This episode is about "positioning." With the CoronaVirus pandemic, a lot of people are worried about their job security, health benefits, inability to keep a job, or having to go to work while your kids no longer have daycare. What do you do? We can not emphasize enough the importance of an emergency fund. With it, you can ride the market without sacrificing (too much of) your life standard, or even take advantage of a down market. Stay tuned, and listen to three guys speaking about how they utilize the emergency fund concept in their investments, their own personal finances, for their clients, and for their business.
This episode is about "positioning." With the CoronaVirus pandemic, a lot of people are worried about their job security, health benefits, inability to keep a job, or having to go to work while your kids no longer have daycare. What do you do? We can not emphasize enough the importance of an emergency fund. With it, you can ride the market without sacrificing (too much of) your life standard, or even take advantage of a down market. Stay tuned, and listen to three guys speaking about how they utilize the emergency fund concept in their investments, their own personal finances, for their clients, and for their business.
spk_0: 0:02
welcome to critical thinking required. Hosted by lbw. Our goal is Simple way. Want to challenge you to think differently about finance and business, Join us and start the journey today? All right, so today we're excited to talk a little bit more about positioning. Obviously, with the current events and what's going on, it's It's a good idea to talk about, um, kind of what? How things stand when it comes to financial planning. And right now we're here with myself, Tim Bickmore, my colleagues, Dan Weiss and the fame you leech. And I think this is gonna be a nice topic just for again what's happening within Society Day across the globe. Um So, Dan, I'm gonna toss it over to you just to kind of talk a little bit about our overall thought process when it comes to positioning from a planning perspective. Maybe hit a little bit on emergency fund and and the overall importance there. But, um, interesting to kind of hear your thoughts,
spk_1: 1:02
I think I think actually, that's probably what we should focus on today. There's there's positioning is a journey, which takes a lot of different steps, and we're going to start with an emergency fund. So ah, um, survive The audience has heard the term cash is king, and cash is definitely king, particularly in an environment like this. We often say that if a person has an emergency fund to play that, uh, that that they don't have an emergency come up because they're able to fund it, which then keeps you from panic. It keeps you from stress so that you could be the best to you to optimize overall, give you an example as to what that actually looks like. Typically speaking most, most of our peers will use the rule of thumb. Rule of thumb is fine as long as we look. It is just a starting point. A rule of thumb of 3 to 6 months off. What they will classify is discretionary and non discretionary income. And what they're looking for here is discretionary income, things that you do not have to pay. So we're talking, not mortgages, rant things like like that, not car loans. You got to keep that to get to your work. Um, but we're talking travel, perhaps, or some level of food right dining out so on. Some will say Pat's, which we're gonna argue. But nonetheless, that's a typical case. The three of us, like the thing of, um, in terms off absolute spent, not discretionary non discretionary. We want to see 3 to 6 months of absolute spent, so you don't have to have the added stress of figuring out what is discretionary and what is not. And only you know that, for example, people are gonna take care of their pets. So I don't think that's discretionary, because that cost is going to come to probably take care of that pack before you take care of yourself. So that's how we determine, really, what a level of emergency funds to kind of start with. And of course, that gets tweaks. If we're talking to an individual that has a strong income stability they probably don't need to have is much of an emergency fund. Or if they have a guaranteed severance situation, then they probably don't need to have a strong rumors. Even if they are a commission individual. A lot of our clients are that might be a different story, so that's kind of what we we start with what that emergency fund looks like, and I'll throw it back, actually, to you 10 because you and you and I in particular, spent a lot of time figuring out how this plays roll into people's lives to really protect them against the downside, so that when they're in situations like like the world is finding today, they're not as freaked out because they know that their stay nable for a period of time.
spk_0: 3:45
I think I could add onto a couple different points that you've made, and I actually I'm gonna tie this into some of our framework. When it comes to investment management, I think number one. The reason why we go with absolute spend, as Dan mentioned, is because scarcely is a real thing. From a psychological standpoint, when you become feel like your back is up against the wall, you come become the fighter flight situation where you will start making decisions that are irrational, regardless if you you are recognizing it or not. So in order to not feel so scarce when it comes to losing a job or being in a position where you actually need cash, it's important that you have enough to feel sustainable, and that's where it comes down to where people look at it from a non discretionary standpoint. Yes, that's great, that you can only cover your bills, but to cut your lifestyle in a snap of a finger down to Oh, I'm not gonna eat out as much or I'm not gonna do this. It's extremely difficult. So why even positioned yourself toe? Have to go through that kind of stress when you could just save enough to protect yourself from an absolute hate. I can live my life for at least three months. I don't cut anything out of it, so at least I have enough time to then think about the job. I don't need to say I can't meet my friends. I can't go to the bar and have a drink, right? That stuff is extremely important from up from, ah, mind standpoint, and that's why we've decided to go with that route. And Dan is right. It depends on the person has to be customized. That's because some eyes to the family, the household, the individual of how much cash on hand, because we do recognize as well that cash on hand becomes inefficient because that cash really isn't there to make money now if we're back in the late nineties, are leaving. Sorry, the early nineties, and we're having a big interest rates Great. We're making a lot of money on our cash, but in today's environment, you're not gonna make any money, and that's okay because it's not there to make money. It's really there for risk protection. And then, in addition to the overall absolute spend standpoint, is that really builds in the margin of safety. So Nathaniel will always speak about when we're doing our investment process that is looking to build in a margin of safety for our clients. When we're looking at buying securities, it's the same effect, right? Let's say that you don't need all that money. That's okay. Like Dan said, Cash is king. You can always put cash back in the market. You can always put cash back into paying down liabilities, but it's very hard to take it back out. So it's It's a balancing act to make sure you have enough cash on hand and then if you feel like you have too much, you can always implement it going forward, which is is our overall mindset, and then it provides you with a lot of, you know, again, not being in a scarce mindset to make more rational decisions, especially when you have a health care crisis of financial crisis in different arenas. And it allows you to kind of move yourself forward, which is which is really extremely helpful. And again, that goes back to positioning. But I'm actually gonna toss this one over to Nathaniel and the thing, in your opinion, how do you look at it like kind of the same type of an emergency fund or positioning when it comes to margin of safety for our investments?
spk_2: 6:56
Well, the margin is safety is kind of like it's a buffer. That's exactly how everybody should look at their emergency fund. It's a buffer. So when I look at the margin of safety concept, why implement that for our investments? It's meant to be a buffer to count for anything that I have missed in my analysis of company, but more importantly, is meant to be a buffer to count for that which I don't know, the unknowns. There's few types of unknowns, the known unknowns and the unknown unknowns. So the known unknowns ca NBI something like. All right, this company operates in the steel making industry. I know that there are macro concerns that can severely impact this company in the steel making industry, because steelmakers are typically rather large. And in some countries they may be state sponsored enterprises, so you could be dealing with geo political concerns. So those are the known unknowns. The unknown unknowns are things like from the pandemic of the cove, it 19 that we're dealing with today. That was something it was a known unknown. On the level that we we've always known. Society has always known that there could be a pandemic like this has happened before. It's happened happening now and it could happen again. The unknown unknown portion is this the amount of how much has spread and how quickly it has spread. It's impossible to know how fast it was going to move without, uh, government's being ableto act in a certain way. It is in that How do I say this? Um, governments, different governments are gonna act in different ways. There's no way to predict how well they're going to act and and succeed in tamping out the virus or how poorly they're going to act and then how quickly the virus will get out of control. In addition, unknown unknowns are that we don't know to what degree the fallout, the second order, the third order, the fourth order effects from this virus will be. I think that that's the reason why the markets have decreased so fast, like the fastest in history in modern history. It's because there are so many unknowns that people are panicking and the markets don't like uncertainty. So when you mix uncertainty into the mix, you have people panic, become irrational and start doing irrational things
spk_1: 10:04
on sand. Well, I think the thing that makes a great point, I'm sure tend to me we're going somewhere, too, and kind of want to tie
spk_2: 10:09
a
spk_1: 10:09
little bit deeper into how how these other concept of an emergency fund or a margin margin of safety, which is obviously very similar, how they come into a role with the markets. So one of which would be I want to give on an example of conversation that we had this week with a client, which is a great example, because we've seen it a couple times even this week alone, but one that sticks out of my mind. So, um, just shy of a week ago, I was talking to a client who has asked us what we hear more of this than Should I take my money out? Is can I put more more more money into the invested And that was the question at hand. Here is the problem is we often talk about this emergency fund being the first step to investing because it allows you personally to have that margin of safety so that we could move forward and actually truly invest in a manner that is, uh is pure to the ability of actually fully taking on what that means to truly invest. So in this case, this client said that they have $20,000 of cash in an emergency fund. They don't really need all that They wanted to throw 10 in, to be able to purchase um positions. Now, while they're depressed, come here to where they were in 2 to 3 months ago. Now that seems logical. And from a numerical standpoint, yes, it makes sense. You should be. If you have the ability cash a wise without causing any do harm to yourself. It makes a lot of sense to put money into the marketplace and be able to get opportunities that you couldn't get before. Here's the problem, though. This individual, like a lot of our clients, works in real estate. This individuals in the construction site of real estate. We know that that's an industry that is feast and famine. His wife is now working right now, so the problem there is, I ask, as we always d'oh, what are you spending? What are your monthly expenses? I know a lot of people that are listening probably think they know, but I'll tell you right now that almost no one knows, including myself. Unless unless I actually go through the exercise and figuring out down to the down to the dollars to what really does that number happens to be person thought it was about $3500 a month. I cannot remember the last time we saw someone spend that little. It's very rare that we find someone that can do that. Now. I don't not that there. I trust the person immensely, but I think they're probably wrong about that cost. So I said Well, what if we'd be conservatives say 4000? This person? Probably again, isn't it? In a situation where they probably could be very susceptible, Thio declines it work, right, declines in their market. And they're not saying income from their other spouse from their spouses. Are there other stuff but this stuff? Sorry. Um, so in this situation, they should probably have closer to the six month rule. Thought maybe even more than that. But if it's $4000.4 times 6 24 So actually, even though they might feel because they haven't had a user yet, you forget the importance of having on hand that they could deploy 10,000 of their 20. They really can't because they really probably should have at least 24 to begin with. So, um, I just want to bring that example and to show how how quickly that scenario actually can change and how it relates to the ability to put into the market and not just like every company has a different margin of safety. So does every person, and I'll give you a different example on, and then it Then I'll set up toe have have my two buddies here speaking to but on the other end of, ah, different kind of spectrum. A lot of our clients, the bulk of intensity between their early thirties to their early to mid fifties, was a younger client base. The most firms recognize that we still have ah, good portion of clients, though, that are either retiring early or retiring at retirement age or after retirement age. And those individuals have to think about this concept a little bit differently. In that case, Ah, six months Emergency fund isn't going to do the job compared to, ah, to a client who's bringing an income. Because we're now we're talking about an individual who is going to be in fixed income in most cases, right? So this individual were now not talking about months. We're talking about years. I know that seems, um, astronomical, but we're talking about years that they should have cash in hand. The reason for that is if that person goes into retirement with 3 to 5 years worth of cash on hand, if they have the ability to do that, we also recognize it's not ever everybody has the fortune to be able to do so. But if person does, that is the best way to not find yourself susceptible to tow a market downturn in tow. We're like we're seeing now because the reality is you have enough cash on hand to allow yourself to continue to have life, the quality of life that you have be sustainable for a number of years, thus not disturbing your assets when they are down. That's the best way to handle that, because at the end of the day we really are concerned about is the change in the sustainability to our quality of life. When we see things going in a direction that we are not happy to see you,
spk_0: 15:23
I think that Dan brings up a lot of good points. And that thing that I would add to both Dan and Nathaniel is when we're talking about margin of safety, if you really think about it from a different perspective, the emergency fund from a financial planning perspective provide you with a margin of safety to actually ride the markets. So when you're looking at it, what we're doing from a financial planning standpoint really dovetails into the invested Mandarin piece because what I'm doing for Nathaniel with our clients is saying, Let's build an appropriate emergency fund to make sure you have cash on hand to support yourself in the event of a crisis or in an emergency, which then means you don't have to go ahead and pull off of your portfolio in the market to sustain that sustainability, which means you can ride the market and allow the market to go on doing its thing. So you're really building in to kind of buffers. Nothing was trying to build a buffer in when it comes to buying value, buying securities at a at a good value relative to its price. And then, in addition, we're building an emergency safety because we haven't enough cash on hand outside of the market to sustain ourselves. And then hopefully if we get our clients into good positions, then were kind of making consistent contributions into investment management to allow it to grow. Now I know that that could be very difficult for some households, and I don't want to say this is it is easy as it sounds to do, but if we can get our clients in a position like that, that's where you can really start taking advantage of situations like this, but that means you have to get going depth of What am I spending? What is my incoming coming in? You know, Is this realistic? Isn't not. Do I want to cut back on my spending in order to do this or not on? And that's really what we provide on our side. A lot of our clients will say, you know, we'll do an expense and I'll say, Oh, you know, I kind of knew this intuitively, Um, but what we do is we provide the science to their intuition, saying, Here are the numbers. Here's exactly what's really going on. And then this is how we can start creating that that picture right painting that, Pete, that art piece that you're trying Thio create yourself and really help with it and provide those numbers which it could be extremely beneficial because it provides clarity. Kind of removes that fog or that that gut check and be like, Oh, yeah, you know what? I am doing the right thing or, you know what? We can make some adjustments so we can kind of continue going forward, But guys, I I think you know, this was really interesting segment on what we're doing. I know we like to talk about things that we've learned within each podcast that we do dio. So, Nathaniel, if you want to kick us off and, you know, tell us a little bit about what you've learned from this one, I think that would be great.
spk_2: 17:59
Speaking from personal experience, I can honestly say that, um before we started up l b W four years and some months ago, I didn't places much emphasis on the emergency fund concept. Um, but But after stick being here, working with Tim and Dan for these year round of years, it's really come into play about how important it is. And And I can speak for myself personally as well as for our firm that we have taking that lesson to heart. And as a result, both myself and my wife, Yang and and the company are on solid footing because of this concept.
spk_0: 18:47
Dan, you wanna you wanna go next on that one? That was good. By the way, Daniel was a good one.
spk_1: 18:53
If a person could obtain accurate financial clarity, it will mitigate their fair.
spk_0: 19:00
That was succinct and very to the point. Also
spk_2: 19:03
a good one. Very good. Yes,
spk_0: 19:05
good work. My mind would be that life is extremely great. Um, I talked to the family and Dan about this book, and I've talked to many others. You know me well, eight. It's Annie Duke's I'm thinking in bets of fantastic book. It literally changed my mind. Um, and it provided a different lens to the world, where I think in panics and fear and even upon the upswings. We think this the world is black and white, and it's not. It's completely great, which means if we're living in the gray, we're living in probabilities, which means we cannot become outcome. But we cannot have outcome buys. You can't be outcome dependent. We have to be position dependent. Meaning. How do we position ourselves in the event of the unknowns? Unknowns like Nathaniel was talking about, which goes back to emergency funds and setting yourself up for different events happening because you can never have a guarantee even pensions are not guaranteed? Um, so it's it's ah, it's an interesting concept, and it really helped us develop from a financial planning perspective on how we approach our clients, and so we're all about positioning. So I think I'll go back to Nathaniel. When we did start this firm, I did the same thing. I have positioned myself from the standpoint of having an emergency fund in the event of something were to happen. And I will always have that regardless of where I'm at in life, because I know that I there are unknown unknowns on bits, just something that's very beneficial. But my last comment is I know it's This isn't always easy for everybody who's listening to put money into savings due to income restrictions or other circumstances in life. But we're always happy to have conversations about what's the best route or how to go about it in the most effective way possible. Um, thank everybody for listening. It's really nice to have people, you know, listen to the guys talk about things that we love, and we're hoping that you will listen to us next time. Brumback. So thanks Dan and Nathaniel and for all our listeners, and we'll talk to you next time. Thank you for taking the time to start your journey of thinking differently and listening to lbw talk about stuff they love until next time. The opinions expressed in this program are for general informational purposes on Lee and are not intended to provide specific advice or recommendations for any individual on any specific security on any specific broker, dealer or custodian. It is only intended to provide education about the financial industry to determine which investments, broker, dealer or custodian may be appropriate for you. Consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. As always, please remember, investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. All opinions expressed by podcast participants are silly, their own and do not reflect the opinion of leech Big More and Weiss Wealth Management LLC. Leech Bickmore Unwise Wealth Management LLC is a registered investment adviser. Advisory service is our only offered to clients or prospective clients or leech. Bickmore and Weiss Wealth Management LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by leech. Think more and wise Wealth Management LLC. Unless a client service agreement is in place