Ben Felix Is Mostly Right, But Where He Isn't Is Extremely Dangerous!!!

Good day fellow investors. I was a little bit under the weather this week and what do you do then? You listen to podcasts and I came across this podcast where Ben Felix said that stock picking is dead. Thinking investing, fundamental analysis, value investing, everything is futile. You better just invest passively and you will outperform all the others that are investing actively. Then I listened to the whole nice podcast. I agree with Ben Felix on most of the things, but the things that we disagree on is where I find Ben Felix as an extremely dangerous person for general investing. So we'll discuss stock picking, his theory that investing is solved, the efficient market hypothesis, passive investing, Buffett not outperforming for the last 20 years, monetary policy having no impact, dividend irrelevance, and other key Ben Felix topics. For those who don't know, Ben Felix, chief investment officer at PWL Capital, 8 billion assets under management, great YouTube channel, very interesting videos, academically backed, and he's so good on YouTube that onethird of the customers of PWL comes from his podcast, YouTube, and social media. And now when it comes to Ben feelings, he doesn't say anything that is untrue. So you on a basis level can agree with everything he says. But I would say that I disagree with everything he stands for. And that is what we're going to discuss in this video. This was a great discussion, a lot of topics. I'm going to select the most important ones and then give my take where we and why we are so different. Let's start with investing has been solved. What does Ben Felix mean when he says investing has been solved? I have taken the transcript and with investing has been solved anyone can buy a lowcost index fund asset allocation. and you get automatically rebalanced globally diversified portfolio and that is going to beat 90% of professional money managers. That's amazing. And he calls it solved. And then he attacks the media, financial analysts like me, financial journalists, because you cannot simply say investing is solved. That's pretty boring. You have nothing to discuss. And then the key factor what he doesn't like is simply that we then write about stuff we discuss things which often makes investor think that they should be doing something being active in my words and Ben Felix doesn't love it. So totally against any kind of activity just put your money in the market passively automatically rebalanced diversified and that's it. that part of your life is solved according to Ben Felix because you can't beat the market. Why some people do beat the market because if you look at the normal distribution most people will underperform, some will outperform. So practically he's just saying luck. Then the discussion also goes later how they perform for a while then they start underperforming. You could take Billman as an example. As I'm telling you, Ben Felix is telling the right things. Billman did great and now he's underperforming. However, when it comes to individuals investing in stocks, he says that it comes to the skewess in the distribution of individual stock returns where just 4% of the market gives you the core of the return. So if you invest in 20 stocks, you miss 4% of the stocks that give you the return. You underperform the market plus fees plus taxes plus this plus that. Again, he is right. Then discussing the efficient market hypothesis, he discusses how there is the Grossman Stiglitz paradox where markets are efficient because of active managers, but if markets are efficient, active management doesn't actually make sense. you should choose an index. If that is true, everybody would index and markets would cease to be efficient. The Grossman Stiglitz paradox again correct when it comes to investing has been solved. The statistics are there. It is most likely we will underperform the market. And here I agree totally most investors will underperform the market. That's a given. That's a statistics. So there is one side okay just invest passively and you will do as the market does you are in the top 10 of performance. But then most investors are gamblers. Most investors are totally emotional. Most investors totally play on the market's inefficiency not efficiency and therefore they underperform. Even passive investors underperform because after all we are humans, right? But when it comes to investing is solved, I with Ben Felix agree that Wall Street and the fees and what they are doing has absolutely no added value. So that's completely something we agree. But here I disagree with both Ben Felix and all of Wall Street. There is always this performing outperforming underperforming and here is where I come to the core of the disagreement. I don't care about outperforming or underperforming. My goal is to perform. Investing is personal and therefore I have to invest according to my financial goals to my risk and reward to my goals with high certainty that I will reach those value investing margin of safety active management that works. I have to be sure I perform. Just buy the index fund and forget about it. Passive is king. Great. that has worked over the last 30 years because the S&P 500 has done 10x plus the dividend. However, the same can be said from the S&P 500 from 2009 10x plus dividend. That means that the 13 years before that the SAP 500 has done zero. 13 years of zero true performance. That means that if somebody paid 1% of fees, he underperformed, right? That means that if somebody made 5% return or 1% per year, he outperformed. Genius. 10x over 30 years, 7.9% plus 2% dividend, that's 11% returns. Okay, but my take is here. 10 years minus 50%. When I'm down minus 50% after a decade, do I care whether I am down minus40% or minus60%. No, I just look okay my wealth has been here. Now it's here. That's not acceptable in my world of compounding. Is this something that can happen to any passive investment strategy? At any point in time you can be down minus 50 60 70% over the next decade. Is it a possibility? Yes. Do all the players invested in such a way accept that as a possibility? No. There is one of the first discrepancies we are discussing. My strategy is to compound through business ownership. I own businesses that whatever happens, let's take the 2000s.com bust financial crisis. Have there been businesses that have compounded no matter what? We knew stocks were overvalued in 2000. We knew that the housing situation was a little bit tricky. Could you have invested in a way so that whatever happens you do well? That's my message. Can I compound so that whatever happens I do well? I don't care about outperforming. I don't care what the market does. I care about performing. Businesses have earnings. Businesses have equity. Businesses can grow. If I own those and good businesses at the fair price because price paid is key. Another huge discrepancy with passive investing. You just invest. You don't care about price paid. Even if Ben Felix constantly says that given the level of valuations, returns are likely to be lower. He says it. So he is smart person. Nothing wrong there. But you can own businesses. You don't have to own all the businesses and you can reach your financial goals. and where it goes wrong. Of course, everybody is trying to beat the market, doing crazy things to beat the market. As Warren Buffett says, I'm smart at spots and stick around those spots. If there is nothing to invest, I do nothing. I don't risk my wealth just because I need to outperform something. Speaking of performance and outperformance, I always discuss this. If you are in the bedroom with your spouse, when you perform, do you ask, "Oh, how did I do compared to the market?" I rest my case on performance. Further on investing, the current dividend yield is 1% has been around 2% on average over the last 40 years. If we calculate the return of the market, everything was great. annualized 10% with dividends reinvested 7% return without dividends and that is it I cannot argue against passive investing because passive investing has delivered for the last 40 years and Felix has delivered since he has been preaching his mantra but again something to disagree on if we take the academic stance This have been the last 30 years. But given the situation, given everything, what is the distribution of outcomes over the next 30 years based on the current price? Academic, let's just use AI. I have asked what is the distribution of returns given the valuation, the fundamentals, the everything. And then given the current valuations when starting from the top 1% of historical valuation the distribution of 30-year outcomes is heavily shaped by multiple contraction. If multiples valuations where now passive investors mindlessly buy whatever they are thrown at SpaceX's this and that the returns require to get a good return. Now 7.4% you require that the P ratio forever till you retire till you die remains 40. If we have a mere reversion to the historical average your expected return will be in the low single digits. If the bubble pops it gets ugly you get a very low return. That is the risk and reward. So only in the Goldilock scenario passive investor continues to make money as he did in the last 20 years not 40 20 less 17 and all other scenarios the distribution is far below what everybody expects and then we come to real life and investing. So, in the best case scenario, I get 7%. I can pay off my 40-year fixed mortgage at 7% and that is a better return. This is where real investing comes in. Here are the distributions starting with 10K. Best case scenario, I get to 84K in 10 years. Mean reversion 36. And that's not much. That doesn't beat inflation. It will not get you far. As simple as that is performing good for us. What the market does is practically irrelevant. And this is the key discrepancy. I want to reach my goals, but am I happy by doing it with a mindless passive investment robot where I just put my money there and don't think about it because it has been doing great for 17 years. Before that, it didn't do well for 14. Then it did well for 20. Before that, it didn't do well for 15. Before that, it did well for 18. Before that, it didn't do well for 25. Whoa. These ups and downs are hard to argue when we have had the biggest bull market in history of 17 years. We cannot predict the future. But is this 3.86 86 most likely outcome good with what you're expecting and this is actually omitted from standard passive by the index discussions always up always up and I personally don't like that or don't love that or as Ben Felix says he doesn't like us discussing it. Why does Ben Felix say that he doesn't like us discussing it? Because the essence of passive investing is that everyone invests passively mindlessly. If people start thinking passive investing is dead, why would 35% of my wealth now be invested in an AI gamble with five AI geek pricks that think they are changing the world and just burning money? Elen Musk, this or that. If those are the geniuses of the future of civilization, guys, we don't need money. We need God to help us all. But that's a different story. The key question is, am I willing to risk given the effect on the economy and everything 50% of my wealth on the AI bet? Then Ben Felix discusses this again perfectly. He's smart. Technological advances lead to low investment returns. But you have to mindlessly invest 50% of your wealth into debt and whatever happens happens because you can't beat the market. This has been discussed by Warren Buffett 1984 how he did beat the market and if you follow that you would just keep on beating the market. But then Ben says it has been more than 20 years now that Warren Buffett has not beaten the market. And here we come again to the story. Can we know what the market will do? Did Buffett perform? I would say Buffett destroyed the S&P 500 in the last 25 years. The stock might not show it, but something more important and the core of investing shows it. It is there. No matter that 99% of idiots there doesn't see it. Whatever. It's your life. It's your money. You do as you wish. You can mindlessly invest in the S&P 500. Let's take the S&P 500 P ratio of 29 in 2000 1.441 points. Earnings are 49. I have looked at the earnings now. Those are 295 for the S&P 500 earnings per share. That is six times improvements. Okay, let's look at Birkshire Hathaway net income 96 97 to 2001. Okay, let's take the peak of the earnings, not the average, which would be more fair. Let's take the peak of the earnings, 3 billion. Let's look at Birkshshire Hathaway earnings. Now this is Burkshar's earnings 3 billion the peak. Now the true earnings are 44 billion. Okay 45 divided by 3.2 billion. Bergkshshire has increased earnings by 14 times since the peak of the bubble. The market has increased earnings six times. And somebody dares to go around and say Buffett outperformed. I have nothing to add. On top of everything, when the markets got fraught, Buffett turned to cash. Then we can also argue, okay, but he didn't perform the last 10 years. 14 billion, 45 billion. This is Birkshshire. Okay, the S&P 500 is 3.6. If you adjust for the open AI entropic and things like that, we are more reality are 240. So he did equally but with 40% in cash thus with much much less risk. Risk adjusted returns understanding true risk. Risk is not volatility that you simply have to accept. Risk is low returns over the long term. Permanent loss of capital something that academia and value investors disagree completely. Buffett performed despite the hardest environment for him to perform in the last 60 years of his career with interest rates close to zero with asset prices ballooning with being a bubble. Birkshshire and Warren Buffett performed I would say outperformed the market and the S&P 500 no matter what the gamblers or the mindless passive investor Roberts are telling you because investing is business ownership. business performance, owning businesses and not to be smart on Wall Street. I have a PhD. How many times do I refer to the academic papers here and there? Why? Because everything in academia you can use it as futile because I'm using Mike Tyson. Everybody has a plan till they get knocked in the face. And that's exactly what I think of academia. I have a PhD. I can say my PhD is futile. It works till you get knocked in the face. And when that starts with passive investing, then we are in trouble. Then they discuss is it a strategy, is it a hobby, is it this or that. I have asked AI asking okay mindless passive investing robot Mike Green Ben Felix what happens when passive doesn't work anymore now passive is more than 50% of the market my green's hypothesis is that when it reach 60 60s something percent passive does not work anymore and we have already been seeing that markets are not efficient markets are inelastic pushing prices higher and everyone is playing that game What happens when this changes? And Felix in discussing with my green admitted that the systemic risk is plausible. But individuals shouldn't change their behavior. The solution when passive breaks requires policy not retail action. When passive breaks, when policy action comes, your portfolio will already be toast, will be destroyed. Your wealth will be burned. your retirement will be good luck with policy. Then there was discussion again here. I agree with Ben Felix to lower it down a notch. Actively managed Canadian funds, that's criminality. I did a video in 2018. The way half of Wall Street or European financial systems are structured, that's criminal. So I agree it would be much better in passive index funds rather than uh robbery funds charging one two 3% for no absolutely no added value. Then on his company they give you peace of mind so you can reach your financial goals. Here I disagree strongly because they give you peace of mind because it has worked for the last 16 17 years. What if things change? That's what is not planned. What if the systemic risk my green is discussing emerges next year? What if AI pops? What if this? What if this? And then we come to reality that you're not allowed to think when you're a passive investor and not thinking in life. Good luck. The answer is very simple. Over the long term, you will be doing well. So maybe 6% the low end of the return, but we can do 18% per year if you're just invested in stocks. Bonds are lower return. They lower your volatility of the portfolio, but you also lower your long-term return. So just be mindless investing in stocks and that's it. Okay, but my opinion is what if the US is not the US in the next 10 years? What if AI is not AI in the next 10 years? What if there is a financial system crisis? Can it happen? Yes. If you are passively investing your future retirement, everything into the mindless investing robot of this market, are you protected for this? No. What happens when you get punched in the face? Ah, you lose everything. Oops. Just hold on. And what if you hold on for 10 years and nothing happens? Ben Felix, what then? And that is absolutely never discussed with passive investing because you are not allowed to think because it doesn't work if you start thinking. Whatever you do, invest in stocks and uh maybe you have to wait 2 years and then you're back to even. But what if this that has driven the passive investing mantra becomes this the Japanese market mindlessly investing into Japanese stocks that has not worked well despite now the last few years looking better. Okay. Mindlessly investing into real estate value at risk nothing can go wrong. Do you remember 2007 people? And then these guys ask the question where were you in 20089 were you invested? No, I was in university playing basketball and then Oh, so this is the real life experience that you miss and if you miss it then just based on your experience if you never felt that you cannot know and this is another huge divergence because I've been there done that seen everything he has just been enjoying the mindless passive robot working because the Fed has printed so much money which is again something we disagree on but let's discuss AI and very smart bunch of studies what tends to happen in that economy when people like railroads things like that we have to accept that it's major technology bubbles and investor returns are pretty poor especially if you invest at the peak of the bubble so you are saying Forward expected returns for the US market are low. Yes, with high valuations, but just mindlessly invest, work it out, wait it out, and that's it. Concentration not leading to high returns. And then the answer is okay. Yes, but that's everything. It has not been that bad. And then these guys change the subject instead of asking what does not that bad mean? And then I look he says 30% of the TS6 has been in Nortal that went bust. Okay this is minus 50% after 10 years negative we have reached equal after 10 12 years and this has peaked at 11,000. Now we are at 35,000 3x over 26 years. That's not bad. But with a lot of luck, luck in money printing that Ben Felix says maybe there is some relationship there. But it doesn't mean assets prices can't go down. I really don't think so. Okay. They are not really printing money. They're just changing the duration of the depth market. They're not really changing the amount of liquidity that exists. What What Kool-Aid is he drinking? Zero interest rates, a lot of liquidity. Everyone can borrow, can build assets, investments, economies, everything goes up. High liquidity, crazy investments, Bitcoin, this or that, more employment, 401k, passive investing, not to mention fiscal stimulus, 7%, 6% of GDP. Everything is flowing into financial markets. And this guys has it has no impact. That's all I can say. But my key disagreement is what if things change? What if the government cannot print money even if it has no impact? Okay. What if valuations just revert to normality? Then passive doesn't work anymore. But then you can't beat the market. Don't bother. H when somebody tells me don't bother. Okay. Plan with his capital firm. Enjoy your life. Don't work. has worked since 1981. But what if things change? What if we have 20209 1681? Okay, what happens? And that's just my question. What if is what if included in passive investors that are now the majority? And that's my key concern. It's not. It's not. Nobody thinks what if. Why? Because they are not allowed to think. My father used to tell me that there was one basketball coach that prohibited his players to read books because they were not allowed to think. The discussion goes on. Covered calls, ETFs, that's crazy. Agree with Ben. Private assets that are most marketed, faking the volatility. Agree. ESG investing lowering return. Agree. Financial analysis is Agree to a degree. He says that every courses that understanding this books and that that's all financial like discussing the price target of Apple and how you can calculate and uh this and that and I agree discounted cash flow valuation this and that you will be 100% wrong but I'm not here to be right in the faces of analysts or Wall Street or is I'm here to increase my wealth long term. And then we go to our educational intrinsic value template. We go to Apple. We have the earnings. We have estimated growth terminal multiple standard. There are very variations. And then my intrinsic value is 128 for the stock. The stock price is 348. Will I be right? I have no idea. I don't care. There are other scenarios. I have a more exuberant scenario. And yes, my valuation is 129 here. If I change the discount rate to five, the valuation is almost double. Guess what? But I'm just saying, okay, intrinsic value for an expected 10% return that I want to get to get to my financial goals is far from the stock price. Thus, I simply don't invest in Apple. I'm not taking that risk. Investing is about owning businesses. And I see it as being a businessman, not a stockpicking, Wall Street gambling, performing, chasing, outperforming analyst or investment manager. That is what Wall Street wants you to be. Then you underperform. I agree with Ben. But we are not that. We are performing objectives focused, managing risk first investors. Then they discuss the dangers of knowing about investing. How everything is financial The more you know, the more risk you're taking, the more you underperform. Okay, then that you should not even read these books. And here I disagree because when you know doing business, you know, okay, I'm not buying that business for that price. I you compare it to other opportunities in life because investing at the end is about life. I can bet more on Nvidia or I can take that money and buy the boat of my dreams. That's investing. You have to connect it with reality. And passive investing is living in an academic vacuum that has just been working for the last 15 years. When it clashes with reality, that will be ugly. On geographic diversification, Benfelix is one/3 Canada and the rest is I think the S&P 500 or according to market weight just 67% US and the rest international I think. And then he says that sometimes others will outperform and this and that but also that how much are you going to be allocated? That's also active investing. allocating 43% to Canada. That's also active investing. That's not investing solved. That's also a decision. And he says that he's comfortable forever just owning equities no matter what happens. Uh however, his clients have 30% of bonds just in case. Then there is this discussion of dividends versus total return. I totally agree. Dividends are just part of the return. Depending on the situation, depending on this, there are some positives, there are some negatives, but dividend as just the dividend means nothing. He finishes discussing scams. He is used as a scammer. I am used as a scammer. Videos of people to WhatsApp groups. Most recent. And here I just want to discuss wrong email. I have just one email and I will never send you an email. and people take their YouTube hashtag where you comment it, attach Gmail to it and then send you an email. Some of you have fallen into these spam situations. Most of you send me emails when this is not you. But okay, so be careful of scams and uh really make sure that you are dealing with the right person. On the conclusion, it's hard to argue now with passive investing where it has been working so well, but there is always the risk what will happen in the next 20 years. What if it goes wrong? I hope it doesn't go wrong. I hope the market keeps on doing its 15 20%, I'm happy with doing my 10 12%. But what I miss in this mindless investing is the simple true investing. Nessim Talb's fat Tony I put my money there am I sure I will get 8% or more if not I don't put my money there that's it that's the old-fashioned way of investing where you simply don't do things in Wall Street you are not allowed not to do you're not allowed to be Buffett and put all your money in cash not do anything because AI will change the world if you start thinking about investing that you understand that investing is not about maximizing your long-term returns. Be the true passive that statistically makes it the best, but it's about increasing your lower bound of wealth across cycles. And here we are requiring some thinking. This is from Spitznagle, safe haven investing. Some complicated thinking, but just quickly understand Ben Felix is this the allin portfolio. And if you look at the average return, the wealth potentially that you can reach with that, it's extremely high, it's everything great. But when you look at the ups and downs, the impacts, the this and this, the net portfolio effect, it's very likely you end up negative wealth after negative wealth. I'm not allowed to go below one. Therefore, speech naggle in discusses cost effective hedging. So where the chances of you being at one are minimal, your maximum okay will be a little bit lower but your lower bound. Your certainty that you will reach some goals will be higher. Allin compared to insured the distribution simply of what is next what is coming looks ugly looks not like something I want to risk my wealth on I want to invest in a way that whatever happens I'm sure I'm above that one the next crisis I'm a little bit above and then that lower bound crisis over crisis saves me and we are not investing in a vacuum at some point you have to eat the crisis will come everything will change and then people will start thinking and then they will make the wrong decision. Academia works fine on paper until it doesn't. Perhaps I'm biased. Been there war been there from uh 7 to 12 makes everything war. Hyperinflation been there twice. Communism born in communism. Capitalism seen that. Seen this. Money printing been there. High deficits been there. Do I know how it ends? Been there. I have seen this. Been there. Financial crisis been there. I might be biased, but I have seen the distribution of outcomes. And I'm not willing to bet my wealth on one distribution that passive investing will work forever. There is no other US mantra. Everything works. I'm just not made like that. That's it. I'm not buying this all in. Everything will be well. You end up rich. I'm just thinking if I look at the distribution of reality, most likely I will not end up rich. We don't know the future, but we can know what we own. Passive now is an easy cell because it works. But nobody knows what they own. It's up to you whether you want to think or not. And this is the danger. This is extremely dangerous. come to PWL. We give you peace of mind taxes. This distributions and that peace of mind when the brown thing hits the fan is extremely dangerous in my opinion. But that's just me. That's why we have different opinions. That's why Ben Felix is Ben Felix. He manages 8 billion. I manage 8 million. That's life. But the key is that you know what you're doing for yourself.