Ben Felix
Home Country Bias
updated
References: zbib.org/dfc892f743e14459bea621fd9fbba1fa
Will buying a home make you happier? The evidence is mixed, at best.
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References: zbib.org/69da8ac719614415ba4dc58e41e86dc3
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Meet with PWL Capital: calendly.com/d/cpws-jyp-znp
References: zbib.org/f91735b1b7dd49ae935916f53d27b1be
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References: zbib.org/b9d40e1d2937490d988270833fb56b92
Investors in ARKK - many of whom arrived late to the party - have experienced dramatic ups and downs, with an emphasis on downs for most investors.
The fund crashed 77% in 2021 and 2022 after taking in huge inflows. The question anyone still holding these funds must be asking - or should be asking - is whether it will recover.
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Canada’s Federal Budget 2024 has proposed an increase in the capital gains tax rate in certain cases.
This means that selling a taxable asset like a business, a secondary real estate property, or an investment portfolio may cost more.
What does this mean for your investments?
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Over the last 10 years I have spoken to thousands of individual investors about their investments and financial plans while working at PWL Capital, and I have interviewed some of the smartest people in finance, economics, and psychology on the Rational Reminder podcast.
This is what I have learned. These are all lessons that investors will learn eventually, though many will learn them the hard way.
0:29 1. You’re not that smart (relative to the market).
0:42 2. This time is always different.
1:03 3. The market is forward-looking.
1:20 4. Market forecasts are not useful.
1:34 5. Time in the market beats timing the market.
1:47 6. Most funds do not beat the market.
2:12 7. Incentives matter.
2:26 8. Expected economic growth and stock returns are unrelated.
3:12 9. Good portfolio management does not make up for bad financial planning.
3:27 10. Risk and expected returns are positively related.
3:42 11. The risk-expected return trade-off has a term structure.
3:58 12. Fees and taxes matter.
4:12 13. Complexity and costs are positively related.
4:27 14. There is no single optimal investment strategy.
4:44 15. The best investment strategy for you is the one that you can stick with.
5:00 16. There is no such thing as a “passive” investment.
5:14 17. Wealth does not give you access to market-beating investments.
5:30 18. Diversification is (still) the only free lunch in investing.
5:44 19. Investments should be evaluated on process, not outcome.
5:58 20. Investing has been solved.
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The CPP uptake decision is one of the most consequential financial decisions that most Canadian retirees will make.
The difference between optimal and suboptimal claiming can measure in the hundreds of thousands of dollars of expected lifetime income.
References: zbib.org/7c977b4ef1a641de8c2db26d5c526a19
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People like to complain about CPP, but it is one of the most valuable retirement assets available to Canadians.
References: zbib.org/fe9a63b38a324cfeb6484f022dd9f258
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Millions of Canadians get financial advice from Canada's big banks, but bank financial advice may be doing more harm than good.
References: zbib.org/c2f2f65a1900445894495b9729872cfd
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Many people take it as a given that stocks return 10% per year on average, but on closer inspection this belief is likely an error.
References: zbib.org/3f0f46d1692f45aca80923ae6fd905e9
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References: zbib.org/f7ba4544493741fab9ca668b592f4085
Home country bias - overweighting your home country’s stocks relative to their capitalization weights - is detrimental at the extremes, but modest home country bias is theoretically, practically, and empirically useful.
It can reduce fees and taxes, it may hedge the cost of local consumption, and it reduces exposure to the potential mistreatment of foreign investors when times get tough.
It may also be helpful psychologically due to the role of social comparison in determining individual happiness.
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References: zbib.org/1611ae243d984b4bb1fe36aa33d1fb3e
Conventional wisdom and popular personal financial advice suggest that portfolios should contain at least some bonds and that asset allocations should shift increasingly into bonds as investors move toward retirement, but new research suggests that this thinking is due for an update.
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References: zbib.org/17df87b9e17b4e6683b67e2a0429192f
I’m noticing investors being worried about stock market valuations. When stock market valuations are higher, expected returns are lower. High valuations are not great for long-term investors. But saying that stock market valuations are high misses a lot of nuance. Which stocks are we talking about, and even more broadly, which markets?
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References: zbib.org/3afb67c29fa64cbe95ae9cabf409542d
Discussion with the co-author of Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms: youtu.be/CHxNpN-2lmw?t=1416
ESG investing - that is investing that puts an emphasis on the environmental, social, and governance characteristics of companies - continues to be popular. Investors may want to avoid ESG-related risks, or to feel good about their portfolio, which are legitimate motivations. But how much good is ESG investing actually doing?
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If you're sitting on cash that you plan to invest you have a few options:
1. Invest a lump sum.
2. Dollar cost average.
3. Wait for a "good time" to invest.
The optimal choice may surprise you.
References: zbib.org/45b504dfd40d43bf833da0c4c250a124
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The salience of yield is no secret to financial product manufacturers, resulting in products being manufactured and marketed based on their high distribution yields.
But distribution yields are not investment returns, they are not sufficient to assess expected returns, and, in the way that they are used to market financial products, often to unsophisticated investors, they can be misleading.
References: zbib.org/7ac95140522c4bf69d60cdcaafcb6f79
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This quote is often used as an argument against diversified investment strategies, but the thing is, Warren Buffett was probably not talking about you when he referred to people who know what they’re doing.
If you think that you are included in Buffett’s group of “people who know what they’re doing” you may have investment hubris, which can cost you in the long-run.
References: zbib.org/785fcdc083604e7797e7036a9c8d3c10
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I am going to tell you what it is and how you can do better.
References: zbib.org/649f0e979c704fa18096a2d5374c816f
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People spend so much time worrying about the next downturn that they miss out on market returns, which tend to be positive in the long-run.
These errors lead investors to hold more conservative portfolios than a more optimistic investor would, to avoid participating in the stock market altogether, and to sabotage their long-term returns with short-term decision-making. There are some potential solutions.
References: zbib.org/ba1e54f7812842f6b2e12ae94c2ce7b8
Related podcast episode: The (Expected) Cost of Pessimism (Plus Matthew Dicks on the Value of Storytelling) | RR 267
youtu.be/qVHT2PEEuDg
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I realized after posting that his claim was even worse than I initially thought.
The S&P 500 returned around 12% per year 1926-2022 measured as an arithmetic average.
Measured as a geometric average, which is what matters to investors, it has been closer to 10%.
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Unfortunately, his logic is flawed, and retirement spending math is not as simple as he suggests.
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Recessions do not always mean poor stock returns.
The reason is simple:
GDP growth is backward looking while stock markets are forward looking.
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That sounds great, especially for people with high incomes, but I will argue that it's a misrepresentation.
There are up to 3 layers of tax on permanent life insurance that need to be considered.
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You may want to reduce financial risk as your human capital decreases, but (empirically) people get less risk averse as they get wealthier.
Together, these can lead to a flat optimal asset allocation over time.
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Subjective return expectations tend to negatively correlate with model-based expected returns.
Both are predictive of realized returns, but in opposite directions.
------------------
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Exciting products focused on things like weed, electric vehicles, clean energy, artificial intelligence, and crypto all burned investors.
Keep it simple. Don't chase trends.
papers.ssrn.com/sol3/papers.cfm?abstract_id=3765063
------------------
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Expected growth is reflected in prices.
Unexpected growth is not predictable.
The highest growth countries and sectors don't have the highest stock returns.
This is one of the biggest misconceptions in investing.
------------------
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Professor Sam Hartzmark, who has studied this extensively, explains on the most recent episode of the Rational Reminder Podcast.
youtu.be/CHxNpN-2lmw?si=DLLVCqCRKnNT5vDg&t=2289
The Dividend Disconnect: doi.org/10.1111/jofi.12785
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With a 5% return on cash, why would anyone want to invest in stocks? I know that cash feels good because its nominal value is stable - it feels safe, but it is counterintuitively extremely risky for long-term investors.
Referenced in this video:
Reaching for Yield: Evidence from Households - papers.ssrn.com/sol3/papers.cfm?abstract_id=4283008
CRASH BELIEFS FROM INVESTOR SURVEYS - nber.org/system/files/working_papers/w22143/w22143.pdf
Who Should Buy Long-Term Bonds? - aeaweb.org/articles?id=10.1257/aer.91.1.99
Portfolios for Long-Term Investors - academic.oup.com/rof/article/26/1/1/6484661
Presidential Address: Discount Rates - onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2011.01671.x
Long-Horizon Losses in Stocks, Bonds, and Bills - papers.ssrn.com/sol3/papers.cfm?abstract_id=3964908
“Buy the Dip” - pwlcapital.com/resources/buy-the-dip
------------------
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------------------
The payoffs of structured notes can seem like a free lunch, but banks are not selling them to you because they’re your friend. When you’re having dinner with lions you have to make sure you’re at the table, not on the menu.
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------------------
Sources:
Cochrane, J. H. (2022). Portfolios for long-term investors. Review of Finance, 26(1), 1–42. doi.org/10.1093/rof/rfab038
Gabaix, X., & Laibson, D. (2006). Shrouded attributes, consumer myopia, and information suppression in competitive markets. The Quarterly Journal of Economics, 121(2), 505–540. doi.org/10.1162/qjec.2006.121.2.505
Carlin, B. I. (2009). Strategic price complexity in retail financial markets☆. Journal of Financial Economics, 91(3), 278–287. doi.org/10.1016/j.jfineco.2008.05.002
Henderson, B. J., & Pearson, N. D. (2011). The dark side of financial innovation: A case study of the pricing of a retail financial product☆. Journal of Financial Economics, 100(2), 227–247. doi.org/10.1016/j.jfineco.2010.12.006
Deng, G., Guedj, I., Mallett, J., & McCann, C. (2011). The anatomy of principal-protected absolutereturn barrier notes. The Journal of Derivatives, 19(2), 61–70. doi.org/10.3905/jod.2011.19.2.061
Bernard, C., Boyle, P. P., & Gornall, W. (2011). Locally capped investment products and the retailinvestor. The Journal of Derivatives, 18(4), 72–88. doi.org/10.3905/jod.2011.18.4.072
Deng, G., Dulaney, T., Husson, T., McCann, C., & Yan, M. (2015). Ex post structured-product returns: Index methodology and analysis. The Journal of Investing, 24(2), 45–58. doi.org/10.3905/joi.2015.24.2.045
Célérier, C., & Vallée, B. (2017). Catering to Investors Through Security Design: Headline Rate and Complexity*. The Quarterly Journal of Economics, 132(3), 1469–1508. doi.org/10.1093/qje/qjx007
Vokata, P. (2021). Engineering lemons. Journal of Financial Economics, 142(2), 737–755. doi.org/10.1016/j.jfineco.2021.04.035
Chesney, Marc and Fattinger, Felix and Krakow, Nils Jonathan and Straumann, Simon, Interest Rates, Competition, and Complexity: Demand and Supply of Retail Financial Products (May 15, 2022). Available at SSRN: ssrn.com/abstract=3499660 or http://dx.doi.org/10.2139/ssrn.3499660
Henderson, B. J., Pearson, N. D., & Wang, L. (2020). Pre-trade hedging: Evidence from the issuance of retail structured products. Journal of Financial Economics, 137(1), 108–128. doi.org/10.1016/j.jfineco.2020.02.004
Ammann, M., Arnold, M., & Straumann, S. (2023). Pricing, issuance volume, and design of innovative securities: The role of investor information. Journal of Financial Intermediation, 55, 101041. doi.org/10.1016/j.jfi.2023.101041
Goetzmann, W., Kim, D., & Shiller, R. (2016). Crash beliefs from investor surveys (No. w22143; p. w22143). National Bureau of Economic Research. doi.org/10.3386/w22143
Henderson, B. J., Pearson, N. D., & Wang, L. (2023). Retail derivatives and sentiment: A sentiment measure constructed from issuances of retail structured equity products. The Journal of Finance, 78(4), 2365–2407. doi.org/10.1111/jofi.13253
Gennaioli, N., Shleifer, A., & Vishny, R. (2012). Neglected risks, financial innovation, and financial fragility. Journal of Financial Economics, 104(3), 452–468. doi.org/10.1016/j.jfineco.2011.05.005
Sec. Gov | regulators working together to serve investors. (n.d.). Retrieved July 19, 2023, from sec.gov/news/speech/regulators-working-together-serve-investors
Das, S. R., & Statman, M. (2013). Options and structured products in behavioral portfolios. Journal of Economic Dynamics and Control, 37(1), 137–153. doi.org/10.1016/j.jedc.2012.07.004
Episode 171 with Campbell R. Harvey: youtu.be/RSwctXnMnrw
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------------------
Sources:
Shefrin, H., & Statman, M. (1993). Behavioral Aspects of the Design and Marketing of Financial Products. Financial Management, 22(2), 123. doi.org/10.2307/3665864
Black, F. (1975). Fact and Fantasy in the Use of Options. Financial Analysts Journal, 31(4), 36–41. doi.org/10.2469/faj.v31.n4.36
Merton, R.C., Scholes, M.S., & Gladstein, M.L. (1982). The Returns and Risks of Alternative Put-Option Portfolio Investment Strategies. The Journal of Business, 55, 1-55. doi.org/10.1086/296153
Rendleman, R. J. . (1999). Option Investing from a Risk-Return Perspective. The Journal of Portfolio Management, 25(5), 109–121. doi.org/10.3905/jpm.1999.319700
Sharpe, W. F. (1994). The Sharpe Ratio. The Journal of Portfolio Management, 21(1), 49–58. doi.org/10.3905/jpm.1994.409501
Harvey, C. R., & Siddique, A. (2000). Conditional skewness in asset pricing tests. The Journal of Finance, 55(3), 1263–1295. doi.org/10.1111/0022-1082.00247
Van der Meer, Robert and Sortino, Frank and Plantinga, Auke, The Impact of Downside Risk on Risk-Adjusted Performance of Mutual Funds in the Euronext Markets (July 19, 2001). Available at SSRN: ssrn.com/abstract=277352
Leggio, K. B., & Lien, D. (2004). Is covered call investing wise? Evaluating the strategy using risk-adjusted performance measures. In C.-F. Lee, Advances in Quantitative Analysis of Finance & Accounting (Vol. 1, pp. 187–204). WORLD SCIENTIFIC. doi.org/10.1142/9789812565457_0011
Farago, A., & Hjalmarsson, E. (2023). Long-horizon stock returns are positively skewed. Review of Finance, 27(2), 495–538. doi.org/10.1093/rof/rfac021
Bessembinder, H. (2018). Do stocks outperform Treasury bills? Journal of Financial Economics, 129(3), 440–457. doi.org/10.1016/j.jfineco.2018.06.004
Goetzmann, W., Ingersoll, J., Spiegel, M., & Welch, I. (2007). Portfolio Performance Manipulation and Manipulation-proof Performance Measures. Review of Financial Studies, 20(5), 1503–1546. doi.org/10.1093/rfs/hhm025
Brooks, R., Chance, D., & Hemler, M. (2019). The “superior performance” of covered calls on the s&p 500: Rethinking an anomaly. The Journal of Derivatives, 27(2), 50–61. doi.org/10.3905/jod.2019.1.087
Shefrin, H., & Statman, M. (1993). Behavioral Aspects of the Design and Marketing of Financial Products. Financial Management, 22(2), 123. doi.org/10.2307/3665864
Calluzzo, P., Moneta, F., & Topaloglu, S. (2021). Complex instruments have increased risk and reduced performance at mutual funds. Critical Finance Review. doi.org/10.2139/ssrn.2938146
Portfolio Growth chart. Source: portfoliovisualizer.com
I have told you in many of my videos that low-cost total market index funds are the most sensible investments for most people - just own the market. I stand by that statement, but as true as it is, there is a lot more nuance to making good asset allocation decisions. How do you know if you’re like most people? And if you’re not like most people, how should your portfolio be different from the market?
Check out the video posted on Rational Reminder: youtu.be/mGCwuS8bjGA
Episode 169 with John Cochrane: youtu.be/gbaCOB6CZ6E
Episode 200 with Eugene Fama: youtu.be/LLbQux2OZjk
Episode 234 with Robert Merton: youtu.be/rmYGZvmYknk
Episode 220 with Jonathan Berk: youtu.be/XOWdKXGXBho
------------------
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------------------
Sources:
Markowitz, H. (1952), PORTFOLIO SELECTION*. The Journal of Finance, 7: 77-91. doi.org/10.1111/j.1540-6261.1952.tb01525.x
Sharpe, W.F. (1964), CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*. The Journal of Finance, 19: 425-442. doi.org/10.1111/j.1540-6261.1964.tb02865.x
Merton, R. C. (1973). An Intertemporal Capital Asset Pricing Model. Econometrica, 41(5), 867–887. doi.org/10.2307/1913811
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56. do.org/10.1016/0304-405x(93)90023-5
Chen, N., & Zhang, F. (1998). Risk and Return of Value Stocks. The Journal of Business, 71(4), 501–535. doi.org/10.1086/209755
ZHANG, L. (2005), The Value Premium. The Journal of Finance, 60: 67-103. doi.org/10.1111/j.1540-6261.2005.00725.x
YOGO, M. (2006), A Consumption-Based Explanation of Expected Stock Returns. The Journal of Finance, 61: 539-580. doi.org/10.1111/j.1540-6261.2006.00848.x
Campbell, J. Y., & Vuolteenaho, T. (2004). Bad Beta, Good Beta. American Economic Review, 94(5), 1249–1275. doi.org/10.1257/0002828043052240
BETERMIER, S., CALVET, L.E. and SODINI, P. (2017), Who Are the Value and Growth Investors?. The Journal of Finance, 72: 5-46. doi.org/10.1111/jofi.12473
Betermier, Sebastien and Calvet, Laurent E. and Knüpfer, Samuli and Soerlie Kvaerner, Jens, What Do the Portfolios of Individual Investors Reveal About the Cross-Section of Equity Returns? (February 24, 2022). Available at SSRN: ssrn.com/abstract=3795690 or http://dx.doi.org/10.2139/ssrn.3795690
Jensen, Theis Ingerslev and Kelly, Bryan T. and Pedersen, Lasse Heje, Is There a Replication Crisis in Finance? (February 2021). NBER Working Paper No. w28432, Available at SSRN: ssrn.com/abstract=3781319
International stocks have trailed US stocks for more than 100 years. Performance aside, the US market is well diversified across industries, makes up more than 50% of the global stock market, and lots of US companies have international revenue exposure. Additionally, international diversification has gotten less effective over time as correlations across markets have increased.
These arguments for forgoing international diversification in favor of US stocks do seem compelling at the surface, but, as I will explain, they’re flimsy, at best. International diversification is crucial, both theoretically and empirically, to sensible portfolio construction.
------------------
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------------------
Sources:
van Binsbergen, Jules H. and Hua, Sophia and Wachter, Jessica A., Is The United States A Lucky Survivor: A Hierarchical Bayesian Approach (March 1, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: ssrn.com/abstract=3689958 or http://dx.doi.org/10.2139/ssrn.3689958
Barber, B. M., & Odean, T. (2013). The Behavior of Individual Investors. Handbook of the Economics of Finance, 1533–1570. doi:10.1016/b978-0-44-459406-8.00022-6
Bailey, W., Kumar, A., & Ng, D. (2011). Behavioral biases of mutual fund investors. Journal of Financial Economics, 102(1), 1–27. doi:10.1016/j.jfineco.2011.05.002
Ritter, J.R. (2012), Is Economic Growth Good for Investors?. Journal of Applied Corporate Finance, 24: 8-18. doi.org/10.1111/j.1745-6622.2012.00385.x
Viceira, L., Wang, Z. (K. (2018). Global portfolio diversification for long-horizon investors. doi.org/10.3386/w24646
Asness, C. S., Israelov, R., & Liew, J. M. (2011). International Diversification Works (Eventually). Financial Analysts Journal, 67(3), 24–38. doi:10.2469/faj.v67.n3.1
Anarkulova, A., Cederburg, S., & O'Doherty, M. S. (2021). The long-horizon returns of stocks, bonds, and bills: Evidence from a broad sample of developed markets. SSRN Electronic Journal. doi.org/10.2139/ssrn.3964908
BEKAERT, G., HODRICK, R. J., & ZHANG, X. (2009). International Stock Return Comovements. The Journal of Finance, 64(6), 2591–2626. doi:10.1111/j.1540-6261.2009.01512.x
Zixuan (Kevin) Wang and Luis Viceira. Working Paper. “Global Portfolio Diversification for Long-Horizon Investors”. Copy at tinyurl.com/ycvedksg
Bekaert, G., Hoyem, K., Hu, W.-Y., & Ravina, E. (2017). Who is internationally diversified? Evidence from the 401(k) plans of 296 firms. Journal of Financial Economics, 124(1), 86–112. doi:10.1016/j.jfineco.2016.12.010
Sinquefield, R. A. (1996). Where are the gains from international diversification? Financial Analysts Journal, 52(1), 8–14. doi.org/10.2469/faj.v52.n1.1961
Lewis, K. K. (1999). Trying to Explain Home Bias in Equities and Consumption. Journal of Economic Literature, 37(2), 571–608. doi:10.1257/jel.37.2.571
Jacquillat, B., & Solnik, B. (1978). Multinationals are Poor Tools for Diversification. The Journal of Portfolio Management, 4(2), 8–12. doi:10.3905/jpm.1978.408629
Senchack, A. J., & Beedles, W. L. (1980). Is indirect international diversification desirable? The Journal of Portfolio Management, 6(2), 49–57. doi:10.3905/jpm.1980.408729
Rowland, P. F., & Tesar, L. L. (2004). Multinationals and the gains from international diversification. Review of Economic Dynamics, 7(4), 789–826. doi:10.1016/j.red.2004.05.001
Heston, S. L., & Rouwenhorst, K. G. (1994). Does industrial structure explain the benefits of international diversification? Journal of Financial Economics, 36(1), 3–27. doi:10.1016/0304-405x(94)90028-0
Is the 4% rule really 2-3%?
Referenced in this video:
- Determining Withdrawal Rates Using Historical Data: financialplanningassociation.org/sites/default/files/2021-04/MAR04%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf
- The equity premium: A puzzle: sciencedirect.com/science/article/abs/pii/0304393285900613
- Is The United States A Lucky Survivor: A Hierarchical Bayesian Approach: papers.ssrn.com/sol3/papers.cfm?abstract_id=3689958
- The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets: papers.ssrn.com/sol3/papers.cfm?abstract_id=4227132
- Episode 224: Prof. Scott Cederburg: Long-Horizon Losses in Stocks, Bonds, and Bills: rationalreminder.ca/podcast/224
------------------
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Index investing as a theoretically optimal investment strategy works best in an efficient market, but if everyone turns into a passive index investor the market can’t be efficient. This is commonly known as the Grossman-Stiglitz Paradox, and it has some people raising the alarm about a tipping point for market efficiency.
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Referenced in this video:
- Optimal Financial Knowledge and Wealth Inequality: https://repository.upenn.edu/cgi/viewcontent.cgi?article=1093&context=bepp_papers
- FINANCIAL LITERACY, RETIREMENT PLANNING AND HOUSEHOLD WEALTH: gflec.org/wp-content/uploads/2019/07/Rooij_et_al-2012-The_Economic_Journal.pdf
- Financial literacy and stock market participation: sciencedirect.com/science/article/abs/pii/S0304405X11000717
- MEASURING THE FINANCIAL SOPHISTICATION OF HOUSEHOLDS: nber.org/system/files/working_papers/w14699/w14699.pdf
- What Do the Portfolios of Individual Investors Reveal About the Cross-Section of Equity Returns?:papers.ssrn.com/sol3/papers.cfm?abstract_id=3795690
- Investor Sophistication and the Home Bias, Diversification, and Employer Stock Puzzles: http://www-personal.umich.edu/~mkimball/keio/5.%20papers/sophist3%20copy.pdf
- Presidential Address: The Cost of Active Investing: onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2008.01368.x
- The Economic Importance of Financial Literacy: Theory and Evidence: gflec.org/wp-content/uploads/2014/12/economic-importance-financial-literacy-theory-evidence.pdf
- Debt literacy, financial experiences, and overindebtedness: cambridge.org/core/journals/journal-of-pension-economics-and-finance/article/abs/debt-literacy-financial-experiences-and-overindebtedness/6140546AF9CA1BAC33FAE47F35C5C178
- Investment Literacy, Overconfidence and Cryptocurrency Investment: papers.ssrn.com/sol3/papers.cfm?abstract_id=3953242
- THE CAUSES AND CONSEQUENCES OF FINANCIAL FRAUD AMONG OLDER AMERICANS: https://crr.bc.edu/wp-content/uploads/2014/11/wp_2014-13.pdf
- Financial literacy and fraud detection: tandfonline.com/doi/abs/10.1080/1351847X.2019.1646666
- Individual differences in susceptibility to financial bullshit: sciencedirect.com/science/article/pii/S2214635022000193?via%3Dihub#tbl1
- Measuring financial well-being: files.consumerfinance.gov/f/201512_cfpb_financial-well-being-user-guide-scale.pdf
- Financial Well-Being of the Millennial Generation: An In-Depth Analysis of its Drivers and Implications: gflec.org/wp-content/uploads/2019/12/Financial-Well-Being-of-the-Millennial-Generation-Paper-20191122.pdf
Bitcoin Awareness, Ownership and Use: 2016–20: bankofcanada.ca/wp-content/uploads/2022/04/sdp2022-10.pdf
FINANCIAL LITERACY AND RETIREMENT PLANNING IN THE UNITED STATES: nber.org/system/files/working_papers/w17108/w17108.pdf
------------------
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This is the private equity pitch in a nutshell. It’s obvious theoretically that Illiquid assets in markets that are more difficult to access would have higher expected returns and opportunities for managers to add value by bringing new information to the market, possibly even enough to justify the high fees, estimated at around 6 or 7% all-in.
Timestamps:
0:00 Intro
1:26 Evaluating the performance of private equity is not straightforward
3:30 My bone to pick with the 2014 paper
6:09 Ludovic Phalippou’s insights to private equity
8:02 Testing the diversification claim
11:20 Main takeaways
Referenced in this video:
Private markets rally to new heights: mckinsey.com/~/media/mckinsey/industries/private%20equity%20and%20principal%20investors/our%20insights/mckinseys%20private%20markets%20annual%20review/2022/mckinseys-private-markets-annual-review-private-markets-rally-to-new-heights-vf.pdf
The Performance of Private Equity Funds: academic.oup.com/rfs/article-abstract/22/4/1747/1567648?redirectedFrom=fulltext
Private Equity Fund Debt: Capital Flows, Performance, and Agency Costs: papers.ssrn.com/sol3/papers.cfm?abstract_id=3410076
Private Equity Performance: Returns, Persistence, and Capital Flows: onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2005.00780.x
Private Equity Performance: What Do We Know?: onlinelibrary.wiley.com/doi/10.1111/jofi.12154
An Inconvenient Fact: Private Equity Returns and the Billionaire Factory: joi.pm-research.com/content/30/1/11
Private Equity's Diversification Illusion: Evidence From Fair Value Accounting: papers.ssrn.com/sol3/papers.cfm?abstract_id=2379170
Private Equity Fund Valuation Management During Fundraising: https://www.hbs.edu/ris/Publication%20Files/23-013_00801cda-46cb-48ee-b6ff-c2b705a41a7a.pdf
Rush to Raise: Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing?: papers.ssrn.com/sol3/papers.cfm?abstract_id=3851819
Interim Fund Performance and Fundraising in Private Equity: papers.ssrn.com/sol3/papers.cfm?abstract_id=2357570
Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting: academic.oup.com/rfs/article-abstract/35/1/299/6136189?redirectedFrom=fulltext
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This hedonic treadmill of conspicuous consumption is difficult to escape. An important question is whether people with luxury vehicles actually enjoy their vehicles more.
Referenced in this video:
The influence of positionality in car-purchasing behaviour on the downsizing of new cars: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.utwente.nl/en/et/ce/research/tem/pdf/2011_Hoen_Geurs_The_influence_of_positionality.pdf
Why don't we learn from poor choices? The consistency of expectation, choice, and memory clouds the lessons of experience: https://efaidnbmnnnibpcajpcglclefindmkaj/https://dornsife.usc.edu/assets/sites/780/docs/11_jcp_schwarz___xu_why_we_don_t_learn__fin_.pdf
Temporal Adjustments in the Evaluation of Events: The ‘‘Rosy View’’https://sci-hub.se/https://doi.org/10.1006/jesp.1997.1333
Luxury car owners are not happier than frugal car owners link.springer.com/article/10.1007/s12232-015-0223-2
Balance andrewhallam.com/balance
The Next Millionaire Next Door rowman.com/ISBN/9781493052752/The-Next-Millionaire-Next-Door-Enduring-Strategies-for-Building-Wealth
------------------
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------------------
Referenced in this video:
Stocks of Admired Companies and Spurned Ones: papers.ssrn.com/sol3/papers.cfm?abstract_id=1540757
Glamour Brands and Glamour Stocks: papers.ssrn.com/sol3/papers.cfm?abstract_id=1571491
Investor Sentiment, Stock Characteristics, and Returns: jpm.pm-research.com/content/37/3/54
Contrarian Investment, Extrapolation, and Risk: papers.ssrn.com/sol3/papers.cfm?abstract_id=227016
Valuation Bias and Limits to Nudges: jpm.pm-research.com/content/45/5/112
Conditional Skewness in Asset Pricing Tests: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/P56_Conditional_skewness_in.pdf
------------------
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------------------
Referenced in this video:
The Dividend Disconnect: drive.google.com/file/d/15Z94LD8QTPbb0ETAixg_zMA0Ew5bdJat/view
Settling the Size Matter: drive.google.com/file/d/1G3daMZp3XbP0Qj1cG-p3VpcJzSYkmd1c/view
Stock Market Returns and Consumption: drive.google.com/file/d/1kVBKtMWXgvlZ8bQzARgK91uhIbUBOXQC/view
Consuming Dividends: academic.oup.com/rfs/advance-article-abstract/doi/10.1093/rfs/hhac010/6530299
Should You Chase Dividend Stocks to Combat Inflation and Rate Hikes?: dimensional.com/us-en/insights/should-you-chase-dividend-stocks-to-combat-inflation-and-rate-hikes
------------------
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------------------
Referenced in this video:
US Inflation and Global Asset Returns: papers.ssrn.com/sol3/papers.cfm?abstract_id=3882899
The Best Strategies for Inflationary Times: jpm.pm-research.com/content/47/8/8/tab-article-info
Value and Interest Rates: Are Rates to Blame for Value’s Torments?: jpm.pm-research.com/content/47/6/65
Duration-Driven Returns: papers.ssrn.com/sol3/papers.cfm?abstract_id=3359027
Inflation Hedging with International Equities: jpm.pm-research.com/content/40/2/41
The Golden Dilemma: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/nber.org/system/files/working_papers/w18706/w18706.pdf
Gold, the Golden Constant, COVID-19, 'Massive Passives' and Déjà Vu: papers.ssrn.com/sol3/papers.cfm?abstract_id=3667789
------------------
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Listen to the Rational Reminder Episode 185: Lighting your Money on Fire with Thematic ETFs where we do a deeper dive of the topic:
youtube.com/watch?v=libTTDzmVGw
rationalreminder.ca/podcast/185
Referenced in this video:
Earnings Growth: The Two Percent Dilution: cfainstitute.org/en/research/financial-analysts-journal/2003/earnings-growth-the-two-percent-dilution
The Big Market Delusion: Valuation and Investment Implications: tandfonline.com/doi/full/10.1080/0015198X.2020.1730655
Overconfidence and Speculative Bubbles: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.princeton.edu/~wxiong/papers/bubble.pdf
Competition for Attention in the ETF Space: papers.ssrn.com/sol3/papers.cfm?abstract_id=3765063
Betting against Quant: Examining the Factor Exposures of Thematic Indexes: jii.pm-research.com/content/12/3/5
------------------
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Characteristics like high economic growth expectations and attractive valuations compel some investors to overweight emerging markets in their portfolios, but there are some often overlooked facts, costs, and risks that should be carefully considered.
Referenced in this video:
Establishing ‘Emerging Markets’: ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/about+ifc_new/ifc+history/establishing-emerging-markets
Is Economic Growth Good for Investors? : http://csinvesting.org/wp-content/uploads/2015/05/Jay_Ritter_paper_14_August-Economic-Growth-and-Stock-Returns.pdf
Earnings Growth: The Two Percent Dilution: researchaffiliates.com/content/dam/ra/documents/FAJ-2003-Two-Percent-Dilution.pdf
Foreign Speculators and Emerging Equity Markets: https://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/P64_Foreign_speculators_and.pdf
Equity Market Liberalization in Emerging Markets: https://public.kenan-flagler.unc.edu/faculty/lundblac/equity_market_liberalization.pdf
What Segments Equity Markets?:https://www8.gsb.columbia.edu/sites/financialstudies/files/files/equity.pdf
Drivers of Expected Returns in International Markets:https://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/P69_The_drivers_of.pdf
Conditional Skewness in Asset Pricing Tests: https://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/P56_Conditional_skewness_in.pdf
------------------
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Special Rational Reminder episode: rationalreminder.ca/podcast/special-episode-stock-bonds-and-war
Referenced in this video:
War, Peace and Stock Markets: papers.ssrn.com/sol3/papers.cfm?abstract_id=885980
ICB Project: https://sites.duke.edu/icbdata/
WHY DOES STOCK MARKET VOLATILITY CHANGE OVER TIME?: nber.org/system/files/working_papers/w2798/w2798.pdf
Earning from History? Financial Markets and the Approach of World Wars: https://www.brookings.edu/wp-content/uploads/2008/03/2008a_bpea_ferguson.pdf
The General Theory of Employment: macroeconomiauca.files.wordpress.com/2012/05/keynes_general_theory_of_employment_qje_1937.pdf
------------------
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------------------
Making the housing decision requires careful consideration of both the financial and non-financial impacts, and the way that they interact with each other. There is no universally right way to approach housing. In many cases, contrary to conventional wisdom and societal pressure, renting is a better option than owning, both financially and from the perspective of subjective well-being.
Referenced in this video:
Extrinsic Value Orientation and Affective Forecasting: Overestimating the Rewards, Underestimating the Costs sdtheory.s3.amazonaws.com/SDT/documents/2010_SheldonGunzNicholsFerguson_JOP.pdf
Does the Dream of Home Ownership Rest Upon Biased Beliefs? A Test Based on Predicted and Realized Life Satisfaction papers.ssrn.com/sol3/papers.cfm?abstract_id=3660256
The American Dream or the American Delusion? The Private and External Benefits of Homeownership for Women papers.ssrn.com/sol3/papers.cfm?abstract_id=1877163
Homeownership and Happiness: Evidence for Switzerland https://digitalcollection.zhaw.ch/bitstream/11475/18640/3/2019_Hofmann-Umbricht_Homeownership-and-happiness-Switzerland_SREJ.pdf
The relationship between homeownership and life satisfaction in Germany https://www.econstor.eu/bitstream/10419/51372/1/672468557.pdf
Is a Fixer-Upper Actually a Downer? tandfonline.com/doi/full/10.1080/10511482.2017.1367317
If Money Doesn't Make You Happy Then You Probably Aren't Spending It Right https://scholar.harvard.edu/files/danielgilbert/files/if-money-doesnt-make-you-happy.nov-12-20101.pdf
The relative relativity of material and experiential purchases pubmed.ncbi.nlm.nih.gov/20053039
The McMansion Effect: Top House Size and Positional Externalities in U.S. Suburbs papers.ssrn.com/sol3/papers.cfm?abstract_id=3378131
Book: Happy Money dunn.psych.ubc.ca/book-happy-money
Shelter in the Canadian CPI: An overview www150.statcan.gc.ca/n1/pub/62f0014m/62f0014m2017001-eng.htm
Theory of Homes and Jobs warwick.ac.uk/fac/soc/economics/staff/ajoswald/homejobs.pdf
------------------
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------------------
Timestamps:
0:00 Climate change in asset prices
3:11 Is climate risk priced in the way that Pastor’s model suggests?
6:11 Transitional risk observed in asset prices
8:23 Carbon-intensive firms in portfolios
10:57 My final thoughts
Referenced in this video:
Sustainable Investing in Equilibrium: papers.ssrn.com/sol3/papers.cfm?abstract_id=3498354
Market Expectations About Climate Change: papers.ssrn.com/sol3/papers.cfm?abstract_id=3336506
An Inconvenient Cost: The Effects of Climate Change on Municipal Bonds: papers.ssrn.com/sol3/papers.cfm?abstract_id=3167379
Disaster on the Horizon: The Price Effect of Sea Level Rise: papers.ssrn.com/sol3/papers.cfm?abstract_id=3073842
Science and the Stock Market: Investors’ Recognition of Unburnable Carbon: papers.ssrn.com/sol3/papers.cfm?abstract_id=2362154
Environmental Externalities and Cost of Capital: papers.ssrn.com/sol3/papers.cfm?abstract_id=1677653
Carbon Tail Risk: papers.ssrn.com/sol3/papers.cfm?abstract_id=3204420
Climate Regulatory Risks and Corporate Bonds: papers.ssrn.com/sol3/papers.cfm?abstract_id=3563271
Greenhouse Gas Emissions and Expected Returns: papers.ssrn.com/sol3/papers.cfm?abstract_id=3714874
Five Factor Investing with ETFs: pwlcapital.com/resources/five-factor-investing-with-etfs
------------------
Follow Ben Felix on
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Visit Rational Reminder: rationalreminder.ca
Follow the Rational Reminder on:
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------------------
Timestamps:
0:00 Trading with Today’s Tech
2:00 Robinhood Investors
4:23 The Impact of Trading on a Mobile App
5:58 The Perception of Free Trades
9:50 Final Thoughts
----------------
Referenced in this video:
Sensation Seeking, Overconfidence, and Trading Activity - nber.org/system/files/working_papers/w12223/w12223.pdf
Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors - https://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/Individual_Investor_Performance_Final.pdf
Robinhood Has Lured Young Traders, Sometimes With Devastating Results - nytimes.com/2020/07/08/technology/robinhood-risky-trading.html
Smart(Phone) Investing? A within Investor-time Analysis of New Technologies and Trading Behavior. - nber.org/papers/w28363
Robinhood Markets, Inc. S-1 - sec.gov/Archives/edgar/data/1783879/000162828021013318/robinhoods-1.htm
Predictable behavior, profits, and attention - http://www.seasholes.com/uploads/3/2/0/6/32066083/seasholes_wu_2007_jef.pdf
All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors - academic.oup.com/rfs/article-abstract/21/2/785/1607197?redirectedFrom=fulltext
Attention Induced Trading and Returns: Evidence from Robinhood Users - papers.ssrn.com/sol3/papers.cfm?abstract_id=3715077
------------------
Follow Ben Felix on
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Visit Rational Reminder: www.https://rationalreminder.ca/
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Visit PWL Capital: pwlcapital.com/teams/passmore-felix
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You can find the Rational Reminder podcast on
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------------------
Timestamps:
0:00 How much is enough?
1:03 What is Happiness?
4:04 PERMA and Well-Being
6:22 Time, money, and happiness
9:48 Spending money for happiness
11:42 The Four Cs
13:13 Setting anti-goals and the Five Factors of Well-Being
------------------
Sources in order of mention
Functional imaging of neural responses to expectancy and experience of monetary gains and losses pubmed.ncbi.nlm.nih.gov/11395019
The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom happinesshypothesis.com
Positive Psychology: The Science of Well-Being uk.sagepub.com/en-gb/eur/positive-psychology/book243503
PERMA™ Theory of Well-Being https://ppc.sas.upenn.edu/learn-more/perma-theory-well-being-and-perma-workshops
Thinking Fast and Slow us.macmillan.com/books/9780374533557
Happiness, income satiation and turning points around the world nature.com/articles/s41562-017-0277-0
Time Smart awhillans.com/new-book-ndash-time-smart.html
If Money Doesn't Make You Happy Then You Probably Aren't Spending It Right https://scholar.harvard.edu/files/danielgilbert/files/if-money-doesnt-make-you-happy.nov-12-20101.pdf
The Geometry of Wealth harriman-house.com/geometry-of-wealth
The End of History Illusion science.sciencemag.org/content/339/6115/96
Rational Reminder Podcast episodes mentioned:
rationalreminder.ca/podcast/102
rationalreminder.ca/podcast/143
Follow Ben Felix on
- Twitter: twitter.com/benjaminwfelix
- LinkedIn: linkedin.com/in/benjaminwfelix
Visit Rational Reminder: rationalreminder.ca
Follow the Rational Reminder on:
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Visit PWL Capital: pwlcapital.com/teams/passmore-felix
You can find the Rational Reminder podcast on
Google Podcasts:
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------------------
Timestamps:
0:00 "Ben, why do you still have a job?"
1:00 What isn't Financial Advice?
3:08 What is Financial Advice?
10:36 Should you get Professional Financial Advice?
12:19 Reasons to Seek Expert Advice
------------------
Follow Ben Felix on
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Visit Rational Reminder: rationalreminder.ca
Follow the Rational Reminder on:
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Visit PWL Capital: pwlcapital.com/teams/passmore-felix
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You can find the Rational Reminder podcast on
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------------------
Before attempting to implement these portfolios, please read this: Why It Would Be Ludicrous To Invest In These Model Portfolios boomerandecho.com/why-it-would-be-ludicrous-to-invest-in-these-model-portfolios
Larger companies like Apple and Tesla make up a larger portion of the market compared to smaller companies, and these relative weights are reflected in a market capitalization weighted index fund. Letting the market dictate your portfolio weights has lots of advantages, but pushing the fundamental logic behind index investing one step further leads to the potential for significant improvements in portfolio construction.
Referenced in this video:
Five Factor Investing with ETFs: pwlcapital.com/resources/five-factor-investing-with-etfs
The relationship between return and market value of common stock: sciencedirect.com/science/article/abs/pii/0304405X81900180
A Five-Factor Asset Pricing Model: papers.ssrn.com/sol3/papers.cfm?abstract_id=2287202
Timestamps:
0:00 Market Capitalization Weighted Index Fund Explained
1:00 The Efficient Market Hypothesis
3:25 Let’s Get Back to Basics
4:51 Capital Asset Pricing Model (CAPM)
6:40 Empirical Anomalies in the Market
8:56 Risk Premiums
12:30 What I do with my Own Money
------------------
Follow Ben Felix on
- Twitter: twitter.com/benjaminwfelix
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Visit Rational Reminder: www.https://rationalreminder.ca/
Follow the Rational Reminder on:
- Twitter: twitter.com/RationalRemind
Visit PWL Capital: pwlcapital.com/teams/passmore-felix
Follow PWL Capital on:
- Twitter: twitter.com/PWLCapital
- Facebook: facebook.com/PWLCapital
- LinkedIn: linkedin.com/company/pwl-capital
You can find the Rational Reminder podcast on
Google Podcasts:
google.com/podcasts?feed=aHR0cHM6Ly9yYXRpb25hbHJlbWluZGVyLmxpYnN5bi5jb20vcnNz
Apple Podcasts:
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Spotify Podcasts:
open.spotify.com/show/6RHWTH9iW7hdnA7eAg7ukO?si=hjZNfLKuSjSeWX38GPqhVA
------------------