameron Passmore: That's the key.

Ben Felix: That is the key. I think that in the Japan sample, the reason you end up leaving returns on the table, because keep in mind, for the last 30 years, you would have been better just by holding T-bills in the Japanese stock market, but in the first half of the sample, or not even the first half, the first 20 years of the sample, the Japanese stock market was going so crazy that it would continuously reach all time highs, which was okay. You would keep investing and you kept having insanely high returns.

Cameron Passmore: But there may have been no dips to be bought in the first 10 years in 1970 to 1980.

Ben Felix: You're right. It just kept hitting new all-time highs without having dips.

Cameron Passmore: So, there's no buying triggers.

Ben Felix: Yeah.

Cameron Passmore: Interesting.

Ben Felix: Yeah. The returns in Japanese stocks in that period leading up to the 1990 crash are so high that if you model, I don't have the actual numbers in front of me here, but if you model stock returns from 1970, until now in Japanese market, they're actually pretty good. Even though the last 30 years have been flat, but they were so high for those first 20 years. Then we slice it up, like I mentioned before to the all time high, so isolating the all-time high periods, and there was one case, or maybe there might've been two, it might've been Australia and in Canada, but I noted down in Canada, with the 20% dip, and this is ... It just seems like it was a random occurrence, but with buy the dip at all time highs in Canada with a 20% drop as the trigger, you actually did end up better off than investing in lump sums.

But that was the one case, that of all six stock markets in the world stock market, where it was successful. In the US, they've had the most frequent all time highs and the least frequent peak, meaning an all time high followed by a drop. That was interesting and it's not a surprise there that lump sums were again dominant even at all time highs. In the US now, like we were just talking about Japan, they had just repeated all time highs early in the sample followed by decades of flat returns. So, investing in the lump sums at all time highs early in the sample worked out really well, which makes the average results in Japan look weird, because you've got the more than 50% of cases underperforming, but on average, the returns are a lot higher for the lump sum.

The last piece that I want to touch on is that that concept of buying the dip with borrowed money, so levering up when things get bad. I think it ends up just being a special case of the concept that we've been talking about. The results you wouldn't expect to be different. Buying the dip is still going to be inferior to being fully invested. I think the thing that people don't realize is that if they have access to leverage, at the time that there is a dip, they also had access presumably to the same leverage prior to the dip.

As we've seen with buying the dip, not being a successful strategy on average, if you have access to leverage, one thing is crashed, you should probably just be using that if it makes sense for your personal risk tolerance. You should be using that leverage

Cameron Passmore: The story to have borrowed in March, 2020 to invest it in AVUV is a pretty compelling hindsight story.

Ben Felix: Extremely compelling. Maybe it's that hindsight story that makes people want to do it. Overall, we did not find buying the dip to be of any use at all whatsoever. It's worse than dollar cost averaging in terms of average outcomes, which maybe isn't a surprise because it's a little bit less systematic. I mean, I guess the way that we designed it here, it is still pretty mechanical, but it's a lot closer to market timing than dollar cost averaging because you may end up waiting for an extended period of time to get the capital invested. Whether someone's nervous or opportunistic or thinks they're going to borrow when things crash and buy the dip to make excess profits, I don't think it's a viable strategy.

I think if you have an investment policy in mind, if it's 100% stocks or whatever, 60% stocks, or if it's 100% stocks with leverage, I don't know, whatever the optimal policy is, I think it's the best time for it to be in places is now. If it's too scary for that policy to be in place now, it may not be the right policy.

Cameron Passmore: Fascinating. Look forward to the paper. Anything else to add?

Ben Felix: Nope, I think that's it.

Cameron Passmore: We'll go to the talking sense segment. This is the cards, the playing cards from the University of Chicago financial education initiative. Actually I had a good call with them last week. They reached out because we've had some success getting them some public exposure for these cards, and they're asking us for ideas about how to get broader exposure for them. We may look at ordering some if there's interest from listeners. We may look at adding them to our merchandise shop. So, drop us a note if you can, or perhaps we can set something up to the community that people are interested, because I think they're excellent.

The shipping cost for Canadians from the university makes them quite expensive. They're over $40, $45, I think, per deck to get. If we bought them in bulk, we get bulk shipped here, then we could ship them out to people. So, there's interest, let me know we'll gladly bring them in.

Ben Felix: We can do a survey in the community. There's always a post for each episode for people to discuss. We can do a survey in there and just gauge level of interest.

Cameron Passmore: So, you're ready for your card?

Ben Felix: These make me nervous, to be honest with you, but yes.

Cameron Passmore: Too funny, this is picked at random. You know that.

Ben Felix: I know that. I have not seen the question either.

Cameron Passmore: If you want to have a happy life, tie it to a goal, not to people or things, from Albert Einstein. Do you agree or disagree?

Ben Felix: If you want to have a happy life, tie it to a goal.

Cameron Passmore: Not to people or things.

Ben Felix: Not to people or things. I mean, it sounds kind of like the Buddhism and stoicism ideas of not getting attached. Yeah, I think tying happiness, because happiness, right? If you want to live a happy life, you tie it ...

Cameron Passmore: Tie it to a goal, not to people or things.

Ben Felix: I think that makes sense and I think it does reflect the Buddhist and Greek stoic philosophies. I only know that because it's in the happiness hypothesis. That whole book is taking ancient philosophy and relating it back to current positive psychological research. But anyway, I do agree. I think the hard part, and obviously this is what we talked about a little bit in this episode and a couple of episodes ago, the hard part is knowing what goals to set that are not going to be affected by hedonic adaptation.

There's so many goals that we can set that when you achieve them, the first thing you think is what the next goal is going to be and the happiness is very short-lived. I think like what Ashley Whillans talked about in the last episode, prioritizing things like active leisure, giving back to others, spending time with people socially and having those positive relationships, engagement flow, I think those are all things that you can set goals that will give you sustained happiness.

Cameron Passmore: But that's the problem I have with this quote. It says not to people, and that's a part I don't understand because engagement is so important. Connection is so important.

Ben Felix: Yeah. I think that the challenge becomes that you can't always control other people, and I think this is the stoic and Buddhist idea that, because you can't control other people, you shouldn't let their actions affect you too much. You detach a little bit.

Cameron Passmore: Okay. Question, I'll kick off, so if you could give someone money to start a business, what qualities would you look for in that person? Really interesting question. For me, obviously integrity, drive resilience, ideas, openness to teammates, transparency. To me, it's all about the team, because you need to have this common mission and purpose that involves other people. So, it's engagement with others, lots of delegation, empowering others. That's what I would look for.

Ben Felix: I agree with all of that. I would be somewhat nervous investing in somebody who had not started a business before. I think there are a lot of things that you can do in life that require all the attributes that you just mentioned. If I take this away from sports, where there are a lot of people that I've known through sport that had all of those qualities and it made them extremely successful in athletics, but it does not always translate into the working world, whether that's starting a business or other careers.

That's something that I always found interesting, where these people that were so driven in athletics, it doesn't always carry over to working at a job or starting a business or whatever. I know that when you talk to people that invest in early stage companies, you're often investing more so in the founders than in the idea, although the idea is important too. If somebody had success starting a company in the past, that would make me feel a lot better about investing in whatever they were doing next.

Cameron Passmore: Together we gave a pretty good answer. Okay. Let's help there's enough interest. We'll bring some cards and get them in our merch shop.

Ben Felix: I tried doing the cards with my kids. My kids are still a little bit too young. My oldest is six.

Cameron Passmore: A little young, but soon enough, it'll come. Anything else this week?

Ben Felix: I don't think so.

Cameron Passmore: We're going to skip bad advice. I think we had enough stuff up top. So we're going to get bad advice this week, but that will be back in a couple of weeks.

Ben Felix: I figured buying the dip was the bad advice, and we just spent a long time debunking it and mixed it in with our investing topic.

Cameron Passmore: And I thought the hedge fund meltdown was bad advice, but we realized it wasn't really advice, but just don't go over concentrated to highly leveraged. It's not a good idea.

Ben Felix: Yeah. It was like 8X leveraged using swaps. I probably wouldn't personally.