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Investing for success w/ Paul Mladjenovic, author of Stock Investing for Dummies

Paul Mladjenovic, CFP is the author or co-author of several dummies guides on investing, including Stock Investing for Dummies and Investing in Gold and Silver for Dummies. Paul shares his views on what makes for successful investing with show host Gene Tunny in episode 133 of Economics Explored. They discuss what types of companies to look for, an often unappreciated benefit of investing in gold and silver, and what Paul thinks about real estate and crypto assets.

You can listen to the conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps.

This episode contains general information only and does not constitute financial or investment advice. Please consult a financial planning professional for advice specific to your circumstances.

About this episode’s guest – Paul Mladjenovic

Paul Mladjenovic, CFP, is a certified financial planner practitioner, writer, and speaker. He has helped people with their financial and business concerns since 1981. You can learn more about him at ravingcapitalist.com. He has authored or co-authored several popular Dummies guides on investing and affiliate marketing. You can learn more about Paul and his online courses at https://www.ravingcapitalist.com/

Links relevant to the conversation

Some of Paul’s books mentioned this episode:

Stock Investing For Dummies

Investing in Gold & Silver For Dummies

Transcript of EP133 – Investing for success w/ Paul Mladjenovic

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored.

Paul Mladjenovic  00:04

The bottom line is, Gene, is that healthy quality companies will keep zigzagging upward no matter what you throw at them.

Gene Tunny  00:13

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 133, on investing for success. My guest this episode is the author of several of those yellow dummies guide that you may have seen in bookstores, Paul Mladjenovic. He’s written Stock Investing for Dummies, High Level Investing for Dummies, and Investing in Gold and Silver for Dummies, among other books. Paul Mladjenovic, CFP is a certified financial planner, practitioner, writer and speaker. He has helped people with their financial and business concerns since 1981. You can learn more about him at ravingcapitalist.com.

The usual disclaimer applies to this episode. This is for general information only, and nothing in this episode should be interpreted as financial or investment advice. Please consult a financial planner for advice specific to your circumstances.

Please check out the show notes for links to materials mentioned in this episode and for any clarifications. Also, check out our website, economicsexplored.com. If you sign up as an email subscriber, you can download my e-book, Top 10 Insights from Economics. So please consider getting on the mailing list. If you have any thoughts on what Paul or what I have to say about investing in this episode, then please let me know. You can either record a voice message via SpeakPipe – see the link in the show notes – or you can email me via contact@economicsexplored.com. I’d love to hear from you. Righto, now for my conversation with Paul Mladjenovic on investing for success. Thanks to my audio engineer, Josh Crotts, for his assistance in producing this episode. I hope you enjoy it. Paul Mladjenovic, welcome to the programme.

Paul Mladjenovic  02:20

Thank you kindly. What a pleasure to be on.

Gene Tunny  02:22

Yes. Thanks, Paul. Yes, it’s good to be chatting with you today about investing. You’ve written several books on investing. One of your books I’ve been reading is Stock Investing for Dummies. I’ve been getting a lot out of that. I think it’s a really great book and has a lot of sensible things to say that are consistent with economics. Really, really positive about that book. I’d like to ask, just to start off with, what is your general approach to investing? Does that vary over the lifecycle? Would you be able to take us through that place?

Paul Mladjenovic  03:04

Oh, absolutely. First of all, as you know, probably one of the most important foundations of investing is good economics. You’re on the right topic in many respects. If people make good choices, and with some economic reasoning, they could prosper, among the many choices you can make out there. And it also depends on many other things, such as politics and that kind of economic environment, etc. For me, I prefer looking through things through the prism of value and fundamental analysis.

Like many folks, when the people who make sense about this, whether it’s economics from that gentleman who’s behind you there, Mr. Friedman, or in my case, somebody more in the narrow vertical of stock investing, someone like Benjamin Graham, who was like the father of value investing. And I think it’s an important concept, because many things have to make sense. In economics, once you understand the basics of your own chequebook and household budget, it’s not that far-fetched to understand choosing good companies to invest in, etc.

I’ve been teaching about investing since the 1980s. I find that if you have common sense and have some basic of economics and grasping long-term success in stock investing and other assets as well, it’s not that difficult. You are much more proficient. It’s when you understand that. Common sense and value, it goes a long way in the world of investing.

Gene Tunny  04:34

Okay, so you’re looking for companies that are reliable over the long term. Am I reading that right?

Paul Mladjenovic  04:46

Absolutely. Actually, I’ll give you a few points from my investing class that I love. You’re a very astute man, and the people in many of my classes, many of them are beginners or beginning intermediates, and the first thing I tell them is, select… I say, remember two words, when you’re choosing your investments, whether it’s directly in stocks, or indirectly through ETFs and mutual funds, two words, human need. Think about all the products and services people will keep on buying, no matter how good or bad the economy is. And I think that especially for beginners who are looking for long-term success, human need will really, I think, crystallise it very much for folks moving forward.

For example, some of the greatest companies in the last 20 years that have been chugging along, no matter what, with the crises and market crashes and booms and busts and all the rest, companies that are profitable, involved in things such as food, water, beverage, utilities, etc. This is where you start. You start with human need before you start going into other pursuits, such as growth investing, or speculating, or everything else for that matter. The first thing is get to the right category.

The second thing is, I look for companies that are profitable and have low debt. Those may sound common sense to maybe folks like you and I, but when I’ve seen the kind of selections people have made for their portfolios over the last, I don’t know, ever since I’ve started teaching, my eyes bug out. People go for the flashy stocks, big names, glamour headlines, and that kind of thing. Those stocks may go up or down in a short term. But if they don’t have star power, in terms of their fundamentals, good profitability that they’ve done year in and year out profitable… Very important.

To me, profit isn’t just a cornerstone of a good stock. I can make the argument that it’s the cornerstone of a successful economy. I was born in a communist country. They obliterated the concept of profit, which means you obliterate the incentive to produce. That’s why you invest in companies because these produce goods and services. That’s the hallmark of a successful company, so profitability.

Again, anybody in our audience, you look at your own budget, what do you look at? If your income is greater than your expenses, you’re doing fine, especially whether you’re a billion-dollar company, or you’re a household budget. That’s one aspect of it. The second one is I like companies that have good balance sheet. And again, assets exceeding liabilities, it doesn’t have to be complicated. Many people think when you’re looking at stock investing, you have to have a degree from the Wall Street school of analysis, but no. A lot of them have gone wrong, because they went beyond the scope of good economics and good common sense.

Those are the things I look for, human need, profitability, do they have good balance sheets, in other words, making sure they’re not overloaded with debt, etc. Of course, they have to be in a free market economy, because obviously, the free market is a very important and very powerful part of any successful economy out there. Beyond that, I look at other things as well, does it pay dividends and so forth.

A lot of these things, obviously, I detail that in my book, Stock Investing for Dummies. I try to also crystallise that in my courses online, etc, whenever I’m doing live programmes or recorded, because I think people, I don’t know, to me, the more they understand about good investing and their own situation, the better choices they make, not only for their portfolios, but also when they walk into the voting booth, believe it or not. I feel that’s part of it. People forget that during the Great Depression of the 1930s, people forget that many people unwittingly voted for the Great Depression, because they voted for policies,  because they didn’t understand economics, and those in turn, created just wretched conditions in many respects. But anyway, on to your other points, my friend.

Gene Tunny  09:09

I’m interested in this concept you mentioned, value investing. That’s contrasted with what’s called growth investing, if I remember correctly. This is one of the things you write about in the book. Would you be able to explain what those differences are, please, Paul?

Paul Mladjenovic  09:28

Well, value investing means that you’re not going to be putting your money into a company that’s overvalued right now. And how do we mean about valuation? You see, when people are buying a stock, they’re buying the company, and if they’re buying a stock that’s very overvalued, then you have less chance for it to grow or do well over the long term. You’ve seen that happen very frequently. I look for something like is it a fair valuation, because I can look at a company and see things like its book value, the price-to-earnings ratio. Again, I’m happy to explain all of these to folks that need it. But there are some very key ratios that tell you if you’re paying too much.

How often have people saw a company that was say losing money, but it had a very hot sexy technology, people kept on bidding up the stock, bidding up the stock, and all of a sudden, you’re paying a fortune for a company that’s not making a profit, which means that the moment the economy starts to get a little bit worrisome, unstable, recessionary, these are among the first that that see that stocks fall. If people are paying a fair amount for the company itself…

Here in 2022, it isn’t like the way it was when I first started investing. You had to go to the library and dig through 27-pound books just to find some of the right numbers. But now you’re online and on your smartphone, and you can find out the key numbers and the key metrics very quickly. And so it should be easier than ever before. But I think people get waylaid because they see all the financial commentators and everybody is… There’s that sales pitch from Wall Street, etc. But my thing is, you always go back, the way you look at the ingredients of a good recipe, you look at the ingredients of a good company, and then say to yourself… One of the things I mentioned was the price-earnings ratio. I like to find a price-earnings ratio of under 25, because that’s a fair valuation. But people buy these stocks where… Would you like me to briefly just explain the P/E ratio for the audience?

Gene Tunny  11:36

Yes, please. Yes, I think that would be great, please, Paul. And yeah, what it roughly means.

Paul Mladjenovic  11:44

The price-earnings ratio tries to make a relationship between the stock, what you’re buying, and the essence of the company. The essence of the company is its profit, of course. And what we do is take a look at the price per share and the earnings per share.

Let’s say for example, you have a company that makes a million dollars net profits, and they have a million shares outstanding. Well, that’s a $1-per-share profit. The earnings per share is $1. Okay, so we can understand it. A million shares, a million dollars. It’s $1 earnings per share. Great. But now, let’s say that company’s stock is $10. Alrighty, so basically, you’re paying $10 for the stock, and you’re paying for $1 of earnings. So that’s a 10-to-one ratio. But that’s a P/E ratio of 10. Very fair valuation. Of course, if the stock is $15 or $20, you’re still in the ballpark. I think that’s a good price that you’re paying for it. In that case, if it’s 15, you’re paying $15 per stock, and you’re getting $1 of earnings.

What happens is this. If everyone’s excited about the stock, and they bid that stock all the way up, but the earnings are still down here, then you start getting into dangerous territory where you’re over, that there is an overvaluation, the price is much higher than what the company has in basic intrinsic worth. Back when the Internet stocks crashed, many of those P/E ratios were not 15 or 20 or whatever. They were north of 100. Some of them were over 1000, which means you’re paying an awful lot of money for the company. When it’s a nosebleed territory, then it’s in greater danger of a pullback.

The reason why they bid up the stock is that they’re assuming, oh, that’s a great company, the earnings are going to come in. They’re assuming that they’re buying up the stock, that the earnings are going to eventually rise, but you don’t know that. You’re basically speculating. You’re buying stocks today, hoping that tomorrow or next year, they can have a sensational profit, but that doesn’t always materialise. So at that case, you’re speculating. You’re not investing. Investing means you look at the reality of the moment, what you’re paying for, and the actual key components that a company are in a good price range, a good valuation, and the price is closer to it. Then it’s less risky.

I prefer people starting off with value investing, because it brings out much of the risk to begin with, because if you’re paying a lot of money for a stock, then the risk is, what happens if the earnings don’t materialise? What if they start to have losses? What if the economy slows down, and 100 other variables. Then that stock gets up here. It could easily be in bubble territory, pop and come back down and you’re sitting on a loser. That’s the issue with this. You want to go for valuation early on.

It’s like if you buy a dozen eggs, if they’re on sale for $1.99 for a dozen eggs, it’s a lot cheaper than if you were going to pay 10 or 20 bucks for the same dozen eggs. The eggs don’t change, but the price in the relationship does matter. This is among the things I emphasise, hopefully, throughout the book, and to casual readers everywhere. Hopefully that are not that casual with their money.

Gene Tunny  15:03

Yes, yes. I was just checking the P/E ratio for Tesla at the moment. I’m just looking at this one site. It says it’s 193.24, March 22, 2022. That’s a P/E ratio well in excess of–

Paul Mladjenovic  15:24

Exactly. Now, I have no problem with people investing in that type of stock. But they need to tell themselves that they’re not investing. They’re speculating. Could Tesla stock keep going up? Sure. Could it crash? Yes. And if there’s a slowdown out there, and less people are buying automobiles, and that puts a drag on the entire automotive industry, that’s going to put a drag on Tesla as well. Plus, it doesn’t pay a dividend. It’s not that you’re getting paid to hold the stock. For me, that’s a speculative choice. Nothing wrong with that. There’s nothing wrong with people speculating. But they need to know that there’s a very material difference between an investment and a speculation. And they need to know that.

Gene Tunny  16:06

If my portfolio was heavy with stocks like Tesla, I would be a growth investor, rather than a value investor. Is that how I should be–

Paul Mladjenovic  16:21

If they all have that kind of valuation, you’re hoping for growth. But the thing is, in reality, you’re speculating, because you’re expecting a stock with a 200 P/E ratio, that you’re hoping that it goes to 250 or higher, translation meaning that their income is coming in and the stock price is going up. They’re bidding it up, and that way you’re holding it, and your stock went up. But you don’t know that. To me, there’s a greater risk in those kinds of stocks. But the thing is this. Fortunately, it’s not all or nothing. There’s nothing wrong with having a few aggressive speculations in your portfolio, but they better not make the majority of the foundation of your portfolio, otherwise you’ll be at risk, especially since when you juxtapose it today’s macro economic environment, it is riskier out there.

I don’t see anything here that’s going to say that a particular automotive company are going to double the number of their cars they’re going to sell next year, when there’s a lot of debt out there. Interest rates are rising. A lot of people buying automobiles. Some of them, fine, you could buy it all cash, well, good for you, I cheer you on. But the majority of the market out there would tend to be borrowing money. And if interest rates go up, then they may not choose that Tesla. They might choose a competing model for now. I think there’s a lot of fragility in today’s economy, if a lot of these things continue the way they’ve been going. I was expecting inflation and everything else over a year ago, and it’s materialising now. Gene, from what I know about you, you’re a smart guy. You were probably there even before me, and hopefully people have benefited from some of your insights months ago.

Gene Tunny  18:10

Our mutual friend Darren Brady Nelson and I were chatting about this, definitely last year, the potential inflation, just because of, as you would have seen, all of the money growth that we’ve been experiencing associated with quantitative easing, and the housing credit boom that we’ve had in here in Australia, and then in other countries. So yeah, certainly something we’ve been expecting. I’d like to ask all about the P/E ratio again. Clearly, it’s relevant to particular stocks. Are you also looking at it from the whole market point of view? There’s a measure of the P/E ratio for the whole market is in there. Is it the cyclically adjusted P/E ratio?

Paul Mladjenovic  18:58

Exactly. Whenever I see that, what is the cumulative P/E ratio for the S&P 500, for example, which is considered obviously a major yardstick and a major barometer of the general health of the stock market. I haven’t looked at it lately, but I do know that it is elevated. It is higher than it should be the last time I looked. That is also a cautionary tale.

For me, because I like to invest in human needs stocks, they tend to have a lower P/E ratio. And so that’s a measure of safety for me. Not the only one, but certainly one of the primary ones. The other side I like to look at, again, especially when I’m dealing with beginners or beginning intermediates, one of my criteria is also they should be investing in stocks that are paying dividends. We call them stock dividends, but they’re really company dividends, because a dividend that’s being paid out by a company. Obviously, if it’s a successful company, the dividend tends to rise, over an extended period of time, like years and decades. And it’s a sign of health. It’s a clear, tangible measurement of the company’s financial success. If they’re having a dividend that’s rising every year, that’s a good sign. So I like that.

And the other point of it is too is that whenever there’s a market crash or a major market event and stocks go down, you’ll find out that dividend stocks tend to be among those that tend to recover a little bit sooner. For me, if my stock goes up or down 10 or 20%, but my dividends are coming in, quarter in, quarter out, I’m not that worried about it. For many reasons, including in family accounts, we talk about having the cash flow coming in. I have clients and students that I remember from decades ago, that today, they’re getting annual dividend payouts greater than their initial stock investment from decades ago. It’s gotta make you feel good.

If a stock falls, then what happens is that… For example, again, using a simple example, if I have a $20 stock, and it’s paying a $1 dividend, that’s the equivalent yield of 5%. 5% of 20 is $1. All right. So let’s say that today, the market is crashing big time, and my $20 stock went to $10 a share. All right. Obviously, I’m not happy. But the thing is, now that $10 stock, if it’s still paying a $1 dividend – again, I’m looking at the health of the company, it’s making a profit or whatever – if it’s still paying $1 dividend and the stock is $10 now, that tells me that the dividend yield at this moment would be 10%. That is a very attractive yield. So what happens is other investors will go in and bid it back up again. And so it has an easier time recovering.

The bottom line is, Gene, is that healthy, quality companies will keep zigzagging upward, no matter what you throw at them, whereas companies that are not financially stable, don’t have all the numbers, are losing money, they’re going to be zigzagging downward. So, which zigzag you want to be part of? You look at these things, because they’re not mysteries. This is public data.

Gene Tunny  22:18

Yeah, I think it’s great advice. And it’s consistent with what David Bahnsen recently told me when I chatted with him, and he was talking about his views on dividends. He’s very pro dividends. I think it’s also consistent with Warren Buffett, isn’t it? I mean, Warren Buffett looks for those companies that deliver reliable earnings over the long term. And in his day, I’m not sure if it’s still the case now, it was Geico, the Government Employees Insurance Company, and also Coca-Cola, I think. So those are the sort of dependable companies that… Not that I’m making any particular recommendations, but it’s those sort of companies, I’m guessing.

Paul Mladjenovic  23:06

And by the way, the human needed investing, as much as I love it for beginners, etc, in the generic sense, also it tends to be a great approach and strategy during inflationary times. The last year and a half, especially with my end with the Federal Reserve, printing up trillions, look, people forget that inflation is not the price of goods and services going up, it’s the value of money going down. When you over-produce something, and you have more units of it out there, chasing the same basket of goods and services, then don’t be surprised that the prices go up.

Plus, in addition, during the pandemic, and people were worried about their economic situations, etc. , when people are worried, and there’s anxiety, and there’s a declining or low consumer confidence, then people will not invest in their wants. They won’t spend on their wants. They’ll spend on their needs. They may want fancy whatever, trips and vacations and snazzy restaurants and so much more. But if the economy is contracting, and there’s more worry on the radar screen, and people are worried about their companies, their jobs, etc, then they’re going to shrink what they’re spending on that that is want-driven. And they will keep on buying things that are need-driven, so that they’re trying to adjust accordingly to the economic environment.

So all of a sudden, you start to think that those things that we do need, all of a sudden in an inflationary environment, it’s almost like they’ve switched hats to be more growth-oriented. You have found that in the last 3, 6, 9, 12 months, the things we’ve invested in that we needed, all of a sudden, they become spectacularly solid  things to put your money in. Grains, for example. I spoke to some of my students last year. I said, “If you’re investing in money, where it’s tied to things that are rising in price such as human need, and you’re talking about energy, gasoline, you’re talking about groceries, which means food and commodities, those things have performed very well.” So, in many cases, I tell people out there and yeah, yeah, good, you can keep complaining about inflation, but part of your action plan is to be invested in those things that benefit from inflation versus being hammered by inflation.

Gene Tunny  25:34

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  26:08

Now back to the show. Now with an action plan, Paul, I’d like to explore that, what that means for an individual or for a household, because we need to think about how diversified should your portfolio be, and then also how actively or passively you should manage it. Do you have views on those that you could take us through, please?

Paul Mladjenovic  26:35

Yeah. There’s the simple 80/20 rule, if you want. All things being equal, I’d love to see people put 80% of their foundational investment money into human need things, food, water, beverage, utilities. Again, it’s a very simple question. Ask yourself, what will people keep on buying, no matter how good or bad the economy is. If people are unemployed, they’re still going to eat, they’re still going to turn on their lights. And that’s where you should have your money, especially if you’re a beginner, and especially if these are worrisome times.

And I like the dividend portion, because then I know that, in many cases, especially many brokerage accounts, they give you the ability to reinvest the dividends. So even if you don’t need the money, if the stocks are down and contracting, the dividends will buy more of it. Then on the other side of it down the road, when you’re ready to have the money being sent home to you, it’d be good to know that over a period of years, and you started with 50 shares, now you have 75, 100, 150, and now their dividends are higher, plus there’s more shares, which means you’re going to have more money coming in to make yourself more financially secure in your later years.

A lot of stock investing, it doesn’t have to be mysterious or crazy. A lot of people think that to make the real big bucks got to be extra risky and extra speculative and extra growth-oriented. Well, that might be true with a portion of your money, but it shouldn’t be the bulk of your money. Absolutely. So 80% value to human need. And I’m saying this real time too, March 2022. And I think a lot of people’s experience with human need is bearing these points out. There, at least 80%. How’s that?

Gene Tunny  28:24

So yeah, 80% on investments–

Paul Mladjenovic  28:27

Of your investable money should be in human need things.It doesn’t have to be just stocks. There are ETFs. There’s actually excellent dividend ETFs, where they’re tied to human need and pay dividends. Again, I can’t get specific with this audience because I don’t know who I’m talking to. But everybody knows they can go on a search engine and find dividend ETFs. They can find ETFs.

For example, when the economy is doing very well, and everybody is flush with cash and they’re positive, then they might go for, I said wants, and that basically is a reference to consumer discretionary. When you have extra cash, what do you do? Fancier restaurants, vacation, take the missus out for the weekend somewhere, all good stuff. When you’re talking about a contracting or problematic economy and commensurate issues in the stock market, then you think consumer staples, that’s where a lot of those human needs are going to be.

There are ETFs that invest just in consumer staples or utilities. You don’t have to worry about trying to choose one winning stock. Why not a winning ETF or winning mutual funds? There’s a lot of sector mutual funds out there. There are food and beverage mutual funds. There are food and beverage ETFs. And these would make a lot of sense in today’s environment, for 2022 and probably for the remainder of this year, because I don’t see any spectacular rebound coming in the economy. And if they’re going to raise interest rates, because they’re fighting inflation, somebody’s going to win, somebody’s going to lose.

Right now, there’s people out there who have a lot of fixed bond. That bonds market is huge. You can have a spectacular problem with the bond market, because if there’s a lot of fixed debt, and interest rates are rising, what will people do? You want to get rid of your, whatever, 2.5% bond and buy a 5% bond? That’s fine, but then that means a lot of selling. And so in this environment, I tell people, if you are going to be in bonds, make sure they’re high-quality AAA, and that they’re adjustable rates. And that could be another component of your portfolio, if you want something diversified away from the stock market. Those are the kind of choices, AAA, high quality, and adjustable rates involved so that you’re not stuck. You don’t want to be stuck with a fixed interest rate, like say, 30-year bonds, and rates are going to be driven upward. That’s going to be like a hammer to the value of the bonds you’re currently holding. Okay, so adjustable rate, quality, AAA, if you can have that, that’s the kind you should have.

Gene Tunny  31:03

That’s 80%. There’s another 20%, is there?

Paul Mladjenovic  31:09

Yeah, exactly. If you’re ultra worried, and you don’t want growth, then maybe 20% should be an adjustable rate, high-quality bonds.

Gene Tunny  31:16

Oh, gotcha. Right. So that’s a really safe part of it.

Paul Mladjenovic  31:20

That’s a possibility, exactly. If you’re more growth-oriented, then put 20% into growth-oriented stocks or ETFs, again, depending on… See, the interesting thing is that investing and speculating can be something in a generic, but in many cases, it depends on the person involved. If I’m talking to somebody who’s a year or two from retirement, then you’d bet they’d have to be much more so into very secure things, human need, high-quality, adjustable rate bonds, money in the bank, low debt, and a few other features. That would be important. But if you’re talking to a 25-year-old, I’d still say, keep the bulk in your human need, but now you could put your money into growth-oriented things that are out there, some types of commodities, because inflation is pushing some of these things up. If people have seen the price of gasoline and wheat in recent months, then they get a good idea about the kind of things that grow in an inflation-driven environment, as we’re in right now.

Gene Tunny  32:18

Yeah. What are your thoughts on real estate, so both your own home and also investment properties? Do you have any thoughts on that? One of the challenges we’ve got in many advanced economies is just the very high cost of housing at the moment. And I’ve seen some commentators questioning whether buying your own home actually does make sense for a lot of young people. So yeah, I’m interested in your thoughts on that.

Paul Mladjenovic  32:48

First of all, obviously, owning your own home I think is fine. I see no problem with it. Obviously, I don’t argue with real estate folks. I know some people who will rent a cheap apartment, then they have their money and invested it and buy rental real estate. That’s fine. Some of this is a personal proclivity. Me, for example, I love real estate, but I don’t buy fixer uppers or other type of thing. My favourite type of real estate investing is true real estate investment trusts that I can buy with a few mouse clicks through my brokerage account. Those people who want to be beginners in the world of real estate, and you’re nodding your head so I think you generally agree, that I think real estate investment trusts is a great place for the beginners to be.

I like the idea that with a few mouse clicks I can get in, and a few mouse clicks, I can get out. The same rules of real estate apply when you’re talking about real estate investment trusts, REITs. You look at the type of real estate, and you look at the location, very important. For me, I like that there are a couple of hundred different REITs out there, certainly in the American market. I’m sure there’s more. I’m sure there’s some in your neck of the woods, etc. But REITs are a way that I can buy a few shares, whether it’s 5 shares, 50 shares, 100 shares, or more, I can participate in a real estate property, get my dividends, CD appreciation, but somebody else is… You have an executive team that’s managing all the properties and that’s their specialty. I prefer that.

Keep in mind, real estate investing, think about the types of real estate. Right now, in the last couple of years, I’ve told my students that I would avoid things like office building real estate investment trusts, because I think if the economy’s going to shrink, and you got pandemic residual issues, why do you want to be there?  I would be invested in REITs that are in the residential complex. For example, the last few years I’ve avoided like the plague shopping centre REITs, and instead I’ve been looking into REITs that specialise in data storage. They still pay dividends. And you see more movement there. There are REITs that are cell tower REITs. In other words, their property is cell towers. They pay good dividends. And cell towers won’t go out of style anytime soon. And if you have teenagers, you know what I mean.

Gene Tunny  35:23

That’s interesting. I’ll have to have a look at some of those. I wasn’t aware of those. That’s fascinating. Paul, can I ask you about gold and silver? You’ve written on gold and silver in the past.

Paul Mladjenovic  35:36

I’ve written two books on precious metals. And I’ve been very bullish on gold and silver and other metals over the last few years. And I feel that when everything finally shakes out, I see no reason why gold and silver couldn’t be at new market highs in the coming months. I have associates of mine who feel that these things will go to new multiples of where they’re at now. That remains to be seen. But the bottom line is, I do think that gold and silver will be appreciating for a variety of reasons. And I think they’re part of a portfolio that’s really…

Let me tell you, I can give one important reason why everybody in your audience should own at least a little bit of gold and silver. Are you ready? I’m going to give you a reason that you won’t hear very often. And by the way, if your financial advisor talks you out of them, tell them to call me. And this is what I meant. Okay, so anybody within the sound of my voice, remember the following phrase, counterparty risk. Counterparty risk. That’s the number one reason why you should have some. I’m not asking you to head for the hills and live in a cave and have a tonne of either one. No, not really. You should be diversified away from the risks of paper assets.

Me, I love gold. I love stock investing. I love the paper assets, definitely. But I favour gold and silver, the physical, because gold and silver are two assets that  are among the few assets on the landscape of choices, of investment choices that do not have a counterparty risk. You talk to your financial advisors about this, see if they know this point. It’s very important. Years ago, I remember I used to even teach financial advisors, and I think this is an important factor.

What is counterparty risk? See, here’s the thing. If you invest in any type of paper assets, you’re undergoing counterparty risk. For example, if I buy stock, the counterparty risk is the performance of the company. In other words, counterparty risk means that if you invest in an asset, the value of this asset is directly dependent upon the promise or performance of the counterparty. If I buy stock, and that company is doing great, my stock will be fine, I’m sure. At the moment that counterparty fails, falters, goes into debt, goes bankrupt, what’s going to happen to the value of my stock at that point? You follow? There is counterparty risk with stocks.

Bonds, perfect example of counterparty risk. If I invest in a bond, the first risk I think of is that, will the payer of this bond pay back the principal and the interest as stipulated in bond agreements, to me as the bond holder. There’s counterparty risk there. What if that entity defaults? Many times in history, especially during bad economic times, people have defaulted on bonds. And so you have to understand that, but also to currencies.

Right now, inflation means that that money is losing value. And that’s a counterparty risk, because a currency is only as good as the counterparty being the central bank of that country, managing, hopefully, properly, that money supply. And we’re seeing that there’s inflation everywhere, the ruble falling apart in Russia, because of the conflict, runaway inflation in Venezuela, etc. In many cases, the currency of a country is similar to the dynamic of the stock with the company. When the company is doing well, the stock does well. If the country is strong and doing very well, and they’re managing their currency, then that currency will be strong. But once you mismanage that, and the currency goes into hyperinflation…

By the way, you’re talking to a guy who has experiences personally with my family. In 1963, as a four-year-old with my family, we escaped communist Yugoslavia. And by the way, communism is a horrible thing, but that’s a different conversation. But they, in 1993, 1994, tried to help out their own economy with inflating the currency, the dinar, and you had one of history’s greatest hyperinflationary catastrophic incidents occur in Yugoslavia, and it collapsed into nothing basically. No more Yugoslavia as of 1994 . I got married in 1993. So my wife and I were thinking about going to Yugoslavia for our honeymoon, but as the civil war it was going through and collapse, these things ruin a good honeymoon. So we opted for the Caribbean instead. And in retrospect, am I glad I did.

Gene Tunny 40:18

Absolutely.

Paul Mladjenovic 40:19

Currencies have counterparty risk. Virtually every paper asset you can think of has a counterparty risk. Its value is directly tied to the promise or the performance of a counterparty. Gold and silver have their own intrinsic value. Gold and silver have never gone to zero. They had value thousands of years ago, they have value now, and likely, gold and silver will continue to have value far into the future. So precious metals, and I mean, the physical, look into bullion coins and the like. Do your shopping. As you know, I did the book Investing in Gold and Silver for Dummies. It’s a whole book on how to choose and shop for it, etc. But gold and silver, again, are a diversification away from currency mismanagement, away from the risk of paper assets, away from geopolitical and other risks. And I think that that is an important fact. And let’s face it, you hear about the rich over the aeons, the centuries, they always had gold and silver. The people are in the know. They know something, I think that’s something for you, that should be a clue to you to start figuring it out and seeing if a small portion does make sense in your overall picture. And I think given today’s economic realities, a portion of it doesn’t make sense.

Gene Tunny  41:38

What about NFTs and crypto that everyone’s talking about? Have you had any exposure to that or do you have any thoughts on that? There’s a lot of excitement about it.

Paul Mladjenovic  41:52

Let me tell you, a few years ago, I was asked about writing a book on cryptocurrency. And the point is, I think I’m good at what I know, but I know the limits of what I know. And I got them a great author on that book. So my publisher does have one called Cryptocurrency Investing for Dummies, and she does a great job with it.

Again, I feel the same way, having a small portion of it is not a bad idea. But there’s been just a lot of, I don’t know, overwrought speculation about it in recent years. And the thing is this. Part of the success of cryptocurrency, again, was the idea that it’s limited in scope. And, and so obviously, if you don’t over-produce it, and more people are buying it, then of course, you’ve seen how well it’s performed. I mean, it’s been amazingly volatile, crashing here and there. And I think investing small amounts here and there, again, as a small diversification away from everything else, is not a bad idea, but a lot of these people who are going whole hog into it, etc, we have to be careful. You have to remember that the governments of the world look at cryptocurrencies as a competitor, and nothing stops them from waking up one morning, passing a few laws and regulations, and all of a sudden, your cryptocurrency becomes problematic versus being an asset. So again, tread lightly here. Obviously, you may get a cryptocurrency expert on who will have a totally different opinion. And I’m not here to argue with those folks.

Again, I think having some cryptocurrencies is fine. And for me, some of my clients, I say to them, why not get some of the blockchain technology companies, because that way, you’re indirectly working with it. And that worked out to be a pretty good speculation. But again, same feelings as with gold and silver, have some of it, not an overwhelming amount, because you never know, because cryptocurrency… Everything we’re talking about has some kind of risk. With cryptocurrencies, what happens? I mean, it’s extremely dependent on electricity. What happens when there’s a power outage? Can you trade with it then? I doubt it.

The whole point about guys like me, in my industry… I was a certified financial planner for 36 years. I retired it a year ago, but I’m still active with education and teaching about this and I love my topic. I doubt I’ll retire anytime soon. I love what I do too much. However, the world of CFPs and financial advisors, they live and breathe the word diversification. Every asset has some type of risk attached to it, if you have money in the bank, fine, you’re away from financial risk, but now how about inflation risk, purchasing power risk, and a few other ones out there? What if the bank closes its doors because there’s a national crisis with the central bank, etc?

This is why you have a little bit across the board. That diversification just makes you stronger and not dependent on the goodness or wellness or the speculative success of an individual entity or asset class. Again, have some cryptocurrencies, fine. Have a couple of different ones, fine. But don’t have your life savings in it. Don’t put too huge of a percentage of your investable assets in it. Same thing as I would say with many other things that are out there. And of course, everything mitigates things. If you are a real estate expert, then having more of a portion of your assets in real estate is not that big of a deal, because your personal expertise is mitigating the extra exposure, but that’s fine. Knowledge is always the thing you should be accumulating the most, after accumulating your wealth, because the both of those things are tied together.

Gene Tunny  45:40

Yeah. Very good observation there, Paul. A couple more questions on how actively should a person be managing their portfolio. Typically I’ve just sort of said, maybe I made some decisions, like a couple of years ago, I’ll invest in this ETF or I’ll have these investments. And I’ll just commit to putting a certain amount in every month or whatever. And you get that, they call it that dollar cost averaging technique. You’re not worried about what the prices are at any particular time. And then over time, you do better out of that. How do you think about how actively investors should be managing their portfolios? How frequently should they be reviewing their selections? Any thoughts on that?

Paul Mladjenovic  46:36

Again, everyone’s a little bit differently, but if you’re not reviewing monthly or quarterly statements, if you’re not speaking to whoever you trust at least once a year or once every half year, then there’ll be issues, obviously. The more you’re aware about what you have, the better. I mean, I look at decisions every day, for my family. And the interesting thing is, if there’s one thing that people need to understand also, it is that to be successfully monitoring your situation, keep in mind that successful investing isn’t just what you invest in, but how do you go about doing it. If your positions are residing in a brokerage account, then nothing stops you. I highly encourage everybody within the sound of my voice to speak to your customers, to your brokerage firm’s customer service department, ask about things, about tutorials and things like stoploss orders, trailing stops. Sometimes you could do some, again, to a small extent, things such as covered call writing, which gives you income. It’s a hedge on a position as well, in some cases.

For example, trailing stops, I’m a big one on this, if, if you’re nervous about what you’re holding, alrighty, then again, it’s not just what you invest in, it’s how you go about doing it. Then you should consider trailing stops to minimise the downside. Now, what does that mean? Well, well, first of all, the generic about a stoploss order. If I bought a stock at 20, and I’m nervous about it, then I should put a stoploss order in at 18, 10% below, just as a generic point. 10% lower, you give it room to fluctuate. My stock at 20, if I bought it, obviously, there’s no upside limitation. But at 18, I now have downside limitation. In other words you’re adding discipline to your situation. You’re not just blindly watching this stuff. You could put that stoploss order in for the day or make it good until cancelled. It could sit there for three months.

If you’re worried about the coming weeks and months, go through your portfolio. If you need to go with your financial advisor, by all means, and say, I’m nervous about position x over here, what should I do? Well, they should be telling you. First of all, if it’s quality, that should remove some of the anxiety. But if you’re still worried, then either, A, sell it if you need the money, or if you don’t need the money, then put in a stoploss order in it. And then what happens? Let’s say your $20 stock zigzags up to 30. Okay, well, now what? That $18 stoploss, cancel it, like it says, good until cancelled, and replace it with one at 27, as an example. Now, what happens? The stock is at 30, you put a stoploss in at 27. Well, now what? Now if there’s a market crash, stock will go down, will trigger a sell order at 27, and you’re out. And you kept 100% of your original $20 plus a $7 per share profit. You added diligence and safety and discipline to your situation, not because you were expecting it, but because you started worrying etc. Then put those on. What’s the worst that happens? You’re selling and protect your money and keep a portion of your profits. Well then, that’s the very essence of prudent investing. You follow?

So in other words, everybody within the sound on my voice, if you have a brokerage account, go to their site. They’ve got to tutorials and other things. Call them up. Ask them, hey, what can I do if I’m worried about my stock dropping? What can I do? Have that conversation. But I find that a lot of people don’t have those conversation, and then what? Then when there is a market crash, and your positions plummet all the way down to the bottom or whatever, or lose 50%, then you do could’ve, would’ve, should’ve, you have anxiety, and so much more.

Right now, as I’m talking to you, the markets are generally in good shape today. But that could change next week. You could have a 1,000-point drop on a Monday morning, because you have trillions flowing in and out. You’ve got sanctions and unintended consequences. You don’t know when the next crisis is going to blow up, which in turn will blow up point A, point B, point C, and all of a sudden, you wake up one morning and your position or your broker has been hammered to pieces. Again, diversification. Remember that you have many tools and tactics in your pocket with these brokerage firms that you should be fully aware of. When you’re fully aware of these and you start applying some of these things in a very modest way, your confidence grow, your knowledge grows, which means more importantly, your financial security does better.

Gene Tunny  51:18

Yeah. Okay. I might ask one more question before we wrap up, Paul. There was an interesting passage in your book on Stock Investing for Dummies, where you’re asking what school of economic thought does the analyst adhere to? So this is things you should ask about analysts when you’re assessing the value of their contributions, what they’re saying, what their advice is. You make a point that if there was one that adhered to the Keynesian school of economic thought, that’s analyst A, and analyst B adhered to the Austrian School. Guess what? I’d choose analyst B, because those who embrace the Austrian School have a much better grasp of real world economics, which means better stock investment choices. Could you explain what you mean, there, please?

Paul Mladjenovic  52:05

Well, it’s funny, you brought up an interesting point. I mean, I love the Austrian School. And as you know, Darren is a devotee of that. It doesn’t necessarily mean the Austrian School… There’s a couple of other schools that are pretty good. There’s the Chicago school, Milt Friedman, I admire his work. It’s just that there are many financial advisors out there who… Obviously, Maynard Keynes, I don’t think highly of him. I mean, if I had a financial advisor who loved Karl Marx, I would be terrified, because that tells me they know nothing about economics. I’m serious about this. Yeah, I’m very serious about it.

By the way, to me, it’s not that I look for a financial advisor who’s into these particular schools. Question number 17, that helps me hone my selections. I want to make sure that they’ve been around for a few decades, they’ve seen bear markets and bull markets. That’s a much more important criteria for me that they understand these things. But if it ever comes down to the school, I’m going to make sure they understand, because remember, it was the free market schools out there were warning about the Great Depression, they were warning about stock market bubbles, and they were warning about these things. I found out that these disciplines helped me be a better tactician and strategist with the money.

I mean, I remember when I read an article about the stock market bubble in 1999, and that was from the point of view of the economics. That just cemented some of my concerns about the stock market. What did it mean? For those students and clients who were your conservative, retirement-oriented, made sure they were in safer waters. But those people out there who were speculators, like me, for example, I made sure that I was not invested in the internet stocks of 2000, because the first wave, you don’t know which ones are going to survive or not. They were all losing money. So in terms of investment, I stay away from them. However, my speculative side, I was buying long-term put options on these. So when these things collapsed, my speculative put options garnered some very nice gains. And that was my speculating.

Understanding basic economics and following some of these schools of thought would just enhance  your ability,  because obviously, understanding the macro picture makes you a better choice of which micro choices, which stocks and ETFs are going to either survive or thrive in that kind of economic environment, and it actually gives you another leg up. When you understand the big picture, it just makes it better choices in your own portfolio, so you could sleep better at night and serve the family that you love.

Gene Tunny  54:48

Okay, that’s a great point, Paul. I was just thinking about Keynes. Keynes himself was a rather good investor and made a lot of money for King’s College in Cambridge. However, I think there’s some speculation that he may have benefited to an extent from insider knowledge he gained while working for the Treasury.

Paul Mladjenovic  55:13

That’s very possible. And actually, when you think about it in the 1920s, look him up, there was an economist called Irving Fisher. When the stock market was in bubble territory, he was notorious for making the call that he feels that they’ve reached a permanent plateau. And this was whatever, like six or nine months before the crash of 1929, and he had been filing for bankruptcy. So no one should have listened to Irving Fisher, including Irving Fisher.

Gene Tunny  55:42

Exactly. Okay. Paul, any final points before we wrap up? I think this has been great. You’ve given me a lot to think about. And I mean, I think we could chat for hours on this stuff. But I think I’ll have to wrap up now. And yeah, I’d be keen to chat with you again.

Paul Mladjenovic  55:57

I really appreciate it. I mean, obviously, you mentioned Stock Investing for Dummies, I’ve done a lot of books out there. So I certainly invite people to see if those things help them with theirs. And if people want to find me, I’m at ravingcapitalist.com. But the point is this. Knowledge is really so important with all of this, and the idea that you’re a better consumer or a better investor, it also makes you a better voter, too, , and it also makes you much more aware of what policies out there will do harm and which ones will do right, and which investments will go up or down accordingly. It’s all about the knowledge. Ignorance is going to be extremely problematic in the coming months. So I invite them to get as much knowledge as possible, apply it, talk to everybody, you’ll be much better off. If they keep on listening to gentlemen such as Gene Tunny, then I think they’ll be served well, and thank you again and again. God bless your audience, and I wish them all prosperity.

Gene Tunny  56:54

Thank you. Paul, it’s been a pleasure. Really appreciate your time. And yeah, I hope to chat with you again soon. Thanks so much.

Paul Mladjenovic  57:02

Continued success to all of you. Take care, Gene.

Gene Tunny  57:04 Thank you. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Big thanks to EP133 guest Paul Mladjenovic and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

The virtues of the free market w/ David Bahnsen – EP132

Renowned US financial advisor, author, and podcaster David Bahnsen argues the best way to defend human flourishing against dangerous economic thinking is to relearn time-tested economic truths. David talks about his new book There’s No Free Lunch: 250 Economic Truths with show host Gene Tunny. David and Gene also talk about David’s previous books on the crisis of responsibility afflicting our societies, Elizabeth Warren’s economic policies, and investing in a post-crisis world.

You can listen to the conversation using the embedded player below or via Google Podcasts, Apple Podcasts, Spotify, and Stitcher, among other podcast apps.

About this episode’s guest – David Bahnsen

David L. Bahnsen is Founder, Managing Partner, and Chief Investment Officer of the Bahnsen Group. He oversees the management of over $3.5 billion in client assets. Prior to launching The Bahnsen Group, he spent eight years as a Managing Director at Morgan Stanley and six years as a Vice President at UBS. He is consistently named as one of the top financial advisors in America by Barron’s, Forbes, and the Financial Times (2016-2021).

David’ Bahnsen’s 2021 book There’s No Free Lunch: 250 Economic Truths.

Relevant links and a transcript are below.

Links relevant to the conversation

David Bahnsen’s previous books:

Elizabeth Warren: How Her Presidency Would Destroy the Middle Class and the American Dream

The Case for Dividend Growth: Investing in a Post-Crisis World

Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It

David’s podcasts:

Capital Record

The Dividend Cafe

Radio Free California

Other relevant links:

The Great Debate: Edmund Burke, Thomas Paine, and the Birth of Right and Left by Yuval Levin

Edmund Burke (1729 – 1797)

Transcript of EP132 – The virtues of the free market w/ David Bahnsen

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored.

David Bahnsen  00:04

There’s no question that whether one accepts my religious assumptions or not, that the free market properly aligns incentives better than the Marxist or central planning, collectivist vision for society that strips away incentives and does not provide the framework for best serving a customer by meeting human needs.

Gene Tunny  00:34

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 132, featuring a conversation with economist and investment manager, David Bahnsen. about his new book, There’s No Free Lunch: 250 Economic Truths. We also talk about his previous books on Elizabeth Warren, his approach to investing, and what he calls the crisis of responsibility.

David is the founder, managing partner, and chief investment officer of the Bahnsen Group, a US national private wealth management firm, with offices in Newport Beach, New York City, Nashville, and Minneapolis, managing over $3.5 billion in client assets. David is consistently named as one of the top financial advisors in America by Barron’s, Forbes, and the Financial Times. He is a frequent guest on Fox News, Fox Business, CNBC and Bloomberg. And he’s a regular contributor to National Review.

Please check out the show notes for links to materials mentioned in this episode, and for any clarifications. One that I know that I need to make relates to the statesman Edmund Burke, who I shifted forward in time by a century. Silly me. You can find the show notes via your podcasting app. And please check out our website, Economics Explored, where I’ll post a transcript of the conversation as soon as I can. That’s economicsexplored.com. If you sign up as an email subscriber, you can download my recent e-book, Top 10 Insights from Economics. Please consider getting on the mailing list. If you have any questions, comments or suggestions, please either record them in a message via SpeakPipe – see the link in the show notes – or email me via contact@economicsexplored.com. Righto, now for my conversation with David Bahnsen, Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. David Bahnsen, founder, managing partner and chief investment officer of the Bahnsen Group, welcome to the programme.

David Bahnsen  02:53

Well, good to be with you. Thanks for having me.

Gene Tunny  02:56

Oh, it’s a pleasure, David. I’ve come across your work recently. A mutual acquaintance of ours, Darren Brady Nelson, mentioned you to me and I’ve been reading your great books, There’s No Free Lunch: 250 Economic Truths. You had a book on Elizabeth Warren, the Democratic presidential candidate, how her presidency would destroy the middle class and the American dream. And you’ve got a couple of others.  I’m really keen to chat with you about your views on economics. You’re someone who has had a very successful career as an investor. And you credit that partly to your understanding of economics, so yeah, really keen to understand your views on economics as someone who’s really proven the relevance and the importance of economics. First, I’d like to ask, with your book, There’s No Free Lunch: 250 Economic Truths, what was your guiding principle for selecting those economic truths? How did you go about it? And what do you think of the major truths, David?

David Bahnsen  04:01

Well, I tried to divide the book up compartmentally by categories, and I start with the belief that economics is about human beings, and not fundamentally a mathematical science or a political science. And so out of the social realities of mankind, if we’re to understand economics out of that truth, then it forces us to discover or inquire what we believe about mankind. And what we know about the human person can then inform us more about economics, if we believe in the premise that economics is the study of human action.

I believe distinctly anthropological truths about mankind, about how he was made, about the characteristics he was made with. And those beliefs serve as a kind of starting point to what I believe about what we consider economics. And so you then go on to certain a priori assumptions that there is scarcity in the world. And economics becomes the study of how humans act around the allocation of scarcity, their scarce resources. And so I’m very convinced that most people are trying to get their economic opinions out of their political beliefs, instead of getting a lot of their political beliefs out of their economic worldview, and particularly in certain policy assumptions. And so the policy beliefs and biases and so forth, I think need to be informed by a coherent economic worldview. And that’s what I’m trying to provide in the book.

And for a lot of people, I think that the book will serve as a reinforcement of things that they instinctively believe, but there may be an impulse to some of these free market assumptions, but not necessarily rooted in a deeper belief system. And that’s what I’m trying to point people back to is those foundational beliefs that can help inform a comprehensive understanding of economics.

Gene Tunny  06:32

Yeah. Look, I found that fascinating. That was something I really found valuable about your book. I mean, you reference great thinkers in economics, such as Adam Smith and Hayek, and Mises. What I really liked was your commentary as well.  You’ve got great quotes. And then you’ve also got your commentary. And one of the things you wrote, I found very profound. I want to make sure I fully understand it, because I’m not a deeply religious person.  I think I know what you’re saying here. But I want to make sure I understand it. You wrote that, “Our case is not that mankind’s fall is suspended when he transacts in the marketplace, it is that the marketplace best tames are fallen nature. The fallen nature, is this what you’re talking about with understanding where we’re coming from, people fundamentally? But is that a religious concept or is it a psychological concept? Could you explain what you’re driving at in that passage, please, David?

David Bahnsen  07:35

Yeah, it’s entirely religious. It is entirely theological. And yet, I’m perfectly content for someone to interpret it only psychologically. But the underlying teleological meaning of it, the purpose is rooted in a belief that mankind does not come in the world perfect. Mankind comes in a world where they fall in moral nature. And this is, to me, the fundamental divide between most political divisions, philosophical divisions, and I also believe economic, is if we believe that mankind is fundamentally good, and then can be corrupted by injustices amongst race or class or gender, things like that, or those who believe that mankind comes in what we in the Christian tradition refer to as the doctrine of original sin, and that we want institutions, family, communities, church, synagogue, the marketplace, to provide a sort of moral formation, and that mankind cannot become perfected. The great socialist and utopian vision is rooted in a belief that mankind can become perfectible. And this is against my own religious assumption.

But the economic relevance to it is that we are trying to solve for a system of social organisation that recognises certain assumptions. And one of my assumptions is not only the imperfectibility of mankind, but also that mankind is created in a certain way, and that that creation that I am asserting involves mankind’s rationality, their reasonability, that there is both a physical, material, and a spiritual dimension. And so those things end up having significant economic implications, because I reject the belief that our need in forming economic policy is to merely meet the material needs of mankind, to give them some sort of water and food and sustenance and call it a day. I believe that mankind has that material dimension, and that to ignore it is wrong. But I believe that they also have a dignity, that mankind is superior to the animal kingdom, intellectually, morally, their use of rational faculties, their use of self-interest, and their capacity for problem solving. But fundamentally, as moral beings, mankind is capable of doing right or wrong and is accountable for doing right or wrong. This ends up inviting non-material dimension into economic wellbeing.

And so because I believe work is the verb of economics, is a line I use at the end of the book, I reject the Marxian notion that work is dehumanising. I think work is dignifying. But why do I care if mankind is dignified or not, let alone if work as an instrument for doing such? Well, I care because I view mankind as created in the image of God. And that’s a religious belief. That’s a theological belief. And if I didn’t believe that, I would believe something different about economics. And so my rejection of a Darwinian view of economics, my embrace of a Burkean notion that there is a moral dimension to how we cooperate in society, these things are rooted in some of these worldview assumptions that I don’t know how I can escape their religious nature.

Gene Tunny  11:40

Okay. Yeah.  Burke, you mean Edmund Burke, the Anglo Irish statesman from the late 19th century?

David Bahnsen  11:50

That’s right. I guess sometimes doing American interviews I take for granted, because I consider Burke America’s foremost political philosopher, but of course globally, his name and reputation would maybe have a different context. But Burke, really known, much like Adam Smith as the Scotsman was a sort of religious or moral philosopher with great economic relevance in classical economics, and Burke was a political philosopher, but again, who brought a sort of moral dimension to his work.

Gene Tunny  12:25

Yes. I’ve been reading this great book, The Great Debate by Yuval Levine or Levin. I’m trying to remember. I might put a link in the show notes as well as links to your books, because Burke, he was involved in that great debate about what’s the goal of politic or what’s the best way to run society, and you don’t want to go and radically transform things, because there might be a reason that your institutions are the way they are in the first place. And so you have to be very careful with meddling.

I just want to chat more about this fallen nature idea. Is this related to the concept of self-interest? The great thing about the market is that it takes advantage of people’s self-interest. There’s a famous quote of Adam Smith, about how we rely on the baker for our meals and on the candlestick maker for the candles, not out of any social concern they have, but out of their concern for their self-interest. I think I’ve butchered that quite. But that’s the basic idea. Is that the idea, so it’s taking advantage of that and getting the incentives right? And if you’re in, say, what you had in the Soviet Union, then all those incentives are the wrong way. To get something for yourself, you don’t necessarily have to create value for another person. And that’s the great thing about the market. It’s that mutual exchange, that you’re creating value for the other person, for them to pay you. That’s roughly on the right track, is it?

David Bahnsen  14:12

Well, I think those things are all very consistent with the assumption, but one of the things that I’m doing from the worldview I’m speaking, which is different than the way Ayn Rand as an objectivist would approach it, and in fact, many secular economists. Secular economists would describe it descriptively, that descriptively one can do better for themselves by serving their customer better. And Adam Smith’s allusion to reference to that self-interest is what they’re referencing. And it’s almost indisputable. It’s the way the world works.

But what I’m adding is the prescriptive, not merely the descriptive, not just that you will do better by serving your neighbour better, but that you ought to serve your neighbour better, and that in so doing, we cultivate more trust in society. Commercial transactions are entirely dependent on trust. And so they’re not merely in micro transactions like the brewer or baker a candlestick maker with a customer. But on a macro level, the greater sense of moral sentiment in the society, which, of course, was Adam Smith’s other book, we couple these two coexisting realities of human nature together, which is mankind rationally working in their own self-interest, providing for their family, and at the same time, their need and requirement to have that sort of moral capacity of service. And so I think that Burke referred to this as enlightened self-interest. And I believe it is the ideal for what I’m after in a framework of economics.

There’s no question that, whether one accepts my religious assumptions or not, that the free market properly aligns incentives better than the Marxist or central planning, collectivist vision for society that strips away incentives, and does not provide the framework for best serving a customer by meeting human needs, providing goods or services that we believe people care about. But I do believe one can make an argument – and I think that this is the straw man that a lot of socialists today are arguing against – that if you don’t care about the moral wellbeing of society in your economic worldview, and that all you’re saying is that pragmatically your wellbeing will be best served the more you serve your neighbour, all we have to do is find a case where that isn’t true, and it would be okay. And most certainly, it sometimes isn’t true, because as long as you can get away with it, cooking the books can help you and hurt your neighbour. And again, you have to be able to get away with it. But a lot of people can get away with fraud, a lot of people can get away with theft.

This Darwinian view that is more driven by the best outcome for oneself, and only relies on serving others as a mere pragmatic supplemental convenience to the process, I think it falls apart in reality, because we apart from that framework that still honours service to others, then one loses the kind of holistic nature that has been the traditional case for free markets. And I would argue more or less that the outcome, that when we look at the great fruits of poverty alleviation and human flourishing that’s come out of free markets, we have never been in need of divorcing that from a moral framework. In fact, it requires a moral and a legal framework, rule of law, enforcement or private property. These are all concepts that have roots in the very 10 commandments of themselves. Coveting what someone else has is sort of the heart of Marxism. And believing in protection of private property is the heart of what we call capitalism. And yet those are moral commandments. Thou shalt not steal, Thou shalt not covet.  

I think that that synthesis between the moral nature of markets and the aspirational vision of society and the self-interest that Adam Smith talks about are entirely consistent, and in fact, not only consistent, but they’re optimised. They work best in conjunction with one another. They each work with one hand tied behind their back apart from the other.

Gene Tunny  19:22

That’s great, David. It’s given me a lot to think about, because maybe I’ve approached economics too much as a technical field, and I need to think more about the philosophy. I really value your thoughts in helping me think more philosophically about it, so that’s great. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  19:55

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Gene Tunny  20:24

Now back to the show. I might move on to your book about Elizabeth Warren. I guess this follows on from some of the points you’ve made. Now, you’ve written that her presidency would destroy the middle class and the American dream. She’s not president, but there’s some of those ideas, they’re out there, and they could be picked up in the future, whether by maybe AOC one day if she ends up very senior position, in a position of power.

One thing that I’m wondering is, how do you think about the balance between market and state? There needs to be some role for government. And there are countries that seem to be doing relatively well with a more interventionist state, such as the Scandinavian countries, Australia to an extent. One major difference between Australia and the United States is that we have what you would call a single-payer health care system. And that is reasonably popular. Well, I think it’s very popular. No opposition party, nowadays they would no longer campaign against it. Once upon a time they did. Political parties would campaign against it. It’s widely accepted. How do you make that balance? And what do you think is so bad about policies just to inject a little bit of what you might call socialism into the system to try and make the political system more stable? How do you think about that?

David Bahnsen  22:02

I haven’t seen an example yet of where a little bit of socialism brings more stability to the political system. I don’t recall there being anything in my Elizabeth Warren book that I would take back or rewrite or don’t still believe. But I confess, it strikes me as a little less relevant because of the implosion of her candidacy, as it pertains to her. But as you say, people like AOC, Bernie Sanders, they’re meeting hard left figures in many other countries besides my own. She just happened to be a failed political candidate that I wrote a book about that became obsolete very quickly, because her candidacy imploded. But there does still seem to be some persistence in the idea of a Green New Deal, a wealth tax, forgiveness of student debt for all. And to the extent these ideas persist in the United States, or in other countries, they remain horrifically bad ideas, even if they’re not connected to the name of Elizabeth Warren anymore.

Now, with that said, when you ask why not just a little bit of socialism to come in and kind of maybe temper things a bit, we hear that expression a lot, to sort of smooth out the rough edges of capitalism. And I love the analogy, because it always sort of implies that capitalism is like a bowl of soup, and it can get a little bit too hot, and if you just add a little cool water on top – and that cool water, in this case, is the loving, all-competent arm of the federal government – then we can cool down the soup a little bit, still get a good warm bowl, and enjoy it and have it feed our appetite, but not scalding hot, burn our mouths. And of course, frameworks of thought and of governance and political and economic philosophies don’t work like a bowl of soup.

I am a Hayekian to the core. Friedrich Hayek told us why that can’t work, that the central planner, whether they’re coming in to do a lot, or whatever it is, a little – I would, by the way, debate the idea that they are ever content to do a little. But even apart from the very reality of slippery slope, there is the knowledge problem. And there is the incentive problem.

The reason why I cannot ask Washington DC to come in and smooth out transactions between me and another economic actor that would freely transact with me in business is that the government has no chance of having the knowledge and the time and place circumstances necessary to be a party in a transaction between me and another person. And the reason why I can’t ask the government to come in and smooth out the rough edges of two free human beings voluntarily transacting with one another is because the government can’t possibly have the incentives. They don’t have skin in the game. They don’t hurt economically if it goes poorly, and they don’t benefit economically if it goes well. It’s none of their damn business.

The government’s intervention on a macro level into the affairs of society must always be limited to its role in protection of private property, settlement of civil disputes, this very rare but nevertheless important function of a civil magistrate. The Warrens and Sanderses and AOCs of the world would have the government take on a role of a central planner. And the Keynesian vision of economics is that the government can play a role on a macro basis in smoothing the difficulties of a business cycle. But of course, my belief is that such interventions not only likely don’t solve the problem they seek to solve, but they inevitably create two new problems. And so the reason for rejection of that vision of government’s role in economic affairs is that I believe that government lacks the knowledge to transact or to have planning jurisdiction over transactions in a free economy.

Gene Tunny  26:36

Fair point. And, yeah, the whole slippery slope thing, potentially there is there is some sort of slippery slope, because the government just keeps ever expanding. And one of the problems we’ve got here in Australia now is that the government’s committed to having what we call a national disability insurance scheme, which is essentially trying to provide a level of care for disabled people, but the definition of that’s expanded a lot and the costs are blowing out. It’s a big challenge. You still got a little bit more time, David, or you got to –

David Bahnsen  27:08

Yeah, I’m okay. Go ahead.

Gene Tunny  27:09

Good one. Excellent. I’d like to ask, you’re also a host of a podcast, Radio Free California, is that right?

David Bahnsen  27:19

That’s one of my podcasts, yes.

Gene Tunny  27:23

Oh, you’ve got another. Great.

David Bahnsen  27:25

Capital Record is my podcast focused on free market, economics, defence of free enterprise, defence of capital markets. And I host. It’s a National Review podcast called Capitol Record. But Radio Free California is a more political podcast that focuses on the dysfunctions in the great state of California where I was born and raised and have lived most of the last 48 years.

Gene Tunny  27:53

Yeah. Could I ask, what’s your take on, just how bad are things in California for business at the moment?  I’ve chatted about this with Dan Mitchell. And Dan pointed out just how many people and businesses are leaving. Is this something that you’ve thought about, or are you concerned about the policy settings for business in California?

David Bahnsen  28:16

Of course I’m concerned. Anybody who cares about the preservation of one of the largest economic bodies in the world, and obviously the largest economic body within the United States, should be concerned. I hear a lot from the political and economic left that they care about the middle class. Yet it sure seems that they are perfectly happy with a policy framework that hollows out the middle class. And a state like California is case in point, where very wealthy people can live in California quite comfortably, and very poor people might be fans of the welfare state or what have you, but there is a kind of middle ground by which policies, school systems, crime becomes very, very unpleasant. And California seems to me to be ground zero for this laboratory of America, what we call blue state policies. And that’s what our efforts are primarily focused on is exposing the folly of blue state policies. And then as Dan Mitchell and others have well documented, it is leading to an incredible migration of mostly middle-class people out of the state of California to go to more business-friendly environments. And I think it’s a tragedy.

Gene Tunny  29:53

One of your other books is Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It. Now, what I found great about that book is you had a really interesting take on the financial crisis. I knew the basic facts, but I hadn’t thought about it in that way. But you argued that there was a failure of moral responsibility in a way, when people were simply walking away from houses where they had negative equity, which I found a really interesting take. And am I getting that right? Am I remembering that correctly?

David Bahnsen  30:39

You’re absolutely getting that right. And that, I would argue, was one of many moral failings in the financial crisis. But it was conveniently the one that was entirely ignored in the narrative. Ultimately, the desire for many of us on the right to put blame with the government, with Fannie Mae, Freddie Mac, the Federal Reserve, we were willing to look past Main Street’s faults, and the desire of those on the left to blame greed of Wall Street, of the banks, various familiar bad guys in their societal narrative, they were willing to look past the iniquities of Main Street. And I think it was entirely absurd set of stories told us about the financial crisis that chose to ignore Main Street’s culpability. And you reference those with negative equity. There’s simply no question that in the end, the pile on of foreclosures, and what really represented this purging of bad investment, that then had the domino effect into the overly levered credit and financial system. What the initial dominoes were to tipping that over-levered credit system over was the fact that people stopped making house payments when they were upside down on their houses.

And so although I would argue the very first act of moral culpability that led to the crisis was people’s Keeping Up with the Joneses mentality, and irresponsibility, and taking on a commitment they couldn’t keep, the lack of necessary protective equity in their home, dishonesty about their own income documentation. There are a whole lot of things that went into this game that was being played, that many people played well for a lot of years, until the music stopped playing. And when the music stopped playing, this house of cards fell.

And my book was attempting to say, I know what Wall Street did wrong, and I know what the government did wrong. But it is simply untrue that Main Street did nothing wrong, and in fact, that Main Street is a victim of this whole thing. That’s the way the story was being told. And I feel like five years later, my book has done a good job in telling the story that needed to be told about the financial crisis.

Gene Tunny  33:25

What do you see as the solution? Is there a solution? I think you’re right, in that there is a problem that that people are reluctant to take responsibility. I think you’ve you have diagnosed a problem. How do we solve this, David? Is there a solution to it?

David Bahnsen  33:49

Well, I think that the book goes into a whole lot of ideas. If I remember correctly, 10 of them are written to the individual person and sort of micro suggestions for a reaffirmation of personal responsibility, and 10 or macro, more of a policy level. I have a critique of the college student loan system, a critique of how we go about thinking about housing in our society.

Fundamentally, if you’ll allow me to go back to the kind of prior conversation about the religious and moral framework of a society, if people can get away with irresponsibly borrowing to buy a home and then walking away unscathed, if people get away with it without any moral compass, I don’t know why they wouldn’t keep doing it. But my belief is that fundamentally, we need a kind of restoration of basic cultural norms. This was really the whole point of the book, that people should be ashamed of what they did, but it isn’t just that they did it. It’s that they were proud of it, that other people congratulated them. Look how smart you are. You pulled one over on your bank. They could brag about it on Friday night with their friends, rather than being ashamed of the fact that they failed in their responsibility.

Paying back debts that one owes is the hallmark of a civilised person. And I think that we desperately need to restore the kind of traditional value system that would never tolerate someone being a degenerate and being so incapable of basic… I’m not referring to people in extreme hardship. We’ve always had that. We always want ways to help those who have genuinely run into very difficult times. But the notion of just simply being able to run away willy-nilly from things, heads, I win, tails, I don’t lose, this is no way to manage a society.

Gene Tunny  36:04

That’s another great example of a book where you’re thinking… Maybe economists wouldn’t normally think about these issues. I’d recommend that as well. Also, you’ve got a book on the case for dividend growth, and this relates to your investing. And I’ve just started that, but the way I’m interpreting it is you’re emphasising look for stocks with good dividends and don’t necessarily buy into all of the fantasies about you’ve got these stocks which will just grow ridiculous amounts in the future, the big tech stocks. I take it that that’s the general view in that book. Is that fair, David? Is that your philosophy in investing is looking for good earning stocks, good earning companies?

David Bahnsen  36:59

Well, dividends are simply what one is doing with good earnings. There are plenty of companies that don’t pay dividends that have wonderful earnings. But our belief is that not only do you want really good earnings, you want confirmation of the earnings, the legitimacy of them and the repeatability of them, and the growth of them, that is validated through the dividend payment to the shareholder. The dividend payment becomes a mechanical benefit. You’re monetizing your investment risk as you go. If you’re reinvesting those dividends, you’re constantly averaging and compounding your return. If you’re withdrawing the dividend for income, you’re satisfying a cash flow need, so that there are mechanical benefits to dividends. But then fundamentally, they represent proof of the profits and earnings of the company, and a vote from management in their own confidence about the sustainability of those earnings. And so dividends are just as much a benefit as they are a signal. And we want both and. That’s our view of dividend growth investing from a risk-adjusted standpoint, producing a much smoother result for investors over time.

Gene Tunny  38:22

Good stuff. Finally, David, I’d like to ask you about Alex P. Keaton, who you’ve identified as a role model. I remember watching Family Ties in the ‘80s here in Australia, and Alex was certainly someone who was very notable. What was it that you found inspirational, or I guess what did you learn from Alex? What are your thoughts on –

David Bahnsen  38:58

Just as a very young kid, I… Here there was this contrarian character on a sitcom on American television that was focused on ambition, on goals, on patriotism. He had a certain love of America, a love of self-determination. And so there was a lot of comedy associated with it and lightheartedness. And yet, at the same time, he was a character who just sort of had a personality that was similar to my own quirky personality as a young person. It’s many years ago now. It’s true, Alex P. Keaton and that character on Family Ties was a big part of my childhood.

Gene Tunny  39:53

Okay. Very good. Yeah. I think there’s a photo of you on your website as a young lad. You’re dressed as Alex P. Keaton or dressed in that –

David Bahnsen  40:04

This is true. I think I was probably nine or 10 years old. That’s correct.

Gene Tunny  40:09

Very good. Okay, excellent. David, this has been terrific. Are there any final points that you’d like to make, any thoughts on your book? Anything that you think it’d be important for us to take out of it?

David Bahnsen  40:24

I appreciate the time. I appreciate your thoughtful questions. There’s No Free Lunch: 250 Economic Truths, and it’s really intended to give people a little something to think about around the different major categories of economic thought.

Gene Tunny  40:38

Okay, thanks heaps, David, I’ll put links to your website and your books in the show notes. David Bahnsen, managing partner of the Bahnsen Group. Thanks so much for your time. Really appreciate it.

David Bahnsen  40:52

Thanks for having me, Gene. Really enjoyed it.

Gene Tunny  40:55 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Big thanks to EP132 guest David Bahnsen and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts

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Podcast episode

EP87 – Saving & investing for retirement: 401(k)s, IRAs, mutual funds, ETFs, etc

In Episode 87 of Economics Explored, host Gene Tunny discusses saving and investing for retirement with Sarah Holden, Senior Director of Retirement & Investor Research at the Investment Company Institute (ICI). ICI is the leading association representing regulated funds globally, including US mutual funds and exchange-traded funds (ETFs). Sarah has a Ph.D. in economics and has studied retirement trends and policy, as well as the behavior of investors, for decades. She uses humor and plain English to make retirement and investment concepts clear. Sarah is based in Washington, DC and Gene spoke with her over Zoom on 12 May 2021. 

Links relevant to the conversation include:

ICI Education Foundation (ICIEF)

ICI webpage on 401(k)s

ICI webpage on IRA

Get on the road to investing

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

Australia vs US: A scorecard on the Australian and US Defined Contribution Systems

Please send through any questions, comments or suggestions to contact@economicsexplored.com and Gene will aim to address them in a future episode.