Could being more patient lead to better investing? Gil Baumgarten talks about how to become a permanent participant in the market and the benefits of doing it!

Apr 12, 2024 | Blogs, Podcast

About the Episode

We focused on better investing, what it means to be a permanent participant in the market and the benefits you’ll get, how to think about inflation, where to get your news and information, and the problems with brokerage accounts and financial products, with Gil Baumgarten, President of Segment Wealth Management, author, and fiduciary advisor.       

Listen to hear a difference-making tip on why now is a very expensive word!

You can learn more about Gil at SegmentWM.com, Facebook, and LinkedIn.

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George Grombacher

George Grombacher

Host

Gil Baumgarten

Gil Baumgarten

Guest

Episode Transcript

george grombacher 0:01
Gil to get us started. Give me two truths and a lie, please.

Gil Baumgarten 0:06
Okay, two truths and a lie. So I have seven grandkids. I’ve driven a car over 160 miles an hour. And my brother survived the Leonard skittered plane crash in 1974.

george grombacher 0:27
Oh my goodness. Those are amazing. Seven grandkids. 160 miles an hour and your brother survived the Leonard Skinner plane crash. Holy cow. I don’t think he got seven grandkids.

Gil Baumgarten 0:41
You are correct.

george grombacher 0:45
How many do you have?

Gil Baumgarten 0:48
Five right now, but one on the way. Okay.

george grombacher 0:50
Nice. So 160 Nice. What was the context there? I

Gil Baumgarten 0:56
had a Ford GT the rear engined supercar and had it out on the Tollway and let it rip. And then, yeah, my brother have three step brothers that have all been in the concert business. And one of them was a roadie for Leonard Skinner, amongst many others, top name rock bands, and he was on the plane that crashed. There were six survivors. So anyhow, that’s that’s my two truths and a lie. All

george grombacher 1:25
right. Well, those those were excellent. Well, it’s good to see you again, like this is our third conversation. So I’m grateful for that. And like going out in the world, what’s top of mind for you right now?

Gil Baumgarten 1:35
Oh, you know, just I’m in the investment business. So investments are kind of crazy right now, stock market’s been going up a bunch. And I think it’s probably going to take a little breather, I think that expectations have gotten a little ahead of reality, people are getting super enthusiastic about the possibility for lower interest rates, and I’m not so sure that’s going to happen, at least not for a while. And that being the case, people are going to find out I think that they’re a little over their skis. And so anyway, that’s kind of what’s been top of mind for me. Yeah, about.

george grombacher 2:09
Same, same, same, same. It’s, I just read an article in the Wall Street Journal, it was sort of a, I don’t know why it bothered me so much. But the author was saying, I don’t know why people are think the economy is so bad, it’s going really well. And inflation is less than it was before. And I thought to myself, well, stuff is just way more expensive. So inflation might be 3% versus six, but doesn’t mean that the cost of things have come down. Oh,

Gil Baumgarten 2:34
my gosh, inflation is terrible. I was noticing today, I had a Pokeball for lunch today. And I was noticing that the pokey is pretty much the same price as it used to be, but the bowl is about a third smaller than what it used to be. So that’s just another another version of it, he’s still got a lot of really expensive products out there. And car prices are still kind of bonkers. Although that’s starting to settle down, prices are starting to come down a little bit plywood was I remember crazy prices back two years ago that seems to settle down. So some of the aberrations of supply chain constrictions have normalized but other types of items have not normalized and food and you know, the recent California change to the minimum wage really is going to be tough on California, fast food restaurants, in particular, with the low price point items, I think are really going to struggle, you’re gonna see a lot of businesses either shift to mechanical delivery of robots and the like, if they have enough scale for that, or just go out of business entirely. So anyway, that’s capitalism is not always very compatible with socialism. And I think we’re gonna see some issues of disjointedness come from that.

Speaker 1 3:55
Are there levers that that that the government could pull to reduce inflation? Or is the horse out of the barn? What?

Gil Baumgarten 4:07
Well, you know what, what we’ve got is a multi administration problem that dates back in my sense of awareness date best dates back to the Clinton administration, but it was the Bush’s two so even though I am a Republican, and I do look more critically, I think at Democrat administrations unfairly in some cases, but the Republicans are guilty of it, too. And it really accelerated with the second Bush administration through the Obama administration. Less so with Trump, but some, to some degree, and surely problematic with Biden, but of them just printing money like crazy. You can make the argument that the 2008 financial crisis was made less scary by all the money that they printed but then COVID Just seemed to come out of nowhere. And I’m not so sure that the proper response was to restrict everybody and then give people money to sit at home and do nothing, when they still have needs to go out and buy products. Where are the products going to come from, from the people who weren’t making those products, that’s a surefire way to kickstart inflation. And I don’t know what the resolution of it is, I think ultimately, we have to extract some of that liquidity from the economy in order to bring things back in line, but you’re gonna have a lot of gnashing of teeth. And politicians who try to get reelected by giving everybody money aren’t going to like the reverse factor of that. So it’s going to be tough to fix if we can just stop generating more money and let things normalize. I think that’s probably our best hope for an outcome is that,

george grombacher 5:53
you know, there’s, obviously so much nuance and all this. But if you were talking to one of your clients, and they were spending out of control, and racking up all this debt, and they weren’t earning enough money to support it, is it you would say to them, Hey, what are you doing, you need to take a big step back.

Gil Baumgarten 6:13
It’s interesting, you say that, so you know, maybe once every five years, we lose a client. It’ll happen once every two or three years because a client dies. And we don’t either want to do business with the offspring, or, you know, they want to spend the money and get out of debt or whatever. But we have clients once every five years who terminate us for one reason or another, either they think our performance isn’t high enough, or we didn’t deal with this situation or, or that correctly. And we have hundreds of clients. So one every five years is not a big deal. But we did have a client who fired us recently, because it was the combination of a after a discussion way in which a divorce see, and I do business with a former husband and the wife, and she’s just spending too much money. And she doesn’t have any means of support other than the money that she got from the husband in their divorce, which is enough to support a reasonable lifestyle, but not new Porsches, and traveling and treating all your friends to exotic destinations and, and the like. And I told her that I thought she was spending too much money. And within four months, I’m terminated. And she’s gone to somebody else who’s giving her a different opinion about it. So many people seek out advisors that will tell them what they want to hear. And, you know, in the end, I felt like I was honest about it. And if I ended up getting terminated, I’ve got plenty of new business. It’s not not a big deal. But it really was a wake up call. And I guess from a political standpoint, or to correlate it to politics. You know, politicians all want to get reelected, just like I want to stay employed as everybody’s advisor. You don’t you don’t stay in office by giving people bad news. And in the end, you know, back in the eighth and 1870 or so, Alexis de Tocqueville, who was a French correspondent, who was doing some work here in the US, wrote back home and said that the American Republic would survive until the common man could determine that he could vote himself prosperity out of the public treasury. And that’s kind of where we are today. You know, the common man votes people in who will give him benefits that are greater than what he is contributing to the society. And it pretty much puts everybody else in a problem situation. And when you have the top 8% of the earners that are paying 42% Of all the taxes, there’s not that many of them to vote against such policy. And that’s what perpetuates the problems that you have that normally crash the economy is under the duress of giving the common man a, you know, all of the benefits that he’s voting for. So I don’t know whether we are there yet. But you know, seems as though we’re certainly on that path to destruction.

george grombacher 9:17
Yeah, yeah. I think that that’s, I think that that’s fair to say, At what stage the the doomsday clock is, if it’s a couple of minutes to midnight, or if we got a little bit more time or it’s already passed. Seems like we’re getting pretty close witnesses

Gil Baumgarten 9:31
that we are still the world’s reserve currency. And the Chinese who seemed like they might be running neck and neck for that posture. Two or three years ago, they seem to be having a lot more financial problems were happening, and I think they have jeopardize their ability to become the world’s reserve currency. And as long as that’s the case, we won’t really have any problem printing more money. I mean, as long as people perceive that we’ll be able to make good on our debts. And so far, that seems to be a believable scenario. And so I’m 60, I’ll be 65 in September. So I don’t know whether that happened during my lifetime. And I would imagine that you will have a mock down of, you know, some type of another debt crisis or a crisis of belief, if you will, during my lifetime. But I think it’s going to be sooner or later, depending on the kind of politicians we elect.

george grombacher 10:32
How has How has your, for lack of a better term advice or counsel changed since COVID, to your clients, if it’s changed at all,

Gil Baumgarten 10:40
it really hasn’t changed. We have, we are a permanent equity investor, we don’t time the market, we don’t add and subtract a lot. We do a little trimming around the edges, we do a lot of strategic giving. So we will accelerate client or will accelerate advice towards the clients to be more generous in times that their returns are really high. That keeps us from having to sell positions and take capital gains taxes. We are very tax efficient and tax minded in the way we give advice. So rather than the traditional advice, which would be to rebalance, one of our rebalancing trends is that we call clients up and say, Hey, I know your family foundation has this amount of money in it, or you have this in your donor advised fund or you give $100,000 a year to your church, maybe we should do that now. And so that’s the way tax efficiency should operate. And that’s the way that’s the method that we manage money for we have $1.7 billion under management and we have over $700 million of unrealized gain. Those are just profits that have never been sold. And so we that’s what we’re curating for we are managing money for unrealized gain, because it’s tax free at the death of the first spouse. It’s really the currency of wealth building. And so that’s what we pay particular attention to.

george grombacher 12:10
Speaking of paying attention to, what do you pay attention to? Are there certain economic data you you look to? Is there a news channel that you pay attention to?

Gil Baumgarten 12:20
I read Barron’s every Saturday, I love the publication. I think if it offers me more mental stimulation than most anything else, I skim the Wall Street Journal every day, but I don’t read all the articles, I look through the headlines, and I pick out the headlines that I want to read the article about. But I don’t really place a lot of credence in financial prognostication, I can give you a couple of data points that are so much more important than anybody’s opinion, that if you stay focused on these things, you will have superior performance almost as a given. And the first data point is stocks go up in 81% of all marketplaces. So every 12 month time period for the past 75 years, stocks have produced a positive rate of return in 81% of all of those rolling 12 month time periods. Well, I can tell you, the position that one should take based on that fact, is buy stocks and don’t ever liquidate. And a lot of people want to visit, they want to put a little bit of money in and take a little money out, they try to turn it into a game of Roulette where they’re spinning the wheel. They’re hoping that they land on, you know, some color that they’ve bet on. But they’re not really permanent participants. Well, those people are really not investors, and investors, somebody who buys something today with the hopes of selling it for more in the future. And that future is measured in decades, not in days, as and there’s significant tax advantages to choosing to do it that way. Because you pay taxes on the assets that you sell for a profit and you don’t pay taxes on assets that you don’t sell for profit, even up until death in which all your taxes are forgiven. So when the odds are at 1%, that leaving it alone, is going to generate a positive rate of return and leave it alone can also make the returns tax free. There’s one pattern of behavior that will be compensated better than all others. And that’s to buy really high quality companies and don’t ever sell.

george grombacher 14:32
Appreciate that. So do you buy the actual individual stocks to

Gil Baumgarten 14:37
use we yeah, we don’t use mutual funds. We do a little bit of ETF investing because ETFs are low fee and are tax efficient. Mutual funds, but open ended mutual funds by their very structure are not tax efficient, and they are not low cost by and large, so that we just kicked them out. They’re not they don’t fit our methodology. So we deconstruct the index. In many cases, our most popular strategy is a deconstructed index where we’re building the portfolio to kind of match the s&p. But we try to do it with dividend income, and we do it in a super tax efficient manner. So with that my business is a wealth management business with tax consultation, intergenerational wealth transfer, charitable giving, counseling, all of that, as part of it, we have an asset management business tucked into it to where we actually manage the portfolios. And we do that to crush the costs that a client would pay to a third party, we can’t put them in a fidelity mutual fund and have fidelity charged nine tenths of a percent. In an 8% Return world, I’m giving up double digit percentages of my possible return. And I don’t think that there’s much hope that they’re going to outperform over long time periods. So we break those indexes down. And we build portfolios with individual security so that we can manage the charitable giving, we can take the strategic losses, we can manage the components, and you’re the IRS has talked about negating it, but they still allow you to pick individual tax lots. So we alone in video, which we have had since it was $40, a share and the stock is almost $900 A share today. But we paid $40 for some we paid $80 For some, we paid $200 For some, and we give the $80 shares away to charity. And then if we take a loss, because we might have paid too much for it, you know, we’ll sell those shares and take a loss and then buy it back later. So it just gives the client a lot more options as to how they manage the nuances of their money when you own the components. And so that’s that’s how we tend to do it. So we run nine separate strategies. And we mix and match those strategies based on cash flow characteristics, risk characteristics, what the clients trying to achieve, one of our strategies was up 49%. Last year, another one was up, you know, double digits 12, or 13. But most of our strategies were up in the mid to high 20s last year. So it’s very similar to return. So you would have found in a mutual fund, but lower cost and lower tax friction.

george grombacher 17:18
And you have a sense of obviously it’s going to be it’s a relative thing, but you wrote a book foolish about all the different expenses and the non good things that investors get from brokerage accounts, like all the fees and the expenses and losses

Gil Baumgarten 17:37
commercially, the brokerage accounts, but it’s partially feeding the ego desire of the investor to so the book kind of goes into Yes, the system is stacked a little bit against the traditional industry, if they’re taking advice from a commissionable salesperson, you’re going to get different advice than if somebody offered a more holistic solution. That’s generally true. But investors want to feel like they’re playing the game. And the way they play the game is very harmful to them, they genuinely spar too much in tax friction, and giving away the real opportunity to have charitable giving, mixed with tax loss, strategic tax loss harvesting, you can add almost two percentage points to your return back to in a 9% return world. If you can pick up two percentage points by tax managing and fee managing those results. That’s way better results and you’re gonna get from actively managing the money. By the time you make some mistakes and you make some profits, you’re not going to have two percentage points left. Whereas if you had done it a different way, it would have been a virtual certainty that you would have gotten that extra two percentage points. So it really challenges the thinking of the traditional way that an investor would approach money. People want to make money, but they think they can make a game out of it too, and get an added emotional bonus to the entire activity. And it’s quite an illusion, and it’s self destructive. And people are not critical thinking enough to evaluate their own performance in the proper context of what could have actually been. Because we never know, didn’t happen, unless we are critical thinkers about it. And so it really takes more a more objective view to do it correctly.

george grombacher 19:31
I think that that’s really powerful, that we want to make money, but we also want to have a little bit of fun doing it. And

Gil Baumgarten 19:37
yeah, and we think that those are compatible when they are very incompatible. The things that we are motivated to do this to buy to high, sell to low, ignore tax friction and ignore pricing friction of the way the spreads between the bid and the ask work. The greater activity you have the greater opportunity you’d have to mess up up. So, anyway, we force people into a particular method. And then that reproduces the results over and over again. And a different type of investor is who would hire us. There are people who understand that they don’t understand. They want to hire somebody who does understand. Fair enough. But what they really want is relief from the uncertainty of what it is they perceive that they might should be doing. And they don’t want to have to think about that. So they hire us to make that problem go away. And we have a mechanized process by which we do that behind the scenes at scale for large investors. So we’re talking about, you know, the $5 million kind of minimum investment. And our typical client is more like 25 million.

george grombacher 20:50
Understanding what you don’t understand. I love that I love it. Great stuff. Gail. Thank you, I think we’re ready for that difference making tip. What do you have for us, even though that was a good one? Well,

Gil Baumgarten 21:02
I think the difference making tip is that people should understand the cost of having something now, you know, now is a very expensive word. If you want a car that you can’t afford, and you want it now, I guarantee you’re going to pay too much for it. If you want results in your portfolio that make you feel good about them, and you want them now, I guarantee you, you’re going to trail what could have happened if you had been more patient. So patience is a fantastic virtue that can be applied in many aspects of life. So anytime you’re thinking that you’re wanting something now, whatever that happens to be, whether it be a relationship, whether it be money, whether it be something self affirming, whatever it is, if you want it now, it’s going to be very hard to come by and it’s going to be very expensive to acquire, whether that’s an emotional toll or financial toll.

george grombacher 22:01
Well, I think that that is great stuff that definitely gets a calm now is a very expensive word. You’ve given me a lot of really great lines and phrases and thoughts to chew on today as you do it, buddy else. So thanks for coming back on Gail. Where can people learn more about you? How can people engage with you? My

Gil Baumgarten 22:22
firm is called segment wealth management so they can find me online. I’ve got many podcasts. I’ve got my book foolish on Amazon. They can find it there they can find us. We have a blog that we write and distribute nobody ever will ever follow up with anybody. It’s a free financial tips line, if you will, so they can sign up for that at the segment WM dots per segment wealth management.com For slash blog.

george grombacher 22:51
Excellent. If you enjoyed as much as I did, she’ll give me your appreciation. share today’s show with a friend who also appreciates good ideas go to segment wm.com check out everything that Gil has been talking about, sign up for the blog and get your copy of foolish on Amazon. We will link to we will link all of those in the notes of the show. Thanks again Gil.

Unknown Speaker 23:12
Appreciate it. Thank

george grombacher 23:12
you till next time and friendly reminder. Never gonna be anybody more interested in your financial success then you are so act accordingly under

 

 

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