The Smartest Investor You’ve Never Heard Of And the Crisis No One Sees Coming

Mike Burry is the smartest investor you’ve never heard of.

Well, I say that. If you saw the movie The Big Short, you’ve heard of him. Burry was the eccentric hedge fund manager played by Christian Bale and one of the select few people that both saw the 2008 mortgage crisis coming and managed to profit from it.

But despite his stellar returns – generating 697% gross returns between 2000 and the first quarter of 2008 at a time when the S&P 500 barely returned 5% — Burry lacks the name recognition of some of his higher-profile peers.  Warren Buffett can’t sneeze without CNBC reporting it, whereas you have to actively search for comments by Burry.

But when he speaks, you’d be wise to listen. And Burry has quite a bit to say these days about the index funds making up your 401(k). In fact, he considers stock and bond index funds and ETFs to be as risky today as exotic mortgage derivatives before the 2008 meltdown.

In a normal, functioning market, informed buyers and sellers reach an agreement on price. This is true of stocks but equally true of houses, cars, cups of coffee or velvet Elvis paintings. The push and pull of buyers and sellers towards a fair price is what economists call “price discovery.”

Of course, central bank tinkering has effectively destroyed price discovery in the bond market. You need look no further than the $17 trillion in negative-yielding bonds as proof of this. But, as Burry explains, “now passive investing has removed price discovery from the equity markets” because it doesn’t “require the security-level analysis that is required for true price discovery.”

In other words, no one bothers to do actual stock research anymore. Passive index investors buy stocks based on their market caps and nothing else. Valuation, earnings quality, forward projections… none of these things matter.

Burry compares this to the collateralized debt obligations (CDOs) he made a fortune betting against in 2008. No one bothered to do actual security-level research then either. Pricing was determined by models dreamt up in a lab by quants in white coats rather than by actual buyers and sellers. And we know how that ended.

Equally scary is the lack of liquidity. As Burry points out, more than half the stocks in the S&P 500 have less than $150 million in daily trading volume. “That sounds like a lot,” Burry says, “but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was.”

Over the past few decades, low-cost index funds have outperformed most active managers. But ironically, this doesn’t mean that active investors are bad at their jobs. The exact opposite is true. Indexing works because talented active managers push the market towards efficiency. Price discovery is the work of active traders and investors. But if everyone indexes, the whole thing falls apart. Someone has to do the fundamental research that keeps this dog and pony show afloat. (Bill Ackman made similar comments about three years ago, and they’re worth revisiting today.)

This probably won’t end well. But it’s not all doom and gloom. As Burry notes, “the bubble in passive investing through ETFs and index funds… has orphaned smaller value-type securities globally.”

As a value investor, that’s music to my ears. An unloved orphan stock is a cheap stock and one that’s off the radar of most investors.

Will the years ahead be good ones for small-cap value investors? Only time will tell. But all bubbles (and busts) create opportunities, and small-cap value stocks may be the ultimate winner in the indexing bubble.

This article first appeared on Sizemore Insights as The Smartest Investor You’ve Never Heard Of And the Crisis No One Sees Coming

Maxing Out Your 401(k)? Try This.

If you’re on track to max out your 401(k) this year, congratulations! You’re building your next egg while sticking it to the tax man. Pat yourself on the back!

But before I go any further, let’s make sure we’re on the same page. I’ve chatted with dozens of people who told me with a straight face that they were maxing out their 401(k) plans every year… except they weren’t. In fact, they weren’t even close.

They weren’t lying, of course. They legitimately thought they were maxing out their retirement plans. But there’s a lot of competing terms here, and it’s easy to get them confused. So, today, we’re going to sort this out. You’ll want to pay attention because this can potentially save you thousands of dollars a year in taxes and hundreds of thousands over the course of your investing life.

Your employer might match your 401(k) contributions up to 3% to 5% of your salary. You should always contribute at least enough to take advantage of the matching. But “matching” and “maxing” are not the same thing.

You can contribute up to $19,000 to your 401(k) this year or $25,000 if you’re 50 or older. This is the maximum you can put in, not including your employer matching or any profit sharing.

Let’s play with the numbers. Let’s say you earn an even $100,000 per year and that you make it your goal to max out your 401(k) plan for the year. Let’s also say that your employer offers 5% matching. This is how that would shake out:

                You contribute:                                 $19,000

                Your company contributes:          $5,000 ($100,000 * 5%)

                Total going into your plan:            $24,000

Ok. Let’s say you’re as fanatical as I am about saving and you’ve managed to max out the full $19,000. But now you’ve caught the saver’s bug and you want to save even more.

If your health insurance plan includes them, you can consider using a Health Savings Account as an “extra” retirement plan.

This requires a little explaining. HSAs are not designed to be retirement plans. They’re designed to help you save for health expenses by giving you a tax break. As with IRAs or 401(k) plans, any money you put into an HSA gives you an immediate tax deduction. A dollar invested in an HSA lowers your taxable income by a dollar. And you can take cash out of an HSA at any time tax and penalty free if you use it to pay for qualifying medical expenses.

But here’s where it gets fun. No one says you have to spend the money. You can leave the cash in the HSA account and invest it in stocks, bonds and other investments. Once you turn 65, you can take the funds out for non-medical purposes penalty free.

You’d still owe taxes on it, but the same would be true of any cash taken out of an IRA or 401(k) plan.

So, you can effectively use an HSA as a “spillover” IRA for extra cash you want to invest tax deferred.

And here’s another fun little kicker. Unlike IRAs and 401(k) plans, HSAs don’t have required minimum distributions (RMDs). In normal retirement accounts, the IRS forces you to pull a certain amount out of your account every year after you hit the age of 70 ½. HSAs don’t have that requirement, meaning you can let your funds grow and compound tax-free well into your golden years.

In order to use an HSA you have to also have a high-deductible health plan. Those with individual plans can contribute up to $3,500 per year (or $4,500 if you’re 55 or older). Those with family plans can contribute up to $7,000 per year (or $8,000 if you’re 55 or older).

If you’re already over the age of 65 and on Medicare, you generally can’t add new money to an HSA plan. But if you’re under the age of 65 and are looking to lower your tax bill and turbocharge your retirement savings,  the HSA can be a great way to do both.

This article first appeared on Sizemore Insights as Maxing Out Your 401(k)? Try This.

Hate Your 401(k) Options? Try This

As you probably know, I’m a big believer in the humble 401(k) plan. Even though it’s a very basic tax shelter widely available to regular middle-class Americans, I challenge you to find something better. I’ve spent my entire professional career looking, and I have yet to find one.

If you religiously max out your 401(k) plan every year (currently $19,000 per year or $25,000 for those 50 or older), it will likely grow to become your single largest financial asset.

There’s just one big, glaring problem with the 401(k): The investment options are often terrible.

Cruddy Investment Options 

Most plans are limited to a menu of mediocre mutual funds that move the same direction as the market. They’re fantastic when the stock market is moving higher but a financial death sentence during a bear market. The gallows humor following the 2008 bear market was that “My 401(k) just became a 201(k).” That joke will be making the rounds again after the next bear market.

And these days, hiding in bonds won’t do much for you. With yields now hitting new all-time lows almost daily, a portfolio invested in bond funds is essentially dead money.

Some 401(k) plans have a brokerage window that allows you to buy individual stocks. That’s a nice feature if your plan offers it, but it’s not available on most plans.

No matter how cruddy the investment options are in your 401(k), taking the funds out really isn’t an option. If you’re under 59 ½, you’d have to pay a 10% penalty, and at any age you’d have to pay taxes on whatever you pull out.

An Alternative to a 401(k)

Well, I have good news for you. If you hate your 401(k) investment options, you might be able to bail on them without triggering a tax nightmare. It can be possible to roll over your 401(k) balance into an IRA while you’re still working.

As you probably know, you can always roll over your 401(k) into an IRA whenever you switch jobs or retire. But if you’re 59 ½ or older, you can legally do the same thing without having to quit your job. This is what’s called an “in-service rollover.”

Your plan might or might not offer this. It really just depends on your employer. But if your company plan does offer it, an in-service rollover might be exactly what you need.

This article first appeared on Sizemore Insights as Hate Your 401(k) Options? Try This

What The New SECURE Act Means For Your IRA

How can you argue with an act of Congress named “Setting Every Community Up for Retirement Enhancement” (SECURE)? Who wouldn’t want an enhanced retirement?

The SECURE act, which recently passed the House of Representatives with a vote of 417-3, is now being debated in the Senate. And at first glance, it looks great. If passed, Americans over the age of 70 ½ would still be able to contribute to traditional IRAs. And the dreaded required minimum distributions (RMD) wouldn’t start until age 72.

With Americans living and working longer, these are solid, if not exactly revolutionary, enhancements.

There’s just one big problem with it. The SECURE Act, if passed by the Senate and signed by President Trump, would turn the world of inheritance and estate planning upside down.

The Not-So Secure Act

Today, you can leave your traditional IRA to your spouse with no tax consequences. Your IRA simply becomes their IRA upon your death, and they’re then required to take RMDs based on their own life expectancy. And the IRA could then be passed on your children upon the death of your spouse, with the RMDs then based on their life expectancy.

Depending on how long your heirs and their heirs live, your original IRA can potentially be stretched out forever, indefinitely deferring the taxes on the accumulated gains.

Well, all of that might now be changing. Under the new rules, non-spouse inherited IRAs would have to be distributed within 10 years of the death of the original account owner.

Now, before this starts to sound like a scare piece, the IRS isn’t “coming after your IRA” to seize it. At least not yet. But there are some things to keep in mind.

There Are Some Key Takeaways Here

To start, the IRS will be getting more of your money and sooner. By forcing you or your heirs to distribute your IRAs sooner, your gains become taxable sooner. Ultimately, this means that your nest egg will grow slower or deplete faster.

Of course, money taken as an IRA distribution doesn’t just disappear. Once you pay the taxes on it, you’re free to reinvest it in a regular, good-old-fashioned brokerage account. It’s still able to grow and compound. It just loses the tax advantages of an IRA.

But I don’t like Congress moving the goal post on us. If they shorten the distribution timeline, they are setting a precedent for making IRAs less advantageous. That’s a remarkably short sighted move. In trying to get your money a couple years earlier, they are disincentivizing people to save for retirement.

Given that the average American has nowhere near enough money saved to last them through their golden years, that’s just about the last thing our government should be doing.

So, with all of this as a backdrop, will IRAs still make sense under the new rules?

It’s A Resounding Yes

The changes impact your heirs. I hate that my kids or future grandkids would have to pay more in taxes. But this doesn’t affect me. I still pay less in taxes today with every dollar I shelter in my 401(k) and other retirement plans, and the nest egg I need to support myself in retirement will grow a lot more quickly.

And while we’re on that subject, we’re now well into the second half of the year, but there is still plenty of time to increase your contributions to your retirement plan. You can put $19,000 into your 401(k) plan this year, not including company matching, and $25,000 if you’re 50 or older.

If you’re not on track to hit those limits, try to increase your savings rate, even if it’s just a couple hundred dollars per month. Every dollar you contribute lowers your tax bill and gets you one step closer to leaving the rat race in style.

This article first appeared on Sizemore Insights as What The New SECURE Act Means For Your IRA

Give Your Smartphone a Frontal Lobotomy

It’s Monday, and I want you to answer a question for me honestly: Did you check your work emails last night? Don’t look down at your shoes. You know you did it. Sunday night has become the new Monday morning, a time to go through messages on your phone, do a little light paperwork and get a start on the week.

You probably feel a little guilty and ashamed about it. I know I generally did when I found myself answering emails on a Sunday. Yet I still do it. I also found myself doing it after hours on weeknights, on Fridays and Saturdays, and on holidays and vacations.

And You Want To Know The Worst Part About It?

No one actually asked me to do it. People are reasonable, and I can credibly say that no one writing me on a Sunday afternoon really expected a reply that minute. They wrote me for the same reason I answered: We were both addicted to our smartphones and had a misplaced need to be constantly busy.

This is no way to live. It’s a dystopian nightmare in which devices that are supposed to make our lives easier and better actually make them worse. And don’t even get me started on social media. Mark Zuckerberg quite literally destroyed human civilization with Facebook. We’re now living in the new Dark Ages.

At any rate, my beat is income investing. I help my readers find a respectable stream of income in a low-yield world. But all the money in the world is meaningless if you’re too plugged in to enjoy it.

So, today we’re going to do something a little different. I’m going to help you get your life back.

I know you’re not going to get rid of your smartphone. That Pandora’s Box is open and there’s no closing it again. But we can at least claw back a little bit of our pre-smartphone humanity.

Turn Off Email Notifications

Having access to your email is great. If you’re sitting in a doctor’s office or airport, why not get a little work done?

But do you really need your phone to buzz every time a group email about the office pizza party hits your inbox?

No, you really don’t. And this is why you should turn off the notification settings. All of those pizza party updates can build up in your inbox, and when it’s convenient you can sort through them. (And by sort through them, I mean delete them all in one swoop). The important thing is that you won’t be interrupted by your phone every 45 seconds.

I know what you’re thinking… What if there is an emergency?

I’d argue that there is no such thing as an emergency email. If it is important enough, they can call you. They have your number.

Follow my lead here. I turned off all notifications on my phone except for incoming phone calls, text messages, and Uber. (I need to know if my cab is waiting for me…) And I’m considering turning off text message notifications. My colleagues know that they can always call me if something is truly urgent or time sensitive. I’m available when they need me, even if it’s after hours. They just have to call me.

Literally everything is turned off. My phone never buzzes to tell me there is an exciting new show on Netflix or that my package just left the warehouse. And after a week of this, I found I stopped hating my smartphone and actually began to view it as a useful tool again.

Delete Social Media Apps

I deleted virtually all social media years ago. I had a moment of truth when I looked down at my watch and realized I had just wasted two hours of a would-have-been productive day looking at pictures of fat people I went to high school with. I barely knew them in high school, before they let themselves go. So why did I just waste two hours of my life looking at photos of their trip to Cancun?

Frankly, I didn’t like the kind of person that social media made me become. Reading other people’s political rants made me miserable.

So, I pulled the plug on all of it. I have no Facebook, Instagram, or Snapchat accounts. And I can assure you that I haven’t missed anything. You don’t “have to” have social media accounts. You really can walk away from it all.

If you’re not ready to take that leap, you can at least take a preliminary step. Delete the apps from your phone. If you have to log in to Facebook on your computer, you’re going to spend a lot less time looking at cat photos than if you have the app in your pocket at all times.

I recommend you delete your accounts altogether and that you storm Facebook’s headquarters like the Bastille. But even taking the baby step of removing the apps from your phone will make you happier. Countless studies have linked social media to depression, anxiety, low self-esteem, and a host of other mental health problems. The less of it you have in your life, the better.

No Phones At The Table

We don’t have a lot of rules in my house. If I’m to be honest, I’m really a softy. There is one rule, however, that I enforce with an iron fist: no phones at the dinner table.

When we sit at the table as a family, the phones have to go away. I’m a Nazi about it. The phones have to be in a different room while we eat.

As much as I’d love to go full retrograde Luddite and banish all smartphones from my household, I know that’s not happening. But we have to have standards or we’re no better than animals. So, no phones at the dinner table. Period.

If you have a few suggestions of your own for how to regain a little shred of dignity and decency in the smartphone era, I’d love to hear them. You can write me at

This article first appeared on Sizemore Insights as Give Your Smartphone a Frontal Lobotomy

The 2018 Tax Filing Numbers Are In, and Most People Won’t Be Happy

Well, the IRS numbers are in from the 2018 tax-filing year. It’s the first under President Trump’s tax reforms, and the results won’t make anyone particularly happy.

It’s not that most Americans are paying more in taxes. In fact, most are actually paying less. It’s just that the difference isn’t big enough to matter to most taxpayers. The narrative is all wrong.

Red-state voters were really hoping for a windfall, but that didn’t happen. Seventy-nine percent of taxpayers got a refund. Of that, the average was $2,879. The year before the tax cuts, 80% of taxpayers got refunds, and the average was $2,908.

Sure, most taxpayers also benefitted from lower tax withholding throughout the year. It’s just that it wasn’t all that much money. The median taxpayer saw a tax reduction of less than $800. Spread out over an entire year of paychecks, that’s simply not enough to notice, let alone matter.

Meanwhile, blue-state voters believed the tax cuts to be a handout to the rich. Yet exactly the opposite was true. Many high-income earners actually saw their taxes rise by a significant amount, particularly if they were previously benefitting from a large state and local tax (SALT) deduction. The Trump reforms capped the SALT deduction at $10,000, meaning that taxpayers with large state income tax or property tax bills had a major tax deduction taken away.

Those self-employed are happy. The Trump tax breaks on self-employment income and income from LLCs and partnerships likely lowered your tax bill by a meaningful amount. But everyone else who isn’t self-employed has something to be unhappy about.

Well, I have some bad news for you. It’s not likely to get better any time soon…

Tax Rates Will Only Go Up

Let’s say the Democrats take presidency, the Senate, and manage to hold the House of Representatives in next year’s election. It’s going to be tough for them to say with a straight face that they support the downtrodden while simultaneously raising the SALT deduction for high-income homeowners. They’d be more likely to raise taxes across the board and keep Trump’s SALT deduction cap in place.

Now, let’s say that Donald Trump wins reelection and that the Republicans managed to win back to House of Representatives and hold the Senate. Additional tax cuts are still going to be a tough sell with the country running a trillion-dollar budget deficit… in peacetime… and during a steady, stable economy. The rates we have today are likely the lowest we’re going to see for years… if not ever.

Looking at the bigger picture, it’s hard to see a scenario where taxes don’t rise from today’s levels.

Next year, interest payments are expected to make up little over 10% of the total budget. One out of every 10 dollars spent will be to pay the interest on expenses from previous years. Interest is projected to be 13% of the budget by 2024. And from there, it should just snowball due to the compounding effect of interest, eating up a larger and larger share of the budget. New borrowing used to pay back old borrowing won’t leave much room for anything else.

If bond yields continue to drift lower, these numbers might end up being a little smaller. But what difference would a few hundred billion really make when you’re looking at numbers this large?

Enough hand wringing. Let’s talk about more practical matters…

Solutions That Could Save You Thousands

To start, think long and hard before upgrading your house. If you already own an expensive home, consider downsizing. I know that’s easier said than done, but you’re likely facing a future of rising property taxes with no offsetting relief via the SALT deduction. Run the numbers. It could be that renting makes more sense for you.

Secondly, get in the habit of stuffing as much money as you can into a 401(k) plan or IRA. There’s no guarantee that the government won’t move the goalpost and start applying a tax on large retirement plans if things get bad enough later. But if something like that happens, it will likely be years down the road. In the meantime, you can grow your nest egg tax free.

And consider tax-free municipal bond funds as a destination for your savings held outside of 401(k) and other retirement plans. The federal government is unlikely to eliminate the tax-free status of muni debt because it keeps the borrowing costs low for states, cities, and other local governments.

This article first appeared on Sizemore Insights as The 2018 Tax Filing Numbers Are In, and Most People Won’t Be Happy

The Student Debt Slowdown: An Overhang of $1.4 Trillion

I was never the biggest fan of John Maynard Keynes. While he was a brilliant economist — and a sometimes solid investor — he was a disaster with policies. His ideas have given generations of politicians from both parties cover to run wildly irresponsible deficits. But while Keynes was wrong about a lot, his thoughts on the Paradox of Thrift are interesting.

The Student Debt Plague 

In a nutshell, frugality is a paradox — what is good for the part is terrible for the whole. If you or I are frugal and save our money, that’s good for us. But if everyone were as big of a cheapskate as me, the economy would grind to a halt, income would drop, and it’d be difficult to save much of anything.

And it’s an idea that pairs well with a current hot topic: student debt.

Just recently I watched a video of Democratic presidential contender Bernie Sanders talking about student loan debt forgiveness.

Now, I’m not a fan of bailouts. I wasn’t a fan of the banks getting bailed out back in 2008, and I’m not in favor of irresponsible universities and their former students getting bailed out today…

And it would absolutely be a bailout for both the universities and the students. I blame the universities more than the students, who were, after all, impressionable children at the time they were suckered into taking on debts. Universities irresponsibly raised tuition prices to unaffordable levels knowing that students could always borrow whatever they lacked. But the students went right along with it, never stopping to ask if the numbers made sense.

That kid who worked his way through college waiting tables… well, he’s just a sucker. Didn’t he know his rich Uncle Sam would have eventually picked up the tab?

And never mind that forgiveness of college loans is about as regressive a tax on poorer and less educated people as you’re ever going to find. Blue-collar taxpayers without a college education would be paying for the educations of white-collar professionals or even doctors who almost certainly make more money than them. That hardly seems fair.

But I digress…

The Potential In Forgiveness

The loan forgiveness debate actually did raise some valid points.

A dollar spent on student debt service is a dollar that’s not available to make a down payment on a house or car. That debt overhang reduces the lifetime spending potential of the debtor. Permanently. And when you’re talking about a large generation of people, that’s a problem.

If they all collectively spend less due to their debt service, then the economy grows much slower, which leads to slower wage growth and makes it harder for them to pay their debts.

There’s no real solution to this problem. If we forgive student debt, then all of us — including the debtors — suffer from higher taxes and slower growth. If we don’t forgive the debt, then we also suffer from slower growth due to the debt overhang.

So, no matter what happens… we’re all paying the price for decisions made by others, even if they’re sometimes underinformed decisions, or misinformed, or just plain poor… There’s a lesson here, and it’s to be sure that your children or grandchildren — perhaps even you, yourself — read and research the risks and costs that come with student loans. And have that discussion with whoever might want to attend college about the cheaper, alternative options — like community college or trade school — instead of going straight to a four-year institute so they can live like Van Wilder.

An Idea To Solve It All…

Here’s an idea. It’s probably not legal, but legality seems to be a murky concept these days. Why not fund partial debt forgiveness with the hundreds of billions of dollars sitting in university endowments?

Harvard alone has nearly $40 billion sitting in its endowment fund. With that kind of money, it’s questionable why they charge incoming students at all. They could certainly afford to chip in. And if we’re voting to spend other people’s money, I’d prefer that Harvard pay rather than the American taxpayer.

Of course, that’s not likely to happen. But there are some other solutions here, too.

College sports are massive money makers for ostensibly non-profit institutions. Perhaps a tax on college football tickets or TV rights with the proceeds dedicated to lowering tuition or outstanding debt of the students of the respective school is a nice start.

Or perhaps rather than a government mandate to raid the college endowments, alumni band together to pressure the endowments to share the wealth a little.

And in your personal life, let’s instead focus on some more practical actions.

If we know that growth is likely to be more modest due to debt overhang, this favors value and income strategies over growth strategies in the decade ahead.

Buying high-quality, high-yielding dividend stocks and other securities that benefit from a low-inflation environment makes sense.

This article first appeared on Sizemore Insights as The Student Debt Slowdown: An Overhang of $1.4 Trillion

Advice to a Young Graduate

Today is a day to remember those who have fallen in the line of duty.

For most of us though, it’s an excuse for the office to be closed and kick off the summer by lounging around the pool, or grilling up some burgers with friends and family.

There’s nothing wrong with that, of course. I like to think that fallen warriors look down in approval knowing that our way of life is made possible by their sacrifice. But we shouldn’t take it for granted.

If you have children, take a minute to explain why today is significant. They need to hear it.

And if you run into any veterans, give them a hardy pat on the back and thank them. If they look thirsty, offer them a cold beer. It would be uncivilized not to.

With the markets closed today, there’s not much to report. But I thought I would share parts of a letter I wrote to my younger cousin who just graduated from college with a degree in engineering.

I’ll refer to him as “W” to keep him anonymous. He starts his new job at Lockheed Martin next month, and we’re all really excited for him.


Congratulations on finishing your degree and on getting the Lockheed job. That first job and getting your career started on the right foot is really important. And you’re getting yours starting right!

At any rate, let me give you a few parting words of advice.

  1. With your first paycheck, have fun. Treat yourself to something frivolous. Blow it. Enjoy it. And then, after that, it’s time to get serious and be an adult. But blowing the first paycheck on something stupid is a nice way to reward yourself for finishing your degree.
  2. I don’t know what your living plans are, but living with your parents for six more months will allow you to pad your savings. You should move out pretty quickly, as that’s important to being a real adult. But another 6-12 months at home won’t kill you, and it will allow you to save up enough cash to buy a car or even make a down payment on a modest house. Just make sure you actually save it and don’t just blow it all.
  3. Open two checking accounts. One will be the account your paycheck goes to and the account you use for your regular expenses. The other should be for saving. You can tell Lockheed to split your check across two accounts. They’ll do that. You can put 90% in the main account and 10% in the secondary account, or whatever makes sense. But keeping that cash separate makes it harder to spend.
  4. Put AT LEAST enough of your paycheck into your 401(k) in order to get the free employer matching. It’s literally FREE money. Ideally, you should put a lot more. You can put up to $19,000 into a 401(k) annually at your age. But at a bare minimum, put whatever you need to put to get the employer matching. It’s just stupid not to.
  5. Don’t get a credit card. Use a debit card or pay cash.
  6. Avoid debt on anything other than a house or car, and even on the car try to keep it minimal. Debt has ruined far more lives than drugs or alcohol ever have.
  7. Learn how to cook. Or, if that is a lost cause, find a girlfriend who likes to cook and treat her right and never let her go. Going out to eat all the time will bankrupt you, and it’s terrible for your health. This is a lesson best learned while you’re still young.
  8. Try to exercise at least a couple days per week. You’ll regret it when you’re 30 (and more when you’re 40) if you don’t.
  9. If your boss yells at you, don’t be a typical thin-skinned Millennial and get offended. Keep the stiff upper lip and use it as an opportunity to learn something and improve your marketability as an employee. I learned FAR more from the mean bosses than the easy-going ones. The boss who is your buddy isn’t going to get you anywhere. It’s the mean bosses that toughen you up who help you advance.
  10. Try to attach yourself to a manager that is really going somewhere in the company. If you do good work for them, they’ll take you with them. If you attach yourself to a manager who’s not really going anywhere, neither will you.

And that’s it. This is the only real wisdom I’ve managed to acquire in the 20 years since I graduated.  

Good luck in the new job, and let’s get the families together for some grilling this summer!

Take care,


Happy Memorial Day, folks.

Do yourself a favor and turn off your smartphone. The office is closed, and whatever it is you were going to check can wait until tomorrow. Our fallen soldiers didn’t fight tyranny only to have you enslaved by your iPhone.

So, put the phone away and be present with the people you love.

This article first appeared on Sizemore Insights as Advice to a Young Graduate

Why You Shouldn’t Put ALL Your Money into an Index Fund

Cliff Asness doesn’t have the name recognition of a Warren Buffett or a Carl Icahn. But among “quant” investors, his words carry a lot more weight.

Asness is the billionaire co-founder of AQR Capital Management and a pioneer in liquid alternatives. For all of us looking to build that proverbial better mouse trap, Asness is our guru. My own Peak Profits strategy, which combines value and momentum investing, was inspired by some of Asness’ early work.

Unfortunately, he’s been getting his butt kicked lately. His hedge funds have had a rough 2018, which prompted him to write a really insightful and introspective client letter earlier this month titled “Liquid Alt Ragnarok.”

“This is one of those notes,” Asness starts with his characteristic bluntness. “You know, from an investment manager who has recently been doing crappy.”

Rather make excuses for a lousy quarter (Asness is above that), he uses his bad streak to get back to the basics of why he invests the way he does.

As I mentioned, Asness specializes in liquid alternatives. In plain English, he builds portfolios that aren’t tightly correlated to the S&P 500. They’re designed to generate respectable returns whether the market goes up, down or sideways.

You don’t have to be bearish on stocks to see the value of alts. As Asness explains,

You do not want a liquid alt because you’re bearish on stocks or, more generally, traditional assets. That kind of timing is difficult to do well. Plus, if you’re convinced traditional assets are going to plummet, you want to be short, not “alternative.” In other words, liquid alts are a “diversifier” not a “hedge.”

You should invest [in a liquid alt] because you believe that it has a positive expected return and provides diversification versus everything else you’re doing. It’s the same reason an all-stock investor can build a better portfolio by adding some bonds, and an all-bond investor can build a better portfolio by adding some stocks.

I love this, so you’re going to have to forgive me if I “geek out” a little bit here. My professors pretty well beat this stuff into my head when I was working on my master’s degree at the London School of Economics.

When you invest in multiple strategies that aren’t tightly correlated with each other, your risk and returns are not the average risk and return of the individual strategies. The sum is actually greater than the parts. You get more return for a given level of risk or less risk for a given level of return.

Take a look at the graph. This is a hypothetical scenario, so don’t get fixated on the precise numbers. But know that it really does work like this in the real world.

Strategy A is a relative low risk, low return strategy. Strategy B is higher return, higher risk.

In a world where Strategies A and B are perfectly correlated (they move up and down together), any combination of the two strategies would be a simple average. If A returned 2% with 8% volatility and B returned 16% with 11% volatility, a portfolio invested 50/50 between the two would have returns of 9% with 9.5% volatility. That is what you see with the straight line connecting A and B. Any combination of the two portfolios would fall along that line (assuming perfect correlation).

But if they are not perfectly correlated (they move at least somewhat independently), you get a curve. And the less correlation, the further the curve gets pushed out.

Look at the dot on the curve that shows an expected return of about 8% and risk (or volatility) of 10%. On the straight line, that 8% curve would have volatility of about 14%, not 10%. And accepting 10% volatility would only get you a return of about 4% on the straight line.

This is why you diversify among strategies. Running multiple good strategies at the same time lowers your overall risk and boosts your returns. The key is finding good strategies that are independent. Running the basic strategy five slightly different ways isn’t real diversification, and neither is owning five different index funds in your 401k plan. Diversification is useless if all of your assets end up rising and falling together.

This article first appeared on Sizemore Insights as Why You Shouldn’t Put ALL Your Money into an Index Fund