 This is Think Tech Hawaii, Community Matters here. Guys, welcome back to The Prince of Investing Show, here, live in Hololulu, Hawaii, episode four. And we still haven't gotten cancer. But anyway, guys, I want to thank you guys for all the awesome feedback and all the other great things. But as always, guys, I don't have a lot of time. And I definitely know you guys don't have a lot of time. So we're going to jump straight into it. So as you guys can see in the topic, we're going to talk about building your portfolio, right? It's those things, people go out there. Maybe you start an E-trade or a TD Ameritrade or some type of online brokerage account. And you want to get into investing. You want to get into investing for yourself or maybe your child. But a lot of times, you don't know where to start. Or you may have a 401k at work or something like that. You don't know where to start. You don't know, like, well, all these, it's so many mutual funds, and it's ETFs, and it's stocks, and it's bonds, and it's this, where do I start? And a lot of times, we go off and we buy off for what other people said and stuff like that. We throw it into our portfolio. We really don't know if it's good stuff. Maybe it may go down. So we really don't know kind of what we're talking about or doing, so it's kind of scary. So a lot of us just avoid it altogether. But as always, guys, this is why I'm here. This is why this show is here, is to break that down. Now, enough of me. I have a very, very special guest calling all the way from France today. He is here live on the show. This is Mr. Lars Kroger. Well, you guys who don't know who Mr. Lars Kroger is, he's written many books on finance, best-selling author, international, Harvard graduate, manager of about five hedge funds he sits the chairman on, all type of aggregates funds throughout the world, high level of finance. One of the top in the industry has been sitting on CNN, BBC, all the major networks, Bloomberg, all the other great stuff. But today he is right here, and he's going to tell you about building a portfolio. I'm reading his latest book called Investing Demising. And when I'm reading this book, it has opened my eyes to a lot of things. But it's always, guys, enough of me talking. Mr. Kroger, how are you doing today? Very well. Thanks for having me on, Prince. It's great to be here. And thanks also for the very flattering intro, which puts me in the kind of light that only my mother would put me in. But there you have it. But we're glad to have you in today, right? And the thing about it, those that I'm glad to have, you don't glad to have that my audience can hear from someone like yourself. But the thing is, when we're looking at building a portfolio, in your latest book, you brought up a great topic. And you was talking about index investing versus having an edge on the market. A lot of people out there that are buying stocks that are making investments, for whatever reason they're making it for, and in your book, you hit on, hey, a lot of you guys are investing. You're investing into things you don't have an edge on. And what do you mean by do you have an edge on the market? Yeah, it's a funny term, actually. It's kind of like you normally talk about an edge of a table or something, right? It's really, you should think of it as an advantage, right? What is it exactly that you know that the rest of the market doesn't know when you buy or sell a stock or any kind of security, really? So imagine that you're buying a share in Facebook and whatever that stock's trading at, you're essentially buying into the future prospects and hopes and threats that Facebook's facing. And the point is generally that there is an incredible aggregate amount of knowledge built into that price and by the smartest minds and thousands and thousands of them all over the world. And by buying that stock as opposed to many other stocks, you really implicitly saying that you know better than the aggregate market, whether that stock is going to go up or down in value, which is a very, very bold and somewhat say full-hearted statement. And so what I'm trying to do in my books and generally in my work is I'm not saying that you can't beat the market. I'm just saying that it is extraordinarily unlikely that you can. And that is the very first question you have to ask yourself when investing is, am I one of the very few people that can beat the market? And if you're not, which most people are not, what should you then do with your investments on the basis of that premise? And that's why I'm not very popular with investment bankers, but I think it's something that when a lot of people sit down and think about their investments, they quickly come to realize that they virtually have no chance of competing with the aggregate financial markets. And they eventually come around to accepting that they have no edge or no ability to beat the markets. Which, by the way, I'm sorry to keep rambling on here. It will, in overwhelming likelihood, make their lives wealthier and easier to come to that realization. Because it's not only hard to beat the markets, but it's also very expensive to try. And Lars, very good point that you made there, right? And what I broke down what you were saying when he spoke about edge, he said, hey, listen, a lot of people are missing form. You're talking about look at hedge funds managing billions of dollars like you've done. You said, hey, look, some people just have connections and ties within the industry that are vastly more than what the average everyday person that's trying to quote unquote beat the market on a consistent basis. And he was saying, hey, if you take a person like you're using your book, you say, Susan, you have someone who graduate from one of the elite schools like a Harvard or Yale or Stanford. And they go off and they have all the resources that are humanly possible to a particular company. They get invited to the meetings. They know everything about the company. They have the most advanced sophisticated trading systems. They have all of the knowledge. They have all the research development at their hands. And they are just immersed into this particular company. And he said, hey, before you make an investment, you need to ask yourself, do you think you know something better, or do you have something better over that type of person? And if you don't, you don't have an edge. And he was saying, most people don't have an edge, and most people will talk about they have selective memory. Like I like you said that, people have selective memory. They remember about the things they got right, and they forget about the things that they got wrong. And they will harp on the times that they got right. And another thing you spoke about while you're not popular with an investor, is that you want to. That's one of the most expensive sort of conventional wisdoms out there is that there's a tendency all of us have to remember our winners. I think it's generally true in life, but it's certainly true in the stock markets. And unlike if you, let's say you go to a casino, and you tell all your friends on Friday nights that you won money at the casino, you don't necessarily appear smart and informed and brilliant. But if you tell all your friends that you've made money in the stock market, you appear bright and smart and brilliant. And so therefore you're double incentivized to remember and talk about your winners and sort of ignore your losers. But fact remains that net of all the fees and expenses and frankly in a lot of cases, net of all the time, it just does net up. It's just, you have very, very small chance about performing the purchase of a very simple, boring, cheap index tracking fund. Which is what I think that vast majority of people should be doing with their investments. Now you say, you believe, so you're saying, hey, if you're a regular everyday person, you should just get the index or if you have a 401k, get a broad based index and just continuously invest into a large equity index. Now your book, you spoke on adding corporate bonds. Well, let me just stop you there, France, it was an important point. You need to make, the stock market isn't for everyone, right? The stock market is a risky place. You can lose a lot of money very, very quickly and often you lose a lot of money when you least expect it. So you have to think about your personal risk levels and whether you should have all your investments in stocks or bonds or cash or whatever. But for the portion that each individual investor decide they should have in the stock markets, they should have the broadest, cheapest index tracking investment they can find and tax efficient. But that often follows. But that doesn't follow from there that you should only own stocks. I'm certainly not suggesting that. But for your stock market investment, which in most portfolios, sometimes a very significant portion of your portfolio should be in stocks by the broadest, cheapest index tracker, absolutely right. Now, when you look at that, right, you say, hey, you should just get a broad index tracker and forget about it, put it on autopilot. Now, you hit on the part about high quality corporate bonds. How does that play a mix into bonds, play a mix into a portfolio? And why would you add that factor in? Yeah, so I think there are real very good diversifying benefits of adding other asset classes. But I often worry that it takes away from a very, very simple message, which is that if you can create a portfolio with two securities and I'll come to which ones, that essentially forms the backbone of your portfolio, you can be better off than in my view, 95% of investors. And the two securities you need to buy are something that is the lowest risk thing you can possibly buy. So let's say now you guys are in the US. So US government bonds, right? And you pick a duration that roughly matches the time horizon of your investment. So if you're in it for 10 years, you pick roughly 10 years. If you're in it for 30 years, you pick roughly 30 years, five years, you pick five years. That's the lowest risk investment you can get your hands on. You combine that with an investment in the broadest stock market index tracker you can find, which is the world equity index markets. If you just do the US, you're still doing very well. And then you combine those two investments according to your risk profile. So if you're very risk loving, you pick a lot of equities. And if you're very risk of those, you pick a lot of the bond. But you essentially have created a portfolio with just two securities. And a very, very adequate one for, in my view, the overwhelming majority of investors. You'd be better off than virtually everyone you know in my opinion. Now to that, you can add other asset classes, but including corporate bonds, and in which case you should, the same principle holds just like you can't pick the winning stocks because the market is so efficient. You can't pick the winning corporate bonds, but you can pick it as an asset class, which means that you can buy very, very broad exposures to all, well, a broader range of corporate bonds as you can get your hands on. And that's a worthwhile addition to a portfolio, but if that all seems a little bit too complex for you, if you just stick to the super simple two security portfolios talking about before, you're still doing very, very well. And the two securities are the equity index tracker and the government bond. Those are two securities. And it's really actually overwhelmingly annoying to a guy like me who's like, I've been in finance my whole adult life. As a hedge fund manager, I was actually going to be a professor if I would have told you that for instance, but originally I was going to get a PhD and teach in portfolio theory. And the complex portfolios I see for someone like my mom or friends or cousins or you have it, when I'm like, they know absolutely nothing about, well, the stock markets know a lot about other things, but they know next to nothing about the stock markets. But yet you have these incredibly complex and expensively purchased portfolios often suggested to them by highly paid advisors. When in fact, they would be far, far better off to buy these broad cheap index trackers. There's actually, I was very proud of a couple of years back when I finally, after decades, got my mom to buy index trackers. So here I am, like my mom thought she, boy, did she have an angle, right? Her son, namely me, was a hedge fund manager in London. Like she couldn't wait to tell all her friends about her angle, right? And yet, and then the worst thing happens which is her son tells her, go buy an index tracker. How boring is that? But I'm even telling my mom to do it. So I'd certainly recommend it to the vast majority of people. Wow. Okay. Well, Lars, we gotta run into a quick commercial break and I want you guys to stay tuned. Don't touch the pulse. We're gonna get more into those expensive fees and he's gonna talk about those investment bankers and investment advisors and things to look out for. But stay tuned here. We'll be right back to the Prince of Investing right here on Think, Take, Away. Ted Rawlsson here, folks. You're a host on Where the Drone Leads, our weekly show at noon on Thursdays here on Think Deck. Where we talk about drones, anything to do about drones, drones, remotely piloted aircraft, unmanned aircraft systems, whatever you want to call them, emerging into Hawaii's economy, educational framework and our public life. We talk about things associated with the use, the misuse, technology, engineering, legislation with the local experts as well as people from across the country. Please join us noon on Thursdays and catch the latest on what's taking place in the world of drones that might affect you. Aloha. I'm Tim Apocha, host for Moving Hawaii Forward, a show dedicated to transportation issues and traffic. We identify those areas where we do have problems in the state but also the show is dedicated to trying to find solutions, not just detail our problems. So join me every other Tuesday on Moving Hawaii Forward. I'm Tim Apocha. Thank you. Guys, and we're back live here on Think Deck Hawaii. My name is Prince Dax, and this is The Prince of Investing. If you guys hadn't caught up yet, we got a financial genius who's been around for a long time here in the financial industry, hedge fund manager, Mr. Lars Kroger. And before we went into the break, he brought up a good point. He said, hey, you know, my mom was so happy when I was in London, I was a hedge fund manager. She's like, you know what? I'm just gonna grab my money and I'm just gonna give it to my son and just let him make me rich. But he has something to say against that, where he said, hey, I just told my mom, you'd be better off just throwing your money into an index. So for people out there, Lars, who says, hey, you know what? I can't beat the market. You have these people out here who can do it. They done it on a consistent basis. Why don't I just give my money to a mutual fund or an investment advisor and just let them deal with it? Yeah, look, I think, first of all, it's the statistic. You have to look at the statistics and the statistic shows that if you look over a 10-year period, it is roughly one out of 10 funds that outperformed the index over that period. So earlier you talked about Susan, who has an amazing advantage or edge to outperform the average retail investor. And I agree. She probably does have amazing angles. So there's a huge sensation to say, well, why don't I just give her the money? And by the way, she's done so great the last three, four years. And to that, the answer is, well, if you could pick the winning mutual funds ahead of time, of course you should do that. Of course, just like if you could pick the winning stocks ahead of time, of course you should do that. You'd be stupid not to. But you can't. And historical great performance is no indication of great future performance. That's one point. The second point is that if you look in aggregate of all the active managers, active managers is another term you use for mutual funds investment trust and things of that nature. And it is roughly only 10% and 10, 12% of them that outperformed the index over that 10-year period. And you gotta ask yourself, could I pick that one out of 10 ahead of time? And the overwhelming likely answer is that you could not. And by the way, if you could, give me a call and love to hear about it. But so it comes back to the same point, which is buy the index. So why can't Susan, why can't Susan outperform the fees? It's outperform the index. It's simply because the fees and expenses that she incurs and she charges you as the end investor. And just to give you an idea of the magnitude of these fees, and this is an important point, I did the math and I live in the UK. So I did the math for someone who drives a train on the London Underground. And they make about 50,000 pounds a year was about, I don't know what that is, it's $65,000. Let's say that that person put aside 10%, let's say of his income over his working life. So from the age of roughly 25 to roughly 67. And there's further more say that they just argument put that all in equities, which they shouldn't, but let's say they did, let's ignore taxes. So that they did that every year, they're all working life and they compounded the returns of the equity markets much like they have in the past. So roughly 5% above inflation, call it. The difference in retirement between having done that consistently in an index tracker versus in a mutual fund is the equivalent amount to six Porsche cars, right? So this is a guy who drives a train his whole life on the London Underground and undoubtedly will never own a Porsche. He will over his working life have paid four Porsche cars in extra fees to the financial industry. Now, he should only do that if he is absolutely certain that he gets a ton of extra value for all of those fees. It's about what, $400,000. Now, someone's gonna say that's not a Porsche cost, but when I looked it up, it was. It's for six of them, by the way. But it's just, it's a critical point, right? And the point is that you just, you lose a little bit of money all the time and over a working life, it adds up to an absolute fortune. You should be very, very aware of that. Now, keep in mind, another important point, I'm not saying that people can't beat the market. I'm not that big a hypocrite. I was a hedge fund manager. I'm not that big a hypocrite. But I'm just saying that each investor has to be absolutely clear with themselves whether they're one of the ones that can and the likely answer for the average retail investors that they cannot. Okay, so Lars, that you make this and you say, hey, 92% of the people, like I just had on Mr. Oliver Lez, who's a day trader, you know, he said, you know, 92% of people can't, will not succeed at day trading. 92% of people can't beat the market on a consistent basis, we know that, right? Now, where do you see this? What do you see the financial industry going if you put it out in this type of information? What is an investment that's supposed to do? What is a financial advisor supposed to do if you're saying, if you're telling everybody, hey, just go get an index, get some low, get a low-cost index tracking device, something like an ETF, and you're saying, hey, go get a low-risk US bond, call it a day. What does that say to the rest of the industry? So a couple of things will happen. And by the way, these are not bad things. First of all, the aggregate amount of fees paid to the financial sector will dramatically reduce. And I don't know how that's a bad thing for the retail investor. It's probably not, right? It's probably a good thing. Now, why should it reduce? Well, it's because it should be commensurate with the amount of value they add to people's lives. And if they're not adding value by providing great returns off the fees, they should get fewer fees, right? That's sort of how things should bear out. You take the next step and say, well, what about all the financial advisors? I actually think there's a hugely important role for financial advisors, which is to help you with tax, help you with estate planning, help you with should you have a lot of equity, should you have a lot of bonds? Those are things you probably should get a lot of professional help with. What your advisor should not be doing is tell you whether to buy Google or Facebook shares. Because he or she doesn't know either. That advisor should also tell you exactly what I'm telling you, which is to buy a broad cheap index tracker. But that doesn't mean that there isn't value in a financial advisor. Actually, there's a ton of value in them. But they should not be picking your stocks, or you should buy the broad cheap index tracker. But I think the future of the advisory industry is gonna change towards that. It's saying someone who helps you given your specific circumstances. I wanna hit on one other, and this is a hugely important point. By the way, I don't wanna be one of these guys who interview a prince where I think that everything I say is hugely important, so just shoot me down. But one of the problems with not picking index trackers is that people tend to add to their concentration risk. Let me give you a real example. There was a guy I knew who lived in London, and he worked for a real estate agency. He had most of his savings tied up in his London apartment, and he thought he knew the sector so well that for his additional savings, he bought London real estate stocks, right? So if you just think he was unbelievably long the London real estate market. And if all of that, if for whatever reason the London real estate market went to hell, like it did in a lot of the parts of the world, then everything in his life would go against him at the same time and for the same reason. So he wouldn't get any benefit from diversifying. If he had instead taken his savings and invested in a broad index tracker, well, at least the part of his savings would be diversified away from the London real estate market, and that would have been to his huge benefit. He would have had indirectly through his index tracker, he would have had investments in the US and as far afield as Australia and China, all over the world, not just London real estate. And so that's another benefit you get from these broad-based investments. Okay, now another key piece, right? You have mapped out, you find out a way to say, hey, listen, a lot of us would just save and then save and then save and you know, I raised my hand, I'm guilty as well. You just put money back, you put money back, but you really don't know how much you would need into retirement and how much you need to save to get there. So a lot of people are just saying, hey, you know what, I just want to have a million dollars or two million dollars by the time I'm 40 and how can I do it? Can you show me how to do it? How can I get there? How can I invest? Because I want to make this money. I'm 25 years old, I want to, by the time I'm 40, I want to have a million dollars. How can I invest? And you came up with a way where you have a YouTube channel under Lars Kroger, where you teach people how to build a spreadsheet of exactly telling them how much money they need to put aside to reach a dollar amount by a standard time. How did you come up with this? That's kind of a funny process. It's actually my publisher of one of my books said, why didn't I make a couple of YouTube videos, just sort of simply in five minutes to outline some of the arguments that we've been talking about today. And I did, and I was frankly shocked by it. I was a bit of a technical novice, so I was shocked by how easy it was to do. And I kind of enjoyed it, to be honest. So I just put up a creative YouTube channel, put up some videos, and then I got really, really good feedback, which is really heartwarming. And it's clear that a lot of people are out there feeling very alone with a lot of these issues. And then frankly, one of them just said, well, how can I figure out how much money I'll have when I'm like 60, if I put aside, I think it was $1,000 a month, which actually pretty decent amount for a lot of people. And so I built a spreadsheet. And then I made the, and I built the spreadsheet live on doing a video. And then I kept adding to the spreadsheet, but only live. And eventually it actually became quite a, quite a complex spreadsheet. And it's been really cool. I've had thousands of people following it and doing it alongside me. So if there are people listening to this, I'd encourage you to go check it out. And one of the questions is, how much money do I need to save every month or every year to, well, won't you save a million here by the age of 40? Well, obviously it depends how old you are. It depends how much you put aside. And it depends on how much, what do you invest the money in. But all of that is really just something you can, you can build a financial model for. So that's what I did. And it's not a particularly hard financial question. It's hard to know what'll happen in the financial markets in the future. That's no one knows that. But we can build the risk of various outcomes into the model, which I also do. So yeah, it's kind of, yeah. It's not hard to do. It might seem overwhelming, you know, if you have Excel on your computer, just build it alongside me. And yeah, let me know if you'd like it. It's been fun to do it. And I'm actually, I'm coming back from vacation next week and I'm gonna do another one. Just a couple of people ask some good questions. I just want to address them. So for people out there who want to get in contact with you, what are ways to get in contact with or to follow you or, you know, to see what you're doing? How can they stay in contact with you? Well, the best is probably YouTube. I have my channel, I don't know if you're gonna put up how to spell my surname, but if you can spell my surname, just bang it into YouTube, I'm there. Yeah, I think I'm the only one with the, that's the one advantage of having slightly unusual surname, but not being Bill Smith, I guess. Bill Smith. Yeah, so there are a bunch of videos there and there's other details on how to get in touch with me and the publisher on there too. So I'm always happy to get them people. There's been a lot of really, really good comments. And actually some of the best comments are the ones where they find mistakes. And evidently as you build a spreadsheet, you make minor mistakes. And so in the next video I just correct the mistakes as they're told and eventually the thing I'm just gonna make that spreadsheet available for anyone who wants to further build on it. Great. Now, guys out there, that is Lars Kroger. My name is Prince Dax, this is The Prince of Investing. I wanna thank Mr. Lars Kroger for coming on. I hope you guys got a ton of value out of that short period of time about building your portfolio, about Edge, about how you can build your own and why you should build your own and you're getting to hear from one of the experts in the industry. Guys, don't forget every Tuesday, 5 p.m. Eastern, The Prince of Investing Show right here. Don't forget to hit the like, subscribe, comment, share button. Tell all your friends and family. And hopefully I see you back next week.