Order of Man - OoM 069： The Laws of Wealth with Dr. Daniel Crosby

00:00:00.000 Building wealth. That's what I want to talk with you about today. I know a lot of people are jaded

00:00:03.860 with the whole process. Unscrupulous financial advisors, unnecessary fees, complex products,

00:00:08.640 industry jargon, and a whole host of issues that keep you from building massive amounts of wealth

00:00:12.860 in your life. My guest today, Dr. Daniel Crosby, is on a mission to help bring some of that clarity

00:00:17.100 and control back into your life and finally help you start taking charge of your money.

00:00:22.160 You're a man of action. You live life to the fullest. Embrace your fears and boldly charge

00:00:26.940 your own path. When life knocks you down, you get back up one more time, every time. You are not

00:00:32.840 easily deterred or defeated, rugged, resilient, strong. This is your life. This is who you are.

00:00:40.000 This is who you will become at the end of the day. And after all is said and done,

00:00:44.760 you can call yourself a man. Men, what's going on today? My name is Ryan Michler and I am your host

00:00:50.060 and the founder of Order of Man. I'm glad you're back with us here today. As always, if you're new

00:00:54.220 to the show, also welcome. This is the show about all things manly. We talk about money. We talk

00:00:58.840 about fitness. We talk about psychology. We talk about self-defense. We talk about relationships.

00:01:03.840 We talk about anything that's going to help you become a better man. Now, I've got a great one

00:01:07.640 lined up for you today. Most of you know by now that I have been a financial advisor for the past

00:01:11.940 nine years and I'm stoked to be having a conversation with a man I've been following for some time now about

00:01:17.480 what it takes to build wealth in your life. We talk about the good. We talk about the bad and the ugly,

00:01:23.000 but real quickly, before we get into that, I want to give you a couple of resources that you will

00:01:26.860 have to check out if you're interested in this conversation. First, check out the show notes.

00:01:31.480 You can get that at orderofman.com slash zero six nine. And also you're going to want to make

00:01:36.920 sure that you join our closed men's Facebook group for a deeper conversation. I think we've got

00:01:41.140 5,200 or so guys in there right now, and we're going to be having a deeper conversation on the topic

00:01:45.520 of building wealth in your life. So make sure you join in that conversation at facebook.com

00:01:50.200 slash groups slash order of man. Now let me introduce my guest to you, Dr. Daniel Crosby.

00:01:56.520 He is a behavioral finance expert and sought after thought leader on market psychology and is the

00:02:01.000 founder of Nocturne Capital. He created the sentiment and valuation measures that serve as

00:02:05.360 the overlay for Nocturne's tactical strategy. His ideas have appeared in Huffington Post,

00:02:10.720 Think Advisor, Risk Management, and then he's also done columns for Wealth Management and Investment News.

00:02:15.260 Daniel was named as one of the investment news 40 under 40 and a quote financial blogger.

00:02:21.880 You should be reading by the AARP. Daniel's second book, Personal Benchmark,

00:02:25.500 coauthored by Charles Widger of Brinker Capital, was a New York Times bestseller that outlies a highly

00:02:30.400 personalized approach to investing, which aligns intention with action while fostering an investment

00:02:35.360 experience that is both enjoyable and rational. And he's got a new book out. It's called The Laws

00:02:40.280 of Wealth, which is what he's here to talk with us about today. Daniel, thanks for joining me on the

00:02:45.740 show today. Glad you're here, man. Absolutely. Great to be here.

00:02:48.680 So we met what, I think we talked about this briefly. We met roughly three years ago at FinCon

00:02:54.140 Financial Bloggers Conference. That was a previous life of mine. And I'm glad that we finally get to

00:02:58.320 have the conversation that we talked about having three years ago. Yeah, I think it was 2014. That was

00:03:02.880 when I spoke. So yeah, it's been a couple of years. Okay. So two years. Yeah, two years. And things have

00:03:07.280 really changed for me. I am a financial advisor by trade. I still own my financial planning practice,

00:03:11.260 but obviously I've gone in a different direction, but this is my language. You're speaking my language

00:03:16.140 and you wrote a new book and I'm excited to talk with you about that today. But before we even get

00:03:19.320 into the meat of this, I really want you to explain to the men that are listening what behavioral finance

00:03:26.240 actually is, because I think there can be some misinterpretation on that term. Yeah, I think so.

00:03:30.480 Most simply put, traditional finance built fancy mathematical models that basically stripped the

00:03:37.980 human from the equation. I mean, they sort of made really simple assumptions about human behavior or

00:03:42.760 ignored it entirely to make pretty models. These all started to fall apart. You know, we've had them fall

00:03:49.460 apart a number of times, even in the last 20 years, you know, 2000, 2008. And so behavioral finance is

00:03:55.700 simply finance that tries to incorporate flesh and blood, tries to incorporate the messiness of human

00:04:02.000 behavior. Sure. What do you think about some of these models and businesses that are coming out

00:04:07.820 that actually eliminate altogether the human element by allowing computer programs and robots to automate

00:04:14.360 everything and so humans aren't involved? Is that a good thing or a bad thing?

00:04:17.500 I think it's, I think it's going to ultimately move the industry in a good direction because I think,

00:04:23.180 you know, these are called robo advisors, right? So I think these robo advisors, what they've done

00:04:29.560 is they've given the world of finance and financial planning that is, that has been historically woefully

00:04:36.500 behind technologically. I think it's given them good tools so that planners and advisors will be able

00:04:42.500 to integrate them into their practice. I think it'll allow them to serve clients more cheaply. I think

00:04:47.260 it's going to push, it's going to further compress fees. And I think ultimately you're going to get a

00:04:51.960 hybrid solution. That's a combination of maybe sort of limited engagement and technology. So I think

00:04:58.120 ultimately it's a very good thing. And I think it's going to, I think we're going to meet in the middle

00:05:03.380 and it's going to be great for the consumer. Yeah. I've heard the term, you know, we had robo

00:05:08.140 advisors and then more recently I've heard this term popping up the cyborg advisor, right? Like a

00:05:13.060 combination of an advisor. You talk about behavioral coaching and then incorporating the technological side

00:05:19.020 that we have as well to create this blend, this perfect blend, hopefully, and ideally that will

00:05:23.140 suit investors the best. Is that, uh, is that on your radar as well? That is, I mean, I've heard it

00:05:27.880 referred to as centaurs and cyborgs and I like, I like both of those. Um, yeah, definitely. Because

00:05:34.180 I think that the future is in sort of real time, uh, real time, we'll call it real time behavioral

00:05:40.180 intervention. And I think that technology has the ability to maybe ping that advisor and say, Hey,

00:05:45.860 Mrs. Jones is worried about her, uh, worried about her account, give her a call. And so then

00:05:50.940 you've got the best of both worlds. Sure. Now I want to set the baseline here for the rest of the

00:05:56.180 conversation. When you talk about investing in behavioral finance and the things that you're

00:06:00.140 talking about, are we specifically referring to the stock market, mutual funds? Are we referring also to

00:06:07.400 real estate, other investments? Help us understand what it is we're talking about. So as we go through the

00:06:12.380 rest of the show, we have some context. Yeah. So my focus, um, my focus is almost exclusively on the

00:06:17.860 stock market. Yeah. So that's, that's when I talk about investing, it's not real estate investing or

00:06:23.920 anything like that, even though that's a lovely and perfectly legitimate way to invest. Uh, my focus

00:06:29.140 is all on, on publicly traded companies. And so why that focus? I mean, is, is obviously this is

00:06:35.200 something you're very interested in. It's not your background because if I understand correctly,

00:06:38.460 you're a psychologist by, by, by trade and profession and education. So how did you get

00:06:42.720 into this world? Yeah. So I'm the son of a financial advisor. So I grew up sort of steeped in

00:06:47.260 this world. Um, went to, uh, went to school to actually be an investment manager. I mean,

00:06:52.300 I started out in business. Uh, then I went on, um, I lived in the Philippines for two years as a

00:06:57.720 missionary for my church, came back and really had had some real in deep exposure to, to helping

00:07:03.700 people and came back, I think with a bigger, a bigger heart than I left with and said, Hey,

00:07:08.540 I want to study why people do the things that they do. I want to help people. So then I got into

00:07:12.980 psychology about halfway through my PhD program. I was sick of, uh, talking to sad people.

00:07:21.380 Yeah. I can see that. Yeah. And said, Hey, you know, I love thinking about, I love thinking deeply

00:07:25.880 about the way that people behave and the reasons they make the choices they do. Uh, but I'm gonna,

00:07:31.280 I'm just gonna die if I have to talk to people who are having the worst week of their life all the

00:07:35.920 time. Um, and so switched back to sort of business psychology for lack of a better word. And so it's,

00:07:42.400 it's actually like a great synthesis of my two, my two loves. And I'm lucky to be able to do

00:07:47.880 something as odd as what I do. And I can see it being a powerful blend. I mean, when I got in the

00:07:53.060 financial planning industry, this was all about eight years, nine years ago, somewhere right in there.

00:07:58.580 And I was hired by a large, uh, life insurance company that happened to do some investments

00:08:04.020 on the side. And this was the furthest thing from what they were teaching. And I ran across

00:08:09.040 the behavioral finance side of things. And so talk to me why somebody really needs to consider

00:08:14.440 their behavior and their emotions. I know you've written some rules for investing,

00:08:18.640 which we'll get into a few of those and cover some of that as well. But tell me why this work

00:08:21.960 is so important.

00:08:22.640 So something that most people don't understand, and you know, we're talking here, uh, a little

00:08:28.260 less than a week after the Brexit vote, something that people, people don't understand is that their

00:08:34.120 decisions and their choices, uh, way more heavily, uh, are a bit better predictor of their ultimate

00:08:40.360 financial success than anything else. And I think so many times men feel disempowered by the process

00:08:47.120 of investing because there's, there's uncertainty involved and there's risk involved. But you know,

00:08:52.140 one of the things that I point out in the book is that at all times you are the best predictor of

00:08:56.520 how this is going to turn out. And it's not what's happening in England. It's not war. It's not famine.

00:09:03.000 It's not bankruptcy. Um, it's really just doing the blocking and tackling of setting aside money,

00:09:11.520 broadly diversifying and staying the course. That is the best predictor. And, uh, sadly, uh, studies show

00:09:17.640 that even though the market gives us over the last 30 years, about eight and a quarter percent per

00:09:22.320 year, um, the average investor in the market only keeps about half of that, um, because he makes bad

00:09:28.680 decisions on when to jump in and jump out, uh, and just does some things that are psychologically,

00:09:33.780 um, misguided. So a big passion of mine is just helping people hang on to more of that hard earned

00:09:40.780 money. Yeah. Yeah. I get that. And I've, I've seen those studies in my own life as well in my

00:09:46.160 financial planning practice. So you talk about these basic elements of blocking and tackling

00:09:50.840 investing, doing it over a long period of time, broad diversification, some of those things.

00:09:55.140 Why is this so difficult for people? I think, um, we, we tend to look for more complex solutions,

00:10:01.400 but what you're suggesting is that the simpler, the better, if I'm understanding you correctly.

00:10:05.300 Yeah. There's a, there's a part in the book where I talk about how, and I go into it in some

00:10:10.160 detail there and it, they'd be hard to do here, but I talk about how really complex, uh, complex

00:10:17.060 dynamic changing systems like the stock market actually require very simple solutions, um, to do

00:10:25.660 otherwise is what a statistician might refer to as overfitting the problem, right? So it's, it's weird

00:10:32.320 because we look at something that is truly as crazy and dynamic and multifaceted as the stock market.

00:10:38.600 And we think, well, to, to conquer this, I need a hedge fund manager. I need some wizard, some,

00:10:45.500 you know, Russian math genius, just cranking out algorithms and some, um, you know, basement on

00:10:50.880 wall street in order to, to be able to master this. And the fact is that people who follow a few simple

00:10:57.480 rules beat those people, uh, handily. And so it's a, it's a weird paradox that, that something as

00:11:04.340 complex and dynamic as the stock market requires a simple set of rules. Um, yeah. And it, and based

00:11:10.320 on what you're saying, it's actually opposite of most of the other areas of life. Is that right?

00:11:14.540 Yeah, that is, you know, like you, like you mentioned, I talk in the book about how the rules

00:11:18.700 of, uh, of what I call in the book, wall street, bizarro world on differ so dramatically from the

00:11:25.480 rules of every day. Uh, like just a couple of examples are, you know, in, in our everyday lives,

00:11:30.360 you know, you and I know what we're going to be doing, um, five minutes from now. We may have a,

00:11:36.040 some idea of what we're going to be doing five months from now, very little idea of what we'll

00:11:40.660 be doing 50 years from now. And the stock market is just the reverse of that. I mean, today is a

00:11:46.580 crap shoot next month. Maybe we have some idea next year. We have a better idea. 30 years from now,

00:11:52.720 we have a pretty darn good idea. Um, and getting people to sort of flip these rules on their head

00:11:58.520 is very different. You know, another, another thing I talk about is what's called action bias

00:12:03.600 in the psychological literature. You know, if you're, if you're doing many of the things that

00:12:08.080 you talk to the men on your show about lifting weights to get more strength or, you know,

00:12:12.840 getting smarter, you read more books. Well, to make more money in the stock market, you actually do

00:12:17.880 less. So, uh, there's not many places in life where being lazier gets you a better result,

00:12:23.320 but the stock market happens to be one of them.

00:12:25.360 I couldn't even count how many times I've used this phrase. Don't mistake action for

00:12:31.620 prudence. I've said that over and over again to people because they do when things are going bad,

00:12:36.360 we want to move when things are going well, we want to move when our friends tell us they're

00:12:39.520 getting a better rate of return or whatever they want to move. And that's probably the last thing

00:12:44.540 that you should do. The other concept that you talk a lot about in the book, what is the idea that

00:12:49.080 over time in the stock market, things become more clear or at least certain. So how does,

00:12:54.100 so explain that concept to me? And then also how does somebody who's listening to this

00:12:58.420 maintain long-term vision? Because it's easy to say, I'm going to be invested in the market for 40

00:13:03.020 years, but it's a lot harder to do in all reality when, uh, you know, shit's hitting the fan and things

00:13:08.440 are going wrong and, uh, it becomes very difficult emotionally to maintain that discipline.

00:13:12.520 Yeah. In terms of, uh, in terms of, uh, uh, you know, the long-term being more certain,

00:13:18.020 there's an incredible, incredible amount of consistency in the stock market over long periods

00:13:23.340 of time. And you find this even when, when those long periods of time encompass really dramatic,

00:13:29.840 negative stuff. And I mean, if you think about, um, the incredible rise we've seen in the stock

00:13:35.600 markets, uh, you know, let's say post-World War II, I mean, uh, during that time we've had numerous wars.

00:13:43.060 We've had on average a correction or a 10% drop in the stock market every single year. So on average,

00:13:52.160 we have a correction every single year over the past 35 years, the average drawdown, the average,

00:13:58.120 you know, crash in the stock market each year has been 14%, but the stock markets ended up 27 of those

00:14:04.760 35 years. So it's a very, it's a very strange thing that it can crash with such regularity,

00:14:11.020 uh, and still give us such dramatically positive returns. Um, but you know, if you look at any,

00:14:16.920 there's only been one rolling 10 year period in all time that you've had a negative result. There's

00:14:21.920 never, never been what I would call an investment lifetime. So say 20 to 30 years where you haven't

00:14:27.640 made really nice money in the stock market. Um, and so over time, those things get more consistent

00:14:33.200 now in terms of, in terms of actually sticking with it for that kind of length of time. I mean,

00:14:38.120 I think there's two, two things you can do that are what I'd say simple, but not easy, right? The,

00:14:43.620 the first thing that you can do is to try and personalize it. Um, you know, I talk in the book

00:14:48.460 about having a personal benchmark. A lot of people compare their returns, like you said, to their

00:14:53.260 neighbor, to their best friend, to their golf buddy. Um, and we need to try and compete on

00:14:59.500 the results that you need to live the life that you want to live. So personalizing that is very

00:15:04.780 powerful. And I actually share a study in the book, um, where people who personalized it. And in this

00:15:10.620 case, they, they looked at a picture of their children before making an investment decision.

00:15:15.520 These people were able to save almost 250% as much as those who didn't. So interesting. Yeah. So,

00:15:22.100 so, so reminding yourself of why you do it is a very big deal. Um, because it's tough. I mean,

00:15:27.360 it's hard as hell to do to say, I'm going to deny myself, deny myself cool stuff today. Um,

00:15:34.820 to put it aside for a hypothesized, you know, return in the future. I mean, it's a tough thing to do.

00:15:41.340 And only by sort of tapping into what's meaningful, are we able to do that? And then the second thing

00:15:47.680 I would say is just don't look at it. I mean, you know, if you, if you look at the stock market

00:15:53.580 every day, the stock market on a day to day basis is down 46% of the time. So, I mean, if you're

00:16:01.220 looking at this daily, it's brutal and you're, yeah, it's an emotional rollercoaster. Yeah. And

00:16:06.380 you know, psychologists will tell you that people experience the pain of a loss, uh, about two and a

00:16:11.340 half times as much as they have happiness with a similarly sized gain. So if you're looking at it

00:16:17.080 and it's down 46% of the time, it feels like it's down every time for all intents and purposes. So

00:16:23.180 just, you know, turning off CNBC and just worrying about it less is a big deal. Yeah, that makes sense.

00:16:29.140 It's really interesting that you bring up that the, having the strong reason why, and that some,

00:16:32.940 some investors will look at their kids. That's actually a concept that I've learned as well. We call

00:16:37.560 it our true purpose for money. What is the reason that we're actually doing this? For me,

00:16:40.880 it's empowerment. It's empowering my life. It's empowering my kid's life. Uh, my oldest son,

00:16:45.800 for example, he wants to be, and I quote a cowboy animal doctor. And, uh, as funny of a term as that

00:16:53.160 is, if that's what he wants to be, it's going to take some money. And so we need to be able to

00:16:57.840 empower him with money and education so that he can actually accomplish what it is that he wants to

00:17:02.640 accomplish. So I can see why having that reason for doing it is so valuable. Oh yeah. I think that,

00:17:07.140 I think that transcends all aspects of life. I mean, we could, we could talk about that all day.

00:17:12.420 I think having that big why is the only thing that gets you through life, much less the market.

00:17:18.160 Yeah. I think it's also interesting that you bring up the point of understanding this for yourself,

00:17:23.640 this individualized or this catered approach. I think all too often, a lot of people will just say,

00:17:28.660 I don't know this stuff. I want to hire a financial advisor. And while that idea is certainly noble and

00:17:34.180 can make a lot of sense in certain circumstances, you still need to know it because when your friend

00:17:39.920 comes and tells you that he's getting 10% and you're only getting eight, you're going to question

00:17:44.880 why it is you're doing what you're doing. If you've never really taken the time to figure it out for

00:17:48.880 yourself. Yeah, absolutely. And I mean, uh, the, the industry is headed in a better direction,

00:17:54.780 but I, uh, you know, I mean, you know how convoluted this thing is, you know, how many unscrupulous

00:18:00.260 advisors are out there. So I think that there's a, there's a modicum of education that we need to

00:18:05.860 take upon ourselves through a book like mine or lots of others that are out there to say, okay,

00:18:10.800 here, here are the basics of investing. And then that's going to help you pick a better advisor.

00:18:15.700 I think that that combination of personalized advice, but a basic knowledge of who to select

00:18:20.700 is a big deal. Yeah. And on that note, you actually go through 10 questions to ask your financial

00:18:26.460 advisor, which I went through for myself and I'm like, okay, if somebody asked me these,

00:18:30.480 would I be able to answer them? So, uh, talk about some of those questions that somebody should be

00:18:35.060 considering when they're hiring an advisor. Yeah. So, uh, this it's interesting. So my wife

00:18:40.300 is, uh, about 70, the book just came out three days ago. So she has a little, she has a little bit of a

00:18:46.000 past. So my wife's about 70 pages into a, you know, it's about a quarter of the way through.

00:18:50.680 And she said so far, uh, the 10 questions to ask your financial advisor has been the best,

00:18:56.420 the best part for her, the most useful part for her. Because frankly, if I got hit by a truck,

00:19:01.200 um, tomorrow, she wouldn't, she wouldn't know what to do. Right. I mean, she's not into this the way

00:19:06.800 that I am. So some of the questions are, are this, you know, the first one I ask is, is, are you a

00:19:11.720 fiduciary? And so, so I was explaining that to her and she didn't understand. And I think most people

00:19:17.000 don't understand that, that not all advisors have to act in your best interest. Sometimes they can

00:19:22.240 sell you products, uh, that, that pad their own wallets, but aren't necessarily in your best

00:19:27.460 interest. And that's, uh, that's a distinctly counterintuitive idea. And you, you feel like

00:19:32.420 that should be regulated away and it's not. Um, and so, you know, simple questions like that. Um,

00:19:38.640 I, you know, the second question I ask is how will you keep me from being my own worst enemy?

00:19:42.660 Um, in, in my field, uh, we've shown that people who work with a financial advisor tend

00:19:48.800 to do two to 3% better per year than those who do it themselves. But it's not for the

00:19:54.780 reason you think, I mean, most people think they're getting that two to 3% on the back

00:19:59.180 of investment outperformance. And all the research shows that, uh, advisors are no better at stock

00:20:04.440 picking than you or I really. Sure. Um, where they're getting at that is through coaching,

00:20:09.440 handholding and keeping people from making stupid decisions. And so I think, you know,

00:20:14.880 you need an advisor who's going to help you, you know, keep you from making four or five,

00:20:20.160 like colossally stupid decisions in your life. And if, if he can do that, he's paid,

00:20:25.800 paid for himself, frankly. Guys, as you know, by now we're having an amazing event lined up for

00:20:31.420 September 15th through the 18th, 2016. It's our inaugural order of man experience. It's called

00:20:36.960 the uprising. Most of you know, after listening to this show for any amount of time, I want you to

00:20:40.920 be a better leader, a better leader in your family, in your business, your community, your life. And

00:20:45.700 that's what this event is all about. That said, we are going to be taking a different approach than

00:20:49.180 your typical leadership event. We'll be doing a lot of hands-on activities, tactical training to

00:20:53.420 get you thinking on your feet, survival training to teach you in the importance of adaptability.

00:20:56.980 And we're going to be doing some instruction on the topics of fitness and mental fortitude and

00:21:01.340 emotional resilience. We've got some breathtaking, just amazing hikes planned where we'll talk about

00:21:06.080 goal setting and vision. And we'll be holding fireside discussions as a mastermind of sorts

00:21:11.040 to discuss relevant topics to you. We're going to be starting out each day with a morning routine

00:21:14.700 and ritual. We're going to be capping each day with an after action review. And this will be

00:21:18.620 extremely powerful as you get back into the quote unquote real world and actually start implementing

00:21:23.540 the ideas that we're going to give you in the tools and the strategies. So everything's included

00:21:26.820 food, lodging, events, instruction, everything. All you have to do is get to Las Vegas by September

00:21:31.160 15th at 11am and we will take care of the rest. Get all the details at order of man.com slash

00:21:37.040 uprising. There are limited seats and spots guys are filling up quick. So make sure you

00:21:41.060 get your spot reserved. Looking forward to seeing you there. Now let's get back to my interview

00:21:44.060 with Daniel. I bring this up cautiously, but it is something worth bringing up is it's kind

00:21:52.180 of like going into a car dealership and knowing to some degree what it is you want doing some

00:21:57.880 research beforehand so that you can negotiate because you know you're going to have to play

00:22:01.360 the game. And I don't like equating financial advisors to car salesmen, but the reality is

00:22:05.960 sometimes that's the case. And if you have at least the knowledge ahead of time, then you'll

00:22:10.700 be able to make a solid decision knowing that that advisor is going to continue to help you

00:22:15.960 and help you get the returns that you're actually looking for.

00:22:18.680 So there was a, there was a court case in my hometown recently where it came to light

00:22:24.500 over the, uh, in discovery that someone was paying three, just over 3% a year in advisory

00:22:30.680 fees.

00:22:31.300 Oh my goodness. Yeah.

00:22:32.420 And the, the judge said, this can't be right. This has to be a typo. And no, sure enough,

00:22:37.260 they were paying like 300, three and a quarter percent in advisory fees and three, 3% sounds

00:22:42.180 like a small number if you don't know any better. But I mean, people, people have to educate

00:22:47.040 themselves to know enough to know that 3% is a ridiculous number. Um, and that advisory

00:22:53.220 fees are just as negotiable in most cases, especially if you have a little money, uh,

00:22:58.060 advisory fees are negotiable. So, uh, something not a lot of people know.

00:23:02.180 Yeah. I could see that that's really important. And then just helping people to be, to, to

00:23:06.920 get out of their own way. I think we have a tendency to do that. Now I want to back up

00:23:11.020 a little bit here cause I think we got a little ahead of ourselves because I wanted to talk

00:23:13.680 so much about this. Talk to me about the importance of stocks in the first place.

00:23:18.080 I think somebody might be listening to this and say, Oh, this is great, but I can't afford

00:23:22.140 to put money away or I don't see the value in the stock market. This is a better way to

00:23:25.980 do it. And maybe they have an alternative. Talk to me about the power of why somebody

00:23:29.480 should even consider implementing this advice in their own life.

00:23:32.520 So the, the biggest reason is that people fail to account, uh, for, for what's called

00:23:38.260 the money illusion. So the, the psychological term for this is the money illusion. Basically

00:23:43.400 it's the failure to account for inflation over time. So if we think of something like

00:23:48.620 being a millionaire, um, you know, we talk about being a millionaire, like it means the

00:23:53.300 same thing that it did 40 or 50 years ago. And that's not the case. And you know, 40, 40

00:23:57.900 or 50 years from now, uh, being a millionaire will be truly nothing. Um, but when, when the,

00:24:04.420 when the money, when money gets eroded at two to 3% per year. So basically the reason you

00:24:10.480 invest in stocks is because they're one of the few asset classes that have historically

00:24:14.640 kept up with inflation. So you over time, I mean, it's just about impossible to create

00:24:22.340 a successful retirement if you're not invested in stocks. And I mean, tilted primarily towards

00:24:28.700 stocks, even especially at younger ages, uh, because other asset classes just simply do

00:24:33.820 not keep up with inflation. What about, uh, what about real estate? Because I know this

00:24:38.520 is a question that a lot of guys are even asking probably in their head right now. Like,

00:24:42.080 Oh, I've heard everybody talk about real estate. This is where I need to be invested. So talk

00:24:45.560 to me about maybe the pros and the cons of that. So it depends on what you're talking about.

00:24:49.800 I mean, part of this, I have no business talking about because I just don't, I just don't know

00:24:53.660 anything about it. So if you're talking about flipping houses and having rental properties

00:24:57.480 and things, that's, uh, that's left to people who know more about it than I do.

00:25:01.200 But, uh, one of the things that I really encourage people to do is, is to invest in REITs to spread

00:25:07.320 their, their exposure around between stocks, bonds, foreign, domestic, and REITs, uh, real

00:25:13.320 estate investment trust. So this is a way to get exposure to real estate in your portfolio,

00:25:18.500 uh, without having to, uh, go through what I consider the pain in the butt of having to be a

00:25:24.460 landlord. Um, I mean, we have one rental property, um, back in my hometown. And I mean,

00:25:29.780 I'll tell you, frankly, I don't, I don't love it. And I know some people have a better system than I

00:25:34.600 do, but for me, REITs are a low cost, easy way to get exposure to real estate. Uh, that doesn't

00:25:40.400 require me to do, uh, some of the, the messy stuff that's involved with being a landlord.

00:25:45.580 So you're talking about the power, not only leveraging dollars, but leveraging your time

00:25:49.580 and energy as well.

00:25:50.500 Yeah, absolutely. Cause for me, I mean, it's just, it's just not worth it. And, uh, you know,

00:25:55.040 a REIT could give you exposure to things like hospitals, shopping malls, as well as commercial

00:25:59.320 stuff. Um, so you, you do need exposure to real estate and it's done incredibly well. Um,

00:26:05.640 and people believe it or not over long periods of time, REITs have been incredible investments.

00:26:10.020 People tend to forget that because of the high profile crash of a few years ago. Uh, but I think

00:26:14.500 it's a great place to be in general. It's a great diversifier.

00:26:17.800 So what do you say to the guy who is considering maybe getting into stocks, maybe investing, maybe

00:26:22.860 doing some of what you're talking about, but they're concerned about the market. Here's what

00:26:26.700 I hear a lot of is this phrase. Yeah, but Ryan, I know the market's crashed, but this time it's

00:26:32.520 different. Like everything's going to fall apart. And so whether that was 2008, 2009, I heard that,

00:26:37.720 of course you've got Brexit, you've got, uh, uh, not too long ago in the, in the not too distant

00:26:43.560 past was the, uh, the tech stock boom. And then you have the real estate boom and bubble and bust.

00:26:47.980 What do you say to somebody who says this time is different history? Yes, has shown us that it's

00:26:52.220 going to work, but it's not going to work this way anymore. Yeah. So, uh, I forget who says it,

00:26:57.160 but those, the, the whole, this time is different has been referred to as the most expensive, uh,

00:27:02.100 or the, uh, the most dangerous words in investing. And it, that actually cuts both ways. You know,

00:27:07.740 people think this time is different in the sort of turn of the century. People were saying this

00:27:12.340 time is different because they had given up on metrics like profitability and said, Hey,

00:27:17.460 we're going to value this internet company at, uh, you know, uh, a billion dollars because they

00:27:22.620 have good mind share or eyeball share. And I think it's dangerous to, to discount business

00:27:27.960 fundamentals. And I think it's, uh, it's also dangerous to discount the power of the stock

00:27:32.940 market. Now I will tell you one thing. I mean, U S U S stocks are incredibly expensive right now.

00:27:38.060 And so that means that, uh, you know, historically speaking, medium term returns are not going to be

00:27:44.120 fantastic, but there are a lot of great opportunities in Europe. There are great

00:27:47.700 opportunities in REITs. And so for the diversified investor, you have to accept as a fact of life,

00:27:53.320 that something you hold is always going to be underperforming. And if that's not the case,

00:27:58.900 you're not well diversified. So spread your money around between, um, stocks, bonds, foreign,

00:28:04.420 uh, you know, foreign stocks, domestic stocks, bonds, REITs, uh, and different places. And just take

00:28:10.840 it as a matter of fact that something's always going to be underperforming, but also know that

00:28:15.700 if you're, you're disciplined about that and you stick with that process over long periods of time,

00:28:20.360 you're going to have some incredible, incredible ability to compound wealth in ways that it's

00:28:25.160 frankly impossible to do on your own. So I want to be really clear here too, because you said

00:28:30.540 something that it would be very easy, I think maybe to misinterpret. And I don't want to put

00:28:34.520 words in your mouth, but you said that, that, uh, that U S stocks are, are high right now. And so

00:28:40.640 you're talking about other forms of investing, but you're not suggesting that we pick only those

00:28:46.660 things or not invest in the U S market. You're talking about still owning those things, but

00:28:50.940 diversifying elsewhere. In addition to that, correct? Yeah, absolutely. Because U S stocks

00:28:55.360 were expensive in 1996 as well, and they went straight up for four years. So, I mean, it's no,

00:29:01.540 uh, all I'm saying there is that the, the longterm, you know, the, the five to seven year returns for

00:29:07.300 U S stocks will probably not be 10% a year because of where they sit now. And because we've had such

00:29:12.240 a great seven years, but, but that says nothing about whether or not you should own them. You

00:29:16.100 should, I mean, we're a U S stocks are half of the, half of the equities in the world. So you,

00:29:22.080 you should be exposed to them for sure. Now, one of the interesting things that I read in the book,

00:29:26.460 and I wholeheartedly agree with this, is you said, quote, humans are ill-equipped to be good investors,

00:29:31.200 right? Yeah. And so talk to me a little bit about that, because now you're talking about the

00:29:35.980 importance of doing this, why it's so valuable, why everybody probably needs to at least expose

00:29:40.460 themselves to the stock market to some degree. And then you're saying in the, in the next breath

00:29:44.700 that, but we're not good at doing it. Yeah. So it's, you know, I talk about that paradox in there.

00:29:48.840 It's like, Hey, you, you have to do this as we've discussed, you're not going to be able to keep up

00:29:53.080 with inflation as of, as of today, uh, the average individual spends $250,000 in retirement on

00:30:01.680 medical expenses above and beyond, but their insurance covers. So, you know, cover, she's

00:30:06.580 covering, covering something like that without having invested is just, I mean, it's just

00:30:12.140 ridiculous. You just can't do it. It's impossible. Yeah. So on the one hand you have to invest. And

00:30:17.240 then on the other hand, you're not very good at it. And you know, it's because of the things that

00:30:20.940 we've talked about before it's, it's because of things like how different experience in the market

00:30:26.200 is than sort of lived experience elsewhere. Um, it's because human beings are equipped for,

00:30:32.140 to look for, uh, to, for certainty and stability and the stock market doesn't provide those things.

00:30:37.940 It's because we're still working with the same hardware that our ancestors worked with on the

00:30:42.980 African Savannah. And, uh, uh, we experienced pain and fear, uh, when sitting in equity markets,

00:30:50.740 the same way they did when they heard a rustle in the grass and thought it was a snake.

00:30:54.260 Like I'm sure our, our, uh, our hardware and our, and our wetware is just not equipped for this.

00:30:59.440 And yet we have to do it. And I think that's when sort of the dual threat of basic education

00:31:05.500 and working with an advisor can be a powerful one, two punch. You educate yourself enough to

00:31:10.780 know the basics and then you get an advisor to hold your hand through the process.

00:31:14.520 I also want to talk about the concept of the, you, I think you talk about the four C's of rule-based

00:31:20.180 investing, which is what we're talking about here. Rule-based investing. You've got these 10 rules in the

00:31:23.620 book. I'm not going to go through them all. I mean, if you guys want to check it out,

00:31:26.240 you can buy the book. It's a great book. I've read through it, but talk to me a little bit about

00:31:29.820 the, the four C's of behavior, rule-based investing. Yeah. So I don't, um, that's,

00:31:34.660 that's a little trickier, but I want to highlight one of them for sure. And, and talk about this

00:31:40.040 because I feel like it's a dirty secret in the fund industry that not a lot of people know about

00:31:44.380 and that's a conviction. And so I'm trying to keep it on the level here. So a passive investing

00:31:50.980 is basically when you own the whole market and you pay very, very low fees for this. And so that's a

00:31:57.020 very sensible way to, uh, to invest in a lot of ways. Uh, active fund management says I'm going to

00:32:03.400 pay a much larger fee, uh, to someone like myself or another professional, um, to pick stocks for me.

00:32:10.040 And the thought is, you know, hopefully that individual is going to use their, their smarts

00:32:14.840 and they're going to pick stocks that are going to beat what just owning the whole market does.

00:32:18.840 Well, um, that there's two things that work here. You know, one is there is, uh, active funds have

00:32:25.480 been spanked by passive funds, um, uh, especially over the last 10 years. And so basically what's

00:32:31.680 happening is that people are, um, paying more money for a worse product, which you don't,

00:32:36.480 you don't find every day. Um, yeah, you, you just wouldn't do that.

00:32:40.040 Right. You wouldn't, you wouldn't pay more for a Kia than a Mercedes. Right. But that's kind of

00:32:44.680 what happens, um, in the mutual fund world sometimes. Uh, but why is that? I mean, I don't

00:32:49.500 want to get you off track here, but why, why is that?

00:32:51.340 Well, I think, um, I think that hope springs eternal, right? I mean, people are greedy and

00:32:57.060 people want to, uh, and plus it's a sort of an intuitive thing that, Hey, there are smart people

00:33:02.340 in the world. Shouldn't, shouldn't we be able to sift through, uh, information about companies and look

00:33:07.660 at their leadership and know, um, that, you know, that this stock is better than that stock. It

00:33:12.080 seems like, uh, you know, that seems plausible to the, to the mind. And, and I suggest something,

00:33:18.500 you know, I suggest something in the book that's a little controversial. That's basically, Hey, uh,

00:33:23.720 active managers have more skill than maybe we realize, but what the, but what they haven't done,

00:33:29.720 uh, is had much in the way of balls, um, because, uh, three quarters, three quarters of what's

00:33:37.340 labeled as active funds and people are charging, you know, being charged good, good money for these

00:33:42.280 active funds. Three quarters of them don't differ meaningfully, uh, from the, their passive brethren.

00:33:49.680 So basically, so basically people three quarters of the time are paying a lot of money for a fund

00:33:55.360 that they could have gotten for a very little money. And the reason that active managers do this

00:34:00.020 is career risk, uh, because they want to kind of own everything. They don't want to look that

00:34:04.540 different from the market because they're afraid of getting fired. And so I'm trying to sort of shine

00:34:09.620 some light in a dark place here and say, Hey, um, if you're going to be active, have the balls to be

00:34:14.620 all in and really be active and use those smarts to, to benefit your investors. And if you're not going

00:34:21.060 to be active, just go get it for cheap, but never, never be in the middle. I mean,

00:34:25.060 never be paying active fees for closet passivity. What do you refer to it as an investment statement

00:34:31.880 or investment policy statement? I can't remember what you, what you refer to it as.

00:34:35.320 Oh, I just refer to it as a rules-based behavioral investing. It's following those four C's. So

00:34:40.720 consistency means, uh, following the rules. Clarity means only focusing on a few simple factors.

00:34:47.300 Uh, courageousness means sort of automating the process of buying low and selling high and vice versa.

00:34:52.560 Uh, and then conviction means this, um, this sort of, uh, having the courage to actually be different

00:34:59.260 if you're going to bother to do it at all. Right. And so are you suggesting that an investor,

00:35:03.700 uh, like myself or a consumer would want to adhere to a passive strategy or an all active strategy?

00:35:10.780 Oh, I think, I think I'm not going to suggest, uh, you know, sort of in a blanket way that either of

00:35:17.060 those is all good or all bad. I talk about some of the, I try and present a balanced, uh, pro and

00:35:22.340 con on active and passive investing in the book. And I think for a lot of people, a blend of both

00:35:27.900 strategies work. That's how I, that's how I manage my own money is through a blend of a blend of those

00:35:32.920 things. I just want, I just want people to not be in that sort of ugly middle of paying good money

00:35:38.600 for, for a fund manager who doesn't have the conviction to actually be different than the

00:35:43.600 benchmark. And you know, what's really interesting is we talk a lot about this, but the reality

00:35:47.780 moderation, which is what you're talking about here is not very marketable, right? Like I can't

00:35:53.040 say that this is not going to be the best and it's not going to be the worst. It's going to be kind

00:35:56.720 of average and you're going to do okay, but you're not going to always be the best. And that's,

00:36:00.360 that doesn't sound real great, even though that's probably the most prudent advice you

00:36:03.400 could take. Well, you know, what's funny is I, I sometimes refer to what I do as middle

00:36:07.960 path investing. And a lot of ways it's, um, it really does sit squarely somewhere between,

00:36:13.740 uh, total passivity, which I think has, uh, you know, a couple of drawbacks, a lot of great

00:36:18.540 stuff, but a couple of drawbacks and sort of super active discretionary hedge funds. And it's

00:36:23.900 not a very sexy place to be, frankly. I mean, it's a, it's a sensible place, but it doesn't,

00:36:28.360 it doesn't engender the kind of fire in the belly, uh, that the other, that the other two

00:36:33.140 do. Yeah. And we talk a lot about the concept, uh, of, of emotions and stoicism and, and maintaining

00:36:39.340 a level head. And that's really what you've got to do here is not be swayed by, like you

00:36:43.100 said, the fire and the passion and the marketing that's out there and available that tends to

00:36:46.480 get people fired up one way or the other. Yeah. Well, so where does somebody start? You

00:36:50.860 know, we're listening to this show. Someone says, great, I get it. I know I need to invest.

00:36:54.680 I know I've got to learn a little bit about this. Where do we get started and how do we

00:36:58.520 get going when it comes to investing in the market? So for me, I mean, there's just a couple

00:37:02.060 of things that, uh, you don't, you don't need to even worry about any of this stuff until

00:37:06.600 you're doing a couple of things. And one is, you know, one is paying down your debt. Um,

00:37:11.440 one is setting aside, you know, 10, 15, 20% of your income each month. Uh, and then this,

00:37:17.520 you know, another thing is maxing out your 401k and the match. So until you've done, uh, until

00:37:22.480 you've sort of done those, those basic things, I think you have no sense, um, that it makes

00:37:27.460 no sense to sort of dabble in the stock market. Um, once you've knocked out the, those fundamentals,

00:37:33.240 I think then you can start, uh, worrying about these higher level things. But I mean, I had

00:37:38.340 a time right now, I think I read the other day, the average, uh, the average American has

00:37:42.980 like 40 or $50,000 in retirement savings. And it's just barely above that. Um, for, for people

00:37:48.860 who are about to retire. So, I mean, oh my goodness. I mean, until we, until we get the

00:37:53.720 basics down, there's no sense in, uh, trying to get fancy with it. So I do those basic things

00:37:59.160 and then, uh, and then go read my book and then worry.

00:38:01.960 Very cool. Yeah, very cool. Well, well, so guys, you heard it. I mean, make sure you get

00:38:06.520 these, these basics knocked out of the way. Once you do that, buy the book and learn about

00:38:10.540 this stuff. I think it's really, really important. And I can tell that when I have a client in my

00:38:14.420 financial planning practice who is educated, at least to some degree about this stuff, the

00:38:18.320 relationship is much better. And that person's actually going to yield better results over the

00:38:22.100 long haul because they have taken the time not to rely only on me, but to also figure this stuff

00:38:26.640 out for themselves. So I really appreciate, uh, Daniel, the discussion today and some of the

00:38:30.320 information. I'm going to ask you a question as we wind things down. And this is a question I ask

00:38:34.240 everybody, even though it's not the topic of the discussion today. And that question is,

00:38:38.260 what does it mean to be a man? So for me, the, the central sort of defining theme of my life is,

00:38:44.640 is meaning and purpose. So for me, being a man is about discovering, uh, that, that catalyst,

00:38:51.440 that fire in your life, and then pursuing that in an honest and truthful way that leads to personal

00:38:57.560 growth. Um, because I don't, I don't sort of adhere to, uh, traditional maybe notions of what it,

00:39:03.380 what it means to be a man. For me, that is as, as varied as the, the men that take that

00:39:08.140 on. Uh, but, but across the board, I think it's, it's human nature to want to find out what matters

00:39:14.260 and then to pursue that thing relentlessly. And so I think that's what it means for me to be a man.

00:39:19.640 Awesome. I love it. Such a great explanation of that. If somebody is listening to this,

00:39:23.360 they want to pick up the book. They want to learn more about what you're doing. I love your articles,

00:39:26.180 by the way. I've been a follower of you for, for quite a while now, years now. And so how do we

00:39:30.600 connect with you and learn a little bit more about what it is you're doing?

00:39:33.360 Yeah. So my, my website is Nocturne Capital. So that's Nocturne, like Chopin,

00:39:37.680 like the, the music. My wife is a pianist and I wanted to, to name it after the music that she

00:39:42.900 loves. So Nocturne with an E capital on Twitter. I'm at Daniel Crosby and those are the best ways

00:39:48.840 to get at me. All right. Perfect. Well, I appreciate you taking the time. I'm excited about

00:39:53.380 your new book guys. Listen to this guy. He knows what he's talking about. I can tell you that from

00:39:56.820 experience of being in the financial industry myself, Daniel, I really appreciate you and I

00:40:00.380 appreciate your time. Thank you, man. It was a pleasure. There it is guys. Dr. Daniel Crosby dropping

00:40:05.340 some serious knowledge when it comes to building wealth. I can attest to you that the man knows

00:40:09.240 what he is talking about. If you're interested in building any amount of wealth in your life,

00:40:13.220 I highly suggest you go check out his blog and also the book. You're going to be glad

00:40:17.020 that you did. Now, in the meantime, remember our inaugural order event uprising, September

00:40:21.260 15th through the 18th, 2016. I do expect the event to sell out. So make sure you act fast,

00:40:26.880 get your spot reserved. We're going to be taking three days in a cabin. I leased out for us and

00:40:30.840 we're going to be really diving in and giving you all the tools and resources to take your life to

00:40:36.580 the next level. Go to order of man.com slash uprising for all of those details. Guys, I look

00:40:40.940 forward to talking with you on Friday, but until then take action and become the man you were meant

00:40:44.840 to be. Thank you for listening to the order of man podcast. You're ready to take charge of your life

00:40:50.320 and be more of a man you were meant to be. We invite you to join the order at order of man.com.

Order of Man - July 12, 2016

OoM 069： The Laws of Wealth with Dr. Daniel Crosby

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