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Making Sense with Ed Butowsky
Hosted by 35-year investment manager, Ed Butowsky, "Making Sense" is designed for delving deep into understanding investing in episodes less than 30 minutes.
To learn more about Chapwood Investments, you can visit us at our website (www.chapwoodinvestments.com).
Making Sense with Ed Butowsky
Wall Street to Dallas: A 35-Year Journey
In this inaugural episode, we dive into the long and successful career that Ed Butowsky has created over three decades. Growing up north of Manhattan, he was immersed in the financial world from an early stage and learned from his father, David, who was the Chief Enforcement Officer at the SEC and was well-respected in the industry.
In this episode, Ed discusses the changes in finance since the late 80s and shares insights from his experience at a large bulge bracket firm. He also highlights the differences in client interactions between large firms and his private firm, Chapwood Investments, which he co-founded in 2005 with his business partner, Kim Sams.
Ed shares how throughout his career, he witnessed significant shifts in the financial industry. He reflects on the evolving landscape, including advancements in technology and regulations, and how these changes have influenced investment strategies and client interactions. With artificial intelligence (AI) and digital currency on the way up, the two share their thoughts on what's to come.
Ed's extensive experience and expertise make him a valuable voice on the frontier of finance. If you would like to have your question answered on the show, be sure to email info@chapwoodinvestments.com
The Making Sense podcast is recorded by Chapwood Investments managing partner, ed Butowski and Jordan McFarland. If you have any questions, please email them to info at chapwoodinvestmentscom.
Speaker 2:Hello everyone, welcome to our first edition of the Making Sense podcast. You may have seen a lot of our videos on YouTube. You may have been watching Ed for a long time, but we thought it was finally time for us to join the podcast world and bring something interesting to the table. So, ed, how are we doing today?
Speaker 3:I'm doing great. Thanks, jordan, for doing this. This is a new venture which I hope a lot of people like and start to follow us.
Speaker 2:Absolutely, and I know neither of us are big elongated intro guys. So I thought, instead of doing the formalities thing, we jumped right into a fun trivia question to start these. So I made this one specific for you because you're from Chappaqua, just north of New York. So the question is how many World Series titles do the New York Yankees have, and when is the last time they won one?
Speaker 3:So the Yankees have 27 World Series titles, and the last time they won one was 2011. 2009.
Speaker 2:First year in the New.
Speaker 3:Stadium. Okay, all right. Well, I had the 27 because the Red Sox have three and we're so much better than the Red Sox, and that's what. As, growing up in New York, anything that's Boston is not looked upon very favorably. So we don't like the Celtics, the Bruins, we don't like the Patriots at all and we cannot stand the Red Sox.
Speaker 2:I would have to agree. The Red Sox beat the Cardinals in 2004 and I've hated them ever since, but neither of them in the playoffs this year. So I guess someone new will be crowned for 2023. Well, let's jump right in. Part of what we're going to do today is just gather more of a background of, obviously, your experience, get a whole picture on your experience over 35 years in the industry. So the first question I wanted to start with was just for you to summarize your experience at the beginning of your career. I know you started at a much larger firm, so we'd just love to hear about how that started. I know there's an interesting story in your book, but we'd love to hear it from your own words.
Speaker 3:Well, sure. So my first day literally my first day in the business was October 19, 1987, which was the day of the big crash, and I remember walking around thinking this could not be a normal day, and it really gave me the opportunity to have people want to talk to me about the industry, because a lot of times when people's portfolios are doing really well, people don't want to talk. It's during stressful times that people reach out to financial advisors. So I viewed it as a golden opportunity to develop new relationships. So, as tough a day as that was and the days following it were, it really gave me the opportunity to talk to people about the industry where I wasn't able to talk to them before. Now, back in those days, you had mutual funds, you had stocks and bonds and there's a lot more, and you also had unified managed accounts. You had oh, my goodness, I can't remember what it's called, but you had a couple of different investments that are not that well known today, but at the same time, you had an onslaught of new investments since then. So the industry has changed, because you used to do commission business, where people would call up and you would buy 1,000 shares of a $20 stock and the broker would make $250. And then when the day is done, we would get 30% of that. So if you made $10,000 in a month, you would get paid $3,000 that month.
Speaker 3:When I started in the business we had a draw against any future business, so I made what? Was it? $2,000 a month, and that was not what I made. That was what I was in the hole. I had to do $2,000 of commissions just to break even and that was a really tough way to start. But that just kind of goes to show why there were so many phone calls made back in those days and why people were always smiling and dialing and we didn't have the internet back then. We didn't have computers, so it was a very different story. We had quote trons which would give you quotes, and it was really really difficult to come up with real-time information. I sound like I'm coming from the Stone Ages but considering how much computers have changed the world of investing, it kind of is the Stone Age.
Speaker 2:Well, I will say, quote trons are of the Stone Age. But I have to tell you, ed, the firm that I was at when I first started in the business, we also had the draw and you said it was $2,000, and that's exactly what we got. So now I'm thinking back and I don't think we kept up with inflation then if that was what you were getting in the 80s and what we got now. But either way, yes, that is something that I did not like about my start in the industry either.
Speaker 3:Well, $2,000 today is a lot less than it was back then. But it was also harder to make back that money because you got paid less on those commissionable business. But Muni bonds were a big deal back then. So when I first started they were building the Dallas Tollway and they were issuing bonds for the Dallas North Tollway and you could get those bonds and get 7% tax free from the state, which there is no state income tax but also from the federal government, and that's how we opened up a lot of new accounts back in those days.
Speaker 3:But when you talk about my experience, it was really hard work. I would get to the office around 7 o'clock in the morning and around 5 o'clock I'd go and work out across the street at the Y in downtown Dallas and then I'd go back until around 9 o'clock. So there wasn't a person that worked harder than me. I was known as the hardest working financial advisor out there and I'll tell you it paid off because I did exactly what I was told to do at that time and I opened up probably one account a day, which was wonderful, and a lot of people listening to this right now probably got a call from me back then. So I really enjoyed the business back then. I still love the business today.
Speaker 3:But there I worked at Morgan Stanley and we had about 100 people in the office and we had a sheet that would go around every single day showing how many new accounts people opened up and how many commissions you did. So it was right out there and the competition was pretty stern, but fortunately after a year I was really fortunate to become the top producer in that office. So my hard work really paid off.
Speaker 2:And to kind of bring it to the people's level. You've seen movies like Wolf of Wall Street. I'm sure You've seen a lot of, I guess, investment movies out there. How close did those movies come to actually being like what you saw at the larger firms in the 80s and 90s?
Speaker 3:Yeah, that was Hollywood. Those firms were boiler rooms where they would take stocks that were not well known, didn't have a very big float, and they would try to manipulate those shares and they did a pretty good job of doing it. But at Morgan Stanley we were limited in certain stocks that we could buy and couldn't buy. And if you had a very thinly floated stock you could not buy it unless it was unsolicited. But if I was to do a movie today, it would be very, very different. It would be sitting with people and counseling them and talking to them about what their pain points are with their money and talk about all the different ways of managing money. It would be very different than the buying and selling that you see on Wall Street in the movies.
Speaker 2:Sure, and Hollywood has never exaggerated anything at all, so that's a huge surprise to me. Well, I guess that's kind of a natural segue. What is, if you could pinpoint one thing, the biggest difference, and more from like a client side, what is the biggest difference from then versus now in terms of client experience, investor experience, things along those lines?
Speaker 3:I think clients today with access to information. You have to remember access to information doesn't equal knowledge. So there's a lot of access to information, but what we do is we consolidate that access to information into knowledge and we try to share with people how to properly evaluate a financial advisor, and that's something that was never really done. So when I started in the business, someone would say, well, he picked Cisco systems and picked Biogen, and those did really well. So then I would get referrals. But that's not management of money, that's just stock selection.
Speaker 3:But nowadays, the whole goal is a holistic approach to every single thing that somebody is doing in their portfolio, not just buying stocks. The idea of calling somebody a stock broker is done, it's gone. And we invest in bonds, we invest in alternative investments, etfs, reits, and there's so many different asset categories that we invest in. So there's more of a holistic approach than just looking at us for just stocks and then buying bonds. That's one of the really big differences. So when I sit down with somebody today, I'm talking about their retirement, I'm talking about their cash flow, making sure that they have it.
Speaker 3:But something I bring up in every meeting and you know this well, jordan is I bring up the idea that the cost of living increase is not the CPI. Too many people don't talk about what the real rate of return is on an investment or on a portfolio, and that real rate of return is taking your growth plus income, minus your cost of living increase, minus taxes, minus management fees. That's what really matters and most financial advisors don't discuss that. And we go a step further Instead of just talking about the CPI, we actually look at the cost of living increase that someone really suffers through in their real life, and the CPI might be down at 4% right now, but the real cost of living increase is somewhere around 9% or 10%. So very few people are making a lot of money or a real rate of return on their portfolio. That's positive and that's something that we talk about at Chapman Investments today.
Speaker 2:Agreed, and I think that would actually be a fantastic topic for next week's podcast, so I'll have to check that one off. But let me fill in some gaps here. So, obviously, 18 years at Morgan Stanley and then you start Chapwood in 2005 with Kim Sams. What was it that led you to do this, and was there anything that you, when you started the firm, you're like wow, I did not expect this.
Speaker 3:Yeah, so starting Chapwood Investments with Kim Sams, who's been my partner for 24 years and she's one of the smartest people you'll ever meet and very, very detail oriented, and I wouldn't be having this career if it wasn't for her, but don't let her know that. But when we decided to go off on our own, one of the things that we realized was that what separated firms were the IPOs and research, and that's what really made these firms special, and everything else could be done through a Schwab or a TD Ameritrade or a Pershing or a Fidelity. And so when I looked at the firms and the IPO market had started to really disintegrate, this was in 2004. So the IPO market really wasn't relevant at the time. And then the research.
Speaker 3:There was an interesting thing that was done. There was a settlement because there was a lot of conflict of interest between research and investment banking and somewhere along the way they made it so research had to be available to everybody. So if you went to Morgan Stanley, they have to give you some of that research for free. Same thing with Merrill Lynch and Goldman. And the research you could also get from other parties, like Seeking Alpha, and there's always ways for us to get a hold of the Morgan Stanley research and the JP Morgan research and research is really the springboard for our success, and that's what separates us is having access to all the research, not just one firm, although I will say that I think Morgan Stanley has the best research, because I grew up there. I really love their firm and I love their research.
Speaker 3:When you look at Merrill Lynch and Goldman and JP Morgan and Morgan Stanley and UBS, you are able to get a consolidated view, not just looking at one firm. So I viewed going off on our own, as you know, kind of being liberated, where we were able to introduce investments that you weren't necessarily able to do at a Morgan. So there are certain private investments that you weren't able to introduce and you weren't dictated by the big brother, if you want to call it that. You were able to be more flexible and there's lots of great investments that people can get a hold of that you can't get from those traditional firms because those firms limit the access to a lot of things for a lot of different reasons. But when you're an independent RIA, you have no limitations at all.
Speaker 2:Well, said, is there anything that surprised you initially, or maybe now that obviously we've been open to 2005, is there anything that's been a big surprise?
Speaker 3:Yeah, the cost of upkeep is really difficult. I mean just getting waters into the office and the plants and we're out of water, right?
Speaker 2:now too. What's that Said? We're out of water too right now.
Speaker 3:And those kind of things were surprising to me. Plus compliance, you have to have compliance officers. And when you look at an investment firm, a traditional firm like Morgan Stanley, and you get 35% of your commissions, well, the other 65% goes to pay for compliance, goes to pay for your office furniture, all the traveling that you might do and all the overhead. So when we sit here and we're able to take 100% of what we make, we still have to categorize a lot of what we've made into expenses. So you know, custodian work costs something. Black diamond, which is our reporting service, costs quite a bit of money. Compliance costs quite a bit of money. So all those line items, so we really are running a small business and oftentimes we don't look at ourselves as running a small business, but we should because it is a small business.
Speaker 2:Sure, and from the client's perspective and I know we're obviously going to get provide a biased answer, of course but what can you expect from a small firm versus a JP Morgan, versus a Morgan Stanley, versus a bold bracket firm?
Speaker 3:Yeah, well, you know, being an independent RIA, it really matters who you're dealing with and what their knowledge base is and what they're inclined to do. There's a lot of firms that are selling annuities and whole life policies and that's what you know. They kind of disguise themselves as wealth advisors but they're really, you know, just insurance salespeople At Amorgan Stanley. One of the things that I find is that they're limited in how much that they can put in alternative investments and, as you know, jordan, to have a properly managed portfolio, you should always have, you know, a certain amount of money in alternatives, and Morgan Stanley and UBS limit the amount that you can put in there, so they cannot mathematically have an efficient portfolio simply using those. The way that Morgan Stanley and UBS and Merrill Lynch and Goldman and Merrill Lynch are set up, you cannot mathematically have an efficient portfolio. So you're able to be liberated in your thinking and your approach and what you show clients, and that's what I love about being independent.
Speaker 2:So last point here, before we go to the question and answer, is so when we talk about, obviously, artificial intelligence even you know digital currency there's a lot of new things sort of coming into the financial world, both for us as RA's, for investors. Where do you see AI? You know digital currency, where do you see this landscape heading in the next decade or so? Because oftentimes you know, as investors, the best way to kind of not predict the future but kind of see what's going to happen in the future is to look at the past. So you've been around for 35 years in this industry and so you're seeing these new things, you know, come up. We've already had a webinar on both of these, actually AI and digital currency. So I'm just curious to see where you see the next decade going.
Speaker 3:Yeah, great question and, by the way, we didn't know these questions ahead of time. This is all impromptu. So, from the AI standpoint, I believe AI, from an investment standpoint, is going to be very similar to nanotechnology. It's going to be implemented into businesses, but you're not going to be able to make a lot of money just on AI. It's going to be, you know again, implemented into larger institutions. From the standpoint of how it affects our business, I do believe, in fact, we're coming out with some CHAP AI funds towards the end of the year which are going to be AI generated and we're using a gentleman named Tal Schwartz who's got every doctorate you know degree in finance, and we'll be talking about that at some point. But I do believe that we already use quite a bit of AI with our calculators that you can find on our website under investment forensics. So I think AI is going to continue to kind of weave its way into our industry. But I also do not believe that brokers are going to become irrelevant. You know a lot of people think you know that. You know some people think we're irrelevant already, but I do not believe that people are going to be able to do this on their own. They're always going to need someone there to talk through things with them and and again, take that information and turn it into knowledge. So, but you know AI, you know.
Speaker 3:Then you talk about digital currency. Digital currency is a way for you to transfer your wealth. It does not impact directly the investments, and a lot of people have been saying, you know, the government's coming out with a digital currency and they're going to have their eyes on everything that we're able to do. I don't know if that's the case. It very well could be the case that they're able to see everything, but it's not going to change how we invest money. It's just going to change how assets are transferred, but we're already doing that with wiring of money. So, again, I don't know exactly how that's going to play out, but that'll be good for another podcast at some point.
Speaker 3:And then other emerging innovations. I don't know. I'm not really that great at identifying what is going to be important and what's going to, you know, be relevant down the road. I would have passed on Facebook and Google if someone had asked me. You know about that. So I'm not the best person to discuss other emerging innovations. I just know asset management and wealth management and that's what I focus on.
Speaker 2:Sure, and when I think of artificial intelligence and all these things that people concern themselves with so much, I feel like the overall sentiment of not even just finance, I mean the overall sentiment is that artificial intelligence will hopefully take care of a lot of boring tasks, a lot of automation tasks, and we as humans can leverage the capabilities of artificial intelligence and hopefully make us better. So, you know, will it wipe out some jobs that some people have, possibly? I mean, that's been happening every single year. Right, the internet. I'm sure people were terrified of the internet when it came in long and obviously Y2K I think that's the name, right, y2k? Yep, okay, that was still when I was a little lowly on the desk.
Speaker 3:There's a gentleman named Barry Asmes who was a very well-known speaker In fact USA Today had him listed as the top speaker for a number of years and he would speak at board rooms but more importantly, at big conferences, and he talked often about how new technologies would come along, but then people would find ways to get employed.
Speaker 3:And I remember him talking about there was a meeting of buggy whipmakers at the Broadmoor and they said at the end of the conference they said hold on a second. We have one gentleman named Henry Ford who wants to talk about some new invention he's working on and he got up and spoke about it. And then the buggy whipmakers all changed jobs. There weren't buggy whips anymore for horses and carriages, everyone switched to the automobile. But those people found new jobs. And so the idea is that people will find new ways and get new jobs, even if it's a time period that they're going to have to adapt to it. I should say I don't believe that AI is going to be a negative thing for employment. I think it's going to probably spawn new industries and new ways of working, but again, that's yet to be seen.
Speaker 2:Agreed, agreed. Well, let's go into the Q&A section and, for our listeners, typically this is where we're going to answer the questions that you've directly sent in, and if you want to do that, you can email info at wwwchapwoodinvestmentscom. But for now we're going to take a question that we were actually verbally asked this past week and to kind of give you the setup. So this is for a $1.3 million house. This person has $400,000 left on their mortgage and, as Ed already said, he doesn't know this question. So fair disclosure. So if I have $400,000 left on my mortgage, should I expedite getting that debt paid off or what should I do?
Speaker 3:Well, it's all about the monthly payment and what interest rate that you're being charged. So if you've had that mortgage for a while and your interest rate is 5% or lower, then you should not pay it off. You should just continue to make the payments. Some people would argue you should just do an interest-only loan. But in terms of trying to pay it down, if you have 5% or less, then when you start to get a little higher, you have to say to yourself can I make more money in the markets from a fixed income standpoint or from a stock standpoint than I can on what I'm being charged for the interest?
Speaker 3:Psychologically, some people just want to have it paid off. Some people grew up and said I just don't want to have a house payment, just want to go on. And from that standpoint, no matter how good an investment is or decision is, if you're not comfortable with it you shouldn't do it. So the bigger question for that person is to know exactly what their interest rate is. But if it's 5% or lower, then they should absolutely not go ahead and pay it off.
Speaker 2:Okay, well said well. That's going to wrap up for today's show. Obviously the first show. I thought it went well. What do you think, ed?
Speaker 3:Yeah, you did a great job, awesome and I look forward to doing this again and we'll do it live next time. And so this has been good and hopefully everybody out there will go to info at chapwoodinvestmentscom and put in questions and somehow we're going to build up our podcast following and we want people to share this link with other people, so please don't hesitate to do that.
Speaker 2:Sure thing, and this will also be available. Obviously, if you're watching it, you know this, but this will also be available on our Making Sense YouTube page as well, if you would like to see the faces behind the microphone. You know, I think, ed, I can speak for myself. Maybe I have a face made for radio, so maybe, uh, maybe, you stick to the podcast edition. You're a very good looking guy. I appreciate that, Ed. Well, that's it for us today, folks. Uh, thanks for tuning in and we'll see you next week on Making Sense. Thanks.
Speaker 1:The Making Sense podcast is recorded by Chaplot Investments Managing Partner at Butoskey and Jordan McFarland. If you have any questions, please email them to info at chaplotinvestmentscom. This podcast contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this podcast will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.
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