Welcome to episode 28 of the Investing for Beginners podcast. In today’s show, we will discuss Andrew’s eLetter and whether or not you should pay for investment advice.
To pay or not to pay for investment services, is the title of our show tonight. Andrew recently had an email subscriber write him a note asking him questions about his service and how it would be of benefit to him.
The format tonight will be Andrew answering the questions on air, and we will have a short discussion about them.
- We are all consumers of online products
- When we find value, the price becomes less of an issue
- Sometimes it is great to have a mentor to help guide
- Value investing has been proven it’s the way to go
- Paying for financial services, when you receive value for it can be beneficial.
So, I am going to read the letter, and then Andrew will offer his responses.
Dave: The letter starts “At $29 a month, that’s just under $14,000 per subscriber for you, you and Dave discussed how much needs to happen to overcome a transaction fee with a stock purchase and focus a lot on percentages.
But you seem to have a reverse opinion on the subscription. If someone follows you for 40 years, at $150 a month with a goal of one million dollars, they will be $14,000 short after the subscription. That would equate to 2812 transactions.
What’s the plan to overcome that? I love your guy’s show but find my mind contemplating things like this. And I in no way intend to think that you shouldn’t charge for your services. After all, you’re a professional, but wouldn’t it be more prudent to charge a percentage of growth or somehow correlate it to the actual value earned?
It’s the biggest problem I have with anyone in this industry. They all want to help, but they want money up front and require blind faith.
All right Andrew, what are your thoughts on that?
Andrew: Yeah, I love the question, if one person is taking the time to write this out. You know at least ten people or more probably have this question in their mind. I think it is a great thing to ponder.
I recall back early into my investing journey, having a similar thought process. I still go through this thought process when I think about other investments in my life. When I talk about other investments, I am not talking about the stock market sense, but more in the other product and services that can better my life in many different ways.
First thing I want to say, I am going to hit a couple of points and go a little bit out of order, but they’re all kind of tie into together and lead into the big answer at the very end. I think some of this stuff needs to be addressed first, and kind of builds on itself afterward.
Firstly I am consumer just as much as a producer, I will say that right away. Even right now I pay for a premium podcast, I’ve paid for premium podcasts in the past on investing. I’ve paid for an investment newsletter, and entrepreneurial newsletter which was $99 a month, gave an ROI much greater than that.
I’ve been there and had to make that decision-making process, is this money I’ve worked and toiled for, is it worth giving to someone else, particularly on the internet. Who you’re not seeing it face to face, not able to swipe at the counter and trust that it is going to do great things for me.
This might not apply to everybody; I am sure there are people who have been scammed in the past. In my own experience, I’ve had a lot of great blessings come into my life from the different types of opportunities that I’ve seen online.
I’ve mentioned the investment newsletter, entrepreneurial newsletter, there is a great entrepreneur, his name is Pat Flynn, from the Smart Passive Income podcast. At the time when I was first starting my business, he didn’t offer any products, but he did offer affiliate links, and so I made sure to go out of my way to make sure he was getting credit on those affiliate links. I knew that was my way of paying him back.
The absolute value and the way information that he provided was able to transform my life, and I wanted to be able to give it back. That was one example of being on the receiving end of a lot of great information, value, and advice.
Another one was Dave Ramsey, that kind of transformed my whole mind set on when I came to personal finance. And looking at the big picture of how does debt, and assets work together. I wasn’t aware that it was a game that is being played, but it is.
Most people aren’t aware of that game, but it is the whole net worth thing.
Building assets and eliminating debt and getting cash flow to work for you. Dave Ramsey also has a podcast, as do Pat Flynn. His podcast, the Dave Ramsey show, I used to listen to that all the time and got a lot of great advice and was able to make concrete steps and work towards my goals.
Make progress towards those goals. I have tried his flagship product, Financial Peace which I went through and found it very useful. Don’t regret spending towards that, and I think it was close to $100.
In other areas of my life, obviously, I’ve also seen some great gains from investing online. There’s an app called strong lifts. When you are starting out into the power lifting, weight lifting, Really with an emphasis on trying to get PRs as far as lifting really heavy weights. That was a $10 investment that while it doesn’t make a financial ROI, it made really big results for me from a fitness perspective.
Those types of things are hard to quantify, but you have to take a subjective outlook and see if it’s making sense to you.
Even today, Amazon loves, even though I talk bad about their stock, they love me as a customer. I’ve got the Audible subscription, getting these books every single month that I can listen to when I am driving my commute, or walking the dog. Just getting all this insight from other people and these books that they’ve produced, and it’s from a collective standpoint it is not easy to give a certain ROI number or figure to that.
There are so many different ways that it has made me grow as a person, as you grow as a person it spreads out to all areas of life, and you’ll start to see results as those things start to line up for you.
Obviously, Kindle is another great example of that. I think if you’re a reader, Kindle can be great because you can take it anywhere you want. I like to do that on the phone.
Just really have a book to read anywhere I am.
I completely get understand, and I get the skepticism, and I understand that he wasn’ saying I shouldn’t charge for the eLEtter. Obviously, the whole capitalism thing and that could be a whole another topic for another day.
I just want everybody to understand, and especially Brian, that I know what it is like to take that leap, because the internet is not that old, as far as years, so there is still and a lot of skepticism, and putting money towards somebody who you might not have met in person.
There can be a lot of good, and bad that can come from it. I tend to be a glass half full when it comes to this type of new era that we see if you want to call it that.
I’ve seen that, and I think I tend to attract that with the law of attraction. I am all for it, and I think it’s a judgment call that everyone has to make personally.
I think it’s a big factor when it comes to not only my service but other investment services out there.
I think that leads into what his next critique was, which was wouldn’t it be more prudent to charge a percentage of growth or correlate it to how much value I am earning. He’s talking about making it a sort of commission thing which I get 100%.
Guys like Buffett, I think he does it. He’ll do a percentage on the gains that he makes, I think a lot of hedge funds do it. A lot of the hedge funds will charge you a percentage based on how many assets you have, plus they’ll take profits off the top. So, they double dip in that sense.
The problem with the charging of percentage whatever growth my portfolio has seen, I’ve talked before I don’t want to manage other peoples money. I don’t want to be responsible in the sense that people can just take their money out because they don’t see things the same way I do.
When you manage other peoples money a lot of it comes down to how much money you can attract. And how much money is leaving, keeping that difference cash positive for the investment manager?
I’ve talked about how that is more of a marketing game than it is even an investment management game.
I don’t see a way to charge an investment newsletter in that way. Even if there was a way to do that, I don’t think it’s right from a mindset perspective. Let me talk about Warren Buffett for a second; it’s so key to think about how performance correlates with everything else.
I’ve talked about in the past how Buffett underperformed the market, particularly in 1999 when the internet stocks were going through the roof. I’ve pulled up a website that is called the Buffett.com, and it shows his performance returns compared to the S&P with dividends. Back since 1965, until 2012.
There is a lot of an individual year basis there is a lot of variation in how his results ended up being compared to how the market did. He’s got years where he has earned 20%, 23%. He has other years where he has only returned 4%, 5%. 2001 he lost 6%, 2008 he lost 8%.
When you compare it to the S&P, there is a variation on how much he beats or loses to the market.
For example, in 1966 he beat the market by 32%, but the following year he lost by 19.9%. Even though since he has some down years but has rebounded. He made 11% in 1967, the S&P was at 30%, so he underperformed big time.
There are examples of this through out the board. YOu can’t take one single year of performance and say that truly reflects how Buffett did, because obviously if you look over the decades, he outperformed the market by a significant amount. Over 10% or more depending on how you want to slice it.
In the same token, having people who want to subscribe to my eLetter, having them focus on the short term results for your portfolio. I don’t think it is very beneficial because that mind set needs to be. That mind set needs to be not so many results but focuses on team work.
Am I making sure that I am sticking to that a successful investor like Buffett would, rather than am I beating the market every single year, a month?
Am I beating the market for this year, does that make me a terrible investor or should I just sell out? That would be the worst possible thing you could do because you could get the recovery and that recovery could be the difference over a ten year period and if you miss out on that one year of recovery because you sold out on your investment strategy.
That could turn you from a winner to a loser. I think having results be the central thesis is very counter productive. I’ve thought a lot about this and even the price point, in particular, $29 a month, I’ve had to think a lot about that and make sure that if I am marketing to people who are going to buy a $150 a month, that $29 needs to be worth it for them.
Brian, you talked about blind faith, I think just as a consumer in general, we have to have the blind faith in a lot of different things. I don’t want to say that buying with me is going to be any less of blind faith than anyone else. But I think the focus needs to be on do I agree with the process, the thought strategy and system that are going along with it.
Not so much did Andrew beat the market in 2017? I think those are some things to consider really and then I mentioned how over a 40 year period, that’s a $14000 cost at $29 a month.
When I thought about that price point, I thought about how can it become a good value for people who want to subscribe.
Let me give numbers on the differences between the different return percentages.
I always put this in each issue of the eLetter, I’ve started giving the numerical difference between how if you would have put money into the S&P versus the eLetter. What that difference would be over 40 years.
I always use the example of ten percent a year, because that is the market average. A $150 a month at 10% a year that comes out to $797,000, so let’s call it $800,000. Just one percent over performance over that, say 11%, which is one percent better than the S&P 500.
That’s $1,047,000; you are talked about a difference of $250,000 over 40 years. While you might have spent, this is all obviously hypothetical, spending $14,000 to make $250,000 over a 40 year period potentially. Obviously, that can be a game changer for you, and it is because of the way that is compounding interest works, so when you are getting that eleven percent for that first year.
It is not going to be a perfect 11% a year, just like if you look at Buffett’s returns, he has gone 20, 20, 10, 16, 4, 5, it’s all over the place. But at the end of the day, when you average out the numbers it will be at this certain percentage.
It is that extra percent that because it is compounding, we talk about compound interest. We talk about that extra one percent you are talking about making one year is going to make an even extra one percent on top of an extra percent, and that next year.
What is interesting is that as you get further and further away from the average market return of ten percent. That increase becomes exponentially greater as well. I talked about the difference between 10%, and 11% is $250,000. The difference between 11% and 12% just another one percent.
It is now $333,000; you’re getting each one percent above that last percentage point, you are getting higher and higher return on your investment. This is the whole point of the eLetter, which is why I set the goal at $1 million dollars because that is an 11% return per year.
All I am asking is to try to beat the market by one percent a year. If we can beat the market, we will have a $1 million for retirement.
I think it is very doable and it ties into the last point of his question.
What’s the plan to overcome that?
The whole point behind the eLetter, and it is the whole point of the podcast, that we are tiring to do here.
To find the right system and strategy to get from average market returns to something that can give a point, two points per year and give us that extra big sum of money, which makes an effort worth to find the right strategy.
The plan to overcome that is value investing which we talk about over and over again. Just in a little snippet, I would like to recap that and if you’re a beginner and haven’t heard about Warren Buffett.
Before I think it would be a kind of nice entry point. If you have been listening throughout all of our episodes, I think a nice recap, a good checkpoint to make sure we say this is why w are learning these topics.
As long as far as possible. When you look at value investing there is a lot of research, data, and studies that have shown how superior to a lot of other investment strategies. We talked about how the average market return is 10% a year.
Merrill Lynch did a study where they compared to value stocks, growth stocks, and regular stocks over a 90 year period. They found that value stocks averaged 17% a year return over that 90 years.
That’s not one percent, two percent over the market average, which is significant and that can make a lot of money. And it has made a lot of people a lot of money; there is a lot of different investors that have done exactly that.
We’ve talked about Benjamin Graham and his book; he earned 17% for 30 years, a guy named Phil Carrot he earned an average of 12.5% for 55 years. He was a value oriented guy who bought companies that were growing their earnings and had solid balance sheets, which is basic, simple value investing.
He ran with it, every single one of these guys were able to do it over decades of time, we’re talking about turning tens of thousands into millions of dollars in those time periods. It can make some significant wealth for average people, and it did make significant wealth for shareholders and people that were along for the ride with them.
I’ve got another guy named John Templeton, earned 13.8% average returns over 50 years. He took more of a contrarian approach; he bought the most hated stocks, which he could find the best bargains. He didn’t discriminate, didn’t matter what sector, country these stocks were. He was going to dive in, the cheaper, dirtier the better.
John Neff, another guy who earned 13.7% for 51 years, he coined his strategy the low P/E investing strategy, those were his words. That’s obvious value investing, the very first ratio we talked in our epic Most Useful Stock Valuations” was the price to earnings ratio.
He also emphasized return on equity, shows he was a guy who liked to dig into the financials statements, obviously Dave and I resonate with that. He was looking for companies with higher earnings, that’s a requirement for companies with good ROE, strong earnings.
And it did well for him.
The last investor is Warren Buffett, which everybody knows about him. We won’t go into that too much, depending on what period you look at. He earned 22% a year for 40 years; I don’t need to talk about how much wealth he has been able to accumulate.
That’s the date, research.
Let’s look at it from the big picture, let’s forget about all the research and look at it from the most simple, easiest, let’s learn to walk before we run kind of idea.
You have the stock, the stock market goes up, and it goes down. The stock market has bull and bear markets. What’s a bull market? That is where everybody gets excited, and they buy a lot of stocks, people tend to get greedy, and the stocks get bid up. You will see the emergence of a bubble, which will usually pop. During a bull market the economy is really strong, and then after things crash, we tend to see a bear market.
It is usually the opposite; people are selling their stocks, losing their jobs, there is a recession. And there is a lot of fear in the markets, not a lot of people feel good about the market. People don’t feel confident when they put money into the market, they see red in their portfolio, and it is just overall not a good thing.
We’ve seen over 100 years of market research, and we’ve seen that these bear and bull markets. Depending on the period you are looking at, they can go a couple of years to 20 years. There’s all these little pockets of bear and bull markets all throughout history.
We know they’re just part of the process, and it’s sometimes there’s a bull or a bear. What we can deduce there’s always elements of greed and fear in the market, and these things are influencing prices.
The market is more emotional more than it is numerical because you have people involved. And people are buying up and bidding up prices, or selling off and you see fall.
How we can take advantage of that is if we look on any given day, take the very top of a bull market. You take stock, and it’s probably the most agreed that you’ll see if you look at the balance of fear and greed.
You’re going t see the most greedy when the stock is at its top, compared to when it’s at the bottom, and there are the most fear and negativity.
As we go through the cycle of the stock market, there is always going to be some fear and greed attached to every stock at any given time. If we understand that it’s not static, not 50/50, but sometimes there can be 60% greed and 40% fear, or 75% agreed and 25% fear. Or flip it the other way around, like a 60% fear and 40% greed.
There’s the margin of safety right there if we know what the stock or that company is worth. And we know that there are more people fearful about that company than greedy. Then how are we going to know what that is because we see what the price in the market is? And if that price is lower than what the real value is then we know there are more people fearful than greedy.
And if we understand that if over the long term, prices will eventually stabilize close to that 50/50 mark. Then we understand that there are times and stocks, there is going to be more fear than greed, and try to snatch those up.
Try to use elements of John Templeton, who loved to buy stocks at a bargain. Benjamin Graham is similar in that same way.
Taking advantage of the emotions and the swings between fear and greed and the difference in opinion on different stocks. That’s were the opportunity is, and if we consistently do that, the chances are that we’re going to be getting one stock, one month we are buying a stock it is a bargain. And the next month we find another bargain.
You keep buying enough bargains, and eventually, you are going to get a nice, diversified portfolio with a lot of stocks that are likely to begin to trade at a more neutral, positive viewpoint, rather than pessimistic.
That’s where you’ll see a lot of price appreciation, but not only that you have the potential for price appreciation from buying stocks when they are hated.
You also have great potential just riding the stocks as the companies grow naturally.
That is the thing that I like to focus on that I think differentiates me from a lot of other value investors in general. And this is the primary reason for the dividend fortress part of the eLetter, where there is a big focus on dividends.
Obviously we try to buy when prices are low, but eventually, we want to have a portfolio of stocks that are continuing to pump out cash, dividends, and getting us compounding interest in many different ways.
If we can get in the top companies that are always growing, and always growing their dividends. And doing that over time, reinvesting those dividends and some shares that we hold is going to continue to grow. That growth is going to spur more growth; we will have this two headed potential equation that we are looking for.
Getting gains from stocks because they are hated and then getting gains from buying stocks whose earnings, business and dividends are growing. If we have a solid foundation of stocks that are growing that’s going to carry our portfolio higher, and by always buying stocks that are giving us that margin of safety and on the right side of the whole fear/greed equation that we are looking at and perceiving, comparing that to the overall market.
That gives us a significant advantage; I don’t think it is crazy to think that combining those two things can even lead to a 1% out the performance of the general market.
I know there is a lot of different opinions of that, we have haters that love to disagree, and there are people that are always chicken little, thinking that there’s just no way that good thing can happen.
That’s fine, and that’s just the way some people are, but I have a lot of faith in the idea that getting a 1% or 2% outperformance doesn’t have to be impossible even for the average investor. If we put these two huge elements of investing strategy in place and use them side by side, then it can overcome a lot of different obstacles that can come up in the way.
That’s really why with the eLetter I am using my own money; it’s a real money portfolio that is being tracked because if I going to sell a service where I am going to expect people to pay money to follow this portfolio along.
You know for sure I need to put my own, if I am asking people to risk $29 a month, I am going to be risking much more than that, from my viewpoint. To make sure that the interests are aligned here if this is going to be risks other people are taking, these are risks I am taking alongside.
That means a 100% of my ideas and beliefs are being tested here. If I fail, then my subscribers fail along with me, but I feel that as well. It’s not just some play money that I see on the screen. The money that I am investing is my money that I’ve worked for as well.
I think that is the way that I look at an investment service. I understand that it’s not the best thing for everybody. A lot of people will and do, just doing it on their own. Just like I am doing myself, and I think that is fantastic.
I also think it’s great to have somebody whispering in your ear all the time, especially when times get tough. To let you know and remind you of these principles, just because the market is crashing doesn’t mean you have to sell out, just because your portfolio is not doing as well, doesn’t mean you have to bail out.
I think there are other intangible advantages that come from being subscribed to a service like the eLetter, but I also understand that it is not for everybody. Not all people can justify the price; some people frankly don’t believe that ROI will ever be there, that’s completely fine too.
I hope there is a lot of excitement there as well because there is big potential for not only, these principles and lessons that we teach on the podcast. Having that put to the fire and being tested every single day, in the market, as the months go on with these performance numbers that I can’t hide from.
This is putting my money where my mouth is; it is a kind of a cool thing to be a part of, especially if you get in the beginning. If things go smoothly, nobody can tell the future; nobody can say what is going to happen. Maybe it is blind faith, and maybe you do need it.
If you do need it and the reasoning behind how this can be something that can positively influence your life. Then I say take the jump with me and see how far it can go.
Dave: Awesome, you laid everything out well. I think you talked about those different points and pointed out your thoughts.
My two cents worth about what Andrew was talking, I also have different things I have bought on the internet as well. The way that I was looking at them was a way to help me learn more about whatever it was that I was investing in.
I haven’t talked about this much, but I am a sommelier which means that I know a little something about wine. Even though I’ve had all this experience and I can talk intelligently about just any wine in the world I also still subscribe to services to help me learn more about wine.
I still have services that I subscribe to, I guess the way I look at it is even though I’ve studied a lot, drank a lot, not an alcoholic but it is the best to learn. I still like to have somebody to bounce ideas off of, or to get a second opinion from somebody that I trust, that I think knows their stuff.
To me, that is invaluable because there are times where you are going to come across wine for example, where you’re not sure what you think. It’s nice to have that second opinion, you can look at their research, or you can reach out to them because of you’re a part of their service.
They will tell you what they think, it becomes part of a collaborative effort, and I think that is one of the things that I like about what Andrew is doing, it is a collaborative effort.
It is not just him standing on a high mountain preaching to everybody, this is what he thinks, but he also helps teach you along the way. So that you are learning as well as your going along. It’s having that second pair of eyes to help guide you as you’re trying to make decisions.
Sometimes it’s nice, as he said at the end of his talk when things aren’t going well, I don’t mean to you, I am referring to when the market is not cooperating. It’s nice to have somebody there that you can lean on, that can help you through the tough times.
I think that is where you are getting your bang for your buck.
There’s always going to be somebody out there that can help you and you have to decide if the price you’re paying is worth it to you. That’s really what it comes down, whether we are talking about Andrew’s service or a financial advisor. You have to decide if that service is worth it to you, is that value you’re getting from it, and we are not talking about strictly a numbers aspect we’re talking about is that value or the intrinsic value worth it to you.
One thing that I have learned in my years in business is that if you take care of the service and create value for your customers, the price goes away. Their concerns about the price dwindle as they see value in what they are buying. If the food is so good, they will pay anything for it and not complain at all.
Andrew: I think there is no such thing as a free lunch, even if the investment service is marketed as a free lunch. You probably have to dig a little deeper; this advisor is getting kickbacks because they are promoting this product or insurance company.
Be cognizant of that and make that decision for yourself, just like you’ll be making intrinsic value decisions in the stock market, make those intrinsic value decisions on any services you might choose to use.