In this episode of Investment Strategy Made Simple (ISMS), Andrew gets into part two of his discussion with Larry Swedroe: Ignorance is Bliss. Today, they discuss two chapters of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this eleventh series, they discuss mistake number 20: Do You Only Consider the Operating Expense Ratio When Selecting a Mutual Fund? And mistake number 21: Do You Fail to Consider the Costs of an Investment Strategy?

LEARNING: Don’t focus solely on the operating expense ratio when buying a mutual fund; consider hidden costs, too. Always consider the costs of an investment strategy, such as bid-offer spreads, market impact costs, taxes, etc.

 

“Successful active management, as I like to explain it, sews the seeds of its own destruction.”Larry Swedroe

 

In this episode of Investment Strategy Made Simple (ISMS), Andrew gets into part two of his discussion with Larry Swedroe: Ignorance is Bliss. Larry is the head of financial and economic research at Buckingham Wealth Partners. You can learn more about Larry’s Worst Investment Ever story on Ep645: Beware of Idiosyncratic Risks.

Larry deeply understands the world of academic research and investing, especially risk. Today, Andrew and Larry discuss two chapters of Larry’s book Investment Mistakes Even Smart Investors Make and How to Avoid Them. In this eleventh series, they discuss mistake number 20: Do You Only Consider the Operating Expense Ratio When Selecting a Mutual Fund? And mistake number 21: Do You Fail to Consider the Costs of an Investment Strategy?

Did you miss out on previous mistakes? Check them out:

• ISMS 8: Larry Swedroe – Are You Overconfident in Your Skills?
• ISMS 17: Larry Swedroe – Do You Project Recent Trends Indefinitely Into the Future?
• ISMS 20: Larry Swedroe – Do You Extrapolate From Small Samples and Trust Your Intuition?
• ISMS 23: Larry Swedroe – Do You Allow Yourself to Be Influenced by Your Ego and Herd Mentality?
• ISMS 24: Larry Swedroe – Confusing Skill and Luck Can Stop You From Investing Wisely
• ISMS 25: Larry Swedroe – Admit Your Mistakes and Don’t Listen to Fake Experts
• ISMS 26: Larry Swedroe – Are You Subject to the Endowment Effect or the Hot Streak Fallacy?
• ISMS 27: Larry Swedroe – Familiar Doesn’t Make It Safe and You’re Not Playing With the House’s Money
• ISMS 29: Larry Swedroe – The Shiny Apple is Poisonous and Information is Not Knowledge
• ISMS 30: Larry Swedroe – Do You Believe Your Fortune Is in the Stars or Rely on Misleading Information?

Mistake number 20: Do you only consider the operating expense ratio when selecting a mutual fund?

According to Larry, a lot of investors are aware that there is at least some relationship between expense ratios and returns of mutual funds. Sadly, too many people ignore that because they believe that active management will likely add value despite the evidence against it.

Further, many investors only consider the operating expense ratio when selecting a mutual fund. Larry says this is just one of many costs associated with investing and often not the most significant. He emphasizes that investors should look out for other hidden costs, such as:

• The “cost of cash” – when a fund holds cash instead of being fully invested.
• Trading expenses such as commissions and market impact costs.
• Taxes on gains.

These costs can significantly impact returns, with high turnover and tax inefficiency leading to lower after-tax returns. So, don’t focus solely on the operating expense ratio.

If you’re trying to decide whether to buy an ETF or a mutual fund, Larry says the rule is for a taxable account: buy the ETF because it’s more tax efficient. If you’re in a tax-advantaged account, buy the mutual fund because you don’t pay a bid-offer spread, and you don’t care about the tax efficiency in the fund. Also, if you’re going to buy an ETF, don’t trade first thing in the morning or last thing at the end of the day. You can get really screwed by price movements. Trade at the middle of the day.

Mistake number 21: Do you fail to consider the costs of an investment strategy?

Investors are often drawn to market-beating investment strategies but should exercise caution. Larry notes that when you see returns on a strategy, they often don’t include costs. What you usually see is a strategy that encourages you to buy stocks by looking at the day’s closing prices. Then, you sell at the closing price later. Such a strategy ignores bid-offer spreads, market impact costs, taxes, etc. Moreover, implementing such a strategy incurs costs that can erode your returns.

Larry adds that most people think that the past performance of active funds predicts future performance. As successful funds see their assets under management (AUM) grow, investors might think it’s a good sign. However, research shows there are diseconomies of scale in active management because the bigger the funds get, the higher their market impact costs go. Therefore, you should always remember that past performance does not always indicate future success, and some strategies may be based on luck rather than skill.

About Larry Swedroe

Larry Swedroe is head of financial and economic research at Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with an enthusiasm few can match.

Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has authored or co-authored 18 books.

Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television on various outlets.

Larry is a prolific writer, regularly contributing to multiple outlets, including AlphaArchitect, Advisor Perspectives, and Wealth Management.

 

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Connect with Larry Swedroe

• LinkedIn
• Twitter
• Website
• Books

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Twitter
• YouTube
• My Worst Investment Ever Podcast

Further reading mentioned

• Larry Swedroe and RC Balaban, Investment Mistakes Even Smart Investors Make and How to Avoid Them
• Philip E. Tetlock, Expert Political Judgment: How Good Is It? How Can We Know?
• Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics
• Larry Swedroe, Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals

BIO: Chong Ser Jing is the Portfolio Manager and Co-Founder of Compounder Fund, an investment fund that invests in stocks around the world.

STORY: In October 2010, Ser Jing bought six stocks. Two of these were companies in the oil industry. By the time he was selling these stocks, he had a loss of 77% and 31% from the two companies, respectively.

LEARNING: Some sectors may not be worth investing in because they tend to historically generate poor returns on invested capital. Pay careful attention to the drivers of a company’s business results. Understand the difference between internal and external drivers.

 

“There are companies whose business fortunes do not depend on the price movement of commodities. And then there are those who do. That’s a really important distinction.”Chong Ser Jing

 

Guest profile

Chong Ser Jing is the Portfolio Manager and Co-Founder of Compounder Fund, an investment fund that invests in stocks around the world. Ser Jing graduated with an engineering degree in 2012, but having been bitten by the investing bug since he was in his late teens, he decided to pursue investing as a career. From January 2013 to October 2019, Ser Jing served in Motley Fool Singapore as a writer as well as a co-leader of the investing team. One of his career highlights with Fool Singapore was to help its flagship investment newsletter outperform a global stock market benchmark by nearly 2x over a 3.5-year period. Besides running Compounder Fund today with his co-founder Jeremy Chia, both of them also have an investing blog, The Good Investors, where they share their thoughts about investing and life.

Worst investment ever

In October 2010, Ser Jing bought six stocks. Two of these were companies in the oil industry. One company owned oil rigs, while the other supplied parts and equipment that helped keep oil rigs running. By the time he was selling these stocks, he had a loss of 77% and 31% from the two companies, respectively.

Ser Jing considers these two stocks his worst investment ever because he had no idea what he was doing. He invested in them because he wanted to be diversified according to sectors. Ser Jing believed that oil and gas was a sector that was worth investing in since the oil demand would likely remain strong for a long time. His view was actually right. But, in hindsight, he was only right to a small extent and wrong in two critical areas.

First, some sectors may not be worth investing in in the long run because their economic characteristics are poor. The second thing is that the global oil demand grew quite strongly from 2010 to 2016.

The annual oil consumption increased from around 86 million barrels to about 97 million barrels in that period. But oil prices also fell significantly over that over the same timeframe. So, Ser Jing could not predict the oil price level. When he invested in the two companies, he completely missed out on the crucial fact that the oil price would have an outsized impact on both companies’ fortunes.

Lessons learned

• Some sectors may not be worth investing in because they tend to historically generate poor returns on invested capital.
• Pay careful attention to the drivers of a company’s business results.

Andrew’s takeaways

• Understand the difference between internal and external drivers.

Actionable advice

Look deeply at what has historically driven the price of a commodity if you’re trying to invest in a company whose business results depend on the commodity’s price.

Ser Jing’s recommendations

Ser Jing recommends Robert Shiller’s historical database on US interest rates, US inflation, validation price, and dividend data for US stocks. The database is an incredible trove of data for investors to learn about market history to have some base rates about how stocks, interest rates, and inflation have performed in the past.

No.1 goal for the next 12 months

Ser Jing has no goals for the next 12 months or the future. He has processes in place that will make him a better person and a better investor.

Parting words

 

“Most people will think about their worst investments as the stocks they bought but fell tremendously in price, maybe because of a high initial valuation. But I think a timing component also needs to be brought into the picture when thinking about this issue.”Chong Ser Jing

 

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Connect with Chong Ser Jing 

• LinkedIn
• Blog
• Website

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Threads
• Twitter
• YouTube
• My Worst Investment Ever Podcast

BIO: James M. Dahle, MD, is a practicing emergency physician who took an interest in personal finance and investing in residency after getting ripped off by every financial professional he came into contact with. He founded The White Coat Investor in 2011 to help fellow docs get a fair shake on Wall Street.

STORY: James got sold a whole life insurance policy in medical school. He invested in it, thinking it would be a good option, only to realize seven years later that it was not. When he pulled out of the policy, he lost 33% of the premiums he had paid.

LEARNING: You must understand anything you buy. Don’t buy more insurance than you need. Focus on one catastrophe-related insurance product that’s reasonable.

 

“Insurance is expensive, so don’t buy more than you need.”James M. Dahle

 

Guest profile

James M. Dahle, MD, is a practicing emergency physician who took an interest in personal finance and investing in residency after getting ripped off by every financial professional he came into contact with. He founded The White Coat Investor in 2011 to help his fellow docs get a fair shake on Wall Street.

Worst investment ever

When James was a medical student with minimal income, a friend interning with a large mutual life insurance company convinced him to buy a whole life insurance policy.

Looking back, what James really needed as far as insurance went was a term life insurance policy. At that point, he was married with no kids, and his wife was designing her life around his financial future as a doctor. The insurance policy James invested in, partially as an investment, was a whole life insurance policy. He held on to that policy for about seven years when he realized this was not a good deal for him. Not only was it not the insurance James needed, but it was a lousy investment.

By the time James surrendered that policy, his cumulative return was minus 33% of the premiums he had paid. So he walked away with only two-thirds of the money he had paid into it.

Lessons learned

• You must understand anything you buy, especially if it has a long commitment.
• Don’t buy more insurance than you need.

Andrew’s takeaways

• Focus on one catastrophe-related insurance product that’s reasonable, find the best price on it, and set it up to protect your family against that catastrophe. Then, build a solid investment plan with the remainder of your money.

Actionable advice

While you don’t want to get paralysis analysis, you do need to take the time to understand what you’re buying, whether it’s an insurance policy or an investment. You need to know how it works and how it’s likely to perform over the long term so you’re not disappointed and end up bailing out.

James’s recommendations

James recommends evaluatelifeinsurance.org if you’re already in a whole life insurance policy and trying to decide whether it’s worth keeping it, even though maybe you shouldn’t have bought it originally. He also recommends the Fire Your Financial Advisor, designed to help you write a financial plan to go from zero to 60.

No.1 goal for the next 12 months

James’s number one goal for the next 12 months is to help as many doctors as possible reach a situation where they feel good about their finances, whether that’s achieving financial independence or just feeling like they have their financial ducks in a row. James wants them to be able to quit worrying about their money so they can concentrate on the things that matter most in life.

Parting words

 

“Keep your head up and your shoulders back. You’ve got this.”James M. Dahle

 

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Connect with James M. Dahle

• LinkedIn
• Twitter
• Instagram
• Facebook
• YouTube
• Website
• Books
• Podcast

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Threads
• Twitter
• YouTube
• My Worst Investment Ever Podcast

BIO: Harley Bassman is an industry thought leader and commentator on macroeconomic issues spanning decades.

STORY: In 2019, Harley bought some calls and sold some puts on Citibank stock for a cost strategy. He believed the stocks would increase because all its peers were trading above their book value. When COVID came, the stocks went south, causing Harley to make his biggest loss ever.

LEARNING: When something trades well below what you think its value is, consider why that’s the case. Size the investment.

 

“Forget timing; size the investment. Pick the size such that you’ll make enough if you’re right, and if you’re wrong, you won’t get wiped out.”Harley Bassman

 

Guest profile

Harley Bassman is an industry thought leader and commentator on macroeconomic issues spanning decades. He spent 26 years at Merrill Lynch. From 2014 to 2017, Harley was an Executive VP and Portfolio Manager at PIMCO. In 2011, he joined Credit Suisse’s Global Rates. In 2006, he built the RateLab, a full spectrum US Rates Trading Desk Strategy Group.

Presently, Harley is a Managing Partner at Simplify Asset Management. He continues to pen an episodic macroeconomic Commentary as well as manage a “hedge fund of one.”

Harley has a B.A. in management science from the University of California, San Diego, and an MBA in finance and marketing from the University of Chicago.

Worst investment ever

In 2019, Harley bought some calls and sold some puts on Citibank stock for a cost strategy. He believed the stocks would increase because all its peers were trading above their book value. Harley put more into this trade than he logically should have. He was hung up on the value construct and wasn’t thinking about why the stock traded under tangible.

When COVID came, the stocks went south, causing Harley to make his biggest loss ever.

Lessons learned

• When something trades well below what you think its value is, consider why that’s the case.
• Size the investment. When you make an investment, invest enough so that your gain can be worthwhile.
• Sizing is more critical than entry-level.

Andrew’s takeaways

• Be very careful when investing in banks because if their equity gets hit, the value of their assets could fall.

Actionable advice

Don’t fall into a value trap. Be careful of single names because there’s always a lottery effect that you can never predict.

Harley’s recommendations

Harley recommends reciting his Maven mantra: Number one, it’s always about character. Number two, it’s never different this time. And number three, you’re born, you live, and then you die. Prioritize your life.

No.1 goal for the next 12 months

Harley’s number one goal for the next 12 months is to focus and spend more time with his family.

Parting words

 

“Just be careful and stay safe.”Harley Bassman

 

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Connect with Harley Bassman

• LinkedIn
• Twitter
• Blog
• Website

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Threads
• Twitter
• YouTube
• My Worst Investment Ever Podcast

BIO: Mike Philbrick is the CEO of ReSolve Asset Management. He has over 30 years of experience in investment management, serving in senior investment industry positions with several major financial services firms, and is responsible for investment decisions, coaching, and strategic leadership.

STORY: Mike learned of a mining stock at the urinal. He invested, and the stock performed well because the mining industry was on fire. And so encouraged by early success and massive ignorance, Mike wiped all of those gains in no time.

LEARNING: Don’t over-leverage. Understand what kind of investor you are. Ensure you have some protection before you go all-in in an investment.

 

“Just because you’re winning doesn’t mean you’re smart or you’re good at these things.”Mike Philbrick

 

Guest profile

Mike Philbrick is the Chief Executive Officer of ReSolve Asset Management. He has over 30 years of experience in investment management, serving in senior investment industry positions with several major financial services firms, and is responsible for investment decisions, coaching, and strategic leadership. He has co-authored the book Adaptive Asset Allocation: Dynamic Global Portfolios to Profit in Good Times – and Bad (Wiley), as well as several whitepapers and research focused on adding new insights to the quantitative global asset allocation space.

Adaptive Asset Allocation and Return Stacked Portfolio Solutions have been popularized by him and his team at ReSolve.

Preceding his investment career, Mike played professional football in the CFL, winning the Grey Cup Championship in 1999 and being inducted into the Hamilton Tiger-Cat Walk of Fame in 2015.

Worst investment ever

Back in the early 90s, there was a lot of mining going on in Canada, and so mining stocks were becoming popular. Mike had started noticing the stocks but had yet to invest. One day, he’s at a urinal, and a guy tells him about a particular mining stock. Mike figured it was a good idea to invest in the stock. He didn’t do any research; he just took the man’s word for it.

The stock wins, and Mike gets a couple more wins from the stock, not because he was a genius but because the mining industry was on fire. And so emboldened with early success and massive ignorance, Mike wiped all of those gains in no time.

Lessons learned

• Understand what kind of investor you are. Can you withstand a 90% decline?
• Can you buy something and then ignore it long-term?
• Don’t over-leverage.

Andrew’s takeaways

• Ensure you have some protection before you go all-in in an investment, particularly when you don’t know much about it.

Actionable advice

Always remember that you don’t know as much as you think, so take different approaches such as diversifying, being less confident, managing risk with stop losses, or managing risk at the portfolio level on an ongoing basis. You don’t need to own more of what’s going well. Just do less of what’s dragging your portfolio from a momentum factor that enhances returns.

Mike’s recommendations

Mike recommends his book Adaptive Asset Allocation: Dynamic Global Portfolios to Profit in Good Times – and Bad, which goes through steps that you would take to maximize diversification and how to use the factor of momentum to enhance that.

No.1 goal for the next 12 months

Mike’s number one goal for the next 12 months is to get his firm 1.5 billion dollars in assets under management.

Parting words

 

“Stay true to yourself.”Mike Philbrick

 

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Connect with Mike Philbrick

• LinkedIn
• Twitter
• YouTube
• Podcast
• Website
• Book

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Threads
• Twitter
• YouTube
• My Worst Investment Ever Podcast

Further reading mentioned

• Robert M. Pirsig, Zen and the Art of Motorcycle Maintenance: An Inquiry Into Values.

BIO: Sam Burns is Chief Investment Strategist at Mill Street Research, an independent investment research firm based near Boston, MA. For 25 years, he has focused on global asset allocation and quantitative stock selection, primarily for institutional investors.

STORY: Sam decided to short-sell options that went horribly wrong after the Russian default. Even though he knew how options work in principle and that he could lose money, Sam didn’t have a plan for what if some geopolitical event happened, causing the market to fall suddenly. And so he lost a whole lot of money in the trade.

LEARNING: Understand what you’re really betting on. Every option trade is about volatility. Have a plan for what could go wrong and what you’ll do about it before you look at the headline to see what’s happening.

 

“There often are hidden drivers of an investment that are not what you think they are.”Sam Burns

 

Guest profile

Sam Burns is Chief Investment Strategist at Mill Street Research, an independent investment research firm based near Boston, MA. For 25 years now, he has focused on global asset allocation and quantitative stock selection, primarily for institutional investors. After spending many years doing research at firms like Oppenheimer & Co, State Street, Brown Brothers Harriman, and Ned Davis Research, Sam founded Mill Street in 2016 to be able to bring all of his best work together and offer it to clients without any constraints or conflicts.

Worst investment ever

Sam had been trading options for a while, mainly from the long side, buying puts and calls, which, at the very least, has a limited risk aspect since you can only lose what you put in. At some point, Sam decided to try short-sell options, which went violently against him.

This was in August 1998 when the Russian default set off a chain reaction of problems and Long-Term Capital Management blew up. Even though he knew how options work in principle and that he could lose money, Sam didn’t have a plan for what if some geopolitical event happened, causing the market to fall suddenly. And so he lost a whole lot of money in the trade.

Lessons learned

• Every option trade is about volatility.
• Have a plan for what could go wrong and what you’ll do about it before you look at the headline to see what’s happening.
• Ensure you’re capitalized well enough to handle or ride through ups and downs and drawdowns.

Andrew’s takeaways

• Understand what you’re really betting on.

Actionable advice

Make a point to think through what’s behind an investment and understand the other things moving simultaneously that might explain the movement of the asset you’re interested in.

Sam’s recommendations

Sam recommends listening to or reading people who are practitioners involved in markets day to day rather than journalists, who, though they do a great job, a lot of them write for a different reason than to make you a better investor.

No.1 goal for the next 12 months

Sam’s number one goal for the next 12 months is to try and stay on the right side of the macro picture.

Parting words

 

“Have a plan.”Sam Burns

 

[spp-transcript]

 

Connect with Sam Burns

• LinkedIn
• Twitter
• YouTube
• Website

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Threads
• Twitter
• YouTube
• My Worst Investment Ever Podcast

BIO: Jay Pelosky has over 35 years of both buy and sell side financial market experience. While at Morgan Stanley, he was ranked # 1 in Institutional Investor in Global Equity Strategy and Global Asset Allocation Strategy.

STORY: In the 90s, Jay was bullish about Mexico even though people were concerned about foreign currency debt and the country’s risk of devaluation. He remained adamant that people shouldn’t worry because Mexico wouldn’t devalue, and everything would be fine. Lo and behold, the Mexican government devalued in the middle of the night.

LEARNING: You can be right but at the wrong time. A forward-thinking approach is precious as an investor. You must have a thick skin to be an investor because you’ll get stuff wrong often.

 

“The only person who hasn’t struck out is the person who hasn’t swung the bat. In other words, if you’re going to be in this business, you’re going to make mistakes.”Jay Pelosky

 

Guest profile

Jay Pelosky has over 35 years of both buy and sell side financial market experience. While at Morgan Stanley, he was ranked # 1 in Institutional Investor in Global Equity Strategy and Global Asset Allocation Strategy. He has over 20 years of global macro experience and has spent much of the past 20 years investing his own capital using US-listed ETFs.

TPW Advisory is a NYC-based, independent investment boutique offering global asset allocation and portfolio strategy advice to retail and institutional investors through its Model Portfolio Delivery Service (MPDS). Learn more at pelosky.com.

Worst investment ever

In the 1990s, Jay was the Latin American strategist at Morgan Stanley Asset Management and the research department head. He had hired many people and did a lot of IPO business because of the emerging market enthusiasm. Many S&P investors were peeling off 5% or 10% of their exposure and putting it in emerging markets to juice their returns relative to the S&P.

Jay was bullish about Mexico even though people were concerned about foreign currency debt and the country’s devaluation risk. He remained adamant that people shouldn’t worry because Mexico wouldn’t devalue, and everything would be fine. He encouraged people to stay invested.

Lo and behold, the Mexican government devalued in the middle of the night. Jay had to go in front of the sales force, admit that he had gotten it wrong, and articulate how he got it wrong. He became the poster child in the Wall Street Journal for how Wall Street got Mexico wrong.

Lessons learned

• You must have a thick skin to be an investor because you’ll get stuff wrong often.
• Learn to handle being wrong publicly, shake it off, and understand where you went wrong.
• A forward-thinking approach is precious as an investor.

Andrew’s takeaways

• You can be right but at the wrong time.
• If you’re taking risks, you’re definitely going to lose. Even the best people fail; it’s just part of the game.

Actionable advice

Talk with someone with more experience to give you an honest read on what their bullish view is. Ask them to help you identify some of the risks.

Jay’s recommendations

If you want to get into the business of Wall Street or invest in the capital markets, Jay recommends establishing your own portfolio. By showing that you’re willing to bet on yourself, you’ll go a long way toward encouraging others to bet on you.

No.1 goal for the next 12 months

Jay’s number one goal for the next 12 months is to have a good portfolio performance and continue to identify opportunities, avoid market pitfalls, and provide excellent service to his clients.

Parting words

 

“It’s been a great discussion. I appreciate your questions and the opportunity to tell some of my stories. It’s always fun.”Jay Pelosky

 

[spp-transcript]

 

Connect with Jay Pelosky

• LinkedIn
• Twitter
• Website

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Threads
• Twitter
• YouTube
• My Worst Investment Ever Podcast

BIO: Reuben Mattinson graduated with a degree in physiotherapy in 2012. He followed this up in 2013 with a degree in Science teaching. During this time, Reuben began building his first company, RJM Tax Exemption.

STORY: Reuben got attracted to a company doing forex crypto trading and invested hundreds of thousands of dollars even though he had no solid proof that the trading was happening and that it was regulated.

LEARNING: Have solid proof that trading is happening. Ensure that your money is being held in a regulated brokerage or platform. Ensure the trader is using proven risk management strategies.

 

“We all need accountability in the investment space because wherever the money is, there’s obviously a lot of dodgy dealings and a lot of human emotion involved.”Reuben Mattinson

 

Guest profile

Reuben Mattinson graduated with a degree in physiotherapy in 2012. He followed this up in 2013 with a degree in Science teaching. During this time, Reuben began building his first company, RJM Tax Exemption. In under 3 years, Reuben successfully developed his vision from its infancy into a highly successful, multi-million dollar global e-commerce consultancy firm by the age of 30.

Possessing a longtime fascination with wealth creation, Reuben has a keen interest in the world of trading and investing, particularly the forex market. He’s spent the last 10 years developing what has now become Puli Trading, a forex software company that clients can tap into.

Worst investment ever

Three years ago, Reuben came across this opportunity, making investors a lot of money. It was a mix of forex crypto trading. Reuben would typically not invest in this type of stuff, but his friends were hyping it. They hooked him up with the CEO and the owners to speak to them directly, and he became a little friendly with them. Reuben thought these must be pretty decent people because they were open, had put their identity out there, and their lives were on the line. They showed Reuben some screen recordings and little clips here and there of the trading that was going on.

Against Reuben’s better judgment, which is the two core principles of what he’s always stood on and still stands for, having solid proof that the trading is happening and that it’s regulated, he invested in the trade. Reuben didn’t have this proof. He just saw the dollar signs and invested hundreds of thousands of dollars.

Reuben also introduced other people to the trade. Then, one day, the company stopped functioning overnight. The owners couldn’t be contacted, no profit was coming in, and investors’ money was trapped and held. It was an absolute disaster.

Reuben’s biggest regret was not the money he lost in the trade but not following his core principles as an investor and trader. He regrets letting the bright lights draw him in and attract him, like the proverbial fly, into the bright electric trap.

Lessons learned

• Have solid proof that trading is happening, and it’s not being faked.
• Ensure that your money is being held in a regulated brokerage or platform.
• Make sure the trader is using proven risk management strategies.

Andrew’s takeaways

• Trade with a regulated entity.

Actionable advice

Before you trade with anyone, ask them the hard questions. If they can’t answer them, you should ask yourself why.

Reuben’s recommendations

Reuben recommends looking at the most disciplined and consistent people to see what’s made them the people they are today and what they’ve done because it’s the hard things we do and the hard decisions we make that make us the people we are. Don’t go for the flashy, super-appealing individuals flashing up on YouTube bragging about the money and the successful things they’ve done in short periods.

Instead, look at the long-lasting, disciplined people of the investment world and take a page out of their book. Reuben highly recommends Warren Buffett’s story and unofficial autobiography because they teach consistency and discipline.

No.1 goal for the next 12 months

Reuben’s number one goal for the next 12 months is to reach 1000s, if not 10,000s, of people and show them that there are people who can do it with integrity and redeem their hope in the forex space.

Parting words

 

“Just get these three pillars in place: regulation, transparency, and proof. Don’t be scared of a bit of risk every now and again. You need to risk to gain at the end of the day.”Reuben Mattinson

 

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Connect with Reuben Mattinson

• LinkedIn
• Facebook
• Instagram
• YouTube
• Website

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Threads
• Twitter
• YouTube
• My Worst Investment Ever Podcast

BIO: Jerry Parker started his trading career in 1983 in the Richard Dennis Turtle Program. He started Chesapeake Capital in 1988. Chesapeake manages about $200M in private funds, mutual funds, ETFs, and managed accounts.

STORY: Jerry has had some stinker investments in real estate and gold over the years. Two things that have cost him money in his real estate investment are overpaying and not being patient. Often, Jerry would find himself buying homes by speculating and thinking that he knew what he was doing, only to realize that he didn’t.

LEARNING: Understand what you’re capable of and your limitations as well. Be afraid of situations you’re unfamiliar with and assume the worst.

 

“If you’re at a poker table and don’t know who the patsy is, it’s usually you.”Jerry Parker

 

Guest profile

Jerry Parker started his trading career in 1983 in the Richard Dennis Turtle Program. He started Chesapeake Capital in 1988. Chesapeake manages about $200M in private funds, mutual funds, ETFs, and managed accounts. All of the trading is done using a Trend Following + Nothing approach. The funds are maximally diversified and include bond, commodity and currency futures, stocks, crypto, and FX forwards. Jerry is active on Twitter and Twitter Spaces at @rjparkerjr09.

Worst investment ever

Over the years, Jerry has had some stinker investments in real estate and gold. Two things that have cost him money in his real estate investment are overpaying and not being patient. Often, Jerry would find himself buying homes by speculating and thinking that he knew what he was doing, only to realize that he didn’t.

Lessons learned

• Understand what you’re capable of and your limitations as well.
• Be afraid of situations you’re unfamiliar with and assume the worst.

Andrew’s takeaways

• Do what feels right for you, but don’t feel pushed into something just because everybody else does it.

Actionable advice

Find a great mentor in a field you’re passionate about, and learn from them. Also, be ready for a big break.

Jerry’s recommendations

Jerry recommends finding people on Twitter and subjects you’re interested in and following them for great advice. He also recommends listening to podcasts and reading books to get information about things you can’t learn in college.

No.1 goal for the next 12 months

Jerry’s number one goal for the next 12 months is to stay disciplined, keep doing what he’s been doing, and continue improving his portfolio.

Parting words

 

“Thank you for having me. I will go back and listen to some of your old podcasts.”Jerry Parker

 

[spp-transcript]

 

Connect with Jerry Parker

• LinkedIn
• Twitter
• Website
• Podcast

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Threads
• Twitter
• YouTube
• My Worst Investment Ever Podcast

Fed Success! High LT Rates & Recession Coming

• World yield curve inversion is falling because of rising LT rates
• Rising LT rates are reducing yield curve inversion fastest in DM Americas and DM Europe
• Rates are high across EMs, crushing in FMs, and low in EM Asia
• France and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT rates
• Rates are low in China, which, together with India, never inverted

Rates returning to normal?

Irving Fisher (1867 –1947) – One of the earliest American neoclassical economists

• Described as "the greatest economist the United States has ever produced"
• His reputation during his lifetime was irreparably harmed by his public statement, just nine days before the Wall Street Crash of 1929, that the stock market had reached "a permanently high plateau"
• His 1930 treatise, The Theory of Interest, summed up a lifetime's research into capital, capital budgeting, credit markets, and the factors (including inflation) that determine interest rates
• Some core concepts
• Time Preference – The idea that people generally prefer to have goods and services sooner rather than later
• Real Interest Rate – The real interest rate adjusts for the effects of inflation, allowing for a more accurate evaluation of the purchasing power of money over time
• Fisher Equation – Relates nominal interest rates to real interest rates and inflation
• Expressed as: Nominal Interest Rate = Real Interest Rate + Inflation Rate
• The Fisher Effect - Suggests that nominal interest rates adjust in response to expected changes in inflation
• In other words, if people anticipate higher inflation, nominal interest rates will rise to compensate

Jeremy Siegel (born 1945) Professor of finance at the Wharton School of the University of Penn.

• Comments extensively on the economy and financial markets
• Wrote two books, but most prominent is
• Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies

History of the real return on long-term US government bonds

Global MarketsWorld yield curve inversion is falling because of rising LT ratesInterest rate level – 5.4% world 3m yield, 10yr 4.4%; LT rates much higher in EM

• World 3m rates were 5.4% in Sept., DM rates were 4.4%, and EM rates were 6.9%, a 2.6ppt premium
• World 1yr rates were 5.1% in Sept., DM rates were 4.3%, and EM rates were 6.2%, a 1.9ppt premium
• World 10yr rates were 4.7% in Sept., DM rates were 3.8%, and EM rates were 5.9%, a 2ppt premium

Year-on-year changes – DM 3m yield rose from lower base; fast DM LT rate rise

• 3m yield had a large 2.2ppt YoY rise to 4.4% in DM; there was a smaller 1.4ppt rise in EM
• 1yr rates only increased 0.7ppts YoY in EM; but were up a large 1.4ppt YoY in DM
• 10yr EM rates up only 0.2ppts YoY, DM rates rose by a much higher 0.7ppts

Rate progression – DM tightening has stopped but continues in EM

• 3m rates were flat MoM in DM and are on the rise in EM
• A 0.5ppt MoM rise in EM 1yr yield is raising World yields; DM yield was flat
• Sept 10yr yield rose in both DM and EM, up about 0.4ppts MoM

Yield curve – Rising LT rates pushed world past August peak inversion

• August looks to have been World peak inversion as LT yields have been rising
• World 3m rates rose fast, but now LT rates have started to rise
• May looks to have been DM peak inversion as LT yields start to rise
• 3m DM rates have flattened, but LT rates have been rising, reducing yield curve inversion
• August looks to have been EM peak inversion as LT yields have been rising
• After a year of significant rises in EM ST rates, LT rates have started rising, reducing inversion

Key points and the bottom line

• 5.4% world 3m yield, 10yr 4.4%; LT rates much higher in EM
• DM 3m yield rose from lower base; fast DM LT rate rise
• DM tightening has stopped but continues in EM
• Rising LT rates pushed world past August peak inversion
• World yield curve inversion is falling because of rising LT rates

Developed Market RegionsRising LT rates are reducing yield curve inversion fastest in DM Americas and DM EuropeInterest rate level – High DM Americas rates, EM Europe lower, and DM Pacific much lower

• DM Americas 3m rates were 5.4% in Sept, DM Europe rates were 4.0%, DM Pacific rates were 1.4%
• DM Americas 1yr rates were 5.5% in Sept, DM Europe rates were 3.7%, DM Pacific rates were 1.6%
• DM Americas 10yr rates were 4.5% in Sept, DM Europe rates were 3.6%, DM Pacific rates were 2.1%

Year-on-year changes – ST rates rising in DM Europe, LT rates rising in DM Americas

• 2.8ppts YoY 3m rate rise in DM Europe, to 4%; up only 0.5ppt to a low 1.4% in DM Pacific
• DM Americas and Europe had a high 1.5ppt rise in 1yr rate; 0.5ppt in DM Pacific to a low 1.6%
• DM Americas had the highest rise in 10yr yields, up 0.8ppts, but other regions are rising as well

Rate progression – Rates hardly moved MoM across all DM regions

• DM Europe central bank tightening drove fast 3m rate YoY rise; rates flat MoM in all DM regions
• 1yr rate barely moved MoM in all DM regions
• 10yr yield rising fastest MoM in DM Americas and Europe, slow MoM rise in DM Pacific

Yield curve – Rising LT rates in DM Americas and Europe flattening yield curve; normal in DM Pacific

• DM Americas inversion peaked in May 2023; LT rate rise reduced inversion by 0.5ppts MoM
• DM Europe yield curve inversion peaked a bit later, in August, and fell MoM due to LT rate rise
• DM Pacific yield curve never inverted as it never went through a US Fed-style hiking cycle

Key points and the bottom line

• High DM Americas rates, EM Europe lower, and DM Pacific much lower
• ST rates rising in DM Europe, LT rates rising in DM Americas
• Rates hardly moved MoM across all DM regions
• Rising LT rates in DM Americas and Europe flattening yield curve; normal in DM Pacific
• Rising LT rates are reducing yield curve inversion fastest in DM Americas and DM Europe

Emerging Market RegionsRates are high across EMs, crushing in FMs, and low in EM AsiaInterest rate level – ST EM rates high, ranging from 12% to 35%, but a low 3.2% in EM Asia

• EM Americas 3m rates were 11.9% in Sept, EM Asia rates were 3.2%, EM Europe rates were 11.6%, EM ME&A rates were 15.7%, Frontier rates were 33.5%
• EM Americas 1yr rates were 11.3% in Sept, EM Asia rates were 3.1%, EM Europe rates were 15.2%, EM ME&A rates were 25.2%, Frontier rates were 16%
• EM Americas 10yr rates were 11% in Sept, EM Asia rates were 3.6%, EM Europe rates were 12.5%, EM ME&A rates were 17.5%, Frontier rates were 11%

Year-on-year changes – ST rates in FM and EM ME&A are up, LT rates are rising fast in EM Europe

• Biggest YoY rise of 3m yields in Frontier markets, up 10.6ppt, and EM ME&A up 4.6ppt
• 1yr yield rose most YoY in EM ME&A, up 7.4ppt and EM Europe up 5.2ppt
• 10yr yields flat YoY in EM Americas; 3.2ppt rise in EM Europe and 2.9ppt rise in EM ME&A

Rate progression – FM ST rates up massively, but flat MoM, LT rates rising in EM Europe

• 3m rates up MoM in EM Europe; down in super high FMs and high EM Americas; flat in EM Asia
• 1yr yields show significant rise in EM Europe; High in EM ME&A; Low in EM Asia
• LT rates are up across EMs, rising particularly fast MoM in EM Europe, low and flat in EM Asia

Yield curve – Inversion massive in FM, falling in EM Americas; normal in EM Asia, Europe, and EM ME&A

• EM Americas yield curve inverted slightly more than World; but peaked in June 2023
• EM ME&A yield curve never inverted as ST rates have always been high
• Frontier yield curve inversion peaked in August 2023, but crushing ST rates remain

Key points and the bottom line

• ST EM rates high, ranging from 12% to 35%, but a low 3.2% in EM Asia
• ST rates in FM and EM ME&A are up, LT rates are rising fast in EM Europe
• FM ST rates up massively, but flat MoM, LT rates rising in EM Europe
• Inversion massive in FM, falling in EM Americas; normal in EM Asia, Europe, and EM ME&A
• Rates are high across EMs, crushing in FMs, and low in EM Asia

Developed CountriesFrance and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT ratesInterest rate level – US/UK have 5.5% ST and 4.6% LT rates, Germany and France lower at 3.6%

• US 3m rates were 5.5% in Sept, Japanese rates were 0.2%, German rates were 3.6%, UK rates were 5.4%, French rates were 3.8%
• US 1yr rates were 5.5% in Sept, Japanese rates were zero, German rates were 3.7%, UK rates were 5.1%, French rates were 3.8%
• US 10yr rates were 4.6% in Sept, Japanese rates were 0.8%, German rates were 2.8%, UK rates were 4.4%, French rates were 3.4%

Year-on-year changes – ST rates are rising fast in France and Germany, LT rates rising most in the US

• Fastest YoY 3m yield rise in France and Germany, up about 3ppt; no change in Japan
• 1yr yield up about 2ppts in France and Germany; Japan flat
• Biggest 10yr yield rise in the US, followed by France and Germany

Rate progression – MoM LT rates rising in the US, Germany, France, UK and Japan are flat MoM

• 3m rates rose most in France and Germany; US and UK have steadied; Japan remains flat
• 1yr rates rose most in France and Germany; US is rising MoM; Japan remains flat
• LT rates are up half ppt in the US, Germany, and France; even Japan has been rising

Yield curve – Germany, UK, and France passed peak inversion in Aug; US passed in May

• US yield curve inversion peaked in May 2023; 10yr rates rose by 50bp MoM in Sep 2023
• Japan had a tiny MoM 0.1ppt increase in both short and long-term rates, never inverted
• The deepest inversion in Germany was Aug 2023; rising LT rates have reduced inversion
• The deepest inversion in the UK was Aug 2023; tiny LT rate rise, and tiny ST rate fall MoM
• The deepest inversion in France was Aug 2023; LT rates up 4bp MoM

Key points and the bottom line

• US/UK have 5.5% ST and 4.6% LT rates, Germany and France lower at 3.6%
• ST rates are rising fast YoY in France and Germany, LT rates rising most in the US
• LT rates rising MoM in the US, Germany, France; UK and Japan are flat MoM
• Germany, UK, and France just passed peak inversion in Aug; US passed in May
• France and Germany ST rates rising; DM countries have past peak yield curve inversion due to rising LT rates

Emerging CountriesRates are low in China, which, together with India, never invertedInterest rate level – Low 2-4% rates in China and Korea, 7% in India, and 12% in Russia and Brazil

• Chinese 3m rates were 2.3% in Sept, Indian rates were 6.9%, Korean rates were 3.6%, Russian rates were 12.4%, Brazilian rates were 12.3%
• Chinese 1yr rates were 2.2% in Sept, Indian rates were 7%, Korean rates were 3.6%, Russian rates were 16.5%, Brazilian rates were 11%
• Chinese 10yr rates were 2.7% in Sept, Indian rates were 7.2%, Korean rates were 4%, Russian rates were 12.9%, Brazilian rates were 11.7%

Year-on-year changes – ST rates in China, India, and Korea up less than 1ppt, LT rates flat; rates rising in Russia

• 3m yield up most YoY in India and Korea, followed by China; down in Brazil
• 1yr yield was up most YoY in Russia, down in Brazil
• 10yr yield was down a bit YoY in China, India, Korea, and Brazil; up only in Russia

Rate progression – Yields are flat in China, India, and Korea, rising in Russia and falling in Brazil

• 3m yield flat MoM in India, Korea, and Russia; rising a bit MoM in China, falling in Brazil
• 1yr yield rising fast in Russia; down MoM in India and Brazil
• 10yr yield was up YoY only in Russia but up MoM slightly in China, India, Korea, & Brazil

Yield curve – Yield curves never inverted in China and India; Russia's inversion stopped; Brazil passed inversion peak

• China never inverted; ST rates were up 30bps MoM, LT rates were up only 10bps
• India never inverted; nearly flat yield curve has remained unchanged MoM
• Korea saw a brief and mild inversion in Jan 2023; slight MoM steepening w/ LT rates up
• Peak Russian inversion Oct 2022; LT rates up nearly 1ppt MoM
• Peak Brazil yield curve inversion in Jun 2023; nearly equal MoM fall in ST rates and rise in LT

Key points and the bottom line

• Low 2-4% rates in China and Korea, 7% in India, and 12% in Russia and Brazil
• ST rates in China, India, and Korea are up less than 1ppt, LT rates flat; rates rising in Russia
• Yields are flat in China, India, and Korea, rising in Russia and falling in Brazil
• Yield curves never inverted in China and India; Russia's inversion stopped; Brazil passed peak
• Rates are low in China, which, together with India, never inverted

 

Click here to get the PDF with all charts and graphs

 

Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

• astotz.com
• LinkedIn
• Facebook
• Instagram
• Threads
• Twitter
• YouTube
• My Worst Investment Ever Podcast