If you consume any financial media, or listen to financial podcasts, you will have recently heard from motivational speaker/life-coach Tony Robbins promoting his new book Money: Master The Game. Having been a fan of his since the early 90’s, I had to order and read all 650+ pages of the book.
Tony’s M.O. is not to invent winning strategies himself. Rather, he goes to the best performers in their respective fields, finds out what makes them successful, and mirrors their approaches. Having coached professional athletes, CEOs, and world leaders, his rolodex is impressive. This holds true as well within the world of finance. I remember hearing over a decade ago that he was working with one of the greatest traders in history. In fact, he used to actually sell a high priced program that allowed individuals to learn this trader’s philosophy and strategies. I always wondered who that trader was and how he did it. Well, in this book Tony reveals who he is (Paul Tudor Jones) and reveals his philosophy which he labels as the $100,000 MBA. In addition to Tudor Jones, Tony “interviewed” eleven other legendary investors and shares those insights in his book.
Although the book is extensive and covers numerous aspects of financial planning, I specifically want to focus on Section 6: Invest Like The .001%: The Billionaire’s Playbook. Like you, I want to know what the top 1% of the 1% say, believe, and do.
Master #1: Carl Icahn: “The Most Feared Man on Wall Street”
Described in the book as “corporate raider” and “shareholder activist” Icahn is known for buying enough shares (ownership) of underperforming companies to be able to shake management and influence change. In doing so, Icahn has been able to earn 50% more in the past for decades than (other Master) Warren Buffett. Unfortunately, this is not a playbook that the average investor can benefit from.
My take: The only takeaway that we could implement would be to invest in Icahn Enterprises stock (IEP). However, that too is not a long-term strategy as Carl Icahn is 78 and won’t be running the company forever. Interesting read, but no real insights gained that the average investor can implement.
Master #2: David Swensen: Chief Investment Officer, Yale University
As I noted in my book, some of the best performing portfolios are college endowment funds. Many of whom have utilized less conventional strategies (alternatives) to help diversify and enhance returns. The top name in the college endowment arena is David Swensen. Therefore, I was excited to read his advice.
Swensen points out that “when it comes to the world that individual investors face, it’s a mess.” He, along with many others throughout the book, believes that the average investor should avoid managed mutual funds and focus primarily on index investing. He also explains that there are only three tools that investors have to increase returns: asset allocation (specific asset classes and specific percentages), market timing, and security selection. As he states in the book, “I love teaching my students at Yale is that asset allocation actually explains more than 100% of returns in investing!”
Two tangible take-aways: Focus on index investing and asset allocation.
Swensen’s recommended asset allocation for individual investors:
20% Domestic Stock
20% International Stock
10% Emerging Markets
20% REITs (Real Estate Investment Trusts)
15% Long-term US Treasury Bonds
15% TIPS (Treasury inflation-protected securities)
In regards to diversification and predicting the markets: “That’s why you diversify. I’m not smart enough to know where the markets are going to go.”
--- David Swensen
My take: I am a big proponent of Professor Israelsen’s 7Twelve portfolio system. Swensen’s recommended portfolio shares many similarities by including emerging market, REIT, and TIPS exposure. Long story short: Investors should pursue more asset classes and increase global exposure (less U.S. centric), for better diversification. I found Swensen’s insights valuable, not only in the interview section but also elsewhere throughout the book.
Master #3: John (Jack) Bogle: Founder of the Vanguard Group and creator of the Index Fund
Jack Bogle is fairly well known in the investment world. He created the index fund and has been a champion for individual investors for decades. Most of his interview re-hashes the indexing argument (no surprise). But as for takeaways: when Tony asks Bogle what principles he would want to pass onto to his grandkids he stated:
1. “Choose your asset allocation in accordance to your risk tolerance and objectives.
2. Diversify using low-cost index funds.
3. Don’t do something – just stand there! No matter what!
And when asked if he had any other advice:
4. Don’t open the Wall Street Journal! Don’t watch CNBC!”
My take: I chuckle in my head knowing that this is valid advice, but know it is not the medicine that the average investor wants to take. Bogle doesn’t providing us with any new revelations per se. However, isn’t it interesting that after all he has accomplished and experienced this wise elder just wants to impart this basic advice of “in-action” to his loved ones? That alone should be eye-opening.
What Bogle is alluding to, the elephant in the room, is that people are emotional beings and consistently buy and sell at the wrong times as their emotional fear and greed buttons are pushed by the market. Some proof sources:
*Investment research group Dalbar found that for the 20-year period ending on 12/31/11 the average equity investor’s annual return was 3.5% vs. 7.8% for the S&P 500.
*From 1977 to 1990 the Fidelity Magellan fund delivered an astonishing 29% average annual return. But Fidelity found that the average Magellan investor actually lost money!
What these masters seem to be addressing is that successful investing doesn’t need to be difficult or complicated, unfortunately we as humans are and that is what makes it a challenge.
Master #4: Warren Buffett: CEO of Berkshire Hathaway
Perhaps the publisher felt that to legitimize the “Billionaire’s Playbook”, that Buffett’s name had to be included. Unfortunately, this wasn’t an interview at all. In fact, Tony simply bumped into Buffett in the green room before the Today Show (on which they were both set to appear). When Tony asked Buffett if he could sit down with him for an interview Buffett responded, “Tony. . .I’d love to help you, but I’m afraid I’ve already said everything a person can say on the subject.”
Tony does note that upon his passing Mrs. Buffett’s portfolio is instructed to be invested in the following portfolio: 10% in short-term government bonds and 90% in a very low-cost S&P 500 index fund.
My take: Before you interpret Mrs. Buffett’s future portfolio as a recommended allocation, keep in mind that everyone is unique and has different goals and risk tolerances. In addition, (and noted in Tony’s book) between January 1, 2000, and December 31, 2012, the S&P 500 was flat. No returns! Is that what you want? I know I don’t.
Master #5: Paul Tudor Jones: Founder of the Tudor Investment Corporation and Robin Hood Foundation
Paul Tudor Jones was the trader that I heard Tony had been shadowing many years ago. He is one of the best traders in the world and here is his $100,000 MBA in a few words: “here, you’re getting a hundred-grand class, and I’m going to give it to you in two thoughts, okay? You don’t need to go to business school; you’ve only got to remember two things. The first is, you always want to be with whatever the predominant trend is. . . The second is “Five to one.” Risking one dollar to make five.”
When asked to how the average person can look at investing through Jones’ eyes, he responded, “I get very nervous about the retail investor, the average investor, because it’s really, really hard. If this was easy, if there was one formula, one way to do it, we’d all be zillionaires. One principle for sure would be get out of anything that falls below the 200-day moving average. Investing with a five-to-one focus and discipline would be another.”
*Jones’ metric (or one of) for analyzing a trend is the 200-day moving average. The five to one concept was mentioned, but the how-to was not explained.
My take: This interview will quench the thirst of those craving an actionable strategy if in fact the Bogle and Buffett sections them still thirsting for some specifics. Championing a more active approach Jones takes a divergent viewpoint and emphasizes that investing is not simple in implementation. Jones recommends exiting positions that fall below a trend (the 200-day moving average) as a more tactical, risk managed approach.
Chapter 9 of my book goes into great detail of trend analysis, its value, and how to implement such methods. Knowing that Jones reiterates the importance of that trending indicator is both reassuring and exciting for the average investor, because with a little time and effort it is a strategy they can implement on their own. I appreciated the Tudor Jones interview. I only wish it was longer and more detailed.
Master #6: Ray Dalio: Founder and Co-Chief Investment Officer, Bridgewater Associates
Ray Dalio manages one of the largest hedge funds in the world. As Tony consistently promoted on his publicity tour, in order to gain access to Dalio’s advice one would normally need to be an institutional investor with $5 billion in investable assets, and your initial investment needed to be a minimum of $100 million. Therefore, gaining access to Dalio’s insights is sold as a key component of the book.
Unlike Icahn, Bogle and Buffett, Tony pressed Dalio to open up, get specific, and reveal what one portfolio he would recommend to the average investor. Dalio presented his “All Weather Portfolio” or “All Seasons Portfolio” which is designed to hold up well in any environment (Inflationary, Deflationary, Rising Economic Growth, and Declining Economic Growth). The asset allocation is as follows:
40% Long Term US Bonds
15% Intermediate US Bonds
*Note: Portfolio needs to be rebalanced regularly.
Using back-tested numbers, Tony touts the fact that the portfolio (from 1984 through 2013):
1) Achieved an average annualized return just under 10%
2) Would have made money just over 86% of the time (losing money in only 3 out of 30 years).
3) The worst down year was -3.93% in 2008.
My take: This is what readers are buying the book for: portfolio allocations that can be implemented by anyone and provided to us by whom many call the “best asset allocator to walk the planet.” Granted Dalio implements a more sophisticated version of this, using tools like leverage, but this is still excellent info that we as readers and researchers can sink our teeth into.
Having said that, people need to have proper expectations if they plan on implementing this portfolio, as investors’ needs and wants don’t always align. Their consistent craving for annual outperformance will not be achieved by this, or any, low-risk well-diversified portfolio. What it will do is provide a smoother ride (less volatility) and peace of mind knowing that it is specifically designed to weather any economic environment. *Note: The Permanent Portfolio is designed in a similar fashion PRPFX.
It should also be noted that Tony’s back-tested numbers begin in 1984. As author, blogger, and money manager Meb Faber notes in his November 26th tweet:
“Biggest challenge w/ @tonyrobbins All Seasons allocation - 0% real returns from 1973-1983...hard for investors to sit through long drawdowns.”
As I note in my book, over the past 30 years we have experienced declining interest rates (which are bullish for bonds). When I emailed Dalio’s portfolio over to Professor Israelsen (creator of the 7Twelve Portfolio), he replied, “That's a lot of bond exposure as we head into a period of rising rates--a headwind for bonds.”
Overall, I found Dalio’s contribution to Tony’s book to be a significant value-add. The All Weather Portfolio is a terrific solution for someone looking for a portfolio with low risk and volatility.
Master #7: Mary Callahan Erdoes: CEO, J.P. Morgan Asset Management Division
This interview provided very little substance. When asked what set of rules and/or portfolio strategy or an asset allocation strategy on to her children, her advice was general and vague. “Invest for the long term and only take money out when you truly need it. Specific portfolio construction will be different for different people.”
To be fair to Erdoes, she did provide interesting arguments (found elsewhere in the book) that is worthy of contemplation. Erdoes disputes the notion that one should only invest in indexes and never use actively managed mutual funds. She points out that J.P. Morgan’s fund managers have beaten the market (in their respective classes) over the past ten years. She attributes this to the fact that active managers played some defense and didn’t lose as much when the market went down. She also added that, “many industry experts agree that certain less-developed, or emerging, markets provide opportunities for active managers to get an edge.”
My take: I go into great detail about the flaws inherent in the mutual fund management system in chapter 3 of my book. I can understand why Tony consistently emphasizes indexing throughout the book. Fund managers are easy targets because nobody likes paying fees. To be able to emphatically provide a solution to readers via index investing helps the author feel like he is on the readers’ side and is providing value. I know . . . I did the same thing. However, if one digs a little deeper there is some truth that a good number (not all) of fund managers did hedge some of the downside risk of the 2008 bear market (see First Eagle Funds). Reducing the major drawdowns can help active managers outperform over time, without needing to outperform every single year.
Throughout the book Tony mentions that 96% of fund managers underperformed the Vanguard 500 Index. However, the analysis he is referencing used a time frame from 1984 to 1998, a great bull market. What happened in the next decade? As noted earlier, between January 1, 2000, and December 31, 2012, the S&P 500 was flat. No returns!
Big picture: if you are an average investor that doesn’t want to research and follow funds, you are probably better off using indexes. But still, whether you exert a lot or a little time on portfolio construction it is more important that you focus on your asset allocation. That is what will predominantly drive performance over time.
Master #8: T. Boone Pickens: Chairman and CEO of BP Capital Management
Pickens is a familiar face having been on CNBC many times and was dubbed the “Oil Oracle.” Like Icahn he was a “corporate raider” or “shareholder activist.” And similar to Icahn he doesn’t have a recommended strategy to implement. When asked what he would pass on to his children if he couldn’t pass on any wealth, he replied, “I really believe that if you’ve got a good work ethic, you probably pass it on. And if you have a good education to go along with a good work ethic, if you’re willing to work hard; I believe you can get there.”
Thanks T. Boone.
Master #9: Kyle Bass: Founder, Hayman Capital Management
I will readily admit that I am a huge fan of Kyle Bass. If he has a media appearance or a video of one of his speaking engagements hits the internet, I am watching it. In fact, I would have purchased Tony’s book just for the Kyle Bass interview alone.
Bass’ claim to fame is “betting” on the collapse of the housing bubble and European debt crisis and making 600% return in just 18 months. The interview is primarily just a retelling of those historic calls and trades.
My take: Besides Bass buying $2 million of nickels (because the “melt value” was worth more than the transactional value of the coin – true story), the major take-away is that (to Bass) Japan looks to be in worse shape than housing or Europe did on his previous trades.
The core message behind Tony’s interview with Bass is to take asymmetric risk, not to focus on nickels and Japan. Similar to Tudor Jones’ five-to-one rule, the idea is to risk a little to make a lot. A couple of the solutions that Tony mentions earlier in his book regarding asymmetric risk that the average investor can implement are investing in structured notes (which I mention in chapter 7 of my book), market-linked CDs, and fixed indexed annuities. I know that is not how Bass and Tudor Jones take advantage of asymmetric risk, but understanding how much effort these Masters put into controlling downside risk is a point of emphasis that I can appreciate.
Master #10: Marc Faber: Publisher of the Gloom, Boom & Doom report
The Swiss billionaire is a member of the prestigious Barron’s Roundtable, where, according to independent observers, his recommendations have had the highest returns, almost 23% per annum, for 12 years in a row.
Faber (as his newsletter title suggests) sees a lot of risk in the world. In addition, he also sees both inflation and deflation occurring at the same time in various sectors of the financial system. Therefore, his allocation has been approximately:
25% Cash and Bonds
25% Real Estate
My take: This allocation overlaps somewhat with Swensen and Dalio’s portfolios (and the Permanent Portfolio, PRPFX). Interestingly, even though he publishes an investment newsletter, he is very willing to admit that things are uncertain and no one knows where things are headed and the average investor should hedge for every scenario – very All Weather-like.
Master #11: Charles Schwab: Founder and Chairman of Charles Schwab Corporation
Those familiar with the “Talk to Chuck” commercials certainly know of him or at least the name Charles Schwab. One of the largest brokerage houses in the industry, with $2.38 trillion in client assets under management, it would make sense that Tony would want to tap the mind of the man who’s firm gives advice to so many.
Charles Schwab is a fan of indexing but not of Federal Reserve policies (along with many of the Masters). When asked what set of investment principles he would advise for his children and grandchildren he replied:
“Well, I think it really starts with earning your own money. Having success in that. And the concept of putting some money aside.
· Make sure you get the right education. And hopefully it fits into the marketplace, where jobs are being created.
· You’ve got to have a well-paying job, which are not that plentiful today.
· And then putting the money aside in your 401(k) or IRA. It takes giving up things. Not buying that car. Giving up that vacation. Having something set aside.
· And then you could begin doing the proper investing.
It’s a pretty simple formula. Lots of people don’t realize it, but hopefully you can teach people to do that.”
My take: Again, not rocket science being explained. However, Schwab does touch upon two key principles that I believe are not just cliché advice. Invest in yourself is probably the first and best place to look. In addition, live below your means and consistently set money aside. At the end of the day, whether you chose an S&P 500 Index fund or an actively managed large cap fund will have much less of an impact on you reaching your goals compared with consistent out-of-sight/out-of-mind saving.
Master #12: Sir John Templeton: Founder of Templeton Mutual Funds; Philanthropist
Tony conducted his interview with Sir John right before his passing in 2008. Of course, as founder of Templeton Mutual Funds he does promote active management in addition to diversification and overcoming the toughest obstacle (previously mentioned): emotions. “Not only do you buy at maximum pessimism, but you want to sell at the peak of optimism.” This is the challenge that so few of us are able to do. When asked what the single biggest mistake investors make is he replied, “The great majority of people do not build up any wealth because they do not practice the self-discipline of saving some of their income every month.”
My take: Similar to Schwab’s advice is to live within ones means and save consistently. From there you can wage the war with emotions, either by taking Bogle’s advice of in-action, or Templeton’s advice of doing the opposite of what feels good. I would suggest that our best strategy is to follow an un-emotional/systematic investment program. First, understand the system (builds trust and confidence). Second, tailor it (to you). Third, implement. Fourth, trust it rather than your emotions and don’t look back.
A lot of the Masters agree that there are currently high levels of risk and uncertainty. However, since no one can predict the future you should:
· prepare for all markets with better diversification
· rebalance regularly
· be tax, fee, and trend sensitive
· hedge downside risk
· live within one’s means and save consistently
· stay the course (avoid reactive/emotional decisions)
Now, should this book be considered a revolutionary glimpse into the secret Billionaire’s Playbook that will lead to unparalleled returns and great fortunes? Not necessarily. There isn’t any secret sauce per se. But for under $20 it is a low cost investment in yourself that has many value-adds (too numerous to list), beyond just the interviews with the “Masters.”
Finally, numerous Masters and Tony himself either hinted at or expressed concern over the extraordinary policies of the Federal Reserve. I outline my concerns in Chapter 4 of my book and highly recommend you expand your understanding of the current environment we are in. As referenced in Money: Master The Game, the aforementioned Ray Dalio has created a very informative informational video that I recommend viewing:
Co-Author of Unconventional Investing:
Alternative Strategies Beyond Just Stocks & Bonds and Buy & hold