#76 - Phil DeMuth - “Nothing in My Global Outlook is Telling Me It's Time to Pull Up the Anchor and Set Sail"


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Oct 18 2017 91 mins   12
In Episode 76, we welcome Phil DeMuth. We start with Phil’s background. It’s a fun recap, involving Phil’s clinical psychology roots, his move to LA to be a screenwriter, his experiences in the Dot Com boom with friend, Ben Stein, which led to the writing of his first investment book, which eventually resulted in his managing money. Meb dives into investing, asking for an overview of the framework Phil uses with clients. Phil seeks to construct a portfolio that matches each individual’s situation, so it’s largely bespoke. That said, in general, he starts with a global market portfolio, then adds various factors – for example small value, or momentum, or low beta… Then he’ll add bonds, some alternatives, gold, and so on – again, all relative to the individual’s needs and goals. This leads into a great conversation on the idea of a person’s “personal beta.” This dovetails into the concept of a person’s human capital. Meb believes that adjusting a portfolio to reflect a person’s human capital is something advisors do well, giving them an advantage over robos. Phil thinks there are ways the robos can catch up here. Next up, the guys discuss the various types of investing clients – doctors, engineers, celebrities, and so on – and whether any specific type is better or worse suited for investing. Meb’s opinion is that many doctors and engineers can be challenging clients because they’re brilliant and love to tinker. They can also have some hubris – an element of “I can do better than buy-and-hold”. Phil agrees that doctors and engineers should be excellent investors. They’re so smart that they can do it all; yet in practice, they tend to stumble. This leads the guys to the takeaway that, in investing, there’s not a linear correlation between time/effort and returns. Phil notes the correlation could even be negative! Next up, Meb asks how the world looks to Phil today. Phil tells us “Everything looks expensive. It’s just a question of what looks more expensive than others.” That said “Nothing in my global outlook is telling me it’s time to pull up the anchor and set sail,” even though there seems to be 10 articles each day claiming the sky is falling. This dovetails into an interesting conversation about how nearly no one believes there will be strong U.S. equity returns over the next decade or so. But what is the psychological impact of everyone believing that? Especially in light of how terrible humans tend to be at these kinds of predictions. From this, Meb brings up alternatives. Phil has been delving deeper into alts since ’08, when all his assets sank together. Phil tells us he’s been looking for alts that have have zero correlation to the stock market, reasonable expenses, and should have positive expected returns. Meb switches to psychology, asking about the most insidious behavioral issues facing investors, and how to protect against them. The guys discuss our shortcomings, including a trick Phil uses with his clients that tends to help them avoid some of the damage. Meb transitions to Phil’s newest book, which is one of Meb’s favorites: The Overtaxed Investor: Slash Your Tax Bill & Be A Tax Alpha Dog. The guys discuss how implementing effective tax strategies in investing is one of the biggest, yet underused, sources of alpha around. Phil notes that any savings in this area goes straight to the bottom line. Meb asks for specific tax strategies. You’ll want to listen to this section, which dives into some of the details of parking the right kind of assets into the right kind of accounts. This dovetails into an idea Meb loves: (and the topic of a soon-to-be-released whited paper) avoiding dividends. Phil tells us he hated the taxes he was paying on dividends and capital gains, so he got rid of everything issuing him dividends and distributions, and instead, sought quality investments that wouldn’t pay a dividend. He goes on to say how dividends are [...]