Brian Livingston

• Brian Livingston is an investigative journalist and the coauthor of 11 books in the Windows Secrets series, which has sold over two and a half million copies.
• He has worked in technology for multiple financial firms and written for a wide variety of computing journals, from InfoWorld to CNET.
• Years ago, Brian made the transition into finance journalism, and is the author of the new BenBella Book, Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk.
• Muscular portfolios are financial strategies designed by experts to never lose more than 18-20% in a bear market
• Muscular Portfolios is the first book to reveal which 13 index funds are the ones that go with Mebane Faber's research, and which nine index funds are the ones that go with Steve LeCompte's research.

• https://www.benbellabooks.com/
• https://muscularportfolios.com/
• https://www.benbellabooks.com/shop/muscular-portfolios/

Glenn Yeffeth: Welcome to the Building Books Podcast. I'm Glenn Yeffeth, publisher of BenBella Books. On this podcast, we will talk about ideas, authors, and how publishing really works.

Glenn Yeffeth: Okay, well, I'm thrilled to have with me today Brian Livingston. Brian is an investigative journalist and the coauthor of 11 books in the Windows Secrets Series, which has sold over two and a half million copies. He's worked in technology for multiple financial firms and written for a wide variety of computing journals, from InfoWorld to CNET. Years ago, Brian made the transition into finance journalism, and is the author of the upcoming BenBella Book, Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk.

Glenn Yeffeth: I will say, I have looked at a lot of proposals in finance. My background in the olden days is in finance, and I'm highly skeptical. Brian's was the first real deal that I saw, and I was really delighted that he agreed to publish with us.

Brian Livingston: Well, Glenn, if I may say-

Glenn Yeffeth: Please.

Brian Livingston: You actually have a master's in business administration from the University of Chicago, so you're not shabby as a financial expert, yourself.

Glenn Yeffeth: Thank you. Also, I will confess a failed PhD in finance, so I studied with some of the people you talk about in this book, Ed Franchi, Eugene Fama. Anyway, so let's jump right into this. What are muscular portfolios?

Brian Livingston: Muscular portfolios are financial strategies designed by experts to never lose more than 18%, maybe 20%, in a bear market, maybe as much as 25% in the worst crash ever, like the Great Depression or the Global Financial Crisis. What people fear is losing half of their life savings because the market suddenly crashes. Now, people don't need to fear that anymore. They can invest. They can get market-like returns, with no fear of crashes. That's a muscular portfolio.

Glenn Yeffeth: Muscular portfolios, if I understand this right, is really about the drops. It's about reducing the drops. What about your overall returns over time? Isn't that what really counts?

Brian Livingston: Yes, we are not advocating day trading. We're not advocating fast, in-and-out shifts of trading. We are advocating long-term investing. That's where you really make money. Studies have consistently shown that people who trade more make less money. People who trade the least make the most money, because they're gaining as the market is going up.

Brian Livingston: The thing is that when your portfolio has lost 30, 40, 50%, as the S&P 500 does every 10 years, on average, your performance just goes down the drain. By keeping your portfolio from crashing, by seeing it going down 18% or 20%, when the S&P 500 is down 50%, you feel great. That is a fantastic feeling that you can brag to your neighbors. You can share your happiness with your family. Watching the S&P 500 go in the tank, and your portfolio is just in a correction ... That feels phenomenal.

Glenn Yeffeth: You also point out that what happens in those crashes, even though maybe we get obsessed with stocks when the market is going up, and we want to beat the market, but what happens in those crashes has a huge effect on the overall long-term portfolio value. You talk about Warren Buffett and his use. Explain a little bit about how Warren Buffett's portfolio was [inaudible 00:03:25].

Brian Livingston: Warren Buffett must be the most celebrated investor of our time. Any investor would kill to have his performance. He has outperformed the S&P 500, I think, five, six, seven percentage points over the past 25 years. The secret, that most people don't know, is does Warren Buffett beat the S&P 500 when it's rising? Does Warren Buffett beat the S&P 500 during a bull market? Most people would say, “Yes, he's such a great investor,” but the truth is that he under-performs the S&P 500 during every bull market in recent memory. He under-performed the S&P 500 during the 2002 to 2007 bull market. He under-performed the S&P 500 during the 2009 bull market to today.

Brian Livingston: The way he has made his phenomenal gains is that the last two bear markets, he lost less than the S&P 500. His portfolio was so well-diversified that it even went up a little bit in the dotcom crash of 2000 to 2002. Keeping your losses small is something that Wall Street never tells people.

Glenn Yeffeth: Right.

Brian Livingston: Wall Street wants you to buy their risky investments. They want you to buy their mortgages or their liquid whatever, and that is how they sell junk to you. What you want, as an investor, is assets that are going to keep a level keel, go up when the market is going up, but not lose very much when the market is crashing.

Glenn Yeffeth: Right. We're going to talk more about what muscular portfolios are in a minute, but I just want to stay focused on what they mean to you, as an investor. You talk about, yes, muscular portfolios will go down less in a bear market, maybe not quite as much in an up market but, net-net, you're ahead, just like Warren Buffett might be, or has been over time, but there's also a psychological dimension, isn't there, which is that when stocks crash, people tend to make the wrong decisions?

Brian Livingston: People have a tremendous intuitive instinct to do the wrong thing in the market. That is something that we see again and again and again with statistics and with studies and with interviews with investors. We all evolved, as human beings, to jump away when we see a poison snake. That saved our lives.

Glenn Yeffeth: Right, exactly.

Brian Livingston: Your grandmother, your great-grandfather ... If they hadn't jumped, you wouldn't be here, so that serves us well, but it works terribly when you're picking stocks. The stock market moves in erratic ways that make people think, “This is going up, so I'll buy it,” and then it goes down, or, “This is going down. I can't stand it. I'm going to sell at the bottom,” and then it goes up. That is how Wall Street makes its money. That's why free markets have accumulated money, ever since the Amsterdam Stock Exchange in 1602. They've been doing this game for 400 years.

Brian Livingston: Well, we should get hip to it. We should learn how not to jump the wrong way, when we see blues in the market. Just ignore the day-to-day fluctuation. Watch your money grow. A double digit return is what individual investors have a right to expect. You can make 10%. You can make 11%. You can make 12%. The S&P 500 has made a return of 10% over the last 45 years. That's a very realistic return for people to expect, a double digit return.

Brian Livingston: What you don't get is if you see your portfolio going down 30, 40, 50%, and then you say, “I'm getting out.” It's not like your panicking. People don't feel like they're in panic mode when they're liquidating all of their stocks and switching everything to cash. Their verbal center is telling them, “You have to protect your family's life savings. You can't stand this pain anymore. You can't let your fortune go down the drain like this. You must get out now.”

Brian Livingston: It seems very logical. It seems very rational, but in fact, people who get out at the bottom of the Global Financial Crisis, for example, tend to stay out of the market for 12 months, 24 months, even more. The first 12 months of the next bull market that starts after a crash is when the biggest gains accumulate. If you miss the first 12 months, you've missed a lot of the next bull market, which this current bull market is supposedly one of the largest in U.S. history. After this long bull market, what's going to happen is a crash. That's where muscular portfolios come in.

Glenn Yeffeth: I want to emphasize, Brian, that point that you just made, because it really is so important. Muscular portfolios, based on all the data, and there's a ton of it in the book, when you, if you, get the chance to see the book, but the data all show that over time, based on being better in the bear markets, the muscular portfolio is going to be stronger than the ... let's say a buy and hold to the S&P 500. The point that is often lost is that very few people, given that the S&P 500 could drop 40-50%, very few people have the stamina to actually stay in that and not sell out. The muscle portfolio almost protects you from yourself, because the downturns are much more survivable emotionally.

Brian Livingston: Yes, how to muscular portfolios work? There are three very experienced experts, who are described in the book. Jack Bogle was the founder of Vanguard. He has chosen two different funds that match the S&P 500's return over the past 45 years, with very small draw-downs or losses. We have Mebane Faber, who wrote The Ivy Portfolio, which is a very successful book, and he has chosen 13 different low-cost index funds that people can choose from to get these kinds of muscular portfolios. We have Steve LeCompte, who's the CEO of CXO Advisory. He has chosen nine low-cost index funds that people can choose from.

Brian Livingston: You have this spectrum. You can have a very, very, very simple portfolio, with just two funds, or you can choose from a menu of nine funds or 13 funds, by staying in the funds that statistically have the best chance of going up in the next 30 days. You do really well. You get double digit returns, but you have to check your portfolio once a month. That's the cost. If you're not willing to go to the website and see what the formula says, your portfolio is just going to drift, and then it will crash.

Brian Livingston: If you are willing to spend 10 or 15 minutes a month, that's all it takes. Just look at our website, muscularportfolios.com, everything is fully disclosed. The information is completely free. It's the first website that gives away Wall Street's secret buy and sell signals at absolutely no cost.

Glenn Yeffeth: All right, so let's dig a little deeper, because I want everyone to really understand this. Talk about ... Let's just talk about what you call in the book, Papa Bear, the 13 funds. There's 13 asset classes, and how many of them would someone hold at one time?

Brian Livingston: In a muscular portfolio, you hold three low-cost index funds at all times. There's no market timing. You don't get in and out. You stay 100% fully invested in three different asset classes at all times. It could be U.S. stocks. It could be European stocks. It could be Asian stocks. It could be bonds. It could be real estate. It could be commodities, whatever is going up, at the current time, over the past 12 months. Three hundred different studies have shown that there is a statistical likelihood that those funds will go up in the next 30 days. You stay in the top three. You look at it for 15 minutes. If you don't have the three, you buy them, and then you turn off the computer, and you go outside and have fun.

Brian Livingston: It's very, very simple, very, very easy. Why don't you just buy the top, number one rated fund? Actually, the 21st century science shows that holding the top three funds makes more money and has smaller draw-downs and losses than holding the top one. These gentlemen have really done a great job of showing us, how do we diversify our portfolio? How do we use diversification to keep our life savings from crashing? That's what's new.

Glenn Yeffeth: Brian, you didn't come up with muscular portfolios on your own. You've adapted it from the latest science that's out there.

Brian Livingston: Well, I read hundreds of financial strategies. Most of them are too risky. Most of them will cost you 40 or 50% of your life savings every 10 years, every 20 years, and people can't stand it. What the book does is it shows you a clone of these three men's portfolios, and a clone means that we have made it available for free, for the public to use very easily. Mebane Faber, for example, wrote The Ivy Portfolio book. It had five different funds that you could choose from. Since that book came out, he has expanded that to 13 different funds that are low-cost index funds, and that provides a much smoother ride, a much better investment experience, but he didn't publish what index funds to use.

Brian Livingston: Muscular Portfolios is the first book to reveal which 13 index funds are the ones that go with Mebane Faber's research, and which nine index funds are the ones that go with Steve LeCompte's research. We have cloned this and created a free website, and people can go and look at it anytime. It's updated every 10 minutes while the market is open.

Brian Livingston: You can go there. Maybe sometimes there's no change from last month. In that case, you just turn off the computer, and you're done. When there is a change, you gradually use asset rotation to get rid of a fund that isn't so strong anymore. Maybe it's going down now, and you replace it with a fund that is going up. You just keep rotating into strength, and that keeps your portfolio from crashing.

Glenn Yeffeth: Okay, so there's 13 potential asset portfolios, index funds, that you could hold. You hold three of them at any one time, and once a month you rotate, based on picking the best three at that moment. What is the principle that determines what the best three is for that month?

Brian Livingston: The 21st century science is that the stock market is not perfectly random. There is a factor called momentum, which is that assets that have one up in the last 12 months have a statistical likelihood to go up in the next 30 days. That's very simple, and it's fully disclosed. There's no black box here. We're not selling any financial products. You don't have to buy our fund. It's completely open to the public.

Brian Livingston: Those funds that have the best momentum over the past 12 months ... It's not perfect. One of the three might go down next month, but statistically, you have better than chance possibility that those funds will go up in the next 30 days. Everybody on Wall Street knows this, but they don't share it with individual investors very often, because the individual investors would learn, “Why should I pay 1, 2, 3% a year to you for doing something that I can do for free on my own?”

Brian Livingston: It's like riding a bicycle. You learn how to ride a bicycle. Maybe you fall off once or twice, but then you get it. Once you've learned to ride a bicycle, why would you pay someone to ride a bicycle for you? It's crazy. If you learn the basic principles of investing, why would you pay some giant Wall Street bank 3% of your life savings a year for bad performance? They don't really do well.

Glenn Yeffeth: Banks have no incentive to reveal this information to you.

Brian Livingston: Of course not.

Glenn Yeffeth: Momentum ... This is something that I studied back when I was at University of Chicago, in finance. There's this thing called efficient markets. You said the markets aren't random, or the markets aren't efficient. Efficient markets basically means that it's very hard to pick stocks, because whatever we know about the stock's price is already, about the stock's performance, is already calculated into that price, so it's very hard to beat the market, but there is ... The biggest single thing that the academics have found is an exception to this is momentum. That's what the muscular portfolios take advantage of.

Brian Livingston: That's right. The market is not perfectly efficient. What we see is that human beings have a hurting instinct. They all like to get out of the market when it's crashing, which is exactly the wrong time to sell everything, because you're buying high and selling low, but people like to herd and buy the things that have gone up the most in the last 12 months.

Brian Livingston: Well, you're already there. You looked at the website, muscularportfolios.com, and you saw exactly what was going up, and you bought it. Then people see, “Oh, this went up a lot in the last 12 months. Maybe I'll buy some, too.” Well, that's great. Other people will always be buying what muscular portfolio's users want to sell, and other people will always be selling what muscular portfolio's users want to buy.

Glenn Yeffeth: Momentum is ... Not only do we see it in the data, but it makes sense, in terms of human behavior and human psychology, when people tend to buy things when they're going up. They tend to jump out of things when they're going down, and that's part of the tragedy of the stock market. This is why people often do worse than the overall stock market.

Brian Livingston: The new thing in the 21st century is behavioral finance. We are not walking calculators. We don't make decisions logically any more than you pick a mate by being rational and figuring it out on a piece of paper. We act on our opinions, which are based on our emotions.

Brian Livingston: In the market, people just have such a strong behavioral bias toward buying high and selling low. They buy when the market is exciting, and they sell when the market is scary. Muscular portfolios defeats that by giving you a computer formula, and you just follow the formula, because it statistically shows something you could never figure out just in your head. It shows which funds are likely to go up in the next 30 days.

Glenn Yeffeth: Now, could you have done this strategy 30 years ago?

Brian Livingston: No. There has been a tremendous breakthrough in low-cost index funds. This is called the Index Investing Revolution. You can get a fund, like an exchange traded fund, from Vanguard or from State Street or BlackRock, or many places now have funds that charge you only one twentieth of one percent a year as their fee. It's really just penny change.

Brian Livingston: You can buy the entire U.S. stock market. You can buy all stocks in all developed countries outside of the U.S. You can buy all stocks in all emerging economies of the world, with just these penny fees. It's really the first time that individual investors have the opportunity to create a diversified portfolio without having to buy 500 individual stocks. That would be crazy.

Glenn Yeffeth: Right, and so the fees are very low, but also, if you trade once a month or once every few months, the cost of making those trades is also extremely low.

Brian Livingston: Yes. Now we have brokerage firms that offer transaction-free exchange traded funds. We rate some of them in the book, Muscular Portfolios. You can even get totally free transactions if you're willing to use an app, do the trading on your phone. That can be totally free. We didn't have that 20 years ago. As a matter of fact, when the book, Muscular Portfolios, lists the exact funds that you would use to follow Jack Bogle's formula or Mebane Faber's formula, one of those funds didn't even exist until 2014. That piece of the jigsaw puzzle fell into place just four years ago.

Glenn Yeffeth: Right.

Brian Livingston: Now we have a complete pantheon, a complete collection, of funds that you can use to get global diversification. If the emerging markets are going up more than the U.S. market is, your portfolio will automatically rotate toward the emerging markets, because that's what's going up. It's really very simple. It's really very easy. We don't hide anything. It's fully disclosed. You could even use websites other than muscularportfolios.com to do the same thing, if you're willing to sit down with a calculator and figure it out.

Glenn Yeffeth: Right. That's fantastic. One of the things that I love about this book is that you've taken the cutting edge finance, that really is not very accessible, and translated it to the point that someone, in 10-15 minutes a month, can do this. Even in the book itself, we've actually done something unusual for an investment book. It's full color, filled with illustrations, charts, graphs, to really communicate these complex concepts as clearly as possible. What made you want to do that full color treatment?

Brian Livingston: Well, I manage my own personal wealth mostly using the muscular portfolios that are in the book. I have a minority of my money that is following some experimental things, which maybe will be written up in my next book, but right now those things aren't working, and the muscular portfolios have been working for 20 years. I had to prepare some kind of a document. I was going to make a 16-page booklet for the trustees of my living trust.

Brian Livingston: My father died of dementia when he was 60. My mother passed away with dementia when she was in her 80s. My family has that history. I need to be aware of that, so I've set up a living trust with three trustees. They're people in their 20s, so they will be there if I have a stroke or I become incapacitated, and my wife might not be there to help me. They would take over to manage my money, so that I could get into a nursing home. I could have care.

Brian Livingston: Now, they wouldn't be able to help me if they just put the cash into a money market fund. If you're getting 1% on your money, that's not enough to support you in a nursing home. Believe me, you don't want to be on Medicaid, because you'll be put in the cellar. You'll want to have saved enough money, so that in your golden years, you can be taken care of, and you'll have a comfortable retirement, even if you don't really recognize people anymore.

Brian Livingston: A 16-page booklet turned into a 400-page book, and now we can share it with everyone, because it explains why this has come about, why it wasn't possible to do this 20 years ago, why we have low-cost index funds now, and we didn't have them a decade ago. That is something that anyone can read. We say, right in the front of the book, you can read this whole book in 60 minutes. Just flip through the pages, look at the pictures, and read the captions, and you'll get 90% of the content. Then go back and read the text of parts that you're interested in. You don't have to read the whole thing. You could in a whole weekend. You could just go through in a nice weekend, and you would get to read chapter one through chapter 24, but you don't have to.

Brian Livingston: Just looking at the pictures, they're designed to make people understand it. They might just put the book aside and say, “I'm not going to read this chapter on taxes until I'm doing my taxes in April.”

Glenn Yeffeth: Right.

Brian Livingston: You don't have to read every word.

Glenn Yeffeth: Yeah, you've really done a tremendous job of translating this complex information. I've got a lot of authors that ... They're deep experts in a field. They're trying to figure out how to communicate to a lay public. Any advice for authors that are trying to do what you did, which is translate this complex information into something that's going to be accessible to the average reader?

Brian Livingston: Well, writing is an art. I don't know if I can really give guidance to all of the other artists.

Glenn Yeffeth: Right.

Brian Livingston: Just learning to use small words, use short sentences, use short paragraphs ... Right there, you could improve the comprehension of your readers a great deal. When you run into these two dollar words, even saying momentum, that's kind of a long word.

Glenn Yeffeth: Right, right.

Brian Livingston: We spent a lot of time. What is that? How do you use that? We found that every single ordinary portfolio that we added momentum to gained four to six percentage points of return over a 45-year period. That is a tremendous improvement with just one little change.

Brian Livingston: Now, to explain that, let's use small words. Let's keep our paragraphs and our sentences short. Let's make it easy, and not make it something that you have to be an MBA to read, no offense.

Glenn Yeffeth: In the book you had ... I just want to go a little bit deeper. You went into three different kinds of portfolios: the Papa Bear, Mama Bear, and Baby Bear. Do you want to just talk about each of those a little bit? We talked about the Papa Bear having these 13 funds. Let's talk about ... Start with the Baby Bear. Talk about that, because that's not really a muscular portfolio, but it's sort of an entry level.

Brian Livingston: Yes. Well, we have these three model portfolios in the book, and a fourth one, if you're really, really rich and you really don't need the money, but you just want to make sure it doesn't crash. The theory of the first chapter is that people are looking for Goldilocks investing. They're looking for investing that makes a good return, but it's not too risky. It's not going to crash. Just in the same way that astronomers look for the Goldilocks planet, which is not too hard, and it's not too cold, to support life, and Goldilocks went into the three bears' house, and she found one porridge was too hot, one porridge was too cold, and one porridge was just right, muscular portfolios are examples of Goldilocks investing. You get market-like returns. You get double digit returns from your portfolio without any fear of crashes.

Brian Livingston: The three model portfolios that these experts we are quoting from have developed, the two that are muscular portfolios are the Mama Bear and the Papa Bear. The one that Jack Bogle of Vanguard has been promoting for the past 25 years is called the Baby Bear, because it's not a muscular portfolio. It's what we call a starter portfolio.

Brian Livingston: Let's say that you were going to go in a sailboat around the world. You might not have Internet access for months at a time. You can't check the market every month. You are going to be in your sailboat. You're going to be paddling around the world, or sailing, hopefully.

Glenn Yeffeth: Right.

Brian Livingston: You could put your money into the two funds in the Baby Bear portfolio, and it's likely that, when you dock on the other side of the world, your portfolio would've gone up. You don't have to worry about it crashing too much, because those two funds give you diversification. If you are not sailing a sailboat around the world, and you can check your website once a month, then you should use the Mama Bear or the Baby Bear.

Brian Livingston: The Mama Bear has nine different funds. The website, muscularportfolios.com, shows you which three you should have this month. You pick a date. It could be the last day of the month. It could be the first day of the month. It could be your birthday, whatever you'll remember. You look there, and if you already have those three funds in your portfolio, because you bought them the previous month, you can quit. You are okay for the next 30 days. If one of the funds has changed, you drop one out and you add one, so that you are always holding the three that have the best probability of going up in the next 30 days.

Brian Livingston: The Papa Bear portfolio is exactly the same, except it chooses from a menu of 13 different low-cost index funds. You still buy the top three, and once a month you check. You just make sure, if the order has changed a little bit, you gradually rotate your portfolio into the three that have the best odds of success.

Glenn Yeffeth: I will personally vouch, because I put a section of my assets into most of the portfolios, and it's easy to do, and the logic of it is impeccable, and it doesn't take 15 minutes a month. I mean, it's ... Most months, or a number of months, you don't even really have to do much of anything. You're just checking. The portfolio didn't change, so you just move on.

Glenn Yeffeth: Some months, you'll find you need to swap out one for another. It's a five-minute exercise. It's very simple.

Brian Livingston: Yes. We have found, over the past 45 years of projections, that there will be a change in your portfolio nine times a year.

Glenn Yeffeth: Right.

Brian Livingston: January, February, March, May, June, July, September, October, November ... The other months, you don't do anything. You have three months of the year that you just check and you're done. You have nine months of the year that there's likely to be one change, on the average.

Glenn Yeffeth: This book is the latest of your books as an author. You've had a very successful series in the past. It's called The Windows Secrets. I'd love to hear just a little bit about that and what made those books so successful. I think you've sold over two million copies of those books. Give us a little background on your history as an author.

Brian Livingston: Yes. We sold two and a half million copies of The Windows Secrets series. My first book was in 1991, which was called Windows 3 Secrets. What I found in 1990 was that Microsoft had really made a breakthrough, that Windows 3.0 was much, much better than Windows 2.1. It had better memory management. It had fonts. It had everything that you would want, and big companies, at last, could use Microsoft Windows 3, because it wasn't a toy. It wasn't a plaything. It was a real operating system.

Brian Livingston: I wrote Windows 3 Secrets, because I was able to research into Microsoft and find the documents that they wrote for themselves, to be able to manage Windows 3.0, but they hadn't revealed it to most of the public. Windows 3 Secrets became the number one bestselling computer book of any kind in the U.S. Later editions, like Windows 3.1 Secrets, Windows 95 Secrets, Windows 98 Secrets, became the number one bestselling computer book of any kind in the U.S., Canada, UK, Australia, Brazil. It was really a worldwide thing.

Brian Livingston: Now the technology industry has changed. Microsoft is not the 900-pound gorilla anymore. Now you have Google. Now you have Facebook. You even have a lot of tech going into these smartphones, like Samsung and Apple. Microsoft is a player, but it's not the only player in the game.

Brian Livingston: Now my attention turned to the financial world. I wanted to let people know how they can manage their money and not be afraid of crashes, without paying any fees to anyone, which really never improves the performance of your portfolio. Paying Goldman Sachs 3% ...

Glenn Yeffeth: Right, it's [crosstalk 00:29:02]-

Brian Livingston: Goldman Sachs is proven to have the worst performance of any of the giant Wall Street banks, but they charge some of the highest fees. That's all in the book. We explain that. If you have your money in any of these giant Wall Street banks, get it out today, move it to a bargain brokerage where they charge you zero, and manage your money yourself 15 minutes a month, very, very easy.

Brian Livingston: The business world and the Wall Street world are 10 times dirtier than the technology industry. I've found so much dirt about the technology industry, but Wall Street makes Microsoft look like angels. It's-

Glenn Yeffeth: [crosstalk 00:29:33] examples.

Brian Livingston: The fees that hedge funds charge ... They can charge 1, 2, 3% of your life savings every year, and they take 20% of your gain. It's been calculated that the hedge funds have produced less return over the past few decades than if you just had your money in a money market fund. They have done such a poor job, because they have such high fees. When you are giving them 20% of your gain, and they're not sharing losses with you, of course-

Glenn Yeffeth: That's right.

Brian Livingston: They're taking part of your gains, and they're taking these fees every year. It's been calculated that a hedge fund would have to outperform the S&P 500 by six percentage points a year for you to just get the return of the S&P 500 after their fees. It's really a big scam, and people should know about this.

Brian Livingston: Now, there are some hedge funds that have performed extremely well, but if you take a thousand people, and you put them in a room, and you have them flip a coin five times, 3% of them are going to come up head five times in a row. Of course there are some hedge funds that have better performance, but if you look at the overall performance, there are very few real hedge fund winners and a lot of hedge funds that are just a rip-off. You just can't trust putting your money into a hedge fund, nor can you trust putting your money into Wall Street banks: the Merrill Lynches, the Morgan Stanleys, the JP Morgans, the Goldman Sachs. These places have high fees, but they're not going to give you as good a performance as the market, because their fees have to come out, and they're investing in things just like any human being. They're buying what's exciting, and they're selling what's scary.

Brian Livingston: That is not the way to invest. Long-term investors can do a much better job by themselves because, in investing, simpler is better. This is truly a place where you want the KISS principle: Keep it simple, stupid. The more simple you can make your portfolio, the more gains you can make. Anything that's complicated will be a formula that works some of the time, but not other times. Anything that's complicated is going to involve fees. Anything where you're trading, you have to pay a little fee every time you buy or sell anything in the market.

Brian Livingston: Avoiding those fees is really the key, and that's really so easy. It's not sexy. It's not like you're walking down the street taking candy from babies, but it's so easy to avoid these fees now that people just need to know how they can do it.

Glenn Yeffeth: Right, and one thing that comes across in your book very strongly is just a frustration with the way the investment system is set up and really takes advantage of the individual investor.

Brian Livingston: Yes. People have been taught, you can't do it yourself. You can't ride the bicycle yourself. Let us ride the bicycle for you. Well, people are getting hip to that. People have been taking their money out of mutual funds, which have high fees, and they've been moving their money into exchange traded funds, which are a new thing that only came out in the 1990s. Exchange traded funds have low fees. Exchange traded funds don't charge a load going in, so there's no case where you have to pay 3, 4, 5% of your money, just to invest in the fund. Those are marketing fees, and they were used by stockbrokers to push mutual funds that would pay them a kickback or a commission.

Brian Livingston: The stockbrokers liked that, but individuals, over time, learned that they don't need to pay these fees going in. Mutual funds, with load fees, have now become a minority of the market. Now we need to educate investors that mutual funds don't give you the low-cost advantages of exchange traded funds. ETFs can be traded any time of the day. You don't have to wait until midnight to find out what the price of the fund you bought was, like a mutual fund. ETFs don't have loads, going in. ETFs are very tax efficient, so you can use them in a taxable account. Mutual funds are required to declare their capital gains at the end of every year, and you pay taxes on those in a taxable account, even if you didn't sell any shares of that mutual fund. ETFs almost never declare a capital gain like that, unless you actually sell the fund.

Brian Livingston: Muscular portfolios work in a taxable account, too. If you're using ETFs, you don't have to pay tax on your capital gains until you sell the ETF. If you hold a mutual fund in a taxable account, you have to pay for the capital gains on your tax form every year.

Brian Livingston: The Papa Bear portfolio, which we talked about ... It has a menu of 13 different exchange traded funds, and a fully disclosed formula, that tells you which three are the most likely to go up in the next 30 days. The Papa Bear portfolio, the majority of its capital gains are long-term. That means you held that ETF for 12 months and one day or more. If you hold an ETF, or any security for 12 months plus one day or more, you pay a much lower capital gains tax rate, which could be zero, could be 15%, or it could be 20%.

Brian Livingston: Right now, the top bracket is around 39%, so you see how much you can save on taxes if some of your investments are long-term capital gains. You've held them for more than 12 months. A lot of investing strategies completely pretend that taxes don't exist. I can't tell you how many books I've read. I can't tell you how many academic studies I've read. This study ignores the effect of trading costs and taxes.

Glenn Yeffeth: Right.

Brian Livingston: Well, trading costs and taxes ... That's the whole thing. That's how your performance goes down the drain. You can't ignore taxes. You can't ignore trading costs. That has to be included in there, so I just throw the book away.

Glenn Yeffeth: Right, now in muscular portfolios, how often, on average, are you holding things for 12 months plus, because there is a certain amount of trading that you're doing?

Brian Livingston: Yes, you're changing your portfolio, with a muscular portfolio, about nine times a year. Three months of the year, you do nothing. The other nine months, you sell one ETF, and you buy another one that has better odds, according to the computer. The trading is calculated on the amount of money you made on capital gains.

Brian Livingston: When you have a capital gain, over the last 45 years of simulations, was that made by selling something that you held for more than 12 months, or was that gain made by something that you sold in less than 12 months? We just calculate that. It's the first time that I've ever seen an investing book that shows you exactly how much you would pay in taxes if you followed the Papa Bear portfolio, the Mama Bear portfolio, or any muscular portfolio.

Brian Livingston: This simply can't be ignored. Everyone doesn't have all of their wealth in Roth IRA accounts. People have a lot of their wealth in the bank or in a brokerage fund that is taxable. Well, you have to take taxed into account. What we've found is that people who are in the lower tax brackets, which are now 10% or 12%, those people don't have to worry about paying taxes on a muscular portfolio at all. They'll lose less than one percentage point a year of their performance, even if they keep their muscular portfolios 100% in taxable accounts.

Brian Livingston: The people who are in the highest tax bracket do have to worry about how much they're going to lose to taxes, and they may want to use an advisor, but we're talking about people who make more than $450,000 a year. That is one half of one percent of the American population. If you and your household make more than $450,000 a year, you should have a tax advisor. If you make less than $450,000 a year, forget about it.

Glenn Yeffeth: Now, one of the things that so impressed me about this book is the range of knowledge levels it's designed to appeal to. Like you said earlier, you could take an hour, go through, read the captions and the pictures and get the gist. At a deeper level, in a small amount of time, you can learn enough to really apply this fully, but there's also a lot of information out there that is relevant and of interest to a PhD student in finance. I mean, there's a lot of tour through the academic theory of finance. Talk a little bit about your motivation for including that and what your thoughts are about that.

Brian Livingston: Well, the book, Muscular Portfolios, has a flow. If you just read chapter one, you'll get a tremendous amount of information about what not to do, as an individual investor and, more importantly, what you should do. Here's how we invest, in the 21st center, now that we have this knowledge, and how individuals can use it.

Brian Livingston: We have packed into the back of the book a lot of history about why did these portfolios grow up in the 1970s, the 1980s, that have been shown not to work. They've been shown to crash. They hurt individual investors, because we, human beings, can't tolerate our life savings going down 40 or 50%. We bail out, and then we miss the bounce that happens at the next bull market.

Brian Livingston: The fact is that the academics who won the Nobel prize in economics in the 1980s and the 1990 ... Their formulas were wrong. The people who won the Nobel prize in economics in the 21st century ... They have proven that these other formulas are better. You should ignore what they said in the 1970s. You should do what the experts have found in the two thousands and the two thousand teens. You see a tremendous advance in behavioral finance, in understanding that we don't simply make the most rational choice when it comes to money. Anytime we are confronted with numbers, our brain checks out and turns the decision-making over to lower parts of the brain that just guess, and then they use the verbal center to tell us, “Oh, this is the most rational, logical decision.”

Glenn Yeffeth: Right.

Brian Livingston: Well, so we're constantly going around. Think about the cars that people buy. Think about the houses that people buy. These aren't rational decisions. These are our opinions. These are our emotions making us make these expenditures. Much more true in the stock market, we just are a victim of our desire to jump away from the poisonous snake, the desire to hide from the tiger. That rules us, but we're not aware of it, which makes it much more dangerous. We're not conscious of the way in which we jump to conclusions about money, and then we are disappointed later on to find that we bought something that's going to crash, or we didn't get out of something that's going to crash.

Brian Livingston: You need a computer formula. To overcome the behavioral biases that we have, we have to think about what if we were invited to win a million dollars by playing against the world's greatest chess grandmaster? Well, if you somehow were drawn out of a hat to play the world's winning chess grandmaster, would you guess the moves that you're going to play? No, you would use a supercomputer, and the supercomputer would say pawn to king 4, or whatever, and you would just do it.

Brian Livingston: You know that you can't possibly beat the grandmaster, but the computers beat grandmasters all the time. That's because the computer just calculates much, much faster than our human brains can do, and it will calculate the same problem the same way every time. We are very opinionated. We're very emotional. We don't think we're emotional, but all of our decisions are based on our entire background, so if you're playing against the biggest gamblers in Wall Street, do you want to guess what to buy and sell, or do you want to use a computer. Obviously, the best solution is to use a computer, play the odds, buy the things that have the most likelihood of going up in the next 30 days, and don't try to outsmart these Wall Street supercomputers.

Glenn Yeffeth: Right, all right, very well said, Brian. Brian, if people want to learn more about you or follow you, where can they go?

Brian Livingston: The website is muscularportfolios.com, and the book, Muscular Portfolios, is at Amazon, Barnes and Noble, every place. It's something that ... I hope it doesn't sell out, but they'll print more if the bookstores are sold out.

Glenn Yeffeth: We'll keep printing them. We'll print as many as people want to buy. My bet is it's going to be quite a few. All right, well, Brian. It's been a pleasure to have you.

Glenn Yeffeth: Brian ... Just to sum up, the author of Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk, out this month, and very excited to have you. Thank you, Brian.

Brian Livingston: Thank you.

Glenn Yeffeth: Thank you for listening to the Building Books podcast. If you enjoyed it, please leave a review on iTunes or wherever you happened to listen to it, or share it on social media. If you're an author, who wants to submit a proposal or pitch to BenBella Books, please go to benbellabooks.com, click on the For Prospective Authors button, and it'll lead you through a little form that makes it really easy to submit to us. Thank you.