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Create Wealth The Cheap And Easy Way

Spencer Jakab, Create wealth

With Spencer Jakab, Writer and editor of the Wall Street Journal column, “Heard on the Street”, Author of Heads I Win, Tails I Win

Spencer Jakab, writer and editor of the Wall Street Journal column, “Heard on the Street,” has heard it all. All the hype, all the advice, all the dos and the donts swirling around the media from every point of view, bombarding the confused investor from all angles, and every source about as reliable as flipping a coin.

In fact, that is exactly the premise of Spencer’s new book, Heads I Win, Tails I Win, a valuable read for the novice and the experienced investor alike because we’re all vulnerable to the latest and loudest horn blower out there. Spencer thinks that most financial advice is “basically useless and a little bit of it is worse than useless in the sense that you are being led down a primrose path.”  His somewhat unorthodox advice, which he says can be summed up in about eight bullet points, is essentially to be cheap and lazy, and that entails a bit of passivity and deaf ears.

The average investor, he says, typically performs well below the market average as a result of zigging where he or she should have zagged, poor timing, over-reacting to news such as Brexit, and getting seduced by the latest financial fad. The antidote, Spencer says, is to be as lazy and as passive as possible in the face of these temptations, to stick to a plan, and to tell yourself: “I’m going to rebalance on this date; I’m going to have this allocation; I’m not going to let this scary headline or this hot new trend derail me from that.”

The other half of Spencer’s advice is to be cheap, to pay as little as possible, not more than one-tenth of a percentage point for a bond or stock fund. In times of low returns, such as now, that alone can save you money and double your nest egg.

The influence of the media is ubiquitous and seductive. And scary financial rants and doomsday prophecies that create a collective adrenalin rush garner the best TV ratings, something that never happens when everything hums along nicely.  Spencer advises taking the grain of salt approach and sticking to your plan.

Acknowledging, however, that we often are no match for the force of current trends and headlines, a professional fee-only advisor can be the neutralizing voice of reason—especially during an anxious time such as we experienced with Brexit or back in 2008 with the Lehman collapse—that can prevent a costly misstep.

So while Spencer cautions investors to remain lazy and cheap, he concedes that for most of us “having counsel and having counsel where their interests and your interests are aligned is a very smart thing.” 

Full of interesting anecdotes Heads I Win, Tails I Win is a concise and entertaining investment guide that aims to keep you on the sane and, ultimately, successful path to financial wealth.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: Spencer Jakab writes for and edits the “Heard on the Street” column for the Wall Street Journal and was a top rated stock analyst covering emerging markets at Credit Suisse.  His new book, Heads I Win, Tails I Win, is a very good book for the novice and the experienced investor alike, so let’s meet him and find out what he has to say.  Welcome to the show, Spencer.

Spencer Jakab: Thank you.

Steve Pomeranz: Spencer, in this day and age anyone trying to accumulate wealth gets a lot of different messages from a lot of different directions, daily barrages of advice on TV and articles telling you to do one thing or another and books telling you what to do.  What does the investor do to wade through all of this in order to get it right?

Spencer Jakab: There’s a tremendous amount of advice out there, you’re right.  By some measures, there is something like three hundred billion dollars of money spent a year in the United States on various types of advice and most of that is financial, so it supports a huge industry.  I think, by definition, most of that can’t be that useful because you’re advising this guy to be that guy and that guy to be this guy. The financial markets are a zero sum game.  That advice is very costly and financial services are very costly.

I think that most advice is basically useless and a little bit of it is worse than useless in the sense that you are being led down a primrose path.  I think that if I had to summarize all the advice that’s in my book, I could probably do it in eight bullet points.  I did it in two hundred eighty-eight pages because there’s a lot of detail around that, but it isn’t extremely complicated in terms of what you need to do, and it mostly involves being cheap and lazy, I guess, is how I sum it up.

Steve Pomeranz: Yeah, you mention that in your book.  In a sense it’s, you can increase your nest egg by twice as much by being cheap and lazy.  Let’s talk about being cheap and lazy.  What does that actually mean?

Spencer Jakab: What I do in my book is, I say, “Listen, first of all, you probably don’t realize how far away you are from the market return.  You would think that the average investor more or less is average, but the average investor is way below the market average, and the biggest chunk of that underperformance comes from zigging where you should zag, poor market timing, reacting to news like Brexit a couple of weeks ago, getting very exuberant about the latest fad and whatnot.  That can be something like two to three percentage points a year, which compounded over a working life saving is a big, big chunk.

One aspect of outperformance is being lazy, being as passive as possible and trying to be really mechanical about things.  Don’t allow your cognitive biases to influence you at all by basically having a plan and forcing yourself to stick to it, “I’m going to rebalance on this date, I’m going to have this allocation, I’m not going to let this scary headline or this hot new trend derail me from that.”

The other part is being cheap, paying as little as possible, because if you do that you really shouldn’t be paying more than a tenth of a percentage point for a bond or a stock fund.  In these times of low returns that makes a big, big difference, whether you’re paying one percent or one and a half percent or paying zero point one percent, just that alone can double your nest egg.

Steve Pomeranz: It’s definitely true what you’re saying about this idea of buy and hold, and you mentioned this idea of, “Don’t let your cognitive behaviors affect what you do,” but we’re all human, and especially those who have no experience in the markets, they are very much prone to zigging and zagging and trying to avoid the pain of loss, that idea that the pain of loss is twice that of the pleasure of a gain.  There’s got to be someplace in between that, working on your own behavior and completely staying passive as if you were Rip Van Winkle and waking up twenty years later and all is well, so what do you do in between?

Spencer Jakab: Right, you’re absolutely right, and I wrote my book very much with that in mind.  It’s fine to say, as they say, it’s simple but it’s not easy.  It’s not easy at all because our brains are hardwired to make us fail as investors.  You mentioned this notion that a loss hurts twice as much as a gain pleases.  The man who was the winner of the Nobel Prize is a psychologist with a Nobel Prize in economics for that discovery.  It’s called Prospect Theory, Daniel Kahneman.  I read an interview with him pretty recently and he says even though he knows that, even though he discovered that, he still makes these mistakes with his own money.  He’ll be overly fearful at the wrong time.

What I advise in my book, everyone is different.  Some people are fine being completely passive and most people are not.  I do advise people to be cheap, but you shouldn’t be so cheap that you’re penny wise and pound foolish, in the sense that if having an advisor, a fee-only advisor, a phone call away when you have a day like Brexit or a day like Lehman’s collapse, or what have you, keeps you from doing something stupid that costs you two or three percentage points of your nest egg by getting out of the marketing and then getting back in later.  That already has paid for itself for several years, that one phone call that you made.

I think for many people, and probably most people, having counsel and having counsel where their interests and your interests are aligned is a very smart thing.

Steve Pomeranz: Let’s talk about the media and its influence on us now.  You’re in the media, you write for the Wall Street Journal; I’m in the media, I have this radio show, but when I think of the media, let’s take TV, for example.  You mention in your book that the best ratings day on TV is the worst crisis and the worst day in the markets, so there’s this dichotomy or this contrary intention here.  People are glued to the screen on these terrible, terrible days, and yet when things are good ratings go down.  What is the media’s agenda here?

Spencer Jakab: It’s not an agenda, but it’s what is news.  Obviously, the media doesn’t control who picks up a newspaper or who tunes into their channel.  They’d like as many people to do that on every single day of the year, but people tend to flock to the news.  CNBC and channels like that, as I said, have their highest ratings on those days.  The headline is largest in our newspaper on a day that the DOW falls five hundred points or seven hundred points.  If the market over ten days is up five percent, that doesn’t really elicit headlines.  You don’t see “Market Humming Along”, but if it’s down by that amount then you do see a big headline.

There have been measurements showing that scary headlines tend to precede actually very good returns and, of course, follow bad returns.  That’s the corollary to that.  We are giving people what they want, and we’re also reflecting what people tell us.  I’m a columnist, but a reporter speaks to people who are out there in the markets, analysts, and traders and whatnot, and they tend to give scary soundbites at scary times and that’s reflected in the media, but what should you as a consumer of the media do?  You should take that with a pinch of salt, not be spooked by it, and remember that holding steady at times like that and sticking to your plan is when most people shoot themselves in the foot and when you can basically outperform your peers by not losing your head.

I hate to poo-poo my own industry, something that I would write, but you should take all this stuff with a pinch of salt.  Obviously, we’re honest people, we do our best, but you need to, especially when headlines are scary, just sit back and have some perspective.

Steve Pomeranz: I get calls from time to time from local media and it’s generally for me to comment on mortgages, mortgage rates, or something like that, but I know that if the market is down strongly, I know that at three o’clock I’m going to get a call from this one reporter who wants a quote from me.  Maybe twice a year he calls, and when I look at the day and I go, “I’m going to get a call,” like clockwork.  He comes to me for that because they’re looking …  I guess people are really looking for insight.  They want to know why, but sometimes it’s not possible to know why certain things happen.

Spencer Jakab: You’re absolutely right.  For example, almost any day of the week, you have some macroeconomic number or some company reporting and usually have two or three things like that at least.  If the market has gone down, sometimes there’s no proximate cause for it, but, of course, if you call someone up, they always give a reason.  Sometimes they’re really dumb reasons like, “More sellers than buyers,” which is impossible because every seller has a buyer.  Sometimes you hear things like, “Well, it was the industrial production.”  People are always in retrospect looking for an explanation of what happened to the market, but I think that you’re absolutely right, and sometimes it’s very obvious what happened.  The market zigs and it zags and I think that these short-term fluctuations are really best ignored.

Steve Pomeranz: That’s the key lesson to take away from this is to ignore these daily market fluctuations that really have nothing to do necessarily with the value of the assets that you’re owning.  These companies that make up the stock market, they price them daily.  Sometimes they misprice them, but most of the time, over a long period of time, you accumulate wealth because the underlying assets that you own are becoming more valuable.

Spencer, I’m sorry, we are out of time I guess.  Spencer Jakab, the book is, Heads I Win, Tails I Win, and I do recommend this book for the novice and the experienced investor to help keep your head screwed on straight during these very volatile and uncertain times.  Spencer, thank you so much for joining us.

Spencer Jakab: Thank you.