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The Smartest Investor You’ve Never Heard Of And the Crisis No One Sees Coming

Mike Burry is the smartest investor you’ve never heard of.

Well, I say that. If you saw the movie The Big Short, you’ve heard of him. Burry was the eccentric hedge fund manager played by Christian Bale and one of the select few people that both saw the 2008 mortgage crisis coming and managed to profit from it.

But despite his stellar returns – generating 697% gross returns between 2000 and the first quarter of 2008 at a time when the S&P 500 barely returned 5% — Burry lacks the name recognition of some of his higher-profile peers.  Warren Buffett can’t sneeze without CNBC reporting it, whereas you have to actively search for comments by Burry.

But when he speaks, you’d be wise to listen. And Burry has quite a bit to say these days about the index funds making up your 401(k). In fact, he considers stock and bond index funds and ETFs to be as risky today as exotic mortgage derivatives before the 2008 meltdown.

In a normal, functioning market, informed buyers and sellers reach an agreement on price. This is true of stocks but equally true of houses, cars, cups of coffee or velvet Elvis paintings. The push and pull of buyers and sellers towards a fair price is what economists call “price discovery.”

Of course, central bank tinkering has effectively destroyed price discovery in the bond market. You need look no further than the $17 trillion in negative-yielding bonds as proof of this. But, as Burry explains, “now passive investing has removed price discovery from the equity markets” because it doesn’t “require the security-level analysis that is required for true price discovery.”

In other words, no one bothers to do actual stock research anymore. Passive index investors buy stocks based on their market caps and nothing else. Valuation, earnings quality, forward projections… none of these things matter.

Burry compares this to the collateralized debt obligations (CDOs) he made a fortune betting against in 2008. No one bothered to do actual security-level research then either. Pricing was determined by models dreamt up in a lab by quants in white coats rather than by actual buyers and sellers. And we know how that ended.

Equally scary is the lack of liquidity. As Burry points out, more than half the stocks in the S&P 500 have less than $150 million in daily trading volume. “That sounds like a lot,” Burry says, “but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was.”

Over the past few decades, low-cost index funds have outperformed most active managers. But ironically, this doesn’t mean that active investors are bad at their jobs. The exact opposite is true. Indexing works because talented active managers push the market towards efficiency. Price discovery is the work of active traders and investors. But if everyone indexes, the whole thing falls apart. Someone has to do the fundamental research that keeps this dog and pony show afloat. (Bill Ackman made similar comments about three years ago, and they’re worth revisiting today.)

This probably won’t end well. But it’s not all doom and gloom. As Burry notes, “the bubble in passive investing through ETFs and index funds… has orphaned smaller value-type securities globally.”

As a value investor, that’s music to my ears. An unloved orphan stock is a cheap stock and one that’s off the radar of most investors.

Will the years ahead be good ones for small-cap value investors? Only time will tell. But all bubbles (and busts) create opportunities, and small-cap value stocks may be the ultimate winner in the indexing bubble.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Maxing Out Your 401(k)? Try This.

If you’re on track to max out your 401(k) this year, congratulations! You’re building your next egg while sticking it to the tax man. Pat yourself on the back!

But before I go any further, let’s make sure we’re on the same page. I’ve chatted with dozens of people who told me with a straight face that they were maxing out their 401(k) plans every year… except they weren’t. In fact, they weren’t even close.

They weren’t lying, of course. They legitimately thought they were maxing out their retirement plans. But there’s a lot of competing terms here, and it’s easy to get them confused. So, today, we’re going to sort this out. You’ll want to pay attention because this can potentially save you thousands of dollars a year in taxes and hundreds of thousands over the course of your investing life.

Your employer might match your 401(k) contributions up to 3% to 5% of your salary. You should always contribute at least enough to take advantage of the matching. But “matching” and “maxing” are not the same thing.

You can contribute up to $19,000 to your 401(k) this year or $25,000 if you’re 50 or older. This is the maximum you can put in, not including your employer matching or any profit sharing.

Let’s play with the numbers. Let’s say you earn an even $100,000 per year and that you make it your goal to max out your 401(k) plan for the year. Let’s also say that your employer offers 5% matching. This is how that would shake out:

                You contribute:                                 $19,000

                Your company contributes:          $5,000 ($100,000 * 5%)

                Total going into your plan:            $24,000

Ok. Let’s say you’re as fanatical as I am about saving and you’ve managed to max out the full $19,000. But now you’ve caught the saver’s bug and you want to save even more.

If your health insurance plan includes them, you can consider using a Health Savings Account as an “extra” retirement plan.

This requires a little explaining. HSAs are not designed to be retirement plans. They’re designed to help you save for health expenses by giving you a tax break. As with IRAs or 401(k) plans, any money you put into an HSA gives you an immediate tax deduction. A dollar invested in an HSA lowers your taxable income by a dollar. And you can take cash out of an HSA at any time tax and penalty free if you use it to pay for qualifying medical expenses.

But here’s where it gets fun. No one says you have to spend the money. You can leave the cash in the HSA account and invest it in stocks, bonds and other investments. Once you turn 65, you can take the funds out for non-medical purposes penalty free.

You’d still owe taxes on it, but the same would be true of any cash taken out of an IRA or 401(k) plan.

So, you can effectively use an HSA as a “spillover” IRA for extra cash you want to invest tax deferred.

And here’s another fun little kicker. Unlike IRAs and 401(k) plans, HSAs don’t have required minimum distributions (RMDs). In normal retirement accounts, the IRS forces you to pull a certain amount out of your account every year after you hit the age of 70 ½. HSAs don’t have that requirement, meaning you can let your funds grow and compound tax-free well into your golden years.

In order to use an HSA you have to also have a high-deductible health plan. Those with individual plans can contribute up to $3,500 per year (or $4,500 if you’re 55 or older). Those with family plans can contribute up to $7,000 per year (or $8,000 if you’re 55 or older).

If you’re already over the age of 65 and on Medicare, you generally can’t add new money to an HSA plan. But if you’re under the age of 65 and are looking to lower your tax bill and turbocharge your retirement savings,  the HSA can be a great way to do both.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Hate Your 401(k) Options? Try This

As you probably know, I’m a big believer in the humble 401(k) plan. Even though it’s a very basic tax shelter widely available to regular middle-class Americans, I challenge you to find something better. I’ve spent my entire professional career looking, and I have yet to find one.

If you religiously max out your 401(k) plan every year (currently $19,000 per year or $25,000 for those 50 or older), it will likely grow to become your single largest financial asset.

There’s just one big, glaring problem with the 401(k): The investment options are often terrible.

Cruddy Investment Options 

Most plans are limited to a menu of mediocre mutual funds that move the same direction as the market. They’re fantastic when the stock market is moving higher but a financial death sentence during a bear market. The gallows humor following the 2008 bear market was that “My 401(k) just became a 201(k).” That joke will be making the rounds again after the next bear market.

And these days, hiding in bonds won’t do much for you. With yields now hitting new all-time lows almost daily, a portfolio invested in bond funds is essentially dead money.

Some 401(k) plans have a brokerage window that allows you to buy individual stocks. That’s a nice feature if your plan offers it, but it’s not available on most plans.

No matter how cruddy the investment options are in your 401(k), taking the funds out really isn’t an option. If you’re under 59 ½, you’d have to pay a 10% penalty, and at any age you’d have to pay taxes on whatever you pull out.

An Alternative to a 401(k)

Well, I have good news for you. If you hate your 401(k) investment options, you might be able to bail on them without triggering a tax nightmare. It can be possible to roll over your 401(k) balance into an IRA while you’re still working.

As you probably know, you can always roll over your 401(k) into an IRA whenever you switch jobs or retire. But if you’re 59 ½ or older, you can legally do the same thing without having to quit your job. This is what’s called an “in-service rollover.”

Your plan might or might not offer this. It really just depends on your employer. But if your company plan does offer it, an in-service rollover might be exactly what you need.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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What The New SECURE Act Means For Your IRA

How can you argue with an act of Congress named “Setting Every Community Up for Retirement Enhancement” (SECURE)? Who wouldn’t want an enhanced retirement?

The SECURE act, which recently passed the House of Representatives with a vote of 417-3, is now being debated in the Senate. And at first glance, it looks great. If passed, Americans over the age of 70 ½ would still be able to contribute to traditional IRAs. And the dreaded required minimum distributions (RMD) wouldn’t start until age 72.

With Americans living and working longer, these are solid, if not exactly revolutionary, enhancements.

There’s just one big problem with it. The SECURE Act, if passed by the Senate and signed by President Trump, would turn the world of inheritance and estate planning upside down.

The Not-So Secure Act

Today, you can leave your traditional IRA to your spouse with no tax consequences. Your IRA simply becomes their IRA upon your death, and they’re then required to take RMDs based on their own life expectancy. And the IRA could then be passed on your children upon the death of your spouse, with the RMDs then based on their life expectancy.

Depending on how long your heirs and their heirs live, your original IRA can potentially be stretched out forever, indefinitely deferring the taxes on the accumulated gains.

Well, all of that might now be changing. Under the new rules, non-spouse inherited IRAs would have to be distributed within 10 years of the death of the original account owner.

Now, before this starts to sound like a scare piece, the IRS isn’t “coming after your IRA” to seize it. At least not yet. But there are some things to keep in mind.

There Are Some Key Takeaways Here

To start, the IRS will be getting more of your money and sooner. By forcing you or your heirs to distribute your IRAs sooner, your gains become taxable sooner. Ultimately, this means that your nest egg will grow slower or deplete faster.

Of course, money taken as an IRA distribution doesn’t just disappear. Once you pay the taxes on it, you’re free to reinvest it in a regular, good-old-fashioned brokerage account. It’s still able to grow and compound. It just loses the tax advantages of an IRA.

But I don’t like Congress moving the goal post on us. If they shorten the distribution timeline, they are setting a precedent for making IRAs less advantageous. That’s a remarkably short sighted move. In trying to get your money a couple years earlier, they are disincentivizing people to save for retirement.

Given that the average American has nowhere near enough money saved to last them through their golden years, that’s just about the last thing our government should be doing.

So, with all of this as a backdrop, will IRAs still make sense under the new rules?

It’s A Resounding Yes

The changes impact your heirs. I hate that my kids or future grandkids would have to pay more in taxes. But this doesn’t affect me. I still pay less in taxes today with every dollar I shelter in my 401(k) and other retirement plans, and the nest egg I need to support myself in retirement will grow a lot more quickly.

And while we’re on that subject, we’re now well into the second half of the year, but there is still plenty of time to increase your contributions to your retirement plan. You can put $19,000 into your 401(k) plan this year, not including company matching, and $25,000 if you’re 50 or older.

If you’re not on track to hit those limits, try to increase your savings rate, even if it’s just a couple hundred dollars per month. Every dollar you contribute lowers your tax bill and gets you one step closer to leaving the rat race in style.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Give Your Smartphone a Frontal Lobotomy

It’s Monday, and I want you to answer a question for me honestly: Did you check your work emails last night? Don’t look down at your shoes. You know you did it. Sunday night has become the new Monday morning, a time to go through messages on your phone, do a little light paperwork and get a start on the week.

You probably feel a little guilty and ashamed about it. I know I generally did when I found myself answering emails on a Sunday. Yet I still do it. I also found myself doing it after hours on weeknights, on Fridays and Saturdays, and on holidays and vacations.

And You Want To Know The Worst Part About It?

No one actually asked me to do it. People are reasonable, and I can credibly say that no one writing me on a Sunday afternoon really expected a reply that minute. They wrote me for the same reason I answered: We were both addicted to our smartphones and had a misplaced need to be constantly busy.

This is no way to live. It’s a dystopian nightmare in which devices that are supposed to make our lives easier and better actually make them worse. And don’t even get me started on social media. Mark Zuckerberg quite literally destroyed human civilization with Facebook. We’re now living in the new Dark Ages.

At any rate, my beat is income investing. I help my readers find a respectable stream of income in a low-yield world. But all the money in the world is meaningless if you’re too plugged in to enjoy it.

So, today we’re going to do something a little different. I’m going to help you get your life back.

I know you’re not going to get rid of your smartphone. That Pandora’s Box is open and there’s no closing it again. But we can at least claw back a little bit of our pre-smartphone humanity.

Turn Off Email Notifications

Having access to your email is great. If you’re sitting in a doctor’s office or airport, why not get a little work done?

But do you really need your phone to buzz every time a group email about the office pizza party hits your inbox?

No, you really don’t. And this is why you should turn off the notification settings. All of those pizza party updates can build up in your inbox, and when it’s convenient you can sort through them. (And by sort through them, I mean delete them all in one swoop). The important thing is that you won’t be interrupted by your phone every 45 seconds.

I know what you’re thinking… What if there is an emergency?

I’d argue that there is no such thing as an emergency email. If it is important enough, they can call you. They have your number.

Follow my lead here. I turned off all notifications on my phone except for incoming phone calls, text messages, and Uber. (I need to know if my cab is waiting for me…) And I’m considering turning off text message notifications. My colleagues know that they can always call me if something is truly urgent or time sensitive. I’m available when they need me, even if it’s after hours. They just have to call me.

Literally everything is turned off. My phone never buzzes to tell me there is an exciting new show on Netflix or that my Amazon.com package just left the warehouse. And after a week of this, I found I stopped hating my smartphone and actually began to view it as a useful tool again.

Delete Social Media Apps

I deleted virtually all social media years ago. I had a moment of truth when I looked down at my watch and realized I had just wasted two hours of a would-have-been productive day looking at pictures of fat people I went to high school with. I barely knew them in high school, before they let themselves go. So why did I just waste two hours of my life looking at photos of their trip to Cancun?

Frankly, I didn’t like the kind of person that social media made me become. Reading other people’s political rants made me miserable.

So, I pulled the plug on all of it. I have no Facebook, Instagram, or Snapchat accounts. And I can assure you that I haven’t missed anything. You don’t “have to” have social media accounts. You really can walk away from it all.

If you’re not ready to take that leap, you can at least take a preliminary step. Delete the apps from your phone. If you have to log in to Facebook on your computer, you’re going to spend a lot less time looking at cat photos than if you have the app in your pocket at all times.

I recommend you delete your accounts altogether and that you storm Facebook’s headquarters like the Bastille. But even taking the baby step of removing the apps from your phone will make you happier. Countless studies have linked social media to depression, anxiety, low self-esteem, and a host of other mental health problems. The less of it you have in your life, the better.

No Phones At The Table

We don’t have a lot of rules in my house. If I’m to be honest, I’m really a softy. There is one rule, however, that I enforce with an iron fist: no phones at the dinner table.

When we sit at the table as a family, the phones have to go away. I’m a Nazi about it. The phones have to be in a different room while we eat.

As much as I’d love to go full retrograde Luddite and banish all smartphones from my household, I know that’s not happening. But we have to have standards or we’re no better than animals. So, no phones at the dinner table. Period.

If you have a few suggestions of your own for how to regain a little shred of dignity and decency in the smartphone era, I’d love to hear them. You can write me at info@charlessizemore.com.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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