Today is our final episode featuring just the two of us before our annual wrap-up show, and we thought we would use this opportunity to cover some important foundational aspects of rational investing. Ben goes over some of the most fundamental concepts about market prices, risk, and actual returns before answering five common questions that relate to this level of information. From investing in an employer's stock to predicting the future and real estate comparisons, these five touch-points are always worth returning to, and should even interest the more experienced of our listeners. For the second half of the show, we offer a quick book review of The Culture Playbook by Daniel Coyle, and have a brief and illuminating conversation with Professor Amer Kaissi about his book, Humbitious, and some of his thoughts on the part that reading plays in rich and progressive life. Press play to catch all this and more on the Rational Reminder Podcast.
Key Points From This Episode:
Picking up a thread from our discussion on the 2% Rule. (0:06:05)
Getting to grips with investing basics. (0:10:45)
How market prices work in response to traders' actions and risk. (0:17:59)
The main determinants of actual returns and starting points for your portfolio. (0:23:15)
Unknowable futures and the eternal doom and gloom predictions. (0:35:43)
Assessing the value of owning an employer's stock. (0:38:21)
Holding stock picks in Tax-Free Savings Accounts. (0:42:07)
How to prepare a portfolio when a recession is predicted. (0:43:49)
Comparing investments in real estate with the stock market. (0:45:14)
Weighing the value of building and emergency fund. (0:47:11)
A thirty-second recap of our episode with Cliff Asness. (0:50:06)
Today's book review focussing on the lesson from The Culture Playbook by Daniel Coyle. (0:51:48)
Professor Kaissi shares a quick summary of his book, Humbitious. (0:58:40)
The potential to develop characteristics and the role that reading plays. (0:59:38)
Professor Kaissi talks about his reading habits. (1:02:12)
Application of ideas from books and how Professor Kaissi captures and organizes information in his own reading. (1:05:15)
A few of Professor Kaissi's favourite book recommendations and how to increase your reading habit. (1:08:52)
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're hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.
Cameron Passmore: Welcome to Episode 231. You know, Ben, as you know, I finished off the backdrop in my office here last night, put a picture on Twitter about it. They come up to almost 100 likes, which for me is a lot. So you never know what really strikes a chord. But I want to give a shout out to a company called the quietroom.ca Which I guess you told me about. That's where I got these panels from. Small – well, I'm not sure how large they are, but it's a company based in Toronto. Great service, great product. They don't even know I'm talking about this. They did not pay us for this. But if people – there are bunch of people asked online last night where I got them, and so, I just let people know if they're looking for panels, quietroom.ca. I also got a teddy bear on my wall there too. I've never been given a teddy bear in like, whatever, 45 years. But I had minor surgery last week, and I came home and the kids gave me a teddy bear from Oscar. That's kind of appropriate to put up an old teddy bear.
Ben Felix: It's pretty funny.
Cameron Passmore: It keeps people wondering why do I have a teddy bear there. Squirrels are in your life.
Ben Felix: Yeah. We bought a house that wasn't quite finished even though it was 20 years old. The soffits are an ongoing project. Yeah, some squirrels there. They were in there. I think they're gone right now. The joys of homeownership.
Cameron Passmore: I was going to say, it's an expression of your pleasure being a homeowner. This is our last us episode for 2022. Since in two weeks, it's our fourth, if you can believe it, year interview episode coming up.
Ben Felix: Crazy.
Cameron Passmore: Yeah, we get to work on that on Monday. We're going to be recording that episode. All the intros, and setups of all the highlights of the year. What a year has been. I tell you, when you look at the list as we head into 2023, the guests we have coming up are unbelievable. Including Nobel laureate, Robert Merton; Lawyer Harold Geller; Professor Ralph Keeney, who is the author of Give Yourself a Nudge; Eric Johnson, author of the Elements of Choice; Daniel Pink, author of Regret and other books; and Charles Ellis, who in our space is probably best known for the book Winning the Loser's Game, but also author of the recently released Inside Vanguard, which I finished on the weekend. Fantastic book, really gets into the history of Vanguard more detailed than like Robin Wigglesworth book, Trillions did. Love the book. That's going to be a great episode. I've been emailing back and forth with Mr. Ellis, Charlie. Boy, he seems like just a great guy. We're going to have a great time with that interview. It's just going to be great lineup, so lots of books there, if anyone's looking for something to read over the holidays, to get you set up.
Ben Felix: I love how a lot of those guests, they kind of close the loop on a lot of stuff that we talked about in 2022. Like we talked about the ICAPM a ton throughout '22. Merton, of course, is the creator of that models, we kind of close the loop on that. Ralph Keeney, that's the Goal Generation papers. He wrote those papers. I think the whole genesis of our goals survey project that was pretty interesting. That came from Ralph. Daniel Pink, the big section of our paper on regret, of the Finding and Funding a Good Life paper, a lot of that came from Daniel Pink's book and research. It's of neat to see the progression of stuff that happened last year, and how it's translating to the guests we're going to be talking to next year.
Cameron Passmore: One thing we learned from the Chris Hatfield episode is that – we'll have to make sure people know what's coming up, so you have to give a plug for next week episode with Professor Annamaria Lusardi.
Ben Felix: I don't know what we learned. I don't know what the lesson was from the Chris Hadfield episode. I don't know if it's, that we need to be better at episode titles or I don't know what the lesson was. We weren't planning on talking about this much. But the comments that have been coming in, since we said that in our last episode, since we told people, "Hey, go listen to the Chris Hadfield episode because it was good." A ton of people have come back and said, "Wow, this is the best episode you guys have ever done, ever, period. Thank you for telling me to go listen to it." Anyway, so I don't know what the lesson is there. But on that note, Annamaria Lusardi, who is – I would be comfortable arguing the world's leading expert on financial literacy, on the empirical side of how financially literate is the world and how does that vary across segments of the population, and across countries and stuff like that. But also, what can we be doing to improve it, and what does the evidence suggest about what is effective and what isn't.
Her research informed a lot of the stuff that I've talked about in the last few months about financial literacy, and we finally got to talk to her. I told her and I say this in the introduction of the episode, and she – I say this too in the episode with her. I don't know if she didn't like it, but she said, "Don't exaggerate." What I said to her is that I can't get out of my head that she is to financial literacy. Eugene Fama is to efficient markets. I don't think that is an exaggeration, because the quality and quantity of her research and her passion for the topic is just absolutely incredible. She has got to be the most cited author on the topic. Anyway, that was a great conversation. Cameron, I think you would agree. She brought a great energy and clear passion. But she also has this like, she comes with the theoretical and empirical rigour that you would – like the Fama example. It's just incredible on that topic.
Cameron Passmore: Yep. So that's next week. Want to give a quick shout out. Speaking of listeners, I was in Charlotte as you know in October at a conference. One of the advisors I met there, Patty from Dublin ended up sending me a little gift box from Guinness, as well as those picture for those on YouTube of a bunch of us that were at his conference, who invited us to go out to a local Irish pub in Charlotte. So she sent me this picture of all of us there. Shout out to all the great people I met in Charlotte. Incredible picture, incredible people, many are very avid listeners of the podcast. Thanks to Patty for doing such a kind thing, and sending this card out to all of us. Really appreciate it. You have to dive back into the two point something percent rule.
Ben Felix: I don't know if this belongs the introduction of an episode or in the after show, but it's in the introduction. I figured people will be eager to hear about it after they listen to the episode about the 2% rule. As I expected, and as I said at the beginning of that episode, lots of feathers were ruffled when we said that the safe withdrawal rate is 2%, which is obviously very low. Now, one of the threads that we had left hanging at the end of that episode was that adding international stocks, because that research was based on – that we talked about in the 2% withdrawal rate episode was based on domestic stocks. Scott Cederburg had done this very interesting research on safe withdrawal rates, but he had taken the perspective of a domestic stock and bond investor. One of the things that we left hanging at the end of the episode was, hey, one of the things that might help this is international diversification, but we don't know by how much. We can't quantify how much better that would make things.
I emailed Scott after we did the episode, to just say like – actually, I wanted to do a common-sense investing video on this topic. But I thought, you know what, before I do that, before I go and tell everybody that 2% is the safe withdrawal rate, but maybe international stocks help a little bit but I don't know by how much. I emailed Scott just to say, "Do you think you might at some point add international stocks to your paper? Because then, I would wait." He replied and said, he had listened to the episode and done the analysis. He'd run the numbers for international stocks based on what we had said in the episode, I guess.
Cameron Passmore: Cool.
Ben Felix: Then he gave me the data. I said, "Can I reference this? I can use it?" "Yeah, go for it." So now we have the data for international stocks, which is, in my opinion, very exciting. He gave us 60, 40 portfolios with 36% domestic stocks, 24%, international stocks and 40% bonds. He also gave us 6% domestic, 54% international and 40% bonds. We got kind of a home biased, but diversified investor, and a less home biased and more internationally diversified investor. As we had talked about in the podcast episode, he also added additional cost to the ownership of international stocks. Because for a domestic investor, typically, between fees, taxes, withholding taxes, you're going to have higher cost to own international stocks, so he added 50 basis points.
So, the punchline is that he found for the 2085 retirement date, so that's for like newborns today, which I found – just looking at the numbers is similar to a Canadian retiree couple today. Canadians have a slightly longer life expectancy than Americans, so we'll use the 2085 retirement date. The home biased, internationally diversified investor has a safe withdrawal rate of 2.57%. The more internationally diversified investor with 6% in their home country has a safe withdrawal rate of 2.76%. Between those two numbers, like in the common-sense investing video that I'll do on this topic, I just called it the 2.7% safe withdrawal rate.
Anyway, awesome to have those numbers, but it was also very cool to have someone like Scott who's obviously a past guest and he's been active in the Rational Reminder community to have him run these numbers and give them to us. I mean, that's incredible, that's mind blowing to me. There was a paper that did that's out there that anybody can read. But then we got additional data. We got to turn over some rocks that nobody else had turned over. I thought that was very exciting.
Cameron Passmore: Love it. All right, coming up in today's episode, your main topic is investing basics and common questions. You want to add anything to that?
Ben Felix: No. I mean, I'll talk about it when I introduce the topic.
Cameron Passmore: I'll do a 60-second recap of our interview with Cliff Asness, which was back in Episode 93. This week, I also will do a quick review of The Culture Playbook, which is a follow up book from Daniel Coyle, who is the author of The Culture Code, which we reviewed back in Episode 187. It's a great book, so I thought I'd do a quick review of that. For inspiration as part of the 22 and 22 Reading Challenge. We welcome a very special guest, Professor Amer Kaissi. Amer is the author of the book Humbitious: The Power of Low Ego, High-Drive Leadership, which I think as listeners know is one of my favourite books on leadership and one that I've recommended often. We reviewed this book back in Episode 189. Professor Kaissi is an executive coach, as well as a professor of healthcare administration at Trinity University. Ben, anything else or should we go to the episode?
Ben Felix: No. This is like our longest intro in a while because we had the safe withdrawal rate stuff in there. So, let's go ahead.
***
Ben Felix: Welcome to Episode 231, of the Rational Reminder Podcast.
Cameron Passmore: All right. Let's kick it off with your main topic, investing basics.
Ben Felix: Yep, so had investing basics and then common questions afterwards. You know, we probably don't talk about topics like this often enough. When I'm thinking about what to talk about in the podcast, and what research avenues are going to be interesting, like of course, a lot of it is informed by the work that I'm doing for our clients. That ends up forming a lot of the topics that we talked about. But in addition to that, I'm often imagining the representative podcast listener, as you know, somebody who's in the Rational Reminder community that I'm interacting with over the internet. But there's a ton of listeners who are not in the Rational Reminder community.
The other thing that we learned that we'll talk about some data later, is that a lot of our listeners, like the majority of them discovered the podcast in 2022. This idea that I get stuck in this idea that we always have to be doing new research and building on past research that we've done to keep things interesting for this representative listener that I have in my mind. But I had to remind myself that sometimes that that's not necessarily the representative.
Cameron Passmore: Yeah. And if you're a new listener, it's not safe for us to assume that you're going to go back and listen to 185 previous episodes.
Ben Felix: Even then, how many episodes have we done on basic topics? That's what I'm saying, right? We could probably count them on one hand. Anyway, that was part of the inspiration for this, is that I want to bring it back to basics. The three nerdiest Rational Reminder community members find this episode boring, I apologize. But hopefully, everybody else finds it interesting. This is based on a talk that I gave to the personal finance club at a large global tech company last week. I was invited by them to come and speak, which is kind of fun. I hadn't done a talk like that in years. I used to do them every month, but I just – we've got other people on our team that are typically doing that now. I prepared this talk, and I figured it was interesting to go through. Then, also the common questions are from that, somewhat. Then also, we have a bank of common questions in the talks that other people in the team usually do that we try and cover. That is the setup for the topic. Ready?
Cameron Passmore: I'm ready.
Ben Felix: Okay. Investing is a huge topic. Obviously, as we were just joking about, there's so many things that you can cover without even talking about the basics. There are 1000s of books written on it, personal finance has its own celebrities, which is kind of funny to think about. Then, of course, there are all of the academics who have made impressive careers researching how markets work, how people make decisions, how financial literacy impacts, like we're talking about Annamaria Lusardi and what all that means for investors. There are all these sources of information. One of the problems I think is that the popular investing books, and the personal finance celebrities are often at odds with the academic literature, which of course makes it challenging to know what actually makes sense. I want to provide a basic overview of investing that will hopefully help people cut through the noise. I guess one of the other useful things about an episode like this is that maybe, it's more shareable because I know, the feedback we've gotten before that someone who listens to the podcast that wants to send something to their mom or whatever, it's not always easy to know what to send.
Okay. From the ground up, the basics. When a company needs to raise capital, to finance its business, it can. Broadly speaking, there are lots of hybrids, I guess. But broadly speaking, it can issue debt where it's borrowing money from investors, or it can issue equity, where it's selling off some ownership in the company's future cash flows to investors. Now, why would investors invest? Investors wants to invest their financial capital to earn a positive real return. People typically have labour income for only a portion of their lives. They save some of that labour income to fund their expenses in the future.
Now, if people just stuck those savings under their mattress, they would lose money over time due to inflation, even in economically stable countries, like I would consider Canada to be generally. Even in Canada, we target low but stable inflation. But that low but stable inflation adds up over time. Then of course, there are also periods like now that we're living through, where inflation can be higher than normal. In both cases, whether it's low and stable, or whether it's whatever it is now, that erodes the purchasing power of cash. So rather than sticking their savings under a mattress, investors may choose to take a little bit of risk by providing the capital to the companies that need it.
From the investor's perspective, investing in debt, investing in bonds is relatively safe, because the company is obligated to make its interest payments. If it's unable to do so, bond investors typically have a claim on the company's assets. On the other hand, if a company does very well, bondholders aren't going to financially benefit from the success of the company in the same way that equity holders do. If you're a bond investor, and a company that you've purchased the bond of does extremely well, you just get your coupon payments and you get your principal back at maturity.
Investing in equities, in stocks, in pieces of ownership of the company is riskier than investing in bonds because the value of a company's stock will fluctuate from day to day as the market's assessment of its expected cash flows and the riskiness of those cash flows changes. Bond prices, I mean, this is a little more nuanced. I guess, bond prices can fluctuate pretty significantly too with market discount rates, whether that's because the riskiness of the country or the company that has issued the bond changes or because market rates have changed. Market discount rates have changed, which has been a big part of the story this year, and bond prices have actually changed a lot, a lot more than they typically do in a given year.
Unlike bond investors, equity investors are unlikely to be compensated in the event of a corporate failure. That's another big difference. Equity investors can and typically would lose all their investment if a company is unsuccessful. But the other side of that tradeoff is that if the company exceeds the market's expectations, stockholders can benefit from high returns. That's the kind of the opposite of the bondholders who have a fixed return. Equity investors have uncertain return, but they have the potential to earn higher returns or to lose everything. So a much wider range of possible outcomes for stockholders.
In the long run, stock investors expect to earn higher returns than bond investors. That has to be true, at least on expectations, because stock investors need an incentive to invest in the riskier asset. Now, the way that differences in risk are expressed in asset pricing is through the discount rate that investors apply to the expected cash flows of a financial asset. So a higher discount rate implies a riskier asset, it costs less. A higher discount rate means it costs less to buy the future cash flows, a riskier financial asset. So if you actually receive those cash flows, you earn a higher return because you paid less for them, you had a higher discount rate.
Cameron Passmore: Very important concept.
Ben Felix: Oh, yeah, discount rates are big. Discount rates are huge. Just that in general, asset pricing, the concept of discounted future cash flows, that's what a financial asset is and expected returns are the discount rate. Very important, I agree. Investors expect to earn a return that is equal. This is what I was just saying. Equal to the rate at which they're discounting future cash flows. So to summarize on this quickly, when companies need to raise capital, they can issue debt or equity to investors, investors in bonds, that's in debt. Get a relatively safe investment return consisting of coupon payments and principal repayment when the bond matures, but they also get limited upside.
Investors and equities have less certainty about the future of their investment. They don't have fixed cash flows, and that comes with a much wider range of outcomes from total loss, which actually happens fairly frequently, for at least significant losses do. We'll talk about some of that data later. All the way up to market beating returns. So much wider range of outcomes.
Now, a really important point here is that no investor – we've got these financial assets out there, we've got investors out here that they want to earn a return. But no investor, at least in public markets interacts with companies in a vacuum. There's a highly competitive market for financial assets, where investors are competing with each other to earn the best possible return relative to the risk that they're taking. No single investor. We talked to Robert Merton about this. I loved the way he described market efficiency and this was part of it. No single investor can possibly have access to all of the information that will affect the price of the stock or bond. But the aggregate of all investors, the market price is a pretty good representation of all information. You can have the smartest investor in the world, but to assume that they have all available information is unrealistic under any circumstances. But the aggregate of all investors is all information. and that's the price. We get that information in the price. Now, how does that work? What's the mechanism?
If you, Cameron owns a stock, but I think I have some information about the stock that you don't have, I will offer to buy it from you for a price above what you think it's worth. You may choose to sell it to me. By agreeing on a price for a transaction, we are inputting the information that we have into the price. Financial markets serve this function of bringing together 1000s or more of traders who are competing to bring unique information to the market in an effort to earn a profit. But again, no single trader can possibly have all available information. The product that we get from that process is prices, market prices. Because prices contain all that information from all of the competitive trading, we can infer what discount rate the market, the aggregation of all of these competitive traders is applying to the cash flows of financial assets.
I talked earlier about how discount – we both talked about how discount rates are important, but what is the discount rate. Computing a discount is hard, to go and estimate what I think the discount rate for a financial asset is. But the market in aggregate tells us, approximately, or at least it tells us about differences in discount rates between companies. If you take more risk by investing in assets with higher discount rates, you expect to earn a higher return. But it's not a free lunch. You expect it to earn a higher return because you're taking more risk.
Now, so we talked about risk. We talked about discount rates. Discount rates reflect risk. But it's important to draw a distinction between two types of risk that are important in investing. One is systematic risk. That is the type of risk where you earn a positive expected return for purchasing discounted risky future cash flows. Systematic risk is also known as priced risk, and it's also known as non-diversifiable risk. It's called price because it's reflected in the discount rate, which is reflected in the price of the asset. It's called non-diversifiable, because you can't make this type of risk go away. It's systematic, it's everywhere, it's in all assets, so you can't diversify away systematic risk.
The other type of risk is idiosyncratic, or diversifiable or unpriced risk. That's the type of risk that's associated with the specific circumstances of an individual company. An example might be a company executive tweeting something inappropriate, causing the company to decline in value. That type of risk is not priced. It's not associated with differences in expected returns. So typically, investors wants to diversify away idiosyncratic risk by owning multiple companies in their portfolio. The number of companies that you need to diversify idiosyncratic risk away, kind of depends on how you measure risk. There's been different ways to approach this. But as a generalization, though, I would just say that more diversification is better than less the distribution of individual stock returns tends to exhibit extreme skewness, which means that most stocks don't do very well. A relatively small number do extremely well. The result is that you're, as an investor, much more likely to miss out on winners than losers by trying to pick and choose which individual stocks you think you're going to do. Okay. Any questions so far?
Cameron Passmore: No, keep going. I'm not breaking this. You're on a roll.
Ben Felix: Okay. The other thing that we have to understand is what affects the actual returns of the stock. We talked about expected returns, it's kind of its theoretical concepts, it's the discount rate. It's the return you expect to earn, but what does that actually mean about the return that you're going to earn? Two distinct concepts, expected returns and realized returns? Expected returns with this – I'm repeating this, but they're the discount rate applied to expected cash flows. A great company, whatever, I don't know, Apple. That's a good company, right? People would agree on that. I think so. I don't know how low Apple's discount rate actually is at the moment. But anyway, great company with a low discount rate. Now, how do we know it has a low discount rate? When you look at the price of a company that has a high price relative to some fundamental measure, like its book value, or its earnings or something like that, a high price typically indicates a low expected return, typically indicates a low discount rate.
Now, your actual return, and we saw this a lot when we were we were talking about all of the FANG style, whatever that acronym ended up being. As their returns kept going up, and we kept saying, "Well, no, they've got really low discount rates, they've got high prices. Their expected returns are low, but their prices kept going up higher, and higher and higher. That's the unexpected return. Your actual return that you get is your expected return, plus, your unexpected return. The unexpected return is going to be related to new information that was not previously in the price. So as an investor, I think it's really challenging to bet on the unexpected return, because like new information cannot be reliably predicted, at least I don't know how to do that. I think it's worth focusing on the expected return, but you've got to understand that the unexpected return is going to have a lot of influence on the outcome, especially over shorter periods of time.
Cameron Passmore: Ken French, Episode 100. That's blazed on my brain. That's exactly what he said.
Ben Felix: Yeah. That was a great episode with Ken. So yes, the unexpected return will dominate the outcome. Now, that can go both ways. We've seen those same FANG stocks, they've come down in price. The unexpected return was a little bit – went the other direction in more recent history. I also think on the unexpected return, betting on the unexpected return starts to look a lot more like gambling than investing. Taking what I've said so far, and applying it to building a portfolio to what should you invest in. I think a good starting point for any investor is the market portfolio, which can be approximated by public stock and bond markets, which you can proxy using stock and bond index funds.
Now, theoretically, if you believe that market prices reflect all available information, the optimal portfolio for the average investor is well represented by the market portfolio of stocks and bonds. That's why I said that, which can again be approximated using low-cost index funds designed to track those markets. Now, well, it is theoretically optimal for the average investor. There are a couple two main ones that I can think of, reasons that you would want to be different from the market portfolio. The market portfolio, great for the average investor, nice and easy, theoretically sound, so on and so forth. But why would you want to do something different? One reason, and probably the most common reason, at least if you look at the data on how people invest their money, is that you do not believe that market prices reflect all available information. If you think you have an edge as one of the traders competing to bring new information into prices, you wouldn't want to own the market portfolio, because you think you have an edge, you think you can earn more returns in the market without taking additional risk by bringing your information to the market.
I think the challenge here can be illustrated with a basketball analogy. I got this from Jordan on our team who's been on the podcast before. He told me this analogy. I mean, it's simple, but I thought was really good, maybe because I like basketball. I don't know. I'll say the analogy. I have played a lot of basketball in my life. I am comfortable saying, even though I'm not very good at basketball, I'm comfortable saying that I am an above average basketball player. But if I played one-on-one against LeBron James, he would win every possession. I've got a pretty good jump shot, so I don't know. But he probably be able to block it and stop me from going to the basket at the same time. I could probably beat, I don't know what the number is, 95% of the population one-on-one on basketball, but LeBron would be me.
In the financial markets, even if you are the Lebron James equivalent of trading, most other large traders are going to be at your level. It's not like you can beat LeBron and dominate, you're going to be LeBron competing against LeBron. The outcome of every possession is going to be determined by luck, by which way the wind was blowing, or whose shoe slipped or whatever. This, of course shows up in lots of academic studies and industry reports on the performance of funds that try to earn higher returns without taking more risk. That's the holy grail of investing, known as alpha, excess risk adjusted returns. Funds try to do this by selecting securities and timing the market.
The vast majority of these funds, which as many listeners will know are called actively managed funds are unable to deliver alpha. The ones that have been successful delivering alpha in the past, beating the market in the past are no more likely to be successful in the future. There's not persistence in performance. Most actively managed funds charge high fees. They're typically tax inefficient. Many of them also lacked diversification. If all they're delivering is tax inefficient exposure to systematic risk, with added noise due to a lack of diversification. Investors can instead, and probably should instead get their systematic risk exposure using low cost, tax efficient and well diversified index funds.
Cameron Passmore: You sound like your CSI video just there.
Ben Felix: That's one reason that you would – maybe want to be different because you think you're smarter than the market. The evidence suggests you're probably not. I think John Cochran jokes about this in his paper on portfolios for long-term investors too. But that brings me to the other reason speaking of John Cochran's paper. The other reason that you might want your portfolio to look different from the market portfolio is if you're different from the average investor. We've talked about this a ton this year. It's worth touching on just very briefly, though.
Being different from average, based on your individual characteristics is a choice about which risks you want to take. In that case, you're not trying to outsmart the market, you're not trying to earn alpha. You're just looking at the risks that are available in financial markets and deciding, "I want exposure to that one, I don't want exposure to that one." Or I want more exposure to this risk than the average investor. Lots of different reasons that you can be different from average, or decide you're different from average. I think an easy one is investors with long-time horizons and lots of human capital. That's the ability to earn income through your labour. Maybe they want to take more risk in their financial asset portfolio than the average investor. Just an example. We talked to Robert Merton about this a ton as well. He had lots of interesting insights.
What would that mean in my hypothetical example there, of a long-time horizon and lots of human capital. Maybe it means tilting more towards stocks, and bonds than the average investor. The average investor says they're 50% stocks, 50% bonds. I don't know, roughly. Maybe if you have a longer time horizon, and more human capital, maybe you want to be whatever it is, 70% or 80% in stocks. That's not an advice. It's just a hypothetical, whatever. More than average in stocks. Or maybe you want to tilt the stock portion of your portfolio toward riskier stocks. Another way to approach it. With Robert Merton, we talked a lot about maybe you actually want to use leverage. That's a whole other whole other way to get more risk exposure. That's the other reason you would want to be different from average.
So easy starting point, that's theoretically consistent and empirically makes sense. It's just on the market. If you think you're smarter than the market, you can try and be different, but you'll probably fail at being smarter. If you're different from the average investor, there are legitimate reasons that you would want to take different risks from the average investor. Which you can still do using low-cost index funds without trying to beat the market and without getting all of the bad characteristics like high costs and tax inefficiency that you get by typically trying to beat the market.
The last piece, we've talked about what a portfolio should look like, what stocks and bonds are risk differences in expected returns across financial assets. The last thing that I think people need to think about is, before you can invest, you have to know why you're investing. It kind of relates to my comment a minute ago about how you're different from average. Different people can have different time horizons, for example, based on having different objectives. You have two identical people who are otherwise identical, but they can have different goals. They want to retire at different ages. Maybe one is saving up for a trip, or a down payment for a house, and the other one is saving up for retirement. So you've got to understand what your objectives are, and understand that different objectives will have different levels of priority in your life, and they'll have different optimal portfolios to fund them. Like an easy example, is it an emergency fund? Probably shouldn't be invested in stocks. A long-term retirement portfolio probably shouldn't be invested in cash. But to make that determination, does your portfolio makes sense for your objectives? You have to know what your objectives are.
I think this is a real source of value for people. We talked earlier about how hard it is for active managers to generate excess risk adjusted returns by picking stocks and timing the market. There's a 2015 paper in the Journal of Financial Planning from David Blanchett, who's a past podcast guest. He finds using a goals-based framework to determine which goals to fund and how to fund them can lead to benefits equivalent to generating an annual alpha, an annual access risk adjusted return that the active managers struggle to deliver on of 1.65% for the lifetime of the base scenario household in their analysis. I mean, that's a model. But still, the point is, there's a lot of value that investors can get out of properly planning for their objectives and funding their objectives, as opposed to trying to pick stocks and then time the market. It's a much more reliable way to add value. So I think that's important. Financial planning as a source of alpha, I think just makes a lot of sense.
So once you have your objectives, you know what you're investing for. You can start to think about your asset allocation, what should your portfolio look like. And as I was just alluding to, with the emergency fund example, risk takes on different forms, depending on what your time horizon is. If you look at one-year periods, stocks change in value a ton. They've got the high one-year standard deviation of returns. Not great for an emergency fund. But on the other hand, over a 30-year period, cash, treasuries, they're much more likely than stocks to lose purchasing power over long periods of time. They're very stable in the short term, which is good, if you need them to fund some expense. But over the long term, you're probably going to lose money. Maybe not probably. There's a So, good chance you'll lose money in cash over long periods of time.
Then the last, last piece is, once you have a plan in place, you figured out what your objectives are, you figured out what your asset allocation is going to be to fund those objectives. You have to be able to stick to the plan. There's always, always, always, always doom and gloom, about financial markets and about how bad things are going to get. I see this now a ton. This is actually in one of the common questions too. I see so many posts on Reddit, saying how are you preparing for the recession, the impending recession that I know is going to happen. What are you doing to prepare for it? Nobody knows that there's going to be a recession. Those conversations happen all the time. It's one of the things I learned, I don't know, maybe five or six years into doing this job. I learned that there's always something that makes people think that the next few months are going to be really bad. Always, always, always, always. I can't emphasize it enough. I don't I don't spend as much time meeting with clients at the moment. But I was doing all the time, anytime you're talking about investing your money, or whatever, or checking up on the portfolio, the conversation is always that things are about to get worse.
Cameron Passmore: And there's often surprises that people didn't even think of, like the pandemic, like the invasion of Ukraine. All these things happen, 911. There's stuff that you worry about that you know, or you think is coming. There's the stuff that's you never even thought of is coming.
Ben Felix: Right. The thing is, and I'll elaborate on this when we talk about the common question of what should I do to prepare for a recession? By the time you know about something, by the time you're worried about something. I'll even take a step back from that. By the time you're worried about something, it's already in market prices. Anyway, so that doom and gloom is not going to go away, though. The thing about the doom and gloom is that sometimes, it gets corroborated by actual drops in stock prices. People always – they always have this tendency to think something bad is going to happen. Every now and then, it does. Something bad does happen. Think about from March 2008 through February 2009, stocks dropped 50%, over a year. That's the MSCI World Index in US dollars, 50%. How would you feel if your $100,000 or million dollars turned into $50,000 or $500,000 over the next 12 months. That can be a real psychological constraint and asset allocation decisions.
I really think taking too much risk can lead to stress, psychological stress, which can lead to physiological stress and it can lead to bad reactions. If you sell out at the bottom, and don't get back in for obvious reasons, that is not very good. So investors need to take some risk typically to beat inflation with their savings. It's just smart to do that. There's an equity risk premium. We know that it's there, it makes sense to take advantage of it. More risk is associated with higher expected returns. Stocks are riskier than bonds because their claims on uncertain future cash flows, and they typically don't have any residual value in a corporate failure. Market prices contain a lot of information. Some investors try to outperform the market by bringing new information into prices by being smart, by outsmarting the market. But that strategy, generally referred to as active management tends to underperform the market. Instead, I think investors should just capture the returns of stocks and bonds using low-cost index funds, maybe tweak that, depending on your own characteristics, how you're different from average. So like how much stocks versus bonds, how much riskier stocks versus safer stocks should you own. I think those things can be tailored. Then the right mix of stocks, and bonds and cash savings, it depends on your specific objectives and it's constrained by your psychological capacity for taking risk. So there you go, investing basics. What do you think?
Cameron Passmore: Awesome, and very shareable. I agree. All right, let's fire through these common questions. I'm going to ask you a question and you rapid fire the answer?
Ben Felix: Sure.
Cameron Passmore: Okay. Question number one, should I own my employer stock?
Ben Felix: This is a great question. Empirically, it is a thing that people do, particularly when their stock has performed well in the past. I think that's super interesting. On one hand, it's also super important on the other hand. There's a 2001 paper that looks at this, and they find that employees of firms that experienced the worst stock performance over the last 10 years allocate just over 10% of their discretionary contributions to company stock. Whereas employees whose firms experience the best stock performance, allocate almost 40% to company stock. So people do allocate to their company stock, and they do it more so if their company stock has performed well in recent history. I think that's pretty important.
Now, we talked earlier about how are you different from the average investor? Well, one pretty obvious way is, if you have an employer, your human capital is more exposed to the specific risk of your employer than the average investor. Pretty obvious and clear, I think. You probably don't want your human capital and your financial capital exposed to the same systematic and idiosyncratic risks. Doesn't seem like the smartest thing to do. I probably wouldn't intentionally hold a large overweight position in company stock. Now, one of the places this question often comes from as people who have equity incentives through their employer, and in some cases, you get a bonus for taking some compensation in equity. In some cases, there's a tax incentive to receive equity compensation and then hold the shares for a period of time. This varies from country to country, but incentives like that are not uncommon, either incentives from the employer or incentives from the government on the tax side.
That's a common extension of this question, of this common question. Should I owe my employer stock? But also, should I hang on to my employer stock or take compensation in it to get some bonus, whatever the bonus might be. All those programs can do is, to an extent, give you a bit more of a downside cushion. If you know your taxes will be a lot lower, for example, if you hold a security for an extra year, sure, there was a bit of a downside cushion. But I want to talk about some data on individual stocks for a second. There's a 2021 paper from JP Morgan, they look at the loss probabilities on individual stocks, US stocks. They find that 42% of Russell 3000 stocks have had negative absolute returns for the period 1980 through 2020, 42% negative absolute returns. Sixty-six percent of individual stocks trailed the Russell 3000 index. Sixty-six percent of stocks in the index trailed the index over the same time period. There's a good chance that holding individual stock, you're going to underperform the index.
In that paper, they also look at catastrophic losses, which are defined as 70% or more declines from peak levels without a recovery to the previous peak. Across all stocks in their sample, this happens 44% of the time, 44% of the time a stock drops 70% or more and doesn't recover. In the information technology sector, from the same period 1980 to 2020. Those losses, those catastrophic losses happen to 59% of individual stocks. In the energy sector, 65%. I pick those two, because they're the most extreme examples. Financial sector was actually interestingly enough, one of the best, one that had the fewest catastrophic losses in the US data. Anyway, so owning your employer stock, maybe not. If there's an incentive to do so, I would consider the risk of individual stocks in general, in conjunction with taking additional risk in your employer.
Cameron Passmore: All right. Question number two out of five, should I hold my stock picks in my TFSA? So in Canada, that's a Tax-Free Savings Account.
Ben Felix: Yeah. Equivalent to a Roth IRA-ish in the US, roughly similar. I'm not an expert on that type of account. Should you hold your stock picks in the TFSA, in your tax-free account, in your post-tax savings account? Given the data that we just reviewed, you're more likely to lose than win picking individual stocks. If you win in your tax-free account, it is great because you don't pay tax on the capital gain. If you lose, it's not so great because you evaporate your contribution room and you don't get to claim a capital loss. In Canada, if you lose on an investment in a taxable investment account, you can claim that loss against any capital gain income in the current year or the previous three years. So I think you magnify both your after-tax upside and your after-tax downside by investing in individual stocks in a tax-free account.
But when you consider the long-term benefits of holding a positive expected return portfolio inside of a TFSA, I think when you project that out, the costs of the downside of evaporating your TFSA room are substantial. In my view, unless you're for some reason certain that you're going to win the lottery, I think the downside of losing your TFSA room and forgoing the capital loss, which is more likely to happen than a gain, significantly outweighs the potential of the less likely good outcome where you get tax-free gains. The other thing, capital gains are the most tax efficient, typically, the most tax efficient form of income or one of the most tax efficient forms of income in Canada. So it's like, I don't know.
Cameron Passmore: Okay. Number three, and I think we know the answer, but ask it anyways. How should I prepare my portfolio for a recession?
Ben Felix: Portfolio management can't be reactionary. That's what I said earlier. By the time you have the information to make a change to your portfolio, that information is probably already in market prices. Even if you take predictors that are supposed to be reliable, but aren't always like the yield curve or when the yield curve inverts, it's supposed to be followed by a recession sometimes. From a portfolio management perspective, still not useful. Fama and French had a paper looking at that, where they find no evidence that yield curve inversions can help investors avoid poor stock returns. I think, that doesn't mean that nothing you should do. If you're worried about a recession, maybe that's more of a reflection on your risk tolerance than it is on your ability to predict the future. But if you're worried about a recession, having sufficient precautionary savings, having an emergency fund to absorb economic shocks, I don't think that's a bad idea under any circumstances.
Again, that should be based on your risk tolerance more so than your predictions about the future. If you are worried about stuff like that, you should have an emergency fund all the time, not when you think there's going to be a recession. Ensure that you have marketable skills. If you're worried about losing your job, put yourself in a situation where you're more likely to be able to get another job. I think managing your expenses. And I know that's hard right now with inflation, but managing your expenses, increasing your savings. These are all ways to increase your financial resilience, which is a good thing all the time, not just when you think a recession is coming.
Cameron Passmore: Number four, how does real estate compare to the stock market, and how does direct ownership compared to REITs or real estate investment trusts?
Ben Felix: It's got returns that look like, if you look through the lens of asset pricing, the returns of real estate look like a portfolio of risky stocks and bonds. The evidence that that's taken that lens looked at real estate through that lens, suggest that real estate doesn't offer exposure to distinct economic risks. It gives you exposure to economic risks that you could alternatively get through stocks and bonds. But in the case of REITs, at least, if you're over weighting them relative to market cap weights, you're also taking the specific risk, the idiosyncratic risk, the diversifiable risk of the real estate sector. The evidence also suggests that direct real estate investments don't offer anything special over public REITs. Once you adjust for stuff like sector exposure, and the valuation lag in private markets, some people may still want to invest in private real estate, because maybe they want the sector exposure that you get from private real estate. But there's nothing special there and you pay a whack of costs for investing in private REITs.
Direct ownership may have the advantage of access to cheap leverage. I don't love the idea of levering up a concentrated investment, very concentrated, like it's a single – if you're buying a single house in an investment property, taking out a bunch of debt to do so. I'd be nervous, personally. People do well that way. But I think you're taking a ton of risk. And we haven't had proper real estate downturn in Canada for more than 30 years. Who knows if some people will get caught with their pants off when the tide goes out on that one, if it goes up, that's not a prediction. An owned home is a little different from an investment property. Because owning a home that you want to live in provides a perfect hedge or close to a perfect hedge for the cost of consuming that specific home. That's a whole other thing, rent versus buy. But anyway, there's a case where an owned home real estate asset acts as a hedge as opposed to a risky investment.
Cameron Passmore: And provides entertainment with squirrels. Okay. Question number five, and then you get a bit of a break. Do I need an emergency fund?
Ben Felix: This is something that I picked up reading Annamaria Lusardi's research. The way that they look at this, at precautionary savings is through the lens of, would you be able to come up with cash in an emergency? So you don't necessarily ask, "Do you have a dedicated emergency fund, a bank account labeled emergency fund that you keep cash in?" That's not the question they ask? They ask the question of, could you come up with cash in an emergency? Household that can't come up with cash in an emergency are considered financially fragile? Now financial fragility has a lot of other baggage that comes with it. Based on Canadian data, I find this data fascinating. Financially fragile households have lower financial, emotional and physical wellbeing. They've got less satisfaction at work, and they report less social connection. You don't want to be financially fragile.
On the question of, do you need an emergency fund? I would step back from that, and say that the objective should be avoiding financial fragility. Having an emergency fund is a pretty good way, but not necessarily the only way to accomplish that. The nice thing about cash is that it holds its nominal value, its nominal value, not its real value. But if you have $1,000 in your bank account, it will still be $1,000 in your bank account tomorrow. The other thing that is nice about cash is that you, with a line of credit as another alternative, many of those are callable. So it's possible that you go to draw from your line of credit and your bank says, "No, you can't take that much" or "No, we're going to amortize the loan starting tomorrow." That's the nice thing about cash.
The other thing, I've lived this actually. I'm not saying everybody should go in and do this, but it's worth mentioning because I have experienced it. Having cash, cash, like currency for proper emergencies can be not the worst idea too. We had that where we had the derecho thing where like all of Ottawa and surrounding areas lost power for multiple days, and you needed cash to buy gas, and stuff like that because nobody had payment processing.
Cameron Passmore: That's a good point. I've been to the bank machine once since the pandemic started. It'll be almost three years I've been to a bank machine. I've not been to a bank.
Ben Felix: I've been five times.
Cameron Passmore: I've been virtually cashless since then.
Ben Felix: Me too, except for the week that we had no power and one power outage since then. Where like, to go and buy gas for our generator, I had to go and get cash from the bank.
Cameron Passmore: Yes, I agree with you. I've been lucky. A thing I noticed too. I noticed Morgan Housel tweeted last week and I've observed this as well. If you notice the usage of Apple Pay seems to have skyrocketed in the past, I don't know, few months.
Ben Felix: I have not noticed personally.
Cameron Passmore: It's incredible. I've just noticed that so many people. Anyways, you get to take a bit of a break now, so I get to carry a bit of water here for a bit. That was awesome. All right. It'd be great to move on to one episode in 60 seconds.
Ben Felix: Yep.
Cameron Passmore: See if we can do it. I got my stopwatch here. So here we go. We were lucky to welcome Cliff Asness back on Episode 93. Cliff has had an incredible career from being a TA for yes, Professor Fama, but also co-founding AQR. Cliff is an absolutely brilliant communicator, incredible mix of intellect, humour and conviction. I think make that episode an absolute must listen. Ideas such as market efficiency, his nuanced differences with Professor Fama, why value makes sense, and why he's not a big believer in the size factor. Now, we also discuss whether the 60:40 is dead, and his push back to us was, define what is in the 60:40. So asked what can be done to prove the 60:40. He said, add in small, value, momentum, international and you get a very different portfolio with improve expected returns.
The part that I loved in a conversation Ben with him was, he said, "When something is dead, this means that something else was not," referring to the US market for the past decade or so. He said, "Never forget, if something is kicking the hell out of everyone for a long time, it also makes it expensive." We're all investing for long term security and prosperity, and there's been an incredible learning from academia for the past 50 years, and you need to understand and believe in what has been learned, and work with people who can communicate these ideas so that you stay in your seat when the inevitable volatility shows up. I believe this conversation will certainly help with that. Blew over by 20 seconds.
Ben Felix: Ah, sorry.
Cameron Passmore: That's all right.
Ben Felix: It was a good, good episode review.
Cameron Passmore: That was a great episode. I loved it. Okay. I want to do a quick book review for everyone on The Culture Playbook: 60 Highly Effective Actions to Help Your Group Succeed by Daniel Coyle. Released earlier this year, and is a follow up to his original New York Times bestseller, The Culture Code, which came on in 2018 and we reviewed on Episode 187. He is a very frequent podcast guest. I love how he thinks about culture and communicates on culture. This book, which is why I had to bring it up, his book up again, is basically a curation of all these things he's been collecting for years of a culture. He puts, this is kind of the culminating tool of his work on culture. To put it simply, he says that culture is your actions at work. This book collects 60. What do you? Key actions that can improve your culture. I'm not going to go through all 60, but I thought I'd just cover off some of the keys that I took away from.
It's also a very readable book, like they're easy list, it's a super fast, it's a good reference book. I have it on my Kindle. I think it makes sense to get a hardcopy just to have by your desk, whether you're work from home or at the office. Anyways, culture is a skill you learn. Culture is always changing and evolving. Your job is to continually adapt, respond and keep culture strong and healthy. Off the top, he also argues, and most importantly, you always start with making sure you have a clear purpose for the organization, then you must create an environment that creates belonging, and rallies that whole group, as one entity around that purpose. There is a science to this, and it's built through. I thought this is really interesting. Build through the exchange of belonging cues. These are small, what do you call it? Small, vivid behaviours that send a crystal-clear message that we are connected, we share a future, I care about you, you have a voice here and you matter.
He also talked about the importance of keeping eyebrows raised, eyes alert and open. Like how we signal this attention, this energy, and enthusiasm, engagement matters a ton. It's even more important, and it's the part that really got me. It's even more important in a virtual world because there's so much fewer physical cues going on, that don't show up, because you're not face to face in real life, so be very aware of that.
Ben Felix: I should keep doing my rapid head nodding when I –
Cameron Passmore: You got to keep – I forget the word that he used. But it's important to keep your eyes moving, eyebrows moving, keep the visual connection. He says, your face is like a door. It can be closed or open, you want to make sure you keep the door open. I also refer this to Amy Edmondson of Harvard, so we did a book review of the fearless organization back in episode 211. To quote the author. When people believe they can speak up at work, their performance of their organization is greater. He also talked about thank yous. Thank yous aren't only expressions of gratitude, but they spark a contagious sense of safety, connection and motivation. Use in person interactions like a booster shot, especially when it comes to creativity.
So we talked about this Episode 215, the book, Running Remote. It does not take much physical togetherness to build a strong team. That's something that I completely agree with, and I know you do also. Always aim to keep project teams to around six people. A six-person team contains 15 two-person relationships, which is a very manageable number of interactions. Stop saying culture fit and start saying culture contribution. Emphasize how you fit to make the sum bigger than its parts. One way to do this is to start asking yourself and your team these questions. What new perspectives do we need to seek? Who can challenge us to get most out of our comfort zone?
Here's another good one I thought was interesting. Embrace flash mentoring instead of traditional mentoring. This is where a younger team member approaches a veteran team member with a low stake, can we grab coffee kind of request. But the mentee' objective should not be to necessarily gained factual knowledge, but rather, [inaudible 00:55:48] suggest, to absorb how the mentor thinks, how they spot and conceptualize problems and opportunities. Gossip, get this. Gossip is it cultural glue. I was surprised by this. He says, of course, you have to avoid the mean-spirited type of gossip, however it work, to continue the organic flow of informal chatter matters a lot. High performing teams set aside time just for hanging out, period. just to get into sync with each other.
Perhaps the most common misconception about successful teams is that they are tension-free places where disagreements are rare and mistakes are few. That is not even remotely true. Successful cultures don't transcend tensions. They embrace them and use them as cultural fuel. They lean into uncomfortable conversations, navigate disagreements, and embrace their mistakes. Happy smoothness isn't a feature. It is a bug to overcome. So call out smoothness, he says, as a negative. If you hold a meeting with zero questions or disagreements, you should point that out as unproductive. If everybody agrees, why did you bother to get together? If all the feedback is positive, why did you even ask for feedback? Conflict and tension are not problems to be avoided. They're opportunities for your group to figure things out better together.
Highlights too, distinguish between relational conflict and task conflict. Relational conflict is between people, me versus you, personality oriented. It's almost always unproductive. However, task conflict. My idea versus your idea, Ben is an engine for innovation and should be cultivated. When you encounter tension always make it about the ideas not about the people make it safe to talk about mistakes. Do post mortems after any project. What went well, what didn't go well? What are we going to do differently next time? Probably, the most effective trust building question he says is, "If you could wave a magic wand and change one thing about the way we work, what would it be?" This one I think is potentially controversial. He says, "Avoid brutal honesty, embrace warm candour." He says, "Look, I'm going to be brutally honest with you might feel authentic, but it creates a culture of brutality," which he said is not healthy. You know the phrase, "Don't shoot the messenger" says Professor Amy Edmondson, "You have to hug the messenger," Coyle says, "And let them know how much you need that feedback. That way, you can be sure that they feel safe enough to tell you the plain truth."
Here's one I like a lot, play the subtraction game. Many cultures face the disease of more. Always review what you do and eliminate what might have once been useful, but now is just kind of an old habit, you're just doing for the sake of doing it. That's my bullet review of the book, highly recommend it. It's a very handy tool and very easy to read.
All right. Let's go to our conversation now with Professor Amer Kaissi, and we'll come up on the other side with our after show.
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Cameron Passmore: Professor Amer Kaissi, welcome to the Rational Reminder's 22 and 22 Reading Challenge.
Amer Kaissi: Thank you for having me. It's a pleasure to be with you.
Cameron Passmore: Well, it's great to finally meet you. We've mentioned you often on this podcast, and I want to congratulate you on your terrific book, Humbitious. I thought before we dive into your reading habits, I have to ask you since you're here, can you just give us a quick summary of your book Humbitious?
Amer Kaissi: Absolutely. Thank you for having me, Cameron, and it's a great pleasure to be with you all. Yeah, the main idea in Humbitious is that, in leadership, humility is not a weakness. It's actually a strength, and it can be a superpower when combined with ambition. Now, many people when they think of a humble leader, they might think of someone who is weak or passive, but that is a wrong belief. Humility requires a lot of strength, and a lot of courage and that's really what the main idea of this book is.
Ben Felix: Do you think that someone can learn to be humble and ambitious?
Amer Kaissi: Yeah. That is a big part of this book, is what are some of the takeaways, what are some of the specific behaviours that leaders can work on if they believe that they are low on the humility part? Now, other leaders may be high on the humility part, but need to work on their ambition and that is also possible. Specific behaviours to work on humility include things such as, listening to understand verses listening to reply, asking for feedback, developing open mindedness, showing appreciation towards others. There's a list of behaviours that we share in the book that can help people work on their humility. In my work as an executive coach, I've seen a lot of leaders start from a point where their humility was a little bit low, and then they were able to dial it up over time with intentionality and with hard work.
Cameron Passmore: Can you also learn to be ambitious or is ambitious like a trade you're born with?
Amer Kaissi: I believe that ambitious is another one that we can work on and dial up. If we are intentional about it and if we get some appropriate guidance, we can learn to speak up in meetings, we can learn to become a little bit more assertive in terms of sticking our necks out in the organization, raising your hand and a meeting. We can learn to have difficult conversations with others, develop that skills that go into know, how to go in and have a crucial conversation with your boss or with your direct report, what are the skills needed, what kind of courage and confidence you need to develop over time. I believe all of this fall under ambition, and they definitely can be developed with intentionality.
Cameron Passmore: So the part of your book that really resonated with me about the whole humbitious idea is the basic belief that anyone has the capacity for substantial growth and self-development. How important in your mind is reading as part of that self-development?
Amer Kaissi: I think it's a significant part of it. As you recall, there are two chapters in the book that deal with self-awareness and self-reflection. I believe that reading books is a significant part of our self-awareness. I believe it was Tolstoy who said long time ago that, when we read, we give ourselves the opportunity to communicate with the wisest people who ever lived on earth. My question is always, why would anyone choose not to do that? Why would you deprive yourself of the chance to be in dialogue and communicate with some of the best minds that have lived on this earth? I think it's a big part of it.
Ben Felix: Can you tell us about your reading habits?
Amer Kaissi: My reading habits is that, I read everywhere and all the time. I always have at least one book with me wherever I go. For example, I had a 15-year-old son who plays competitive soccer. Whenever I drop him at his soccer practice, the first thing I do is I grab my lawn chair, I sit on the sidelines, and I read. All the other parents are on their phones, or maybe they're chit chatting. I mean, they see me reading. The first time they saw me read, they look at me weird like, "Wow! You have a book with you." I do that everywhere. I mean, I read at the airport, I read on long plane rides. The other day, I was just flying back from Portland to San Antonio where I live. I made it a point to look around me on the plane, there is not a single person who had the physical book with them. Maybe some of them were reading a book on their phones, but I highly doubt it, but almost everyone was on a phone, or a tablet, or watching a movie. You don't see people these days reading a physical book. I like reading, I like having a book with me all the time. If I'm at the doctor's office, and they make you wait 30 minutes, or 45 minutes, most of us would go on our phones and waste our time. I always have a book with me and I try to take advantage of that time.
Cameron Passmore: For the benefit of those listening and not watching on YouTube, your backdrop has probably hundreds of hardcopy books. Do you always read hardcopy?
Amer Kaissi: I prefer hardcopy but I also listened to a lot of audiobooks. I mean, it's such a convenient way of reading a lot of books. I also listen to audiobooks when I'm cooking, when I'm doing the dishes, when I'm running outside, when I'm driving to work. I have a 25-minute commute. I listen on long trips. I love audiobooks. I don't discriminate against audiobooks. I love them as much as I love physical copies.
Ben Felix: How do you decide what to read or listen to?
Amer Kaissi: Podcasts are a great source. Podcasts like this one. Many podcasts interview authors like myself who have just published a new book. So if I'm listening to that podcast, and I like what the guest is saying, I just go online right away and I order their book. There's so many of them, but there's one specific podcast that is related to books. It's a podcast called 3 Books by Neil Pasricha, where he brings in people, he interviews them and he asked them about – to share their three most formative books. That podcast I get a lot of ideas from it. I also intentionally search for books, depending on the project that I'm working on. I do my own research on books and related books. I also have one habit that I try to implement a lot of time, which is when I meet someone that I think is someone who's very interesting, towards the end of the conversation, I always ask, "What is a great book that you have read in the last year?" I bet you, this is better than any online algorithm in terms of, people will share with you some of the best books that way.
Cameron Passmore: Fascinating. Neil was a past guest of ours as well.
Amer Kaissi: Awesome.
Cameron Passmore: This next question is, of course, I've been most looking forward to asking you, which is. Your book, Humbitious is a perfect example of a book that has lots of takeaways. So many listeners right now, work in organizations, they lead organizations, and they probably read a fair amount on the subject of leadership, and culture and organizations. Do you have advice for them for us on how to decide what to apply from your book, and how to apply it to the organization?
Amer Kaissi: Yeah. Cameron, that's a great question. We have to be careful, and we have to understand that there is nothing that applies to all situations all the time. If I were to sit here and say, "Be humble" or "Be humbitious all the time, in every situation." That would be bad advice. My book's advice is to be a more humble leader in general. But what if your boss and the whole organization doesn't believe in humility, then it's bad advice. It's not good advice. What if you are in a situation that requires you to make a quick decision, like a crisis or an emergency, being humble in that situation, and listening, and reaching consensus and collaborating is also probably going to be bad advice. In that situation, you have to be more decisive, you just need to make a decision, and tell people what to do. You have to take the takeaways, but you also have to make sense of them and customize them to your own situation, to your organization, and to the culture in which you work in.
Ben Felix: That is good advice. How do you capture and organize the things that you learn from reading.
Amer Kaissi: When I'm reading a physical book, I always have a highlighter with me. A few years ago, I went online and ordered a big box of highlighters, and I have them everywhere. In the car, in my bag, in the house. I have highlighters everywhere. When I'm reading something, and I like it, I like the paragraph or the idea, I highlight that. Then when I finish the book, I transcribe all of these into a Word document. Sometimes, I do it myself, but when my kids have time, I actually hired them to do that for me, which I think is a good idea. I have a 15-year-old and an 18-year-old. During breaks, or when they don't have a lot of work or commitments, they are willing to do that for me and I pay them for that. But I think it's also a good thing for them to be exposed to some of the books that I'm reading.
But anyways, what I have is I have a Word document that relates to every book that I've read. Then I have summaries of all of these books. I've had these for the last 10 years. At the end of each year, I go back and I read all of the summaries as a way to internalize all the learning, and kind of make connections between the various concepts. Between the books. I do the same if I'm listening to an audiobook. If I'm listening to a book, and I hear an interesting idea that catches my attention, I pause the recording, and then I write the idea on the Notes app on the phone. This way, I capture all of these ideas, and then I add them after that to the list of Word documents on every book.
Cameron Passmore: That must be one incredible Word document you have now.
Amer Kaissi: Yeah, it's – Cameron, if we don't capture those ideas, then what is the point of reading? I don't know. I'm someone that doesn't remember stuff. Sometimes I will read a book, and then six months later, I'm like, "What did I learn from this book if I didn't capture thoughts?" For me, it only makes sense to be capturing your thoughts or capturing the ideas from the book in that way. Then after that, you can use them for different projects you're working on, or just for your own self-development.
Cameron Passmore: So your book is about leadership. Before you wrote this book, did you have some favourite leadership books?
Amer Kaissi: Oh, there are so many, and some of them may not be considered leadership books, per se, but for me, they kind of influenced my thinking about leadership. One of them is a very famous book by Carol Dweck called Mindset. I'm sure our listeners are familiar with it. There's a lot of overlap between the concepts of this book and the ones that I talk about in Humbitious. There is Quiet by Susan Cain, the power of introverts in a world that doesn't stop talking. These are not leadership books, per se, but I believe they pertain to leadership. Then if we get more specifically about leadership books, some of my favourites are The Five Dysfunctions of the Team by Patrick Lencioni, The Speed of Trust by Stephen M.R. Covey, and then there's just so many others, obviously.
Ben Felix: Are there any books that you regularly go back and reread?
Amer Kaissi: There's one book specifically that I go back and reread, and this one is a little bit morbid, but I'll explain. The book is called The Five Regrets of the Dying by Bronnie Ware. Bronnie Ware was a palliative care nurse in Australia. Pretty much what she did was she took care of people who are dying. But when she spent time with them in their last few days, she asked them, "What are your five regrets? What are your regrets in your life in general?" Then based on that, she summarized those regrets into five main regrets that people shared with her. The reason I like to go back and read that book every now and then is because it reminds me of the things that I'm not focusing on in my life that I should be focusing on. Because these are probably going to be the things that I'm going to regret, hopefully, after a long life on my deathbed. And there are things that – she talks in this book about people sharing with her that they wish that they had the courage to live a true life to themselves, rather than what others expected from them.
Another main regret was, I wish I hadn't worked so hard. Us, as professionals, as overachievers, sometimes we forget that. We focus too much on work, which we should be doing. But sometimes, we forget the other important stuff. That book is always for me a reminder of what my priorities should be in life, in addition to work, in addition to professional achievements.
Cameron Passmore: As you know, Amer, I've recommended your book Humbitious to many people. Do you have books that you recommend to others? If so, what might they be?
Amer Kaissi: Yeah. I recommend a lot of different books depending on what that person is working on. Again, as an executive coach, I work with leaders, I work with my own students at the university and every person is working on something different. Depending on their area for development, I recommend one of many books. For example, there's a great book called Leading with Emotions. This one, I recommend for leaders who kind of tend to show up a little bit more cold, more robotic, and not bringing emotion to the workplace. There's another book that is more of a workbook, it's called The Assertiveness Workbook. It's a little-known book, but that one I recommend for individuals who are working on dialling up their ambition, as we talked earlier, and being more assertive. There's a great book called How to Raise Your Self-Esteem. That's one that I typically recommend for individuals who come to leadership with a little bit of a lower self-regard or confidence in themselves.
For those who are on the other end of the spectrum, I recommend Ego as the Enemy by Ryan Holiday. For people who are working on networking skills, one I recommend a lot is Never Eat Alone by Keith Ferrazzi. It's not just one book for everyone, but rather, depending on what that individual is working on, I probably recommend something specific.
Ben Felix: You mentioned earlier your habit of reading all the time. What advice do you have for other people who maybe want to read more, I guess, in 2023, at this point?
Amer Kaissi: Yeah. I'm sure you've talked to a lot of people who say, "I want to read more." Then you ask, "Well, what are you doing to read more?" They say, "Well, I'm not doing much." My advice is, I mean, it's pretty simple. You got to invest time and you also got to invest money. Now, maybe the money part you can bypass by borrowing book from the library, from the public library at first, but the time one is non-negotiable. You got to invest time in this thing. One of the things that bothered me a little bit is, now, all of this advice about how to listen to a book at three times the speed or how can you speed read through a book? You just read the first page, and you skip the chapter so you can finish so many books.
My reaction to that is, that's not the way I like to read at all. I want to take my time with the book, I want to enjoy it, I want to digest the book. I don't like to finish books so fast, because then you're not taking the full advantage of the book. Investing the time is a key for me. You got to put in time in there and make sure that you're spending time on books, and learning from them and all of the other things we talked about. My other advice would be, if you're 50 pages into a book, and you're not learning from it, and you're not enjoying it, then what's the point? Just ditch it and get another book. One thing I learned from that podcast we mentioned earlier from Neil Pasricha is, quitting is okay. That was the great insight in terms of giving me that permission to quit a book, because prior to that, like if I started a book, I felt like I had an obligation to finish it, even if I wasn't learning from it or I'm not enjoying it.
Now, if I'm into it, and I'm not getting anything out of it, then I'm done. I'm going to move on to read something else, because our time is so precious. Life is too short to spend your time on books that honestly probably are not that good for you.
Cameron Passmore: Yeah, and if you just make it a regular habit, it's incredible how the books just get completed half an hour, hour a day. Just a little bit every day. That's been my experience anyways.
Amer Kaissi: Absolutely. The key is consistency.
Cameron Passmore: This has been amazing. Thanks so much for joining us, Amer. It's been great to have you on.
Amer Kaissi: Oh, absolutely. It's my pleasure. Thank you both.
***
Cameron Passmore: All right. That was an awesome conversation with Amer. So great to have him on.
Ben Felix: Definitely.
Cameron Passmore: It's the after show for the three people that are left. Since you did this presentation. Do you want to take a crack at it first review that someone was kind enough to leave us?
Ben Felix: Sure, sure. I can take a crack at that. It's from PFI Conference on Apple podcasts. They say that it's the number one podcast in the physician community. They said, "Thank you, Ben, for taking the time to answer our questions and speak at the Physicians' Financial Wellness conference. I really appreciate the research and expertise that goes into each episode, as well as the breadth of topics covered from wealth, health and happiness. As a doctor, I am learning lots from your guests, not just on finances, but burnout, motivation and decision making. You're doing great work and giving your time, and knowledge, and guiding physicians and educating students on investing. I hope you have the time to take care of yourself and enjoy your new trampoline, which is pretty smart to put it indoors so you can use it year-round." Maybe context on that quickly. There was this, as they mentioned, the Physicians' Financial Wellness conference that I spoke at. There were, I think, a couple 100 doctors. It's a very cool thing that they do. But it's like, there's a stereotype of doctors. It's a stereotype. I hope no one takes offence of this, is the stereotype of doctors being bad with money, because they're often confident, they're often intelligent. That makes it easy for them to make money mistakes. You're cringing. Should have I not said that?
Cameron Passmore: Not, not at all. I just say, I know some doctors that are exceptionally good at their money. But it is a stereotype, absolutely stereotype, for sure.
Ben Felix: It's a stereotype. So this community of physicians have taken that very seriously, and they've created this community. They have a big Facebook group, I believe that only physicians can be in, where they all share good personal finance knowledge stuff. Then they have this conference that they put on to help people think about tax, and investing and all of the stuff that's relevant to a physician. So it's a very impressive, cool thing and I'm glad to have been – this a second time I've spoken at.
Cameron Passmore: No kidding. Few LinkedIn reach outs I got in the past couple of weeks. Jonathan and advisor from Edinburgh has been enjoying the podcast. George from London, "Wow! So glad that you re recommended the Colonel Hadfield episode. So many great insights, like it seems others did." I skipped past that one, as it wasn't typical finance content, generally one of the best on our episodes. Also from Alexis, an engineer in London reached out saying, "My family has a terrible history of investing and has a perpetual fear of equities, yet gives me advice such as getting multiple mortgages as guaranteed money. I've been self educating myself for a while and your podcast plays a large role in that. I enjoy your factual based summarization of papers as I don't yet read them myself, as well as discussions with professionals. I do find some topics a little too; however, I believe that listening to experts discuss topics as they would over coffee helps me absorb the knowledge in any efficient and unique manner. The alternative being lectures designed for my level, which simplify topics a great deal. It's how I learned computer science. My goals are financial independence without the retirement bit through cap weighted rolled equity portfolio by investing in minimum 25k USD annually."
Ben Felix: Very clear goal.
Cameron Passmore: Okay. You can talk about the Spotify rap, which man, this past week, it's been everywhere.
Ben Felix: Oh, really? I have not noticed that. This is our Spotify rap summary, which is like on the creator side, I guess. It's different from what our listeners would get. Maybe that's obvious. So we created in 2022, and I guess this is up to that point, because we regretted more content in this calendar year. We created 4,160 minutes of new content, pretty crazy. Rational Reminder was listened to in 90 countries, also pretty crazy. Top countries – this is on Spotify. I'm pretty sure it's the same on Apple podcast, approximately. Top countries on Spotify: Canada, US, Australia, Germany and the UK. Again, I'm pretty sure that generalizes to Apple podcast too. It's at least very similar. Where it's Canada first, US. On Spotify, this surprised me honestly. Top 1% most shared podcast globally. Crazy. I wouldn’t have guessed that.
Cameron Passmore: No chance.
Ben Felix: Also, top 1% most followed podcasts. I wouldn't have guessed either.
Cameron Passmore: Never would have guessed.
Ben Felix: This one blew my mind. I wouldn't have guessed those ones. I wouldn't have guessed this one either. Because again, I get stuck in this. There are people in the Rational Reminder community that I talk about random investing stuff with all the time or I read their post or whatever. It's relatively a small number of people and it's a consistent group of people that are very active in there. So I have this imaginary image of this like static podcast audience, 65% of our podcast listeners discovered the podcast in 2022. That blew my mind. Totally blew my mind.
Cameron Passmore: In other news, I have to cancel the meetup in Orlando. It's just not going to work out. We got feedback in the community to have a meetup in New York City, which would be super cool, which I'm sure will happen at some point. But I think in the very near future, hopefully in like Q1 next year, we want to have a meet up in Ottawa and Montreal. So if you're interested, we're going to build a list. Email info@rationalreminder.ca. We'll let you know if there's enough interest to do that, which I suspect it will be
Ben Felix: Two meetups? Ottawa and Montreal?
Cameron Passmore: Yeah, yeah.
Ben Felix: Social butterfly over here.
Cameron Passmore: Lots of merch in the store and still time to order before Christmas. We'll make sure Jackie will for sure get them out to you in time. One of the most popular items in the store has been the Talking Sense Cards. When I was at the London meetup, three weeks ago, one of the guests there was Chris, who's a math teacher in London. He was talking about cards and I happen to have an extra set with me.
So I gave him a set to use in his class. He dropped me a note of thanks, dropped us a note of thanks last week and said, he's been using them in class with great success. I thought we'd put it out there. If there's teachers that are listening, that would benefit from using talking sense in class, and maybe you don't have a budget for cards in your school, drop us a note. I think we can easily contribute some decks of cards to teachers. We'll see what the demand is like, but I think it's something that we should do, especially when you read the note that Chris sent. Thanks, Chris, for the inspiration.
As always, connect with us on LinkedIn. We're both on Twitter. Rational Reminder on Instagram, CP313, and #rationalreminder on Peloton. Speaking of Florida, it is wild. I never even thought of looking to getting tickets to take the kids when we're there to Disney. It's basically sold out over Christmas. Never thought about it, but there's only a few days where a couple of the parks are available. Let me tell you, it is not the cheapest day you'll ever spend in your life.
Ben Felix: I don't get it.
Cameron Passmore: It's wild.
Ben Felix: Can you articulate to me why you want to go to Disney?
Cameron Passmore: It's amazing. It is truly an experience. I get it. I totally get it. I'm just saying, linking back to a conversation about recessions and stuff. It's like – and I've done a fair amount of travel this quarter. It is not visibly obvious that there's a recession happening. I don't mean that in insensitive way. I'm sure people are struggling, I get it. But boy, the airports are jammed, restaurants are jammed. Restaurants in London jammed. It's wild. Airports, like of all the flights I took this quarter, I think there was one flight I saw – I actually got lucky with an empty seat beside me in one of the flights. But everything's jammed. You try to get into the Air Canada lounge, Air Canada gives all these free lounge passes. Well, the lounge is packed. You can't even get in the lounge. It's wild. Try getting a rental car in Florida.
Ben Felix: I won't. I can't imagine doing any of those things.
Cameron Passmore: Yeah.
Ben Felix: My kids are probably not going to do it.
Cameron Passmore: Disney is not your , but it's an incredible experience.
Ben Felix: I did it. My parents took me and my sister when we were kids, because they wanted to take their kids to Disney because that's what people do. I hated it. Never going back. Not to diminish the great time that I'm sure you will have.
Cameron Passmore: I have a great time. Your feedback is not affecting me. We're all different. I know it's not your happy place. All right. Anything else, Ben?
Ben Felix: Nope. No, I think that's good.
Cameron Passmore: Beautiful. Thanks, everybody for listening.
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Books From Today’s Episode:
Humbitious: The Power of Low-Ego, High-Drive Leadership — https://amzn.to/3WjHjry
Mindset — https://amzn.to/3Wzl7Kr
Quiet — https://amzn.to/3htlN4X
The Five Dysfunctions of a Team — https://amzn.to/3YmKqRv
The SPEED of Trust — https://amzn.to/3UWCljq
Top Five Regrets of the Dying — https://amzn.to/3uQcUWf
The Assertiveness Workbook — https://amzn.to/3VVDVUf
How to Raise Your Self Esteem — https://amzn.to/3BDM33p
Ego Is the Enemy — https://amzn.to/3BAyCkZ
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
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Benjamin on Twitter — https://twitter.com/benjaminwfelix
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Amer Kaissi on Twitter — https://twitter.com/amerkaissi10
Amer Kaissi on LinkedIn — https://www.linkedin.com/in/amer-kaissi-ph-d-38258919/
Amer Kaissi — http://www.amerkaissi.com
'The Value of Goals-Based Financial Planning' — https://www.financialplanningassociation.org/article/journal/JUN15-value-goals-based-financial-planning
'Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock' — http://independent401kadvisors.com/library_articles/ExcessiveExtrapolation.pdf
'The Agony of Ecstasy: The risks and rewards of a concentrated stock position' — https://assets.jpmprivatebank.com/content/dam/jpm-wm-aem/global/pb/en/insights/eye-on-the-market/agony-ecstasy-2021.pdf
'The financial resilience and financial well-being of Canadians during the COVID-19 pandemic' — https://www150.statcan.gc.ca/n1/pub/75f0002m/75f0002m2021008-eng.htm