The Rational Reminder Podcast

In this discussion, Professor Robert Novy-Marx, a renowned finance scholar, delves into the intricate relationship between profitability and stock returns. He challenges conventional views on evaluating multi-signal investment strategies. The conversation covers the complex dynamics of profitability premiums, critiques the timing of market factors, and illuminates the low volatility anomaly. Novy-Marx also explores the relevance of the five-factor model for regular investors and shares insights from his unique journey from triathlete to academia.

Today we dive deep into the connection between happiness and money, looking at a host of theories and studies that have examined the important factors in this discussion. The main material referenced is the fascinating, The Happiness Hypothesis by Jonathan Haidt, and during the episode, we get to look at a great selection of the findings and claims in the book. To kick things off, we consider the broad ideas around how money can stimulate happiness, as well as its addictive aspects, before examining a few of the most prominent lenses used for measuring different kinds of happiness. Talking about the ideas of Hedonia and Eudaimonia, the influence of forecasting and the future, and the effects of different kinds of spending, we see the common threads as well as the distinctions between these models of measurement. Ultimately all of this material should hopefully enable us to live out a better life with this information in mind, and we spend some time reflecting on some of the key takeaways that seem to come to the surface in the happiness debate. To finish off, we field some listener questions on avoiding spending, and returns on investment, before diving into this week's bad advice featuring a video starring Warren Buffett, Charlie Munger, and Mark Cuban!   Key Points From This Episode: A great book recommendation for getting to grips with branding and building relationships with consumers. [0:03:52.2] The interesting statement released by IIROC regarding conflicts of interest. [0:07:14.7] Barry Ritholtz's interview with Jack Brennan and their perspectives on index funds. [0:10:44.1] Books and studies on the subjects of happiness, finances, and addiction. [0:12:21.4] Different theories for the largest determining factors for happiness. [0:20:21.3] Hedonia and Eudaimonia; two different types of pleasure and their measurement. [0:24:47.6] Experienced happiness and experienced unhappiness; statistics from around the world. [0:32:04.1] Spending and happiness and the debate around the human ability to accurately forecast. [0:40:21.7] Designing a happy life based on all the research in the field. [0:44:48.8] Inverting the goal-setting process and working backward from what you don't want! [0:47:33.9] Love and work as the two most crucial ingredients for human happiness. [0:49:47.3] Avoiding the temptation of spending when aiming to save money. [0:51:15.6] Examples of investments that have paid off for Cameron and Benjamin. [0:52:31.1] Bad advice of the week; Buffett, Cuban, and Munger on diversification. [0:54:03.7]

It takes only a handful of smart choices to convert regular savings into a secure future. Today we welcome famed financial educator Paul Merriman onto the show to discuss how the right habits and investing approach can add millions to your retirement nest egg. After chatting about his personal and professional background, we dive into Paul’s investing philosophy and how it’s been influenced by the work of Eugene Fama. A significant theme in this episode, we then talk about why Vanguard’s portfolio allocation ensures that clients have the smoothest possible emotional relationship with their investments. This leads to a discussion on the benefits of simple versus complex funds and how simple funds fit with the preferences of many do-it-yourself investors. Linked to this, Paul explains why it’s emotion and not strategy that gets in the way of successful investing before exploring the challenges of sticking to portfolios that are heavily weighted in small-cap value stocks. Reflecting on his career as an advisor, we ask Paul about his difficulties in working with clients as well as the role of financial advisors. Later, Paul unpacks some of the top habits and beliefs that lead to investing success; a key focus of his new book, We’re Talking Millions. We wrap up our conversation by touching on target date glide paths, how Paul’s foundation educates investors, and the relationship between money and a life well-lived. With such an illustrious career in financial education, tune in to benefit from Paul’s investing advice.   Key Points From This Episode: We introduce today’s episode with financial educator Paul Merriman. [0:00:17] Paul shares details about his personal and professional history. [0:03:16] How Eugene Fama’s work impacted the way that Paul built his firm. [0:06:55] What PWL Advisors went through to access Dimensional’s products. [0:08:21] Insights into the fateful chat that Paul had with Jack Bogle in 2017. [0:09:08] How Paul helps his clients balance fee frugality with expected returns. [0:13:29] Exploring the trade-offs between simple and complex funds. [0:16:49] Paul compares his former buy-and-hold strategy with his simpler new approach. [0:19:06] The costs of do-it-yourself investors having an overly-complicated portfolio. [0:22:46] The rationale underpinning the small-cap value strategy. [0:27:20] Why it’s so difficult to only invest in small-cap value stocks. [0:25:36] What Paul would say to clients who want to ditch their small-cap value stocks. [0:37:32] Paul reflects on challenges when communicating with investors. [0:40:39] We ask Paul about the value of financial advice and financial advisors. [0:46:32] Discover the habits that every investor should follow. [0:51:29] What Paul is trying to achieve with the Merriman Education Foundation. [0:58:21] Pros and cons to target date glide path funds. [01:02:00] We chat about Paul's radio show from the previous decade. [0:50:35] Hear Paul’s top lessons on the relationship between money and a life well-lived. [01:08:51] How Paul defines success. [01:16:29]

As many of you already know, we have been working hard to figure out the best way to model expected stock returns for financial planning and asset allocation. It has a lot of history in financial literature, which is to be expected, given the importance of the figure. In today’s episode, we’re looking all the way back to 1985, when Rajnish Mehra and Edward C.Prescott called the equity premium a puzzle, through to the present day, when the equity risk premium has only gotten larger. We dive into some of the theories for resolving the equity premium puzzle, explain why US stock market data isn’t the best way to estimate future premiums, thanks to its survivorship bias, and some of the general issues with interpreting past returns. Benjamin also gets into predictability, which is not as obvious as it seems, and highlights some of the information from the simulation he performed, and the big breakthroughs from running the numbers. All this and more in today’s episode on expected stock returns, so make sure to tune in today!   Key Points From This Episode: Kicking off with the fallout from the collapse of Archegos Capital, the death of Bernie Madoff, and the story of the $100 million New Jersey deli. [0:06:35] Reflecting on the recent article, ‘Could Index Funds be ‘Worse Than Marxism’?’. [0:11:05] On to today’s topic: do expected stock returns wear a cape? [0:13:05] Theories for resolving the equity premium puzzle; either the model is wrong or the historical premium was higher than it will be in the future. [0:14:14] Hear John H. Cochrane’s theory from his 1997 paper, ‘Where is the Market Going?’ [0:14:42] Why we can’t use historic US stock market data to approximate future premiums. [0:14:57] Other issues with looking to past returns, like no proof that the equity premium was stationary. [0:15:23] Why time periods characterized by decreasing risk should effectively see decreased discount rates too. [0:16:04] Dimson, Marsh, and Staunton (DMS) on expected stock returns using out of sample data. [0:16:40] Hear some of the equity risk premium stats from their world index versus the US. [0:19:38] How annual returns have been relatively unaffected by global financial crises. [0:21:15] From looking back, to what to expect going forward: the issues with interpreting past returns. [0:22:10] Why, according to DMS, expected returns equal the growth rate in dividends plus the dividend yield. [0:25:26] Hear the actual figures, which reflect the minor contribution of multiple expansion. [0:26:49] What a company is worth if it doesn’t distribute capital to shareholders. [0:29:03] Find out why the expected geometric equity risk premium works out to 3.5 percent. [0:30:13] While the DMS approach is reasonable, it still doesn’t account for whether expected returns are constant through time or if they vary. [0:32:21] Predictable stock returns dictate that changing risk aversion over time measurably affects risk premiums after good and bad events. [0:34:45] Diving into the vast literature on return predictability, including a paper by Goyal and Welch. [0:35:12] Why predictability is not as obvious as it seems, thanks to our sample data. [0:36:15] What we can learn from ‘Long Horizon Predictability’ by Boudoukh, Israel, and Richardson. [0:39:30] R-squared and market timing decisions; why it would need to be higher than it was historically. [0:40:32] Hear about the world index analysis Benjamin performed and what it proves about risk premiums over 30 and 60 year periods. [0:42:31] Bootstrap simulations and why they are criticized; because they ignore mean relationship, you get a much wider distribution of outcomes. [0:44:50] Big breakthroughs from running through these numbers, like noting the upward bias and tighter distribution in long-run historical data. [0:50:34] How to apply this on your own, using the 3.5 percent risk premium in the long run. [0:52:23] Some of the other interesting things we noted during these simulations. [0:53:10] We pull two cards: choosing between a holiday and a pet, and borrowing money with interest. [0:53:56] Bad advice of the week: a free lunch-esque article on investing in private credit. [0:55:53]

From YouTube channels to get-rich playbooks, whole industries are devoted to the subject of building wealth. But few books present a clear and honest view of what it’s like to have a lot of money. Today we welcome author Jennifer Risher onto the show to share her insights on living with wealth. Early in the episode, we explore how Jennifer and her husband ‘hit the lottery twice’ by being given stock options for both Microsoft and Amazon before they went public. Jennifer then shares details about the key premise of her book: people with wealth never talk about their money. Informed by her experience of having sudden wealth, we discuss why gaining wealth doesn’t significantly change people despite it leading to feelings of isolation. After talking about how wealthy people rarely feel that they have enough, we unpack the many benefits that come from talking about your wealth. As Jennifer explains, using examples from her life, communicating your feelings about money is a solution to many relationship issues that arise from having wealth. Linked to this, we dive into how you can raise balanced children whose outlooks aren’t spoiled by affluence. Later, we touch on the role of giving, Jennifer's top advice for newly wealthy people, and how Jennifer views work now that it’s optional for her. We wrap up our conversation by hearing about how the wealthy make a positive impact on society. In this episode, we dispel many myths about being rich. Tune in for more on why we need to be talking about wealth.   Key Points From This Episode: Details about author Jennifer Risher, today’s guest. [0:00:17] Jennifer shares why she wrote her book and the problems that it addresses. [0:02:43] Exploring the question: how much does wealth change you? [0:06:55] What wealth has given to Jennifer and what it hasn’t. [0:09:10] Jennifer describes the feelings that came with suddenly becoming wealthy. [0:10:14] The process informing Jennifer’s decision that she had ‘enough.’ [0:13:41] Hear Jennifer’s advice for couples who have different definitions of ‘enough.’ [0:16:49] How few wealthy people don’t feel that they have sufficient wealth. [0:19:03] The important role that financial advisors play aligning wealth with people’s values. [0:20:13] How Jennifer’s book is opening up the conversation on wealth. [0:23:09] Challenges around raising children in a state of affluence. [0:25:36] Why modelling virtuous behaviour is key in raising balanced children. [0:28:40] What Jennifer learned from speaking to other wealthy couples. [0:30:23] How having wealth can impact your relationships. [0:34:06] Overcoming the taboo of talking about money. [0:38:52] Ways to view work when working is optional for you. [0:42:28] Jennifer unpacks her biggest lessons on giving. [0:44:00] Jennifer shares her advice for newly wealthy people. [0:50:35] What the wealthy can do to improve society. [0:51:59] Hear how Jennifer defines success for herself. [0:53:34]

Today’s episode doesn’t have an external guest, but Benjamin and Cameron provide fascinating information on a vast range of topics. First, the discussion centers around the book that Cameron is currently reading and what it is teaching him about social networks, the ego-driven world of social media, and the benefits of anonymity online. The hosts share some of the findings from a very insightful discussion which took place on their anonymous community board platform around people’s thoughts on the positive and negative impacts of work. Happiness and the factors that cause it are a big theme in today’s show, as is the practice of ‘buying the dip.’ If you aren’t familiar with this term, you should have a decent understanding of what it is and why you shouldn’t do it by the time you finish listening. The hosts also discuss the incident that has been called “the largest financial meltdown since 2008,” who the RR Model Portfolios are aimed at, and some of the ways people react to crises (in terms of their investments.) Tune in for a whirlwind education on some very important topics!   Key Points From This Episode: Benjamin and Cameron share statistics which show how the podcast is growing. [0:02:53] How the hosts find the guests that they interview on the podcast. [0:03:10] Staggering one year stock performance numbers. [0:04:22] Why Cameron is reading The Hidden Psychology of Social Networks, and what he is learning from it. [0:06:56] Community boards and the arguments for and against anonymous online communities. [0:08:02] The “epic meltdown” which makes up the news story for today’s episode. [0:10:17] Where the value of the Rational Reminder Model Portfolios lies, who will benefit from them, and who probably won’t. [0:13:53] Tools which make implementation easy. [0:21:00] Data on individuals participating in 401(k) plans and a discussion around how humans deal with crises. [0:22:12] The conversation around connection, control, competence, context that was sparked by the question of whether the goal of retiring is a good one to have. [0:26:43] Jonathan Haidt’s Happiness Hypothesis; the importance of love and work. [0:29:34] People don’t tend to prioritize time over money to a point where it is detrimental. [0:32:53] What it means to ‘Buy the Dip,’ the reasons that people do it and the problems with engaging in this practice. [0:33:15] The paper that Benjamin has produced on ‘buying the dip’ which will be out by the time you listen to this episode. [0:40:34] Why the ‘buying the dip’ strategy has been particularly costly for Americans, and the contrast between the cases Benjamin looked at in the USA, Australia, Canada and Japan. [0:45:45] What people don’t realize about leverage and how this impacts their decision to ‘buy the dip.’ [0:52:00] The cards created by the University of Chicago Financial Education Initiative. [0:53:53] Cameron asks Benjamin a question from one of the cards; coincidentally it is about happiness. [0:55:00] The qualities that Cameron and Benjamin believe are most important in someone who is starting a business. [0:57:05]

Ashley Whillans, an Assistant Professor at Harvard Business School, dives into the intriguing concept of time poverty and its impact on well-being. She explains how modern technology creates stress despite offering some leisure time. Whillans discusses the surprising benefits lower-income women experience from having extra time versus money. The conversation shifts to how work-from-home dynamics can exacerbate feelings of time scarcity. Ultimately, she emphasizes the importance of valuing time over money for long-term happiness and well-being.

While there is no way of knowing what the best portfolio is, empirical data and financial economics have fixed the problems surrounding investing. But if we’ve fixed investing, then what’s the point of financial advisors? Today we dive into this topic and reveal why financial advice is still valuable to the everyday investor. We open the episode by touching on our movies and books for the week, as well as the latest from the financial world. We then explore why, despite their failure at making predictions, experts are so important across many industries. After defining what financial advice is, co-host Benjamin Felix systematically unpacks the value that financial advisors provide as they relate to key areas including goal-setting and quantification; asset allocation; understanding your human capital and insurance needs; selecting the right financial products; and tailoring strategies to tax considerations. Later, Benjamin highlights how financial advisors can help investors overcome their biases while helping them align their investing goals with living a meaningful life. We close the episode with our Talking Sense segment, followed by the bad financial advice of the week. When so much data is available, it’s necessary to revisit the relevancy of financial advisors. Join us to hear why they continue to play such a valuable role in helping people meet their investing goals.   Key Points From This Episode: Cameron shares the birthday message he received from Seinfeld’s ‘Soup Nazi.’ [0:00:35] We discuss community feedback and the documentary The Last Blockbuster. [0:02:53] Details on financial educator Paul Merrimen, our next guest. [0:06:10] Updates on podcast merchandise and shipping times. [0:07:32] Elon Musk and Mark Carney; hear about our books of the week. [0:09:00] We talk about the latest from the financial world. [0:10:14] Introducing today’s planning topic: What is financial advice? [0:18:40] The role of financial planners when index fund investing is so easily available. [0:19:45] Exploring what financial advice is and what it isn’t. [0:23:37] We unpack the link between goal-formation and quantification and sound financial advice. [0:24:35] The challenge of trying to predict what will make us happy in the future. [0:27:07] Happiness, life satisfaction, and goal-setting as it relates to financial advice. [0:29:00] Pricing your goal and avoiding the hedonic trap of never ‘having enough.’ [0:32:00] Asset allocation as key to the value of financial advice. [0:34:02] Quantifying human capital and your insurance needs. [0:37:00] Why knowledge of financial products is the basis of financial advice. [0:37:50] How taxes impact investing strategies. [0:39:05] Why managing wealth and getting financial advice is an iterative process. [0:40:02] How financial advisors help you eliminate biases that affect decision-making. [0:40:40] The many reasons that people seek expert advice. [0:43:28] We summarise the arguments for the value of financial advisors. [0:47:00] Advice on determining a financial advisor’s level of expertise. [0:48:34] Hear our answers to the profound questions posed in our ‘Talking Sense’ section. [0:51:02] Courtesy of TikTok, we share our bad financial advice of the week. [0:53:30]

How do your perceptions of time influence your long-term decision-making and financial well-being? Today we speak with psychologist and UCLA Associate Professor Hal Hershfield to answer this abstract question. We open our conversation with Hal by exploring the concept of well-being. After chatting about the factors that impact financial well-being, Hal unpacks the balancing act that’s required to live in the present while safeguarding your wealth to support your future self. Hal shares exercises that can help you develop a more vivid sense of your future self and we discuss how this can lead to better financial decisions. We then dive into the role that free time plays in determining your well-being, leading into a discussion on how financial advisors can steer their clients towards achieving their idea of well-being. Returning to the notion of your future self, Hal shares insight into the importance of self-compassion, dealing with life and preference changes, and how hitting age milestones lead to periods of personal reflection and financial reevaluation. Later, Hal gives listeners his take on annuities and how retirees perceive them. We wrap up another informative episode by looking into the link between perceived wealth and spending before touching on how Hal views success. Tune in to hear more about Hal’s research and how it can give you a stronger and deeper conception of your financial future.   Key Points From This Episode: Introducing today’s guest, decision-making expert Hal Hershfield. [0:00:03] Exploring the definition of ‘well-being.’ [0:02:28] Ways that Hal measures well-being. [0:03:46] How financial behaviours and psychological factors impact financial well-being. [0:05:17] Hear how your relationship with your future self affects wealth savings. [0:06:52] Hal talks about how we can get closer to our future selves. [0:10:14] Reflecting on exercises that can help you imagine your future self. [0:13:14] We ask Hal when the present and the future begin. [0:17:01] The link between well-being and your perception of your present and future self. [0:20:32] Distinguishing between your present and future self versus having no distinction. [0:22:18] Whether not having little free time is detrimental to life satisfaction. [0:23:51] Hal discusses whether people would rather have more time or more money. [0:28:06] How financial advisors can help people achieve higher well-being. [0:30:59] How changes in your chronological age can trigger moments of reflection. [0:35:48] Differences in how retirees view lump sum and monthly income streams. [0:41:49] Helping people get a clearer idea of the value behind annuities. [0:44:42] How people can develop opposing ideas about when they’ll die. [0:47:33] Hal’s work on the relationship between meaning and spending. [0:49:21] Hear how Hal defines success in his life. [0:52:40]

Where do stock returns actually come from? The answers to this deceptively simple question might change your investing perspective. We dive into this foundational investing topic after sharing community updates and chatting about our books and TV series of the week. A key concept in understanding where returns come from, we unpack how stock returns are impacted when companies migrate across size and value portfolios. While exploring how migration differently affects value and growth stocks, we also break down why book equity and growth drive capital gains for growth portfolios but not for value stocks. Linked to this, we discuss stock convergence as they relate to growth and value stocks. Looking deeper into the stock returns, we assess research on why valuation changes in asset classes are critical in determining expected returns. We touch on how valuations lead to an unfair depiction of international stock performance before asking: how justified are valuation changes to value and growth stocks? From understanding stock returns, we jump into our mini-planning topic on Canadian work from home tax reductions, followed by our Talking Sense segment. We wrap our conversation by sharing some bad financial advice. Join us to hear what it is, and to learn more about the anatomy of stock returns.   Key Points From This Episode: More updates from the community and co-host Benjamin’s battle bot building. [0:00:20] Hear about The Defiant Ones, our TV series of the week. [0:02:50] From The Coaching Habit to Elon Musk, we share our latest book reviews. [0:04:50] Introducing our investing topic: the anatomy of stock returns. [0:10:00] Exploring how changes to a stock type affect value premiums and returns. [0:13:40] Why small stocks tend to have high returns compared with big stocks. [0:17:00] Understanding the value premiums that underpin stock types. [0:18:45] What happens when a stock improves in type. [0:21:32] Factors that lead to price increases in growth and value stocks. [0:25:19] The concept of stock convergence and how convergence impacts value and growth stocks. [0:28:45] Behavioural explanations for the capital gains of value and growth stocks and the role played by stock drift and convergence. [0:32:25] Whether historical returns tell us anything about expected returns. [0:34:15] Why you should always include international stocks when assessing value stock performance. [0:39:18] Using value spread to determine expected value premiums. [0:41:39] We ask the question, “what if the trend in valuation changes to value and growth stocks are justified?” [0:44:17] Diving into our planning topic: Canadian work from home tax deductions. [0:50:12] How renters get a better deal than owners on work from home tax reductions. [0:52:25] Hear our answers to the profound questions posed in our ‘Talking Sense’ section. [0:54:06] Courtesy of Forbes, we share our bad financial advice of the week. [0:57:16]