Average Is Great
John Goodell | Apr 8, 2020
I RECENTLY DISCUSSED retirement plans with my old college roommate, Joe, who now runs his own business. As we wrapped up the conversation, Joe asked if I had any book recommendations. I told him I was about to start Good to Great, the management book by Jim Collins. It’s been a huge bestseller, with four million copies sold. Joe immediately shot back, “John, that book demonstrates precisely why low-cost index funds have to be the answer for most retirement plans. Read it and you’ll see what I mean.” Initially, I thought Joe was talking about fees, but he wasn’t. Instead, he was referring to the other major reason to own low-cost index funds: diversification. In seeking to find the best companies—those that go from good to great—Collins had uncovered some general truths about what constitutes the best leaders for a business organization. Collins posits that these leaders end up leaving their companies enduringly better. Did they? Here are some of the great companies that Collins identified: Circuit City, which went bankrupt in 2008, in part because of the rise of Amazon and online shopping. Fannie Mae, which effectively imploded during the Great Recession, thanks to bad lending. Wells Fargo, which has been mired in the fallout from its creation of millions of sham customer accounts. Clearly, time has proved how difficult it is for the great to stay great—or even good in some cases. To be fair, Collins profiles some companies that haven’t performed nearly so poorly, such as Nucor, Abbott Labs, Kimberly-Clark, Kroger and Walgreens (though the last two have also struggled because of online shopping and the behemoth that is Amazon). Changes in business models, and disruption caused by low-cost competitors and new technology, happen to the best of companies. Everyday investors can’t reliably predict these things. Even professional money…
Read more » Renting Problems
John Goodell | Oct 5, 2021
I’M REASONABLY certain that Dante Alighieri’s Divine Comedy has a long-lost section where he details the 10th Ring of Hell: being a landlord. I’ve done so twice and, despite the glorification seen on HGTV and heard on BiggerPockets podcasts, I found no joy in either experience. Selling those properties felt better than I can possibly describe. Being a remote landlord may be the worst of all worlds. Getting an 8 p.m. phone call to fix a broken toilet is annoying. But getting that call for the same issue at 4 a.m., because you moved and there’s now a time difference, means existing in a special kind of purgatory. Sure, you can pay a property manager to handle maintenance and upkeep, but that often eats up most—if not all—of the profit. Instead, I favor owning a real estate investment trust (REIT) index fund. REITs are included in total market index funds, but their weighting is tiny relative to their role in the broader economy. REITs offer significant advantages over owning rental properties. A REIT index fund, such as Vanguard Real Estate ETF (symbol: VNQ), offers wide diversification. When the pandemic dealt a blow to shopping malls, commercial office space and college housing, those hits were offset by gains in sectors like data storage and single-family homes. REITs are run by experienced real-estate operators who understand the cyclicality of their market far better than you or me. They’re able to take advantage of growth opportunities in ways that individual investors simply can’t. For instance, during the COVID-induced capitulation in the mall space, Simon Property Group pivoted from pure landlord to business owner by astutely picking up several iconic but bankrupt brands like Brooks Brothers and JCPenney for, err, pennies on the dollar. REITs also operate with much less debt and are therefore…
Read more » Don’t Be Deceived
John Goodell | Mar 11, 2022
AT FIRST GLANCE, personal finance might appear to have nothing in common with the world of personal fitness. I’d argue otherwise. Perhaps the clearest parallel is between the gains from diligent investing in low-cost index funds and the gains from proper diet and exercise. Both are hardly noticeable at first and, as a result, there’s a temptation to stray. But if we continue the process of saving and investing—or eating correctly and exercising—we can see tremendous gains over time. There is, however, another analogy—one I recently came across in an article discussing the rampant use of steroids in the fitness industry. The use of anabolic steroids among bodybuilders is widely known. But did you know that many famous fitness social media influencers, and even some of our favorite Hollywood stars, have likely bulked up using performance-enhancing drugs? The short-term gains are remarkable, though they mask significant longer-term health costs. Many fans don’t realize that these fitness gurus are effectively lying and cheating their way to profits. For average folks, the consequence is severe disappointment when they don’t enjoy results similar to those they emulate. As a 40-year-old who has worked out regularly since he was 16, I can attest that the first decade in the gym produced little result, and it was discouraging. If the Army didn’t force me to exercise continuously, I probably would have quit and never have realized some of my best fitness gains—many of which have only become obvious in my third decade working out. This same integrity issue afflicts the financial services industry. What we see online and on TV is rarely indicative of reality. The amount of investor assets that some CNBC pundit manages is akin to the number of followers a fitness guru attracts. Neither metric actually measures performance. No one should confuse…
Read more » Stay Positive
John Goodell | May 24, 2022
AMONG THE AREAS of law that have made me miserable over 16 years of practice, it’s the adversarial roles that have made me most miserable. My experience in labor and employment law has been particularly difficult because the interaction with opposing counsel is usually contentious, each side compelled to zealously advocate for their position. Almost any type of litigation is a zero-sum game. One side wins, the other loses. Because the outcome is never guaranteed, those involved often engage in cut-throat, zero-sum behavior. I’ve slowly come to realize that the financial world has a similar dynamic. Short-term trading usually delivers zero-sum outcomes, while longer-term investing offers positive-sum results. The game that investors choose to play determines the outcome they receive. In a zero-sum game, rational actors seeking the greatest gain for themselves will necessarily do so at the expense of other actors. Trading amounts to a zero-sum game. Buyers hope to get a better deal at the expense of sellers, and vice versa. By contrast, in positive-sum games, the overall pie is growing, so there are more spoils for everyone to share. Positive-sum games can be win-win situations. Investing for the long term in a broad market index fund, and thereby avoiding the risks inherent in individual stocks, is a positive-sum game because markets move up over time—and all investors can potentially win. Moreover, the longer investors hold a diverse basket of stocks, the greater the likelihood that the engine of capitalism will produce a happy outcome. An added bonus: Investors can avoid the nasty “winner takes all” mentality that many short-term traders consciously or subconsciously have. For my own mental health, I prefer to play positive-sum games—whether it’s in my professional life or when investing.
Read more » Bye-Bye I-Buy
John Goodell | Nov 19, 2021
ZILLOW ANNOUNCED recently that it would cease its algorithm-driven home buying program. Thus ends its three-year experiment to disrupt the real-estate brokerage business with what’s known as “i-buying.” Zillow had purchased homes without significant involvement by real-estate agents. Instead, it used its proprietary algorithm—which it calls the Zestimate—to determine a property’s value. It then offered homeowners a percentage of this value, in cash, to buy their houses. This offer proved appealing to many home sellers. They didn’t have to stage their homes and could be certain of the price they’d get. It also gave them a definitive closing date. To generate a profit on each home sale, Zillow would keep the commissions usually paid to the seller’s and buyer’s brokers. They would also update the properties cosmetically, when needed. Ultimately, Zillow erred grossly in anticipating how difficult it would be to turn a profit in the residential real-estate market. There were several problems with its model. Zillow likely discovered what the rest of us already knew—that getting a contractor to show up on time and do a good job is incredibly difficult, and that it’s hard to know whether a house is good value unless you take the time to carefully inspect the property. Of the 1,000 homes Zillow recently listed for sale in its five biggest markets, 64% were being offered for less than the company paid for them. I wouldn’t fault any company for realizing the error of its ways and pivoting accordingly. What Zillow did, however, was irksome. How so? It announced it was pausing its i-buying program on Oct. 18. But it turned out to be more than a pause. Just two weeks later, on Nov. 2, Zillow admitted defeat and shut down its home buying program, shedding roughly 25% of its workforce in the process. Zillow stock…
Read more » Standing Down
John Goodell | Mar 3, 2021
AFTER 14 YEARS ON active duty with the U.S. Army, I recently walked away from being a fulltime soldier. At age 39, it’s the only professional life I’ve known. I plan to complete my 20 years of service in the U.S. Army Reserve, which will earn me a reduced pension. It would be hard to argue this was a smart financial decision. While defined benefit plans have mostly been replaced by defined contribution plans such as 401(k), 403(b) and 457 plans, the military still offers a pension. In fact, it’s arguably the gold standard of pensions, one that’s indexed to inflation and backed by Uncle Sam. If you remain in military service for 20 years, your pension will amount to 50% of your highest 36 months of base pay. For each additional year of service beyond 20 years, that percentage increases by 2.5 percentage points. The plan is so good that Congress recently tweaked it to save costs. Those who join now only have access to the hybrid Blended Retirement System, which shifts some of the burden to save for retirement onto the individual. The size of a military pension varies substantially, depending on rank and years of service. Given my active-duty career path, I estimate a 50% pension would have equaled roughly $58,000 per year in today’s dollars, plus I could have drawn that amount starting at age 45. Pensions for Reserve and National Guard servicemembers are far less generous, and hinge on the amount of time spent in uniform working on weekends, mobilized to assist during natural disasters, fighting in combat zones and so on. My pension will depend on how actively I participate in the Reserves, but I conservatively estimate I’ll draw roughly 39% of my salary. That means I’ll receive some $42,300 a year once I turn…
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