Ep68: Michael Falk – Get and Stay Invested

By Andrew Stotz | 04/22/2019 |

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This podcast is dedicated to John Bogle (1929 to 2019)

Michael and Andrew would like to dedicate this podcast episode to the icon who passed away at 89 just before this recording was made. John Bogle, founder of The Vanguard Group, and author of such classics on investing as The Little Book of Common Sense Investing, was a real vanguard and revolutionary so they tip their hats in tribute.

John “Jack” Bogle (8 May 1929 – 16 Jan 2019), investor, author, and philanthropist, was the founder and CEO of The Vanguard Group, whose mission was to provide simple mutual funds for ordinary investors, with no “fancy stuff” and low fees. To that end, he is credited with creating the first index fund. Fortune magazine asked him in 2007 about his biggest mistake: “When I was 38, I became head of Wellington Management, and I did an extremely unwise merger. I got wrapped up in the excitement of the go-go era, and the go-go era ended. As a result of that stupid decision, I got fired. The great thing about that mistake, which was shameful and inexcusable and a reflection of immaturity and confidence beyond what the facts justified, was that I learned a lot. And if I had not been fired then, there would not have been a Vanguard.” Photo courtesy: Vanguard Jobs

Guest profile

Michael Falk is a CFA charterholder and a certified retirement counselor. He is a partner at the Focus Consulting Group and specializes in helping investment teams improve their investment decision making, investment firms with their strategic planning, and mediating firms’ successions. Previously, he was a chief strategist at a global macro fund and a chief investment officer in charge of manager due diligence and asset allocation for a multibillion-dollar advisory practice. Michael is an author, co-author and frequent speaker. In 2016, he wrote the CFA Institute Research Foundation monograph Let’s All Learn How to Fish. He is on the CFA Institute’s approved speaker list a has taught on behalf of the CFA Society Chicago in its Investment Foundation Certificate program. He has been a contributing member of the Financial Management Association’s practitioners’ demand-driven academic research initiative group and taught at DePaul University in its Certified Financial Planner Certificate Program. He’s frequently quoted in the financial press and presents at industry events.

Moneyball man

Michael was an athlete who played competitive baseball until he was 31 years old. But in his early 20’s, he realized that he couldn’t make a career of this, so he decided to get an education, and graduated from the University of Illinois with a B.S. in Finance, adding to his interest in growing wealth. It caught his attention, but it wasn’t about getting large amounts. It was about how money drove behavior. But still, he played ball and was working on the side until his body’s aches and pains started to surface.

Summary

Michael recounts his experiences as a private wealth manager advising clients on what to do about holdings in two big companies. The story revolves around what is seemingly his not-so-lucky share-price level, US$8/share. He shares his take on the fortunes of these huge companies and the reasons why he didn’t take the risk of investing in them, even though he was an educated investor and had advised his client to hang on to the stocks. Andrew will add why execution is a vital part of building an investment plan through his six-step process. Inherent in that is how crucial it is to avoid aggressively taking huge positions so you don’t end up in the same sad state as do many investors.

“Lose profitably. Use your takeaways and your learnings from those losses to not repeat the same mistakes. They say there’s no such thing as failure if you’re learning. So, my parting comment is, if you’ve got to lose, at least lose profitably.”

Michael Falk

$8/share investments and the odd stories behind them

Apple Inc. (AAPL:US) is now trading at US$199.23/share

Apple was starting to drop, before Steve Jobs returned and saved the company. It was trading at around $8/share. Michael was a fan of Apple computers and so his friend approached him, curious about the drastic consequences if the company should fall. Michael was confident that it wouldn’t. Buying the stock was “an absolute steal”, given these two probable scenarios: 1) Apple would rebound, or 2) Microsoft would buy them because of the value of the technology. Surprisingly, he didn’t follow the instructions that he gave to his friend.

Philip Morris International Inc. (PM:US, $86.19); Altria Group Inc. (MO:US, $56.94)

Michael started his career in private wealth management. He had a client named Jack, who inherited a stock portfolio from his father. As he was doing an audit on the low-cost-basis portfolio, they were unable to decide whether or not to hedge out the risks. One company they were looking at was Philip Morris, which was also trading at $8/share. It was also around the time that the US government was going after the tobacco companies in terms of health-care lawsuits.

Michael’s analysis:

The dividend payment at that time was 8%, and he believed it would continue.
He dug into legal research and started to read the case history on the lawsuits against Philip Morris. He realized that the government wouldn’t put them out of business since it needed the company to survive so it would have money with which to settle the lawsuits that had been filed against it.
Jack thought of selling his shares but Michael told him flat out: “If you sell Philip Morris, I’m going to slap you.” Backed by his research, his solid reasons were the following:

The 8% dividend growth was scarce.
The government couldn’t put them out of business.
If Jack sold his shares, his tax bill would be quite high.
Jack had every incentive to hold on to this stock.

Michael personally avoided buying Philip Morris’ stocks for the reason that it was trading at $8/share.

“It wasn’t about losing money. It was about not making money.”

Michael Falk

Michael’s takeaways 

He admitted having had the following downfalls in investing. Most often:

He doesn’t take a lot of risk.
He has eluded buying individual insecurities to avoid conflicts of interest due to the nature of his work in private wealth counseling or institutional advisory services.
He held on to either active or passively managed mutual funds so he has very few stories other than the fact that he consistently takes very little risk.

Michael called himself out for his unwillingness to take risks, and it did hurt his self-esteem. He is a professional, an educated investor who knows so much and yet he has still made considerable missteps.

“We have to come to recognize that what I took away from it is for better or for worse. Most often, remain invested, depending on what the purpose of the money is and what your goal is and where your goal is out in timescale. Stay the path and … research.”

Michael Falk

Lessons from Hendrik Bessembinder

Michael credits Professor Bessembinder, who published research in January 2017 posing the question Do Stocks Outperform Treasury Bills? Quoting from this paper’s findings, Michael says:

“… 58% of stocks fail to beat treasury bill returns over their lifetimes; 38% of stocks beat treasury bill returns by just moderate amounts. If you look at the total return of the market index over time, trouncing of treasury bills … just over 4% of stocks are responsible”

The research made Michael ask himself whether he should pick stocks at all, citing it as the same theme that the lottery companies use to pull people in: “You got to be in it to win it.”

“If you’ve got an appropriate time to be invested, get invested, be widely diversified and stay the course.”

Michael Falk

Andrew’s Takeaways

1. A key part of building an investment plan is executing it

Andrew outlines his six-step process in investing he came up from his works and previous interviews:

Step 1: Find an idea

Step 2: Research the return

Step 3: Assess the risks

Step 4: Create a plan

Step 5: Execute the plan

Step 6: Monitor the progress

He emphasizes that Step 6 may not always be the last step. Investors might want to keep holding, so they should monitor the progress. But the point is, “You’ve got to act.”

Michael adds a Step 7

Step 7: Find an educated and skilled person to be the devil’s advocate, the raging skeptic, and take all of your research and findings to them and ask them to tear it apart and poke holes in it.

Andrew adds that he has done just that, pointing out that it creates constructive ideas during meetings and raises the quality of a decision.

“When I work with investment teams … I teach people how to properly do devil’s advocacy, how the role gets assigned, how it rotates among team members, and how the action is supposed to be taken in a decision-making meeting. You can actually create constructs around this topic, to materially raise the quality of a decision, so your input is great stuff.”

Andrew Stotz

2. Take a small position

The mistake most people make is that they take a huge position immediately and it overwhelms them.

“Keep in mind that if it really is going to be a Juggernaut, that small position is going to become a huge position. It’s just a matter of time. You got a 4% chance of that according to the research.”

Andrew Stotz

To avoid the same fate

Make your investments simple instead of dreaming about buying the next Amazon, Google or Apple, TenCent or Alibaba.

No. 1 goal for the next 12 months

Michael has a follow-up book all set to be released by the end of 2019 based on the CFA Institute Research Foundation monograph Let’s All Learn How to Fish. The three initial chapters in the forthcoming book are: 1) Work, 2) Artificial Intelligence and Robots, and 3) Universal Basic Income. The first book is downloadable in Amazon Kindle for free. It was about rethinking entitlement policies to generate sustainable economic growth. The book focused on 1) Retirement, 2) Health Care, and 3) Education, and these were the three main policy chapters as well. Michael has lectured on this book in 14 countries.

Parting tips from Michael

Take valuable lessons from monetary losses. You might lose money from your decisions. But in the end, you still gain from all the learning that goes with it.

Final words from Andrew

Michael and Andrew would like to dedicate this podcast to John Bogle (see tribute at top of post).