Guest User

April 7, 2022

Episode 195: Common Misconceptions Among Beginner Investors

Guest User

April 7, 2022

The world of personal finance is full of axioms, and new investors can get caught up in investing myths and ‘rules of thumb’ that are limiting at best and lead to underperformance and unnecessary losses at worst. In this week’s episode, we outline some of the common misconceptions that new investors have, the evidence (or lack thereof) surrounding them, and how to think more like a seasoned investor. Is value investing really a safer strategy with lower expected returns? Do you need to employ a Buffett-Lynch stock picking approach when value investing? Are all index funds good investments? Tune in to find out the answers to these questions and gain some insight into the relationship between risk and return, dividend investing versus total risk investing, and whether or not exclusively investing in US stocks is a good idea, plus so much more!

Key Points From This Episode:

Upcoming guests, including Professor Eugene Fama in Episode 200. [0:01:27]
An update on our 22 in 22 Reading Challenge, with over 1,000 books read. [0:05:30]
A review of The Great Depression: A Diary by Benjamin Roth and lessons learned. [0:07:18]
A quick overview of The Bond King, the story of Bill Gross by Mary Childs. [0:17:10]
This week’s news stories: 24/7 investing from Robinhood, stock splits, Wealthsimple portfolio changes, and more. [0:20:02]
Our main topic: some of the common misconceptions that new investors have. [0:28:50]
Whether or not value investing is a safer strategy with lower expected returns. [0:30:42]
Some examples of where the myth that value stocks are safer comes from. [0:33:25]
The fallacy that value investing requires discounted cash flow (DCF) analysis. [0:40:52]
Why Warren Buffett’s outcome could be a challenge to systematic value investing. [0:43:41]
Debunking the misconception at all index funds are good investments. [0:46:48]
Conversely, Ben shares why not all actively managed funds are bad investments. [0:47:34]
Why all exchange-traded funds (ETFs) tracking an asset class are not the same. [0:48:12]
The myth that risk and return are always related and the cases when this isn’t true. [0:51:02]
Ben shares his reflections on the misconception that dividend investing is less risky than total return investing. [0:53:14]
Analysis that demonstrates whether or not dividends are actually safer. [0:56:09]
Our last misconception for today: you should only invest in US stocks because they perform best. [0:59:40]

Read the Transcript:

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

Cameron Passmore: Welcome to episode 195, if you can believe it. So I'm curious, Ben, new house, first time going through spring. Do you have any sort of household spring rituals as a new homeowner?

Ben Felix: No. It's a little early for a ritual. Isn't it? It would not have to happen multiple times to be a ritual.

Cameron Passmore: I guess. So, but to kick off your annual, like normally springtime get gardens ready and stuff.

Ben Felix: It's still winter at my house. I don't know what it looks like over there. I've still got snow on the ground and it was like freezing yesterday.

Cameron Passmore: No, I think we're almost snow free here. You're a little bit further north, I guess. Is the ice off the water?

Ben Felix: Not enough to go kayaking.

Cameron Passmore: I thought about that the other day, going kayaking with still some ice floating around. I don't know if that's risky or is it dangerous.

Ben Felix: I've thought about it too.

Cameron Passmore: Is it dangerous?

Ben Felix: Probably.

Cameron Passmore: If your tip is not good, but it'd be really cool to see what it's like, and especially with the water's rushing a bit more now.

Ben Felix: Yeah.

Cameron Passmore: And I got my summer tires on last week so I'm optimistic. I always do that around my birthday. So, any new shows you've been watching? I must admit, I've not watched much all lately, so I have nothing new to give as an idea.

Ben Felix: Nothing.

Cameron Passmore: But we do have a special announcement, which I think is pretty exciting. I think people have been speculating for a while about this. So we are episode 195, which means we are five weeks away from a very special guest. And as everybody knows, we had Professor Ken French join us for episode 100. So for episode 200, drum roll, Ben, go ahead.

Ben Felix: People have guessed it already. Professor Eugene Fama is going to be the guest for our 200th episode.

Cameron Passmore: So the so-called father of modern finance and who's credited with developing the efficient market hypothesis will be here, and we cannot be more excited. It's going to be great to have a chance to chat with him.

Ben Felix: I wonder if we've mentioned his name in every episode.

Cameron Passmore: It's pretty funny. Anyways. I think Angelica will set up a spot in the community for capturing some ideas for questions from the community.

Ben Felix: It's up today. We're recording this on Friday, April 1st and it's already up. So, by the time this comes out next week, hopefully we'll have some good initial questions in there. But the plan is definitely to try and source a good number of the questions from the community, and make sure that we're asking questions that are interesting to listeners and not just to us, we might tend to ask nerdier questions than the average person. I don't know.

Cameron Passmore: I don't know. I think we'll get some pretty nerdy questions, no matter what we do.

Ben Felix: That's fair.

Cameron Passmore: But coming up with a list of 15 or 20 questions for Professor Fama is not a difficult task, it's which ones do you ask is the hard part.

Ben Felix: It is a difficult to ask. It's difficult to get it down to 20, not up to 20.

Cameron Passmore: No kidding. So other upcoming guests. So next week we have Sebastien Betermier joining us. In three weeks, Gerard O'Reilly. Then after that is Professor Fama. So we had a really nice review from R2134, who said, "Gentlemen, this is my second flying colors review, which we're very grateful for. Your modern portfolio theory episode is a masterpiece." Ben, it was a masterpiece. And suggests that it's required listening or reading for everyone. The transcript he's referring to. "You'll learn many insights and I refer to it often. You'll become a better investor, keep up the outstanding work. The emerging markets episode was also amazing." So we appreciate that very much.

Ben Felix: It's pretty good.

Cameron Passmore: And we also appreciate whenever there are reviews that go on iTunes, it does help, I believe to get this exposed to more listeners.

Ben Felix: Yep. The feedback definitely helps too, because like that modern portfolio theory episode, I had no idea if people would find that interesting or not, because it was pretty deep in the theoretical weeds.

Cameron Passmore: But as I told you, that's part of the benefits of it though, if you did want to learn it, there has to be a certain amount of oomph to it.

Ben Felix: True.

Cameron Passmore: If you don't, you don't.

Ben Felix: And then you're probably not listening.

Cameron Passmore: I don't think you can cut the corners on something like that.

Ben Felix: Yeah. That's true.

Cameron Passmore: Anything new from the community?

Ben Felix: No. Our main topic today actually came from the community. So, I won't spoil it, but when we get there, we can talk about it.

Cameron Passmore: Cool. As always connect with us on LinkedIn. I love hearing from people on LinkedIn, different people all over the world each week, which is very interesting. We're both on Twitter, Rational Reminder is on Instagram. And last week you got to see Morris, Ben's cat.

Ben Felix: Yep. I never thought I'd have a cat. I grew up with dogs. Full convert. And I would never, never even imagined having a dog. I wouldn't have had one anyway. I got enough kids to take care of. But growing up as a dog person, I viewed myself as a dog person. Never thought I would have a cat. Now that I have a cat, I don't understand dog people anymore. Full on convert.

Cameron Passmore: And what's also funny for people who are, I'm guessing maybe 40 years old or older, because you didn't get the reference to Morris, I say, "Oh, so cool you picked Morris." Ben didn't even know who Morris the Cat was. So for people who know that cat food commercial from the 70s, I think when we looked it up, Morris the Cat is a very famous cat, but you just got it randomly on your own. So that's pretty cool.

Ben Felix: Yep.

Cameron Passmore: Update from Angelic on the reading challenge, we now have 427 participants, still lots of time to join. Which is cool. Almost a thousand books read, almost 1500 badges have been earned. I know a bunch of people have gotten badges to buy merchandise at discounts, and those orders are coming through, which is super cool.

She asks that you share your experience of the reading challenge with the #RR22in22 on Twitter and I believe on Instagram, but I'm not the Instagram resident expert.

And in fact, Angelica dropped me a text this week just letting me know that, so she was an avid reader through university, kind of slowed down a bit. And she said last year she read two books. This year so far, she's read seven and going on to number eight right away. So she's super engaged.

And Sandrine who does our social media postings and creative work as part of the team. She reached out to me last week just to rave about a bunch of the books that she's been reading as well. And in fact family members have been kind of swapping books and trying to grab certain books before the other. So it's kind of neat to see it take hold.

Ben Felix: That is very cool.

Cameron Passmore: It's a lot of fun to have that engagement. Anything else you want to bring up?

Ben Felix: Nope. You're not kidding though. Cameron's not kidding when he says that he loves people reaching out on LinkedIn. Because I always hear about it second hand, and it is cool.

Cameron Passmore: Yeah. What can I say? It's just neat to get feedback from people. And I heard from an adviser this in Manitoba, which was super fun and just people are listening and appreciating it and finding some value. And yeah.

Ben Felix: Very cool.

Cameron Passmore: All right. With that, let's go at episode 195.

Ben Felix: Welcome to episode 195 of the Rational Reminder Podcast.

Cameron Passmore: So for the book review this week, we're going to do our best to try to make this both of us talking, because both of us have read this book. We have a bunch of notes, whether we stick to the notes or not, we'll see how this goes.

But the book is called The Great Depression: A Diary by Benjamin Roth. So I had heard you mentioned this book a while ago and then Morgan Hazel mentioned it when he was on with Tim Ferris a couple weeks ago. So I thought, yeah, I'm going to check this out. Because we've been talking about monetary policy and money, and I just wanted to kind of dive back into it and learn more about the gold standard and kind of this ended up being a great place to really jump into that.

And certainly my generation hurt our grandparents. Maybe you did as well talk about what it was like living through The Great Depression. I would hear it often. And incredibly, I never did this connection. My father was actually born just after the inauguration of Roosevelt to 1933, which rated the depths of the depression. And he was like the fourth of six kids. So I can only imagine what my grandparents lived through that time, having six kids living in urban Montreal. It's just unreal.

And I regret now never having the insight to sit down, ask them about that. I guess I was too young.

But anyway, this is a book which is a collection from the financial diary of an attorney living in Youngstown, Ohio named Benjamin Roth. And I tell you, it paints an unbelievably vivid picture, in his words of what it was like during this absolutely brutal economic period.

Ben Felix: I think if I remember correctly, one of the differences in this perspective, not only in its vividness, but also the fact that Benjamin Roth wrote the diary was a sort of middle class businessman like a lawyer, I believe. And that perspective is very rare.

You can find stories about the wealthiest people and the poorest people during The Great Depression, but this is a guy who's still carrying on a law practice or trying to and had the means to be investing in stocks. So it's a very unique perspective on that.

Cameron Passmore: And he said as he called himself a professional man. So he talked about other professional men, which the wording is interesting. But he's incredibly astute observer. He learned lessons about investing in monetary policy, and ended up transcribing this diary for over a decade, which was much longer than he ever anticipated. And you really appreciate reading this, that how nascent monetary policy was back then. Like it wasn't nearly as evidence based. I think it's safe to say as it is today in terms of how-

Ben Felix: This was where the evidence came from. This is like some of the foundational papers on modern monetary policy came from studying what happened in The Great Depression, what went wrong in monetary policy response? That's where the data come from.

Cameron Passmore: And then it go back and link it back to World World War I, as he said, this is a quote, "World War raged in Europe from 1914 to 1917. We had unparalleled prosperity in US stocks and bonds of war industries, sword millionaires are made overnight." Then it goes on to say, "From 1919 to 1921, we had the greatest real estate boom of all time, because two million soldiers were released from the army, got married in established homes of their own. And then from 1922 to 29 America rebuilt Europe. And because of this, we had here the longest and wildest period of expansion and speculation ever seen."

And he talked about how many people margined and borrowed to buy more real estate and buy more stocks. And that it all came crashing down on October 1929, and went on until the summer of 32. And by 1932, as he said, "Good stocks and bonds were selling at five and 10% of their 1929 prices." Can you imagine?

Ben Felix: No. I mean, no. Frankly, that would be devastating.

Cameron Passmore: So he talks about bank failures and the country was on the gold standard then. So people were hoarding gold, this reduced gold deposits, therefore reducing the amount of money supply.

And then in 1932, all of Europe seemed to collapse and people realized that the depression had just started, and it would be many years before the normal period of 1929 would return. And after that 44 European countries went off the gold standard. And he says worthless currency was issued. And then changing government from Republicans to Democrats in 1932, you kind of think back to a conversation with Lubos Pastor, right?

Ben Felix: And that's debatable, of course, the worthless currency being issued. That's I think a foundational misunderstanding of the nature of money. And I mentioned earlier that the research on monetary policy that comes out of The Great Depression, a lot of it looks at that.

There's a famous paper that looks at the recovery, the economic recoveries of countries that went off the gold standards and those that did not, and the ones that went off the gold standard had much more robust recoveries.

Cameron Passmore: Because?

Ben Felix: Presumably because they were no longer in the gold standard and they were able to ban their money supply.

Cameron Passmore: Right. Because you weren't linked to gold.

Ben Felix: Correct.

Cameron Passmore: And it wasn't this fight. Because consumers are fighting to hoard the gold themselves, to protect their buying power. And banks wanted the gold to get enough money to implement monetary policy. That's the tag of war that was going on.

Ben Felix: And there's a massive deflation, right? Like that's one of the things that happened in that period of economic history, that there was a market crash when you correct for deflation, the market crash wasn't actually as bad. And the recovery was a lot faster.

I often hear the statistic that in 1929, it took the US market 25 years to recover back to par, back to where you were when the crash happened. But it's a statistic based on looking at a price only index. I think the Dow Jones index. So not including dividends. And it's not inflation or deflation adjusted. But when you adjust for, geez, I don't know if I can remember these numbers. Like when you adjust for dividends, the recovery happens in 15 years or 12 years or something like that instead of 25. And if you adjust for deflation, the purchasing power, you recovered within seven years from the crash.

Cameron Passmore: And as he talks at length about the new deal that Roosevelt came out with, which was implementation of a bunch of new programs and relief programs for unemployed, such as social security and farm security administration, he goes on to say, "Inflation, I am told the managed economy of new deal has eliminated future booms and depressions, but I do not believe it. I'm afraid that during the next few years we will see some form of inflation."

He also goes on to talk about lessons learned in terms of what to do with investments. He says, "It has always been interesting to know whether in the long run the speculator and stocks who bought and sold frequently made more money than the plotter who bought stocks and held on. This story is told of a young couple who used the following plan. So they started saving 10% of the earnings in 1915 and bought little by little. They never speculated or sold. They knew nothing about the stock market. In 15 years, the original 5,000 was worth a hundred thousand because of dividends, stock splits of the original stock.

This seems to be the sound rule for obtaining wealth, but it requires patience, which few possess. So he developed his own rules, live on less than you earn, and save at least 10%. Invest, don't speculate so that none of the principals is lost. Reinvest the earnings and never sell good stocks unless the price is above its intrinsic value."

It's really interesting to think that someone at that time had the daily drive to write a diary about this. I think it was on to talk about how this went through the 30s and then leads right into World War II, which is incredible.

Imagine the boom post-World War I, the depression of the 30s, and then go right into World War II. There's all kinds of very interesting quotes about the time that I just flew through the book because it is so well edited and put together.

Ben Felix: Yep. One of my big takeaways when I read it, which was a while ago now, was that stuff goes on. Things keep going. There was this massive economic catastrophe, but when you read it from Benjamin Roth perspective, it's like things were hard, but people were still living their lives just differently. That was one of my big takeaways. It's like the world doesn't end.

Cameron Passmore: And I went back and finished off Cullen Roche's book, Pragmatic Capitalism after reading this. And it kind of bookends each other, which gives you an appreciation. Because he talks about on that book, how you need this federal reserve central bank model of monetary policy because left on their own, the competitive marketplace will end up going too far on its own. So it needs some sort of correcting mechanism. And that's what the point is of the current monetary policy model, is monetary policy to stimulate when needed, and pull back and try to manage it to help self correct what the markets will do on their own. And here's a perfect example of it.

Ben Felix: Yeah. Well, you look at what led to the federal reserve. Well, it was a private money and a fragmented financial system. And I don't remember the exact story, but some wealthy individual was required to come in and be the lender of last resort to stop a financial collapse. And that's when they decided they had to centralize the financial system.

Cameron Passmore: So I think we both highly recommend this book, it's safe to say.

Ben Felix: It's a really good book for some historical perspective. Definitely.

Cameron Passmore: Very quickly he invented another book, which was suggested to be by Luke on Twitter. It's called The Bond King: How One Man Made a Market, Built an Empire, and Lost It All by Mary Childs.

So, this is a story about Bill Gross, who is famous bond trader for decades at PIMCO. Larger than life character. I mean, so many of us in the industry read his newsletters all the time. He was on TV all the time, a very, very high profile type personality. I always had the great sound bites. I knew he was eclectic to say the least for those who follow the news recently, he's had these crazy battles with his neighbor at his home, like playing loud music, and speakers on his yard pointed towards his neighbor. And this are like 30 million homes or something completely crazy story. I think it was finally just settled.

For anyone in our business and is interested in the Bill Gross, PIMCO story, this is an excellent read. The author, I can't imagine how much work Mary Childs must have done to interview all these people and triangulate all the stories to try to make it as accurate as possible. It was simply an incredible work about Bill Gross's career, how they built PIMCO.

Ben Felix: Wait, so what does it mean that he lost it all? What did he lose?

Cameron Passmore: That's an interesting question. Because I thought about that, he didn't lose any of his money because he is exceptionally wealthy. He's a multi-billionaire.

But I think what she's referring to is his career is pretty bruise at the end, because he left PIMCO in the end and went and joined Janus, and that didn't go the way they had thought. So I don't think he had kind of the swan song from PIMCO that he had hoped for.

He's a very unique personality. Arguably that's the kind of personality you need to be an active on trader. But what was really interesting is that his character and his personality and his strength, the amount of assets he managed got him in positions where he was able to actually... My interpretation for reading the book is he was able to manipulate the media and the issuers of bonds enough to kind of capitalize on that.

So, there's some things that didn't quite seem proper that went on. And she talks about that at length.

Mohamed El-Erian and another high profile name in the investment space, they talk about him coming backing to the firm and having a falling out and lots of fights. So it's a great business book for people who are interested in profiles of business people. So even if you're not into bonds or investing, this is a really good read. Massive bond shop, like multi-trillion dollar bond shop made huge trades. Arguably had a bit of a free ride because interest rates fell during his entire career, so it made it easier. But still he had years of spectacular returns and incredible business success.

So, another recommended read for you. Okay. Under some quick news stories, this one super quick. You saw the news about coming out of Robinhood. The future of investing is 24/7. So they release news from a blog on March 29th saying they're launching new extended hours that allowed customers to trade from 7:00 AM to 8:00 PM, adding an extra four hours.

So it quotes, "Our customers often tell us they're working or preoccupied during regular market hours, limiting their ability to invest on their schedule or evaluate and react to important by market news," Goes on from there.

Ben Felix: I look forward to the academic paper that decomposes the 7:00 to 9:30 and 4:00 to 8:00 returns.

Cameron Passmore: Yeah. That's the perfect ending of that news story. And have you seen all these stories about stock splits this week?

Ben Felix: Yep.

Cameron Passmore: I don't know what to make of it. It doesn't make a ton of sense, but shares are popping based on this. Like Tesla announced an unknown split. Google and Amazon are doing each at 20 for one. I saw this morning GameStop announce they're planning a stock split. The stock jumped 15%. None of these shares are on the data index. It doesn't impact like they're waiting in an index at all.

Ben Felix: Playing the sentiment game. Who knows?

Cameron Passmore: I don't know. We'll see how that all plays out. Okay. Next story.

Ben Felix: I just wanted to mention quickly, Wealthsimple, and I know we kind of pick on them a lot, but they just market so aggressively. It's so on your face, you can't ignore it.

Cameron Passmore: You have to.

Ben Felix: Yeah. They made some changes to their portfolios recently. And I think they changed, like I couldn't find the actual holdings anymore. You used to be able to find that on their website, but it seems like they've changed around, so you can't see the exact allocations to ETFs anymore, which was kind of annoying. Because I used to like being able to dig into that.

But anyway, they say it right on their website, that research has proven that passive investing, tracking the market over time using a diversified portfolio is the most reliable way to grow your money over the long term.

Cameron Passmore: And that's been their message forever.

Ben Felix: That is true. And I think this is why it's so interesting to kind of pick on when they make portfolio changes, because that has been the foundation of their business. And it's still right on the front page of their website, but they're not doing it, which is why it's so interesting.

So in 2019, they released a document. We talked with this on the podcast back when it happened in an earlier episode, they increased exposure to longer duration bonds, because they said that that increases the risk contribution of bonds to balance out equities, kind of a risk parody type idea.

At that time, they also added inflation protected bonds through tips, they reduced or limited exposure to corporate credit to improve performance and recessions, they said. They shifted part of the equity allocations to minimum volatility strategies to reduce the equity risk in the portfolio. Presumably they mean like market beta risk, and moderating exposure to the largest companies. I guess it didn't have a cap waiting scheme maybe, or maybe it overweighted smaller cap. I'm not super familiar with the mineral product that they used.

They also reduced the domestic bias to Canadian stocks and increased exposure to international stocks, including emerging markets. This is all in 2019. Do you know Canada is like whatever, up a percent or something year to date and US and international markets are down almost double negative percent? Not quite?

Cameron Passmore: Canada's up even more than that. Canada's very strong year to date.

Ben Felix: Year to date more than up a percent?

Cameron Passmore: I'll take a look. You keep talking, I'll look it up.

Ben Felix: In 2020, we also picked on this when it happened, they added gold. They swapped out tips. So I mentioned they add, they added tips. They swabbed out tips and added gold in 2020. And their statement at the time that we picked on was that gold has a reliable relationship with inflation over the very long term, which is true over hundreds of years, which is usually irrelevant to investors. And it's true in the historical data.

So they said that they hold it to replicate the inflation hedging parts of our fixed income allocation that no longer offer the potential for diversification or return. The gold holdings we've added are very small part of our portfolio.

Okay. And then most recently, March 2022, they reversed some of the changes that they had previously made. So they dropped the world low volatility ETF, for an ETF that incorporates factors like quality and momentum. And it wasn't clear what that ETF was. Because I couldn't see their detailed holdings.

They went back to aggregate bonds instead of a barbell bond portfolio. So they got rid of the long term bonds that they had added, which was in September 2020. I think. So that's another pretty big change. And they said in their commentary that with the change there will be about as much fixed income risk in the portfolio as before, it'll just be sourced from different bond ETFs. I don't know how true that is. Because they kind of went from a barbell long term and short term bond to an aggregate bond. But you can have two bond portfolios with the same duration, but they can have different convexity and bond portfolios with different complexity will respond very differently to changes in the yield curve.

Cameron Passmore: I have the Canadian returns if you want. XIU, to the TSX 60 year to date to March 31st up 3.44. XIC, which are the composite up 3.88. Couple of dimensional funds which are the smaller value tilts. Year to date the core up 8.46.

Ben Felix: Geez.

Cameron Passmore: And the vector's up over 10 year to date.

Ben Felix: I wonder why I had 1% in my head. Maybe that was the end of last month.

Cameron Passmore: Yeah. But compared like the US core, for example, I'm just looking at the Dimensional site. So year to date Canadian core up 8.4, year to date US core and Canadian dollars down five.

Ben Felix: Whoa.

Cameron Passmore: So 13% spread, almost 13 and a half percent spread.

Ben Felix: What's calculated US down though? Got to get that in there too. So dimensional core was down to 5%, she said year to date?

Cameron Passmore: Down five year to date.

Ben Felix: I got to get the cap weight.

Cameron Passmore: XSP down 473. And S&P 500 hedged.

Ben Felix: Okay. Hedged. The reason that I brought up the Canadian returns is because Wealthsimple said that they reduced their home bias. And of course it's just noise, but Canada has been very nice. The Canadian overweight has been very nice for our portfolios this year. And not just the Canadian overweight, but the Canadian tilted overweight, like you said, was that Canadian vector that was up 8%.

Cameron Passmore: No. Vector was up over 10, 10.4.

Ben Felix: Oh that's wild.

Cameron Passmore: As they say, you never know when the returns are going to show up, got to stay in your seat.

Ben Felix: Yeah. Seriously. And actually, we'll talk about Canadian returns in a different part of the podcast too.

Anyway. So Wealthsimple's reallocations they really look to me like class of active management. I mean, they're anticipating what securities make sense based on the market conditions. And they're making active changes, which seems to be counter to their pitch on their website, which is that you should just passively on the market.

And I think I saw this in personal finance, Canada, Reddit, where someone was posting complaining about how Wealthsimple is changing the portfolio again, and they're going to switch out to owning asset allocation ETFs instead because they're tied of all these changes, which just doesn't make any sense to me. I don't know. And that's how I found about it last time too, is that somebody posted on Reddit complaining like, "Oh, Wealthsimple did this thing in the gold, and then the gold dropped, and look, what happened." Why are they doing that? It doesn't make any sense to me.

Cameron Passmore: Oh, that doesn't make sense to me, like go buy VGRO or VBAL or something or IBTL, like that makes a 22 basis points or something?

Ben Felix: Yeah. Well, XBAL the iShares one is 22 basis points, I think VBAL and VGRO, and those ones are 25 basis points maybe. But other like McKenzie I think has asked allocation ETFs, Fidelity has asked allocation ETFs that have Bitcoin in them, whether that's a good thing or a bad thing is a open question, I guess. But they're so many options out there.

And when you've got the robo-advisor, who's supposed to be making it hands off and easy to be a passive investor, doing the opposite, making it easy to not be a passive investor. I mean, it doesn't make any sense to me why you wouldn't just go and buy the asset allocation ETFs, it just doesn't make sense.

I thought it was worth mentioning. I just find it, it's really the disconnect between, we'll help you be a disciplined passive investor and make it really easy, oh, but we're going to change the portfolio once a year. It doesn't make sense.

Cameron Passmore: Like someone said a couple weeks ago, it's even hard for robots to stay passive.

Ben Felix: Right. But you'd love to know what their motivation is. Maybe somebody from Wealthsimple can come and tell us.

Cameron Passmore: Don't want to speculate. All right. Main topic.

Ben Felix: Yeah. So this came from a post in the community. I mentioned that we were going to talk about that. Anarki is the username in the community. A-N-A-R-K-I. They made a post asking people to share there observations on common misconceptions that new investors have.

I think financial markets are a really good place to have misunderstandings about how things work, because a lot of things that will seem intuitively obvious, fall apart very quickly with a little bit of foundational knowledge. It's like the Dunning-Kruger effect idea, where you show up at stocks and you're like, "Oh yep. This is easy. I'm going to buy the good companies." As an example. But of course, that's not actually how it works.

Anyway. So, this post in the community got quite a bit of attraction and a lot of really good discussion, and a lot of really good suggestions for misconceptions that new investors have. So I thought it would be kind of fun to go through them and talk about what they are.

I just picked a selection of ones that I thought were good to talk about. And then talk a little bit about some of the evidence surrounding them. And be honest, I was going to do something else for this episode. I was going to talk about the theoretical relationship between time horizon and asset allocation. That it's a substantial topic. I think that's more substantial than the modern portfolio theory discussion that we had.

Cameron Passmore: Really.

Ben Felix: Not longer necessarily, but like a lot to choose chew through to figure out what the relevant insights are to talk about in episode. So we will cover that eventually. But instead today we're going to do these common misperceptions, which I think is also a good thing to talk about. It's a little bit lighter. Not too light though.

Cameron Passmore: It can't be too light recording this on a Friday afternoon.

Ben Felix: I'm fired up though. All right. So the first one is that value investing is a safer strategy with lower expected returns. Now, in our world, that's like, "What? That's insane." But it's actually a really common perception.

Cameron Passmore: Absolutely.

Ben Felix: Yeah. Which is fascinating, right? So, why is it fascinating? What do we know about value investing? Stocks are lower relative prices are cheap, probably because they're riskier or because investors have extrapolated their poor fundamental performance too far into the future.

Risk based behavioral explanations. If we follow the risk based story, value stocks are by definition riskier than growth stocks. In episode 193, the modern portfolio theory, the one that I was just referencing. We talked about the ICAPM, the intertemporal capital asset pricing model, which assumes that investors are concerned about risks other than portfolio volatility, like how the portfolio does when things like laboring income are down, the additional economic riskiness of value stocks, theoretically drives their prices down and their expected returns up.

Now, when you look empirically, like our value stock is riskier. When you look at the fundamentals, they tend to be companies that are under distress, have high financial leverage and face substantial uncertainty in their future earnings. They also tend to be riskier than growth stocks in bad economic times, and only slightly less risky in good times. And they deliver low returns when labor income and consumption fall. So that's like textbook ICAPM risk, right? Where even beyond volatility, they're riskier in bad times, which makes them much riskier for most investors who have other like labor income, for example, particularly risky labor income to worry about.

So, I mean, economically from the perspective of anything, volatility, when the volatility shows up theoretical risk based asset pricing, even empirical holdings of like investors who have more exposure to risky labor income, yes, they tend to tilt away from value stocks. So it's kind of like no matter how you want to look at it, you can make a very strong case, the value stocks are riskier.

I took the, just for a fun little example. I took the 429 months from 1926 to 2021 where US growth stocks had negative returns. The annualized return of value stocks in those negative growth months had negative returns that were 10% lower than growth stocks. So it's just, I guess, an example of value stocks doing worse when stuff's going bad.

Now, I don't know if I can say where the idea that value stocks are safer comes from exactly, but can definitely confirm that it is a common fallacy. One place that confirms that is Adrian Robertson, who's a guest in episode 133. She had co-authored a paper in the Journal of Finance, where they looked at a representative sample of US households and found that households tend to believe that value stocks will be safer and contrary to the historical data do not have higher expected returns.

Crazy. So that's interesting. And I just googled like value stocks. What do you find? First page on Google, a blog post on Fidelity's website. Fidelity the $4.2 trillion asset manager, right? Credible source, you would expect as maybe a new investor, maybe an investor in Fidelity's funds, who knows. So they explain their website that value stocks are less risky. They have already proven an ability to generate profits based on a proven business model, stock price appreciation isn't guaranteed though. Investors may have properly priced the stock already.

Explicitly, they say that value stocks are less risky. Okay. I can see where this misperception might come from, misconception. So that's sort of at odds with the research in general.

And also with the Fama and French's migration paper, stocks that stay in the value and growth portfolios from one year to the next contribute 1% to the value premium for small stocks and 1.7% for big stocks. So that's a migration paper showing like sometimes value stocks become neutral or growth stocks they migrate from the value portfolio to the neutral or growth portfolio. And they're trying to decompose, where does the value premium come from?

So some of the value premium comes from value stocks that stay in the same portfolio. They tend to have higher returns and growth stocks. So that's an important takeaway from the migration paper. But the big one plus transitions contribute 3.5% more per year to the excess returns of value portfolios than they do to the matching growth portfolios.

So stocks that go from value to something else is a huge portion of the value premium in historical data. And those plus transitions are happening more frequently for value minus transactions are a drag on the excess returns of growth portfolios, particularly in small stocks, they contribute 5.1% per year to this small stock value premium, and 1.2% for big stocks.

So, basically not what fidelity said, I mean, it's interesting to see. But you can definitely see where the perception that you're going to get low stable returns. It comes from when Fidelity is saying something like that. They clearly haven't read the migration paper.

And then I always look at the Motley Fool, because I know them to be another credible source of quality evidence based information. And that was a joke, they're typically not that unfortunately.

Cameron Passmore: We picked up on that.

Ben Felix: Yeah. So on the Motley Fool website, again, on a post about how do you choose between value versus growth stocks? They say value stocks don't have flashy growth characteristics. Company considered value stocks tend to have steady predictable business models that generate modest gains in revenue and earnings over time.

They also note that value stocks may look more attractive for investors who prefer more stable stock prices. Value stocks may look more attractive if you seek out these characteristics. So that's another interesting one.

In the historical US data, value stocks have an annualized standard deviation calculated from monthly returns that is 6.5% higher than gross stocks. I mean, that doesn't make any sense to me. Why would they say that?

Cameron Passmore: I'm only speculating, but marketing.

Ben Felix: I guess, it just doesn't make any sense. I mentioned the higher volatility of value stocks. And of course there's also the multidimensional state variable risk sensitivity, but then we got to look at returns too, right? Because the other thing that, part of this misconception is that value stocks are safer and have lower returns. All of those sources that we just talked about, Adriana Robertson study, the Fidelity blog posts and the Motley Fool blog posts, they all say that you're going to get these nice, safe, stable returns from value stocks, but you shouldn't expect to outperform.

For the period from July 1926 to February 2022, Fama French a US value research index beats the Fama French US growth research index by 2.87% per year. And that's a long time period in terms of wealth accumulation. That's nearly 12 times more accumulation over the full period. Is that a lower return? Can you check my math on that?

Cameron Passmore: It'll take some deep research. We'll get back to you.

Ben Felix: Okay. That sounds good. Now, maybe the value premium is dead though. That's something that we've talked about. Not so much recently because it hasn't come back a bit, but a couple years ago when everyone was saying values that we talked about it a lot.

When you look at the post 1993 data, which is where Fama and French really popularized the idea that value stocks had a premium, from then until February 2022, the US value premium has been an annualized negative 0.35%. It's pretty crazy. Negative value premium another sample post publication. So maybe value's gone.

But then you look at emerging markets over the same time period, because you kind of think if, if value died in one place, it would probably die everywhere else too. Or at least, I don't know, there wouldn't be a big premium or something like that. But you look at the emerging markets premium for that same period from, I think it's July 93 until February 22, 4.53% premium for value over growth with a T-statistic of 2.59. So highly statistically significant.

Now, for international developed data, I don't know why, but the Fama French index is not updated to February. It's updated to December. So from July 93 to December 2021, international developed value beats growth by 2.72% annualized over the full period, a T-statistic of 1.75 in that sample.

Now, if you look like using the MSCI indexes, the EFI value versus growth up until February, and I guess if I pulled the data, I would have March now too, but no, I didn't look. EFI value beat growth by 10.3% in January 2022, and 0.9% February. So that if we extended that a little bit more, the average premium would be a bit higher and the T-stat would be a bit closer to too. Anyway, I don't think the value premium has gone away. It seems unlikely.

Even it's crazy to look at the annualized US premium. If you look at December 2021, it was like negative 1%, and then just in the last two months over the full period, the annualized difference has changed by almost 70 basis points, improved by almost 70 basis points. It's crazy how quickly that stuff happens, which is something we've talked about in the past.

Anyway, value is a risky strategy with higher expected returns, expected and historical returns for the majority of history, and not the other way around. So that's definitely a big misconception.

I knew about Adriana Robertson's paper, when I found it on the Fidelity and Motley Fool's websites, I was like, "Really? It doesn't make any sense." Anyway, another big one on value investing is that value investing requires that Warren Buffett, Peter Lynch, stock picking discounted cashflow analysis by what you know, all that kind of stuff.

I think that's another big myth out there about value investing, that you kind of have to be in the financial statements, running your own DCF analysis to figure out what the fundamental value is. I mean, you even hear that in Benjamin Roth's diary, not to sell things if they're below their true value or whatever he says.

Of course, the implicit assumption there is that market prices are incorrect. If prices are correct, we don't need to do any manual analysis to know what's cheap because the prices contain all of the information that we need to make that assessment.

I think this one might be related to the perception that value investing is safer, because if you go and do your DCF analysis and you feel really comfortable with the company, you feel like you've got a margin of safety built in based on your own DCF valuation. I can see that leading the perception that by value stocks are safer or more stable.

Now, this isn't a whack job idea. It's what Ben Graham and David Dodd taught and wrote very well known books about. And people like Brad Cornell, who is, I guess in episode 151, he still abides by the same general thinking. And then Warren Buffett too. And Brad Cornell kind of explains his thinking in that episode.

But of course, this isn't the only way to do value investing. I think it can be done successfully with a systematic strategy using simple metrics like price to book, in the case of how Dimensional does it, ideally combined with some kind of profitability or quality metric to avoid investing in value traps, which is like a company with a low price because of low expected cash flows, and not because of a high discount rate controlling for profitability can make that go away or at least reduce its incidents.

I think Warren Buffett and Brad Cornell would disagree. I mean, I know that for Brad Cornell, because we asked him about this. They would say that you have to do your own analysis to know what the true value of a company is. You can't assume market prices do contain information because they don't, and those guys view. But I think that's debatable, especially given the record of active management, particularly in value investing.

I looked at just the S&P SPIVA report for the 20 years ending December 2021, 83% of actively managed large cap value funds trailed their relevant value index. 94% of midcap value funds trail, and 86% of small cap value funds trail, and 87% of multi cap value funds trail their relevant value benchmark index.

I don't know. I don't see a whole lot of, not a whole lot of alpha in there, which is consistent with what we'd expect from active management in general.

Now, Buffett's outcome. Buffett's outcome could be a challenge to systematic value investing, but it also could not be a challenge. Buffett has beaten the market. There's no question about that. It's likely highly related to his skill and abilities as a businessman, more generally beyond his ability to select securities. And Buffett also pioneered the style of investing in low volatility, high quality, cheap stocks, before we even had a notion of multifactor as a pricing.

Cameron Passmore: It's also a story of low fees, right? He doesn't charge traditional asset management fees, which has a huge impact.

Ben Felix: True. But is Buffett's outcome a challenge to systematic value investing. Now that we know about multifactor asset pricing, which is what a systematic value investor would use. I mean, it's like a Dimensional or an Avantis fund, those are systematic value, or an Alpha Architect fund. Systematic value funds that are using asset pricing models or sorts on characteristics to systematically build value portfolios.

There's a paper in the Financial Analysts Journal called Buffett's Alpha. And they looked at exactly this question. So they found that Buffett's Berkshire Hathaway has a realized sharp ratio of 0.79 with significant alpha to traditional risk factors. But the alpha becomes insignificant when they control for exposure to betting against beta and quality minus junk.

And they also find, and this is a unique thing with this paper, that Buffett has an implied leverage ratio of about 1.7 to one on average. So Buffett's returns they conclude are not luck or magic, but they're a reward for leveraging cheap, safe, high quality stocks. And that leverage comes from the insurance float from his insurance businesses that has an average cost for that implied leverage below the TBLA rate. So again, Buffet's obvious acumen as a businessman played a huge role in the Berkshire Hathaway outcome. It's not just luck, but he was able to build that strategy, leverage it up and stick to it.

But the interest thing about the paper is that they did recreate it using a systematic strategy. They identified which factors his performance had been explained by. And they said, "Okay, let's go recreate a systematic strategy that implements this." And they did that in the data without transaction costs and all that stuff, but they were able to match his historical performance, which shows that it's possible.

Now, of course, we don't know what the future factor exposure of Berkshire Hathaway's going to look like. We also don't know if Berkshire Hathaway's going to outperform in the future. So you may not want their future factor exposure. But I think the main takeaway is that a diversified, systematic strategy can match even an outlier, concentrated stock picking strategy like Buffett, it's the factor exposures and the leverage that matter. Which is what you'd expect given what we know about asset pricing. So that's myth number two, that value investing requires a Buffett Lynch stock picking approach.

Another big one, that all index funds are good investments. I think index funds really become a marketing term. Lots of index funds look more like actively managed funds. We covered thematic ETFs in a recent episode, they look a lot more like a traditional actively managed fund than they look like a index fund. And we kind of said that thematic ETFs are like lighting your money on fire.

Adriana Robertson in another one of her papers, passive in name only delegated management and index investing. They find that fund managers can use the term index fund or the ETF structure more generally to compel investors to invest in products with relatively high fees. That wasn't a finding actually, that was their sort of commentary on why they might be seeing affiliated indexes. But all index funds are not good investments.

And the other side of that is that, not all actively managed funds are bad investments. I mean, you look at Avantis and Dimensional, I would call them pretty good investments, but they're actively managed. Like if you look at what is their classification, they're not index funds. They don't follow on index. They're actively implemented. But I think it's like, you want to look at the characteristics of the fund implementation. And market cap weighted index funds tend to have these characteristics, which is why I think they are good investments for a lot of people, but it's not exclusive to them.

So you want low fees, broad diversification, low turnover, tax efficiency, but that can be found in both an index or an active fund.

Another good one is that all ETFs tracking and asset class are the same. Kind of like all index funds are not being good investments, just as an example, all small cap value funds are not the same, not even close. It's easy to look at a fund and say, "Oh, small cap value. Yes, I want that." But they're not all going to be even close to the same.

I looked at 12 US equity small cap value ETFs with small cap value in their name. The cheapest one in terms of price to book was half as cheap as the most expensive one. So like much cheaper by a factor of two. But they're both side by side. These are two small cap value ETFs, but one is substantially cheaper than the other. And then in terms of average market cap, the smallest one in my sample of 12 was one fifth the average market cap of the largest one. So substantially smaller. I know.

Cameron Passmore: Wow. And you're not even talking about the implementation side of this. Like how often are they rebalanced and brought back to the proper-

Ben Felix: Oh yeah. I mean, some of the ones in this sample were index funds, some were actively managed funds. Some were systematic active, some were active active. But if you look at them, they're all called whatever fund company, small cap value. In some cases, it's a index beside that, but not in all cases.

Cameron Passmore: It's interesting. Did you see our friend Eric at SaveWealth tweet this week? It was something, I think it was investing in index funds is not an investment philosophy. I think his point was an index fund is a tool, and not all the tools are created equal. Your philosophy's really, what's your asset mix? What's the factors you want exposure to? So it generated quite a bit of debate I saw.

Ben Felix: Oh, I bet it did. The other way that I compared this sample of 12 ETFs was just looking at the performance from April 2020, so kind of COVID crash, to December 2021. And I knew they were all going to have really good returns, but the cumulative return of the worst one of this sample of 12, was 92% cumulative over the full period. Still that's very good, but the best one in the sample returned almost twice as much 181%.

Cameron Passmore: Wow.

Ben Felix: And again, these are all small cap value ETFs. So it's like the difference is going to be meaningful. So, I think this matters for a portfolio construction. If you're sitting down, which security should I use to build my portfolio? It's not enough just to find small cap value ETFs, you got to look under the hood.

And I think this is relevant for probably tax loss harvesting too. Where again, if you wanted to sell position at a loss and rebuy a different security with similar asset class exposure, there can be significant tracking error, especially in stuff like small cap value ETFs. Less problematic for market cap ETFs, but I think anything that's even a little bit specialized, you start to have enormous differences in construction. Even in definitions of value, right? Like what is a value company and what metrics are we going to use to determine that? That's going to be different from company to company.

Another one that's I think pretty interesting is that risk and return are always related. You think that's true, right? In an efficient capital market risk and expected return have to be related, risk and realized return have an obviously much noisy relationship. And increasingly so as we reduce diversification.

So I think with an individual security, you're probably not going to get anything close to the expected return, because the unexpected return's going to dominate the outcome over long and short periods of time.

Even with diversified portfolios at shorter horizons, there's going to be a lot of noise as well, but over longer horizons and diversified portfolios, at least on a relative basis, like value stocks have higher expected returns. You don't know what the premium's going to be necessarily, but you'd expect there to be a premium. I think those relationships are more reliable in diversified portfolios. But the risk of an individual company, that's not a price risk, that's not the case where risk and return are related.

And then you think about the skewness in individual stock returns. In individual stock picking is like playing the lottery, you're probably going to lose, but you might happen to pick a big winner. Of course, you also have to hold on to it for the right amount of time, but you could be become very wealthy doing that. But because of the losing prospect on average, I wouldn't really call that like a high risk, high reward approach to investing. The risk is not compensated on average. It's more like a high risk hope for luck strategy. I think that's different than risk and expected return.

I think this is probably a big deal with crypto too, like people see the volatility and they think it's a high risk, high reward strategy, but that's not always going to be the case. There can be a lot of uncompensated risk and a lot of skewnesses that can really mess with that.

Gold too is maybe another example. Although I think people generally get that gold to low expected return asset, but gold's volatile. People might look at that and think, well, it's risky. It must have high expected returns. But if you think back to the ICAPM thinking, all assets are priced based on their mean expected return in their covariance with the market. So to the extent the gold is uncorrelated, you end up with a lot of volatility in a very low expected return. So risk measured by volatility in that case and return are not always related. Good to do a couple more?

Cameron Passmore: Sure.

Ben Felix: Okay.

Cameron Passmore: Try to wrap it up in our tonight's bundle here.

Ben Felix: Dividend investing is less risky than total return investing. I love this one, as some people know. People really believe this. They really believe it.

We spoke actually earlier today with the author of one of these papers, Tobin Hanspal. We didn't talk to him about that paper, but he is an upcoming guest.

So they've got a paper where they find that investors exhibit excess sensitivity to dividend income. They increase consumption precisely around the days that dividends are paid out. They find that the excess consumption is driven by individuals who are relatively wealthy. They don't face self-control issues, and they're not characterized as inpatient or people who make regretful consumption choices.

The people who do consume make financial plans and actively track their income from dividends. So the results they find are consistent with investors employing mental accounting practices and following rules of thumb, such as consuming income not principle and living of their income. The planned consumption channel they document is consistent with the idea that investors are attracted to the income stream from dividends, incorrectly perceive them as free money, and planned consumption around their arrival.

Fascinating. And then Marco Di Maggio, another guest back in episode 179. Though we talked to him about crypto, not about this paper. Actually, we talked to Tobin about crypto too, not about his dividend paper. We missed two good dividend papers because we were talking about crypto.

So, the Di Maggio paper, they find that the marginal propensity to consume the MPC out of dividends for all wealth groups in their sample is much larger than the MPC out of capital gains. Higher margin propensity to consume out of dividend payments is consistent with a near rational behavior in which households optimize their consumption with respect to capital gains and dividends income as if they were separate sources of income. And that interpretation is consistent with the free dividend fallacy, more investors view capital gains and dividends as separate attributes of a stock.

And now one more paper confirming that this is a real thing that people believe, a paper called the Dividend Disconnect. I think it's a 2016 paper. They looked at individual investors, mutual funds and institutions, and find that they trade as if dividend capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases.

Cameron Passmore: Exactly.

Ben Felix: They find that behavioral trading by patterns like the disposition effect are driven by price changes, not by total returns. Again, fascinating. But intuitively you can see how that would happen at the individual investor level.

Investors rarely reinvest dividends and trade as if they're separate stable income stream. Analysts fail to account for the effective dividends on price, that's wild. Leading to optimistic price forecast for dividend paying stocks.

And this one's also fascinating, demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend paying stocks, because people want the free dividend money and they end up with lower total returns because they're overpaying for the dividend. It's just wild.

Now, why is this a fallacy? Are dividends safer? Because we've talked about the fact that this is a well documented bias, but are they safer?

I did some analysis on this a while ago, for a discussion we were having in the Rational Reminder community. So I drew on that analysis. I found for 771 30 year periods from July 1927 to November 2021 using a monthly time stamp, that an investor owning a portfolio of the top 30% of a dividend to price stocks from Ken French's website. And only spending their dividends, had an identical investment experience on average to an investor matching the spending of the dividend investor, but investing in a factor matched total return portfolio.

And I think the difference was like it was a 6.4% dividend yield for the dividend portfolio and a 4% yield for the non-dividend portfolio. So the difference because the spending was identical, the difference was coming out of capital.

Cameron Passmore: What would the tax impact be?

Ben Felix: I ignored taxes in my analysis. Well, that depends on your tax bracket, really. In some cases in the low tax brackets, dividends are taxed very favorably, in some cases you even are in a negative tax bracket. But a higher tax brackets you're paying a lot on dividend income. So it's going to depend on the tax bracket. So that alone I think is fascinating.

I showed that from a withdrawal perspective and using the dividend income as the spending policy, as opposed to trying to do a fixed withdrawal rate or something like that. Like we're only spending dividends. So dividends drop spending for both the dividend and total return investor drop, you're no better off being in a total return portfolio, despite the fact that you're spending capital. I take that to be evidence, that factor exposure is what matters and not dividends.

Then I also looked at the Vanguard dividend appreciation ETF. It's got a negative five factor alpha of 61 basis points from June 2006 to January 2022, and a coefficient of determination, which is like how much of the variation in returns is explained by exposure to the factors in the regression of 94%. So, a negative five factor alpha, but most of the returns are explained by factor exposure. That's what you would expect if the five factors and not dividends explain differences in expected returns.

Now, dividend stock do tend to load on profitability investment and a little bit to value. Although I think this Vanguard ETF is actually a bit growthy right now. But you can target those factors directly, which is going to be more efficient, lower cost and better diversified. So I don't think dividends are-

Cameron Passmore: But they feel so good. They cause good behave behavior.

Ben Felix: It's fascinating though, right? I mean-

Cameron Passmore: They do cause good behavior. If you love it, you're going to stick with it.

Ben Felix: But it's more than love. Like when we talked to Tobin about this earlier today, he briefly mentioned another study that they're looking at, where they try to change the behavior of people who are consuming dividends. And his comment was that changing this type of behavior is extremely difficult, but it's very interesting stuff.

One of the thing that John Cochrane talks about in portfolios for long term investors is that one of the ways financial advisors can add value is by creating a payoff stream from portfolios that is not necessarily related to dividends. Like, can we create a sustainable payoff stream without relying on dividend payouts? And that's kind of what we try to do. Like our clients wouldn't know the difference between dividends and capital gains. They know how much we send to their bank accounts. So I don't think that dividends are less risky.

Okay. The last misconception that we'll talk about today, and we're going to save a couple for a future episode. The last one I'm going to talk about is that you only need to invest in US stocks because they perform the best. When you look at the historical data, it's like, yep, US stocks they perform the best. But the question that I would ask is over what time period? Using the Dimson, Marsh, Staunton annual returns data from 1900 to 2010, the US returned the 9.18% measured in USD, while Canada returned 9.14% in USD, and Australia actually had 10.24% in US dollar terms, annualized over that full period, 1900 to 2010.

So if we're sitting here in 2010, I think December 2010, having this conversation, the US actually has not performed the best. Canada has performed nearly as well and Australia has performed substantially better. So, all of the superior performance of US stocks over Canadian stocks, over the last 120 years has come in the last decade. And a lot of that's come from price multiple expansion, not from fundamental growth, which could lead to lower expected future returns, not higher going forward.

And then I also used monthly MSCI data, and found from January 1970 to October 2013, the MSCI Canada index returned 10% annualized, and the MSCI USA index returned 10.01% annualized. So they are pretty much the same return if we were having this conversation in October 2013, and looking back to 1970. Now the US index was less volatile over that period.

One year earlier, so this is October 2012. If we're having this conversation, Canada had beaten the US since 1970 by an annualized 45 basis points. And if we look to October 2010, Canada had nearly a 1% annualized return advantage over the US back to 1970. It's crazy. So it's this decade or so that US has pulled away. Where we look back today, and it's like, okay, the US has superior performance. Australia has still done a bit better, but the US relative to pretty much anything else, it seems like, yeah, it has done the best.

But that has not always been the case. And there are many historical periods where you can look back and other countries have performed better than the US. So it's this like ex-post bias where we see the US has done really well, but it's time period specific. And there's not a whole lot of reason to believe it's going to be the same in the future.

And if we believe that price earnings ratios contain information about expected returns or price dividend ratios, whatever, and they probably contain a little bit of information, then we might expect the US stock market to have lower returns going forward, not higher. So that's another big one. A couple more that we can save for a future episode. And this could be even be a misconception segment.

Cameron Passmore: It could be. But you got five more. Cool. All right. That's awesome. Anything else to finish up with?

Ben Felix: No, I don't think so. Well, you didn't mention that you're off to the masters, right?

Cameron Passmore: Well, by the time this airs, I will hopefully have been successfully traveled back and forth from Augusta. So we've had our negative test today, that went well. Flight's tomorrow. Got to do that. And then pray for good weather. The weather looks spectacular, so by the time you guys are listening to this, we'll know the answer.

Ben Felix: Well, I hope the trip goes well.

Cameron Passmore: Whole lot of things have to go well to pull this off, like between the rapid tests, the travel, the flights, the weather, it's something, but it's going to be incredible. I've talked to a bunch of people that have gone, and it's quite the experience.

Ben Felix: All right. Well, enjoy. And to all the listeners, we'll see you in week.