Episode 8: Sell Everything!

Key Points From This Episode:

  • Fidelity’s 0% MER index funds are already at $1 billion [0:02:34]

  • When costs are 0%, how do you pick a fund? [0:03:44]

  • Indexing is not a passive investment strategy [0:04:11]

  • Index construction and product implementation > low fees [0:04:11]

  • A three factor regression on the Manulife Multifactor ETFs [0:06:49]

  • Indexing is still a tiny part of the market [0:16:06]

  • Not all factors belong in a portfolio [0:17:42]

  • Dividend investing shouldn’t be so controversial [0:26:49]

  • Dividends are not a spending rule [0:29:17]

  • Financial experts don’t sound like experts to non-experts [0:30:15]

  • Sell everything! [0:33:47]

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 are hosted by me, Benjamin Felix and Cameron Passmore.

We're back with our eighth episode, our eighth week of the Rational Reminder podcast.

Cameron Passmore: Amazing a whole summer almost.

Ben Felix: Yeah, that's right.

Cameron Passmore: And today I think is going to set a record temperature another day of almost 40 degree temperatures with the Humidex.

Ben Felix: It's that hot outside.

Cameron Passmore: It's going to be record high for September 5th today.

Ben Felix: Wow. Wow.

Cameron Passmore: So, anyways, so just like quick update, some stuff has been going on lately. I was in Montreal last week for meetings and a fun day roaming around town. Got referred, by a friend of mine, to the Dominion Square Tavern, right downtown. Incredible restaurant, what a great place. Interesting menu, great service, great location. Then we walked over to the Comedy Nest, which was a great show as the old forum, which I hadn't been in in years. So it's quite a little different venue, but great comedy. We had a great time down there.

Ben Felix: You said you were referred, I was expecting something business related. You said you were referred to a restaurant.

Cameron Passmore: No, a friend of mine is a bit of a foodie on Instagram. So I thought, well, who better to ask then…

Ben Felix: Do you say that about a restaurant, "I was referred to this restaurant"?

Cameron Passmore: Yeah, well, I was. Highly recommended, he said-

Ben Felix: Recommended.

Cameron Passmore:... "You got to go." Yeah.

Ben Felix: So speaking of referrals, you got referred to a new truck.

Cameron Passmore: Yeah, I did. We got the Ascent that I've been talking about. It's great. I mean, it's... Yeah, it's great. I fit in it very well with two car seats behind me, which is impressive. So we're happy.

Ben Felix: That's awesome.

Cameron Passmore: Yeah. And we also have... Together we have kids starting school, new stages of school.

Ben Felix: Yeah. So we took Noah to his orientation. I thought it was his first day of school, it wasn't.

Cameron Passmore: It was really orientating you.

Ben Felix: Yeah, it was an orientation for the parents, but there were two other families, so they didn't in a small group and just kind of showed us around the classroom. Noah picked his cubbyhole, but he starts on Thursday.

Cameron Passmore: Awesome.

Ben Felix: Tomorrow, yeah.

Cameron Passmore: And my kids are both back in college, again, this week. Anna's starting out in the interactive media design program at Algonquin, James is year two in the eCom program there as well. So pretty big week in our household too.

Ben Felix: Is that a four year program, for James?

Cameron Passmore: Yes. Yep.

Ben Felix: Wow.

Cameron Passmore: Yeah. And we've been lucky to have him here working in our office this summer, so it's been great to have him here with our team.

Ben Felix: Yeah, that has been great.

Cameron Passmore: So as far as the news goes, I was blown away by... We've been talking about the Fidelity zero fee ETFs that came out recently. And in a matter of a month, they've picked up a billion dollars.

Ben Felix: Yeah. That's a lot of assets.

Cameron Passmore: And what's really impressive is that they gain that... This is a retail only product, this has not been swamped by their portfolios buying in or other institutional money. It's a retail driven product, because you can only access it online. So, that is very impressive.

Ben Felix: Yeah. I mean, you have to think like... I read an article a couple of weeks ago about how funds companies are cannibalizing their own funds by creating new lower fee classes, and investors are dumping the old higher fee ones and getting into the new lower fee ones. So this is the lowest fee. I mean, until we start to get into, into negative fee territory, which we haven't seen yet. But it makes sense that people would start dumping their money into a zero fee product, when fees are all that matter, in a lot of ways, to people right now.

Cameron Passmore: But incredibly competitive space. I mean, I would suspect there must be some cannibalism going on, where savvy investors are moving some money over. Either way, a billion dollars in a month is very, very impressive.

Ben Felix: Yeah. I think it starts to get pretty interesting when costs are at zero, so this is a zero fee fund. So what do you base your decision on? If you're choosing between a bunch of funds with no fee at all whatsoever, you start to worry about what? Index construction, what index are they tracking, because that matters? And how are they implementing the product?

Cameron Passmore: Right. And there's a risk, I think that people become too focused on fees and stop looking as much of the value side of the equations.

Ben Felix: Right? Like what is the... Well, that's kind of what I'm talking about, I think. With what type of index are they tracking? And how are they implementing the product? And I guess implementation part of that is securities lending. So how are they doing securities lending? I read something a couple of weeks ago about how fund companies, potentially, could start getting into... Well, I think it's pretty heavily regulated, but they could start getting into slightly riskier securities lending practices, which could, obviously, have implications for the fund unit holders. But I think the thing that we have to remember with index funds, we talk about index funds, and it's like, "Oh, well, they're kind of all the same. They're passive." If you think that way, then, yes, costs are all the matter. But index indexing is not a passive activity.

Someone's making the index. There are... As of... I saw an article from May this year, at that time, there were over 3 million indexes in existence. There are far more indexes than there are stocks that exist in the world.

Cameron Passmore: Can't even imagine 3 million.

Ben Felix: 3 million indexes. There's an index for... I mean, you think about it, there's an index for anything, right? You can find a marijuana index, I don't know, a gold index, anything you can think of there's an index to track the space. So indexing is super competitive. All of these companies like MSCI, Standard & Poor's, and... I mean, there are tons of other index creators, and they're all competing to make the best index. And that comes down to their methodology.

If they have different methodologies, just by nature of that, they're going to have different underlying holdings. So when you're choosing between ETFs, like the... I haven't dug into what Fidelity has in their products, but they've created their own. You mentioned, in one of our previous episodes, they've created their own index to further reduce costs.

Cameron Passmore: Right, to stop paying the royalties back to Standard & Poor's or Russell or whoever created the index.

Ben Felix: Vanguard's done that too. They have the Vanguard 500 that they track instead of having an S and P 500 index fund. So when we start talking about different index as being one of the differentiators, if you're comparing... I mean, and, again, I don't know what's in the Fidelity index, but if you're comparing a Fidelity index fund with the zero fee to something else that has a 15 or 20 basis point fee, but it's tracking a superior index, then you'd rather pay the cost to get access to the better index.

Cameron Passmore: That's really the big reason why we've chosen to largely use the funds from Dimensional Fund Advisors. Arguably, technically, a better index is being followed. And then the other side of the coin is better implementation of executing those indices.

Ben Felix: Right. Right. So I just said, "Superior index," what does that mean? What is a superior index?

Cameron Passmore: There's two side to it. One is the construction, the definition of the index. And the other side is, how do you actually manage the index? A couple of years ago or was it last year that Manulife came out with their DFA multi-factor ETF. I know a lot of our peers in the country got upset saying, "Well, Dimensional's going direct and you can buy the ETF from Manulife." And now will that only picks up the construction side of the portfolio, you've got the indexation side of it. Now, you looked into the data of that fund-

Ben Felix: Well, they created this... a couple of Manulife multi-factor products, and then, there's... On the Manulife website it says, that they track an index that's created by Dimensional, and I think it's rebound semi-annually, which is probably not enough when you're tracking factors. But, anyway, that's, that's a different discussion. So you're ending up with these products that are sort of designed, or at least sold, as tracking an index that's supposed to get you exposure to, well, the factors, size, value-

Cameron Passmore: Profitability.

Ben Felix:... profitability. And so I just ran a quick regression to look at that Manulife... Well, one of the Manulife ETFs, I only looked at one. And to be fair, it's called the Manulife Multi-factor US large-cap ETF. So you wouldn't expect it to have size exposure, although in the explanation of the methodology of the index, they do talk about how it sorts large-cap stocks by size.

Cameron Passmore: Okay. Bit of a nerd alert here, what is regression trying to do?

Ben Felix: Right. So it's statistical analysis that's kind of attributing, well, in the case of indexing where the sources of rate of return are for the index. So we know returns come from exposure to the market, exposure to small stocks, exposure to value stocks. Now, I only ran a three factor regression, a four factor would include profitability, too.

Cameron Passmore: Of course, it would.

Ben Felix: But the regression tells us, how much of the return of this index was explained by exposure to the market? How much was explained by exposure to small stocks?

Cameron Passmore: And what you normally find is these factors explain returns far more strongly than an active manager's prowess at predicting the markets.

Ben Felix: Well, absolutely.

Cameron Passmore: That's how the story normally goes.

Ben Felix: Well, that's how it is. That's how the science goes. That's the model. The three factor model, which is what we're talking about, it explains... So what you're talking about is explaining the difference in returns between diversified portfolios. So in a three factor world, with a three factor model, when you do a regression based on market, size and value, that explains about 90% of the return difference between two diversified portfolios, so it's got very strong explanatory power. If you add in more factors, like you start adding in a momentum, profitability, investment, you start getting into like 96 or more percent explanatory power, to explain the difference in returns between diversified portfolios. So-

Cameron Passmore: This is not just data mining. I mean, these are powerful statistics with the t-stat that are very high, which means it is statistically significant factors that explain it.

Ben Felix: Well-

Cameron Passmore: It's not just some piece of data that [crosstalk 00:10:02]-

Ben Felix: The t-stat depends on the regression, so that's one of the things that I looked at when we looked at this Manulife product. So it had a negative exposure to the size premium, which, fair enough, I guess, because it's a large-cap fund, so maybe that's okay. But the big one, that you'd expect, is you'd expected to have exposure to HMO, which is a value factor. And it only had a regression coefficient of 0.08. But the big story is that it had a t-stat of 1.4. Now, a t-stat of 1.4 is what you would call not statistically significant, which means it does not have a statistically significant exposure to the value premium. So that's... Obviously, if, in that case, you're paying 35 basis points to own that fund, you'd probably hope to have statistically significant exposure to value. Now, again, I only ran a three factor regression. I didn't have profitability in there. Maybe they have a statistically significant exposure to profitability. I'm skeptical, but-

Cameron Passmore: But the point is your data shows that you're not getting what you paid for.

Ben Felix: In that case, yeah.

Cameron Passmore: In this one simple example, that's what it's showing.

Ben Felix: Right.

Cameron Passmore: The point being you want to make sure you're getting what you're paying for. If you are paying a bit of a premium for exposure to a factor, these tests can determine whether you're getting that factor or not.

Ben Felix: Right. Right-

Cameron Passmore: Like the old ad, "If I wanted water, I would have asked for water."

Ben Felix: Yeah, exactly. To tie it back to what we were talking about is we care about, what index is a fund tracking? And how is it being implemented? So in that case, it's tracking an index that you might expect to be better, but I didn't run a regression on the index itself. But in any case, you're getting implementation that's not giving you exposure to the factors that you might be paying for. And you compare that to something like the DFA US core, which I also ran a regression on just for comparison. It's exposure to HML or it's regression coefficient for HML is 0.23, so almost three times more than that Manulife product, with a t-stat of 3.94. So with almost complete certainty, you're getting exposure to the value factor with that product.

I mean, even if we talk about indexing being... indexing as passive... And I know we already mentioned this, but I think the S & P 500 is one of the craziest examples. It is often cited as being like the index fund. The index fund to beat. And it's selected by a committee of people. It's not even a quantitatively selected index. So what does passive mean? Does passive mean it's-

Cameron Passmore: And it is tough beat.

Ben Felix: Yeah, it is tough.

Cameron Passmore: Very tough to beat.

Ben Felix: Yeah. But I don't know what the real definition of passive is. Someone on the YouTube channel commented yesterday saying... someone asked me a question, "How would I invest my own money if I had a lump sum right now?? And I said, "I would invest it all in DFA global equity, because that's what I do with all of the liquid assets that I have available." And someone else commented saying... because I talk about passive indexing and index investing on the channel a lot. Someone came back and said, "Well, isn't DFA active?" And it's like, "Wow. It depends how you define... What is active?"

Cameron Passmore: I mean, this has been an age old debate in our world.

Ben Felix: Yeah. Anyway, so on the topic of indexing, we often hear the question or the concern, especially from, I think, active managers of... "Is indexing getting too big or can it get too big or is there a tipping point?" All different ways of framing the same question. And it's tough to get good information on this, because the easiest source of data... Because Morningstar Direct, for example, reports on it, and I can go access to the information anytime I want and I can do it, right now. But that information tells us how much of fund assets are indexed.

Cameron Passmore: Including ETFs or not.

Ben Felix: Yep. Mutual funds and ETFs, so fund assets. So we can go on Morningstar and look at how much of fund assets are indexed. And that number, globally, as of now, is about 30%, according to a Vanguard infographic that they just published a couple of weeks ago. So 30% of global fund assets are indexed 30%. That's a lot. We look at Canada, it's like, I don't know, 10%.

Cameron Passmore: Right. That's what's held. However, a lot of that is held in active type environment.

Ben Felix: That's a huge, important point.

Cameron Passmore: So you could have a pension fund that owns an index ETF, that's holding it to deploy new cash or being tactical. We don't know what the motivation is for holding it.

Ben Felix: That's right. That's just products. So 30% of assets in products are indexed, but are those products being used passively or actively? We don't know the answer to that. Vanguard looked at that in their study too, and they showed that a lot of index funds are being used actively.

Cameron Passmore: The point that Vanguard made that I think is the most powerful one is that, they said that only about 5% of trading is done by index funds, and 95% of all trades are being placed by active participants. Even though there may be a lot of money in index strategies, very low trading volume, relatively speaking. So therefore most of price discovery is being done by the activity.

Ben Felix: Yeah, yeah, yeah. And that won't change, because index funds aren't going to start trading a lot. I think one of the really interesting things in that Vanguard infographic, which we'll put in the notes, that they showed that... So we talked about out of fund assets, about 30% globally are indexed. So 30%, that's a lot. Now, that's funds though, only funds, mutual funds and ETFs. If we change that to just the global universe of securities, so that's all stock and... just anything. Anything that you can invest in on a public exchange, index strategies only make up 10%.

Cameron Passmore: And that includes bonds as well. That's all securities I believe.

Ben Felix: That's the whole investible universe of stuff that exists, so 10%. So people getting worried about, "Oh, we are at thee tipping point, it's getting scary, too much indexing." And active managers are saying, "Well, indexing is going to cause a crash," and all that kind of stuff. It's still a pretty tiny fraction of the overall investible market that's invested in index funds.

Cameron Passmore: In the US, is 15% of the total US investible market.

Ben Felix: That's still nothing.

Cameron Passmore: It's still nothing. It's remarkably small.

Ben Felix: And you hear... Fama's talked about it in the past. And I think we've mentioned this too, who knows what the tipping point is, but it might be 90% indexing before markets start to have trouble with price discovery.

Cameron Passmore: That's the question, how much activity do you need for prices discovery that's accurate? and I think if it starts to tilt, arguably, you'll get more active managers that go in to pick up the free money that's lying in the lobby, so we shall see.

Ben Felix: I think kind of on that topic, too, that's another interesting point is... And this, maybe, ties back to the first conversation we were having about index funds being passive or not, I saw an article about how BlackRock has used their voting rights because they own tons of shares, and they can vote. They've backed a proposal to replace Elon Musk on the board of Tesla after all of the shenanigans that have happened recently. But it just goes to show you that, again, what is passive? If you have huge companies like BlackRock, who own massive amounts of shares, and they're using their votes, is that a passive... What is passive? What is passive? It's a tough question to answer.

Cameron Passmore: So we've got a question in this week from a listener, which we love getting, and the question to us was, what other factors are out there that Dimensional Fund Advisors did not cover?

Ben Felix: Yeah, it was more about how do we feel about other factors that Dimensional's not covering? We know there are... I read an article yesterday, there are 300 or so factors, and 40 new ones being discovered every year.

Cameron Passmore: Right. The factor zoo, they've been calling it.

Ben Felix: It's the 300 or 300 plus 40 Rule, the 300 factors plus 40 new factors being introduced to the literature every year. Now, obviously we're not going to talk about all of them, because there are just too many. And a lot of them are not great in terms of how the research is being done, I don't think. But-

Cameron Passmore: But what you have as a bunch of academics around the world with a lot of technology, just grinding through these databases to look for patterns and trying to reverse explain them, I believe.

Ben Felix: Well, yes. And it's also become a massive competition, because if you find the next thing, like look at Fama and French, they made a massive name for themselves. With... I mean they founded factors, but then you look at other people, like Campbell Harvey is doing tons of research on this stuff. I can't remember the name, there are a couple of other academics who are making really big names for themselves, associate themselves with fund companies. I'm sure they're making lots of money and you're going to do that. If you find-

Cameron Passmore: Like Rob Arnott and Cliff Asness and people like that?

Ben Felix: Well, those are fund... Like Rob Arnott owns RAFI, Research Affiliates, so he's creating investment product. AQR is creating investment products, but there are people who are starting in academia, and then being pulled into fund... Like Campbell Harvey was speaking at the RAFI conference, who knows how much they were... I don't know the... I don't even know if he's associated with them or if you're just being paid to speak. But anyway, the top researchers in the factor space are making big names for themselves and making lots of money, which is driving competition, which is driving more factors, whether or not those factors are robust as a different story.

Anyway, there are some factors that are very well-researched and... Like Mark Carhart, his paper in 1997 on persistence in mutual fund performance, I don't know if that's where momentum was introduced. I think it was introduced before then, maybe he just wrote the paper that... Anyway, momentum is a well-researched factor has been around for a long time.

Cameron Passmore: I remember back in the mutual fund days, we used to sell momentum funds back in the mid and early '90s.

Ben Felix: Right. Okay, so it would have been before Mark Carhart's 1997 paper then. But momentum, like I said, it's well researched, it shows up in the data. We follow what Dimensional follows when they consider a factor to include in the products. And so they... And I think this is actually a... I was reading a paper in the CFA and the Journal Finance about factor robustness or something like that. And they use these same criteria that we're about to talk about, but it's actually a framework that has a name. I thought it came from Dimensional. I'll have to figure out, what the name of... Anyway, so to be considered a factor, and this is the framework that I can't remember the name of, it has to be persistent, pervasive, robust to alternative specifications, and sensible.

Cameron Passmore: Sensible's a big deal, they really highlight that. It has to make intuitive sense, not just be something that can be explained by data mining.

Ben Felix: And actually I forgot one, it also has to be investible. So what that means is if it's persistent, that means it shows up across time periods. So it can't just be from 1960 until 1990, this thing showed up. It has to be, as far as we have data. This is a total sidebar, but my favorite story about persistent and persistence, does it work out of sample? My favorite story about that is, I think it was Neil [inaudible], who's a researcher, I can't remember what university.

Cameron Passmore: Arizona.

Ben Felix: Arizona. So he looked at profitability. So profitability... We had data like from 1960 on, I think, and it was this new factor, it was a big deal. And he wanted to test it out of sample, but he didn't have the data. So how do you do that? So he and some of his students went through... I can't remember they're called those newspaper machines. Do you know what they're called? And you're not that old.

Cameron Passmore: Thanks for... Oh, the microfiche.

Ben Felix: Yeah, the microfiche. So they use the microfiche and they went and found, from old newspapers, the profitability data going back to 1926 or something. So now, they had out of sample data for US stocks, and it's like, "Let's see if the profitability factor works out of sample," and they did it, and it was there, pretty cool.

Cameron Passmore: Well, that's kind of what Jim Davis did to get out of sample data for the original Fama/French paper of '92, '93. So Jim Davis led that project going back to the mid to late 20s to get the price data on securities. And then, they took that around the world to get that original paper out of sample, not only from a geographic standpoint, but also from a time standpoint.

Ben Felix: Right. Because Fama and French got slammed when they made their first paper for data mining.

Cameron Passmore: This was what? '66 to '92.

Ben Felix: That's what I said 1960 to 90, yeah.

Cameron Passmore: So they went back to '29, and they went around the world. That was a huge project by the Jim Davis lead [crosstalk]-

Ben Felix: We're talking about persistent over time periods and you're talking about going around the world, so that's pervasive. So it has to exist in different geographic regions, in different sectors, all that kind of stuff. It has to be robust to alternative specifications, that means if you slightly change the way that the factor is defined, so that's like using price earnings versus price book to define value, it still has to show up. So if you slightly change the way that you're defining a factor and it disappears, then it's not robust to alternative specifications.

Sensible, you mentioned, is super important. So if there's no reasonable explanation for why this thing is happening, then it's tough to justify that it will probably happen going forward. So small-cap and value stocks, we know it's risk-based. So those are riskier. They're just inherently riskier securities, and therefore we expect higher returns.

Now momentum... Well, let's actually finish the thought here with the criteria. So investible means it has to... Well, it has to be investible. So if you can't capture a premium, then it's useless. So that brings us to momentum. Momentum checks a lot of these boxes. It is persistent. It is pervasive. It is robust to alternative specifications. Now, sensibility is a tough one. So the explanation for momentum, the one that I-

Cameron Passmore: But you can make a behavioral explanation for it.

Ben Felix: Well, that's what I'm about to say-

Cameron Passmore: Oh, sorry.

Ben Felix:... exactly. But you're right. Well, you can talk about it. Tell them.

Cameron Passmore: I mean, basically, if something is going up, it's going to keep going up, because people have a bandwagon effect.

Ben Felix: It's hurting behavior.

Cameron Passmore: And recency bias, so if it's been going down, it's going to keep going down. But is it a fact that you can go and build a momentum fund around it? Not necessarily, however, and Dimensional's world, they can put it in as a trading rule on portfolios, which they do. So I think we get the benefit of a momentum factor, although it's not a specific factor waiting inside portfolios.

Ben Felix: Well, they... Dimensional use it as a sort of a decision tool when they're placing a trade. So they need to add a type of security to the portfolio, they'll be less inclined to sell something that's been going down. Right?

Cameron Passmore: Right.

Ben Felix: Because it expresses it to…

Cameron Passmore: No, more buying... less inclined to be buying. If it's been falling, they're going to wait on the buy side. And same on the sell side, if it's not in their sell range and the price have been going up lately, they will wait and sell later. And they've got specific academically, substantive rules around this. But the point is implement benefits of the factor without a specific factor waiting like the small-cap and value weightings that are in the portfolios.

Ben Felix: And you can look at a momentum product, the big challenges that you have are, okay, well, number one, is it sensible? And that's the big question, is it a risk... Is it's not a risk-based premium, it's a behavioral premium, will that persist? Who knows, maybe. But the bigger issue is, is it investible? Momentum is inherently a high turnover strategy. So you have a lot of transaction going on inside the fund, which increases your cost, increases your risks and all that good stiff.

Cameron Passmore: Data, taxes.

Ben Felix: Yeah. So, yeah, our thoughts on other factors, other than the ones that Dimensional uses, are, I guess, to summarize it is, when you have the best academics and the best practitioners, probably, in the world working at a place like Dimensional, our view on other factors is that if they met these criteria, they would be in the products. So we don't worry too much about chasing other factors that might be new or interesting. We have a great relationship with Dimensional. And if there's something worth adding, it will be added. They added profitability in 2014, because the research was robust and it was relatively easy to implement in portfolios.

Cameron Passmore: So in other news, I think you got a new friend last week on your YouTube channel. So it's going back to the YouTube video that you did on income investing, talking about dividend strategies, which we've talked about in the past. Huge appeal, huge emotional appeal to a lot of people, but I think your video struck a chord with someone and-

Ben Felix: It struck a chord with a lot of people over time. There was one commenter who was pretty aggressive, so we had a nice little conversation in the comment section. It worked out all right, I think the guy was... in the end, after he realized that I was actually reading the comments and replying, he turned to be a little bit nicer than he appeared. But anyway, that video-

Cameron Passmore: But great information came out of that debate though. It was really, really professional on both sides. It was good.

Ben Felix: That's what I mean, it turned into a good discussion. His first comment was a bit aggressive, but it turned into a good discussion. That video is the most controversial, if you can call it that, video that I've posted on YouTube. So it has 144 likes with a thumbs up on YouTube, and 13 thumbs down, which is a big deal because most of the videos don't get any thumbs down or maybe they get a couple. But in terms of the spread between thumbs up and thumbs down, this is by far, the most-

Cameron Passmore: The emotional feel of dividends is so powerful.

Ben Felix: Yeah. Yeah. I think that that bias where people just have this preference for income is, it's really... it's unbelievable how strong it is. And I think like, obviously, the thing that people miss is that when a company pays a dividend, the value of the company drops by the amount of the dividend. That is a fact.

Cameron Passmore: It has to otherwise you'd arbitrage that, collect the dividends, sell the stock back, and get the dividend for free.

Ben Felix: So if you're an investor and you receive a dividend before taxes are considered, you don't care, it doesn't make a difference at all whatsoever to your total return. The fact that you've received a dividend, I think, for a lot of people feels good because now they have cash, and they feel comfortable spending cash as opposed to selling some of their securities to raise capital. They should be indifferent between selling some stock versus receiving a dividend, because on net, you're in the exact same position.

Cameron Passmore: If not better off getting a capital gain on selling, as opposed to a dividend, [crosstalk]-

Ben Felix: Depending on your tax bracket, yeah. Now, I think that in the end, people use... they use dividends as a spending rule. So they end up treating their dividends as, this is the amount that I'm allowed to spend. In retirement, that makes you feel like you're never going to run out of money. Which is true, assuming that the underlying companies that are paying you the dividend stay in business, which is not a guarantee at all.

Cameron Passmore: But you end up with a more focused portfolio. Usually, people that follow the dividend strategies have fewer holdings. Therefore, you have more individual security risk.

Ben Felix: Yeah. Yeah. That's-

Cameron Passmore: And you really had fun doing that debate though, didn't you? Because your response was a pretty substantive response.

Ben Felix: Yeah. Well, the guy, he was pretty aggressive. I had to-

Cameron Passmore: Yeah, but you picked it away pretty well. Hopefully, we link that in the show notes. I don't know if you can link comments in the show notes-

Ben Felix: NO.

Cameron Passmore:... or not-

Ben Felix: No, we cannot link the comments.

Cameron Passmore:... but it's worth... For those interested in going back and looking at the debate, it was very, very interesting.

Ben Felix: Yeah. Yeah. It's fun doing stuff like that, I think. Let's just quickly wrap up Michael Batnick had a really good post. It's something that I've thought about many times, but he just has a way of putting these things in into words. What does it mean to be a financial expert? I don't know if I would call myself a financial expert. I probably wouldn't, but I at least like to learn from financial experts. And when you learn from financial experts, you start to realize stuff like, "Well, you can't pick stocks. And analyzing companies is not particularly useful in terms of selecting the right securities." So in Batnick's post, he quotes Jason Zweig talking about the paradox of expertise. He says, "The broader and deeper your knowledge, the more readily you will say, 'I don't know,' thereby convincing the typical person, like the non-expert, that your knowledge is narrow and shallow."

Cameron Passmore: Very true.

Ben Felix: Yeah. And they just nailed it. And if we talked to somebody at a, I don't know, dinner... I don't go to dinner parties.

Cameron Passmore: We don't cocktail parties.

Ben Felix: Talk to somebody, somewhere-

Cameron Passmore: You sit down with someone on a plane.

Ben Felix: Sure.

Cameron Passmore: I mean, now when someone asks me what I do, I always say I'm an insurance agent, and that usually... Because I enjoyed just my time alone on the plane. But if I actually say, "I'm an investment advisor," the question that comes back as always something predictive. What should I be buying these days? What do you think of Apple? The stock of the day. Should I buy POD stocks or Bitcoin? Look back through the times, right?

Ben Felix: But the problem is you get into a conversation like that, and if you say, "I have no idea," or something along those lines, then the person thinks you're a fool. They think that they... "You don't know what you're talking about. What kind of investment advice do you give?" Which is the whole point, we don't give that type of investment advice. But for someone who doesn't understand any of the evidence or any of the data, we probably sound like, not the brightest investment advisors out there.

Cameron Passmore: But this links back to... I mean, we have this chart that was floating around the web this week that we can put in the show notes, just with all kinds of predictions, going back over the past few years, which you read them are unbelievable. People like Marc Faber back in 2017, "Epic decline ahead, stocks will plummet 40%." Paul Krugman back in 2016, "Very probably looking at a global recession, with no end in sight." Paul Farrell, "100% risk of a 50% crash, if Trump wins nomination."

Ben Felix: Look at the one from 2017, "70% market crash to strike September 1st." Now, were laughing about this stuff, watch that happen tomorrow. But the point of the images... And you know what I was chatting with somebody about this recently, I think that you could probably find, on any day of the year, you could find a headline talking about the impending market crash. I bet we could go back and find, for every single day of the past 10 years, an article talking about how the market's about to crash. Every single day of the week, I bet you could find one.

But, yeah, tying that back to expertise. It's like people want the experts to say stuff like that, but the actual experts know that saying stuff like that, doesn't make a whole lot of sense.

Cameron Passmore: But they're big names here. Mark Faber, Paul Krugman, Bill Gross, Morgan Stanley, Ron Paul, Harry Dent, "Once-in-a-lifetime crash coming in next three years."

Ben Felix: They're big names who make big predictions that are often wrong. But they're big names, because they make big predictions. It's like that Royal Bank of Scotland article that was-

Cameron Passmore: Oh, my God.

Ben Felix: It was a huge article.

Cameron Passmore: Remember how many calls you got on that? That was two and a half years ago.

Ben Felix: Yeah. It was a while ago now. But it said, "Sell everything." I don't remember what else.

Cameron Passmore: And it got big coverage. We did a radio show at that time. We had calls on it. I remembered everybody was talking about it.

Ben Felix: But it's all about... It's just the people want big predictions, because that... I don't know, if it makes them comfortable or maybe they just think it's interesting. We don't make predictions, so we don't sound like experts.

Cameron Passmore: Don't just stand there do something.

Ben Felix: Yeah. All right. Anything else?

Cameron Passmore: No, that's good for number eight.

Ben Felix: All right. That's it. See you next time.