FinLit Contest: Unlocking Financial Literacy with Professor Thorsten Hens

Welcome to the UMushroom podcast! In today’s episode, we would like to invite you to the first Switzerland for Financial Literacy: An Investment Contest. Our goal is to spread financial knowledge and help our listeners improve their financial literacy.

We are delighted to present the first prominent Jury Member of our Contest, Professor Thorsten Hens.

For our non-German speakers, we included the whole transcript of the podcast episode below, so you can still learn from numerous insights that Professor Thorsten shared with us in today’s episode.

Unlocking Financial Literacy with Professor Thorsten Hens

Luba: Dear Community, welcome to our Podcast! As you know we launched a new series dedicated to our Contest Switzerland For Financial Literacy. Our Investment Contest aims to get each of you to acquire the necessary knowledge to manage your money. Today I have the great pleasure of welcoming our jury member Professor Thorsten Hens to our studio. Welcome, Thorsten!

Thorsten: Hello Luba!

Luba: Thorsten, I have known you for 20 years. I had the great pleasure to do a doctorate at the Swiss Banking Institute, today I think it’s called the Institute of Banking and Finance and that was also the time when we met. But for our listeners, it would certainly be exciting to find out who you are.

Thorsten: Well, at the moment I’m a professor of finance at the University of Zurich, but I’d better start at the beginning. As you can hear, I am from Germany. I come from the Ruhr Region where people worked with their hands. My family is from there and at some point during the 80s I went to Bonn to study. This is where I studied finance and began to invest in the stock market

As I went back home to my family, they told me: Now, you are no longer one of us. Haha, that’s interesting! Now you’re a capitalist! You’ve switched sides! They had a strong perception of class division. We’re the workers, these are the capitalists and we don’t want anything to do with finances and such.

Luba: It’s very interesting, this idea and I think it’s still very present…

Thorsten: Well, there is this idea, this perception of class division but there are also these ethical ideas. I am the head of finance at the Reformed Church here in Wietikon and they had major ethical barriers. They said no, that’s the realm of evil, the financial market, we can’t be part of that. We can’t participate. We can’t be investing money or any of that. There are a lot of strange ideas that keep people away from the financial market.

Luba: It’s so interesting that you are telling us this and we are also observing this very often in our immediate environment and in conversations we have with our listeners and with the users of our platform. There are a lot of barriers when it comes to investing. We have, for example, the saying: “A rich person is not necessarily an honest person.”

I think that exists in almost every culture or every cultural group. Before we talk about this, it would be very interesting to go over the reason why we are doing this contest. Not for Thorsten, as he already knows as we discussed it many times, but for our listeners out there. Financial Literacy, i.e. basic knowledge about financial markets, about investing money, about the nature of money in general, is very dear to our hearts and we have found that overall the biggest barrier when it comes to why people don’t manage their own money or do not deal with the topic at all is that they do not have the necessary knowledge. We know this is not taught in schools. It’s not taught in universities either.

Okay, we come from an economic background and have studied economics so we are probably rather the exception, but even after studying economics and my doctorate, I must say that it took me a while to start investing and with that I mean properly and systematically and not just using some funny notion strategies here and there. In addition to knowledge, there is of course another topic and that is to make investing a habit, to deal with the topic of money, investing and stock market information. This is also the reason why we are organizing the Investment Contest in the way that we have planned it. We discussed this briefly in the previous episode, so here it is again as a short recap: of course, there is the performance that counts to win attractive prizes accordingly.

But what’s also very important to us is that our participants regularly compete in certain activities. The purpose of these activities is to help you acquire the necessary skills and develop the necessary habits to deal with the topic. Back to you. Why do you think financial knowledge is so very important?

Thorsten: Well, it’s very valuable. There might be more enjoyable things to want to learn about, but it’s very valuable for sure. Statistically speaking, the stock market generates an average return of 10% per year. My salary will increase by 1.6 percent this year and this has been the case for decades. The wages are more or less stagnating, maybe once in a while you’ll get an inflation adjustment or something like that and on the other hand shares are exploding.

And if you are just observing, it can end up being very harmful then at some point you belong to the Working Poor, i.e. you work and you don’t have the money to pay rent. I think everybody should take this step and get out of their comfort zone understand what’s going on and inform themselves.

It’s tedious and time-consuming, but I think it’s worth it to be a part of that. It’s certainly not easy. When I started in 1981, I made a lot of mistakes. That’s part of it, isn’t it? That’s the great thing about UMUshroom you can make mistakes without losing money.

Luba: Yes, exactly! For us, it’s about paper portfolios and as you said primarily about training your instincts. Speaking of mistakes, are there any lessons you would like to share with our listeners?

Thorsten: The most important lesson in my opinion is what I find in my current research. In a nutshell, there are 1000 ways to invest the wrong way in the stock market and there are a handful, maybe 6 or 7 strategies that work well, that are known over the long term, that Warren Buffet may have used or other successful investors and so on. 

And the best thing to do is to understand your personality. You have to choose one of these 7 styles. There are people with a rather hesitant personality. I don’t know much about it and that is no problem, because of index trading. They can buy index funds, then they get a long-term average return of 10% There are others, who might say: I am brave and if it crashes, I’ll go out there and find cheap shares and so on. They can make so-called value investments and there are the ones, who say they want to generate income through investments. I don’t care whether the stock market fluctuates as long as I get a dividend or other forms of income. There are 5, 6, or maybe 7 successful investment styles that can be measured repeatedly using various regressions.

But there are different personality types. You have a different personality than I do and the listeners also have different personality types. you have to find the perfect match. It’s like a marriage, there are a lot of options. There are great women out there but I have to find the one that suits me.

Luba: That’s a great analogy and…

Thorsten: I have stuck to mine for 40 years.

Luba: Incredible! That’s wonderful. It’s an incredible… that’s an incredible achievement, as they say. But it is also very interesting that you say there are 5 to 7 Investor Types. On our platform, we also noticed that there are 8 different profiles that our users have and it’s exactly as you describe. It’s a matter of personality. The personal relationship to risk, the personal relationship to profit.

It’s also a matter of knowledge and it also has a lot to do with what your perception of money is. Do you see money as something extremely rare? Are you a saver? Or are you someone who is completely indifferent and thinks: Oh my God, never mind, I'll get to the money somehow? Or do you lean more towards the other extreme, where you think… We have this funny saying: “I know how to gamble!”

That's one thing, the mode of the eight different investment types. And there are, as you say, also the type of people who say I have such a good intuition, I want the shares that make about 20% a year. There are people like that and… according to my research, this usually goes wrong.

Thorsten: Yes, this can work well but it’s more about… You are right. Certain ground rules are e.g. diversification. Yes, we had access to 144.000 accounts from a large internet broker and we were able to observe all of the trades for 5 years. That was the key to success was diversification. If you say yes,  I know which stock is going to go up tomorrow,  it's very likely to go wrong. There are ground rules: You have to diversify. You have to keep an eye on your willingness to take risks so that you don't have to sell when the shares go down. 

Due to financial or psychological reasons, this is the worst thing you can do. And you shouldn’t overestimate yourself. And that's why it's important to find a balance between what you know and what you do. So increase your financial literacy a little bit and perhaps reduce the risky things you've tried, so that you get the balance right.

Luba: Agreed. And these are two very different aspects that are very, very important to invest successfully.  One thing is basic knowledge. It's basically like learning a new language. What are shares? What are bonds? What are commodities? Understanding the different asset classes and the risk-return factors of each asset class. Choosing the instruments correctly. Understanding the concept of diversification and above all understanding that when we talk about investing, we often don’t know what we are doing it for.

If I am investing for a house or my pension, I will tend to choose a long-term passive strategy. A strategy that tends to carry or track the broad equity markets. And I won't waste too much time going in and out, but stay focused.

Thorsten: You have to choose the strategy that suits you, right?

Luba: That’s exactly it!

Thorsten: There are personality types who find it far too boring to buy an index. I would always recommend that they adopt a so-called Core Satellite Strategy. In other words, they should essentially do something boring so that they can stably get through the financial markets and then play a round with satellites to keep their boredom at bay.

Luba: This is also exactly what we like to encourage in our training. The majority should be stable and long-term oriented so that you have fun, so that you have the feeling that okay, I'm investing, I'm trading. I can also support certain topics that are close to my heart and support certain industries and companies. Then there is this so-called stock picking in the satellite part. That’s exactly what we want to encourage our students to do.

Thorsten: A second important question is: make or buy?  Do I do it myself or do I buy it somewhere? All of our listeners probably have some sort of smartphone and know how to use it. They probably know how to use it better than I do. But how many of them know how it's built? You don't have to know every electronic circuit on it. So you can also educate yourself and say yes, okay, now I get it somehow, but now I'll buy something and say okay, I'll go to an advisor who will manage the money for me according to my goals. I don’t have to do that myself.

Luba: It is…

Thorsten: I didn’t build my smartphone myself. I couldn’t talk to you on the phone if I would do that myself.

Luba: It's a very important point that you mention. And it's true, you can decide to invest your money yourself or you can decide: there must be a bank, a broker or an advisor…

Thorsten: But you need financial knowledge for both. If you don't have financial knowledge, then you get ripped off. Some claim they produce returns and charge high fees. In the end, they get the fees and I am stuck with the losses. That’s why you also have to understand the other side. Which of these 6 or 7 strategies do they pursue and when they pursue many strategies that you know can't work then you shouldn’t pay for it.

Luba: That's how it is. And back to the previous topic about the initial errors. One of the mistakes I made, even though I studied economics, is simply not starting to invest in time.

Thorsten: It is never too late!

Luba: I know I've since corrected the mistake.  But I remember, at the beginning of 2000, these wonderful ETF instruments did not exist in the way we know them today. There was also the..

Thorsten: I started in 1981, as I said, and I bought what today would be called an ETF. I had a strong Homebeiss. I bought a product from DWS, a provider from the Deutsche Bank which was called  German equities type zero. Okay, it was broadly diversified across German equities, it was called type zero because it had no issue or redemption premium.

And I have used it to create a simple rebalancing strategy over the years. Instruments like this also existed back then but they weren't called ETF’s

Luba: That’s right, and you also didn’t necessarily know them

Thorsten: No, but such instruments already existed. Only the wave of ETFs, as it’s called in marketing, came later, but there were index instruments in the past.

Luba: You're right, the only difference is probably that they're not traded at the stock market. I assume that…

Thorsten: But that’s okay, as a beginner you don’t want to trade daily. I've looked at my portfolio maybe twice a year and changed it a bit and that way it doesn’t matter if it's credited the next day. It doesn’t have to be on the stock market immediately. But if you buy an ETF now, because it is traded on the stock market, it has completely different functions.

Then there are hedge funds that use it for their high-frequency strategies and things like that. Then you might have volatility that you don't want.

 Luba: You're right, I'm talking more about the ETFs that track the index.

Thorsten: Exactly. But as a small investor, it doesn't matter if you receive the credit in your account a day later.

 Luba: You're 100% right. That's true. If you're investing for the long term and not doing day trading, it's just about making sure that you're benefiting from the long-term performance of the stock markets in the most cost-effective way. And as we know, you mentioned it, 10% on average. The Swiss stock market, for example, has also made just under 10 % nominal value on average since 1926.

There is a very interesting study. I think it's done by Big D if I remember correctly, and the figures there are really exciting. And what’s also interesting is if you had invested at the worst possible time just before the financial crisis in 08 and didn't make the mistake of selling immediately when the shares went down, but had the patience to wait, you would have started to record positive annual returns again in 2012 and

Thorsten: Well, you have to evaluate a little bit. The first thing is to be part of it.

Luba: Yes, that was my mistake.

Thorsten: And the second thing is, when should you be part of it? And some phases are exaggerated and where valuations simply go to the roof, speculative bubbles arise and things like the end of 2000. And then you have to look at the valuation figures, PE ratios for example, the price to earning ratio and so on, and say yes, maybe I'll wait a bit or I start buying in stages so that you don't fall into the trap you just described, where it takes decades to get back to the top.

Normally the markets are rationally valued. Warren Buffett, who obviously gets it right, always says that 80% of the time the markets are rational and in 20% they aren’t. I have to pay attention to the 20%, right? So if I get caught on the wrong foot, then I have a problem.

Luba: The interesting thing about the study was that even if you invest in just one of these 20% cases, the risk you take is that it might take a little longer, but it still recovers. And that's the fascinating thing. That's why it's so important. There is a saying: “Timing in the market beats market timing” and almost all empirical studies prove it.

Thorsten: That’s also a question of personality.

Luba: That’s true.

Thorsten: You might say I don't understand any of this. I buy the index and that’s it. That's perfectly alright. So if you know you don't know anything, that's okay too, right? Then you should get it for a good price. But then there are different active investment styles and for that, there are different personality types. Some are good at picking stocks.

Luba: That’s true.

Thorsten: Those are mostly those who have studied business administration like you because they know companies, they know what the growth opportunities are and they are good stock pickers. But then there are also those who are better at market timing, i.e. who are perhaps better at understanding the market sentiment and so on, these are more the economists, the sociologists and so on, who understand the interaction of groups better.

And you have to figure that out. I'm an economist by training, you're a business economist.

Over time, I realized okay, I have a good sense about whether the market is overvalued, undervalued or whether I should correct it a bit.

Luba: That’s one of these questions. What do you think about the current situation?

Thorsten: Yes, but I have no idea about stock picking or when I play the financial economy game, for example, I had to choose the stocks or I was allowed to choose stocks, and I counted and chose and had plondzer at the beginning. Of course, it fell directly by 30%. So I'm a very bad stock picker. I was on the 12.000th place out of 16.000 thought oh sh**t, what a disgrace.

Over time, I got better and managed to get to the 2800th place. These things happen of course.

The most important thing is always a little bit of luck. You really shouldn't run out of it.

Luba: Yes, that is something that you always need in life.

What we have found, for example, something that we like to encourage among our users, is that one of the biggest barriers when it comes to getting started with investing, even among people like us who have experience, is that you always feel like you're missing the right time to get started. And my personal opinion on this is and I'm very happy to hear yours as well,

Of course, it exists in theory, but it is very difficult to get hold of it. So what we always recommend, for example, is that you try to invest in stages. Maybe once a month or once every second or third month, depending on what your budget allows and, as you say, depending on your personality type.

Thorsten: That’s true for most of us. Many don't just have a lump of money that they want to invest, they work and they have to invest in stages, they can invest some of what they save from time to time and then they can build up a portfolio over time. That way, they are already somewhat protected against starting with a large chunk at the wrong time.

Luba: This is the case if you get into the habit of regularly spending a certain small amount, say 100 francs. In Switzerland, this is a fairly manageable amount. 

Thorsten: 1 pizza

Luba: Haha exactly, 2 pizzas and 2 cokes. And if you make this your habit, you benefit from something that Einstein called the eighth wonder of the world. And that is the compound interest effect. And yesterday, just for fun, we opened an Excel spreadsheet and calculated the compound interest effect.

What happens if you invest 100 francs every month and it earns interest at an average of 8% from the stock markets or even 10%? The result is very impressive and over 40 years if you use the trick with the habit of investing 100 francs every month at an average of 8 % per year, you quickly have over 300,000 francs, i.e. up to just under 1 million.

Thorsten: That way you can buy your own restaurant in no time! That’s how to switch sides from consumer to producer.

Luba: This is how you can make your dream come true! And that's also something you don't even realize. People say to themselves. Oh, if I only invest 100 francs in a single event, it won't bring much. True, but invested over 30, 40 years for our younger participants. But, with today's life expectancies, we also have such an investment horizon…

Thorsten: You have at least another 40 years

Luba: At least!

Thorsten: I don’t.

Luba: I am sure you do too! And if you additionally save every month, you will build up a substantial fortune for yourself, which shouldn’t be underestimated. And as you mentioned correctly at the beginning of our conversation, you are also protected against inflation, because inflation has long been a ghost from the past but now it is once again a phenomenon that is very present here in Europe.

And that is also one of the goals of the contest because we encourage everyone, every investor or every future investor to become aware of the fact that the compound interest is somewhat like gravity, it affects each and every one of us, you either pay for it or you benefit from it.

Thorsten: Let me rephrase that. It's terribly cold out there right now and there are lakes and they are frozen. Now, of course, we don't want to lead our listeners out on thin ice.

Luba: Exactly.

Thorsten: And that means it's also dangerous. You can break your bones. That’s why you have to learn something. That's why you have to learn financial literacy, you have to understand, what are the basic mistakes you can make. You have to get yourselves some blades so that you can skate on the lake.

Luba: That’s a very beautiful analogy

Thorsten: And we are not salesmen, at least I am not. I only ever sell my knowledge. You can get that on the working papers or in books or something, I don't have a bank or anything. So, I hope that those who pay me, the taxpayers, I actually get my money from the listeners out here, I live from their taxes. I can give something back to them by saying yes, look, this is what I've found. It’s better to do it like this and not in another way.

Luba: That's a very, very good point that you are mentioning. A very accurate point. And indeed, like you, we are also independent. We don't sell any products either. We are a platform and are not paid by the manufacturers of ???. We buy these information.

Thorsten: No, but… sorry to interrupt you!

I like listening to music on YouTube and then, because I don't want to pay for it, I always get these commercials. So many charlatans somehow claim that they now know how to get rich and so on, you should book seminars with them and such. They sit somewhere in the South Seas and have a nice life and sell some seminars with some nonsense about the crypto field or some other field and you get bombarded with stuff like this. We have to let people know that we are not these guys. We are sitting here, in the freezing cold and not at the South Seas.

Luba: Yes and what we sell is fundamental knowledge and the beautiful craft of investing money. I wouldn’t even call it selling, we aren’t selling, as you said, it's not selling, but we're drawing attention to how important it is to get to grips with it. And we are always fascinated. You are in top shape with knowledge about physical fitness. Mental fitness is now also socially acceptable.

There are companies that invest in meditation courses, in their employees, in the prevention of burnout etc.. But the knowledge about my money, how do I invest my money, how do I start saving? How do I create an additional cushion for my retirement? Because our society is getting older and it has many layers, as we all know.

In fact, this is simply not taught anywhere. Our mission with this competition is actually to raise awareness out there or to raise and build and strengthen awareness that you can take the topic of investing money very seriously.

Thorsten: And you're supposed to be healthy in your later years, but it doesn't help if you're poor. You also need to have some money because you might want to explore the world or do other things like that. Or as a Christian, you can also say that you want to help other people and there are so many others in this world who are poor.

Luba: Yes, that’s true and I think this is also one of the beautiful objectives that many people have, that you donate a portion of what you earn. That's a very, very good, very noble closing sentence to our podcast. Is there anything else that you think our listeners need to hear?

Thorsten:  No, but I hope we meet again in the middle or the end and that we have some touchpoints. And maybe we’ll get feedback. I can always be reached at my email address. So I'm someone who uses email, I am not on WhatsApp nor Facebook. I'm the email generation, not LinkedIn either. So if someone wants to contact me, write me an email. I'm also someone who answers faster than people write to me.

Luba: That’s true, I can attest to that and with that sentence I would very much like to thank you, Thorsten, I would also very much like to thank our listeners.

If you have any questions, please do not hesitate to contact us at hello@umushroom.com we will also include Thorsten Hens email in the comments section of the podcast, so that you can contact him directly.

Thank you very much and I can’t wait to have you back here with us soon!

Prof. Thorsten Hens: thorsten.hens@bf.uzh.ch