[transcript]
Dangerous Don: Welcome back everybody! Welcome back to the MACHO INVESTING blog, the home of you and me and many, many other stock-market millionaires. We’re blogging to you direct from our worldwide corporate headquarters in Scranton, Pennsylvania.
Johnny: Welcome back, everybody!
Johnny: And this is our co-host. . . .
Johnny: Don, this whole thing is suspicious. . . . .
Dangerous Don: . . . . . and this is my very distinguished and always level-headed co-host, Johnny Doorknob. The Numero Uno, go-to guy in the Scranton financial community.
Johnny: Thanks, Don! So. . . . what’s your hot stock tip for this week?
Dangerous Don: Johnny, two words. Koscot Interplanetary.
Johnny: Ahhh. . . . . okay. . . . . so, lemme guess. Some kind of science fiction movie? Maybe a spaceship?
Dangerous Don: Hottest stock in the market today.
Johnny: So. . . . . like. . . . . it’s a home run?
Dangerous Don: You been living under a rock the last six months?
Johnny: Okay, so. . . . . what do they do? What do they make?
Dangerous Don: They repair umbrellas. Actually, they franchise umbrella-repair shops. Fastest growing business in the world today.
Johnny: Wow!
Dangerous Don: Each franchisee lines up more sub-franchisees, and the business just keeps on growing and growing. The stock is a little pricey at seventy times earnings. Buy it on the dip.
Johnny: So. . . . lemme guess. Each sub-franchisee then turns around, and lines up more and more sub-sub-franchisees.
Dangerous Don: How did you know that?
Dangerous Don: Not at all.
Johnny: Sounds like a classic pyramid scheme.
Dangerous Don: Listen, if you buy the stock, make sure you mention my name.
Johnny: Why?
Dangerous Don: Investment professional. I get a small commission.
Johnny: A kickback?
Dangerous Don: We call it revenue sharing.
Johnny: What about that 401(k) that you’re now in charge of? You plan to recommend this stock to the employees?
Dangerous Don: Already have! Johnny, I couldn’t sleep at night if I kept quiet about deals like this!
Johnny: Deals like this? Oh boy!
Dangerous Don: Besides, I’m a fiduciary. I can’t let my guys miss out on opportunities this big!
Johnny: Of course not. But how about that revenue sharing? You get a commission when the employees in the 401(k) buy this stock?
Dangerous Don: Standard operating procedure. Standard 12b-1 fees. Everything we do is technically legal. No 401(k) on Earth operates any differently.
Johnny: This whole business of hidden fees in 401(k)’s is a volcano waiting to erupt.
Dangerous Don: Think so?
Johnny: Actually, the 12b-1 fees and the revenue-sharing are just the tip of the iceberg. There are ten or fifteen other kinds of fees that 401(k)’s charge, half of which nobody has ever heard of. Hard to even keep track, there's so many fees.
Dangerous Don: Not that many. Not ten or fifteen.
Johnny: Wrap fees. Sub-transfer agency fees. Mortality fees. Finders fees. Shareholder servicing fees. Market adjustment fees. All these fees on top of the biggest fees of all, which are the expense ratios of the mutual funds inside the 401(k). Here, here’s an interesting article I can give you.
Dangerous Don: Sure.
Johnny: Fact is, a generation ago, people put their savings in their savings account in a bank. The bank paid you 3% a year interest.
Dangerous Don: That was before my time.
Johnny: Today, people put their savings in their 401(k). But now, you pay them 3% a year in fees.
Dangerous Don: Very reasonable fees. Competitive rates.
Johnny: The industry always says things like that. Sure, the fees are competitive. But the whole system is rotten to the core.
Dangerous Don: Not true.
Johnny: Let’s take a look at each $100 you’ve got in your 401(k). Every year, you pay upwards of 3% in fees and costs. That’s $3.00 a year. For each $100 you’ve saved up.
Dangerous Don: 3% is nothing. Heck, sales tax is 4%.
Johnny: So. . . . let’s take a look at your situation year by year. That's the best way to see what's going on.
Dangerous Don: Okay.
Johnny: Let's take a look at what you contributed in 1992. That was twenty years ago. Each $100 that you put in has gotten whacked by a $3.00 fee, every year, for twenty years. So. . . . out of each $100 you contributed in 1992, you’ve paid a total of $60 in fees. Twenty times three. So, now you’ve only got $40 left, out of your original $100. Basically, 60% of what you contributed in 1992 is gone. Used up to pay investment management fees.
Dangerous Don: Hey, now wait a minute, Johnny! These are just. . . . I mean. . . . just wild exaggerations!
Dangerous Don: Okay.
Johnny: Let's take a look at what you contributed in 1992. That was twenty years ago. Each $100 that you put in has gotten whacked by a $3.00 fee, every year, for twenty years. So. . . . out of each $100 you contributed in 1992, you’ve paid a total of $60 in fees. Twenty times three. So, now you’ve only got $40 left, out of your original $100. Basically, 60% of what you contributed in 1992 is gone. Used up to pay investment management fees.
Dangerous Don: Wait a minute! Only $40 left? That can’t be right!
Johnny: But it is right.
Dangerous Don: Besides, that original $100 has been growing and growing and growing. . . .
Johnny: Maybe. Lot of ups and downs over the last twenty years. Who knows? Maybe there's going to be steady growth in the future. Or maybe not. But here's the thing. Let’s be frank. . . . . no investment strategy will ever work, no matter how brilliant, when you have fees eating away that big a chunk.
Dangerous Don: Besides, that original $100 has been growing and growing and growing. . . .
Johnny: Maybe. Lot of ups and downs over the last twenty years. Who knows? Maybe there's going to be steady growth in the future. Or maybe not. But here's the thing. Let’s be frank. . . . . no investment strategy will ever work, no matter how brilliant, when you have fees eating away that big a chunk.
Johnny: When you losing 60% in fees, nobody’s going to be able to dig you out of a hole that deep.
Dangerous Don: But that’s over twenty years. Twenty years! Who pays any attention to something that slow? Something that plays out over twenty years?
Johnny: Exactly! Right there is the Big Trick that the financial industry plays on people! People don’t pay attention to a lousy little 3% a year. And they never stop to think that 3% a year adds up to 60% over twenty years.
Dangerous Don: Hey, if nobody misses the money, I’d say let’s keep on taking it.
Johnny: Spoken like a true investment professional!
Dangerous Don: Seriously. . . .
Johnny: You know. . . . there’s been so much talk recently about income inequality. People don’t realize that 401(k)’s play a big part in that.
Dangerous Don: How so?
Johnny: Nationwide, there’s a couple trillion dollars sitting in these 401(k)’s. Try figuring out what 3% a year, on a couple trillion bucks, brings in to these investment managers on Wall Street.
Dangerous Don: I’d say. . . we’re talking. . . some pretty big bucks.
Dangerous Don: I’d say. . . we’re talking. . . some pretty big bucks.
Johnny: Mega-bucks. The whole 401(k) movement, with all these tax incentives, has been a huge shot in the arm for Wall Street.
Dangerous Don: But they earn it! The market was up almost 6% in 2011.
Johnny: Struggling to get back to where it was in 2007. And still not making it.
Dangerous Don: Takes time.
Johnny: And in 2003, 2004, 2005 and 2006, the market was struggling to get back to where it had been in 2000, before the DotCom Crash of 2001.
Dangerous Don: This is all just ancient history. Who cares?
Johnny: Fact of the matter, the S&P 500 was lower on January 1, 2010 than it was on January 1, 2000.
Dangerous Don: One bad decade doesn’t ruin a rally.
Johnny: So. . . . if you kept your 401(k) mostly in equity stocks, you were pretty much in the same place in 2010 as you were in 2000. Minus, of course, those 3% fees that you paid every year over that ten-year period. Which took a total bite of 30% out of what you had in 2000.
Dangerous Don: Wait a minute! I don’t believe 30%. Way too high.
Johnny: Okay. . . . . let’s try an example. Let’s say you had $100,000 in your 401(k) in January, 2000. And you had it all invested in one of the thousands of mutual funds that have an annual expense ratio of 1.50% or higher. And let's say this fund charges another 1% a year in 12b-1 fees, which is also pretty typical. Plus, of course, you've got all those additional fees. . . . please bear with me. . . . . for operating the 401(k) itself, as opposed to operating the funds inside the 401(k).
Dangerous Don: Okay. I'm listening.
Johnny: So. . . . . let’s say, just to keep it simple, that this fund managed to keep pace with the S&P 500 during the next ten years, from 2000 to 2010. So, in January, 2010, based on the S&P 500 Index, your $100,000 should have been almost flat. A little under $100,000.
Dangerous Don: I’m listening.
Johnny: But actually, that’s not what happened. Fact of the matter, you’re way under $100,000. Because you paid $3,000 in fees every year, for ten years. For a total of $30,000 in fees. Your original $100,000 is now less than $70,000. You're down 30%.
Dangerous Don: All I can say is. . . . you prophets of doom are all alike. No guts. You need guts to make it on the stock market.
Johnny: Guts?
Dangerous Don: One big play can turn everything around.
Johnny: One big play? Such as?
Dangerous Don: Koscot Interplanetary. Guys in my 401(k) are going to triple their money in a couple months.
Johnny: That stock is headed for big trouble. Everything about it smells wrong.
Dangerous Don: Everybody and his brother have already bought Koscot. How can so many people be wrong?
Johnny: Interesting that your strategy is to go for the “big plays”. What ever happened to the expression “playing the stock market”?
Dangerous Don: Dunno.
Johnny: Used to be. . . . when I was young. . . . people would say that so-and-so made money “playing the stock market”.
Dangerous Don: Point being. . . . ?
Johnny: The whole idea. . . back then. . . was that the stock market was strictly a rich guy’s game. You only “played” the stock market as a game. Only if you were so rich that losing a few million didn’t matter.
Dangerous Don: And. . . . ?
Johnny: We should go back to that idea. That was the right idea. Average people should be putting their savings in a bank account, not in the stock market.
Dangerous Don: Ridiculous idea. Banks don’t pay squat in interest. What? Less than 1% on savings accounts?
Johnny: I know, and that’s a big problem. But low interest rates are a fly-speck problem, compared to watching your entire savings drop by over 50%. Like what happened in 2008 and 2009.
Dangerous Don: Still think it’s a ridiculous idea. . . .
Johnny: . . . . not to mention paying all those investment management fees.
Dangerous Don: Oh man! More of these wild exaggerations about 401(k) fees! Johnny, you're driving me crazy!
Johnny: Proof is in the pudding. Because of all those fees, and the huge stock market losses in the Crash of 2001 and the Crash of 2008, lot of people retiring in 2012 are going to be really hurting.
Dangerous Don: Their own fault. Should have been more aggressive.
Johnny: Problem is, what's the total amount, when you add up all the contributions into your 401(k) over your entire lifetime? Lot of people are finding out they've got less today in their 401(k) than the total of what they put in.
Dangerous Don: Because they didn't invest in deals like Koscot Interplanetary!
Johnny: Amazingly enough, these people would have been better off putting their money into some kind of savings account option in their 401(k), even if it had zero interest. Think about that. Zero interest would have been better than keeping your savings in the stock market.
Dangerous Don: Oh man! More of these wild exaggerations about 401(k) fees! Johnny, you're driving me crazy!
Johnny: Proof is in the pudding. Because of all those fees, and the huge stock market losses in the Crash of 2001 and the Crash of 2008, lot of people retiring in 2012 are going to be really hurting.
Dangerous Don: Their own fault. Should have been more aggressive.
Johnny: Problem is, what's the total amount, when you add up all the contributions into your 401(k) over your entire lifetime? Lot of people are finding out they've got less today in their 401(k) than the total of what they put in.
Dangerous Don: Because they didn't invest in deals like Koscot Interplanetary!
Johnny: Amazingly enough, these people would have been better off putting their money into some kind of savings account option in their 401(k), even if it had zero interest. Think about that. Zero interest would have been better than keeping your savings in the stock market.
Dangerous Don: Well. . . . guess we’ll have to talk about that next time.
Johnny: We’re out of time?
Dangerous Don: Sad but true.
Johnny: Okay. . . . last thing. . . . . since I'm the Number Two guy on this blog. . . . . I'm supposed to ask you about the motto of the MACHO INVESTING blog. Something like that. So, Don, what's the motto of MACHO INVESTING?
Dangerous Don: Attaboy! Good job! Our motto is BE DANGEROUS!
Johnny: And what's the take-away from this post?
Dangerous Don: Same thing I've been saying for years. All the finance books will tell you. Risk equals Reward. So, obviously, MORE RISK EQUALS MORE REWARD.
Johnny: Dangerous idea.
Dangerous Don: That's why they call me Dangerous Don. I'm afraid of nothing! When I walk out on the trading floor, people are afraid of me! I really like that!
Johnny: Heck of an imagination.
Dangerous Don: I tell you. . . . people are terrified! They can't figure out what I'm going to do next!
Johnny: No man is an island. But some of us are very, very long peninsulas.
Dangerous Don: I tell you, that's what MACHO INVESTING is all about! Shock and awe! Show 'em what you're made of!
Johnny: Before we go, ask me what my bottom-line is.
Dangerous Don: Okay. Johnny, what's your bottom-line?
Johnny: First, folks should keep their 401(k) money in low-cost index funds. Like Vanguard Total Stock Market Index. You get better long-term returns.
Dangerous Don: You're boring me to death.
Johnny: Plus, index funds usually don't have these astronomical fees that eat the guts out of your savings. If your 401(k) doesn't have any index funds, head down to your Human Resources office, and pound your fist on the table until they get you some!
Dangerous Don: You sound angry.
Johnny: Bet your sweet bippy I'm angry!
Dangerous Don: That's it?
Johnny: Also, make sure your company adds some bond index funds, as one of the options in your 401(k). Fact is, as you get older, you gotta move gradually into more bonds.
Dangerous Don: That's it?
Johnny: Hammer your Human Resource department on those 401(k) fees. Don't let them get away with wishy-washy answers. Mention every one of these fees I've talked about. Revenue sharing. Wrap fees. Sub-transfer-agency fees. Pin them down on every single one of these fees.
Dangerous Don: Human Resources? Forget it! They won't know from a hole in the wall.
Johnny: Sometimes the Human Resource folks won't know. Sometimes, nobody in your company will know. If they've hired an outside investment manager, Human Resources probably doesn't know squat. They won't even know whether your 401(k) plan is being charged these fees or not. So you have to force them to go find out. Wall Street is really good at hiding fees. You're going to have to fight. . . . . to get the full story.
Dangerous Don: Okay! Thank you, Johnny! Time's up. Good-bye everybody!
Johnny: Okay. . . . last thing. . . . . since I'm the Number Two guy on this blog. . . . . I'm supposed to ask you about the motto of the MACHO INVESTING blog. Something like that. So, Don, what's the motto of MACHO INVESTING?
Dangerous Don: Attaboy! Good job! Our motto is BE DANGEROUS!
Johnny: And what's the take-away from this post?
Dangerous Don: Same thing I've been saying for years. All the finance books will tell you. Risk equals Reward. So, obviously, MORE RISK EQUALS MORE REWARD.
Johnny: Dangerous idea.
Dangerous Don: That's why they call me Dangerous Don. I'm afraid of nothing! When I walk out on the trading floor, people are afraid of me! I really like that!
Johnny: Heck of an imagination.
Dangerous Don: I tell you. . . . people are terrified! They can't figure out what I'm going to do next!
Johnny: No man is an island. But some of us are very, very long peninsulas.
Dangerous Don: I tell you, that's what MACHO INVESTING is all about! Shock and awe! Show 'em what you're made of!
Johnny: Before we go, ask me what my bottom-line is.
Dangerous Don: Okay. Johnny, what's your bottom-line?
Johnny: First, folks should keep their 401(k) money in low-cost index funds. Like Vanguard Total Stock Market Index. You get better long-term returns.
Dangerous Don: You're boring me to death.
Johnny: Plus, index funds usually don't have these astronomical fees that eat the guts out of your savings. If your 401(k) doesn't have any index funds, head down to your Human Resources office, and pound your fist on the table until they get you some!
Dangerous Don: You sound angry.
Johnny: Bet your sweet bippy I'm angry!
Dangerous Don: That's it?
Johnny: Also, make sure your company adds some bond index funds, as one of the options in your 401(k). Fact is, as you get older, you gotta move gradually into more bonds.
Dangerous Don: That's it?
Johnny: Hammer your Human Resource department on those 401(k) fees. Don't let them get away with wishy-washy answers. Mention every one of these fees I've talked about. Revenue sharing. Wrap fees. Sub-transfer-agency fees. Pin them down on every single one of these fees.
Dangerous Don: Human Resources? Forget it! They won't know from a hole in the wall.
Johnny: Sometimes the Human Resource folks won't know. Sometimes, nobody in your company will know. If they've hired an outside investment manager, Human Resources probably doesn't know squat. They won't even know whether your 401(k) plan is being charged these fees or not. So you have to force them to go find out. Wall Street is really good at hiding fees. You're going to have to fight. . . . . to get the full story.
Dangerous Don: Okay! Thank you, Johnny! Time's up. Good-bye everybody!
Johnny: See you next time!
Dangerous Don: And don't forget what I told you! Whenever you buy stock, any stock, always mention my name.
Johnny: He gets a commish.
Dangerous Don: And don't forget what I told you! Whenever you buy stock, any stock, always mention my name.
Johnny: He gets a commish.
Dangerous Don: Stay tuned to the MACHO INVESTING blog! Believe me, you are going to make a TON of money!
