At the Money: Keeping It Simple



At the Money: Keeping It Simple with Peter Mallouk  (June 26, 2024)

We’re attracted to complex ideas – they sound sophisticated and smart – but are they the best approach? As it turns out, when it comes to your money, simple beats complex.

Full transcript below.


About this week’s guest:

Peter Mallouk is CEO of Creative Planning, with over $300 billion in client assets. He is the author of Money, Simplified.

For more info, see:

Personal Bio

Masters in Business





Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.





[Music: Tell me, Why’d you have to go and make things so complicated? I see the way you’re Actin’ like you’re somebody else, gets me frustrated]


Barry Ritholtz: We’re attracted to complex ideas, maybe because they sound sophisticated and smart. But when it comes to your money, simple beats complex. The more complicated an investment approach is, the more error-prone it tends to be. Even the best strategies can be undone with only one mistake.

I’m Barry Ritholtz, and on today’s edition of At The Money, we’re going to discuss how to keep it simple and avoid the most common mistakes investors make.

To help us unpack all of this and what it means for your finances, let’s bring in Peter Mallouk. He is the CEO of Creative Planning, which manages over 300 billion dollars. Peter also wrote two books coincidentally on these exact topics. The first, “Five Mistakes Every Investor Makes,” and more recently, “Money Simplified.”

So Peter, let’s start out with complexity. What, why are we so attracted to complex, sophisticated sounding solutions?

Peter Mallouk: Well, I think for, for two reasons, one, it makes it easier for someone to sell. Hey, this is so hard. You really need me only. I can help you and save the day and it makes it easier to buy.

People want to believe that they can be better at something, and so the harder something sounds, the more complicated it sounds, the more it sounds like the person really knows what they’re doing, the more inclined I am to buy it. You know, in investing, if you come at somebody and explain, Hey, I, for this part of your portfolio, it should just be really simple. You don’t get wonderful from people usually. They don’t go, Oh, that’s awesome, Peter. They go, wait, wait a second. You mean you’re telling me that, like, it’s just I did something seems wrong. I thought you were really sophisticated, Peter. Why, why is this recommendation so straightforward? You know, it’s not human nature.

Barry Ritholtz: Really interesting. So, so tell us what are the advantages of keeping it simple?

Peter Mallouk:  I think the advantage of keeping it simple is that investing tends to reward simple. Not always, but I think a good rule of thumb is make it as complicated as it needs to be and no more complicated than that.

Every now and then you could add something incremental. It might even actually help a little bit, but you’re not accounting for the hassle and the work and the paperwork and a separate tax form and all this stuff that you’re going to have to do. Think about your goals and say, how do I accomplish these? I don’t want to do anything that doesn’t add incremental value.

I also don’t want to do things that add very tiny incremental value relative to the other hassles it brings to me.

Barry Ritholtz: Your book, five mistakes every investor makes lists.  A number of errors. Let’s work our way through them and see, uh, if we can figure out how to not make these mistakes, starting with market timing. How hard can that be? You sell right before the market crashes, and then at the bottom, you jump right back in.

Peter Mallouk: I know, it’s just so straightforward. Talk about something that’s very easy to sell. That’s a very, very easy thing to sell. Because everybody wants “I’m going to be in the stock market when it goes up and you’ve got these special signals that will get me out before it goes down.”

I mean, look, some of the biggest money managers in America, that’s what they’re selling, right? And you know, look, they’re wrong most of the time. It doesn’t take a lot of research to figure it out, but my goodness, it’s easy to show.

Now, what we do know is that if you buy, if you have an active managers, a trader, and you compare them to the index, just say buying the S&P 500 in the or an international index, that over a decade, over 90 percent of them will underperform the index, right? And so in this case, more cost-effective. is and simpler is a better outcome. You’re not sacrificing making that simple move.

Barry Ritholtz: So you mentioned active management. Let’s talk about active trading, a related issue. Again, not that hard: Just buy good stocks that go up. And when they stop going up, sell them.

Peter Mallouk: Right. You know, it’s most people are surprised to know that most U. S. stocks over their lifetime underperform the treasury. It’s very few stocks that really do well. They tend to lift up the market. Like if you think today, what’s lifting the S&P 500, companies like NVIDIA, and a couple years ago it was Apple, and years before that it was Southwest Airlines and Monster Energy, and it always seems obvious, uh, through the rearview mirror, it’s not.

One of the reasons the indexes does so well is, yeah, some of the stocks go to zero. But you can only have a stock go down a hundred percent. You can’t go down 101%, but a stock can go up 10,000%, right? So an Apple or an Nvidia, or a Southwest Airlines or a Monster Energy can offset dozens and dozens and dozens of failures. Like Bogle said, you don’t need to look for the needle in the haystack, just buy the haystack. And you, you wind up lifting up the return. So people who are doing security selection, they wind up with a lot of those stocks that tail, that, that trail the treasury. They wind up missing the needle in the haystack, and that’s why the active trader, among other reasons — cash drag, expenses, taxes — underperforms.

Barry Ritholtz: You, you talked about costs and taxes. You haven’t discussed the emotional toll, and I know you’ve discussed this in the past. You know, for people who are either actively trading or market timing, What is the emotional toll, not just the commitment and time, but emotional energy?

Peter Mallouk: That’s an interesting insight because I think that that’s the biggest price people pay is not the monetary price, unless they’re devastated. You know, every now and then you see somebody get economically devastated. It’s, it’s, that’s, that’s obviously a tragedy.

But most people, they just kind of learn a lesson, right? They lose more money than they should have or they don’t perform as well as they should have. And it’s really the emotional toll that you point out, Barry, that really becomes the true negative side effect of being so actively engaged in this emotional roller coaster and absorbing all of this news and thinking you’ve got a narrative that you could translate into trading and it doesn’t work and you’re up at night thinking about it, it occupies mental space, it’s not positive.

I think that for a lot of people, it starts out as fun then they think they can do it. And as you wind up seeing that up and down, it’s no different than the emotions of being in a casino for a long period of time. There’s those moments of euphoria looking for, but look, if you’re doing it for anything but entertainment, you’re more likely to have negative energy come out of it.

Barry Ritholtz: What are the practical steps investors can take? to try and prevent some of the first couple of eras, either over trading or market timing or even stock selection.

Peter Mallouk: The first thing an investor should do is figure out  what are you trying to accomplish, right? What are, what, how much money do I need? When do I need it? Is some of that money coming from Social Security or rental property or selling my business? What do I actually need from my portfolio?

Okay, now I know what I need from my portfolio, so I, I can back into, How much should be in bonds? How much should be in stocks? My situation is a little more complicated, maybe private equity, private lending, private real estate for more wealthy individuals or people that can afford the illiquidity.

And then there on the stock market side, track indexes, get yourself out of the market timing game. Get yourself out of the security selection game. You’re for sure going to lower your fees. You’re for sure going to lower your taxes. You’re almost certainly going to outperform the active manager.

Barry Ritholtz: Let’s talk about performance and financial information. It seems investors hoover up everything they can; They don’t really understand their own performance and they seem to misinterpret a lot of financial data. Tell us about that mistake.

Peter Mallouk:  I think financial data is really interesting to track. For example, if you look at mutual fund returns,  you can look at a 10-year return of a mutual fund and go, Oh, on average they did really great. But the reality is that most investors, can lose money in a lot of these top-performing funds. An old example is Lake Mason Value, right? So Bill Miller, one of the only people, or the only person ever, I believe, to beat the S&P 500 15 years in a row.

Then you have peak inflows into the fund, and then they’re in the bottom one percentile of performance. So even though that fund had a great history, for most of the time, the reality is most of the investors in the fund lost money.

The most recent examples is Cathie Wood (ARKK) who I find very interesting online, but the reality is her fund. A lot of money not in there when you have these great returns, record inflows, and then devastating losses.

So the average investor’s experience is often quite different from what they see, and the investing is filled with data that looks like that.

Barry Ritholtz: I jokingly say if you set the course record on the straightaway, but then crash into the wall at the curve, it doesn’t count. [Right!?]

So let’s talk about the really big one: letting emotions and biases interfere with your process. Tell us what investors do where either their cognitive biases or just their emotions get the better of them.

Peter Mallouk: Confirmation biases, it’s an incredible bias. I was in New York City a long time ago, maybe a decade ago, I stopped to see our advisors, some of them, and I told them to pick a restaurant, and they said, hey, Peter, we want to go to a steakhouse. I said, hey, I’m, you know, headquarters is in Kansas City, like take me anywhere but a steakhouse. You know, we’ve got steakhouse discovery. They’re like, no, no, no, New York, best steakhouses. I’m like, all right, fine. So we go to the steakhouse. We are, you know, the waiter comes out, they’re going through all the different, it’s one of those steakhouses, right? So they go through the filet and then they go through the, the porterhouse and then they go in here. Here, now we’ve got our New York Strip. It was just flown in last night from Kansas City.

My takeaway was like, see, and all of them were like, look, we get the best cut from everywhere. That’s how good everything is in New York. So we have this confirmation bias where we look through everything through our own lens. Most people think they’re above it. Nobody is.

If you’re a Republican or conservative, you might go to the Drudge Report online. You might read the Wall Street Journal. You might be watching Fox News. If you’re a Democrat, you might be, you know, there’s a lot of websites like,  HuffPost that you can go to, you might be reading the New York Times. You might be watching MSNBC, right?

We all are looking for stuff that just already validates what we’re thinking all of the time. We’re avoiding stuff that contradicts us. We dismiss it. We dismiss the person saying it. This translates into investing. I remember Warren Buffett talking about when he’s looking at a stock, he doesn’t just say, why should I buy this stock?

He asks, what can go wrong? And really say, if this fails, how did it fail? What’s he trying to do there? He’s trying to conquer that confirmation bias.

How it translates to that typical investor is, you might have somebody who has Apple today and Apple’s struggling this year. And so they might be online looking for all the reasons it will do better, right? And ignoring the stories that say its best days are behind us. We tend to just go search for what we want to validate. And investing is a very powerful emotion.

Barry Ritholtz: And finally, the fifth mistake you reference is working with the wrong advisor. Let’s talk about that. What is the wrong advisor and, and what can people do to avoid working with the wrong advisor?

Peter Mallouk: I think to start — it will help for your listeners to understand the profession. 90% of advisors of which there’s 300,000? About 90 percent are brokers. And so that means that they are not a fiduciary to the client 100% of the time.

They don’t have to be acting in the client’s best interest all the time legally. This blows people away, right? They think like, My doctor has to, right? Well, yeah. Legally they have to, uh, my CPA does, right? Yes. Legally they have to. And your My lawyer does, right? Yes. Legally they have to. But the advisor, no.

The advisor can optionally choose to be a fiduciary, and the majority of them optionally choose not to — they stay brokers.

How does that translate into what it means for the the client? For the client it means. You know, a broker can have a  take a spread on a bond. They can collect a commission on investment. They can participate in what’s called revenue sharing, where if they put you in a fund, some of that money from that fund goes back to the advisor.

All of those things are conflicts of interest. It doesn’t mean every broker is dishonest. Of course, there’s many honest brokers, but if you are choosing between an advisor who has to act in your best interest all the time and one who doesn’t have to act in your best interest all the time, 100 percent of the time you would choose somebody who has to act in your best interest all the time.

Well, the good news is, that’s 8 to 10 percent of advisors. It’s still 30-something thousand advisors. So if you can find somebody who has to act in your best interest all the time and doesn’t own their own products, I think that’s a good combination of making sure they’re on the same side of the table with you.

Barry Ritholtz: So to sum up, To succeed in investing, simple beats complicated. Long-term beats short-term. If you want to avoid errors, steer clear of stock picking, market timing, and if you’re working with a professional, work with a fiduciary. I’m Barry Ritholtz, and this is Bloomberg’s At The Money.

[Music: Tell me, Why’d you have to go and make things so complicated? I see the way you’re Actin’ like you’re somebody else, gets me frustrated]




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