Episode Summary
Executive Summary: In this milestone episode, hosts Ben Felix and Cameron Passmore celebrate 1 million downloads and discuss a wide range of topics including an interview with Shane Parrish on decision-making rules, a book by Seth Godin on creative work, and a deep dive into dividend irrelevance theory. They also analyze a paper on small-cap investing, review a financial planning research agenda, and critique an article defending active management.
Main Topics: Podcast Milestones and Community Updates (Priority: 2/5): Celebration of reaching 1 million downloads, current monthly downloads of 100,000, and community growth to 728 users. Shane Parrish Interview Insights (Priority: 4/5): Discussion of Shane Parrish's approach to decision-making, including using rules to reduce decision fatigue and the importance of automating choices. Seth Godin's 'Practice' Book (Priority: 3/5): Review of Seth Godin's book emphasizing the importance of process over outcomes, working on one's craft, and overcoming imposter syndrome. Small-Cap Investing Research (Priority: 5/5): Analysis of a paper from the Journal of Portfolio Management on the size premium, finding no standalone premium but stronger factor effects in small caps when combined with other factors. Dividend Irrelevance Theory (Priority: 5/5): In-depth explanation of Miller and Modigliani's 1961 paper, showing that dividend policy is irrelevant to share valuation given investment policy, with practical implications for investors. Financial Planning Research Agenda (Priority: 4/5): Review of a paper outlining key areas for future financial planning research: technology, client behavior, retirement decumulation, ESG, and ethics. Active vs. Passive Management Debate (Priority: 3/5): Critique of an article defending active management, highlighting the nuances between active and passive strategies and the importance of evidence-based investing.
Key Arguments: Dividend policy is irrelevant to share valuation given investment policy, as shown by Miller and Modigliani's 1961 paper. Small-cap stocks do not have a standalone size premium; the premium comes from shorting junky small caps and combining size with other factors like value and profitability. Using rules instead of preferences reduces decision fatigue and eliminates arguments, as demonstrated by Shane Parrish's approach. The five-factor Fama-French model, based on dividend irrelevance, explains most differences in returns between diversified portfolios. Active management is not inherently bad; it depends on whether it is rules-based, low-cost, and diversified, or involves market timing and high turnover. Financial planning research should focus on technology, behavioral insights, retirement decumulation, ESG, and ethics to improve client outcomes.
Data Points: Podcast Downloads: 1 million total, 100,000 per month - Milestone achievement for the podcast, excluding YouTube views. Community Users: 728 - Number of users on the Rational Reminder community site. TFSA Limit 2021: $6,000 - Annual TFSA contribution limit for 2021, with lifetime limit of $75,500. Tesla Market Cap: 7th largest in US - Tesla's inclusion in S&P 500, with $11 trillion benchmarked to the index. Tesla Price Increase: 6-fold in 2020, 25% on inclusion news - Tesla's stock performance leading to S&P 500 inclusion. Tesla P/E Ratio: 100x 2021 forecast earnings - Valuation metric for Tesla at time of inclusion.
Pivotal Quotes: "I never have meetings before noon. That's my rule. Well, once it's your rule, everyone's fine with it. But if you say it's your preference, you decide not to have a meeting, people typically will try to challenge him." — Cameron Passmore (paraphrasing Shane Parrish): Discussion on using rules to reduce decision fatigue and avoid arguments. "Given investment policy, dividend policy is theoretically and empirically irrelevant to the valuation of shares." — Benjamin Felix: Conclusion of the deep dive into Miller and Modigliani's dividend irrelevance theory. "I don't get why a fund manager should invest in terrible companies that are basket cases just because they happen to be in an index." — Author of 'In Defense of Active Management' (quoted by Cameron Passmore): Critique of passive investing, which Ben Felix counters by explaining that bad companies can be good investments due to estimation errors.
Implications: Investors should focus on factors like profitability and investment rather than dividends. Small-cap tilts may be beneficial when combined with other factors. Financial planning will increasingly integrate technology and behavioral insights. The active vs. passive debate requires nuance; evidence-based, low-cost strategies are key.
About The Rational Reminder Podcast
A weekly reality check on sensible investing and financial decision-making, from three Canadians. Hosted by Benjamin Felix, Cameron Passmore, and Dan Bortolotti, Portfolio Managers at PWL Capital.