In this week’s episode of Retire in Texas, Darryl Lyons, CEO and Co-Founder of PAX Financial Group, explores the nuances of investment decision-making and the importance of patience in achieving long-term financial success. Drawing on real-world examples and lessons from PAX Financial’s due diligence process, Darryl unpacks the complexities of managing portfolios and avoiding common investment pitfalls.
Key highlights of the episode include:
- The importance of patience and why the market rewards long-term investors.
- Real-life examples of investment mistakes, including the infamous Zoom vs. Zoom Technologies mix-up.
- Insights on diversification and how outsourcing to skilled money managers can reduce risk.
- The critical role of due diligence in assessing underperforming assets or asset managers.
- Why switching “money lanes” prematurely is one of the most common and costly errors investors make.
- How PAX Financial Group remains loyal to clients by maintaining transparency and avoiding conflicts of interest.
For more insights and to explore how PAX Financial Group can guide you on your financial journey, visit http://www.PAXFinancialGroup.com. If you enjoyed this episode, share it with someone who could benefit!
Transcript:
Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group. And you’re listening to Retire in Texas. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. So, I was looking over our portfolios as we come into the new year, and we have a lot of different portfolios, for clients.
And some of them did well and some of them didn’t. And I tend to anchor to the ones that don’t do well. That’s just because we want to make sure that, you know, there’s nothing broken. But it’s certainly worth, like, kind of examining and saying, what can I extrapolate from my due diligence to translate to you guys to help you do your due diligence as well?
Not to the degree that we do it here, but at least like, how do I think about this stuff? And you know what? It’s just really hard sometimes to be patient, especially in today’s world. I mean, we’re just not, we’re getting less and less patient. Not only as we age, but just to society as a whole. So, when it comes to investments, we always have to just kind of say, okay, we’ve got to get back to this idea of being patient.
You know, the market. You’ve heard me say this before. The market has a peculiar way of transferring money from the impatient to the patient. And I think we can’t be so confident that we’re not a victim of that. And there’s so many different ways that you can make mistakes. That’s the strange thing about it.
Like, think about it. In 2020, you know, Covid, of course there was the video conferencing company Zoom, ZM was the ticker. Like it became a household name, and everyone started shifting to do their virtual meetings and chatting with Grandma on Zoom. And the stock price just like took off. But some people started buying another company.
It was called Zoom Technologies. That ticker wasn’t ZM, it was ZOOM. Different company. In fact, it was a Chinese technology company that had nothing to do with video conferencing. But people were buying that stock and not the Zoom stock that they thought they were using. So, what’s crazy is that people started buying the ZOOM and that stock shot up, you know, supply demand, and it went up like 1,800%.
The SEC Securities Exchange Commission ended up having to step in and suspend trading because of all the chaos. But it just goes to show that it’s so easy to make mistakes, not only just like buying the wrong company, buying the wrong amount at the wrong time, selling at the wrong time, just all these little mistakes and then we start having real like adult money.
You just, there’s zeros on these mistakes and it’s fine if you do it with little play money. But when it starts to become serious, you don’t really want to deal with it.
And so, I want to kind of go through some of the process of thinking through these investment mistakes and the part of the thing that we do when we diversify is we’re diversifying some of these mistakes away. We’re transferring the expertise to some third parties. And a lot of people think that they’re transferring their expertise to PAX.
And there is a role that PAX plays, or any investment advisor that you use, that there’s a role that they play. But what we don’t do at PAX is some of the nuance details that are really beyond the scope of our core competency and when you learn, when you study investments or study law, even medicine.
There’s this idea of core competency that needs to be respected. And so, there’s certain areas of the investment market that’s beyond even my core competency. And if you were to ask me about how to trade currencies or even commodities for that matter, that’s a skill set I just don’t have. And so, we outsource that to money managers. Now, when somebody invests with PAX, we typically use money managers and think of us like, you know, I’m a Spurs fan.
And y’all, if you listen to me, you know I’m a huge San Antonio Spurs fan. And the general manager of the San Antonio Spurs is R.C. Buford. And he’s a mastermind in kind of putting these teams together. And so, a few years ago, when it was the heyday of the San Antonio Spurs, he was able to assemble Tim Duncan and Tony Parker and Dave Robinson.
And so, think of us kind of like the R.C. Buford’s. We’re hiring the Tim Duncan’s and the, Tony Parker’s and Dave Robinson’s now that they’re institution. So, like Blackrock or Inspire Fidelity, we go out and find all of them and there’s thousands of them. Thousands. And it gets really confusing. I mean, every five seconds I have an investment company reaching out to me saying, hey, we’d like to pitch you in and we’re pretty careful on who gets shelf space at PAX.
And we have very limited inventory. And we just make sure that we get to know these asset managers very well. Bryan Wing plays a key role in that. So, we’re checking out all these managers. And at the end of the year just kind of assessing, you know what did results look like. Is there anything broken. What I love about our company is we are not loyal to any of these asset managers.
Now, I respect them, and they respect us. I think anytime you have a vendor as a business, there’s just this mutual respect. But our loyalty lies with our clients. Now, that’s very important. We don’t, there’s no reason for us to use another manager at all. Like there’s not any incentives or, I worked for this one company.
This is when I was first getting started and I got free office space, and I thought it was free until I got a notice saying I owed rent because I didn’t sell enough of their products. So, some of these financial institutions will find a way to get you to push their product. We don’t do that. The team that we assemble for our clients is the team that we think is the best.
So that’s what’s beautiful about our organization. If you’re working with an advisor, just check on those conflicts and just make sure you can accept them, because sometimes they’re a little nuanced. But let’s talk a little bit about, let me give you some examples of what I mean by these managers and how by outsourcing your investment decisions to these managers, it’s very, very helpful.
But at the same time, there’s a certain level of due diligence that I think is important. So let me give you an example. Zack’s is one of the asset managers. We use. I have actually been using Zack’s research since like 1997. Incredible research. They do some research on these sectors. I love it. I can nerd out and I’ll say a bunch of funds.
So, what happens is, you’ve got these managers and then they have different styles. And so, let’s say I’m just using this as an example. It’s just an example. Let’s say Zack’s has a small cap fund. And so, what it’s going to say is Zack’s is going to buy small companies. And let’s suppose, I don’t even know the numbers on this particular fund.
But let’s suppose that Zack’s small cap fund did really, really bad last year. This is just a conversation. We might say some clients or even us might say, well, Zack’s is horrible. They don’t know what they’re doing. Or we might say, you know, are small company stocks out of favor? Which one is it?
Is it Zack’s is broken or small company? Because the way we approach it is resolving that problem is significantly different if we don’t assess the problem correctly. Does that make sense? So, we got to say is Zack’s broken. Like is the manager of Zack’s going through a divorce and making bad decisions? Or are small company stocks out of favor?
Which if you don’t know anything about last year, much of last year, small company stocks were out of favor. If you look at any of your small company stocks in your portfolio, they didn’t really keep up. And a lot of them struggled. I have a lot to talk about small company stocks. We’ll do that another time. You can ping me if you want me to talk about small company stocks, be happy to.
I’m an expert in my own opinion in small company stocks. But the idea here is that you’re outsourcing, all these trading mistakes to a third-party manager. It’s our responsibility to make sure. I say PAX or an investment advisor with you kind of collectively to, at maybe one time of year is fine, to say, what’s broken and is it the manager or is it that specific type of investment?
And then what is our next move? Like what do we do as a result of this? Let me give you another example. This one might help as well. If you I don’t know if you’ve invested some of you guys might have invested in biblical responsible investing. Some of these managers in the biblical responsible investing have struggled compared to the S&P 500, because they didn’t own, like, Nvidia or Apple, because those companies were doing things that were antithetical to a biblical worldview, in fact, sometimes in direct conflict with the biblical worldview.
So, a lot of these biblical responsible vestment managers excluded the big companies like Apple and Facebook and Nvidia, which performed incredibly well last year. So, you see this huge discrepancy between performance on biblical responsible investing and maybe like if you looked at just the S&P 500, you’re like, what is going on? Eventide is one of those managers that fits in the biblical responsible investing space.
So, you might ask yourself, okay, is Eventide broken is and I’m making this example up is the CEO Finny is his name. He’s an incredible man. One of the smartest guys I’ve ever met. Is he going through divorce and dealing with all kinds of issues and distracted? Or is the biblical responsible investing screening tool broken? Or what type of stocks is he owning, mid-sized companies versus small?
Like I said before, are those broken? And so, you just kind of dig into there and we’ll do a lot of the digging. Like I was looking at their holdings. They owned a company called Idexx and it’s a really cool company because they do a lot of technology to support veterinarians. And that’s kind of the theme behind Eventide is they want to invest in companies that make the world a better place.
That could be vets. It could be cancer patients or cancer treatment. And so, a lot of the companies they own are really good companies that just really didn’t do good over that season of time. So, did Eventide lose their mojo? That’s an assessment you have to make. Is BRI going to be out of favor? Are these companies bad or mid-sized companies bad?
So, it’s just kind of part of that, like part of the decision making you have to make with your advisor. And we often do that internally. So, just so you know, that’s happening all the time at PAX, but also sitting down with your advisor and having that dialog, I think is useful in this case, if you were to say, okay, Eventide, again, just an example.
Eventide, if you were to own mid-sized companies, let’s say that’s the fund that we’re looking at. Is there a problem with midsize companies? And for those that don’t know the size of midsize companies, H-E-B is like a regional company, not publicly traded, but a regional company. That’s not like Mega Caps. That might be more considered a midsize.
That’s not small, not mega international, but pretty big. And, you know, for the most part, those have been historically great companies to own historically. But, for the last year and a half, they haven’t done that. Well, let’s keep going. Just to kind of break this apart just a little bit more. You may be looking at your even your 401K and saying, I mean international’s killing me.
I know Darryl might have mentioned in another podcast that I should own international. I have this international fund. It actually says emerging markets on it. So, what is that? Emerging markets is like Brazil, Russia, India and China, not the major European countries that we think of and believe it or not, over the last three years, if you had those types of investments, you’ve lost money in the last three years, which is absolutely crazy.
And so, you’re asking yourself, are the managers not doing their job or is that that specific asset class? Is it that specific type of investment that’s not doing well? And again, it’s hard for a PAX advisor or any advisor for that matter, that’s trying to help somebody accomplish their goals to ascertain the political risk or the accounting standards or the currency risk.
That’s too much to ask an advisor, but to a certain degree, the advisor and you have to assess, is that an asset? Is that do we want to own emerging markets going forward, or is that manager going through divorce? Like what is the issue here? And I would suggest to you that, you look at some time, look at the 2000s and emerging markets and they blew the water out of U.S. investments and what would happen if we got out of emerging markets and gave up and said, we’re out of this.
And all of a sudden, India and this, this idea of US exceptionalism fades, and India is now just killing it. We would lose out if we shifted money lanes too quickly. Last example. Okay. So, bonds, let’s think about what bonds actually have been. Excuse me. Bonds have actually been a little bit of a concern of mine. No, don’t misunderstand, I think they have their place.
But I was just hoping for more from bonds this year. If you heard my podcast at the beginning of the year, I was really, not like ecstatic about bonds. For those that really know me, know I’m a big favor of owning companies, but I really thought we’d get more out of bonds this year. And so, we only got like around 1 or 2% on bonds.
Not that great. And so, we have to ask ourselves, a lot of clients have bonds, a lot of people have 30% of their portfolio in bonds. So, you have to ask yourself, are bonds a problem? Do we need to get rid of bonds or is it the manager? Is the manager going through a divorce and they’re not paying attention.
And those are really good questions. Now bonds can get really nuanced. You can have high yield bonds that had a pretty good year. You can have international bonds that actually lost money. So, the manager has a lot of responsibility for navigating this very complex bond market. We feel pretty good about all the managers that we have in all of these spaces, but sometimes they have good years and sometimes they have bad years, and sometimes the investments that they own just haven’t got ripe yet.
And I’ll talk to these managers many times on the phone or go, I’ve flown in New York and visit with them. And having conversations like they show me the companies, hey, these are good companies. They’ve just haven’t hit yet. So, we have to be patient. And that’s really hard for me to do. When I’m trying to achieve your goals and all of the advisors out there are trying to achieve goals, and you have an investment that is, you’re looking at the other ones and they’re all doing well, and you’ve got some that aren’t.
And that’s always frustrating. So, what do you do? Like Darryl, do I switch, or do I stay? Here’s what I think. Here’s how I think about this, I actually really have a real problem, switching money lanes. And in fact, if you look at and I’ll put a link to all this research together for you.
But if you look at the mistakes people make, I mean, you miss out. I mean, you miss out on three of the best days of the year. And you go from positive returns to negative just three days of the year. And there’s another I don’t like to use a lot of numbers in this podcast, but I want to share this with you real quick.
If you look at 2007 to 2009, that was like the great financial crash that we’ve already forgotten about, because Covid is our most recent memory. That was about a year and four months where the market actually went down 57%. Many people said, I am out this game, I’m over. This game’s rigged. Get me out. They got out.
The market was down 57%. I get you, like you’re done. I had clients that and people that I knew that said I’m out, down 57% in 2007, 2008, 2009 during that time period, then then in 2009 to 2020, that was a ten-year run up, 401%, up 400%. So, like this thing where the problem with this thing, which is a machine that’s not rigged against you, the odds are in your favor if you’re patient.
The poor people think, by the way, I was one of these people. Poor people think that it’s rigged against you. It’s not. It’s rigged for the patient. It’s absolutely. It’s in your favor if you’re patient. So, what am I? What am I suggesting? I’m suggesting you could make tweaks if you need to with your advisor. Asking the manager.
You know, there they go. Yeah. They are getting a divorce. Are they taking their eye off the ball and distracted with life, or is it this particular type of asset that’s not doing well? Do we need to make some adjustments. But those adjustments need to be minor because the reality is, you put together a plan and make sure that plan sticks for the full market cycle, for full market cycle.
That’s five years. You need some ups and downs. You need some goods and bads. You need some of these stocks to materialize. And be recognized. Bailing too early and switching money lanes is a surefire way to lose money. I’ve seen it happen. That’s probably the number one way I’ve seen people lose money. This market is rigged to reward people who are patient.
And so, if you can stick with your plan over the full market cycle, which is five years, make moderate adjustments with your advisor, but not material adjustments. Stick mainly to the plan that I think you’re going to find over five years. You’re going to be grateful. Nothing’s guaranteed, but that’s generally the best approach to investing, even when you have some investments that are zigging and others zagging, and you want to yank those zaggers out of your portfolio but do it very carefully.
Okay, so there’s some a lot of stuff in here that I shared with you in terms of investments. None of this stuff is, none of these recommendations, by the way, and none of them are promissory in any way. And all the research will be attached to this podcast. But above all, I want to remind you, as always, you think different when you think long term. Have a great day.
Resources:
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