Jason and Bob interview Dr. Cloonan regarding his new book, Investing at Level3.

James B. Cloonan earned his MBA from the University of Chicago and his BA and Ph.D. from Northwestern University. After teaching for several years in 1974 he helped found and served as CEO of Heinold Securities, a brokerage firm specializing in derivatives. He returned to teaching and began the preliminary work leading to the founding of the American Association of Individual Investors in 1978. He is currently Chairman of AAII an organization providing support, education and information to individuals who manage their own investments. It currently has over 160,000 members.

He has served on the Consumer Advisory Council of the National Futures Association, the Advisory Panel on Securities Markets and Information Technology of the Congressional Office of Technology Assessment, the NASD Special Committee on the Quality of Markets, the New York Stock Exchange Panel on Market Volatility and Investor Confidence, the Chicago Mercantile Exchange Financial Instruments Advisors Committee, the New York Stock Exchange Individual Investors Advisory Committee, The Consumer Affairs Advisory Committee of the Securities and Exchange Commission and other industry and regulatory panels.

Dr. Cloonan is also the author of books and articles on investing and writes a series of columns for the AAII Journal. He created and manages the Shadow Stock Portfolio, a real portfolio, which has realized an annualized return of over 15% for the past 23 years. He lives with his wife Edythe in Chicago.

To get the special price on Dr. Cloonan’s book visit: www.aaii.com/level3


Below is the full transcript:


Announcer: Welcome back America to Sound Retirement Radio, where we bring you concept, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. Now, here is your host, Jason Parker.

Jason: America, welcome back to another round of Sound Retirement Radio. I’m so excited to have you on the program this morning. This is going to be a great one. We’ve got an excellent guest lined up for you. Before we bring our guest on, as you know, I like to renew our minds, and I think the best way that we can do that is with a verse. Bob, we had a verse, Jeremiah 29:11. Do you want to go ahead and share that one?

Bob: “For I know the plans I have for you,” declares the Lord,” plans to prosper you and not to harm you, plans to give you hope and a future.”

Jason: Awesome.

Bob: This is something we all need right now.

Jason: Absolutely. The one is we like to share a joke with our listeners, and so I’ve got a joke here for you. Something to share with the grand kids if you’re going to go visit with them this weekend. Bob, why do divers fall backwards into the water? Divers, guys that are diving in the ocean. Why do they fall backwards into the water?

Bob: Jason, I don’t know.

Jason: Because if they fall forward, they would fall into the boat.

Bob: Wow! That’s a very logical joke!

Jason: Wait. Let me give you one more then. That one might be dumb. This one is probably just as dumb. What’s the difference between a hippo and a Zippo?

Bob: I have no idea Jason.

Jason: One is really heavy, and one is a little lighter.

Bob: Ba dum tss!

Jason: All right. Here we go. Folks, you’re listening to episode 112. If you’re driving down the road in the Seattle area this morning, I want to remind you that all of these programs are archived for you online at soundretirementplanning.com. We also transcribe them for you. Today, we have the very good fortune to bring Dr. James Cloonan on to the program to talk about his new book, Investing at Level 3.

 Dr. Cloonan was the founder of the American Association of Individual Investors, or which I’m a lifetime member, so it’s really a good fortune for me to have him on there. We’re going to share his official bio, because some of you may not be familiar with Dr. Cloonan. Bob, will you share his official bio here?

Bob: Absolutely. James B. Cloonan earned him MBA from the University of Chicago, and his BA and Ph.D. from Northwestern University. After teaching for several years in 1974, he helped found and serviced as CEO of Heinold securities, a brokerage firm specializing in derivatives.

 He returned to teaching and began the preliminary work leading to the foundation of the American Association of individual investors in 1978. He is currently chairman of AAII, an organization providing support, education, and information to individuals who manage their own investment. It currently has over 160,000 members.

 He serves on the consumer advisory council of the National Futures Association; the advisory panel on Securities Markets and Information Technology of the Congregational Office of Technology Assessment; the NASD Special Committee on the Quality of Markets; the New York Stock Exchange panel on Market Volatility and Investor Confidence; the Chicago Mercantile Exchange Financial Instruments Advisers Committee; the New York Stock Exchange Individual Investors Advisory Committee; the Consumer Advisory Committee on Securities and Exchange Commission; and other industry regulatory panels. Wow!

 Dr. Cloonan is also the author of books and articles on investing and writes a series of columns for the AAII journal. He created and manages the Shadow Stock portfolio, a real portfolio which has realized an annualized return of over 15% for the past 23 years. He lives with his wife, Edith, in Chicago.

Jason: Dr. Cloonan, welcome to Sound Retirement Radio.

Dr. Cloonan: Thank you very much Jason. Good to be with you.

Jason: This is a real honor for me to have you on the program; I’m a lifetime member, like I said, of AAII. Dr. Cloonan, do you like how I gave Bob the heavy work there of going through your bio? That’s a pretty impressive bio.

Dr. Cloonan: Yes. A lot of these membership are something that [inaudible 00:04:16] give them a day every month or something, but they weren’t full time jobs fortunately.

Jason: Yeah. As we get started … I want to start out with your new book, Investing at Level 3. Will you share with our listeners why you wrote this book?

Dr. Cloonan: It came from a lifetime of looking at things in the market. Actually, I started to write the book previous to what I thought would be my retirement, maybe five or six years ago. The ideas came before the 2008 catastrophe. After that, I thought maybe I wasn’t looking at the market in the right way. A lot of what I was thinking about was things that other people say all the time, or they come from modern portfolio theory.

 It occurred to me that something was wrong with the way we were looking at, particularly, risk, but also how we invest, and that modern portfolio theory, instead of helping us, was, maybe at this point, leading us to astray. I’ve changed the nature of the book, and Investing at Level 3 tried to move beyond the current thinking in terms of what investments will provide the best return. Also, how we look at risk in a real way.

Jason: Yeah. That’s great. A couple of things I want to talk about as we talk about risk, because this is something that you really … Your book has really shaped my thoughts on. That is the idea between real risk and volatility, and how the investment world looks at volatility and risk versus how you talk about volatility and risk. Will you speak on that for a minute?

Dr. Cloonan: Sure. Volatility is the traditional measure of risk, and we measure volatility in standard deviation succinctly. Assuming we have a normal distribution of returns, the average would be 10, and then the distribution would go around that average.

 For the long term investor, this doesn’t really represent anything. First of all, there’s the problem with the measure itself. We all know that an average isn’t a very good description of anything. We talk about the mean return, which is 10%, and then we talk about the standard deviation, or which is the average … The average distributions around that mean. That, once again, is just an average.

 We have all these information and data about what prices have been, and returns have been through time. Now, we want to sacrifice all that information with just two numbers, the mean return and the standard deviation around it. We give up all those little variations in the smoothness of the curve. We also give up the order that the returns occur in. Now we know that momentum, or most of us believe that momentum has an impact on returns, and we give up the order. We give up the ability to consider momentum when looking at volatility that way.

 Even if we found a better way to measure volatility including the [inaudible 00:07:39] or the problems with the ends of the distribution going out, we [inaudible 00:07:46] does it really make any difference to a long term investor? Giving the assumption that the market always comes back, which is a reasonable assumption I guess. In the United States, if you lose a war, maybe that wouldn’t be true. It has been true since the Civil War, and we’ve averaged 10.4% return on stock since the Civil War and it probably is going to go on.

 If you have that assumption, then why do you care about volatility? It looks pretty. It jumps up and down, but you can pretty well ignore it, at least until the time when you have to start to withdraw money, and then short term volatility comes more important.

Jason: Then it becomes real risk, like you talked about. I want to just share a quote from your book, it says, “My view of real risk not short term volatility, but rather the possibility that the assets we expected to have for consumption will not be there we need them.”

 One of the things we try to focus on here Dr. Cloonan at Sound Retirement Radio, a lot of our listeners are getting ready for retirement. While they still consider themselves long term investors, because they may have 20 or 30 years in retirement, at the same time, they’re a little bit concerned about market volatility, because they are going to have to, in many cases, start consuming those assets. I want to ask you your opinion on how somebody that’s getting ready to retire right now, today, how do they deal, or what’s the best strategy you think for dealing with the short term volatility for somebody heading into retirement?

Dr. Cloonan: I think you look at how long the market can be down substantially before it returns, and then you want to have the money that you will need in that number of years in safe investments. We use the example, and I think it’s a pretty good one of keeping four years. Sometimes, market 1970 and 2008 may have run happy or longer than that. If you have four years out there that you can draw on and take without selling your stocks at the bottom, then I think that provides sufficient safety.

Jason: The other question I really wanted to ask you here, because I know you’ve done a lot of research and a lot of this research has shaped your own investment practices. We talked about the returns from the shadow stock portfolio that you’ve been overseeing for a long time. For the past 23 years you’ve averaged over 15% return. If you were to just boil down maybe other than, obviously, small cap stocks and value stocks as being these anomalies in the markets, what are some of the … What’s some of the analysis? What are some of the most important components when building a portfolio that’s been able to outperform like the one that you’ve been managing.

Dr. Cloonan: The two things you mentioned account for quite a bit of it that is small. Small and microcap stocks have just outperformed over a very, very long period of time. They have their ups and down relative to large cap stocks, but long term they simply do better. That is as quite a bit of impact. The other one, as you mentioned, value. Value stocks have outperformed what is called growth stocks. The strange thing is the way most people look at value and growth stocks is … They look at the stocks that don’t have value and say they must be growth.

 The decisions as to what’s growth and what’s value, is based on value. Those that don’t have value are called growth under the assumption that if they don’t have value, there must be some reason people’s buying is … People are buying them, and that is because they are going to grow. There is no real measure of growth in that sense.

 A lot of people use momentum, which is another kind of growth. Stocks that are moving up in the last six months, one year, are considered momentum stocks and there is indications that momentum tends to continue until it ends, of course, but it tends to run at least two years on average, most of the research shows.

Jason: That’s fascinating. Overtime … In your book you talk about some of the different ways that you see our industry recommending people invest. I’ll just share with our listeners a couple of quotes here from your book. You say, “Fundamental analysis has been largely ineffective in obtaining above average portfolio returns in real world applications.” That was one piece. That is based fundamental analysis.

 Over on technical analysis, you say it’s broadly defined as the attempt to find stocks who provide above average returns based on their historical price movement and trading volume. You talked about momentum being a component to technical analysis that may be effective. Then you go on to say, “I have never seen a fund or even a portfolio that is governed primarily by charting produce long term results even equal to market averages.

 Just in that first chapter, you take both fundamental analysis and technical analysis and you put them both aside. What’s the best way for investors out there trying to earn market like returns, or maybe even above market returns. What’s the solution?

Dr. Cloonan: One way and probably the simplest way to get a little bit than average is to simply take advantage of value and size. You can take advantage of those … And I discussed it later in the book, using equally weighted portfolio of the SMP. Rather than a portfolio that’s weighted by the size of the companies that are cap weighted.

Jason: There’s a great thing I want to just hit on. Cap weighted versus equal weighted. I don’t know if a lot of our listeners understand what that means, but when they buy an index fund, most of them are buying cap weighted funds. Why is that relevant or important?

Dr. Cloonan: When you use equal weighting, you give more weight to the small and value stocks than you give to the others. As compared to cap weighting, which weights it only on capitalization. You get a bit of the benefit of value and a little bit of benefit of size by doing that. It’s substantial. I think it’s going to run 2%, but they rebalance and that takes away a little of the advantage.

 If I were running a fund like that for myself, I would not rebalance quarterly or even semi-annually. Probably, once every two years is enough, and you would save all that expense from changing the portfolio to rebalance. That’s the first thing.

 The other … There’s been a lot of research on different aspects. Almost all of them have to do with some different measures of value and some have to do with safety. Although the safety ones don’t turn out to be as dramatic in the research that I’ve examined as the ones that are based on trying to find aspects of value that are important. In the book, I quote a lot of people on a lot of research that’s done on different variables.

Jason: When it comes to your approach, because you talked about level 3 investing. You talk about level one investing as the individual investor that’s trying to play the market, get in and out using emotions or something that isn’t effective.

 Level two investing would be more of your person that’s allocated modern portfolio theory, the efficient market hypothesis and they’re broadly diversified. What I found interesting about level 3 investing for the person that doesn’t want to take an active approach, you had what you call the plan Z approach. Will you take a minute and talk about that?

Dr. Cloonan: A passive approach is for people that really don’t want to be involved and are in basically index funds now, but they’re in cap weighted index funds and they tend … The SMP, you have not only as a cap weighted, but it’s only the top 500 stocks. I think you can pick up … Still be a passive investor, but pick up a few more index funds that are more balanced across size and value, and that I feel should provide additional return of 1-1/2 to 2% a year, which is quite significant amount over a lifetime. All that without being involved in the day to day market.

Jason: I want to remind our listeners as you’re turning in here, Investing at Level 3 is Dr. Cloonan’s new book. Dr. Cloonan, if people want to pick up a copy of your latest book, what’s the best way for them to get that?

Dr. Cloonan: The best way is at our website, aaii.com/level3, and that will take them right there. We have a toll free telephone number, 1-800-428-2244.

Jason: That’s great.

Dr. Cloonan: It’s supposed to be $33, but it’s going to be $29 because we have this program prior to the first of November and our computer is still setup for the member price to 29. People calling before the first of November even if they are not members can get the book for $29. That includes a website that has updates constantly in charts to help people understand and to set up plans.

Jason: Okay. One of the things I thought was interesting, and when I saw the e-mail come out to the AAII members saying that your book was available, I immediately bought it, because I knew that you have a lifetime of wisdom and a lifetime of investing experience. I wanted to plug in to that, and so I want to encourage our listeners, if you’re not familiar with AAII or Investing at Level 3 wisdom, you’re never going to regret an education, an investment in education. Even if you disagree with Dr. Cloonan, I think it’s important that you read about what he’s learned over his lifetime.

 Dr. Cloonan, am I correct in understanding that you’re actually getting ready for retirement?

Dr. Cloonan: Yes. Actually, it started, but I’m doing it gradually. I’m down to two-thirds time now and next year, it will be one-third, and then after that I think I’ll be around long enough just, assuming that the book is a success, to work on the next version of it, and then I can disappear on the sunset.

Jason: All right. One of the big concerns right now for people that are getting ready to retire, is the stock market seems expensive based on things like Robert Shiller’s CAPE ratio, cyclically-adjusted priced earnings. If somebody’s getting ready to retire today, should they have a high degree of confidence that the stock market is going to continue to produce the returns that are needed?

Dr. Cloonan: It is near on all time high, but there’s quite a bit of disagreement one way or the other about whether it’s overpriced or not overpriced, and that’s a very hard thing to guess. Earnings can turn around in a hurry and make things a lot better. On the other hand, we have an election coming up and a new congress, and life is always dangerous when congress is in a session. We don’t know what impact that might have on the stock market.

 I think you have to take a long term view. Even if you knew there was a disaster coming, a lot of people feel that the market can run at 50% before it collapses. You’ve missed out on all that. It’s very, very difficult too. I think you have to go with the long term averages.

 The CAPE ratio has helped sometimes, but predicting market turns has been very, very difficult and not many people have been very successful at it. I don’t have a lot of faith in the different approaches to doing it. It makes a lot of sense to think there’s things about the economy that cycle … But they don’t cycle at exactly the same time all the time, and I think a number of people point it out, “If you miss the five best up-days of the year, you’ve lost almost the entire value of the year.” It’s always dangerous to be out of the [line 00:21:05] as it is to be in it sometimes.

Jason: When you look back historically at other markets, if we take for example in Japan, or even here in the United States, we look at the NASDAQ, or the NKE, should investors be concerned that it’s possible that the markets could under-perform for a long period of time right at the same time they’re retiring?

Dr. Cloonan: I think it’s possible that it could. It depends on how long a period of time we’re talking about. Our suggestion that you’ve put away, you have four years of needs put away in safe investments should cover almost all of that. In the book, I do show that you have these other risks, but they’re not as much as we think they are. We get fearful … I guess one of the basic things is we think of the market collapsing and we think, “Gosh! The market went down 40%.” But the market didn’t go down 40% for you, only the parts you have to withdraw went down 40%. That’s a big difference, and a different fresher way to looking at it.

Jason: That is a refreshing way of looking at it, and you talk about this idea of ghost risk. Real risk and ghost risk. What’s ghost risk?

Dr. Cloonan: Ghost risk is a volatility that doesn’t matter. You can have volatility, say, every year of a certain level. It’s just there. You look at it, like waves on a lake shouldn’t bother a good boat, or if they’re just trivial waves and they’re always there. What you do have to worry about is a tidal type wave, but that is not measured by standard deviation, or by the usual measures of volatility.

 There’s no reason … You can have a certain level of standard deviation; it could come from virtually no movement and then one great big movement. It can come from small movements all the way, and there’s a big difference between those for most people.

Jason: Almost. Dr. Cloonan, we’re almost out of time for the radio, but you had agreed to do a little bonus for our podcast listeners. We’re going to keep this conversation going. We’re going to talk about the deficit. We’re going to talk about fixed income and bonds. For our listeners this morning, I want to remind you, you’re listening to episode 112. I’ve got Dr. Cloonan, James Cloonan on the program. His new book is Investing at Level 3. We will put a link to the book purchase site. If you want to buy Dr. Cloonan’s new book, it will be available. Dr. Cloonan, thank you for being a guest on Sound Retirement Radio.

Dr. Cloonan: Thank you for having me Jason.

Announcer: Information and opinions expressed here are believed to be accurate and complete. For general information only and should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program.

 Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subjected to claims paying ability of the company. Investing involves risk.

 Jason Parker is the president of Parker Financial, an independent fee based wealth management firm located at 9057 Washington Avenue Northwest, Silverdale, Washington. For additional information, call 1-800-514-5046, or visit us online at soundretirementplanning.com.

Jason: All right, Dr. Cloonan, we’re back. This is the special extra bonus for our podcast listeners. I wanted to transition in this whole idea of deficits spending in our country. We’ve got this national debt that’s now over $20 trillion. What are your thoughts about how that could impact stock investors going forward, or is there any impact?

Dr. Cloonan: Historically, I guess there hasn’t been. We’ve been far in debt many times, although the rate of growth now is scary. I don’t know the way out of that, the market seems to be ignoring it at this point, either from hope that have changed, or the feeling that going into debt [inaudible 00:25:39] matter. There are some arguments that it doesn’t make that much of a difference as long as it’s some reasonable amount. However, we’re getting … Where the cost of the debt itself, the interest rates on the debt starts to become a very large part of the annual, or the biannual budget.

 I think there’s a concern there. I don’t really know what you can do about it, or to know what impact it’s going to have on the stock market, or the bond market.

Jason: Okay. The other thing is, historically, a lot of times, 15, 20 years ago when people are retiring, they would just go and they would plunk money into bonds, and they would just live off the interest income that was being generated and they would never really touch the principle. Today yields on tenure treasuries, or less than 2%; 30 year treasuries, or less than 2-1/2%. Are bonds a bigger risk today than stocks in your opinion given we’ve been in this zero interest rate environment for so long?

Dr. Cloonan: You should open the book. I’m not much on bonds. I don’t see the reason to buy bonds. They don’t produce the returns that stocks do, and there’s no reason that I can see for people to be in them. Now, I’m not talking about short term bonds, four year bonds, five year bonds, one year bonds are I consider in my group of safe investments for people to put their money in.

 Long term bonds, I don’t know why people would buy them, but people do. In analyzing today’s … There’s something very important, I think, that we overlooked when we look at the rates we’re getting today. The rates you get on safe money today may be the best you’ll ever get in your lifetime.

 When we try to estimate what people can safely withdraw from a retirement portfolio, for example, we say, “We’ll take whatever the average interest rate is,” say, 10%, “you have in stocks,” and you give the government 20% of that so you have 8%. You have to put away 3% for next year’s inflation. That gives you 5% to spend.

 Look what happens when we look at short term today. Let’s say you’re getting .3% in a money market fund. The government takes none of that. You have to subtract from … I’m sorry. I should have said that’s 3.2%. If you’re getting 4%, I’m mixing up my average with what the situation is today. The average situation would be a 4% return. You would get 3.2%. You put way 3% for inflation and you have a little bit, .2% to spend. That’s your safe money, you’re not counting on that.

 If you look at what it is today, and you look at the real rate of return, you don’t have to save that 3% today, because there is no inflation. You can add 3%, withdraw 3% more from your portfolio in addition to the .2% you’re getting. That makes it a pretty good return, and the government is taking virtually nothing.

 If the inflation is 9% and you’re getting a 10% return on short term [safe 00:29:10] things as we have seen over the years on several occasions, then the government takes 20%. Then you have to take out the amount for inflation and you wind up with a negative return.

 If terms are low, your real return is higher than it’s ever going to be, because you avoid government taxes. I know it’s hard for people to realize they get that extra 3% by being able to take it out of their capital because the inflation doesn’t require that that be there for the capital. That’s a different way to looking at it, that it’s really not so bad when you have 1% interest rates, or 2% interest rates. Assuming inflation is the reason that that’s occurring.

Jason: In your boo, when you talk about the passive approach to level 3 investing, instead of using the active approach, the passive approach where, for example, you point to that Guggenheim ETF that’s equally weighted to the SMP 500. At the same time, you’ve talked about value stocks and small cap stocks being the big winners overtime. Why does your passive approach avoid small cap stocks in that sense?

Dr. Cloonan: I don’t want to avoid small cap stocks; I think there’s a real benefit. I have a problem with funds that have them. It’s very, very difficult for a fund to run a small cap portfolio for several reasons. First; to buy any quantity, you push the bid ask price significantly and that reduces the long term effect.

 Worst yet, in crisis, in down markets, a lot of the [planned 00:30:49] holders will panic and try to sell. Trying to sell small cap stocks in a descending market creates a real panic and drives them down further.

 Those people that invest in the fund of looking for the long term are hurt by the people that are trying to get out of the fun, even though they are sticking with it. I think that is harmful and it’s hurt small cap funds. There are few that stays small enough that they avoid these troubles, but they’re all closed almost immediately, or they’re the ones that require a million dollar minimum investment.

Jason: There’s so much controversy out there about the right way to construct a portfolio that’s going to sustain people through retirement. Here are some of the things we hear people say. Some people say, if you’re going to be really conservative, that you purchase an immediate annuity contract and you allow the insurance companies to take on mortality risk and generate cash flow that way.

 Some people believe that you take a total return approach to retirement where you have modern portfolio theory, efficient market hypothesis. You have this broadly diversified basket of stocks and bonds, and then you use the 4% withdraw rule.

 Other people say you use a time segmented strategy, and that’s what we’re probably the most in favor of, where you have different goals for the money based on when you’re going to need the asset. Like you talk about, short term money is going to be your safe money, your withdraw money. The more time you have, the more risk you can afford to take with the portfolio.

 There’s a lot of different competing ideas out there, and yours is pretty radical. You’re not a big fan of bonds. You’re a big fan of small cap stocks, where there can be a lot of volatility out there. How does the average investor cut through all of these noise to figure out what’s going to be the best approach to them, and what are your thoughts on some of these different approaches?

Dr. Cloonan: First of all, I think it’s important that people take their own view points into consideration, particularly their fear of risk and don’t do anything wilder than they can comfortably live with. You can come up with all kinds of theories that show you can make more money by doing this. If you don’t need the money, there’s no reason you should lose sleep over how much money you’re going to leave to your heirs.

 Despite what I say is being the optimal thing, the optimal thing for any individual will change based on their own attitudes about … And fears of risk. I think the market comes back quickly enough in most cases, that four years of protection is enough. Even if you hit one of the times when it might go to five years, then the little bit you lose out of your portfolio is overwhelmed by the amount you give up by being out of equities.

 The equity premium puzzle [inaudible 00:33:50], as it’s called by people in the profession and academia, is a realization that stocks pay a higher return then they really should based on the risk. It’s like flipping a coin with someone and it gives you two times whenever you win and you only have to pay them one time when you lose. Nobody can explain why this exist, but it’s existed for almost all time and it continues to exist probably based on a lot of people’s fear of volatility. It’s just a shame to give up this … This is the real free lunch in investing. Equities pay more than they should based on the real risk involved. That’s even an academic type of risk.

 If we talk about our type of real risk, then the premium, the benefits you’re getting from equities is even more. Again, if you can’t live with some level of risk and you can’t sleep with it, then you have to adjust to whatever has to be adjusted so that you can live comfortably and not be awake with nightmares.

Jason: What are your thoughts on annuities?

Dr. Cloonan: The concept is wonderful. If they were done properly without the high cost. Typically … The typical annuity is there’s so many fees built in. There’s an initial fee for the salesman that’s built in to it, and then if the annuity goes and uses mutual funds at the company that’s providing the annuity carries out, then you’re paying fees for that too.

 It’s a shame that someone hasn’t come out with a … We’ve got [inaudible 00:35:33] as commissions are coming down in other areas, expenses in mutual funds are coming down. Someone’s going to click on to an annuity that’s reasonably priced. I think it’s the ideal way to avoid risk, at least for part of anyone’s investment.

Jason: What about … You hear all these doomsdayers saying to buy gold. What are your thoughts about buying gold?

Dr. Cloonan: I’ve never been a gold bug. I think that any commodity, gold, or other commodities, go up and down in price. They don’t have to have intrinsic value like a building that you rent out as money coming in or stocks may have dividends. You’re betting on the future price, and there is nothing built into gold that makes it have intrinsic value. There are some used for jewelry, and people like it. Most of it is speculation and the believe that it is a currency that will hold its value when other things collapse. I just don’t see any growth.

Jason: You also mentioned … I really appreciate taking this extra time Dr. Cloonan. I want to remind our listeners that are on the podcast, we’re going to have a link to Dr. Cloonan’s book, Investing at Level 3. He’s got a lifetime of experience. You’re going to want to plug in to this knowledge and this wisdom.

 Dr. Cloonan, in your book, you spoke pretty harshly against options. What are your thoughts about using options to try to protect a portfolio, or to earn a fair rate or return there?

Dr. Cloonan: The expenses. Once again, it’s the expenses. I came up from the option direction. There are a lot of ways to use options preferably if you really understand what’s happening. It’s very, very difficult to find options almost any stock. The top act of stocks will have very tight bid-ask spreads, and some of the industries will have tight bid-ask spreads.

 You look at, say, some stocks you want to like to buy, even if you have inside information, you go to buy it, and you see that it’s $2 bid and 250 ask. You’re talking about 20%. No matter how good a strategy you have, if you’re giving up 20% of the top. You might be able to do better than that. If you’re dealing with the current options and very liquid stocks, it’s just the expense that’s too much. A lot of buying is tremendous, because the commissions are high. You get all these hype on which you can do with options.

 You look at closing prices and you see all these deals that you can do, but then you can’t get them. There’s a bid-ask spread, and options don’t trade as regularly as stock, most of them. The last price you see may have been an hour before the close, and the bid-ask now is totally different, and so you can’t do that spread that looks so wonderful.

Jason: The other thing just real quickly, and then maybe we’ll wend on this. It may be … I have one more question for you. In this really low yield environment, we see people reaching for extra income in a couple of different places. Obviously, going to junk bonds, high yield. Also looking at things non-traded REITS and master-limited partnerships that are promising 6%, 7%, 8%, 9% yields. What are your thoughts about those types of financial vehicles? Non-traded REITS, master-limited partnerships, and high yield bonds.

Dr. Cloonan: I have no problem with them at all. They’re equity like, and the kind of thing that you can invest in on the same basis as you invest in stock, but they are not safe investments. That’s not where you’ll put your 20% that you might need over the next four years.

Jason: Okay. You like them for the equity-like returns, but definitely don’t think of them in terms of safety.

Dr. Cloonan: No. They’re not safe. They go up and down dramatically, and then they had a big collapse not so long ago. Even with people reaching for yield, they’re still not performing all that well. You can find ones that have current returns that are very high, just from the risk that they may change their dividends, or their payout, and then their price will drop dramatically.

Jason: Dr. Cloonan, you have been an educator for a long time helping individual investors around the United States of America, for sure. Like you said, 160,000 current members, of which I’m one. Bob, I haven’t given you the opportunity to be able to ask many questions. Is there anything you want to ask Dr. Cloonan before I ask him my last question?

Bob: Actually, I think you’ve said it all. I really appreciated what you’ve shared. In fact, I became a member last night. I just thank you for your time and your wisdom.

Jason: Dr. Cloonan, big picture now. It’s all said and done. Your time is over. As we stand, your family, your friends, your co-workers, stand at your funeral, and they remember who you were, what’s the most important thing? What do you hope they say about your life and your legacy?

Dr. Cloonan: I won’t be able to listen to it, but I guess I would like to think that it would be nice, that I made some contribution. It’s very difficult to think of legacies. I would like to think that people felt that I made a contribution. I do get an awful lot of letters from people that say I help with their grandchildren through college. I hear that and that makes me feel very good. I just wish the quantity of people that I’ve helped was larger than I know it is, but I’m grateful that I have helped some people.

Jason: All right, very good. Again, we appreciate the work you’re doing. Thank you so much for your book and thank you for the years of service. Any parting words of wisdom you’d like to share with our listeners before I let you go?

Dr. Cloonan: Just … We get back to the main thing of the book, is the risk. Think of risk and what you’re paying to avoid it, and make sure that there’s a balance between the risk you’re taking and what you’re paying.

Jason: All right, very good. Thank you Dr. Cloonan.

Dr. Cloonan: Thank you.

Jason: Take care.

Dr. Cloonan: Thank you also, Bob.

Bob: Thank you.

Jason: Bye-bye.