Mike Stohler: Hey everybody. Welcome back to another episode
of The Richer Geek Podcast. Today we have Mark Hebner, he is
the Founder and CEO of Index Fund Advisors, Inc. , is on a
mission to change the way the world invest by replacing
speculation with education. And actually the investing company,
Acorns was inspired by his methodology. How're you doing,
bud?
Mark Hebner: Acorns.
Mike Stohler: Acorns.Yeah.
Mark Hebner: Yeah. Acorns is an app that helps people kind of
save and invest.
Mike Stohler: So we're going to get into a little bit of what we
think the stock market is, and the traditional advisors tell us
to believe, give us a little bit about your background, how you
got started and where you're at now?
Mark Hebner: Sure, so I started this company 25 years ago, on
March 5th of 2024, it would be 25 years. We'd been planning our
big celebration of that. I started with the idea that most
of my friends and relatives had been essentially gambling in the
market. And we're not aware that a passively managed index fund
actually does better on a risk-adjusted cost, adjusted
basis than people sort of gambling among different types
of stocks. So you have to benchmark their performance. If
they're buying large stocks, gambling and the S&P 500 stocks,
then you compare that to the S&P 500. If they're buying
technology, stocks, you want to compare it to NASDAQ and
different benchmarks out there that are available. And most
people didn't really understand, and probably even today, don't
understand this concept of benchmarking their returns
against an alternative investment, which would be these
passively managed index based funds. So anyway, so we started
25 years ago, we were really an internet-based investment
advisory business with investment advisors on the phone
and doing webcasts, way back then and 1999. We were trying to
do that with clients. We had all the tools, but most clients
didn't. But after COVID, it works great now, because
everybody knows how to use Zoom. Anyway, we started basically
with zero and today we have 5 billion in assets under
management as of the year end of 2023. We've obtained about, I
don't know, 2400 clients, and help them manage their wealth in
what we like to call the most optimized way that's optimized
between the risks they take and the return they expect to earn.
Did it help you?
Mike Stohler: Yeah, it does. You're speaking about index
funds. What is an index fund, compared to all the other stuff
that you can do out there?
Mark Hebner: Sure. The most famous of them is the S&P 500
fund, though, there's 500 stocks. And when you invest in
them, they put the most money of your investment in the largest
company, they call it a market cap weighted index based on the
market capitalization of a stock. So Apple, Microsoft are
going to get the most amount of money of all the of your
investment, maybe it's I don't even know what it is today, five
6% goes into those stocks, and then it goes down. And so the
smallest company in the S&P 500 gets the least amount. But
that's just one index. I think there's literally hundreds of
1000s of indexes today. If you look at all the different
companies doing index creation, and there's even indexes created
by academics, they call them research indexes. Among the most
famous there are a couple of guys, Eugene Fama and Kenneth
French, they're the Fama French indexes. And they slice up the
market to value companies and growt h companies and large
companies, small companies, and they do that international us
emerging market. So there's all kinds of ways you can slice and
dice markets. But I like to say an index fund is a set of rules
of ownership that are held constant, regardless of the
market condition. That last part is the hard part for people.
They think, oh my gosh, it's 2008 2009 I've got to change my
investment strategy, something went wrong with the market, what
have you and or whatever it might be COVID, you know, and
March of 2020 market takes a big dump people get scared want to
sell, but you don't want to do that you want to basically bear
the risk to capture the return. That's what returns are tied to
it's basically the risk you expose your assets to.
Mike Stohler: Do you feel that the index is probably the most
cautious part instead of going out on your own or saying "Hey,
you know this EV stock kind of tanked today."
Why not put some money into it? Should we diversify some of
that? Or just say, you know what? The S&P, this index,
they've given you 10 plus percent? Just stick with what
you know.
Mark Hebner: I think the beginning of your question had
to do with the risk of them, right?
Mike Stohler: Yeah.
Mike Stohler: Yeah, that does make sense. And that's probably
Mark Hebner: So risk can be quantified with basically the
variability of the return of that investment over some
reasonably long period of time. And if you look at the risk of
one stock, versus the risk of 500 stocks, it's a little more
than double. Okay, so what that means is the ranges of outcomes,
both on the negative and the positive side, are twice as much
as you would expect from owning 500 stocks. So from that
perspective, it's less risky. But here's the key, the expected
return of one stock is the same as the expected return of all
500 together. And that's because on average, those 500 stocks
earn that 10% a year, and you just don't know people think
they know, but you don't know which stock is going to get 100%
return or go bust. Okay. So this is a Nobel Prize for Harry
Markowitz, that the expected return of one stock and 500
stocks is both 10% a year. But when you buy all 500, you
basically double the certainty of getting that return. And they
call that the only free lunch in investing, because you've
improved your expectation of getting that return by diversifying.
why it's big news when a stock falls out of the S&P or a
company, because now they're not part of that index. I know,
Tesla goes in and out in and out, as just one example. And
other big companies fall in and out, is that why it's such a big
deal, all of a sudden, they're not available in those big
indexes anymore?
Mark Hebner: It can be a big deal to those individual stocks.
But I wouldn't say over the long term, that's a short term, maybe
opportunity to kind of gamble on those. But you'd have to be so
careful, that price adjusts immediately, that the
information is known to traders, this is a real problem for
investors is they read news, and they haven't quite appreciated
the fact. But by the time they've read it, the price is
already adjusted to it. And so you're too late, virtually all
the time is the way you should at least perceive it. The
probability that you know, something that's not already
embedded in the stock price is virtually zero.
Mike Stohler: Yeah.
Mark Hebner: The goal of most investors is to discover a
security that's undervalued or overvalued. If it's undervalued,
that means, you know, the market hasn't quite appreciated what
you know, then you should back up the truck and load up on
those stocks. And if it's overvalued, you shouldn't be
selling them and getting them out. But the real problem is,
instead of that all securities are fairly valued all the time.
And why is that because we have 10 million traders, half of them
buyers, half of them, the sellers, they're trading 10
billion shares a day, at through this huge processing machine, if
you will, of all these sub 40 publicly traded markets all over
the world, we arrive at the fair market value of all of these
securities virtually all the time. And so you should just
give up on this idea of speculating on mispriced
securities, and just accept them as being the fair price. And
instead of having speculation as the reason for your return.
Think of it as basically capturing the cost of capital of
those firms. That's a little bit difficult. But every person who
gets capital has some costs something they have to give up
to get that cash, right. And all sellers of securities give up
their future return. If I sell you Tesla today, I think "Oh,
maybe in the next 12 months, it's going to make 10%." And so
I want to price that free compensates me for the
probability of getting that 10%. That's what investing is about
is it's basically capturing the cost of capital of the seller of
whatever security you're buying. But the other way you can think
about this, as you just said, 10% for 95 years now, those
large companies have earned about, it's about 9.8, I think
percent per year for 95 years, that should tell you something,
but if you invested in smaller companies, those are riskier,
have higher cost of capital, it's more like 12%. And then if
you look at value companies, it's also in that 12, maybe a
little excess, and these numbers are all based on indexes. You
know, we have indexes for that long for a period of time,
that's the other reason to use an index is you have more data
about the risks and returns of those stocks that have those
characteristics. They're large, they're small, their value their
growth.
Mike Stohler: Yeah. What do you say about you know, some of us
have been burned by our brokers, because they get perhaps,
something on the front something that they steer you. How does
that work? And what are some of the tactics that you know, I
love this little blurb that you have? It's, they have tactics
that are cleverly designed to make your broker rich, and not
you.
Mark Hebner: Exactly. As in most business transactions, you want
to follow the money, okay? How is somebody else making money
off of you. And in the brokerage business, their model is to make
money on transactions almost in all cases, it's a transactional
business, right? We call that the broker deal dealer world,
there's another classification of investment advice through
registered investment advisors, and registered investment
advisors have a fiduciary duty, while brokers don't one's
regulated by FINRA and one's regulated by the SEC. But the
way you get around that, is you work with an advisor who just
takes a percentage of your assets. So they're not motivated
to get you to trade, or get you all emotionally excited about
buying or selling, and basically creating transactions. The short
answer, I hate to say it, but brokers are not the best place
for investors because they encourage this trading. And
we've now through all this research that I've mentioned to
you, we've concluded that the more you trade, the worse off
you are not the better off you are. We'd like to say, you know,
why they call brokers is when they're done with you, your
broker?
Mike Stohler: Well, I haven't heard that one. That's very
true. For instance, I remember back in the day, I wanted to
spend x amount of 10s of 1000s of dollars on gold when it was
$100 announced. Sure, and the guy goes, no, no, no, there's a
fund out there, or there's a something American fund that has
gold mines. And that's what they want to do, instead of put money
on gold, because he got 5% on the front, he got whatever on
the back.
Mark Hebner: Right.
Mike Stohler: And I missed out on gold being $100 an ounce, you
know, so that's sort of the cleverly designed stuff that...
Mark Hebner: I want to just give you a few seconds. I know we're
running short on time about gold and virtually all commodities,
okay. The value of a company is basically the present value of
their future earnings. Gold has no earnings, a Bitcoin has no
earnings, all commodities are not profit generating
investments, okay. So their value just as a speculation,
based on future supply and demand, which really, nobody
knows, I mean, this whole thing about 21 million Bitcoins, and
you know, the bid demands gotta go up, and blah, blah, blah. But
there's really no foundational earnings tied to any of these
commodities, I would avoid them like the plague. I've got the
data right here, the long term return of gold is about 4%,
which is about the same as inflation, except for gold has
this huge volatility of about 18% standard deviation, that's a
measure of risk. That's one of the things that investors want
to try to pay attention to. They want to see how much return
they're getting for the risk, they're exposing their assets
to. And that's the Nobel Prize for this guy named Harry
Markowitz. He went back and looked at the returns and the
basically the variability of return the uncertainty of
return. And when you do that, it gives you a set of investments
that have maximize the return given the risk, historically
speaking, and if you have a really large sample size, I'd
say 30, 40, 50 years, then that gives you a better estimate of
what you could anticipate literally every year going
forward. That's the application of statistics to the market. And
statistics works as long as these prices are fair, so that
there's not opportunities to sort of outsmart the market. And
that's basically what we've concluded. And that's all in my
book, Index Funds. And we call it The 12-Step Recovery Program
for Active Investors because that's sort of modeled after
gamblers anonymous, they actually have a brochure about
stock market gamblers. And so I just kind of use it as a rough
framework for the design of my book and providing this
education so that people will not engage in speculation, as
you said at the front.
Mike Stohler: Yeah, so let's talk about that. I never thought
about this, that there are people out there that are day
trading and they can't get off the computer. That's right and
If it's almost like playing poker or going to the casino.
Mark Hebner: It is like, it's not almost it is the same.
Mike Stohler: It is the same. So it's just another, it's money.
Right? So this is the 10th edition of the 20th anniversary
of your book Index Funds: The 12-Step Recovery Program for
Active Investors. Let's talk a little bit about that. And
what's in it, how do you even say, "Hey, yeah, I'm an addict."
Mark Hebner: So we actually have a list of things. And this is
what actually gamblers anonymous does. Also, I think they have 10
items, 10 things that would give you an indication that maybe you
have a some level of addiction to gambling. And it's things
like as the first thing you think about in the morning, is
where's Tesla stock going to be the day, and I should run to my
computer and still look at the charts from the last three days
is or last three hours, and tried to decide what I should be
doing. And are your thoughts consumed with the market, as you
mentioned, these day traders, I guarantee you, a large
percentage of their thinking is dedicated to the next trade. And
there is the real of the big return. And the regret of the
loss that is constantly nagging at them. Gamblers anonymous,
calls each trade an action. And it's like a hit of adrenaline,
when they actually make this decision to buy to sell. This is
what is the addiction, like it is for drugs, and smoking and
alcohol, so many other things. It's basically becomes
addictive. As you said, very few people recognize that as an
aspect of investing. But I assure you it is there's there's
been brain studies where addicts have been shown cocaine, and
then they've been shown a way to get rich quick, this is the real
issue here, people think they're going to cheat risk, and get
rich really quick instead of slow. Basically, money comes
slowly, it doesn't come fast. And so what that does is it
lights up the same component, same areas of our brain, that
are tied to our addictive behaviors. My book covers all of
these in step one about basically, are you an active
investor. And then in the traditional 12 steps, they want
to come up with something that will be more important to you
than your addiction, right. And so traditionally, they come up
with some god or some religion that gets you away from your
addiction. And what occurred to me is the academics and in
particular, those who won Nobel Prizes, for their work on how
investing works should be your investing gods, not just
somebody who had a great return last year or last three years or
whatever, what you want to see is independent, peer reviewed
empirical research. And in particular, that research that
was so good, a bunch of other academics voted on it to get the
Nobel Prize. And that's what my step two is about, we list all
these various Nobel prizes that lead to this basically a
portfolio of index funds type of strategy for investing.
Mike Stohler: So instead of saying, "Stop doing this," and
maybe stop doing the daily trading and things like that,
you try to get them to change their mindset and say, hey,
look, you can still invest, but do it the smart way. Do it the
proven way, is that correct?
Mark Hebner: That's right. I like to think of it as given
them an education, you know, just like anytime you go to
school, you might walk into some class with some preconceived
notions about a topic. But then as the professor starts laying
out the facts for you, you're going Oh, okay. I mean, you
might think of it as a doctor or a lawyer, you know, anything
like that, where there's a certain expertise to be known.
In investing, there is a huge body of research and academic
papers that I almost guarantee you very few investors paid any
attention to. So I mentioned a couple of Nobel Prizes for you.
Some of them have to do with this risk of return. The other
Nobel Prize I talked about with where the prices are fair, and a
third Nobel Prize. Well, it's actually a component of prices
being fair, but small companies have done better than large and
values done better than growth. There's a lot of Nobel prizes
have been thrown around here that people basically aren't
aware of. And once they know these ideas, have that sort of
Nobel seal on them, then maybe they'll pay a little more
attention to them, as opposed to their broker who probably didn't
even graduate from college. I hate to say this doesn't take a
lot to get a brokerage license, they send you to a review
course. And then you take a test and you're out giving an
investment advice to people. It's kind of scary.
Mike Stohler: Yeah, it is scary. You know, every time I walk into
my bank, there's a 27 year old kid say, "Hey, you know, yeah,
let me talk to you about retirement fund 2036 or
something like that." And I'm like, "No, that's okay."
Mark Hebner: Because you need some help. Mike, you can call
me.
Mike Stohler: There you go. I appreciate it. Everybody, we're
talking about book Index Funds: The 12-Step Recovery Program for
Active Investors, and Mark Hebner. So what do you see Mark?
We're in an election year.
Mark Hebner: Yep.
Mike Stohler: The stocks always respond, usually, this time of
year, are people going to be relieved? Or do you still see
some volatility? What do you see 2024? And then maybe the end of
2024 to 2025? What are your thoughts?
Mark Hebner: So listen carefully. Nobody knows,
including me.
Mike Stohler: Good answer.
Mark Hebner: Stocks follow basically a normal bell curves
and their monthly returns. And the reason is, those forecasts
that you just said, are all in the minds of the 10 million
traders today. They're all thinking about that. And as they
go to place their trades, they embed their knowledge, the
current surveys, and the polls of all the experts or whatever,
all the things that they know, one group of people think that's
a buy and other group, people think it's a sell. And they kind
of go almost negotiate to get to the just the fair price, given
all that information. So you know, it's kind of interesting,
when you look back over time, the returns of the market are
almost precisely the same for Democrats as they are for
Republicans. And I've know both sides might like to say, hey,
the market is going to do better under this or that. But just
like I told you before, this news and information gets
embedded in the price so quickly, it's too late for you
to benefit based on your idea or your forecast. Yeah, we used to
joke that people would read the Wall Street Journal as if they
were the only ones reading it. And then they would go and place
their trades. First of all, by the time it's getting printed in
the Wall Street Journal, it's really old. It's the Bloomberg
Terminal. And that's why Michael Bloomberg is so wealthy, that
scrolls that news for the whole world through all these
Bloomberg terminals all at the same second. And even there,
half the people think it's a buyer and have them think it's a
sell, and they come together and come up with a fair price. So
the answer is, and let me just add the record of these
forecasters are horrible. Who monitors these forecasts of all
these people walking across the stage on CNBC? They ought to
introduce that. Okay, what's been your accuracy over the last
100? Forecast? Okay, well, I can tell you, it's pretty low. The
accuracy needed is 74%. And there is no long term record
like 100 forecasts or more that exceeds 74%. Let me explain that
really quick. Because that 10% return you mentioned. Turns out
it's only about three or four days a year that make up that
10%. So a big day is like two and a half 3%. Right? So let's
just say it's two and a half, four of those big equal your 10%
return. So if you weren't there weren't invested when those big
days came along, then you missed out on your 10%. And this is why
it's so difficult to forecast in a way that would allow you to do
better than just buying and holding that is sort of the
benchmark, if you will, the buy and hold index have a similar
risk. All speculators should hold themselves accountable to
that, but they don't.
Mike Stohler: Yeah, that's fascinating, you know, hearing
it that way, because it's the same thing in real estate by the
time it gets to an MLS or listing.
Mark Hebner: Right.
Mike Stohler: No one else wants it. Because all the big guys
turned it down. And now that you get to see it.
Mark Hebner: I mean, they're the whole pocket listing, right,
they get right in there. There's phone calls made before it even
gets in there. They put it on there for we might call the
newbies.
Right.
Mike Stohler: Exactly. That's exactly. Let's give it a shot.
Mark, it's been a pleasure having you on where can people
find you? What's the website's LinkedIn?
Mark Hebner: So the websites ifa.com That's india, frank,
alpha dot com. It stands for Index Fund Advisors. And all of
our information is there. We have incredible charts and
videos and articles that were considered one of the top
resources for investing I would say in the world are what I'll
call proper investing, and not speculation. And hopefully, your
listeners will be sobered up by this information. So you don't
want to continue to gamble in the market, like they are
probably doing now I guess you have a lot of tech listeners, I
think you might have said. So you know, those people like to
maybe gamble within their industry. But I can assure you,
even though they work in those companies, all the analysts and
all the other people that are trading those securities
combined, are going to know more than you. So let it go. So we
have a little questionnaire. So what do you do with your
investment, you take this questionnaire to find out how
much risk is right for you. And then there's a portfolio of
index funds that we show on our website, that we can now show
historic data for 95 years because there are indexes. And
that's all spelled out my 12 steps to in my book. There's
also an audio book, which is kind of nice. I know a lot of
tech listeners are probably more into an audio book, just like
they might be listening to this podcast, right. And those with a
Kindle or any device pretty much can do a Kindle, you can also
get that.
Mike Stohler: Well, there you go. Well, thank you Mark. And
again, everybody it is Mark Hebner, ifa.com His book, go to
Amazon, and it's Index Funds: The 12-Step Recovery Program for
Active Investors. Mark, it's been a pleasure having you on
The Richer Geek Podcast. Have a wonderful day.
Mark Hebner: Yeah. You're doing good work there, Mike. Thank
you.
Mike Stohler: Thank you.