Redefining Financial Wisdom: The Moneyball Method with Mark Shupe

Foreign.

Good afternoon, ladies and gentlemen. Welcome to the episode 114, I believe, the Secular Foxhole podcast today. We're pleased to have author Mark Shoup with us today.Mark received his BA in Accountancy from Notre Dame.He built a 22 year career in retail brokerage with Morgan Stanley, plus 10 years on the institutional side with Huntington national bank or Huntington National Bank's wealth management and trust business. He currently resides in Cincinnati and he's written a book called the Moneyball Method. What is the subtitle? Mark?

A Middle Class Manifesto for Objective Investing.

That's great. That's great.

Mark.

I want to go through the book sort of section by section, if that's all right. And the first thing I'll ask you is you divided your book into three sections which are Intervention, Resolution, and Redemption.Can you give a quick overview of those sections, please?

Yeah. Thank you for noticing that the first section, the first four chapters of 1212 chapters is titled Intervention.Because in it I try to expose, explain and dispel a lot of the fallacies and false premises regarding economics and in particular the financial investment advice industry. The very first chapter is title is about money and it is titled A Tribute to Money.And I try to explain that money is not something that should be demonized. It should not be denigrated, it should not be devalued. In fact, money is not the root of all evil, as certain people seem to think.And in fact, money has a lot of virtues behind it. The virtue of production. Money is production. Its value is derived from what you can convert it into, goods and services. And production is money.But money, I emphasize this a few times in the book, is the legacy of somebody's productive virtues. Unspent money is wealth that has not yet been consumed.And I think until we have a healthy respect for money, understand its meaning and purpose, the rest of the book is not going to be as compelling.So there are many ways that money gets devalued, both ethically and in practice in our, in our culture, certainly not the least of which is government fiat currency. But what I establish is the virtues of money. And then in the second chapter I talk about prices.Most government bureaucrats, regulators and their voters and supporters in as well as media and academics, they believe that prices are unjust, that they need to manipulate the economy and manipulate demand, manipulate prices in order to serve some social justice agenda. And what I do in my chapter about prices is to emphasize the fact that prices are information. They are the original information superhighway.Everything that everybody knows about A commodity, a service, a good, whatever the case may be, is built into the price that is currently trading.And entrepreneurs, managers, manufacturers, consumers, producers, they use prices to make decisions about availability, supply, scarcity, whatever the case may be, look for alternatives when prices rise. Creates a much more efficient system. Prices need to be protected, they need to be respected.And that leads me to the third chapter, Markets and the Elegance of Markets. And what is elegance? You know, it is genius, it is grace, it is efficiency. And I believe that the efficient market hypothesis is valid.It goes down to prices being containing all of the information that is available to most consumers and producers.But nonetheless, we live in a culture that believes that government should manage the economy, that regulation is necessary to prevent profit seeking entrepreneurs from abusing their customers. Well, what rational entrepreneur, or any business person for that matter, is going to make a habit out of abusing their customers?It's not going to happen. So what I do in the third chapter is emphasize the trader principle.That we gain value by trading with other people who have skills and have access to resources that we want and that we are willing to pay for. And we are willing to exchange our voluntary production with their voluntary production for mutual profit.Adam Smith wrote about this in wealth of Nations. Neither the butcher, the baker or the brewer is terribly concerned about your well being.But nonetheless, the spontaneous order of capital markets, if you believe in the notion of unspontaneous order, benefits everyone in the long run. In chapter four, the last chapter of Intervention talks about profits.Profits are demonized in our culture and you know, like markets are denigrated and prices and money are devalued, profits are actually a virtuous, noble enterprise. It takes a lot of planning, intelligence, experience to be able to make a profit.In fact, companies that make a profit are the ones that are creating value. If there was no profit, there would be no value creation. If there is no value creation, there is no government, there is no civilized society.So essentially the intervention is a way to dispel all of the fallacies and false premises related to money, prices, markets and profits.

I really appreciated how you termed a price as this, quote, source code of the entire operation, if you will. Do you want to expand on that a bit or you know this what you mean by source code is it because it is that where everything emanates.

I first learned of this when I was introduced by, to an economist by the name of Friedrich Hayek. He wrote a white paper.It is the most widely read white paper in economics and it is about the information that society I'm Sorry, I forget the title of it off the top of my head. It's the Information problem.And he talked about the people that are manufacturing and trading have access to information that no central planning committee could possibly possess.If you're on the ground in Peoria, Illinois, manufacturing blades for lawnmowers or whatever the case may be, or for John Deere, you have dozens, if not hundreds of manufacturing inputs that you need to balance with regard to their availability and their price. And the alternatives if there are shortages, not to mention the labor inputs that are necessary to manufacture these parts that go into machinery.And there is dozens, hundreds, thousands of pieces of information that that is widely dispersed. It is decentralized information.No centralized planning authority could possibly possess the information needed to run an efficient division of labor, complex economic system.

Let's jump to your second section, Resolution. Give us an overview of that, please.

Well, the first chapter in resolution has to do with the concept of risk.How do we resolve all of these disparities that have been built into our culture, built into the economic media, built into the financial advice industry? And I begin it with a conversation about risk.Most people are familiar with terms like risk tolerance, which is a psychological phenomenon that really doesn't exist except in specialized situations. And they're familiar with the term called risk aversion, which is commonly believed to be you will avoid risk at all costs.But you know, I've changed the definition, or I. Let me say I resurrect the correct definition of risk aversion, meaning that you're not willing to take risk unless there is a sufficient reward.Risk and reward go hand in hand. Risk aversion is rational.Certainly there's no point in taking risks if there's not an expected return that is commensurate with that level of risk, that is efficiency. And then there is risk evasion. Those are people that are not going to take risk under almost any circumstances.All three of those concepts of risk, I believe, are not terribly useful for the objective investor. What I do in that chapter is replace it with a concept I call risk capacity.Risk capacity is based on your particular situation, your financial resources, your cash flow, your life expectancy, your values, goals and aspirations. How much can you afford to lose if the market were to have a major setback? Or how much could, if you were to lose your job.We can calculate risk capacity in terms of dollars that are relevant to your particular situation. Risk tolerance does not do that. Risk aversion and risk evasion do not do that.Hardly anybody in the industry has any idea what I'm talking about when it comes to calculating your risk evasion, risk capacity. But that is the first step toward resolution. That's chapter five of my book. Chapter six of the book has to do with time.And time is really the most precious resource that we have. All of it has to do with creating time to enjoy the things that give your life meaning and purpose. And what I do is do this quantitatively.I take the assumptions that are built into the traditional investment advice model and turn it on its ear.By factoring in the time over the course of an investor's lifetime with the uncertainty of capital market performance, this unveils one of the top precepts of objective investing of the Moneyball method. Most people believe that successful investing is beating the market or market timing or stock selection.Or for more conservative investors and the industry in general, the top factor toward investing success is your asset allocation. None of those are true.What I have learned and studied and proven and illustrated in chapter six is that the top two factors for investing success and failure are the order or sequence of investment returns. In other words, how they actually pan out over your lifetime and the timing of your cash flow.So what I do is I focus on cash flow expectations over the lifetime of the client. These are based on their values, goals and aspirations that we're going to identify in chapter eight.And we integrate that with that which we cannot control. We cannot predict and we cannot control capital market performance. The future is uncertain. That is an absolute fact.And so we respect the uncertainty of the future much like we respect money, prices, markets and profits. And we integrate that in chapter six. Chapter seven is cashing the reality check.And in this chapter I do a couple of things that I believe are fairly compelling.And one is to investigate what happened in the pension industry in America both during the dot com bubble of 2000 to 2003 and the Great Recession of 2007 to 2009. In both cases, just about every government employee pension fund was terribly underfunded. Now how did this happen?How is it possible that the certified financial analysts and the certified investment management associates who are with master's degrees in finance and economics from the Ivy League school, Stanford and Notre Dame, in charge of the pension fund as consultants and trustees, screw this up. They were using bad assumptions. And what did they do to remedy the situation?They changed their methods, their practices, their philosophy to goals based investing. Whoop de doo. That's what I've already been doing.That's what David loper, who created Financeware, had pioneered in the 1990s they changed their entire methodology to what they call liability driven investing.Because liabilities in the pension fund industry are the income streams that you owe to current and future pensioners, your beneficiaries, the people whom you have a legal responsibility to look out for their best interests. Yet you became underfunded twice within 10 years. That's one thing that I've identified in chapter seven of my book.And the remainder of the book is where I compare in concrete terms the premises and the practices of the traditional advice model with the principles and procedures of the Moneyball method. And then in chapter eight, which is the last chapter of the resolution or part two of my book is where I turn to how do we do this for ourselves?How do we determine the cash flow expectations that give meaning and purpose to our lives, that will help us make the investment strategy and the cash flow strategy decision? And I hope that long winded answer is, leads us to the next question.

Well, my next question was you've already covered most of it. You did argue that prediction is a trap, but how does an investor practically shift from prediction mindset to an objective evidence based one?So that's your remainder of the book.

Thank you. That is why I titled the book the Moneyball Method. If you don't mind, I'll spend a few minutes talking about baseball.

Please.

I don't know if you have very many baseball fans in your audience, but it's really not necessary. Essentially, Moneyball is the title of a book. It was published in 2005. The author's name is Michael Lewis.Michael Lewis was writing about the 2002 Oakland Athletics baseball season. Flash forward to 2011. It was turned into a hit movie starring Brad Pitt and as Billy Bean, general manager of the Oakland Athletics.But getting back to the Oakland days, they had a new management group and I'm sorry, ownership team and the owners approached Billy Bean and they said, you know, we need to earn a profit. We have a limited budget for baseball talent. Our payroll is the second lowest in the league. Our payroll budget is your budget.We need to earn a profit on top of.Now this is a team that had never heard of a budget because the previous owners had spent many millions of dollars over budget to put winning teams on the field because he felt he was giving back to the community. Well, Billy Bean also had another problem, and that is he had just lost his three star players to free agency.Jason Giambi went to the New York Yankees. Johnny Damon went to the Boston Red Sox. A pitcher named Isringhausen went to the St. Louis Cardinals.He had to rebuild the team with the second lowest payroll in the league and earn a profit. Now, how does a baseball team earn a profit or any sports team? Well, they've got to sell tickets. That generates revenue. Revenue is a good thing.And to generate revenue, they needed to win games. Oh, win games. How do I win games with the second lowest payroll in the league?And he realized that the traditional methods for evaluating and hiring talent were not going to work.To make a long story short, he had to fire most of the scouting department because their subjective analysis of expensive players was not going to win enough games and make a profit to satisfy the owners of the Oakland Athletics.Fortunately for Billy Bean, he had a couple of college kids or recent college grads working out of the janitor's closet down the hall with laptop computers who had access to Bill James Baseball Abstract, which was a newspaper newsletter for die hard baseball fans compiling all sorts of statistics. And they educated Billy Beane on the statistics that actually correlate to winning baseball games.Now, typically you will think of for batters anyway, it is batting average and runs batted in. They discovered that does not correlate to winning games for pitchers. It has to do with earned run average and wins.Well, that does not correlate to winning as a winning season either. What they discover, there's one statistic that correlates to winning baseball games, and that is on base percentage.And on base percentage measures one thing, the batter's plate discipline. What is plate discipline? Simply put, you're standing in the batter's box, there's a 90 mile an hour pitch coming at you.You've got a split second to react while thousands of people are watching. What you do you do you swing the bat or do you not swing the bat? That is the choice. That is what a baseball comes down to.So if you swing the bat at bad pitches, you will strike out or get out in some other fashion. And once your team has three outs, you're done. The other team takes the bat. So before there's three outs, anything can happen.Once there's three outs, you're done for that in it. So the goal of the batter is to get to first base, which means don't swing at bad pitches.The pitcher's job, there's two people of this duel, is to get the batter to swing at bad pitches. And his job is a little more complicated. Which bad pitch do I throw? So what does that have to do with personal investing, you might ask?Well, it has a lot to do with it. What are the bad Pitches in the investment strategy decision or just investing in general?To get back to your original question, how do I eliminate all of the propaganda? The economic analysis, the market forecast, the stock market predictions, the charts and the graphs? Those are bad pitches. Don't swing at them.I ask investors just ignore the noise. It is noise. They cannot predict what markets are going to do. They cannot control the volatility of markets.Markets are efficient, markets are elegant. Prices contain every bit of information that most people know about.And we are capitalists, we believe in entrepreneurial free market capitalism and that is going to be the wealth generating engine. But there is going to be volatility. We can't predict or control it.What we can control is how much do we spend every year, how much do we save every year, how much risk exposure do we have to the market when we do invest? What are the goals we're trying to achieve? What are is my life expectancy? What are the aspirations that give my life meaning and purpose?In other words, control what you can control. What Billy Beane did is find a statistic that measured what batters could control.The only thing they can control is whether to keep the bat on their shoulder or swing. And so. And that correlates to wins. And what I do is I try to identify the statistics.And I've done it, by the way, with the help of some people that are a heck of a lot smarter than I am. And that is to. The metrics that we can control come in two flavors.There are these objective data that you as an investor control, which is your cash flow. And then there is the objective data of the markets that you do not control. That data is produced by the center for Research and securities Prices.It's affiliated with the University of Chicago, Booth School of Business. The Booth School of Business is where Gene Fama won the Nobel Prize for the efficient market hypothesis.And that is the foundation of the economic and financial philosophy that I use in the Moneyball method. Control what you can control. Identify the metrics that give you a high correlation for winning your life as an investor.

And so you go on in the book to flesh out those two things you just mentioned, the efficient market hypothesis, if you will. One of my questions was who are your personal champions for individualism and for freedom and for free market economics?

Well, certainly my first champion for individualism is the author that we all know and love, that I first discovered the philosophy of individualism grounded in reason. And of course that is Irand. But I would also like to mention David Loper in terms of Personal finance, someone that no one has ever heard of.When I was a branch manager at Morgan Stanley, this was in around 2005, a consultant was visiting my office. He was a consultant who coached high producing advisors. He coached successful professionals, and he was sitting across my desk.I had met him when I was a branch sales manager in Cincinnati. And he handed me a white paper.And the title of the white paper was Understanding Monte Carlo Simulations, which is the software that does the statistical analysis much like Billy Bean used statistics different, you know, Bill James, Baseball Abstract.I use a Monte Carlo engine, which is the software program to evaluate all potential outcomes of all investment strategies that you may want to consider. But the subtitle to his paper was if you perceive a contradiction, check your premises.So that got my attention and I studied the white paper and I contacted Morgan Stanley's financial planning department to see if we offered a similar service for our advisors and their clients. We did not. As it turned out, Merrill lynch and Wells Fargo were using something very similar and to great effect.And so I learned everything I possibly could about this objectivist who was talking about objective investing in terms of identifying the goals, values and aspirations of your client first and understanding how markets work, understanding how market volatility works, understanding how to measure the standard deviation, which is a measure of volatility of different asset classes and just as importantly, the correlation coefficient among those asset classes to create an efficient portfolio and to make sure that your clients are not taking unnecessary risk or experiencing unnecessary sacrifice to their lifestyle spending goals. So in terms of economists, you know, one that I have read quite a bit that I have followed over the years is Richard Salzman.He wrote a book where have all the Capitalists Gone? There is another book that I mentioned in my, in my book. The author is Brian Simpson. I believe you've had him on this show.Oh, yes, yeah, the Markets Don't Fail is.But I would say the one that's had the greatest influence on me lately, who is not an objectivist, but it's a libertarian and a pro market, free market journalist. He's not a, you know, an economist by designation, and that is John Tamney. He is a contributor to Forbes. He is the editor of Real Clear Markets.He has some very interesting contrarian ideas about money and markets. And I've just learned a ton from him that has really helped me crystallize some of my thinking and my writing.

So once beginning investors grasp these principles, if you will, how can they caution against or defy tradition and withstand the ridicule of going a different way. What forms of resistance do investors face when they adopt your method?

I think it's mostly internal. I think most investors have probably bought the notion that I've got to beat the market, or at least beat the market on a risk adjusted basis.I've got to have a hyper diversified portfolio. So no matter what is doing well, I own a little bit of it.And I think it's these hyper diversified portfolios that most advisors sell as customized portfolios.Certain amount of customization is important, particularly for tax planning and estate planning purposes, but in terms of investment strategy, it generally backfires and we can talk about that in some detail in a few minutes. But I think the social pressure to conform I think is easy to overcome. Just ignore it.Ignore the analysts, ignore the economists, ignore the stock picking pundits out there. Now if you have favorite companies that you want to own, bless your heart, we're going to do it.And, but what we are going to do is we're going to take into account what the expected return and this and the risk volatility might be for owning any particular thing.And we're going to model that using our Monte Carlo engine, just like we would model any other investment so we can own any exotic security that you care to own. But I think it really begins with what I call the values inventory. This is where I get the most pushback. Introspection is hard.People do not like to think out loud about what their most important goals and values are, let alone how much it costs and when you need it. And this is really what we do is identify. You know, I try to make it as easy as possible. Let's start with the four major categories.First is your family and relationships. Second is health and fitness. Third is career and business. Fourth is wealth building.And attached to each of those four value domains is the values inventory. What are the various aspects of things that you spend money on? And before we even get to that, let's talk about the things that you enjoy doing most.And why do you enjoy doing that? What about it makes you happy or gives you satisfaction or, and how can we replicate that? How can we, you know, do more of that?And if the pursuit of values and the pursuit of happiness is the ultimate goal here, and it is, and then we, you know, integrate that with the needs and the, the, the duties that you have taken on, the financial obligations that you might have for family or, you know, debt that you might have taken on.We take into account the whole of life scenario, but it's really about converting the things that Give your life meaning and purpose into dreams, dollars and deadlines. What is that? Values inventory.And let's talk about each of them in terms of what is the ideal level of spending, what is the ideal time frame for that to happen, and what is the minimum acceptable. What is the minimum that you would need to spend before it's just not worth it anymore? And how long can you put that off?So we identify the important values that require money, put them in terms of ideal and acceptable levels, and also talk about market risk exposure. We want to balance what we can. We can control market risk exposure.We cannot control what the market does in terms of performance or volatility, but we can certainly control our exposure to it. We balance all of these things together in a tool that I introduce in chapter nine called the Fact and Values Matrix. And that is step number one.That is how we get to the objective data of the things you can control. The other half of that is the objective data of the market.That is the capital market assumptions that have been compiled by the University of Chicago that go back as far as 100 years, depending on the asset class. Some asset classes just don't go back that far. But I bring that up because long term historical data is the most reliable data.And it is the data that the rest of the industry ignores that they denigrates, that it just doesn't want to use. Because almost every advisor and every strategist will tell you, well, things have changed.You know, the market, the economy is far different, far more complex than it was in 1953. Well, guess what? What happened in 1953 will happen again.And it's certainly a lot more reliable than any market projection that you're going to put on paper.And the big mistake that people make within the industry, and this is universal from advisors to Wall street strategists to even the companies that sponsor the simulation software is they try to. They think that their capital market assumptions are predictions of the future and they use them that way. They are not. We do not predict the future.The mark, the future is uncertain. We can't predict or control it. But what we can do is we can anticipate the possibility of extreme market events.For that we need the most reliable historical data possible. We need to know how different asset classes behave.It's the law of identity and the law of causality, philosophical precepts that are in my book that is kind of rare for a finance book, but nonetheless, I use the capital market assumptions that help us understand how markets behave. And the cat and the Asset classes that I focus on are the ones with the longest historical data sets. What are they?U.S. stocks and U.S. treasury bonds. Second to that would be international stocks.The Morgan Stanley Europe, Australia and Far east index is probably the most reliable index for long term historical data. But notice what I've done here. What is the industry standard, traditional best practices, the scouting department, the Billy being fired?What they do is they measure performance looking backward. How did we do compared to the s and P500? How did we do compared to the Russell 3000? How did we do compared to Europe, Australia and the Far East?Or the Barclays Aggregate Bond index? They measure performance looking backward. We outperformed, we underperformed or we were on par with the market indexes that are our benchmark.And what do they do about capital market assumptions? They project those into the future. They try. They're making predictions. I flip it. I do the opposite. I measure performance looking forward.What is our confidence level for meeting or exceeding all of the cash flow expectations that make your life meaningful? I use the capital market assumptions looking backwards. How do we anticipate the behavior of markets, particularly extreme market events?Because it really doesn't matter if markets are performing within one standard deviation of the median, that's normal. That's, you know, it's not going to make or break anyone. But what's going to happen if we have a, a large deviation event?What is going to happen if we have a crash like 2001-2002, the.com bubble as they call it, or the Great Recession of 2008? What's going to happen to your net worth? What's going to happen to your funding status?What happened to the funding status of government employee pension funds managed by the smartest people in the history of the world from the greatest schools that anybody's ever heard of.So and I think this is key is what I'm trying to do is help people understand, you know, what is the likelihood of an extreme event and what impact will it have on you? And just as importantly, what is our contingency plan? It's good to have one in the drawer that you can dust Auto.We anticipated this and we do have a contingency plan. Let's, let's put that to work. Let's at least discuss it and see what elements we want to put to work.Now like to tell you and your audience a little bit of a story about contingency plans as you may we discussed before our interview started. I worked for Morgan Stanley in 2001. We were the Largest tenant at the World Trade center. We had 22 floors of Tower 2.We had over 2,000 people in that building. All but nine got out alive. That's another story. I can tell you.Who's responsible for all of those people getting out alive and the subject of another book, however, the individual who's responsible for all those people getting out alive was also the security guard from Morgan Stanley in 1993 when the world Trade center was bombed from the basement. His name was Rick Rescorla and he knew that the World Trade center was a target.He knew that it was going to be subject to another attack, or at least he thought it was really likely. Well, sure enough, it did. Eight years later there is a book.

About him, or there was a book about him in particular.

I believe the Heart of a Soldier is the title of the book. Thank you for bringing that up.And Rick Rescorla convinced Morgan Stanley's senior management that we need a contingency plan if this building gets hit again. We need to know where we're going, how we're getting there and how we're going to resume operations as seamlessly as possible.They had that plan and it turned out to be quite valuable. But I'm getting a little dramatic with that.But the point is to have a contingency plan that anticipates the possibility of extreme market events and the likelihood of that happening. And we can only do that if we have objective data.What are the goals we're trying to fund and what would need to happen for you to become underfunded?

Mark, this is fascinating. I'm telling you this.

Yeah, we have to do a follow up here. So Mark, the audience, then the middle class, could you make a comment or remark?What's the status and the situation for individuals belonging to middle class and what is middle class now in today's America?

In the context of my book, middle class investors are people for whom cash flow matters.Where your cash flow is important to you, doing the things that you enjoy and the things that you've taken on as obligations, as the case may be for someone with in today's dollars, 100 million dollar net worth, ultra high net worth people.Cash flow's not really an issue, you know, for the investor that has a 401k plan with their employer or a 403b plan, a brokerage account, owns annuities, invests in mutual funds, where cash flow has an impact, or let's, let's put it this way, where, you know, market volatility might have an impact on Your cash flow and your lifestyle spending goals. You know, that is probably, you know, 90% of, you know, working people, you know, whether it is blue collar or white collar.I had an interview similar to this with a financial professional. You probably have heard of him, his name is Jonathan Hoenig. He's on Fox Business quite a bit. Great guy. And he asked me a similar question.I said, well, anybody with a net worth of less than $10 million would probably benefit from these ideas. And even an ultra high net worth investor would benefit from the knowledge of knowing that markets are efficient.The economists don't know what they're talking about. The analysts, they may or may not have a good idea in terms of what sectors to own or the state of the business cycle.But for people that where cash flow matters, it's important to start with your cash flow strategy. The investment strategy comes second.And on the other hand, this is how we introduce rational thinking and rational behavior to a mass market audience that's never heard of Ayn Rand. Know this is a way to educate people about objective principles for reason and purpose and self esteem and do it in a context they can understand.Their personal finance, their money, that is, that is.

I hope your book sells 10, 100 million copies then.

Well, I only got 999 million to go,.

So. So how could we spread the good word about your book in.

Well, thank you. You're doing it right now.This means a lot to me and I am so excited to have been invited by Blair and to meet Martin and I've really enjoyed listening to the podcasts that I've, you know, list the guests that you've had on in the past. You do appreciate that.

Thank you.

And yeah, I would ask you maybe to be a guest on your show again so we can talk about part three of the book. A little more detail at the beginning. Blair, you asked how do we implement this? Yes, it gets a little technical.You've got to have access to the software. You've got to be an experienced user with the software.

I was about to ask you about is the Monte Carlo system available to the average investor or.

No, you have to be a subscriber and, and the companies that offer those subscriptions, they cater to registered investment advisors. I see now that's changing with AI and, and who knows, there might be a good website out there that offers it to the individual investor.But I would hesitate to try to do this on your own because it, it's important to know what the important variables are and how they work together.And I Would say that somewhere between 85 and 95% of registered investment advisors that have access to this software and are using it on a regular basis are doing it wrong. And the proof is in the advertisements I see on tv.Anytime you see an advisory firm, you know, bucolic office setting, with the wonderful couple nearing retirement and the wonderfully clad advisor sitting across the desk with a computer and pie charts on it, and it zooms up to 99% probability of success. Well, first of all, probability of success is the wrong way to characterize this.And Second of all, 99% means you are overfunded, meaning you are taking more risk than is necessary, or you are sacrificing your current lifestyle for future lifestyle goals that may or may not be important. And on top of that, who knows what capital market assumptions were built into that simulation.These simulations are essentially 1000 random simulations of all potential investment outcomes for any given investment strategy integrated with your particular cash flow strategy. And then we can do different what if scenarios. What if I want to retire a little earlier? Or what if I want to fund my grandchild's college education?Or what if I want to self fund my long term care needs or whatever. What if I want to take a trip to Europe and do that every year for the next 10 years?You know what, we can do all these what if scenarios, but first we have to have that baseline of a fully funded plan that we know how that confidence level was achieved. You might ask, well, why is probability of success not correct and why is 99% not good?Well, I mentioned, you know, the 99% part being not good because it maybe is too much risk. But probability of success is misleading because to be over funded is not success. It means you're taking more risks than you need to.It means that you're sacrificing your goals more than you need to. So out of those 1,000 random simulations, 100 of them were overfunded, meaning they weren't successful, meaning there was too much money.Now how is too much money a problem? Well, only because we're trying to live the one life we have on planet Earth.If you have a big legacy goal, you want to leave money to family and charity after you leave planet Earth, that's a little different. And we'll build that into the modeling. But it helps to work with an advisor who is skilled at not only the software, but the data that goes into it.And that's hard to do.

Yes, I bet. Now I just, I've been trying to formulate this question over the last minute or two.But we know that it's been shown year after year, decade after decade, that economics or capitalism works. Yet today the democratic socialists of America are gaining popularity and gaining members of running and political candidates and winning elections.So the deficit there, if you will, is the philosophical moral aspect of capitalism. And you and I and Martin and maybe just a few others recognize that Ayn Rand has the answer or is the answer.Can you, would you confirm that or do you agree?

I am a radical for capitalism, I am objectivist, and I certainly support reason, purpose, self esteem, capitalism, free markets more strongly than almost anybody I know. And there's, there's a few people I do know, present company included, that are equally strong advocates for free markets.But regarding the dsa, I think they are the natural consequence of the economic lockdowns of 2020-2022, the so called affordability crisis that we've experienced with the record inflation that occurred with the lockdowns.But nobody on any political side understands the causality of the price inflation that we experienced in 2020-2022, nor do they understand the so called debt crisis that we're in. I'd be happy to talk about each of those subjects. But regarding the rise of the dsa, I would.You know, the Republicans are just as guilty as everyone else because all of them believe that the role of government is to manage the economy. All of them have helped.They are accomplices in this illusion of free money that somehow the Federal Reserve, which is a government agency, creates wealth. Going back to my beginning of our conversation, money is production. Production is money.The government does not create money, it does not create wealth. Certainly they devalue the currency, they do it greatly.But it is literally impossible for a government agency, including the Federal Reserve, to create money. What they do is they give the Treasury Department money to spend.And once that money gets spent now it crowds out money that is already in circulation.But once we believe that the Federal Reserve can and should control money supply and interest rates, that just opens up a huge can of worms that, you know, where people don't have any respect for money. And that's why chapter one of my book is a tribute to money. Yeah, Yeah.

I mean, yeah. You can't help but notice that no, no state level candidate, no federal level candidate even discusses free markets.They talk about affordability, they talk about capping the price of energy. They talk about, now they want to restrict data centers. You know, it's always more government, more government, more government. Yes, the answer.So that's why? Five or six years ago, Martin and I started this podcast. That's why we, before that we were.

Bloggers.

And we will continue to be that way and continue to advocate these ideas. And we were, we had, we're delighted to have you on today, Mark. It was, it was great fun.And we will have you back to discuss, to finish discussing your book, certainly. Section three and some other things that I, I would like to expand upon in that section.But I have one final question that I always ask every economist that comes on the show. Is the stock market a casino?

No. Capital is attracted to talent and the stock market is driven by earnings expectations.And in the short run, it sure seems to have some casino aspects to it. But that's an interesting idea. Casino. What I'm trying to do with the Moneyball method is give the investor the same advantage as the casino.In other words, put the odds in their favor through quantitative analysis, through statistics, through probability analysis, with the proper data, the proper capital market assumptions and the, the things that they know about and can control and become the casino in their own personal life. But in terms of the stock market, broadly speaking, it is a wealth generating engine unlike anything else in the history of the world.Certainly these are secondary market securities. They trade on information especially and including long term earnings expectations.But the real wealth generators in America, the real risk capital, where wealth is created, economies change, lives are improved. Is venture capital, is private equity, is merchant banking.These are the people, these are the investors, these are the entrepreneurs that really matter.And regardless of what the stock market's doing at any given moment in time, or the bond market, which is really irrelevant to wealth generation, it is what venture capital they need in equity interest.Equity interest is everything A entrepreneur with a startup company could not possibly compensate a fixed income investor for the tremendous risk that they're taking. So risk and reward go hand in hand. But sometimes you gotta wait a long time for it. And in terms of venture capital, 90% of those investments fail.

Fail or delayed gratification, I believe it's called. Yes, go ahead if you have any.

Oh, I'm sorry, it's having a, a low time preference, meaning you don't need the immediate gratification. A high time preference is you want immediate gratification.

So I'm kind of debating on whether I should just come out with this poor people like me. How do I, how would I start.

Investing Inventory of your financial resources and debt obligations.And then we would take a look at your sources of income, both current and potential future resources that you might have a reasonable expectation for. And then we would take a look at the spending priorities that you have. We have to essentially do an inventory. What do you own?What is your cash flow and what are we trying to accomplish? Start with those three.

That's great advice right there. That's great. All right, ladies and gentlemen, today our guest has been Mark Shoup, author of the Moneyball Method.Again, the subtitle, which I can't recall,.

A Middle Class Manifesto for Objective Investing.

Very good, Very good, sir. Thank you so much for appearing today and thanks for manning this foxhole with us, Blair Martin.

I appreciate this invitation. It's been very enjoyable and I'm sure we'll cross paths soon.

Yes.

And I will add something to Blair's question.So I saw a graph that is called the site map and that could be interesting to talk about next time because if you value this conversation and this podcast and Mark as a guest, you are welcome to give something back in a voluntary way. And then you could go to TrueFans FM as Mark has done and create an account and click the button, support this show.And then you could do one time support and donation. I know that you have different legal things. What you could say we include that in the show notes in America, if you could deduct it or not.But to sponsor the show in different ways. And you could also stream satoshis. That's a bit of bitcoin or send a boostogram. And of course we are welcoming silver coins also.Then you have to ask about our snail mail address. So with that, thanks again, Mark for your time and we will do definitely a follow up and you're welcome to be a returning guest.

It is a thrill to be in the secular foxhole with you. Thank you.

All right.

Thanks, Mark. Appreciate it.

Sa.