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The Investing for Beginners Podcast - Your Path to Financial Freedom
36 minutes | Jul 29, 2021
IFB202: Derivatives, Tobacco, and Inheritance
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: Andrew discusses the ins and outs of derivatives, how they work, and their potential impact on companies and your investments Dave and Andrew discuss their thoughts on investing in Tobacco, and other similar investments such as utilities and oil Andrew talks about dollar-cost averaging (DCA) and how to use it to its full potential For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com Quartr. With Quartr you can access conference calls, investor presentations, transcripts, and earnings reports – straight from your pocket. Quartr is 100% free and includes companies from 12 markets including the US, UK, Canada, India, and all the Scandinavian countries. Quartr is available for both iOS and Android, so check out the app today. SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript Announcer: [00:00:00] What’s the best way to get started in the market—download Andrews ebook for email@example.com. Announcer: [00:00:13] I love this podcast because it crushes your dreams of getting rich quickly. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-by-step premium investing guide for beginners. Your path to financial freedom starts now. Dave: [00:00:00] Welcome to investing for beginners podcast. Today, we have episode 202 tonight. We are going to return to answer some great listener questions we got recently. So without any further ado, I’m going to go ahead and jump in and read the first question. So I have a good morning; if you don’t usually answer questions like these, sorry for taking up your time. I’ll get to the point. A mutual friend of mine recommended it. Take a look at JUSHY J U H J U S H F. The stock meets zero of your prerequisites dividends, cash flow positive market cap, et cetera. But I have a question about their financial statements located on SEDAR operating income for 2020 was negative 92 30. But a fair value change in derivatives of negative, 173,707 drops net income to a negative 1 92, 2 33 further derivative liabilities account for over half of their total liabilities. I cannot find any information about these derivatives and why there is such a large part of the business. Professor Google and their annual report have not yielded much. Is there somewhere else you recommend working, or could you explain why companies generally use derivatives? The whole thing confuses me. Thank you so much. Liam. Andrew, what are your thoughts on Liam’s really good question. I’m curious to know, too, because I’m not super up on derivatives myself. Andrew: [00:01:20] Yeah. It’s one of those where. Derivatives are basically like options, so if you want to go back and listen to the episode, we just did with Cameron. And that could be a good primer for talking about different sorts of options. In his case, he was talking about puts, we have called, and you have putts. So options are derivatives, but a derivative doesn’t always have to be an option, but, we saw with the great financial crisis, what can happen with Really messy. And we saw it more recently with the art arch to if I knew how to pronounce or take us, I think that’s it. Yeah. I PR well, we still bet drain it, but the Archegos goes thing. You had a lot of derivatives exposure. And so it’s just one of these weird things and, I don’t know why that’s the case. And it’s one of those mysteries right now with the finance world. But. Three of those basically will give you the option, and it’s a contract. So you’re able to be positive on security or negative on security. You can go; you can like leverage up and basically be acting like you have a lot of positions in stock but not have to pay too much. So it’s a form of leverage. So you’ll have companies use it what Cameron was talking about a couple of weeks. As a hedge. So they won’t use that as a hedge. And so, they use the derivatives to hedge against interest rates. They’ll use derivatives to hedge against currency risk, so if you’re a. A company that’s selling stuff to Southeast Asia and also to Europe, you do not necessarily want, if your core competence is, we make really great components or something, or we make a really great electronics product. You don’t necessarily want to play this currency trading game because that’s not in your core competence, but it does have an effect on what your profits are going to be. And so to try to. Mitigate that exposure and make your financial results follow your true operations and not have to do so much for currencies. They’ll use derivatives. Derivatives are tough because if you really search into a company’s financial report, they should have some disclosure on it, but there’s not as far as I’m concerned, and what I’m familiar with, there’s not like. It’s not as detailed as I am; a financial statement would be like a balance sheet or an income statement, and then it’s just not. And we also talked to Jeff from Visual Capitalist, and he had a really cool infographic where he talked about the world’s different wealth. And I wrote a blog post on it too, or. I linked to his infographic, but it was amazing because you have wealth and stocks, bonds, real estate, and then there was this huge bubble that’s derivatives. And so you have the actual financial value of the derivatives, and then how much, basically the bigger bubble of what the derivatives could control. So again, I like to use an example; let’s say I have a derivative to go along a stock, so maybe I would pay. I don’t know, a hundred dollars. And if the stock goes up 10%, I go up a hundred percent or 200% instead of just that 10% because I’m using derivatives to maximize the leverage. Does that make sense? So you have the value that I paid for the derivative, which was like a hundred bucks. Really what the outcome could be, which is multiples more of that. And that’s like a notional value is one of the ways that they use to describe this difference between how much do you pay for the derivative and how much exposure you have to it. And so, a lot of these financial instruments have a lot of not notional value. And so there’s a big part of. The market and we don’t really know to what extent it is because it’s so under the table, but a big part of it is possibly controlled by derivatives. And again, we saw with the Archegos thing where. Some derivatives went upside down, and the stock crash was at 25, 30, 40%, something crazy. Who knows how much of the current market is subject to that kind of a thing. And so when to circle all the way back to this question about this company which I’m assuming is in Canada because this Sedar thing is like Edgar in the U S just the fact that they already lost that much. And it’s wow if operating income is like 9 million or 9 billion, whatever the scale is on this, and they’re losing 173 million, a 173 billion from derivatives. That’s a huge proportion compared to what their operating income was. So it just raises a lot of red flags to me. And if you’re having trouble finding. Disclosures about it, is it because they don’t want you to know? I don’t know if that’s the answer or not, but when it comes to finding good investments and being able to stick with them for the longterm if you’re really struggling to find reasons to be comfortable for a stock, then you know, there are thousands of stocks out there that choose from it. You don’t necessarily have to go to places where you’re uncomfortable. I think it’s good to try to dig around and uncover those rocks. But to me, it just throws up all sorts of red flags because. Like you say, you’re having trouble figuring out what their derivative exposure is. And they’ve already shown that they’re not good at managing it by losing so much. So I don’t care what the other financial say. I would not feel comfortable putting your money in something like that. Dave: [00:06:35] Would it be fair to say that the derivatives are something that you would find in companies that deal more internationally? Would that be fair? Andrew: [00:06:47] Yeah, I think international is part of it. The biggest exposures that I’ve seen so far out tend to be with the financials, and you’ll see it with the banks too. And so they’ll call like this off-balance sheet. Not, it’s not like off-balance sheet exposure, but there’s there; it might be off-balance sheet exposure. There’s a certain you have obligations and potential commitments. Are you familiar with that term? I think it’s obligations and potential commissions. Dave: [00:07:12] Evidential commitments. Yeah. Yeah. Andrew: [00:07:16] Yeah. Maybe you can explain the obligations and commitments first. Cause I think the derivatives fall into commitment, but not an obligation. Dave: [00:07:25] I think obligations that commitments basically refer to. Outside commitments that the company may have in different contracts, whether it’s derivatives or whether it’s operating leases, or anything of that nature. I think it’s just, I think it’s my understanding is its money that the company owes to somebody outside of the business for other commitments that pertain to either making money or operating. In a certain way that they could make money, whether it’s something like a lease or whether it’s a derivative. That’s my understanding. Yeah. Yeah. Andrew: [00:08:03] And from what I saw, cause I remember reading this, one of the companies I was looking at the difference between obligation and commitment is a commitment is something you could possibly have to pay. But a lot of times, you probably don’t have to, whereas obligations like this are going to be due, and so you’re going to have to pay it regardless. And so that’s where I’ve seen the whole derivative thing show up, but it is not something that’s super common. And nobody can fault you for not wanting to invest in the. Super exotic derivatives, especially when this kind of stuff blew up AIG and some of the other big companies. Dave: [00:08:41] Yeah, exactly. I know that this is not something that I honestly am super familiar with, mostly because the companies that I have worked with and worked at it generally tend to be minor. Part of their business, whether it’s, they’re using it to offset any sort of currency fluctuations, if they deal with other countries selling their products or buying products or supplies or raw materials from other countries, they may use derivatives as a way to even out the cash flows from. Yeah, paying this a dollar and buying this in, Yuan or something along those lines or Reais for Brazil, whatever it may be. So generally, it’s a very, the ones I’ve dealt with personally have always been such a minor thing that it’s honestly just one of those things. They go, oh, okay. Yeah. And move on. And it’s, it’s like one of those companies that they may have. A billion or a million dollars in investments, and it makes them almost nothing. It’s okay, great. I see that they have it, but it’s just not something you’re going to focus a lot of attention on, but it looks like with this company in particular, that it is very much a big impact on the business and has obviously helped contribute to some serious negative numbers. As I did a real quick talking about. 32nd quick look at this company before we jumped on here, and it looks like it’s a cannabis company out of Canada. And I know that the cannabis stocks are a far different breed than they are here in the United States because it’s legal in the country, from what I understand. And so, I think there’s probably more opportunity to investigate other cannabis or marijuana companies in Canada that might have better opportunities than this one. Not trying to tell you, no, like Andrew was saying, there are so many red flags about this. You even mentioned that in an email that means zero of our prerequisites, no dividends, no cash flow, positive market cap, et cetera, et cetera. Yeah. Oh, I was like, do. Okay. But, it’s interesting to look at these things, and it could be a great learning tool. Liam is trying to use it to learn more about derivatives because that could impact something else that you learned. In the future. And so the more you learn about different things, even if you pass on the company, it’s still going to help you in the future. So I applaud them for doing that. Andrew: [00:10:59] Yeah. 100%. Technically, I guess anybody can do anything within the business like Berkshire was a textile company. The CEO had this crazy idea that you wanted to buy stocks and businesses. Obviously, it turned out really well for him. I don’t know this company that we were talking about personally, and I could be great at what they do, but it’s good to be aware and, kudos to Liam. Doing the research and digging in and finding this because how many people just look at the surface level numbers? I could imagine people looking at revenues and completely glossing over the fact that, yeah, this is a huge part of their business, and you need to be aware of it because, if you go along the stock, and then it turns out two years later, The publicity around their derivatives exposure becomes more apparent, or people start to care about that. All of a sudden, if you didn’t know about it, then you’ll probably freak out and sell. But if you were already aware of it and you knew that this was part of the long-term plan, then you’re able to stick it through, and probably, yeah. Add more to the position of Wall Street freaks. So all positives are still doing that research and no negatives from what I see. Dave: [00:12:10] Yeah, I would agree with that. And one of the things, I guess I would like to throw out there a, as a possible consideration is when we think about different businesses that we want to invest in, we’re not just buying the company, and we’re not just buying the product or the service that they produce ourselves. We’re also buying the management that runs the company as well. And so one of the things that we have to. Attempt to do is to determine whether those people are going to be good stewards of our capital and the other people that invest in the company as well. And so when you see situations like that, it would naturally cause you to ask questions and wonder if this person or the people running the company, the right people to be running that company. And maybe they’re just not the best managers of the capital. They may be great salespeople. They may be great. Technicians and come up with a fantastic product, but they may not be great at managing the money part of the business. And those are all things to consider. It’s all part of the process of thinking about buying a company is assessing the management as well. It’s a soft skill. It’s not something that gets discussed a whole lot, but it’s, it certainly is important because the better capital allocators, the Warren Buffett of the world, people like that’s part of what makes him so special. Is that he’s able to take the money that people give him as an investment and turn that into more returns for not only the business but also for the people that are investing in him. And so that’s why it’s like finding a great coach in a sport or finding a great producer of record albums back in my day. Back in the old days, there were two or three producers that were famous for producing all these albums and all these top albums, and all the artists wanted them to produce their music because they knew it was going to give them a good outcome. And it’s the same idea. When you’re thinking about buying stocks, is looking for good CEOs or CFOs. The management team overall and assessing whether that’s going to be a good fit for you as well as for the company. And so those are all questions you can add to your list of questions. You want to ask when you’re thinking about investing in different companies, Andrew: [00:14:18] that’s super key. And if that idea didn’t cement in your brain, I’d recommend going back and relistening to that. Cause that’s. That’s a lot of wisdom packed in what it takes to find good investments. Another reason why I like companies that pay a lot of dividends and buybacks a lot of shares is because they’re showing that they’re willing to give the money back to where it belongs. So moving on to the next question. Hey Andrew, I was wondering about your opinion on the tobacco industry, and I don’t give specific advice wondering more about the industry as a whole. A lot of tobacco stocks have high dividend yields. I’ve been growing for a while and have some pretty stable capital appreciation over time. However, they’re obviously not very sustainable companies. And with the high potential for a big move towards ESG investing, they may become even more unpopular. Additionally, I haven’t looked into this as much as I should have probably, but I know there was at least in the attempt to ban menthol C regrets, maybe only in New York, other than that in a very high dividend payout ratio, which you’ve mentioned, you would prefer less. To a lower payout ratio, leaving more room for growth, many have a relatively strong financial summary, even dividend kings. What do you think about companies? What do you think about companies like that? Decent financials, high dividends, historical dividend growth, uncertain futures. They have; let’s throw that off to you first. I’m curious. Dave: [00:15:36] I guess for me personally, tobacco companies or companies that I stay away from, and for me, it’s more of a personal choice. I don’t like smoking. I don’t believe in smoking. I personally have never smoked. I’ve literally never smoked a cigarette in my entire life. I worked in the restaurant business for a very long time, over 20 years, and I saw a lot of people smoking and. I just, I don’t know anything good that comes from it. I know that they all swore by it, that it helped to calm their nerves. The restaurant business is a very stressful business, and there’s a lot of stress and a lot of just a lot of anxiety and a lot of stress that go into it. Just because of the nature of the business and it doesn’t excuse people. Smoking, but I guess underneath it all, it always frustrated me that smokers would get a break, but we non-smokers never would. So I guess maybe I always ran slanted that, but the health benefits, there are none for smoking, and I don’t know anybody that could. Reasonably that there is, the flip side of that is the tobacco industry has been smart about a few things. Number one, I think they saw the tea leaves or the tobacco leaves changing many years ago. And they jumped on the bandwagon for creating the patches. Gums and Nicorette gums and all of those things to help people stop smoking. So they would get people to smoke, and then they created the products to help them stop smoking. And then they jumped on the vaping bandwagon as well. So they’re trying to play both sides of it, which is smart, but I agree with what the. The questioner was, it was commenting about ESG even whether it’s ESG or not. I really think that the health effects of smoking are going to lessen, and over time, hopefully, I know that my generation we’re a big smoker. And I think as they got older, they moved away from it. That Andrew’s generation, at least from what I saw in the restaurant business, were big-time smokers too. So I’m hoping that maybe they would move away from that. But as far as the idea of what they do and how they do it, and all the things that they mentioned at the end, decent financials, high dividends, historical dividend growth, those are things where those are all awesome. But I think one of the things that would turn me off is if I was just taking. The ethical part of it for me personally, again, is just my opinion. So if somebody else disagrees with me, obviously more power to you, but the uncertain futures of what’s going to happen with Tobacco and the tobacco industry going down the road will go away. No, but what lesson in prominence probably. And I think that would be something that would give me pause about thinking about having this as something as a long-term investment. And I think there are so many other opportunities out there that offer a lot of the same. Ideas that you’re talking about are decent financials, high dividends, historical dividend growth, and maybe not the most outstanding financial futures, but certainly, if you look at utilities, just as a brief example, that utilities offer all those same kinds of ideas. Financials strong moats, strong businesses. They may not have huge growth rates, but they all pay dividends. They all pay strong dividends. They all pay growing dividends. And in some cases, they are. In essence, a monopoly in their region. And it’s unlikely because of the high costs to unseat them. And I’m thinking of a company like ConEd, for example, which is, which does service here in Illinois, but also in the Northeast, I believe. And to unseat to somebody like that is going to cost billions, if not trillions of dollars, to develop an infrastructure and all the things that go into unseating. A utility like that. So there’s some stability in that, but, and they pay great dividends, but you may not see five, 10% growth in the stock price over a long period of time, just because of the nature of the beast. But I guess my point is that you can find some of these other characteristics outside of the tobacco industry. If you look a little bit and there are other industrials that will offer a similar idea. And I guess along with the same idea, the oil industry is probably maybe on the same kind of a tenuous future, possibly that Tobacco is who knows what’s going to happen over the next 5, 10, 20 years. Nobody does, but the signs are on the wall that maybe the oil industry could. It could be in for a struggle bus here over the next five, ten years as green becomes more of a thing. But again, I think to go back to the question for me; the tobacco industry is something that I would stay away from personally. I’m curious to hear what Andrew has to say about this. Andrew: [00:20:17] Since I used to be a smoker and I smoked for a while, I guess I could be the natural person to take the other side of the argument. There is. It’s like a; it’s like paying your bills. Like you just, you gotta buy your cigarettes, and there’s nothing like it. And, it’s great for building relationships and just hanging out and all of that. I think that all said, I have noticed. Between people who I used to smoke with or just looking around and seeing people out in public, there is a big move towards vaping. And then you also have to wonder how much is cannabis going to eat into what used to be Tobacco. And so a hundred percent agree, like when the financials look good, the dividend yield is very high. I think there’s a lot of opportunities, like Dave said, and industries that are maybe unfairly beaten up where the sentiment says this industry is not going to last. And so there’s going to be a lot of opportunity and industries like that. But I think when it comes to Tobacco, it’s, there’s a lot, even if we want to compare like Tobacco, the oil how many. And I guess, it all depends on what circles you run into, there, a lot of this can be anecdotal or personal opinion, and maybe that does play a lot into the valuation, how many, I don’t want to; I don’t want to bring oil into it. Forget it. Forget. I even said anything about oil, but the fact of the matter remains. There’s a lot of pressure against Tobacco. And I think it’s obvious over the last 20, 30 years that health has become a greater priority for society and within the culture. And I think you’re seeing a lot more, especially in the past 10, 15 years than you have seen in the past. Even something as simple as calories used to never be on in drive-through. Windows now you see them all the time. So information informed people are trying to be more healthy trying to live longer. These are all things that don’t really fit in with what Tobacco is. So you’re always going to have people who love it, but you wonder to Dave’s point with the newer generations coming in. They take on to a similar demand that somebody like Dave’s generation saw, and if not, what’s that gonna do to the demand for this kind of a product. So that makes it really tough. You combine that with the fact of a high dividend payout ratio. So what that means is just one-on-one super quick. A company makes this much in profit, and then they’ll pay this much in a different. And so, the more of their profits that go towards the dividend, the higher the payout ratio is. And so if their payout ratio has been increasing over time, what that means is they’re eventually gonna run out of profits. That’s not a trend that can sustain itself. And so, if you want to continue growing a high growing dividend, you have to have growth in the business. And so the question becomes. Where’s the growth going to come from, and how confident can you be that growth is going to be there? I think when you have things that are societal changes, it’s hard to; it’s hard to project that demand of them even. Warren Buffet, when he bought Coca-Cola, he bought Coca-Cola in 1987. There was not much going against people drinking sodas. Would he buy Coca-Cola again today? I don’t know what the answer to that question is, but you do wonder with all of them, again, Focus on health and the idea that products like Coca Cola are really bad for people and just different consumer behaviors of people switching I know an of offices have like the LaCroix stuff, it’s like soda, but there are no calories and no bad ingredients in it. So these are the types of things where. No, no business lives forever. And every business kind of goes through its life cycle, and they have these periods where they have high demand, but that they’re not able to move with the evolving tastes of consumers. Then they’re going to get left behind. And so when I look at the tobacco industry, I just, I don’t even if the prices are low if I feel like I’m pulling onto a ticking time bomb, that doesn’t fit in with what I’m trying to do. I’m trying to do buy investments for the long-term that can compound over decades and where the time is on your side and not against. Because trying to play that game of hot potato and trying to be the one who’s not holding that hot potato it’s a tough game, especially on Wall Street when everybody else is trying to play it too. Dave: [00:24:50] Yeah. I would agree with that. And the thing that I go back to when I think about the tobacco industry, and you were talking about the other side of my negativity about it. I cannot remember. And maybe you could correct me. I can not remember a single person that I’ve ever talked to that didn’t regret smoking and didn’t want to quit; every single one of them that I talked to wanted to quit. They all knew it was bad for them, but they still did it. Now. I can’t get on my high horse too much because here I am drinking soda. Every day and it’s my addiction. And so I understand that there’s an addiction. Part of it was cigarettes, for sure. And, but. I just wonder about the long-term viability of investing in companies like that. And, you brought up a great point with Coca-Cola, like when Buffett did buy it in 87, there was not the stigma that there is now of soda. And so you just wonder. What’s gonna, not what’s gonna come next, but what’s gonna come next, and where is the next thing? That’s that could be potentially not good for us, that we all know is not good for us. I know that soda is not good for me, but I still am. The combination of the bubbles and the sugar and being a diabetic. I, this is my only access to some sort of sweetness, and it doesn’t seem to freak my body out so much so I can, it can handle it. But those are all things you have to consider when you are thinking about investing in anything. As you just have to, you have to look at what the long-term effects could be of the particular product or service that they’re offering and decide if that is something that you want to be involved with and whether you think it could be or could not be something that is beneficial down the road. Andrew: [00:26:37] Yeah. That’s a great point. I think it speaks to the personalized nature of investing, a whole group of people looking at the same set of facts and coming up to wildly different conclusions, just to go back to the financials, having payout ratios that are increasing, particularly if revenues are decreasing that’s a very different situation than an industry that is cheap and things are growing revenues. Growing profits are growing dividends grow. Those are two very different scenarios. And so investors need to be careful when they’re looking for value like that. Dave: [00:27:12] Yep. I would agree with that. That’s a very good assessment. So I have, hi. I have a question. I was hoping you could address in one of your upcoming podcast. I, unfortunately, lost a parent last year and inherited a substantial amount of money. I already have a good deal. Save for retirement 20 years off and don’t need the money for my day-to-day. So the question is how to invest it while minimizing the risk of investing in a market after a historic rebound coming out of the 2020 pandemic crash. For example, if dollar-cost averaging is one possible strategy, what sort of timeframe should one consider? Thanks, Andrew; what are your thoughts on this really interesting question? Andrew: [00:27:50] Yeah. First, I’m sorry for your loss. That’s awfully here. I am having 20 years until retirement and receiving a substantial amount of money. I like the idea of dollar-cost averaging that I know there are studies that say a time in the market versus timing the market. If you’re just going to throw it in an index fund, and that’s maybe the better option, but there’s a lot of psychological benefits too, I think, cushioning any potential Crash that could come cause a crash one year in the market crash could happen at any time. And so we have to be cognizant of that. And so if this is like a crazy amount of money to you and imagine putting it in, and if the market were the crowd. 20% tomorrow. And you would see that negative dollar amount in your portfolio with it freak you out. And the answer is yes. Then don’t put it all in at once. For me, like I’ve mentioned this several times, but when I did a rollover from 401k, I think I had 20 or $25,000 at the time. It was a lot of money. And so what I did is I just split it up into ten months and. Every month, I put in $2,000, and then by the end of those ten months, I had fully diversified that’s that lump sum. And so what that does for you is several things. Number one, you can find ten different, great companies instead of just having to find one. And when you put it into ten different companies, you can afford to be wrong. And, or you can afford for a company to stumble or for it to have some big change happen that’s out of its control. So those are the benefits of dollar-cost averaging that if the timeline to retirement was closer, maybe if it was me personally, I’d look more into putting some of that into bonds, but something that’s still 20 years off, I feel like. It fills me. I’m very comfortable with the stock market. I know the history of the stock market, and that’s something I’ve studied for a very long time, and I’m very familiar with. So that’s why I’d be comfortable putting it on the market. But at the same time, I like spacing out over time because he had diversification of timeframe. And then you also get the diversification of companies and opportunities. If you’re doing individual stocks, Dave: [00:30:01] That’s great. . All right. Folks who will, with that, we are going to wrap up our conversation for today. I wanted to thank everybody for taking the time to write us those great questions. Keep them coming. You guys are asking some really good stuff, and we hope you guys are getting some good value out of our answers. So without any further ado, I’m going to go ahead and sign us off—you guys. Go out there and invest with a margin of safety emphasis on safety. Have a great week. We’ll talk to you all next week. The post IFB202: Derivatives, Tobacco, and Inheritance appeared first on Investing for Beginners 101.
65 minutes | Jul 22, 2021
Andrew Wilkinson’s Tiny Tech Empire
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: Andrew’s origin story and how he became the founder of Tiny, the Berkshire Hathaway of the tech world The idea behind starting to buy businesses based on the same framework that Warren Buffett uses for his investments What Andrew has learned from running his own business and how that has made him a better investor, plus the advantages from reading to learn. For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript Announcer: [00:00:00] What’s the best way to get started in the market—download Andrews ebook for firstname.lastname@example.org. Announcer: [00:00:13] I love this podcast because it crushes your dreams of getting rich quickly. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-by-step premium investing guide for beginners. Your path to financial freedom starts now. Dave: [00:00:00] All right, folks. Welcome to Investing for Beginners podcast tonight. We have a very special guest with us tonight. We have Andrew Wilkinson from Tiny. He is the CEO, founder, and entrepreneur and a really smart guy. And I think you guys are going to really enjoy our conversation. Andrew, thank you very much for joining us today. We really appreciate you taking the time out of your schedule to come and talk to us. I know you’re a busy guy, so I guess you tell us a little bit about you, your company, how you got started. I know that’s a lot of stuff to dump on us, but I guess throw it out there, and then we’ll see what we got. Andrew W: [00:00:31] Sure. Thanks for having me, guys. Yeah, I have a bit of an odd story; my story really starts when I was in high school. I’m from Canada, grew up in Vancouver, which is a pretty big city. And when I was 15, my family moved to Victoria, which is a very small city on an island. And I was not very happy about that. I was 15. I was moving away from my friends. I was bored stiff, and the city was all old people, and I didn’t know anybody. And so I had a summer before 10th grade started, and I spent all my time on the internet, just fooling around learning how to build websites. And I ended up realizing that there were all these websites that reviewed tech products. So speakers, computers, iPods, that kind of stuff. And I learned that those companies get free review units sent to them. And as a teenage nerd, that sounded amazing. And so I started—a tech news site. I started writing articles reviewing products, and getting all this stuff sent to me for free. And I was just in hog heaven. My family didn’t have a lot of money, and I was always using 15-year-old computers. So suddenly, Apple was sending me iPods and laptops and all sorts of amazing stuff. That ended up turning into kind of a bit of a business and hiring employees and managing a staff of writers. I ended up getting to travel to all the Macworld conferences. I interviewed. Steve Jobs had just an amazing experience. And throughout all this, I kind of skipped high school. I was just barely passing. I think I got 49.5% on my math 11 final. Like I was just scraping by, and I went to my father when I graduated, and we’re driving down the street, and I said, dad, I’m not going to go to university. I’m going to keep doing this tech stuff. And I remember he slammed his foot on the brake. He pulled aside to the side of the road, and he pointed it at a gas station. And he said you’re going to be working there for the rest of your life. What are you thinking? You have to go to school. My dad did ten years of architecture school, so he’s very serious about it. And he ended up talking me into going to journalism. I went to journalism school very quickly realized that I was not for myself. I didn’t want to write hard news and felt like it was a dying industry. And so, I was a little lost. I had given away this website that I’d run through high school to a friend that I’d started it with. And I was just trying to figure out what I wanted to do next. And I started reading about all these companies in Silicon Valley like Google that we’re doing in Facebook. They’re doing all these amazing things down there. And so I decided I wanted to move there, but I was dead broke. I just moved back from school, was living in my parents’ basement. And so, I decided that I would do some freelance web design to save up some money before moving down. And I realized one thing, which was. Pretend to be an agency instead of calling yourself; hey, being like some 19-year-old twerp designer, people would take you a lot more seriously. And so I came up with the name MetaLab I designed a super slick-looking website, and I started just applying for contract work with startups to helping them design their websites and stuff. There were all these websites where startups would put out a job listing saying, I need someone to redesign my marketing site or help me design my product and stuff. I ended up winning a contract with one of them for $10,000. And it was like it was suddenly, I was like, why would I go and get a job down in Silicon Valley? I can just keep doing this and make more money. And I get to live up in Canada, where it’s really beautiful. And so MetaLab just continued to grow and grow. And over the years, we ended up going from working with tiny little startups to companies like Walmart, Apple, Facebook, Google, and it was amazing. It was like being the Forrest Gump of the startup world. We got to work with Slack and Pinterest and Shopify and all sorts of amazing people. And along the way, I started making a lot of money. The business was profitable, and I didn’t really know what to do with the profits. And everybody always said you should invest in real estate or stocks, but those seem very boring to me. I didn’t really understand those and what I was excited about with software businesses. And so I ended up starting a whole bunch of businesses, incubating businesses within and what I really craved was recurring revenue. And so, I started a bunch of software companies and digital goods businesses. I didn’t want to have clients and have to manage those complicated relationships. And before I knew it, I had about five businesses. I had over a hundred employees, and it was just me and my business partner, Chris, managing everything. And I hated my life. I was absolutely miserable. I couldn’t keep track of everything that was going on. I didn’t know how to hire executives. I was just so stressed. And so, I ended up deciding to sell one of my businesses. I sold a business that we had started called Pixel Union, which was Shopify’s first partner in the theme ecosystem. So basically allowing stores to buy templates for Shopify. And we sold that business, and suddenly I had a big pile of money, and I’d never had that before. I’d always just been reinvesting my profits. And so for the first time, I was like, okay, I have to learn this investing stuff. And I got really lucky. I just happened to pick up a book about Warren Buffett, and I always knew who Warren Buffett was, some stock market guy. But I never thought much of him. And when I read about Buffett, I was like, oh my God, this is amazing. He’s one of the wealthiest people in the world, he owns about a hundred businesses, and he actually doesn’t do anything all day. He just reads any talks on the phone once in a while. And I was like, how does he do this? And so I started learning about the way he’s structured, Berkshire Hathaway. And it really appealed to me. I’m somebody who loves starting stuff. I love doing deals. I love working with interesting people, but I don’t actually like the day-to-day operations. And so once I read about Buffett, I went, maybe I’ll try this same thing in the tech world. And so I spun it all my businesses. I hired CEOs to run. And a funny thing happened. They all started growing faster and doing better. And I was just hooked on investing. And so I started buying companies from founders like me, hiring CEOs to run them and leaving them and holding them forever. And so for the last seven years, we’ve been doing that, and now we’re up to about 35 companies. We have a public company. It’s been totally crazy. So yeah, I’m super lucky to be able to do it and especially lucky to be able to do it from Victoria, Canada. So it’s awesome. Dave: [00:06:56] Yeah, that’s a fantastic story. And I, I. What was it like being, as you put it in an 18-year-old twerp and running around with some of these, these big names now, I don’t know where the big names, then Facebook, Google, were those big names then, or was it, was that it is that kind of like a monopoly money situation where you’re like pinching yourself that you get to hang out with Steve Jobs and people like that. Andrew W: [00:07:20] I was honestly just going, how is this happening right now? I did not deserve to be here. Lots of imposter syndrome, but over time working with, you working with all these founders, I’ve probably worked with, I don’t know, 150, 200 founders while I was running. MetaLab the agency. And you realize, everyone’s just figuring it out on the job and that it is really hard and that some people do get lucky and some people are just really smart. But it was an amazing experience because I got to see other people fail. Without taking personal risks, we were always getting paid for our work. And so I came out of it feeling like I had done ten years of startups myself without having to fail myself. Of course, I have my own failures, which I can tell you guys about. But it was really helpful. Dave: [00:08:04] Yeah. That’s amazing. So what was the book that you read that kind of started this whole idea? Andrew W: [00:08:08] I read the Roger Lowenstein book The Making of an American Capitalist. And then I read Snowball after that, and I just got hooked on the idea of buying a dollar for 50 cents or just having one insight Coca Cola is going to go global, and it’ll keep growing for the next 30 years and making that one bet and then not doing anything for 30 years. That’s, there’s something amazing about that. Dave: [00:08:32] Yeah, there’s certainly is I, one of the things that I really enjoyed about listening to some of your other talks and reading through some of your stuff was the, how you’ve really adopted Buffett’s idea completely. And not only just with the formation of your company but how you structure your day-to-day life. And I wonder the question that kept popping up in my head when I was thinking about all these things is why don’t more people adopt this. What do you think? Andrew W: [00:08:58] I think it’s a unique situation. Most people are not don’t have my personality. My personality is like I’m Teflon for tasks, right? Ever since I was a little kid, if my mom said, do the dishes, I would find every excuse, every way to get out of it, try and convince my brothers to do it, try and pay my brothers to do it. I just didn’t want to do anything that I didn’t want to do. So I have a unique personality in that way, and that makes it easy for me to delegate. Whereas most entrepreneurs, I think, really struggled to delegate. They often hire the wrong person. It doesn’t work out. And then they say this doesn’t work; I’m never going to do this again. And I think that’s part of it. And then the other unique piece that’s enabled me to do this was I got lucky, and my first business was profitable. And so, I never needed any outside money. So to date, we have we’ve only in the last two years raised any outside capital from anyone else. So we, we got 14 years in without any money, a little bit of bank debt, credit cards, that sort of thing. But that gives you a lot of independence to run your day, the way you want when you don’t have to answer to other people. Dave: [00:10:03] Yeah, good point. Andrew S: [00:10:05] I got a question there. So you mentioned having that financial independence, not needing to look for outside capital, and I think that’s one of the. Things about Buffett that doesn’t really get much attention is the fact that by the time he had Berkshire, he was already on the journey of financial freedom. And I think that when you look at the way he structures, like the fact that they have Geico, and he needs to have all of this cash to sit on the balance sheet so that they can serve that business. Some people look at that and say they should be putting that cash to use, but for somebody like Buffett, it gives them that kind of patience to wait for really the best opportunities, maybe that one or two big insights. And so for you do you think that. That fact that you had that independence has helped you when you’re looking at businesses to invest in and be pickier in that process? Andrew W: [00:10:56] Certainly on the investing side, because I don’t want to, I have no incentive to buy a business. I can sit and wait and build up cash. Maybe I could reinvest it in one of our other businesses. What I see from a lot of entrepreneurs is who want to become investors, are they go I can’t do that until I buy a business; I need to buy a business. Then I can start being an investor, or I can move to this different way of life. And so they have a massive incentive to buy any business at any price. And we just don’t have that pressure. There have been years where we’ll sit on our hands for a full year without doing any deals or only making a few small bolt-on acquisitions. So yeah, it provides us incredible freedom to not have to do stuff and just be able to sleep. Dave: [00:11:40] Yeah, that’s important. Huh? Andrew W: [00:11:42] It just goes back to we’ve done that before, where we have levered up to do a deal, or we’ve bought a business just because we’re excited about it. Or we saw the potential, and it just so rarely works out. I love taking base hits, and I’m very comfortable writing very large checks; when I see something that is just so logical where I just go, I will bet my future on this. And it’s just a better way to invest. I find that when you try and when you have to pencil stuff out too much, it’s never a good investment. Dave: [00:12:11] Yeah. That’s good; that’s a good insight. Andrew S: [00:12:13] Can you talk about that? You said you levered upon and what you learned from that? Andrew W: [00:12:18] I will just say that what we’ve done in the past is We’ve levered up to, and we’ve levered up as a group, right? So it’s always we have very large cash flows. We’ve never had a crazy amount of debt on one specific deal or on the whole company, but I’m just allergic to debt, and I’m very conservative. And so there was a period where we bought a business. I won’t say which, but we have; we bought a business, and it took about three years for us to see our thesis through; we were very confident, but we felt that we could make the business much more profitable and scale it. And so, we used leverage. And we were able to pay our, the bank and covenants and everything else, but we had this period where we’re going, wow. Should we have levered up because we weren’t able to grow it for the first two or three years, but then in year three, it became massive. So I just don’t like that feeling of going, oh God, will this work out? And I’m, I’ve built the business in a way, or Chris and I have built the business in a way where pretty much everything could fail, and we would still be fine. We’ve got adequate cash and the ability to pay off any debt we have or whatever. But I just don’t generally like to have to think about it at all. Dave: [00:13:32] Yeah. That’s interesting. So I guess, could you tell us a little bit about it, there was a story you shared on Twitter a while back about losing a few dollars. And I thought it was a really, it was really insightful, and frankly, that’s one of the things that really attracted me to follow you on Twitter. The honesty that you showed through that tweet. And I guess, could you tell us a little bit about that? Andrew S: [00:13:54] Sure. When I was running Metalab, I really idolized Jason Fried and David Heinemeier Hansson, who are the founders of a company called Basecamp, which used to be called 37 signals. And they had this amazing business. They had started a project management software called Basecamp, and they had built it into a business that did tens of millions of dollars of recurring revenue. And they’d bootstrapped the entire thing. And they basically said you don’t need VC to go out and start a great business. Look at this business we’ve built. And they are amazing guys—friends with them. I’m a huge fan. But I drank the Kool-Aid. I, I read the book, and I went, oh my God, I want this. I want to wake up in the morning and have made recurring revenue, right? Because I was running an agency. And when you run an agency, you’re constantly balancing supply and demand. You’ve either got too much demand and not enough people, or you have too many people and not enough demand, and either, or either one of those really sucks. And so, I love the idea of a predictable business. And I also liked the idea of building our own software. We were always building software for other people. And I started taking my profits maybe $20,000 a month at first. And I took a couple of our developers off of the agency, and we started building a product called Flow which was task management software. I’m a to-do list junkie. I got really into the getting things done system, and I wanted a way to delegate tasks to my team and be able to have a global to-do list. And so we started building the software, and it was really beautiful. We had amazing designers on the project, and we were a design agency, and nobody had built anything like it. And so we launched a beta, and we got crazy attention. Everybody wants to be a part of this beta. We’re getting amazing feedback, super high NPS score. And when we opened up the flood gates, and we started letting people in overnight, we had $20,000 a month of monthly recurring revenue. So I was going, this is absolutely amazing. I had the founder of Twitter, Evan Williams, call me and say, I want to invest. I had all sorts of venture firms wanting to invest. And I just said, no, I, I don’t want to do that. I want to bootstrap. I want to do it like David and Jason. And what I missed was that at the end of the day, productivity is very hard for a variety of reasons., one of the number one reasons is that every developer wakes up every morning and says, I’m going to build a to-do list app. Everyone has a take on it. And everybody likes to blame their lack of productivity on whatever project management software they happen to be using at that time. It’s not my bad management; it’s we don’t have the right to-do list system or whatever it is. So people jump around a lot, and we had this great business; it was growing relatively fast. We’re probably growing 5% a month for the first few years. And over time, I just started pouring more and more cash into it. And then an interesting thing happened, a little shortly after we launched. I heard that the co-founder of Facebook had left Facebook, and he had the same idea. So he wanted to build a very similar to-do list product called Asana, which I’m sure you guys have heard of. And at first, dismissed it. When I looked at it, it was very badly designed. It was built by engineers. It was very confusing. And I said that’s fine. We have a better product; ignore them. So we kept growing, and then Android started becoming an expectation and iPhone apps. And so it got more and more expensive for us to keep building on more and more platforms. And so before I knew it, I was spending a hundred thousand dollars a month on this business, $150,000 a month hiring more and more developers. But I was total; I’m I was totally confident we were going to kill it. I’m not worried at all. And what I had done was I’d done something that a lot of people do, which is a field of dreams, marketing, which is the idea that if you build it, they will come. And that’s rarely true. Generally, when you release a product, you need to have a go-to-market strategy. You need to have marketing. I hadn’t done any of that. I didn’t understand that I was a product person. And so, while we had what I felt was the better product, Asana went out, it was founded co-founded by a billionaire. They had unlimited resources. They’d raised tons of venture. They just started outspending us on ads. And so I was quite upset in the beginning thinking, these guys have the worst product, and there, but they’re getting, they’re becoming the name in this space, and we’re not getting the attention we deserve. But then, over time, even that advantage got eroded. So as they raised more money, they hired better designers, and eventually, they redesigned the product, and their product actually became better than ours. So when you looked at a matrix of features, they had more features. They were better designed. They were on more platforms, and they had an unlimited marketing budget, and they were a two-factor secure enterprise that enterprise sales team, everything. And so, all of a sudden, our business started declining because, at the end of the day, people wanted somebody that was a big company. They wanted to be on the company that was standardized that the fortune 500 used, et cetera. And we just started a slow decline. And what ended up happening is the business just petered out. And now the business has stopped growing. It’s been unprofitable up until about five months ago, and we basically had to do a hard pivot where we had to let the team go, which was horrible. We were, fortunately, able to place most people at other companies or portfolio companies. People worked on this for ten years, and we were wrong. And I lost $10 million in the process, which was terrible, but what’s worse is we had all these incredibly smart people pour their heart and soul into this business, which didn’t end up reaching its full potential. And it didn’t reach its full potential because I didn’t understand the dynamic of competing against venture-backed businesses. Venture-backed businesses can afford to be unprofitable and outspend you for five or ten years if that’s what’s required to win. And I had nothing; I was just some random guy injecting a million or $2 million a year into this business. And so I compare it to. Fiji is trying to invade the United States, where they have a bunch of rowboats with Gatling guns on them. And we have aircraft carriers; it’s just obvious looking back. Of course, we’re not going to win. Of course, we had to raise money. We needed to have a militia. We needed to have guns. We need, we had none of those things, but due to my overconfidence in inexperience, I ended up losing a lot, and it was a great lesson, and I’m fortunate. I had other businesses that did well, but man, it’s a great way to lose, to learn a lesson. Dave: [00:20:30] Yeah. So what was the aha moment for you? When did that, when did it Dawn on you that, Hey, maybe this isn’t gonna be a thing? Andrew W: [00:20:35] It’s one of those things where I think you subconsciously know it, but you’re not willing to admit it to yourself, and it’s much more painful to think about it. And so, I just kept funding the business over and over again. I think in the last two or three years, I realized it was not going to be the success that I thought it was. But it was a slow creeping realization. And my business partner, Chris, constantly told me from six or seven years ago, Hey dude, I don’t know what you’re thinking here. It’s easy; it’s hard. It’s hard to just hear, have someone else tell you, you have to come to that realization yourself. Dave: [00:21:06] Yeah. That would be so; how do you think that has shaped what you do now when you’re searching for other businesses to bring under, under your umbrella? Andrew W: [00:21:15] There’s a great saying by Charlie Munger, who’s Warren Buffet’s business partner, fish, where the fish are, and that really resonates with me. The idea is that you can go to a large fishing hole that’s crowded with other fishermen that are trying to catch big fish. And let’s say there’s five big fish in a huge pond, but there are a thousand fishermen around. I’d rather go and walk off the beaten path and find a sleepy little fishing hall with a bunch of herring or something in it with plentiful fish and a few sleepy old fishermen. I’d much rather fish there. And so what that lesson has taught us is don’t go to these hyper-competitive markets; find the quiet, sleepy off the beaten path areas. And so, I always like to joke that while we do tech, we buy the auto dealerships and dental clinics of the internet. We’re not looking to do robotics and deep tech. Dave: [00:22:10] So you’re staying away from the AI and all the flashy, fancy stuff. Andrew W: [00:22:14] Yeah. Do any of that? I look around, and I think all of our businesses do something good in the world, but they’re mostly pretty simple. They’re not doing anything cutting edge. They’re using existing technologies to build communities or help find people find jobs or just simple stuff like that. Dave: [00:22:30] And I think that’s the most useful stuff. And one of the things that I like about what you’re talking about is that it highlights the idea that you don’t need to get rich fast, and you don’t need to search for the latest hottest thing. Sometimes boring is beautiful. Andrew W: [00:22:43] Imagine if everyone in real estate was doing cutting edge, BRK angles, crazy buildings, right? And you come to me, and you say, oh, I’m doing a real estate project. I’m building a 30 townhome development for single-income families. And imagine if I said that’s ridiculous. I can’t believe you’re doing that. You need to be building these crazy skyscrapers that might fail and no one alike or whatever. It seems crazy. And that’s what people do in tech. So 99% of people in tech seem to have this attitude that if you’re not doing something crazy, cutting edge, and changing the world, and you have a 90% failure rate, you’re not doing something worthy. And I think there’s a lot of just basic picks and shovels kind of work to be done on the internet. And I love those businesses, and I’m glad that fewer people I’m glad that there are not too many people who have caught onto that. Dave: [00:23:34] They’re not fishing in that small pond like you’re looking at it. So how do you find deals? I got to imagine you get bombarded with requests, emails, and that kind of thing. Is it something that you actively search for, or is it just a, like you were saying, a wait-and-see kind of idea? Andrew W: [00:23:48] We have found reputation and network compounds over a long period. And for 15 years, we’ve had one of the premier agencies in Silicon Valley and in tech in general. And I’ve just gotten to know a lot of interesting people and gone to a lot of conferences and just had lunch with someone every day. And when you do that for long enough, and you put out into the world that you’re doing something. Things start coming to you naturally. And so we aren’t like other private equity firms that go out and they hire an army of associates and bombard every founder on the internet with templated emails saying we’d like to buy their business. We really just put our shingle out there. Talk about what we’re doing publicly and wait for people to come to us. And that’s worked out really well for us. I think just having a reputation for treating people well and doing fair deals, and not making a complicated goes a long way. Dave: [00:24:41] Yeah. I would agree with that. So I guess if you were 18 years old now and you wanted to start a business, what would you tell yourself? Andrew W: [00:24:47] I don’t know what I’d tell myself. I know what I’d tell someone today. I would say w focus on a launchpad business. Don’t focus on building the perfect business. I think I talked to a lot of ’em. Young MBA students and people who are keeners and stuff. And I think most people overthink whatever business they’re going to start. W they always say it I want to build a billion-dollar business. And I always think your goal in entrepreneurship is about freedom. So your first business just should provide you freedom. And once you have freedom, then you can do the billion-dollar crazy stuff. People forget that Elon Musk went out and started PayPal, which is a kind of a boring business, right? It’s payment infrastructure. He made 200 million. Then he started launching rockets into space and doing all this crazy stuff. He didn’t start with rockets. If he started Space X on day one, he would have failed. He couldn’t have taken that risk. And so I think there’s a really wonderful power in just building a business that can make you a hundred or $200,000 a year of profit. Even if it doesn’t grow, even if it’s something boring, even if it can never be something huge to provide you with that base, I call it like a launchpad business. And that gives you the launchpad to launch the rocket. And the rocket could be a crazy out-there idea or just a bigger business, something iterative. It could be investing your capital, whatever it is. I think the other thing I see is most people. They think what they’re doing is measure twice cut. Once they want to be thoughtful about the idea they pursue, but I find most of the measure ten times and then just never cut. They just don’t pull the trigger. And so I always tell them, just start, design a logo, come up with a name, write some copy, tell your friends you’re going to do it, tweet about what you’re going to do. And for me, that just helps me move it forward. I’ve made a public declaration; it has a name, it’s a real thing. And generally, in the first day or two, I try and propel the business forward in some way. And I find that really helps me because otherwise, I’ll just cut caught in analysis paralysis. Yeah. Andrew S: [00:26:48] Along with that, but so when we’re on the show, we’re telling people to look at different businesses to invest in, in the stock market. One thing that we. Key in on is like management, and that’s their role in the business. So you mentioned, with CEOs, you’ve gotten pretty good at hiring good CEOs that are good fits for businesses. Can you give any insight into that as, or something that I guess maybe it might be different for you looking at a person versus like somebody from the outside and trying to evaluate management but are there any common themes in evaluating management that you could share with us? Andrew W: [00:27:24] It’s really hard. And I think it’s like brain surgery. So you take a founder, and they’re the brain in someone’s body. You’re cutting the brain out, and you’re installing a new brain, a new CEO. And it’s incredibly important to make sure that they have shared DNA. That they’re the same kind of person. And that could be something as simple as if we have a very casual culture where people are very plain-spoken; they don’t get dressed up. And I go, and I hire some slick MBA from Harvard business school who wears this. And toxin fancy words. That guy might be great for a different business, but not for that one. If I put that person in the body will immediately reject them. And so there’s that kind of qualitative, is this just culturally the right person? And then on the skillset side, I’m really looking for somebody who’s done it before. I always say, if you want to build a house, you find a building contractor, a general contractor who has built a hundred houses before you, that you like, that you think are beautiful and well built. And it has a great reputation. You don’t go and find some kid down the street who says, yeah, you know what? I think I’d like to build a house. I’m okay. Carpenter. So you look for people who have a track record of building businesses that are similar to the one that you’ve just acquired. That’s how we like to think about it. And I would say our hit rate is pretty good. Occasionally we have a misfire, and we try and make a change as quickly as we can. But for the most part, we’ve been very lucky with the CEOs. Dave: [00:28:49] How do the, how do I guess what’s your hit rate on the founder, staying with a company? Is there, do you have ideas of whether when you buy the company, I’m sure you probably talk through whether the person’s going to stay or go. And is that something you encourage, or is it really up to the person that you’re buying the company from? Andrew W: [00:29:07] It’s totally up to the founder. Our favorite acquisitions are the ones where founders started. It built, it grew it, you always talk to founders, and in year one, they say, I’m doing this forever. I’m in this for 40 years. Talk to them about your five or six. And they start to say; you know what, I’m a little bored. I want to do something new. And often, they don’t actually want to just fully say bye to the business. They might want to keep equity in it. They might still want to be tangentially involved, or they might even want to. But often, they’re saying to us, look, I want to leave, and I don’t want it to be painful because private equity usually makes it painful. They make you stick around; they do a big earn-out. They make you stay for two or three years, and then they sell the business. So it’s just not great for founders. And so what we do is we say, look, here’s a big pile of money. You can sell a hundred percent. You can sell 60%. You can stay in business if you want, or you can fully leave. Or you can stay as an advisor or whatever you want to do. And generally, people decide they want to leave. And what we’ve seen is that founders are often incredible product people, but they often miss marketing and sales, and other opportunities. And so usually, when the founder leaves, we can start to scale up those efforts and often grow the businesses substantially as a result. And then the founder benefits because they’ve held onto it. Dave: [00:30:23] Do you have a more decentralized system in that it’s more hands-off from you and your partner and the people that you hire, whether they’re outside CEOs or whether the founders, they run the companies and basically like Buffett they just send the cash to the home office, and then you allocate it from there kind of thing. Andrew W: [00:30:42] It’s exactly the same thing. So we, and we’ve learned this lesson the hard way. We have had moments where we’re like, oh, we should synergize a little bit, or let’s have the CEOs write us monthly reports just so we can keep track of what’s going on. And what we do is we just have every CEO write us a report or come and visit us once a year. And otherwise, we don’t talk to them. So unless they have an issue, or they want to spend a huge amount of money or something or acquire a company, they don’t talk to us. We always say, call us if you need us. But that decentralization is what allows a company like Berkshire or Tiny to actually function. I think running a conglomerate like GE would be really hard and all of our businesses are so different. I don’t know how we would synergize them effectively. Dave: [00:31:23] Yeah. And I’m sure it allows you to focus on the things that you feel like you are good at and to do and want to do. And that helps Tiny overall grow. Andrew W: [00:31:32] Well. And CEOs don’t like to; I always call it the swoop and poop where, suddenly a CEO asked me a question, and then I dig in, and I have a bunch of opinions, but my opinions are uninformed. The CEO knows best. And also, I haven’t had a lot of success. If the CEO says I’m going to do this thing, and I come in and Kai Bosch it, then they just feel frustrated. That they didn’t get to do the thing, and they might resent me. So I often, even if I disagree with what the CEO is going to do, I just leave them to do it. And as long as it’s not self-immolation and it’s going to destroy the business, it’s fine. We can have, we can mess up a few strategic initiatives, but it’s it, it’ll teach the CEO something, and often I’m wrong. Often the things I think are goofy work out really well. Dave: [00:32:18] Nice. So I guess let’s talk a little bit about, you mentioned earlier about taking a company public. What was that process like? You were actually the first person I’ve ever spoken to about kind of an insider, if you will, of that process. So what was that? What was that like? Andrew W: [00:32:33] It was pretty wild. It’s like climbing a mud hill, first of all, because you’re the process of doing it is really frustrating, right? It’s a lot of filings and audits and very boring kind of procedural stuff. So that stuff is not fun. You’re signing a lot of documents. You don’t know, what should I, what do I need to take seriously? What do I need to be looking at? Which banker can I trust, like all these things? And then you have to deal with investment bankers who are selling your stock and negotiating against you and stuff. So that whole process is frustrating and very stressful. I don’t think it would be stressful now if we did it again, but doing it the first time was very stressful. But once we’re public, it’s amazing. You got access to huge amounts of capital. You can basically go and tap the market and raise equity or debt if you need to very quickly. And you can raise a lot more capital much more quickly than you can when you’re private. So if your business doesn’t require capital, I think being public is. It’s pointless. Unless you have shareholders that you want liquidity for, you want liquidity yourself. But if you have a business that necessitates large amounts of capital, it’s amazing. And historically, as I mentioned before, we never really needed cash. We had tens of millions of dollars of free cash flow. We would just reinvest it constantly. And then we basically had this business that I mentioned that we sold pixeling. Yeah. In the Shopify space. And when we sold it, we kept a 20% stake. And my business partner, Chris, and I stayed on the board, and we watched that business grow and grow. And we realized that Shopify was becoming the dominant player in independent e-commerce. And that e-commerce was going to double over the next 10 to 15 years. At least Shopify was very well positioned. And so, all of the software companies in the Shopify partner ecosystem would probably do very well. And so what we did is we basically the guys who had bought the business from us, we said, Hey, we’d like to buy you guys. So we paid up, we paid, five or six times what they had bought the business for. And we decided to start a holding company called We-commerce, and we started acquiring businesses in the Shopify partner ecosystem. And so that was an opportunity that required a lot of capital. And so, for the first time privately, we raised from Bill Ackman and Howard Marks and all sorts of really interesting people that we had at the table, Shane Parrish from Farnam Street. And we did that as partners started We-commerce as partners. And then we took it public on the TSX venture exchange last December. And we’ve been able to raise a lot of money, and we’ve bought a lot of incredible companies as a result, and that just wouldn’t have been possible to the same degree if we hadn’t gone public. Dave: [00:35:14] Do you think you would do that again with other companies that aren’t during your umbrella if the opportunity presented. Andrew W: [00:35:19] Absolutely. I would consider it, but it goes back to, I need a reason. There’s gotta be a reason for it. I think, while it’s very neat to see your net worth, suddenly for me, my net worth is always a number that I can calculate, but it’s a very fudge factory, it’s I don’t really know how the market would value all my different businesses and having We-commerce stock and seeing it actually get valued by the market every day and remind yourself, wow, that’s a crazy number. That’s a neat thing. But other than that, I mean there’s no, yeah, there’s no real upside other than the access to capital. Dave: [00:35:53] Are you like the baseball nerd? Are you going online to check the price of your public company every hour Andrew W: [00:35:59] No, how they’re doing few days. And I realized that was a road to nowhere. So I stopped looking, and I’d probably look maybe once every two weeks or so. Andrew S: [00:36:09] Cool, everything about your story and your background and how you conduct business sounds really intentional. To me, do you, how, as you come across a lot of different startups, do you find that intentionality is a common thing, or are there other kinds of similar characteristics that have led to their successes versus some of their other peers who don’t find success? Andrew W: [00:36:36] I think the biggest, they always a lot of VCs say this, but I’ve always found people who have failed before succeed more because they’ve got scar tissue. Now, of course, there are people who are just serial failures who keep repeating the same mistakes, but when you see someone who. Burns their hand on the stove and then uses a better technique and guards against burns and learns from it. Those are the people I want to invest in. So I generally like to invest in second or third-time entrepreneurs. And I like people where they choose a business where it doesn’t have to be a billion-dollar business to succeed. I don’t like those moonshots, although we did invest in Space X, which is a literal moonshot; most of our portfolios are businesses where I look at them and say, you know what, if this fails on a venture scale, there’s still a good business here. They have happy customers. They’ve got real revenue; it’s recurring. It doesn’t have to be a billion-dollar business to be successful. Dave: [00:37:32] Yeah, that’s true. It’s there are lots of niches out there that you can fill to find what will work and plug that hole. I think that’s, yeah, that’s awesome. So I guess you’ve run a business now for a while. So what do you think you’ve learned from running a business versus investing with us, with spreadsheets and going that route it’s it seems like it’s there; you can’t do one without the other successfully, but which do you think is a better fit? Andrew W: [00:38:01] There’s that great Buffett quote, I’m a better businessman because I’m an investor, and I’m a better investor because I’m a businessman, and that really rings true. Chris and I my, for he was a long-time CFO and then became my business partner and bought into the business. We started Tiny together for the last ten years. We basically were, or I guess, when we’re operational, it was a daily knife fight of okay, we’re about to run out of money or how are we going to make payroll or this employee is freaking out and there, it was just so complicated. And I think a lot of investors; are used to looking at businesses like spreadsheets, where they go, oh, we’ll just make a 5% reduction in payroll or, oh this margin should just be this much higher because I looked at comps, and there’s some truth to that. If there are other businesses that make more profit, it’s worth looking at inefficiencies and stuff, but they forget that businesses are not made up of cells of numbers. They’re made up of people, and people are very complicated, and they take a long time to change and inspire and move in a direction. And so I think that gets missed a lot. And so we’ll hear about startup ideas that another investor would say, wow, this sounds incredible. And I always just ask myself what I want to be CEO of this company. If you came to me and said gun to the head, you’re now the CEO of this company, would I be confident? Yeah. You know what? I can pull this off or what; I think this is a fool’s errand, this is going to be impossible operationally. And I admire the people who take on the crazy ones cause they work sometimes, but I don’t want to do that, and I don’t want to invest in those companies. So yeah, it’s, it’s incredibly instructive having operational experience because, from the outside, it always looks easy. Dave: [00:39:41] Yeah, it really does. I was lucky enough to run a restaurant for about eight years. See how to talk about headaches and knife fights and all that stuff I had to maybe not this particular restaurant, but I’ve been there, done that. I had had about 50 employees. And I was the general manager, and I was in charge of everything. I had to manage the cash flows and manage the payroll, manage the inventories, manage the employees. That was the real fun part. Bob today doesn’t feel like working in this section, but Jenny wants to work in this section. And how do you juggle the pieces to get them to where they go? And it was stressful, and it was a lot of work, and it led to a lot of the gray hair that I have now, for sure. But now, thinking about investing, it’s enlightening because I can like you were saying, I can look at all these things, and I can understand why management may make a decision the way they do. Granted, it’s a much smaller number. In the restaurant I was working, we were doing 5 million a year in sales. So it’s peanuts compared to the stuff you’re working with, but it’s still the same idea. Andrew W: [00:40:42] So what’s crazy. You had 50 employees. If that was a tech business, you’d be doing 30 million a year. That’s the reality of how spoiled we are in tech and that no one could up the office for a day and the revenue would keep coming in. And I haven’t really shared this publicly, but about five years ago, a friend of mine and I we said, Hey, we’d really love to start a tangible brick and mortar business. And we started a New York-style pizzeria. And it was when you think about starting a restaurant or a cafe, you think about the fun part you think about coming up with the logo and the name and the concept and the menu and tasting food. But it’s not about that. It’s about hiring people and motivating them and keeping them on track and keeping the place clean and paying insurance and mopping and all these things you just don’t think of. And so we started this business, and it was a complete disaster in every conceivable way. We went through three managers at one point; we had people. Staff stealing, liquor, like it’s just endless the problems you face in a brick and mortar business. And so when I hear someone’s a successful operator in brick and mortar, I actually put them on a pedestal way beyond the neat tech CEO or luminary. They, it’s insane, the amount of work that goes into a business like that. Dave: [00:41:55] It really is. And yeah, I, amazing. You lasted for all that time and had no gray hair. So I’m impressed Andrew W: [00:42:02] you there, they’re coming in. Dave: [00:42:06] Yeah, it’s, but I really think that I’m lucky that I’ve had that I had that experience. I didn’t always feel that way at the time, but it taught me so much. And just about. How to read financials and understand the impacts of all these things. In the restaurant business particular, the margins are so thin. And so, every decision that you make has an impact. And, I know that investing, they talk a lot about picking up pennies in front of a steam roller, but in the restaurant business, you have to pay attention to the pennies because they add up over, over time, and they can make it a big impact. Andrew W: [00:42:38] Well, the problem is the difference between making money or not is two or three pennies. Your net margin is maybe two or 3%, maybe 5%, if you’re best in class. And so what I missed was an owner-operator would care when, when you need to clean the windows, they would go out and do it themselves because they go, I’m not paying some guy, a hundred bucks to do that. But when you have a manager, and it’s your money, not theirs, they go, yeah, sure. Let’s have the guy come and clean, and because they don’t go the extra distance, that’s the difference between being profitable. Dave: [00:43:07] Yeah. Yeah, exactly. Exactly. So let’s pivot completely and talk about reading. So you had this great. He had this great tweet a while back, and you were talking about the impact of reading. So what does, how has reading impacted you? Andrew W: [00:43:20] I think reading is essentially a really amazing way to learn what you don’t want and to learn from other people’s mistakes. So growing up, I thought I wanted him to be the next Steve Jobs was totally obsessed with him, idolized him. And then I read the Walter Isaacson biography, and I was like, wow, like an amazing guy, but I don’t want that life. I want to have a balanced life and exercise and spend time with my kids. And, I don’t want to push people so hard that they cry and all that stuff. He obviously achieved amazing things, but personally, I just go; that’s not for me. And so I’ve found it really instructive too. As Charlie Munger puts it, learned from the eminent dead people who have done amazing things, and then you work backward from what they achieved and go well. Was it worth it? And were they happy? And so many times, you learn that these people who have achieved incredible things just weren’t happy people. And so that’s taught me a lot. And that’s been my favorite way of learning. I never did particularly well in university or and high school, but just reading constantly really accelerated things for me. And it’s been a pattern. That’s another thing; I look for in people I invest in are people who I hired on my companies is I just want people who read books, that when they have a problem, they go to the library or their Kindle. And they immediately start reading a book on the topic to just save all the time, because it can save you five years of strife. Dave: [00:44:43] Yeah, totally. So is that how you, weren’t all your tech skills and all your design skills was the reading or was it the doing? Andrew W: [00:44:52] It was really cool. I read Dan Cedar Homes’s book about CSS, and Dan ended up founding a company called Dribble, which I use to find a lot of my early. It was a social network, very, it is a social network for designers, and I used it to find a lot of my early jobs and meet clients. And then, we ended up buying the business in 2015 or 2016. And so it was this amazing thing where I learned to design from Dan, and then he started this company, and then, we bought it. He’s still, still a shareholder, and we’re friends, and it’s just like a neat, it’s a neat thing. He was like my idol when I first started designing 15 years ago. Dave: [00:45:28] That’s cool. So as somebody who’s colorblind, is that something that I can learn how to design because I’m color colorblind. So I got issues. Andrew W: [00:45:37] Just choose things that are in that color palette that you can see. I don’t know. I don’t know if that would impact you. I haven’t actually looked into that. You find it affects you much. Day-to-day? Dave: [00:45:46] Only when I get dressed. Yeah. There, there have been times, especially when I was in the restaurant business, I would show up sometimes; as the general manager, you have to go out, shake hands, kiss babies, and all that stuff. And there would be times when I’d walk in on my employees to go no because you’re wearing weird colored shirts. Yeah. You can not go and talk to people like that. The blue socks and the black socks that’s happened more times than I can count. It doesn’t impact me per se, but there are times when I’m trying to do things that, yeah, it’s a bit of a challenge when I’m trying to do, design any sort of graphics or anything further for our blog. It’s sometimes I look at it. Yeah. I don’t know if that’s gonna work or not, but I trust that people will tell me, Hey, I know David Canva has great templates. Yeah, I actually, yeah, I do. I do use the stuff on canvas, so it does help, but yeah, there are some anxious moments from time to time. I’m not gonna lie. So I guess, are you, when we think about reading, then I love to read I read constantly. Are you one of those people that sit on your butt and reads all day, like Buffett and Munger? Or is that more like is it intentional or is it more like when you need to learn something that you go to the resource to find it, Andrew W: [00:46:58] those guys are unique. I think they have a personality where they can just sit and quietly read for six hours a day. I’ve never had that personality. I’m an extrovert. I like talking to people. And I spend a lot of my day talking on the phone and meeting people in person and just moving the ball forward, but I’m not operational, so I’m never. In the businesses I’m working, maybe on a very high level on the business with a CEO, if they’ve sought me out for feedback, or I’m just looking at deals and opportunities. And I’d say I probably read 30 to 60 minutes a day, split between audiobook and Kindle before bed. There have been periods in my life, though. Like when I first started learning about investing, I became totally obsessed with value investing, and every night I’d be reading for four hours. So I’ll go through periods of intense study where I’m deep diving on a topic, and then I’ll read a ton. But no, generally it’s like a one-hour, a day thing. Dave: [00:47:49] Nice. So do you, are you, do you read the annual Buffet’s annual report every year? Andrew W: [00:47:54] I do. Yeah. Dave: [00:47:55] Okay. Welcome to the club. I actually took time to work through all that. From his early partnership letters to this most current letter, it took me almost six months, but yeah, it was interesting. Andrew W: [00:48:06] That’s all you need to do. Like you can learn everything you need to know about business by just reading Warren Buffett. Dave: [00:48:10] Yeah. Yeah. It’s an amazing compilation of knowledge and insight, and humor too. So he’s got some; he’s got some nice one-liners there. So I guess let’s talk a little bit about podcasting. You, you talked about you had some really interesting ideas about podcasting. I listened to your interview with John Mihalajevic on MOI Global a while back. And that was really interesting. So I guess you thought that Joe Rogan had made a mistake. And so I was curious what your thoughts on that. Andrew W: [00:48:39] Yeah. So I think podcasting is where internet websites were in 1999. So in 1999, everyone valued websites based on their advertising eyeballs. So it was all about how many eyeballs, how many impressions. And then what we saw was that the most valuable websites were actually internet soft. So it would be Saas software where you pay a recurring fee to use a service. And that’s a much better way to monetize. It’s much more predictable. You can make a lot more money; you can build a business; you can do R and D, et cetera. And so, the best businesses online are now membership-based. And when I looked at podcasting, I just went; it seems like that would be a much better opportunity. I’m a huge fan of all these podcasts. And if there is extra content or a way to support them, I would love to get that extra content and buy into it. And so I think advertising is great for most podcasters, but there’s always 5% of your fans who are super fans. And if you model that out and if 5% of my listeners converted and they paid me five bucks a month or ten bucks a month, if you offer them more, what’s that worth. And when it turns out when you do the math, it’s actually a lot of money. So if you’re going to make a hundred thousand dollars a month of ad revenue, you can probably make a hundred thousand dollars a month of premium subscription revenue for your top fans, especially if you offer additional content and stuff to them. And so we started a business called Supercast, and we’ve been pursuing this and helping podcasters move to a subscription model. And it’s not an all or nothing. You don’t have to give up ads, but there are always those super fans who want more. And so we enable them to give them private feeds for those subscribers and give them extra content. Dave: [00:50:23] Yeah, the whole podcasting thing is interesting, isn’t it? Because it’s really its radio. It’s what our parents used to listen to, and now it’s become. This hugely successful, popular thing. And it’s really just radio. Andrew W: [00:50:35] It’s like radio blogging almost where it’s now it’s first there were newspapers. Then there were like thousands and thousands of bloggers, and everyone had a blog, and now it’s, everyone has a podcast. But it’s, and it’s so long-tail now. Dave: [00:50:47] Yeah. Andrew and I started what, four years ago, I believe. And, podcasting was, it was big, but not like it is now. There’s just you like you said, you, you turn around, and every single person who walked down the street and probably every single person has their own podcast, it’s just, yeah. Andrew W: [00:51:05] We have a podcast that we started. Yeah. Dave: [00:51:09] Yeah. So it’s amazing. So, where do you, what do you think the future of podcasting is? Where do you think this is going to go? Andrew W: [00:51:14] I think probably consolidation, like anything. I think there’s going to be a; you look at e-commerce or anything else. Generally, there are large platforms like Amazon. So in audio, it would be Spotify. And I think Spotify is going to go out, and they’re going to acquire as much exclusive content as they can and try and become the Netflix of podcasts, audio, or audiobooks. But that said, I think there’s real power. Suppose you have an established brand. You don’t need to go to Spotify. You don’t need to do what Rogan did, Rogan. Could’ve built a brand Rogan, I think, could have built a multi-billion dollar business that he owned a hundred percent of had he done subscription podcasting. Look at Howard Stern needed to go to Sirius because at the end of the day, it was terrestrial radio, or it was satellite radio. He couldn’t go online. That just wasn’t feasible at the time. Now Howard Stern could easily cut Sirius out of the picture, do it himself for no additional cost, and take a hundred percent of the revenue instead of 10 or 15% or whatever he’s taking. So I just think Rogan con just missed an opportunity, and I don’t think he’s necessarily super money-driven guys. And it’s obviously a great deal for him, but from a business perspective, business strategy, I think it’s insane, Dave: [00:52:27] all right. So let’s talk a little bit about where you think the future of tech is. What do you think is, what do you think is gonna be the next thing. Andrew W: [00:52:37] Honestly, I have no idea. It’s so not what I do. I’m not ever doing cutting edge. I’m trying to think of them. I’m not thinking about what’s coming; I’m thinking of what’s not going to change. What do people, what are people going to care about in 10 years that they care about today? And if they want, maybe that’s a better those areas. Dave: [00:52:54] Maybe that’s a better question then what do you think is not going to change? Andrew S: [00:52:57] And can you apply it to podcasting? Maybe why? Andrew W: [00:52:59] I think that’s very difficult to, everything’s going to change, and this is the hard part Buffett can go out and buy a railroad or an energy business, and they’re heavily regulated. There are no more railways getting built. They have a monopoly over certain geographic regions. That’s a very predictable business. You can pick that out 50 years. It doesn’t matter how strong the business is in tech. There’s always an army of marauding zombies coming for your business, and they wear Allbirds and hoodies because they’re, and they’re backed by Sequoia, right? So they’re just constant influxes of competitors. And so I think where you want to be somewhere boring, where the venture guys don’t think you can build a billion-dollar business, and maybe you can’t, maybe it is a small market, but you want to own a vertical there. And typically, the businesses that can stand the test of time have some sort of sustainable competitive advantage. In our case with Dribble, for example, we have a network effect. So we have a social network that’s been around for almost 15 years. You have all the top designers in the world on it if you start a new drug. Why would you move over? What’s the reason, why would you go to everyone, goes there to be seen and to find the best designers you want to go where the other designers are. You don’t want to go to some random new place. And what I like about it is even if somebody, let’s say Microsoft, said, we’re going to put a billion dollars into competing with Dribble. I just don’t think it would resonate because it’s corporate, and they just wouldn’t do it. Whereas if you have a more corporate social network, yeah. Maybe there’d be a legitimate competitor. So yeah, that’s a business, I think I can stand the test of time, but there are other businesses that are very challenged over the next five or ten years. Dave: [00:54:38] I have to admit, Andrew, you have taken the Buffet and Munger philosophies to heart. You got all the right ideas and all the right philosophies. It’s awesome to hear you talk about all that stuff. No, it’s amazing. Andrew and
36 minutes | Jul 15, 2021
IFB201: Back to the Basics (Updated)
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: How to start investing, creating a plan, and deciding on your “why” The difference between retirement accounts, diversification, the impacts of inflation, and how to reduce fees. The six different investments for beginners to focus, and how to start dipping your toes into investing, even without a lot of money. For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript Announcer: [00:00:00] What’s the best way to get started in the market. Download Andrews ebook for email@example.com. Announcer: [00:00:13] I love this podcast because it crushes your dreams of getting rich quickly. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Dave: [00:00:00] All right, folks. Welcome to Investing for Beginners podcast. Tonight, we have episode 201 tonight. Andrew and I are going to go back to the basics. We’re going to do a little refresher for those of you who are maybe just starting out with us tonight or just recently. Or any of those who view, who have been with us for a while might just need a refresher. It’s not bad to go back to the basics once in a while and think about how you get started with the stock market. So I thought we would talk a little bit about some of the ideas about investing and how you get started investing. So let’s, I guess the first thing, let’s discuss. Why invest in the stock market? Why do we talk about this? Why do we want to do this? And really, it comes down to what is your plan and what are you trying to do? And it really comes back to what are you investing for? Are you investing for your retirement? Are you trying to save for a home someday? Maybe you’re trying to save money to put your kid through school, or maybe you’re trying to start a legacy fund for your children. It doesn’t really matter what that is. What’s your, why is what really matters is that you understand what the why is? Because before you can begin to do anything with investing in the stock market, any sort of money planning, you really need to figure out what your why is and how to go from there. So there are some different ideas that Andrew has. Some things he’d like to comment on before we proceed. So Andrew, take it away, sir. Andrew: [00:01:34] I guess for me, one of the biggest visualizations for having a great why is financial freedom? On our tagline, your path to financial freedom, there’s a lot of stuff. I guess visualizations. You have some people who think about lying on the beach all day long. Other people want to just save and have a comfortable retirement. I always enjoyed the idea of my money being put to work for me and having a solid stream of income where you don’t see your money, your pile of money shrink. So when you get to a certain size of financial wealth, You can start to have these income streams through dividends. And if you can live your life and spend the money from your dividends and basically not have to sell your stocks and just let the money continue to grow, and you spend some of your dividends, and that’s how you survive. That’s really how I picture financial freedom. And I think it can be; it’s a big reason why I’m so passionate about the stock market because I don’t know. Maybe outside of a rental real estate where you have a similar type of thing, the stock market is just so much more hands-off in the sense of, I don’t have to deal with people and tenants and everything like that, but really that’s why I get excited. And I think it’s. It makes a reason to be excited about the stock market in general. Cause that snowball can come to pick up, and you can have that kind of a life as possible. Dave: [00:03:07] Yeah, that’s a great point. And it is picking up on that point, thinking about the snowball and thinking about how to escalate your wealth. So when you think about investing, it doesn’t just necessarily mean the stock market, even though that’s what Andrew and I focus on. And that’s what we spend the majority of our time thinking about writing, about talking about on the podcast, because over time, the stock market has proven to be the greatest compounder of wealth. That out there, and there are other investments that you can choose. You can invest in gold; you can invest in bonds. You can invest in real estate. You can buy horses; you can buy art; you can buy baseball cards. Really. There’s a wide range of things, but the returns are going to get you where you want to go, depending on what your goals are. And what your plan is the stock market and a big reason for this. Some people will put their money in savings accounts, and the reason why we, it’s best to avoid those is because of our good friend inflation. So this is a term that’s come up a lot recently, but inflation basically means that your earning power, your buying power is less in the future than it is today. So, for example, if you’re buying milk or gas, That same $2 that you spend on a gallon of gas five or ten years from now is not going to buy you the same amount of gas that it did today. And so, by using something like a stock market to help you earn better returns, you can help overcome the impact of inflation savings accounts. For example, right now, at Wells Fargo, pay a blistering 0.1%. So that means that for every hundred dollars that you put in your savings account, you’re going to earn a whole. One whole penny. So that’s not going to get you where you want to go. No matter what. Now savings accounts are a great place to store money. They’re safe; they’re secure. And if you’re not planning on using it, perfect, no problem. But. Using the stock market or something along those lines is going to give you a better opportunity. And we talked about this in the past, and there are lots of great blog posts out there. And I linked to some of them on our website. And the article that I wrote about this recently about compounding Albert Einstein is credited not credited with saying that. Compound interest is the eighth wonder of the world. And it is undoubtedly one of the greatest forces out there that can help you grow your wealth. And it really comes from investing and continuously putting money to work, like Andrew was referencing over a long period of time. Fun fact. Warren buffet. One of the richest men in the world really did become one of the richest men in the world until about his seventies. So he had been investing for about 30 or 40 years by that point. So it’s not something that’s going to happen overnight. And the things that Andrew and I talk about on the podcast and we write about do not get rich quick schemes. If that’s what you’re looking for. Turn it off right now. Go find something else. Cause that’s not what we’re talking about. What we’re talking about is building your wealth over time and doing it safely, and doing it consistently. So let’s talk a little bit about some things that you need to consider before you get started. So number one, goal and time horizon. So we talked about that a little bit before. So what are your goals? Where do you want to go? How do you want to get there? And how long are you looking to invest? And what is your plan? The next thing you need to think about is something like the risk is called risk tolerance. And basically, what that means is you’re looking for. You’re looking for investments that you can go to bed at night and not lay in bed stressing and flipping and flopping and counting the ceiling tiles because you’re so stressed out about what’s happening with your investments. You’re looking for things that you feel comfortable putting your money to work for you over time that is going to be safe and secure and not allow you to get you where you want to. So that’s one idea. If you’re investing in things that are driving you crazy, then you need to maybe rethink your investing strategy. The next thing we want to think about is diversification. So this is an idea that basically what it means is thinking about buying different investments that are not related to each other. In other words, if you have. All of your money in bank stocks and 2007 and 2009 comes along. You’re going to be hurting unit for a while because you’ve put all of your wealth into one big bucket, and everything turns south, which means you’re going to lose money, and it’s going to cause you to your returns to suffer for a long period of time. Because once those things turn south in a major way to return back to the. The positive side of the equation is going to take a long term long time. So diversification is an idea of having different investments in different baskets. A simple way to think about this is instead of having all of your money in one sector, think about having it in different kinds of sectors. So investing in something like. Tech stocks like an apple or Amazon, Microsoft, something along these lines, then maybe having something in real estate, maybe having something in consumer goods, it’s like a Walmart or a grocery store, or maybe having banks or having investments in different unrelated. Not correlated investments because when the market turns, not necessarily, everything goes south all at once. Sometimes different sectors are going to get beaten up more than others. And having diversification helps lessen some of that risk of having you lose all of your money or having negative returns over a longer period of time. Andrew: [00:09:00] Okay. Yeah. So you also have the fact that these businesses all have risks within themselves too. So even businesses that used to look great, you could think of the blockbusters of the world. Nostalgically remember going to blockbuster and then being like the time to be alive on a Friday night to go to blockbuster, and they ended up going bankrupt Washington mutual; they had such a bright, what people thought was bright management with huge goals. It turned out that they were a little bit too aggressive with their growth; to say the least, they go bankrupt too. So you want to have, you have to understand that. Yeah. We want to, we invested in businesses, and we want to be owners in them, in them so we can have part of their profits. That’s what investing in stocks is. But with that comes the risk that our company could fail. And that’s just the reality of capitalism. And so we want to make sure that we have enough. Equity ownerships and enough different businesses where if one goes bankrupt, it doesn’t completely wipe us out and make our returns a lot worse than they should be essential. Dave: [00:10:03] Very good point. Very good point. All right, so let’s move on to the next idea. So the next idea of things that we need to think about is fees. So fees are things that we can avoid or are going to eat into our returns. So think about it. When you’re investing in different investments, whether it’s mutual funds, ETFs, or individual stocks or buying things outside of the stock market, there could be fees involved in those. And the more that you can reduce those fees are less than those fees. The more that you can impact your returns, you have to think about those as a possible hurdle rate. Perfect example, if you buy a mutual fund, And investment firm like Fidelity or Schwab, for example, and they charge 2% a year. Just as an example, they charge 2% a year to manage that mutual fund. Then, that mutual fund automatically has to get at least 2% for you to earn a positive return for that year. And so, over the course of a long period of time, that could really eat into your returns. So the more that you can lessen those kinds of fees, the more, the better returns you can get. And in today’s world, now, most of the individual. Stock investment firms offer free trading. So, in other words, you can go on Schwab and fidelity for sure. And you can buy and sell investments without having to pay fees for those. And so that is a great way to have. Increase your returns by half a percent to 2%, because not too long ago, we had to pay 4 95, for example, a trade. And so, all those things going away helps us earn better returns over a period of time. This also applies to taxes and other fees that could be charged for investing. Perfect example, if you use any sort of Robo advisors or automatic advising investment firms, they will. Fees for those. So you want to find things that are going to have the returns you want, but also the fewer fees. Okay. So the last thing we want to think about is retirement accounts. So when you’re investing. Another way to help reduce your fees is to invest in retirement accounts. The government allows us to use different kinds of investment accounts, in other words, IRAs. So that those meet individual retirement accounts, there are two main kinds of accounts. There’s a traditional, and there’s a Roth. And without going into all the technical details of the accounts, the easiest way to think of those accounts is traditional. Uncle Sam. Think about this. Uncle Sam has always going to want his cut of taxes. This is the way it works. Unfortunately, however, with a traditional, you don’t pay the taxes you pay. I’m sorry you pay the tax at the end of your investment. So when you invest your money in a traditional account, Uncle Sam is not going to take his cut. He’s going to take his cut when you start taking money out of your account. So the money will earn over the period of time with the taxes in there, and you’ll have to pay taxes. In the end. Our Roth is uncle Sam takes his cut out of your income. Now invest the money. And then, when you take the money out of the account at the end, you don’t have to pay taxes. So those that’s, those are simple. Easy ways to understand that there are a little more intricate, involved ideas behind those accounts, but those are things that you can easily adapt. Andrew, I know you had some comments you wanted to make about those, Andrew: [00:13:32] just to think about what a traditional IRA kind of will look like. If you have, if you’ve ever had a 401k at your job before and they have taken money out of your paycheck and what that did, was it reduced the taxes that you owe for the year? That’s the exact same thing happening. And so that’s what happens with a traditional IRA. It lowers your taxes for this year. You can sometimes get a tax refund from it, or they’ll just make your tax bill lower as you get each paycheck. But you do pay the taxes when you retire. Dave: [00:14:03] Yep. Perfect. Yep, exactly. Okay. So we’ve set the stage for all the things you need to think about before you started investing. So before you started investing, you have to have a plan. You have to understand what kind of accounts do you want to put the money that you’re going to invest in. And you have to think about trying to reduce the fees so that you have a better chance of earning the return that you want and deserve by the time you retire by the house or whatever goal that it is that you have. Once you have all those ideas, thought out a good idea is to write those down and put those on a spreadsheet, put them on a word document, save it someplace that you can refer to from time to refresh your ideas. So let’s say that you’ve got all that done, and you’re like, all right, I’m ready to start buying stuff. So what do I buy? So there’s, I guess there are six different kinds of investments you can choose. So before we dive into that, I want to think, we need to think about. What kind of investor are you? So if you’re doing yourself DD, professional help, or one help, or do you want to invest with your employer? So those are really the three categories; a do-it-yourself is obviously somebody that wants control. You want to do all the work yourself. You want to pick all the choices, whatever they may be. You want to manage their portfolio. You want to have complete control and say about what happens with your money. And that is a do-it-yourself type thing. Let’s say that you’re; that is just not your cup of tea. You do not want to do that. You want professional help. There are options out there for you to do that. There are lots of different firms out there. Personal Capital. We actually just spoke to Brendan, who is one of the portfolio managers at Personal Capital. They have. Personal bankers that will walk you through investments. They will help hold your hand through the whole process. They do charge fees for this, but they will walk you through everything. And if you have a little bit more money, and these are things that you want to have, people, help you with the whole kitten caboodle, pick all the choices, manage the money for you. Those are great options for you. And then the other option. They are working with your employer. Most of us that work for larger companies or even ma mid-sized companies have retirement benefits that they offer as benefits to help us. Stay with the company. A 401k is a very common benefit that employers offer, and these w they will manage for you. And the benefit of these is that they take the money right out of your paycheck. So you don’t see it. It just goes right into the 401k and gets invested for you. You have limited choices with these, but this is a great place to start. If you’re not sure what to do, how you want to start getting invested is a great place to start. A lot of these companies offer a match, which means that if you invest 3% of your paycheck, they will match 3% of your paycheck. Typically it’s with company stock, but who cares? It’s free money. And if you’re turning this down, I’m going to come through this microphone and beat you. So it’s free money. Take advantage of it. Please be, please. Anyway. So it doesn’t mean. That you have to pick one of these silos, you can pick or choose any of these. You can be a do yourself or part of your portfolio and have the rest of it professionally managed, or you can do a 401k for the majority of your stuff. And if you want to play in a stock market, you can do that as a duty yourself. So you don’t have to pick, you can pick and choose these as, as much as you want. So once we’ve figured that out, let’s talk about some of the choices that we can make. So we have index funds. We have ETFs; we have a 401k; we have a Robo advisor. We have individual stocks, Andrew and I’s favorite, and we have investment apps. So let’s talk about those a little bit. So index funds and ETFs fall in a kind of the same. Kind of category. They’re not exactly the same, but they’re similar. And the similarities are that they are designed to match a certain sector or fund of a different basket of stocks to mimic what’s going on in certain areas of the stock market. A perfect example is the S and P 500, which is what most people benchmark their returns too. And it’s a collection of 500 of the. Businesses in the United States are all lumped into a sector. It’s not uncommon to have any S and P 500 index and an ETF. They will both try to mimic the return of both of those. It’s just how you invest in them is a little bit different. They both generally charge. Much lower fees than mutual funds, for example. And they are generally what you would consider passive investments. In other words, there’s something that you invest in, and they don’t have a lot of active management as far as what we go through. There may be a lot of activity underneath the surface of a lot of buying and selling of the different companies that are in the funds or in the indexes, depending on what those are ETFs—traded just like stocks. So you can buy an ETF, an S and P 500 ETF that trades for a hundred dollars, for example, and it’ll fluctuate daily in the market. Just like a stock will, you can buy and trade it, just like a stock, an index. It has a price, a fixed to it as well, but it only trades at the end of the day. So in other words, it may go up to $102 at the end of the day, but you can’t buy it at a hundred because if you didn’t invest it the day before, it’s not available to buy at the end of the day until the end of the day. So most of these are. The easiest way to think of them is you can buy one, trading like a stock. The other one is more of a static investment if you want to think that these are great tools. Suppose you want to dip your toes in something you’re not comfortable buying. A single company for, they’re also great if you want to do it yourself, but you don’t want to pick individual stocks, you can build your own portfolio, this diversified with ETFs or index funds because there are those zillions of them out there. Have. Skyrocketed the number of choices you can buy cannabis ETFs, you can buy airline ETF so you can buy a bank ETFs. You can buy ETFs that match that only buys solar companies. Anything you can think of, you can buy an ETF for and an index fund for. So there. I guess beginner investments that allow you to get your feet into the stock market and earn it a return Andrew: [00:20:39] I would just add that hedge funds are also an option, and I feel like they don’t get much love. But particularly because they’ve underperformed for so long, but they are called hedge funds for reasons, because they’re supposed to underperform when the market’s up, but they’re also supposed to do better when the market’s down. So people who maybe might be close to retirement or be, have like really significant sums of money. Look to put their money in the hedge fund because you’re able to draw out a safer source of income regardless of where the market’s going. So if you’re close to retirement or in that situation, that could be an option too. We generally talk to beginners who are just starting out, so that might not be so pertinent. I wanted to throw that as one of those possible options Dave: [00:21:24] yeah, that’s great, that’s a great option as well. All right. Let’s talk about 401ks. So 401ks, as we’ve mentioned earlier, our unemployment benefit retirement plan that they offer employees. And generally, they are a basket of either. ETFs index funds mutual funds. Sometimes it may be individual stock and the company that you work for; they may also offer what’s called target-date funds, which are a collection of different. Investments that are geared towards whatever your risk tolerance is and also how old you are. So, for example, if you’re younger, let’s say you’re 30 years old and you plan to retire in 35 years, they may have a target day fund that old matches that 35-year timeframe. And as it gets closer to the end of that 35 years, the allocation. The investments may change from the majority of being stocks to the majority to being bonds because those are considered safer investments as you get closer to retirement, and those are all kinds of different options that you can choose. Again, 401k is managed by not necessarily your employer by an investment firm that they hire to manage the money for you. And it also comes out of your paycheck. You can choose traditionally. Retirement accounts and Roth retirement accounts for the 401ks and 401ks are your money. So after a certain period of time, they will vest, and you can take them with you. So let’s say you work for a company for five years, all that money that you’ve invested in the 401k. Best. If you leave and go to a new company, you can take that money with you. So those are, it’s a great place to start. And if you work for a company that matches again, take advantage of the match. All right. Anything you’d like to add about 401k, sir? Okay. Andrew is saying, all right, so we’ll move on to Robo-advisors. So Robo-advisors, Robo-advisors are. Basically what they sound like. They are automated investment businesses that allow you to pick a different menu of usually mutual funds, index funds, or ETFs that mid-match. Risk tolerance and your age and what kind of investment goals you have. And then the AI, the artificial intelligence, manages it for you. This is the perfect, or one of the perfect investments for somebody who does not want to invest does not want to manage their own money. They don’t want to pick stocks. They just want to put the money in and set it, forget it. I and Andrew. Are not big proponents of Robo-advisors because it doesn’t give you a lot of freedom. It also doesn’t give you a lot of choices, and you don’t have a lot of say in what happens with them, and they do charge fees for it. But again, there are pluses and minuses to Robo-advisors, and if this is something that floats your boat, then there are lots of opportunities out there to check in on those. All right, moving on. We have individual stocks. So this is where you are do-it-yourself. So this is where you’re going to pick your investments, whether it’s individual stocks, individual bonds, whatever it may be, you are going to be in control of picking and choosing the things that you want to buy. Or invest in individual stocks really requires you to do your due diligence, which means you need to research the companies that you are going to invest in. You need to learn as much about the company as you possibly can before you buy any sort of company. This is not the area where you want to listen to what your uncle Bob tells you to buy because he thinks it’s a hot stock tip. Th that’s not this individual stocks is where you really want to work as much as you can about the company, what they do, how they make money, the financials of the company. It really involves more work on your part, but it also gives you complete control over what you’re going to buy and what you’re going to sell and what kind of, how much you want to invest in the company and all those different kinds of things. So this is definitely geared towards more of the do-it-yourself, and this is a great way to go. If that’s really, you really want to be in control. Andrew: [00:25:44] And it’s the best way that most investors have made a significant amount of wealth. So I guess our whole podcast is about those kinds of success stories. And if you don’t get excited about the prospect of being a part-owner of a business, it’s probably not the best route for you. Dave: [00:26:01] Yeah. Yep. Exactly. Exactly. All right. So the last choice for. Good investment choices for beginners are investment apps. So the two that I came across doing my research were acorns and stash. Those are two of the ones that are probably, the most legitimate air quote. There is, of course, our friend Robin hood, not a fan don’t recommend them. They gamify investing, and it just doesn’t feel like that is a good place for beginners to start because. Really investment investing is not about gambling. Investing is about finding things that are going to help you meet your goals. And that’s what we talked about goals at the beginning. And I feel like Robin hood really gamifies things and really glorifies how you can make lots of money in the stock market. And you can, but you also need to balance that out with the risks that you’re willing to take. And. I just don’t feel like that’s the best route to go, especially for beginners; if you’re going to be picking and choosing stocks, you need to really figure out what it is your understanding about the company and the PR the potential for the company and all the different aspects that go into that. Such companies like acorn and stash or investment apps will. Allow you to acorns; for example, basically, it takes the change from your account and invests for you. It gives you limited choices of ETFs and index funds, as well as some individual stocks. And it buys smaller portions. The stock for you, and it’s a great place to start. And if you don’t have a lot of money to start investing in the stock market, it’s a great place to get started. The other option is stash, which is very similar and offers the same kind of idea. It gives you a choice; it’s limited choices and allows you to get started with smaller amounts of money. That brings me to the last thing I wanted to talk about. You don’t have to have. One of the misconceptions about investing is that I have to have $200,000 before I can start investing in the stock market. You don’t; you can start with ten bucks today. There are lots of things that you can do with ten bucks. And one of the things that I think is one of the greatest. Revelations recently is something called stock slices, fidelity, and Schwab, which are two investment brokers that allow you to buy small portions of companies for as little as $5. So if you have $5 a change in your pocket, you can buy $5 worth of Amazon. If you want, I’m not, that’s not investment advice, but it’s just an example of the things that you can do with smaller amounts of money. And even if you put $50 in. The stock market every single month, over a long period of time at the end of the year, the $600 you’ve invested. And if that if those investments do well over the period of time, that could be an extra a hundred bucks in your pocket. And as you continue to invest in the compound, that continues to go up, and you’ll find yourself being able to invest more money. As maybe as you earn more money there, there are all kinds of different ways you could do that. So those are, that is something that I think. I want people to get over it, and you really can get started with a little amount of money. Andrew: [00:29:10] And I know I’ve told this story before and probably too many times in the past couple of weeks; the very first stock I ever bought was Microsoft, and I didn’t buy a whole lot of it. I bought one share. This was back in 2012. You fast forward almost nine years later. And one share that was worth $27 is now worth over $300 because. I’ve had dividends all along the way. And they’ve all been reinvested. Now. I know a lot of people don’t necessarily get too excited about the dividend, especially if you look and you look in your account, and you got a 4 cent, 5 cent dividend; what’s so exciting about that. But if we think about the Microsoft example I just told you, let’s say you got 10% as a dividend. Obviously, it’s a lot, but maybe over a couple of years, you could; that would be like $2 and 70 cents based on this example. If you’re reinvesting that as you should. And that’s what builds this compounding snowball that makes investing so sweet that $2 and 70 cents. 10% of a share. Now, if we fast forward to the nine years later when their shares are trading at something like 200 and something, now all of a sudden, 10% of a share is closer to the $20, instead of $2. So you see how, not only does the price of the share multiply, but so does the little dividends that you got at the very beginning, those multiply two as the, as a stock grows and that’s something, yeah. Really great businesses can do that. You can’t get anywhere else. And that’s really what fires me up the most is because if you can combine all of these great things we’ve talked about and you make sure you’re diversified, and you make sure you’re doing this smart, you have a plan, and you’re letting money work for you and let that money go the work and reinvest it and build this huge compounding machine. That’s when you can really build sustainable wealth and get you closer to those goals that you have a more comfortable retirement, maybe a car or a house or financial freedom. That’s how it’s going to happen, but it’s going to take time. It doesn’t happen overnight. Nine years is not a very exciting time to wait, but if you do that consistently, you can. It’s like building a tree, you build these little seeds, and as you continue building more and more of them, you’ll reap those benefits down the line, and they’ll just expand as time continues to go on. Dave: [00:31:28] Exactly. And those are all great points, and that’s a great illustration of how powerful investing over a long period of time can really be. And I guess one thing, if. If you take nothing away from this, I want you to think about this idea that you can absolutely do this there, you don’t have to have tons of money, and you don’t have to be Warren Buffett to be successful in a stock market. Andrew and I spent a lot of time talking about individual stocks and thinking about those ideas because that’s what works for us. And that’s what really helps us be excited about the stock market. And we see the greatest wealth grown from that. But investing in index funds and ETFs is a fantastic way to go. If, if that is not the thing for you, earning 12% over the next ten years. No matter how you get there. It’s not important how you get there. It’s important that you get there. And I think sometimes it becomes like a macho or an ego-driven thing that, Hey, I did it this way. It really doesn’t matter if you’re buying ETFs and those work for you, and that works for your investment lifestyle and what you really want to do, then, by all means, pick up. Bull and ride that horse, baby, because that’s really what this is all about is Andrew and I are very passionate about investing in the market can help you reach that financial freedom that Andrew was talking about earlier. It can really help you meet the goals that you have, but you have to start, and you have to dip your toes in. And if you’re not comfortable buying an individual stock, then buy an ETF if that’s. For you, then what gets the 401k that your employer offers and start investing with that? And it doesn’t have to be lots of money, but if you just start and you start now, and you continue dripping that stone, it’s going to make an impression. Am I’ve said this before, and I’ll say it again, probably a million times. My grandmother had this great saying that water dripping on a stone eventually makes an impression. And it, you have to think about the same thing with the stock market and investing. It becomes a habit to consistently doing it over time. We’ll do all the great things that Andrew was talking about with his illustration because that’s really how you’re going to get to where you want to go. All right, folks. With that, we are going to wrap up our discussion on investing for beginners a little back to the basics. I hope you guys enjoyed the show, and if you have any questions or comments, please reach out to us and let us know we’re here for you. We’re here to help. That’s what we’re all about. So without any further ado, I’m going to go ahead and sign us off—you guys. Go out there and invest with a margin of safety. Emphasis on the safety. Have a great week. I’ll talk to you all next week. The post IFB201: Back to the Basics (Updated) appeared first on Investing for Beginners 101.
37 minutes | Jul 8, 2021
Intro to Protective Puts with Cameron Smith
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: How you can use protective puts as a hedge option to protect your portfolio from the downside of volatile investments. A great method for screening, starting your due diligence, and red flags to look for in your next investment Finding the right tool to help you value a company, with the flexibility to adjust metrics to show you context to your ideas. For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript Announcer: [00:00:00] What’s the best way to get started in the market. Download Andrews ebook for firstname.lastname@example.org. Announcer: [00:00:13] I love this podcast because it crushes your dreams of getting rich quickly. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Dave: [00:00:00] All right, folks. Welcome to investing for beginners podcast. Tonight, we’re going to talk to a fellow contributor, Cameron Smith, who is also a CPA. He works with us on the investing for beginners blog. And he, as I mentioned as a CPA, is a very smart guy. And he’s going to share with us some ideas about how to help mitigate losses. So Cameron, do, would you like to say hello to everybody? Yeah. Tell us a little bit about yourself. Cameron: [00:00:27] Yeah, sure. Hi Dave. Hi Andrew. Great to finally get on the podcast then writing for you for a while now. So it was long overdue, sadly. It sounds like I just missed the 200th episode. So I’ll have to come back for that one, maybe. Dave: [00:00:41] Yeah. Sounds good. So I guess you tell us a little bit about what you got going on and what your focus has been on the blog, and some of the things you wanted to talk about. Cameron: [00:00:52] Yeah. Sure. For anyone out there that’s read some of my articles on Andrew’s site. I’m a pretty frugal value investor and a pretty cautious guy. So one of the things that really has caught my eye in the last year, and I’ve started to experiment with it, has been protective put options, strategies. It’s something that I learned about while studying for the CFA. And I think it’s. Overlooked a risk management strategy. That’s pretty easy for your average retail investor to take a stab at. Andrew: [00:01:21] So maybe let’s start at why is a put, and let’s just assume we don’t know anything about options at all. So what is it put and how does it. How does that help mitigate losses? Cameron: [00:01:30] Sure. So pretty much a put option. It’s an option to sell an underlying security. So that could be any security. It could be a market index as well. So you’re buying the right to be able to sell that security at the strike price of the put option, and then, of course, you have the maturity horizon of the option as well. So at some point, it will expire worthless if it has never reached that strike price. Andrew: [00:01:57] So you can think of it as like shorting a stock. And so I guess in the scope of the portfolio, what is the goal of we are trying to buy and sell quickly or, how does it function within the portfolio? Cameron: [00:02:11] Sure. So I’ll go back to it is a lot different than shorting a stock. Cause when you short a stock. You’re you have potentially unlimited losses if that stock continues to go up, whereas, with a put option, all you can lose is the premium that you paid for the put option if it expires worthless. So it has that good aspect to it as well. Dave: [00:02:32] Okay. So I guess, so if we could back up just a minute for beginners, like me, with this kind of idea, can you give me a real-life example of maybe how exactly this would work. So if I was going to buy, I don’t know, let’s say Apple or a company like that. How would this work? Cameron: [00:02:50] Sure. So I got a couple of examples in the recent article that I’ve written for Andrew. One of them I used was JP Morgan, and the other was Tesla. Oh, perfect. Yeah. So with JP Morgan, so one of the underlying factors of any option price is volatility. So JP Morgan is obviously a lot less volatile than Tesla. If we’re looking at September maturity at the money, put options for JP Morgan you’re only paying a 4.8% premium to hedge that position at the money up until September. So here we are sitting in June that’s July, August, September, that’s three months’ worth of sort of insurance. You can think about it for that 4.8 insurance premium you’re paying. You can hedge a JP Morgan position for three months. Dave: [00:03:40] Okay. Okay. And then, I guess, how would that work with Tesla then? Because it’s there, they’re a lot more like the level of volatility. So how would that work? Cameron: [00:03:49] Very different ball game with that. So, Tesla, you’re looking at a 24.8% premium for that at the money put option that expires in September. And when I say at the money, the strike price of the option is the same as the current trading price of the underlying security. Dave: [00:04:08] All right. All right, so that makes sense. Okay. Thank you. Cameron: [00:04:11] the way I do it with my portfolio, Dave I use what’s called a cross hedge, and I have a long portfolio of various sectors and individual securities, and rather than buy, put options on the individual securities, I just buy, put options on the S and P 500. So it’s called across hedge because you’re not matching exactly asset for the asset. But it still gives you that that protection to the downside. And let me just look up the number here for what your pay, what you’d be paying for a September SNP put option. You’d only be paying a 3.4% premium to hedge a passive portfolio with a put option. Andrew: [00:04:50] Can you explain exactly what that hedge would look like? So let’s say you, you hedge the S&P and, the S&P_ crashes 20% by September; what does that look like? What did the hedge do for you as far as return and versus what you paid for the premium? Cameron: [00:05:07] Sure. So in that scenario, so you’ve paid 3.4% for the to have the put option, the market’s fallen 20% your net gain on that put option would be what is that? 16.6%. Yep. Yeah. Sounds about right. 16.6%. And then don’t forget your stay long, your underlying portfolio as well. Because we’re not talking about naked, put options, we’re talking about protective put options. So you’re protecting your underlying position. So your underlying portfolio would have lost 20%, and this whole put option strategy would have gained 16.6%, so your net loss would be that difference there, which is, in effect, the premium that you’ve paid. Andrew: [00:05:54] Yep. Yeah, that makes sense. So basically, the upside is if we have a market crash, I’m assuming, assuming that the stocks in your portfolio crash and the market also crashes, then you have protection on the downside and then. It’s like you said, like an insurance policy where if the market doesn’t crash by September, you’re out the 30% in premium. Cameron: [00:06:18] Exactly. Exactly. So you’re you always do have that risk of the option expiring worthless. And I’ve had that happen to me before. So it’s probably been a year. A year and a half that I’ve been experimenting with this. And it was actually quite fortunate. I started experimenting with it before COVID hit. So I was actually pretty much fully hedged when COVID hit, but of course never really thought COVID would get that bad and the market would do what it did. So I only probably sold my put options, protecting about 15% of the downside there. It was still really nice to have. And sorta was the proving factor to tell me that it can work because yeah, looking back last year, the market was already expensive. Pre COVID. Now we’re getting over COVID, and we were even more expensive than we were before. Andrew: [00:07:10] Yeah. It’s an interesting idea for sure. And particularly if you feel very strongly about where valuations are and where the market is going, and it is interesting too as well, where, based on how volatile the market is, how much you’ll have to pay for that insurance. And I guess when you’re looking at for yourself. Is this something that you plan to have a hedge for the rest of your investing life? A thing that would be. Part of the question okay. So how do you determine where to put a hedge? Cameron: [00:07:40] Yeah, so I would say really in times of excess, like when we’re sitting one, two standard deviations above historical market average levels, I’d say that would be a good time to put a hedge And the other thing cause like we’re talking about volatility is such an important part of the pricing. The interesting thing that happens is as the market goes up and just melts up, as we call it, volatility always becomes really low. So these options get really cheap. So the market doesn’t even have to fall all that much, and volatility can pick up as well. And these things also end up quite in the money. But yeah, not a strategy to do every year of your life, for sure, because it’s really going to affect that compounding power of your portfolio. Cause on an annualized basis, you’re looking at seven and a half percent to hedge, which really is the market return that you’d be expecting to get over the term. So not something you want to be doing every year. Andrew: [00:08:38] Like anything else, there’s no free lunch. But to your point, if you feel strongly about where the market is, and you can have some potential upside to where, if the stocks in your portfolio happened not to fall as much as the market does now, you’re gaining on both ends. Yeah, exactly. Cause as I mentioned, I’m doing a cross hedge here as if my portfolio. Totally passive. But I’m probably 75% active, 25% passive. And as we it comes down to stock picking, can you pick stocks that are going to perform better than the market’s going to perform? As well. Yeah, Dave: [00:09:11] a specific loss, or is it more about trying to hedge the whole market? Cameron: [00:09:15] Yeah, so for me, it’s more about trying to hedge the whole market, but if you’re an individual investor who Is a little cautious about one of their holdings, for sure. You can just do one of the holdings, but that being said, the riskier that holding is, the more you’re going to be paying for this put option, as we saw in the case with Tesla. Dave: [00:09:33] Yeah. So would it make any sense to put these kinds of options on the company you don’t Cameron: [00:09:40] Yeah, you could do that. For sure. That would be losing the protective put options strategy of it. It would become a little more speculative at that point. But yeah, you, for sure you, for sure could. Yeah. Okay. Because it has the benefit, unlike shorting a stock where you don’t have unlimited losses, all you can lose is the premium that you paid. Dave: [00:10:01] Okay. All right. That makes sense. Cameron: [00:10:03] Yeah. Andrew: [00:10:03] I think the big thing about it is that when you buy an option, like a call option or put option, it gives you basically effective control over a hundred shares. So when the stock moves like a percent, you could gain like 10%, so I like it magnifies. It gives you the effects of leverage without needing to be leveraged. Cameron said you could only lose what you put in. And so that’s how, like only paying 3% can give you a gain of 10%, 20%, whatever it is if the market goes down because of that kind of amplification factor. And I know where your mind’s going, Dave, because when I first heard of this thing, I may or may not have dabbled as well. And you instantly. Effectively short and buy puts against the stocks that are very expensive. But Cameron was saying in the example; those tend to be more volatile because they are expensive because they’re this like these like really high, multiple stocks that have huge dropdowns. And that makes it really hard. Make a profit when they do crash because that’s what they do, and you’re paying for that volatility. And so I think it is difficult to, like you said, Cameron, the, to pick stocks are they’re going to go down because it can get speculative. Cameron: [00:11:21] Yeah, for sure. For sure. But once again, it is a little safer than shorting the stock. Dave: [00:11:26] So what’s the time length of how long you can put these kinds of options on? Cameron: [00:11:31] Yeah, that’s a good question. It really depends on who’s writing what options cause someone has to write this option for you to be able to purchase it. So right now, I’ve. I have seen the March 2022 option on the S and P 500. And I’ve recently seen the December 20, 22 options spring up that people have started writing on. So we’re looking out like a year and nine years or six months there. So yeah, so quite a long timeframe for myself; I try and keep it around a year. That is what I do. And then I roll it as it gets close to maturity to not let it expire completely worthless. Dave: [00:12:10] And these do not have, do they have a monthly or an annual fee that they charge to put these on? Cameron: [00:12:17] Nope. Nope. Okay. Yeah, just the time decay. Yeah. Of that maturity and premium expiring. All right. Then the other thing that I’ve I’ve noticed that’s worth mentioning is with like most profitable companies and the index in general, the longer you look out in maturity, the cheaper you’re paying per day for a put option because. That company or the index is making profits and naturally going up in value. So your fixed strike price as you go out in the future becomes less valuable. So the longer you go out in maturity, the cheaper you’re paying per day to hedge. So that’s an interesting point that I’ve found out. Yeah. There are some tidbits on that in the article that seem to be posted on Andrew’s website as well. Dave: [00:13:07] All right. So we’ve talked about put options and the insurance that can help with hedging your portfolio. Let’s talk a little bit about the companies that you choose. So when you’re looking at buying a company. What kind of, what is your process? How do you work through from finding the idea to pulling the trigger? What are those? What is the process for you? Cameron: [00:13:32] Sure. I think screeners are a really important thing for every investor to use. Because screeners are where you’re going to uncover the gems that you never knew about before. If you’re not using screeners, you’re just going to be sticking with the same stocks that you read about in the news. And then everyone else is exposed to a bit of a herding mentality. So I think screeners are always a really important idea. And I have a couple of saved ones on my broker that I refresh on a weekly basis and see what’s changed. And if any new names have sprung up, that excites me. Go ahead. Sure. Yeah. And then after that point, I have sort of one metric that to me is it’s the be all end all for that initial back of the envelope, math, and I have an article on investing for beginners on this, actually. It was the first article I wrote for you, Andrew. If you recall, it’s I’ve coined it. Investors adjusted return on and it’s very similar to the Shiller PE, which takes ten years earnings and adjusted for inflation. But here I’m looking at ten years, average return on equity as a percent. And then I’m multiplying that by the price to book value that you’re paying for that equity so you can think about it in terms of an equation where you have a return on equity and price to book value. And if you combine those together and cancel out likes and likes, you have an earnings yield, and that will quickly give you an idea of, okay. If I hold this stock for ten years, I can expect an average return of 10% at this price to book value. Now it doesn’t work for every company, especially tech companies. Who really don’t trade there accordingly to book value and companies that repurchase a lot of shares, but it does still tell you quite a lot about what you’re paying for books value and what the return on equity is of that business. Andrew: [00:15:26] So can you explain the return on equity for a beginner as an awareness of the concept and also why it’s. A useful tool when looking at companies. Cameron: [00:15:36] Sure. Return on equity is the net income of the company divided by the equity of the business. So you can think of it as the owners of the business have contributed all this equity. And how much are they earning per year on the equity that they’ve contributed? Yeah. And then what the, like the Shiller PE does and my own sort of investors as it looks at that average over ten years, so that you get the business cycle in it as well. So as a long-term investor, I’m fine with a couple of bad years, and it might even be a great opportunity to buy. Dave: [00:16:14] So do you have a, do you have a threshold that you look for when you’re looking at that kind of thing? Cameron: [00:16:20] Yeah, so I’m generally looking for like that, that 10%. So what would a passive investor be getting over a long-term time horizon, and that’s my, my, my hurdle rate. Dave: [00:16:31] All right. So after we find a company that passes your hurdle rate, where do we go from there? What do you? Where do you take the next step? Cameron: [00:16:40] Sure. So after I find a company that sort of meets that initial hurdle, I’ll take it a step further, and I’ll really start analyzing the financials. I’ll look at the balance sheet income statement, cashflow. I’ll look at it on a historical basis. I’ll look for things like share buybacks, good return on equity. Good return on invested capital good debt levels. And then I’ll make a start making projections into the future. And I use a model to do this. I’ve actually started selling it on Investing for Beginners with the help of Andrew, which has been great. And it’s up there for anyone to purchase. And pretty much you can plug in a couple of years of historical financials. It’ll calculate various ratios for you to help you project into the future. And it’s all pretty automated. Once you punch in those couple of years, you can then play around with growth levels, with different debt levels. And it’ll really spit out a bunch of different valuation metrics for you from Discounted cash flows to forward PEs, Gordon Growth model. And yeah, I really it, I developed really six, seven base valuations, and then I’m looking at an average so that it’s aimed small, miss small when you got that average valuation. Andrew: [00:17:49] So this is something that I use as well as one of the tools I use for my stocks, particularly with the DCF model. So whether the DCF has a stands for discounted cash flow, and it’s basically how Warren Buffett analyzes the valuation of a company. And, Cameron, you mentioned you’re studying for the CFA. That’s something they teach in the various classes on valuation there. Cameron: [00:18:13] And for sure, a CFA university class, the DCF is it’s really your golden boy in terms of valuing a company because, at the end of the day, it’s all about the cash flows to investors. Andrew: [00:18:25] And so I guess, Basic inputs. You have to make an assumption on what you think the growth rate is and how risky you think that growth is going to be. And then how much cash flow a company makes. And that’s how you’re trying to come up with it. Estimate how much a company is worth. And so it can be, it can pinpoint you more than comparing like a price to earnings or price to book would because you’re building these different things in and I, I. I liked the model just for the DCF part. And I like, I, I’ve customized it and made it into my own where I can use it for the companies I’m looking at. Yeah. Cameron: [00:19:07] Customize them a little bit. Dave: [00:19:09] The thing that I like about it, and one of the things that have really been helpful for me is you can see I like the way that it projects future; differently, it projects, different metrics as well as different items from the financials into the future, so that I can look and see. How realistic my projections are. So, in other words, if I’m looking at a company and I am projecting that, Hey, it’s going to grow 10% over the next ten years, then I can see how much that really is going to be. And then I can, in my head, look at it and go, is that really a realistic number for the revenue? And one thing that I started doing. If it’s a smaller company, let’s say it’s a smaller market cap company, and it’s in a, it’s in a market that has a couple of big players in it. Then if I look at that projected revenue growth over ten years and compare it to some of the big boys in, the sector and it’s blowing them away, then I can go away. Maybe that’s not realistic. So that can help give me a sense of whether I’m a little bit too enthusiastic or not. Cameron: [00:20:22] Yeah. And especially when you’re looking at smaller companies that are growing and comparing them to bigger guys in the industry, you can look at things. How their gross margins are operating margins will change as they get bigger and develop into one of those big players and see I’m okay. Is that already built into the valuation that the market is giving it, or is there still an opportunity there to be had? Dave: [00:20:46] Yeah, I agree. And the other thing I liked about it too, is the ability to adjust things so that you can. Try to find a range of values, as opposed to just trying to find the one perfect price, because sometimes, you can make small adjustments so you can see. What does having a bigger impact on the value of the company, whether it’s the debt load or whether it’s the revenues or whether it’s the margins, all those things have an impact on how you value a company. And it’s kinda cool to see with the model. It weighs everything out, so you can see it. I’m a visual person. And so I like to see that stuff, and that’s very helpful. Cameron: [00:21:27] Yeah. Yeah. You have a lot of sensitivity analysis that you can do there with all the different inputs that play Dave: [00:21:33] So how long did it take you to create this thing? Cameron: [00:21:36] Oh, it took me. A couple of weeks to create it and in a year to perfect it, I would say yeah, kept on adding in sorta more evaluation metrics as I got, because once you get the projected financials, you can build in a bunch of different things. So as I kept learning different valuation metrics through the CFA and my other studies, I just kept on adding it. More evaluation metrics. So that football field of valuations that we give on the front tab there builds into that average. Dave: [00:22:06] Yeah. Yeah. That’s very helpful. So when you’re using this kind of model, is there a, is it, was there company types or styles of industries that you felt like this was a better fit for? Or is this kind of a one size fits all kind of model? Is that, is, was that kind of your hope for them? Cameron: [00:22:24] Yeah, I would say it’s really a one-size-fits-all. Cause it gives a lot of flexibility in terms of. What you’re looking at and how you want to look at it. So if it’s a company that’s financially distressed right now, you can be paying close attention to the cash flow projections and how bad are things going to get in a year and two years and what they need to do to turn it around, and how realistic that is. And if you’re looking at yours, one of your big mega-caps that’s a steady grower. You can look in, so how much of that’s already being priced into the valuation as we look out in time, and what’s the chance of them beating that from your perspective. Yeah, they’re very flexible in terms of what it can be used for. Dave: [00:23:07] Nice. So let’s say that you find a company that you really like, and you go through all of this. Is there anything, is there anything in particular that you look for that is maybe a red flag that would make you go, Nope, we’re done here and move on. Or are there things that you’ll work through and maybe normalize over a longer period? If you see something that’s lumpy, for example, Cameron: [00:23:30] Couple of red flags for me are always, and normally this I’ll catch these before I even get to. The point of putting it into the model. But I always, first off, I’m looking at a return on invested capital that’s a really above and economically appropriate level. So when we talk about return on invested capital, we’re talking about the returns to both debt and equity. We were talking about return on equity before, but there we’re looking at just the equity people. So return on invested capital, both debt, and equity. And that needs to be an economically sound level. And I typically look for something about 7% depending on the industry, which gives it the potential to be levered up so that your equity holders are getting that 10% return that I look for. So that’s the first rule of thumb that I look for is a 7% return on invested capital. And then the second thing that I always look for is share issuances. I find that can be a real red flag. If a company’s issuing shares on a constant basis, it proves that they can’t grow under their own weight a bit. Yeah. And I don’t like my equity being diluted. Andrew: [00:24:39] Who does, Dave: [00:24:43] who does? No, that’s that? That’s awesome. All right. So let’s say it passes all the tests then. Are you a margin of safety kind of guy, or what is. What would hold you back from pulling the trigger? Is it? Do you go through the financial part of it? And do you start looking at maybe some of the quantitative or the qualitative started looking at some of the qualitative types of ideas as well? Cameron: [00:25:08] Yeah, I’m probably more of a quant guy. Dave. Okay. But I definitely have to like the industry and the long-term prospects. I’m not too much concerned with the industry. Like I’ll go anywhere and do anything. If I can get that valuation and investors adjusted Roe that I want. So yeah, I’d say I’m really more heavily on the quant side. One other important thing, whenever you’re doing a DCF or evaluation is the WACC the discount rate that you’re going to discount the cash flow is that, and that’s something we’ve built into the model as well where you can go and grab the specific figures for the company that you’re analyzing. And just, you gotta be really careful there. Really using a conservative discount rate, or else things can easily start to look very rosy when really they’re not. And you’re just a little aggressive with that discount rate. So I tend to really keep my discount rates stable around 8%, 7%. And really, don’t get too aggressive with it. Andrew: [00:26:08] I guess that’s where the value of you having multiple models in there comes up because then if your DCF is like through the roof and all your other valuations are telling you that’s not the case, then you’re like maybe it was my discount, right? Cameron: [00:26:23] Yeah, exactly. And yeah, I will go lower for really great companies. Like, I’ll go down to five and stuff, but that’s very rare. Andrew: [00:26:32] Yeah, I have a similar kind of mindset to that too. Thinking about somebody who’s maybe just starting out, they’re wanting to dip their toes into looking at evaluation models, looking deeper into the financials. If you could kinda go back in time and think about when you were first digging into that, would there be something you would say. Past version of yourself to help him along the way of not getting too overwhelmed because there’s a lot of jargon and a lot of parts to financial statements. Cameron: [00:27:03] Yeah, sure. I had one teacher back at university. I think she, she told us to sorta Google one word every day and slowly continue to build your vocabulary and your knowledge and don’t get overwhelmed and yeah. Read the business section and stuff as well. But yeah, just be curious and explore and yeah, do it until your brain hurts and then take a break. Andrew: [00:27:28] I like that philosophy, then goes outside and take a walk. This has been great. A lot of good ideas on the show tonight, Cameron; we definitely want to thank you for coming on and sharing with us, from having the portfolio hedge, to digging deeper into companies and trying to find value in a. Arguably overvalued market always a tough sell, something that people who are in the trenches trying to find stocks, we’re dealing with that all the time. And it’s good to hear your thoughts on that. And some ways that people can try to navigate that. So tell us about, if there were interested in more of your work, how can they find out more about you and the model that you’ve been doing? Cameron: [00:28:07] Sure. So my model is available on Investing for Beginners under the products page. And you’ll find, I also have quite a few articles up there as well. I think over the years, it’s probably crossed the 50 point mark for sure at this point. Andrew: [00:28:21] So I guess we, we can search for you your name, Cameron Smith, to be clear. It’s not the Australian golfer. Who’s on TV all the time. It’s Cameron Smith. The finance guy. Yeah. Cameron: [00:28:33] Cameron Smith, the finance guy, often confused with the Australian guard. Andrew: [00:28:36] Yeah. Do you have a similar haircut? No. Don’t rock the mullet. No, Cameron: [00:28:40] no, not Andrew: [00:28:41] anymore. Dave: [00:28:42] Same handicap. Cameron: [00:28:44] Same handicap though. Yeah. Dave: [00:28:47] Wow. Andrew: [00:28:50] Awesome. Yeah, I definitely think people are interested in checking out the blog posts you did. You can go on the website, Cameron: [00:28:56] protective put option. Yeah. Andrew: [00:28:58] Okay. To protect the put option, you can read all about the hedge. If you search investor-adjusted Roe or return on equity, you should be able to find the other posts that we referenced and all good stuff. And hopefully, we can talk to you. Cameron: [00:29:14] Thanks a lot, guys, and congrats on nearing your 200th show next week. Dave: [00:29:19] Appreciate it. Thanks. Thank you very much, Cameron. We really appreciate you taking the time to come talk to us tonight. It was awesome. Cameron: [00:29:28] Thanks a lot again, guys. The post Intro to Protective Puts with Cameron Smith appeared first on Investing for Beginners 101.
31 minutes | Jul 1, 2021
IFB200: Stock Screeners, Cheap Stocks, and Great Businesses
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: Using stock screeners to find great investment ideas, and how to think about those businesses beyond the numbers Avoiding the stock market for short-term investment goals such as buying a house, car, or other large purchases that you need the money in a short-time horzinon. Deciding when is a good time to sell, or hold on to a good investment. For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript Announcer: [00:00:00] What’s the best way to get started in the market. Download Andrews ebook for email@example.com. Announcer: [00:00:13] I love this podcast because it crushes your dreams of getting rich quickly. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Dave: [00:00:00] All right, folks. Welcome to Investing for Beginners podcast. Tonight, we have episode 200, the big 200. We made it 200 episodes. So tonight, we’re going to answer some listener questions. We have three really good ones that we thought would be a great learning experience for everybody. So we thought we’d share those with you and Andrew, and I will do our usual give-a-take. So I will go ahead and read the first question. So I have; Hi Andrew. I am a huge fan of the podcast and really appreciate all of the advice and knowledge that you and Dave share. I have a question about stock screeners. I’m hoping you could help shed some light on I’ve created a couple of stock screeners using metrics you shared on previous podcasts to look for good value stocks to buy. Most of these picks have been great buys. I continue to hold them, and they have been doing well, but I have a question. What do you normally do when a stock you have previously purchased no longer shows up and the stock screener that you use to find it? I’m assuming that means that it’s no longer a great buy. Does that mean that it should be a sell I’m just curious what your steps are to take that point. If the stock you owned any insight provided would much appreciate it. Thanks, lifetime subscriber, Dan. So Andrew, what is the question on the question? What are your thoughts on Dan’s really, really interesting question? Andrew: [00:01:17] Yeah, I really appreciate the writing in Dan, and I’m glad to hear you’re enjoying all of the content. To me, it comes down to a big fundamental question is. What’s my goal for this? And I know that sounds kinda, you know, kind of Just very personalized, but really it’s like if you are making a portfolio where you are buying cheap stocks and then selling them when they become fairly valued, buying more cheap stocks, selling them when they’re fairly valued, then yeah. Once the stock is out of your screener, if you have something better to replace it, then that’s probably what you should do. And that can work for you very well over very short time periods. And on the other hand, if you’re buying stocks that you’re looking to hold for decades, that might not be the best way to go. And so I think when you look at trying to buy good businesses over the very, long-term what looks cheap to you might or might not look cheap from the basis of a number necessarily compared to everything else, but it could still be a good price. And at that point, If you’re really in as a business owner for the long term, it doesn’t matter. And it should not matter to you what the price is in the market because you know, this is something that you want to hold for decades. And so, you know, you know, maybe before we lose people who just started to tune in today, you know, what’s a stock screener or a stock screener is something where you can put different metrics in, and then we’ll filter a group of stocks with that criteria. So if I want to take a very simple, like price to earnings ratio, which is one of the most common ratios that’s used to approximate a price or valuation for a stock, you know, you can use a screener to say, Hey, show me only price-earnings ratio is below ten or below 15. And so you can get a list of a lot of the statistically cheap stocks in the market. And so when you’re doing that, you know, you’ll find a lot of these stocks that get temporarily beaten up and out of favor, but you also find a lot of stocks that. They might not have great businesses underneath them, and that’s why they are cheap. And so, you know, while Wall Street is emotional, it’s also not dumb. And so, a lot of times, there something could look too good to be true. And so you have to be careful with that. When you have positions in your portfolio, and you look at them, and they’ve gone up in price, the question does become. You know you want to look at the companies and, and think about. You know, are these companies, I can really see myself in for the long term. And so, you know, when I try to think about what kind of a company does that, it’s really going to be companies that can take your money and put it to good use. And so whether that’s them giving it back in a dividend or through buybacks, or whether that’s them reinvesting in themselves and being able to grow and compound, those are the things that you want to look for. And those show up in the numbers. And the answer to whether a stock is a good business, I think, is a separate question from whether it’s still cheaper or not. And that’s an important distinction, but something that I think people should take into account, Dave: [00:04:40] I agree with all that. A really good way to think about that as when you’re looking at companies to screen, and you’re looking to invest in them using the stock screener is obviously a great way to help you narrow down your choices, because when you start looking at the vast universe of companies that are available to buy. It’s a lot. It’s tens, if not tens of thousands in the United States, but it’s, you know, thousands. And so, it can be overwhelming. So using a screener to help you narrow down those choices is a great tool. One of the things that I think about, and Andrew and I have talked about this in the past as well for him, and I do this the same way is when you’re thinking about whether the company is whether you want to keep a holding it or whether you want to sell it. A great question to ask yourself is, has anything fundamentally changed about the company? In that? Is it something that they’ve stopped making? Whatever it is they’re making, have management completely turned over? Is the product or service that they offer completely become unrelevant? A perfect example, Kodak was the king for a long, long time. And then these little cell phone things came out, and then all of a sudden digital photographs were the thing and the old analog type of taking pictures and processing film that just kind of died a horrible death and Kodak didn’t adapt. And they got caught flat-footed, and boom, they’re out. They’re not out of business, but they’re certainly not relevant. And at one point, they were one of the largest companies in the market. And now they’re, you know, I don’t know what, I don’t know what their market cap is, but it’s quite small. Anyway, that’s a perfect example. A company that fundamentally changed the universe in which they existed fundamentally changed. And so we needed to sell out of that company. You could look at some of the oil majors today, and wonder is something going on that would cause you to fund. We caused them to fundamentally change and that they, they either need to adapt or they’re going to die. It could happen. I don’t know. It could, it could take a while, but it’s certainly something to consider if you’re going to buy an Exxon or a Chevron. But the flip side of that is like, Andrew was saying if your screen right now, you might see some of those companies and there’ll be cheap. You think, oh God, you know, this is great. You know, a five-star or a blue-chip type company like Chevron and Exxon is trading at the super low PE. This might be a great time to buy in, but you have to ask that extra question. Why is this so cheap? Why is this company that was so awesome? Five years ago, ten years ago. Now, so cheap what’s happened? And so those are some of the questions that you need to ask beyond just looking at the numbers, and obviously looking at the numbers are great. And the number tells you a story, and a low PE for a company like Chevron or Exxon is telling you a story, just like a high PE for a company like Adobe or Facebook is telling you another story. And our job is to try to figure out how to decipher what those stories are. And that’s what makes investing interesting and fun. And the challenge, because it’s not easy to, to pick up that book and figure out what it’s trying to tell you. You have to sometimes think a little bit between the lines. And so I guess my thought is for, for Dan’s great question is. When you’re looking at the stock screener, and a company moves out of it, in some cases, that’s actually a good thing is because the company is improving its metrics and it’s becoming the market is starting to recognize; hey, this is a really good company and are starting to bid the price up. And so, your shares that you bought at a lower price are now worth more. And so I guess it’s your decision then is trying to decide whether you want to continue to hang on to that company or whether you want to take the gains and try to find another cheaper company and try to work that up. Really, there’s no right or wrong answer to that. That really comes down to your personal preference and how much you want to do sometimes. You do want to move on to another company because it’s more interesting and it keeps you challenged, but I also challenge you to think of this. Charlie Munger said once that the greatest challenge to compounding is not interrupting it unnecessarily. And so if you’ve got a great company that you’ve bought really cheap and that’s going through the roof, then sometimes it’s best to step away and get out of the way and let the thing do its thing. Until it gets to a point where you just don’t feel comfortable holding it anymore, and then you can sell out of it. But anyway, those are, I guess, some of my thoughts along those lines. Andrew, did you have anything else you’d like to add to Dan’s question? Andrew: [00:09:43] I mean, I would think in just to give a tangible example of kindness, taking that second question over where you’re asking, why is this company so cheap? I think you can look at something like I think I got an example is when I think of like, why I bought Cisco years ago, The numbers were all saying everything was fine. It was just, people were, people were convinced that they were done like that, that for whatever reason, their technology was going to be obsolete, but the numbers are still there the backup that they were good. But like on another side, you can look at a company like. Where their revenues are going down, their profits have been going down, and so they have a cheap PE ratio. So those are two very different stories. One is like; people think that they’re over the hill, a second story they are over the hill, look at their numbers are falling through the roof. So it’s not though it is very like an individual to what the stock is it doesn’t need to be super complicated or complex. Sometimes it can come down to something as simple as looking at which way are the numbers going? Also, understanding that Hey companies also go through stumbles. Like if you’re a sports fan and you know that you have a player who’s really, really good. And he goes through a slump; the team doesn’t just trade them, you know? And so you have to distinguish between, you know, what’s a company looking like, what’s their trend looking like, and then. You know, how does that compare with the whole picture? And so that’s why I, like, I like the questions you’re asking, you know, like is, is the best, the model obsolete has it fundamentally changed, right? Big picture type of things. And the, and those are the things I think the similar type of questions that you can ask when you’re wondering if you want to sell something that’s gone up. Because I think in answering that question, you can get a lot of the answer to what to do with this stock Dave: [00:11:40] Yeah, exactly, those are great insights. I, Dan, hope that helps answer your question. So I think, I think those are all things that you need to consider when you’re looking at whether you want to buy, sell, or how you want to handle that. But those are, think of, think of those ideas, and I think that’ll help you a lot. All right. Let’s move on to the next question. So I have I Andrew; with interest rates on savings at an all-time low investing is the smarter play for long-term value. However, is investing worth it if you need to cash out within a few years, and around two to three years, I will need to pay for surgery that has a likely cost of $50,000. Assuming I can maintain my current rate of savings, I will still need to acquire a loan of up to 15,000 to fully pay for the surgery, plus all the savings I have accrued until then. A strong ROI could reduce the loan aid. But given the volatility of investments, building up a portfolio that I will be selling off in a couple of years could increase the loan while investments pay off in the long term given the short period that I will be holding, I’m not sure if it’s if the risk is worth taking for my capital. Any thoughts would be greatly appreciated; kind regards Cara. Andrew, what are your thoughts on Kara’s question? Andrew: [00:12:56] Definitely, timeframe does make a big difference on the likelihood that you’ll succeed. I think it’s easy for investors to look at the recent past. There’s a psychological term for it too. I think it’s recency bias, but basically, it’s this idea that whatever’s happened in the past couple of years is what’s going to happen in the next couple of years. So even like a perfect example is, and I fall victim to it too, just like anybody else. So don’t think I’m better than anybody. But you know, we can look at the stock market crash in 2020 and how it crashed. And then it rebounded. So everybody said, man, why then everybody just buys the dip. And I remember you can even go back into the archives, and you can listen. I mean, There was a lot of talk about it being the next great depression. And so, you know, we have this idea now that wherever the next crash happens, that it’s just going to be another by the dip. But what that is, is this a recency bias? That’s not necessarily what could actually happen. And so that’s what makes the stock market difficult is over a very, very long time period. You’ll have it going up most of the time you’ll have a dip and going up most of the time, but then every once in a while, you’ll get this really, really bad five, maybe seven, even 10 or 13 years, time period where stocks just don’t do anything. People don’t want anything to do with the stock market. And that’s exactly what you don’t want to happen if you have a big expense to pay. So even though probably nine out of 10 times, you might be okay investing in the market. It will just take that one time to, to, for the markets to turn against you. And now, all of a sudden, you have to get into more debt, and I would never advocate getting into debt in order to invest. I think you really want to get your financial house in order. Put that foundation down, and then once you do have that, then whatever you’re making from your investments is just icing on the cake. You know, we don’t want people to go mortgaging their homes and living in homeless shelters. So you can go get dividends. It’s just; it doesn’t make any sense at all. And if you think that’s going to help you sleep at night, even in the safest investments, I don’t think it will. So though it is, it does make sense. Kind of logically, you have to think about really what the long-term history of the stock market has been, and what’s the risk-reward, you know, and, and to me, it’s not worth even a one in 10 chance that I’m going to have to go into debt in order to, to get a better return. It’s just not worth it. Dave: [00:15:22] No, it isn’t. And in the idea of, I guess, trying to pick the company or the company. That could get you to the point where you want to be. It’s a; it’s a gamble. There’s just no other way to put it there. It’s taking a chance. You don’t; there are no guarantees. Even if you talk about the big movers and shakers in the market, there’s no guarantee that they will perform well. For the period of time that you need them to perform well. And that’s what makes investing and particularly investing in a stock market, so difficult. You know, granted, there have been some companies over the last year, or so that have gone nuts, and there have been some people that have done really, really well with those, but there’s also a lot of people that. Have not done well with those, depending on when you get in on a particular company, you could either be at the top of how the company has performed or not. And I’m not picking on Peloton, but if you just take the price of Peloton right now, let’s say that you think that that’s going to be the stock that will help get you to the balance that you need to help pay for whatever it may be, whether it’s a house, a car surgery, any, anything of that nature that you’re trying to gather money for in a shorter period of time. If you had a bet on Peloton, let’s say. Prior to the pandemic, you could have done really well. If you would’ve sold out here in the last, I don’t know, two months ago, three months ago, you would’ve done really well. However, if you had bought it, let’s say in December of 2020, and you still needed another two years to get to where you’re going to be. Yeah, it might be a tough row to hoe with that company. I’m not saying that the company is bad. I’m not saying the product is bad. I’m not saying it’s a bad investment. But what I am saying is, it is down 30 or 40% off of its high and to recover back to that high. And did you, can you go higher is unlikely. And it’s also going to have to do some serious, serious, you know, growth to get back to that level. And so it just kind of help illustrate. How challenging something like that could be, and if you pick the right companies, yeah. You could do well, but it’s such a gamble, and that’s certainly not anything that Andrew and I advocate for. And it’s just not a, it’s not a prudent thing, a wise, I guess, margin of safety type thing to do because it’s gambling, and there’s just no other way to put it. And there’s nothing; there would be nothing worse. I would hate to have somebody go out there and tell them to go buy all these companies. And two months before they need to go pay for something important, like buying a house or a car or the surgery that the Cara was talking about, that all of a sudden, the stock market crashes two weeks before she’s got to pay for everything and it loses half of its value. What do you do? I mean, it’s, it’s terrible. And so that’s why. When you’re thinking about these kinds of things, it’s better to figure out a way to do it safely and to be a little more prudent about it. And if that means putting the money in your savings account or putting it in a CD at a bank, or even looking at treasuries through Treasury.gov, but they’re guaranteed that they’re not going to lose value. So those kinds of things could help you earn a little bit of money, but are still going to be safe. So those are options but putting all that money in the market in the hopes that you’re going to. Accelerated that much is its chance, and that’s not something that Andrew and I advocate for somebody because, like Andrew was saying, we don’t want to, you know, putting all this money into the market and then you can’t pay for what you want. You lose everything. And then, you know, you’re homeless, and you have to try to live off of dividends from a company. And that’s just not the way to go. It’s tough, you know, because we go into the market wanting to make money really where big money is made in the market is when you’re compounding that stuff over a very long time period. So you’re not talking about one year is not talking about two years, even after five years. I mean, the compact, you can start to see the ball rolling after five years, but really the magic happens ten years, 20 years. Yeah, exactly. Just from those little things, adding up. It is. And a lot of people don’t realize this, but Warren Buffett really did become Warren Buffett wealthy, like he is now until he goes around and around his seventies. And he had been investing since he was ten years old. So he’s been professionally doing it for 50 plus years, but he really didn’t start reaching the, oh my God. He’s a wealthy number until about the last 20 years of his life. So it’s, you know, it’s a slow burn. It’s not going to be something where you’re going to strike it rich overnight. You know, the Bitcoin billionaires are it’s not a lot of people. So anyway, that’s my thought. Andrew: [00:20:51] What was that quote from Munger? He said the first a hundred thousand or the first million is the hardest was a hundred Dave: [00:20:57] thousand, a hundred thousand. Yeah. Andrew: [00:21:01] Cause, I mean, you think about like, if you make 10% on like a thousand bucks, that’s not much right. You make 10% on the million. Now you’re talking about a hundred thousand. So, you know, again, as, as it gets bigger, it compounds on itself, and the dollar amounts become bigger. It’s just when you’re first starting. And certainly not in a couple of years; you’re not going to be able to really move the needle unless you get into a Peloton before the pandemic. But we don’t know how to tell you exactly how to do that for us any particular stock. No, no, we don’t. Nope. We do not have a crystal ball. Unfortunately, if we did, we’d share it with you. All right, so let’s move on to the last question. So we have Andrew just started the IFB podcast from the beginning a couple of weeks ago, about 20 episodes deep, already. I really, really appreciate the info. I do have a question that you may answer on the show eventually, but it’s been killing me lately. I found a smaller cap company that hits every fundamental marker you have discussed. PE is below 10. The price to book is good. Cash is good. Everything looks pretty good. The price of the stock is a little over $4. If this was a bigger company, I have no doubt I’d buy this as I’m using the value investor mindset. However, I’m not sure how to evaluate if this is a good buy as it is a smaller company that flies way under the radar. Any thoughts or advice, Andrew, what are your thoughts? Yeah, so kind of going back to what we said at the beginning of the show, right. Let’s what I would do if I was in, in; who was it? I think, yeah. Corey Corey shoes. Well, I would do I would go into the annual report, the 10 K, and let’s learn about what this business does. And so, you know, is it a big fish in a small pond or is it a small fish in a massive pond. So as an example, you know, if I dunno, give me, give me like a big tech company, Dave: [00:22:56] Facebook, Andrew: [00:22:57] Facebook. Okay. So if we have somebody who may like social media for pets or something, and, you know, they’re, they had like maybe a hundred million dollars in revenue or something, which would be generous, right? Maybe they have, like, I don’t know, 1 million pets on their platform. Something, something really small, even if the company was cheap. I don’t think I would want to buy that because all it would take would be for Facebook to say, oh yeah, we just added a pets feature, and they would be able to so much more cheaply move into your industry. W versus you had to do this, like this, this other pet company had to do that organically. Right? Facebook could just make a tab on their page, instantly get all these users, and build their own. And so in that case, you know, I don’t care how cheap the company is. I don’t think I would want to play there. On, on the flip side, you know, some of the other good small companies I’ve seen are the ones where they’re relatively shielded from the bigger players. So whether they have like relationships with some of these, or they’re just like, they’re, they’re, interconnectors, you know, if they have like distributor relationships, wherever they, wherever they fit. But if they are the big fish in their small pond, then I like that kind of a company a lot better because they’re just, all they have to do is be the person who’s, who’s closest to them. Like if you’re, if you’re running away from a bear, You don’t necessarily have to outrun the bear. You just have to outrun the person who’s next to you. So in certain industries, that’s kind of how it is too. And you know, there’s always a risk any kind of Amazon type company coming in and just, I, Amazon thinks they can, they can enter whatever business they want these days. You know, that’s always a risk, and that’s with any business, but a lot of times you can figure out and you can, you can tell the difference between, you know, some really, really small company who’s. Going up against huge, massive nuclear weapons, and they have little knives, and they’re in their pockets. Or you can look at something where it’s a little bit more sustainable, and they’re actually could be a good competitive advantage. And I think that has a huge factor when you’re looking at small companies on if they have a good chance to succeed moving forward or not. Dave: [00:25:17] Yeah. I agree with that. And I, I think the. The idea that you need to learn about the company, I think, is probably the greatest takeaway from what Andrew was just saying. Because when you look at the numbers like we were saying earlier, the numbers tell you a story, but if you don’t understand what the story is telling you, then it’s hard to make a decision. To really understand those numbers, you really need to understand what it is the company does and how they make money and how they operate in the ecosystem that they operate in. Because like Andrew was saying, if they’re a small fish in a small pond, Then maybe that’s not the greatest thing, but if they’re a big fish in a small pond, then that gives them the opportunity to continue to grow and dominate that pond and grow beyond that pond. Whereas if they are somebody in a niche that one of the big tech companies operates in, it’s quite easy for one of those companies eventually to gobble them up. And so. I think that’s a one. I think that’s probably the greatest takeaway I would recommend is as learn more about the company read through the 10 K read through any financials that you can find listening to earnings calls, do some of that due diligence to learn more about the company, because once you know more about the company than a number, start to make even more sense, and it will help you make those decisions because that’s the hardest part is, is trying to figure it out. Yeah. Hey, I found this great company; it’s, you know, all the screeners make it look awesome. But if we don’t really know what the company does is really hard to think about how it can make money and how it could be successful as an investment. And I don’t remember who said this, but it might’ve been Peter Lynch. He said, when you think about a company, think about being able to describe it to a ten-year-old and how it operates. And if you can do that, if you can break the company down into a simple way that they can, you can explain to somebody that doesn’t understand anything about the business, then you really understand the company, and that can help you make your decision. It doesn’t mean you have to 10,000 different kinds of information about the company, but it certainly means you need to know a little bit about what it does and how it, how it operates. And I think once you understand those kinds of things, I think everything Andrew was telling you will start to make sense. And, and it’ll, it’ll, it’ll come a lot clearer to you when you think about it. All right, folks. We’ll that is going to wrap up our conversations for tonight. I wanted to thank everybody for taking the time to listen as well as to send us these great questions; keep them coming. And this is awesome. We are at episode 200. That is amazing. Thank you very much for continuing to support us and enjoy what we’re trying to teach you and for learning everything we’ve been teaching you guys, and continue to go out there and do a great job. Continue to invest with a margin of safety emphasis on safety. Have a great week. We’ll talk to you guys all next week. The post IFB200: Stock Screeners, Cheap Stocks, and Great Businesses appeared first on Investing for Beginners 101.
48 minutes | Jun 24, 2021
Passive and Sustainable Investing with Personal Capital’s Brendan Erne
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: Investing in Passive Investing using ETFs with Brendan Erne from Personal Capital How to protect yourself in a downturn in the markets The benefits and ways to invest in the ESG movement, plus all the insights on the benefits for society and the businesses. Click here to learn more about Personal Capital and their services, plus their free financial dashboard. Advisory services are offered for a fee by Personal Capital Advisors Corporation (“PCAC”), a registered investment adviser with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Investing involves risk. Past performance is not indicative of future returns. You may lose money. PCAC is a wholly owned subsidiary of Personal Capital Corporation (“PCC”), an Empower company. PCC is a wholly owned subsidiary of Empower Holdings, LLC. © 2021 Personal Capital Corporation. Personal Capital SRI portfolios are powered by Sustainalytics. For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript 2020_midroll IFB ad: [00:00:00] What’s the best way to get started in the market. Download Andrews ebook for firstname.lastname@example.org. 2020_Investing for Beginners Pod (revised) 2 : [00:00:13] I love this podcast because it crushes your dreams of getting rich quickly. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Dave: [00:00:00] All right, folks. Welcome to Investing for Beginners podcast tonight. We have a very special guest with us. Brendan Erne from Personal Capital is the director of portfolio management at personal capital, and he has joined us tonight to talk to us about investing and all kinds of great stuff. So Brendan, could you take a moment and, I guess, tell us a little bit about yourself and maybe some of your background and kind of how you came to where you are today? Brendan: [00:00:24] Yeah, absolutely. A pleasure to be here; first of all, guys. But, but yes, so. I, as you mentioned, my name is Brendan Erne; I’m originally from the Pacific Northwest, actually the east side of the Seattle area. And then I moved down to the bay area in 2004, where I’ve been ever since and reside today. I’ve always held roles in the financial services industry, particularly in investment management, and my career has kind of. Progressed a little bit, I would say it, at least in far as my investment philosophy is concerned into the role that I’m currently in a Personal Capital where we’re focused on more passively managed long-term investment portfolios and wealth management for clients, but kind of my, my roots are beginnings where we’re a bit more of the opposite of that and more of the active management world. You know, as an analyst, trying to pick stocks, pick the cap categories of the market that we felt were going to outperform. So I’ve kind of had a little bit of a. You know, progression, so to speak, but yeah, I ended up where I am today. Dave: [00:01:20] So how has that changed from going from an equity analyst and picking stocks to what you do today? Was, was that a difficult transition for you or kind of, how did that work for you? Brendan: [00:01:29] You know, it wasn’t; it was one that just kind of naturally occurred. I was, you know, I really enjoy being an equity analyst and picking, sorry, it’s fun to go into pick stocks and to try to, you know, beat the market. But I think what I realized, and this was when a lot of the data started coming out, is that just when you look at the data that the vast majority of active managers out there, the ones that are trying to outperform the market, these fund managers, they don’t, they actually underperform their, their underlying benchmark. And then, so it’s very difficult just from a numbers game and then the ones that can. I don’t really have a great chance of doing it consistently every single year over time. It really only takes one, it kind of blows up, so to speak, to erase all those gains. And I think, you know, the poster child of this, you know, during my time as an equity analyst was built, you know, Bill Miller from the Legg Mason value fund you know, he was hailed as this financial genius. He beat the S&P. I forget how many years in a row it was, wasn’t it like 13, 13 I think was the, it was the number and then 2008 happened, and you know, all that outperformance went to under-performance. And so you know, It just, it’s very difficult to do, even from a professional standpoint, you know, consistently over time. And I saw the impact that had on clients’ portfolios and, you know, I really just thought that there was a better way to go about it. And that’s where my mind had kind of shifted into more passive management that, that really the best chance of success. Just kind of your average, the everyday investor is not to go out and try to pick stocks, and you know, try to gain the market. You can do that, you know, but just make sure it’s not the lion’s share of your net worth or that if you lose that amount, you know, it’s going to have a heavy impact on your retirement. You can have fun with it that that’s fine. But you know, at the end of the day, if the professionals, you know, with all the resources they have at their disposal, Aren’t able to do it on a consistent basis. I mean, how is your average day, you know, everyday investor going to do that with; they don’t have teams of analysts like focusing on every single detail of every company. So that’s really where my mind shifted and moved towards passive management and that the best chance for long-term success is really just owning the market instead of trying to kind of dance around it. So to speak. Dave: [00:03:39] Yeah, that makes sense. So I guess explain to maybe our listeners who aren’t familiar with some of the terms, like the difference between active management and passive management, what does that entail? Brendan: [00:03:50] Yeah, so, so active management just means you’re making active calls within the investment portfolio. And so you’re trying to find stocks or companies that you think are going to outperform an underlying benchmark. Let’s say it’s. The S and P 500 is an index, you know, within the US, a lot of us fund managers try to outperform the S and P 500 by picking various categories of the market, whether it’s overweighting certain sectors or just the companies that they’re actually investing in. So again, the goal is to generate outperformance versus the market. Passive indexing is a little bit different, instead of trying to outperform them. You just buy and own the market. And so you buy a fund or ETF that tracks that underlying index, and you’re not actually trying to go out and make those active market calls to predict what you think is going to outbreak. Dave: [00:04:37] Okay. That makes sense. So at Personal Capital then, so what, what, what do you guys do at Personal Capital for those who aren’t familiar with the company and kind of what you do there? What can you tell us a little bit about that? Brendan: [00:04:48] Certainly. So we’re what I would probably call digital-first or digital forward wealth management and financial services company. And that just means we kind of put technology at the forefront of the client experience, and we use that technology too, or just leverage that technology too. Provide what we feel is just a better overall client experience in a more kind of cutting-edge client experience. So we have something that’s called the financial dashboard. This is free for anybody to go in and sign up. And when you log in, you’ll just aggregate all of your financial accounts. You might have. Vanguard, you might’ve won at Schwab; whatever the case is, you can aggregate them all into one place. And then you can view your entire kind of financial life. So to speak, in one location as one portfolio. So you can drill into fund fees, all those kinds of things to see what you’re paying. So that’s kind of the: first piece or the initial front end of the personal capital experience. And then on the backend, we’re a, a, you know, a wealth manager. So we actually manage portfolios for clients. If you have over a hundred thousand and investible assets, you can hire us to manage those portfolios. Dave: [00:05:51] Cool. So the portfolios that you guys manage are those. Are those a combination of like Robo-advisors or are you guys actually, is it more hands-on, you know, I sit down with you, and then we talk my goals and kind of work through that kind of process. Brendan: [00:06:07] Yeah, no, the word Robo-advisor is somewhat of a little bit of a bad word around our company. We, we don’t take no that’s okay. So yeah, but you know, we, while we put technology first and try to leverage it as much as we can, I mean, we come to the realization. Yeah. I mean, money above all else is probably one of the most emotional and personal things for people. And so we just don’t feel a true, like a Robo experience is the best experience for clients. People have emotions, and they need to talk to a human being. And so every client that signs up has an advisor; there’s that human interaction always on that other side of the phone or video screen or, or even in person. Yeah, so everybody has an advisor, a personal account. Dave: [00:06:47] Awesome. So that’s, that’s great to hear because. I know that I had an experience with betterment a few years ago, and it was, it was really frustrating because there were some things going on in the market, and I didn’t have options, to react to what was going on in the market. And it was really frustrating. So that is very appealing to me. I know that’s something I like. So, I come from the banking world. I worked at Wells Fargo for about five years as a personal banker. And one of the things that I noticed right away, That nobody had people who had nothing saved for retirement. And I’ve read about kind of the looming crisis, if you will, with retirement. So what are your thoughts on that? Is it real? Is this blown out of proportion? Is there, is there a way we can come back from this? Brendan: [00:07:35] Yeah, that’s a great question. And I would say, you know, if we’re not classifying it as a crisis, it’s certainly. A major issue that needs to be addressed. I think, you know, personal capital, we put out a survey very recently actually. And I think we found that about 60% of people in the country have access to a 401k and only about 30%. Of the people who utilize the 401ks, over half of the people aren’t even touching the 401k. And those 401ks often come with company matches free money that, you know, investors need to take advantage of. And they’re not. And I think the median retirement account for. Someone who’s just about to retire, close to like 65 was about; it was like close to like $70,000. And that’s all that was in the retirement account. And so that’s not good. We, we need to improve, and we need to improve by, by a lot more than that. And so, you know, ways to go about doing it. I mean, I think it’s just financial clarity, transparency. And I was just talking about this because there’s just a lot of people that just don’t understand. I think your podcast is a great example of trying to get the word out simply because there are so many people out there that just don’t understand the investment side of things. And when they don’t, they often just get paralyzed, and they don’t make a decision at all. You know, rather than just put some money to work, they don’t do anything just because they’re somewhat frozen. So I do think, yeah, getting the word out there is the best thing that you can. Dave: [00:09:00] Absolutely. We, we a hundred percent agree, and that’s a big reason why we’re here is trying to help educate this view. And I saw that day in and day out at the bank, and it was, so it was so discouraging and so frustrating. And like you said, the free money that they’re just not taking advantage of it. Yeah. If they found 20 bucks in the street, they’d pick it up. But, but they won’t, they won’t do it. They won’t do it in their investment account. And I think a lot of it is fear, and I think it’s just education. And, you know, I, I was opening the other day that I wish, you know, how CNN has been running the COVID trackers through this whole ordeal. I wish they would do the same thing with retirement. So they would get the word. Brendan: [00:09:41] I agree. I mean, yeah, they just need to raise awareness of it. And then I just think, yeah, financial literacy is just a big part of that as well. They are just helping people understand. What their options are and how to invest towards the future. But, but absolutely. Dave: [00:09:54] So how can personal, how does personal capital help with this and, you know, what, what are you guys trying to do to help people with this? Brendan: [00:10:02] Well, I mean, I, our official mission statement of the company is better lives through technology and people better financial lives through technology and people. And so. You know, we’re really trying again to leverage that technology to produce better client outcomes. And that’s really where, you know, I talked about or alluded to earlier about passive management. So that’s really our overarching, you know, investment philosophy. But we, we do as much as we were full-service wealth management firms. So when clients come to us, we do as much as we possibly can for them, whether it’s—insurance planning. We, we don’t sell any products. We don’t make commissions of any kind. We’re registered investment advisors to make that clear that we’re, we’re a fiduciary, so we don’t make commissions. But we do, you know, estate planning, tax planning, you know, any kind of financial planning need that a client might have. We’re there to help them or guide them through that, that answer, and that, that learning process so that they can kind of figure out and get a grasp of their financial life. I do think our financial dashboard is just such a great piece of technology because once you aggregate all your financial accounts, then everything is live and real-time. So for all of our clients, we know the very second that something in their financials. Changes because it shows up in their financial life. We see it on the dashboard. And so we know exactly when, oh, they’ve now reached, you know, a couple of years to retirement or they just got an inheritance or maybe they should get more conservative or more aggressive. We see that information it’s dynamic and real-time. And, you know, we can just reach out and say, Hey, we’re, we’re moving you to a more conservative strategy based on this. And it’s just such a seamless experience that, you know, I think that. It just does so much to help clients kind of ease them into these types of things. And just helps with a lot of those difficult conversations. Are harder to have when you have to be in-person in an office, filling out, you know, paperwork with a pen. I mean, we just, technology can alleviate so much of that, that headwind for, for clients. And so I think that’s one of the areas that, that we help. Andrew: [00:12:01] Brandon. I’m gonna jump in here. I’m going to ask you a tough one. So, you know, you mentioned Fund managers, whether it’s a hedge fund or other fund managers not able to beat the market. And you also mentioned, you know, recommending buying an index. So I guess my question would be two-part one why, you know what’s the value add if they should just, if clients should just be buying an index and then two Is moving a portfolio to more conservative, kind of, not like away from the market. Is that kind of shifting more towards active versus passive? Brendan: [00:12:36] No. So, well, let me start by taking the indexing question first. So I think passive indexing is a good first step from active, but I do think passive indexing has. Flaws to it as well. And I think the biggest ones are the fact that most passive indexes are market cap-weighted or more; most indexes are market cap-weighted. And what that means is that the size of the company. It is going to dictate how large of a position it is within that fund. And that just seems a little odd that just because a company is large, that means you need to own more of it. Right. And it kind of goes counter a little bit to the fundamentals of finance of the BI-LO and sells high because. It is inherently buying something that’s already gone up in value more and owning less of the stuff that is potentially undervalued. So you’re somewhat systematically doing the opposite of selling high; you’re selling high essentially, and, or sorry, selling low and buying high. So that’s a problem with passive indexing in its true form. So. One of the approaches that we take, Personal Capital, is what we call smart weighting, and this is where we more equally weigh different factors within the portfolio. So we’re still not out there picking stocks that we think are going to outperform, but what we’re doing is we’re—broadening the diversification across various factors. Such styles like growth value, core size. We have a more even weight exposure to mega-cap, large-cap, mid-cap, and small-cap, as well as equal exposure to each economic sector. By doing that, you know, we can still say that we’re passive indexing because we aren’t trying to pick which categories are going to outperform the market, but doing systematic backtests, you know, we’ve, we’ve seen that that’s been able to produce kind of better returns in the market with lower risk just by kind of spreading that risk more evenly within the portfolio. So that’s kind of the difference in our investment approach. And then I would say, When you hire us to manage your portfolio, it’s not just that, that you get, I mean, we do use portfolios of individual stocks, and that also allows for additional benefits. Tax-loss, harvesting tax location. This is the process of locating higher-yielding securities in IRAs so that you can shield that income from taxes. We have, we can do a, you know, kind of more acute rebalancing, so to speak. So there are a lot of other benefits that come from just, you know, from our portfolios rather than just owning a passive index fund. So that’s that side of thing. And then I’ll, I’ll need you to repeat the second part of your question. I’m sorry. I think Andrew: [00:15:06] you could, you, you kind of covered it. You, you really encompass the whole theme of it. So I guess just to circle back for beginners, when you mentioned value factors, you’re talking about groups of stocks with different characteristics, and then within those groups, you have a, basically an entire, yeah. Brendan: [00:15:21] That that’s right. So, the value or the style factors are things like you have value stocks. These are the companies you know that are, might be paying higher dividends. They may not have as high of growth rates; typically, more established growth stocks are the ones that you know, often, they don’t pay dividends. They plug all their money back into growth. They have high revenue, growth rates. And then you can just kind of have the middle, which is referred to as core and the best way to probably. Label. This would be just the Morningstar style box. If you were to go to morningstar.com and look up a fund, you would see that there’s all the style box. So you have large values, small values, you know, large growth, small growth. And so, yeah, the idea is really to spread. Risk more evenly across each of those buckets because they do go in and out of favor. It’s cyclical, you know, over time that one category is going to perform well and another is not. And then you want to be able to take advantage of the stuff that is. We’ll also rebalance it into the stuff that’s about to do better. Andrew: [00:16:15] Totally makes sense. And I think, you know, it’s a good, good way to kind of think about when we, when we think about different industries. So I know when you guys reached out to us, you had mentioned how you have a focus on ESG. And so one of the big things that we’re trying to get in front of and trying to present a lot of information for, for our listeners, is the whole green revolution because I think it’s, it’s quite clear too. Many of us, regardless of what pocket of the market you’re looking at, that there’s just this huge push, not only from companies but the governments and individuals to, to move towards energy that is more green than, so it’s not even a question of if it’s more of a question of when, so on your side. You know, obviously, we’re not talking about individual businesses or anything, but are there certain types maybe talking about factors? Is there a way that you guys are, are adding that kind of exposure for clients, and is there a way that other average investors can emulate that? Brendan: [00:17:11] Yeah, so, I mean, I think I would take it up a level higher. Instead of saying the green revolution, I mean, I would almost just say sustainable. The revolution, which encompasses, I think all the factors within kind of ESG green being just more of the environmental side of things, but you also have the social and the governance and, and yeah, I mean, this is a. This is a really important area of the market, and we see significant demand growth here. And I think the USF is just a forum for sustainable and responsible investing. They did, you know, they do their surveys every couple of years. And I think they said that the last one, that about one in $3. Professionally managed assets in the US are now incorporating some form of sustainable mandate. And then I think even Bank of America recently came out with their own figures saying that in 2021, about 30% of all global equity inflows were into ESG. And that you know, that number basically doubled over the year before. So this is growing really fast, and I. That it’s growing and I’ll, I’ll highlight maybe a couple of reasons why I think it’s growing so fast. And then you know, basically like how you can apply that or how investors might be able to access that. And I think it’s growing fast for a couple of different reasons. One is just a value base. It’s the common sense that, you know, companies, there’s just a growing consensus that companies need to be more responsible stewards of the environment of their communities and of their employees. And so, more investors want to build that into their investment philosophy and their investment choices. So there’s that aspect to it. But the one that I think gets missed the most, at least in the retail space, the institutional world has picked this up very, very fast. And this is where ESG is already spreading. Wildfire in the institutional world. It’s that ESG factors are actually financially material to a company’s bottom line. In other words, they impact profitability. And I think that’s the point that a lot of people in the retail space just haven’t been exposed to yet. I mean, when you think of. Let’s just say like an industrial manufacturer. Suppose there to go through and reduce their carbon or their energy and water utilization that lowers their cost of capital. And that actually flows directly through, through to earnings. So it’s not just doing well by the environment. They’re actually improving their competitive edge, and the same can even be said on social and governance factors. You know, companies that do right by their employees are better able to retain top talent. Whereas more diversity, particularly at the board level, has been linked to greater levels of innovation as well as better financial performance. And I think that’s really a common theme through, though most of the research that’s emerged in recent years, is that companies are performing better on ESG metrics. Tend to be more profitable and produce stronger financial results. So I think that that fact, or that. In conclusion, so to speak, from all this research that’s out there is really driving a lot of the demand towards this space. So this is an area of focus that you know, as personal to me, this is what I focused on specifically at Personal Capital. So I’m something that I’m, that I’m passionate about. And, you know, I think there’s a couple of ways that investors can get, get on board with this and. The first, well, there are two ways. Yeah, it’s done it yourself or hire a professional. Those are really the two camps that you can choose from. And so in the, do it yourself world, it can often be. A little bit daunting to try to go through and do all the research to pick all the individual stocks. Suppose you’re building a portfolio of individual stocks to basically produce a well-diversified ESG optimized portfolio. So if someone’s going to go this route, I mean, my suggestion is. You know, go and low cost, passive ESG funds. So again, that goes back to passive management, just being, in my opinion, at least, you know, a, a better chance of success for, for retail investors over the long term. But you know, again, I think you have to be careful even when you do that, because when you kind of peel back the wrapper on passive funds, particularly in the ESG space, they can have really significant sector or category concentrations. You know, more than a third of their portfolio in technology, you, you want exposure to technology, but not when it’s more than a third of your portfolio. So you need to be careful when you’re building a portfolio. So there’s a lot of great options out there. There’s a lot of low-cost options out there, but just make sure you’ve examined your exposure when you buy it so that you know that okay. If it does have these huge concentrations in technology, I’m probably going to have to offset that somehow in my portfolio by buying or supplementing with additional funds, whether they’re ESG optimized or not. The one thing that you can’t do is just. Abandoned the fundamental principles of investing is diversification, just to jump on board with ESG, you know, you need to pay attention to your exposures, and I’ve, I’ve seen a lot of people come through. They say like, oh, I just, just want to own, you know, green, green, clean energy, that’s all I want to own. And they pile all their money into it. And I mean, I think you can probably imagine what happens if that turns south for any period of time. I mean, that puts their entire retirement at risk. So you still need to keep the core. Principles of investing in place. And again, if that means folding in non ESG, optimize, you know, positions into your portfolio or funds into your portfolio, you need to do that in order to get proper diversification, particularly if you’re building a portfolio across multi-asset class global diversified. So. That’s how I would approach it in them, do it yourself world. Again, I’d look for kind of a core low-cost ETF. That’s ESG optimized. Of course, you’re going to have to go look at the mandate, figure out if you agree with how it’s making the decisions on ESG. But then supplementing that with kind of some traditional funds and ETFs to make sure you still have that diversification. Now the other side of that is that of the higher professionals. So this is obviously I’m going to feel a little more biased on this one because this is what I do for clients. But you know that there are benefits that come along with this, right? I mean, you can more easily get a portfolio that is built with individual stocks. And not only does that allow things like the better ability to tax optimize, but it allows you to customize as well. So, you know, with an off the shelf, thunder, you know, ETF, you can’t go and say, I don’t like Walmart. I don’t think it agrees with my values. You, you can’t go and exclude that or remove it from the fund or ETF. So you need a portfolio of individual stocks to do that. And so that’s where you, you know, hiring a professional can be, you know, a good route. If you want to kind of, I think, just have a more robust offering that has just a little bit more personalization allowed within it. Dave: [00:23:45] Yeah, that’s a great insight. And I w I, I, I agree with a lot of the things you’re saying, and I wonder, do you feel like that as the economics become more obvious and will capitalism kind of step up and I guess convert somebody like a Walmart who people may not agree with, do you think that. Do you think that may eventually become just a standard operating procedure for companies as opposed to something that’s differentiating them from one or the other? Brendan: [00:24:19] All right. So for your question, you are just mostly asking. Will a Walmart eventually kind of become more ESG aligned. Is that the main question, Dave: [00:24:28] I’m just wondering if, you know, you made a very astute point about the economics of it. What you were talking about is actually way better for the company in the long run. And I just wonder if eventually that the economics will win out and we’ll, you know, we’ll eventually overcome some of the resistance to that. Maybe some companies are having to, to embracing some of these ideas. Brendan: [00:24:52] I, I think that is absolutely true, and that will absolutely happen. More company boards are beginning to realize the financial materiality, so to speak of ESG issues and the realizing that, you know, not all. Does folding them into their operations in their business practices. You know, that that’s obviously, you know, it’s better for the world, and it’s better like investors like it more, but it’s better for their business. And the more companies that realize this, you’re just going to start seeing adopting it across the board. I would say the companies that are probably are, are a little bit more behind would be the smaller companies. Just because, you know, it can be. Some upfront, you know, additional costs in order to put a robust ESG framework, you know, within your company operations. And so they might be a little slower to adopt, but I mean, I think there’s a growing pool of capital. I mean, particularly in the institutional world that only wants ESG. Analysis, sorry, they don’t just want yesterday. That’s a part of the portfolio that they want. It’s one component of the portfolio that they want. So when that’s the case, that’s going to motivate these companies to not only disclose ESG issues, but by disclosing, they’re going to realize. We obviously can’t have poor metrics after we disclosed. So we’re going to have to improve and report on this stuff ongoing. And I think that’s where a big benefit of the rating agencies come in is that they actually can kind of push companies into reporting more in order to get better scores because more and more people are starting to look at those rating agencies. Dave: [00:26:22] Yeah. W let’s talk about those rating agencies a little bit. We had, we had a question about that a few, a few months ago, and I guess I’d be curious to get your thoughts on the rating agencies and maybe how that works and the adoption of that. And I guess, and I guess to talk a little bit about maybe some of the downsides to some of that if there are. Brendan: [00:26:42] Yeah, absolutely. So we actually use Sustainalytics at Personal Capital for our ESG scoring data. They’re the experts; they’ve been doing this for several decades. We’re pioneers in the field, but there are a number of rating agencies that are out there. And I would say. The good news with rating agencies, it’s still kind of early innings. The good news with the rating agencies is that there’s becoming they’re converging on a more standardized way to define ESG criteria and to report and score on ESG criteria. So I think that was one of the early pitfalls of using them. They were so disparate in their approaches that there wasn’t anything that was well-defined. But I think, you know, with the advent of like the sustainable accounting standards board but I think it’s based here in San Francisco, they came out with a framework, the framework, essentially, financial materiality and. You know, each industry is subjected to different ESG issues and risks. And a lot of the rating agencies are now incorporating that broader framework within their scoring methodologies. And then we’re also starting to see the government get involved. We just, we already saw that in Europe with the EU taxonomy and the sustainable financial disclosure regulation and. Probably at some point in the US going to see something similar. And so I think over time, it’s just, it’s going to get better and better, but I think it’s still in a pretty good spot relative to where it used to be, you know, many, many years back. So that’s good. The downside of the rating agencies, I mean, I guess. I guess it would just be the flip side of that is that, you know, it’s a slow progression for them to get to that point where things are, are very, very well-defined and kind of standardized across the industry, so to speak. But, but I do think they’ve gotten a lot better in the fact that most of the major players out there are now focusing on financially material, ESG issues. I think that’s doing a lot for them. Dave: [00:28:40] Yeah, that’s great. So I guess, talk to me a little bit about some of them, like, how, how do you, how do you guys work through the, when you’re working with any funds that there’s been some criticism on, on Finn twit about some funds that have had. Air quotes, not really ESG friendly companies rolled into those funds. So is that something that you guys work with? Maybe the funds to try to. Change some of that or how, how does any of that work? Brendan: [00:29:16] Well, I think the tough part with all of this is that you know, some of it can be very subjective. Right. And that’s, it’s a difficult thing to kind of pinpoint and say you know, just because you think this fund qualifies is, you know, ESG optimized, so to speak, and this company thinks that it’s not so, so that’s a difficult thing to solve for. So there’s also the concept of what’s called greenwashing out there. And that’s where some of these funds kind of hit themselves as this ESG, you know, greener, more sustainable funds. When in fact they’re not, they just, they might just own, you know, a certain cohort of the market that they think they can call green, but, but it’s not really green. So I think that side of things will improve. Probably quite a bit in coming years, just because the SEC has started to step in and address this head-on and say, okay, if you’re going to. State that you were a, you know, sustainable or ESG manager; you need to have proven steps within your process to show that you’re applying those metrics to your portfolio. So I think some of those funds have capitalized on just the frenzy around kind of green and sustainable investing. But, but I think over time that that will get better and that more of those companies will, will go away. Dave: [00:30:34] Good. I’m glad that that was, honestly; that’s been one of my concerns about it is just the some of the. Shadiness that can sometimes go on and it’s, it’s, it’s discouraging because you know, the idea behind what you, what you’re talking about is it’s, it’s, it’s something that needs to happen for not only the companies but also us. And so why people choose to use that for ill is kind of sometimes disheartening, but I’m glad to hear that. So, As somebody that’s maybe trying to do this on their own, how can they, how can they avoid some of those air, air quote, greenwashing type funds? Brendan: [00:31:14] Well, it’s, it’s tough to spot, but I mean, I think just the more you dig under the wrapper and dig into the investment methodology, I mean if they continuously are using like hot buzzwords, like in their descriptions, and there seems to be a lack of I guess just supporting evidence within their portfolio to you know, say that they’re actually doing what they’re doing. So again, the easiest way is to just peel back the wrapper and look at the underlying fund holdings. And to be honest, you can even track high-level ESG scores. You know, if you go to the MSCI website, they’ll give you the top-level ESG score. You are supporting data that’s underneath it. You have to subscribe to their service in order to get that. But I think even Yahoo finance gives free Sustainalytics scores. So, you know, anybody can kind of go and just see from a rough high level, at least, you know, whether this company qualifies or not. Dave: [00:32:07] Awesome. So I guess, how did you, how did you end up, how did this become a thing for you? Like what, what led you to, what do you know, focusing on that? Brendan: [00:32:18] It’s a good question. And I think it’s probably a variety of things. I think I’ve always just had somewhat of affinity, you know, being kind of a Pacific Northwest or, you know, at, at, at heart. I think I always just kind of had an affinity. For nature, you know, even do, you know, landscape, nature, photography as a photo enthusiast in my off time. So I think the environmental side of things is really what kind of sparked my interest in it, like, from the beginning and then kind of how that evolution played out at my company is that more and more clients started—asking for an offer in this space. And as the director of portfolio management, I saw all the types of customization requests that would come in from these clients. And I just, a lot of them didn’t want to own tobacco. A lot of them didn’t want to own big oil. And so there were these very common themes that I was seeing and I. We could do that, and we can do that for anybody, but we didn’t have a holistic portfolio that not just excluded those categories that they don’t want to own or the more controversial categories; we just didn’t have something that proactively went out and sought companies that are doing better on environmental, social and governance issues. And so we just want, I wanted to have a more holistic approach to it. And so that’s where the idea really sparked from. And I mean, There’s also just the fact of living in the bay area, to be honest with you, you know, there’s that, and then there’s, I mean, climate change, it’s something that a lot of people probably think because this far off you know, kind of intangible subject, but living in the bay area it’s anything, but intangible, I mean, it’s right in your face with the number of wildfires that we have on any given year with the entire city, just doused in smoke for weeks on end. I mean, it’s just. The wildfires aren’t 100% driven by climate change, but it’s a major part of that. Yeah, exactly. And so, you know, it’s just very front and center and very real and very, almost alarmist in the bay area. And so I just wanted to do so do my part, and you know, this was one way that, that I can help. Dave: [00:34:17] Yeah, that’s awesome. I, I applaud you for that. I, I used to work in the wine industry, and so I went to Napa and Sonoma a lot, and all you have to do is go talk to one single winemaker or 1, 1, 1 guy out working in the fields, and he’ll tell you that things are changing and it’s, it’s happening pretty drastically there. And it’s, it’s scary. It scares them, you know, Brendan: [00:34:40] They are. And I mean, there’s been a lot of damage up there. You know, there, we lost a lot of wineries and some of those recent fires. And yeah, that’s, that’s kind of. You know, partial or like, you know, part of my heart as well, because I am a big wine person. And so you know to, to see that as really saddening. Dave: [00:34:57] Yeah. It really is. Yeah, for sure. They will. The next few vintages are going to have a smoky after taste, but, you know, Brendan: [00:35:04] yeah, exactly. Not the Dave: [00:35:06] greatest. I guess, I guess pivoting off of the ESG, why don’t we talk a little bit about it. How to survive, a market crash, really different segue. So if it comes again, you know, there’s all this discussion about whether we’re in a bubble, we’re not a bubble. So how can investors set themselves up for success if something like that comes to pass? Brendan: [00:35:27] So the first thing that comes to mind is always, anytime I talk about this subject, it’s. The number one rule in Hitchhiker’s Guide to the galaxy. It’s don’t panic, right? I mean, that is the biggest reason why people hurt themselves in any financial downturn is that they wait until they sell off is almost complete. Then they sell their entire portfolio, go to cash. And then not only until after it’s risen, you know, but X amount and they’ve also missed out on most of the upside, do they figure out, okay, there’s the all-clear signal I guess I can get back in, and they’ve just erased. A significant portion of their net worth. So, I mean, they don’t panic is, is kind of the kitschy version of that. But I think from a more, you know, technical perspective I think there is, there’s a couple of things, and it goes back to what I was describing earlier with kind of our diversification strategy at personal capital. So you can imagine that you know, there are certain people that are more susceptible to downturns than others. And I think the ones that are more susceptible to downturns or the words. That kind of chase performance, so to speak. So if there’s a hot segment of the market that’s doing really well, they kind of chase that performance and they want to invest, and they kind of get in a little bit late, but either way, they see it all the way to the end when it’s gone way up. And unfortunately, what goes up the most in the market tends to fall the most when the subsequent crash happens. And those people end up getting burned. Pretty much more than, than anybody. So you gotta be careful when you’re doing that, especially if you’re actively out there picking stocks. But you’re also susceptible to passive index funds. And what I mean by that is, you know, you might think that you’re diversified by just going and buying an S and P 500 index fund. But the reality is, is that what we described earlier with, you know, market-cap-weighted in the largest companies making up, you know, a larger weight in those funds. That means in 1999, If you bought the S and P 500 fine thinking that you’re, you know, diversified, you have more than a third of your portfolio in tech. If you were in 2007 and eight, before that downturn, you had the same and financials. And what happened at each of those sectors, they both fell 80%. I mean, that’s a significant hit to your net worth. Even if you just bought what you thought was a diversified passive index fund. So that’s really where we think, you know, the approach that we’re taking with more equally weighting, the various sectors, and styles, and categories within the market, it more evenly distributed. So you’re never really fully exposed to those bubbles or those concentrated segments of the market that boil up to those frothy areas. And then have those severe and violent downturns, you know, by more equally weighting sectors, you do have exposure to what’s doing. But you’re never overexposed to what’s doing well. And so I think from our perspective, that’s the best way. We know to try to help mitigate some of that volatility from market crashes, but, you know, ultimately. Don’t panic. Don’t try to jump and dance around any sort of downturn. You know, it’s best to just kind of hold on if you can, and you know, write it out because the market always goes back up. Dave: [00:38:29] Yeah. And w we saw that for sure. What happened a year ago, March, and now look at the market now. So that’s a perfect, perfect illustration of that, I think. Yep, absolutely. So I guess. Do we want to touch the third rail and talk about the meme stocks Brendan: [00:38:47] we, we, we can yeah, that’s, that’s an interesting area of the market for sure. Yeah, you know, it’s interesting and unfortunate, to be honest, that I think a lot of the people that have jumped onto that. Bandwagon is going to end up getting pretty badly hurt. I think that you hear the stories of the, you know, the few people that are striking it rich or that we’re able to sell and get out. But I think the vast majority of people getting into that area are going to hurt themselves. So that’s kind of the unfortunate part because I know that, you know, it was kind of this. I dunno, visual representation of the individual investor, being able to kind of take on the, you know, the David and Goliath moment. Right. And it turns out that the individual investors are probably going to get hurt more and in the long run. But you know, I, I’ve also heard concerns like, Hey, does this pose—risk to, to the market in general. And to be honest, I, I don’t think there’s any sort of systemic risk built-in from this kind of, you know, day trading. And when you think about it, I mean, the market is still, I, I forget the last latest figure, but I think it’s about 80% owned by large institutions. And these are, you know, institutions like pension funds, foundations, endowments. These are ones that are not. Jumping in on the meme stocks, they’re not going out and just overturning their portfolios at the drop of a dime because, you know, they’re trying to squeeze out a short seller. So I don’t think that we’re going to see any sort of systemic risk to, to the rest of the market, but yeah. And some of these smaller names that do have, you know, a lot of short sells built into it, you might see some, some oddballs. Dave: [00:40:22] Yeah. That’s for sure. Yeah. One of the things that I think. I’ve heard people ask me questions to talk. I think they get an average, and they think that they can strike it rich like you were saying quickly. And I think that. What we’re talking about is, you know, growing your wealth over a longer period of time. Yeah. A lot of people don’t realize this, but Warren Buffett really didn’t become the gazillionaire. He is until he was about 70 or so. And he was wealthy obviously, you know, before that, but, you know, he didn’t really escalate his wealth until much, much later in life. And so it was a long gradual, you know, up, up to climb for him. So I think that’s one of the things that I guess has concerned me about some of the meme stocks is just the. The striking it rich, you know, you’re, you’re in California. So, you know, the gold rush, you know, everybody moving out there to try to strike rates quick, and it just doesn’t work that way. Brendan: [00:41:15] Yeah. It’s always getting dangerous when that element of greed creeps in. Just because, you know, it’s, it’s the slow and steady turtle that wins the race. I know that’s not exciting. And you know, people have such a hard time. Grasping that, but it’s true. You know the slow and steady turtle wins. Yeah. Compounding is our friend. Exactly. Very good point. Yeah. Dave: [00:41:35] Thank you, Andrew: [00:41:36] Brendan, before we let you go, I’ve been dying to ask this,g to put you on the spot and ask you to give us a score. Maybe one to 10, maybe not an ESG score, but a tasty score. Fisherman’s Wharf, clamshell. One to 10. What are your thoughts? Well, it depends on where you’re going to get it. In fisherman’s Wharf. I would Give us a couple of recommendations next time. One of us is in Cali. Brendan: [00:41:58] Well, you got, you got Boudin’s famous, that’s the sourdough bread, you know, famous sourdough bread manufacturer. And they produce a pretty good bowl of chowder. I’ll be honest. It Fisherman’s Wharf. It gets a little crazy around there with the number of people. And so I think local is mostly, yeah. Don’t go in that general direction, but if you guys ever do find yourselves coming to the bay area, let me know. I got plenty of restaurant recommendations that I can issue. Dave: [00:42:24] Awesome. Well, we would love that. Brendan: [00:42:27] Great. Dave: [00:42:29] All right. Well, we really, really appreciate you taking the time to come and talk to us and help educate us as well as our listeners. Cause you, you, you dropped a lot of great knowledge on us, especially about all the ESG and air and everything about that. I know that really helped educate me a lot. So was there, I guess, where could people find you if they want to learn more about what you’re doing and what Personal Capital is doing, where, where could they go? Brendan: [00:42:50] Yeah. You know, just Personal Capital. You know, just go there, you can go to our website, and I mean, you can download our entire methodology for our socially responsible ESG offering to see exactly how we build that portfolio. And I mean, it’s, I got to say it, you know, even if you don’t become a personal capital client, it is free to sign up for the financial dashboard and. A really, really powerful tool to help kind of establishment where you’re at in your financial life and kind of how you need to get where you’re going. So I would suggest at least doing that. Okay. Awesome. Well, thank you very much for coming and talking to us. I really, really appreciate it. And I know you have a little one, so I know you’re taking time away from spending with them, and we do appreciate you taking the time to talk to us tonight. All right. I really appreciate it, too, guys. It was a pleasure speaking with you both. Dave: [00:43:36] Thank you very much. Advisory services are offered for a fee by Personal Capital Advisors Corporation (“PCAC”), a registered investment adviser with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Investing involves risk. Past performance is not indicative of future returns. You may lose money. PCAC is a wholly owned subsidiary of Personal Capital Corporation (“PCC”), an Empower company. PCC is a wholly owned subsidiary of Empower Holdings, LLC. © 2021 Personal Capital Corporation. Personal Capital SRI portfolios are powered by Sustainalytics. We hope you enjoyed this content. Seven steps to understanding the stock market shows you precisely how to break down the numbers in an engaging and readable way with real-life examples, get access email@example.com until next time, have a prosperous day. The information contained is for general information and educational purposes. Only it is not intended as a substitute for legal, commercial, and or financial advice from a licensed professional review—our full firstname.lastname@example.org. The post Passive and Sustainable Investing with Personal Capital’s Brendan Erne appeared first on Investing for Beginners 101.
37 minutes | Jun 17, 2021
IFB198: Two Value Boomers Talk Bitcoin and Crypto
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: Investing in Bitcoin and other cryptocurrencies Positives from both the blockchain tech and the coin, and the negatives Some ideas to explore the Bitcoin investment and the importance of doing your due diligence before buying any investment. For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript 2020_midroll IFB ad: [00:00:00] What’s the best way to get started in the market. Download Andrews ebook for email@example.com. 2020_Investing for Beginners Pod (revised) 2 : [00:00:13] I love this podcast because it crushes your dreams of getting rich quickly. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Dave: [00:00:40] All right, folks. Welcome to Investing for Beginners podcast. Tonight, we have episode 198 tonight. We’re going to talk about cryptocurrency. We have really not really broached the subject much. And we’ve got a great listener question, Earlier, and we thought maybe we would answer this and talk a little bit about cryptocurrency and kind of see where it takes us. So I’m going to go ahead and read the first question, and then we’ll do our little give and take on crypto. So buckle in, folks. This could be interesting. So hello. My name is Ben. I do. I graduated college students who missed the COVID crash in the stock market. As I began investing, I dove in without a plan and had some successes and a lots of failures; with that being said, I began looking at cryptocurrencies. Quote, unquote, get rich quick scheme, which unsurprisingly is experiencing a pullback as a relatively new listener. I was wondering what your take on the crypto currency market is. Is it a good long-term investment strategy to help boost your portfolio? Or will it be like.com a bubble and will go the way of boo.com. I love the podcast, and thank you for providing such great insight. So, Andrew, what are your thoughts on cryptocurrency and kind of what the great question for Ben. Andrew: [00:01:51] Yeah. I mean, so obviously, there’s a lot of things to consider about it. You know, also say from the onset, I don’t know what’s going to happen to cryptocurrency. I don’t think most people do. I think a lot of people are very confident and it’s, there’s a lot of. Diverging and extreme opinions, either. You’re, you’re a believer, or you are an antagonist or about it. And I, and they really don’t know. We don’t know. And that’s the thing about money it’s, particularly when you’re talking about something, that’s not only on the national level but the global level. And then you have all the bank systems and everything. That’s all intertwined with that. You have the energy implications, and you have all the investors and speculators and everything that. That has been feeding into it. So, you know, I’ll say maybe we should introduce kind of why, why crypto has been attractive for people and why people have been diving into it. Maybe that’s a place to start. So, you know, again, we’re not crypto experts where long-term stock market investors. But the basic premise of what we could start with Bitcoin because some of the other cryptos kind of are derivatives of it and share some of the characteristics and not all of them. And so, you know, basically crypto is a way for it; it’s like an alternative currency. And so, you know, a lot of the pushback about. Governments as that they spend too much. And so, you know, they’ll print money and, and run government deficits and you’ll see inflation because of that. And so crypto is seen as a benefit, particularly a Bitcoin, because you can’t print it. It has a fixed supply, which is decreasing as time goes on, and that’s going to max out soon. And so governments won’t be able to spend because of it. Another big feature of crypto is the blockchain part of it, where everybody can be anonymous, and there is a ledger; there’s a record of every transaction. And so, You know, it has this decentralized nature, and the anonymity behind it; makes it very attractive. So maybe you can speak on the blockchain part. From your perspective, and kind of fill in whatever gaps I missed there. Dave: [00:04:12] Sure. So keep in mind, this is coming from somebody that like Andrew was saying, is not a big crypto person, but as somebody who has worked in the finance industry loves to talk about finance banks, insurance companies, all the boring stuff, Blockchain, the blockchain technology offers some advantages in that the. The ability to conduct transactions over the technology is, from what I understand, far quicker, far easier, cheaper. And is it a lot more efficient than the current systems that we have? And in particular, with the protocols that are used by companies like Visa, MasterCard, American Express, and some of the other big FinTech players that are coming onto the stage like PayPal and Square, for example, they have all acknowledged that Bitcoin. Not Bitcoin, but the blockchain technology might offer some advantages to them and allow them to conduct payments over that system in a much more efficient way. It also has the ability to at least at this point is proven to be unhackable. So that offers some security to the payment system. And I think that is, I think very. Encouraging and also attractive to the people that want to make payments. You know, there are, there are people out there that are afraid of using debit cards and credit cards because they don’t want their information being out there. And especially with cybersecurity. There has been a lot of attention to that lately. Of course, there’s the Colonial Penn hack, but there’s also on the smaller scale, maybe not smaller scale, but a different scale. A few years ago, Target was hacked, and people were able to access all the debit card and credit card numbers that Target had in their database from people processing payments with them, and it exposed millions of peoples. Data and information to people who wanted to use it for ill. And it caused a lot of consternation among Target as well as bank holders. People that own, those cards that were, it was a lot, it was a very stressful time. So Blockchain would. From my understanding, it would allow that to not happen anymore. So if people were making payments over the blockchain technology, the bad people wouldn’t be able to get in and access Andrew, and I’s credit card information or the information we’re using to transact over that technology. Whereas right now, That is available to be accessed. If the people work hard enough at it, the theory is, is that they would be able to access it. So for a company like Visa, for example, it offers possibilities for them, which could be really good for the company, but it could also be a competitor to somebody like Visa, Visa, and MasterCard really kind of own the. Electronic transaction world. Like I said before, there are up-and-comers like PayPal and Square. And some of those other companies are certainly challenging, but as of right now, Visa and MasterCard really own the payment rails, as our friend Braden Dennis likes to talk about and. So they, they really control that. And Blockchain could be an opportunity for other companies like Square, for example, which is invested heavily in Bitcoin. And Jack Dorsey is a huge proponent of Bitcoin, as well as blockchain technology. That could be his way of that company. Taking market share from Visa at some point, we don’t know. So there, there is, there are certainly possibilities with the, with the technology, especially in the payment space and in the banking realm, there could be a lot of opportunities. I think when you start talking about the actual coins themselves, it’s the Bitcoins, the Ethereums, and any other. Other meme stocks out there. Yeah. All the billions of them that are out there. It’s, it’s kinda dizzying to try to keep track of all of them. I don’t know how people do, but anyway, It seems like there’s a new one, literally every single day. But anyway, the point is, is that I think once you get outside of the technology, I get a little more. You know, I got to remember I’m old, I’m an old dude, so it gets a little scarier for me. So I guess I would be interested to hear what Andrew thinks about the coin itself and Bitcoin and investing in that part of it. Andrew: [00:08:42] Well, you know, I think, I think your, the fact that our alarm bells going off in your head is not so much a factor of your age as it is a fact of your experience and your knowledge of history, and the fact that. Again, a lot of this stuff is like brand new tech, and a lot of it’s so innovative, and it could change the world. And a lot of it could also fall away. You know, I like the example; I should have like had the source, but it just popped in my head. I heard that a couple of weeks ago, you know, basically this idea that, Back in the day, oh, you know who it was, it was, The guy who you sent the video of you had the Terry what’s a funder, Terry Smith. Terry Smith. Yeah. He gave a great speech on YouTube. You know, go check it out. If you’re able, basically, he talked about how back in the days of the internet, there were actually a lot of companies that were competing with Microsoft. As the first competitor for Microsoft word was actually a different software program that everybody was using before. Word, same thing with Excel. And then actually Microsoft bot. That program and turned it into their Microsoft Excel. There was another spreadsheet program before that. So like, and you can, you can use that kind of example for so many different types of technologies, and that’s what makes it such a dangerous place to be in because you really don’t know what innovation is going to be. The one to two. It kind of is the king, and it’s only obvious after the fact. So, you know, we could look today and see Microsoft as one of the biggest companies in the world and say, well, yeah, you know, I would have known to invest in Microsoft, but duh, You know, that’s the story. That’s as old as time. So, When you talk about new innovation, that’s, that’s one problem. I think a second problem. And this is kind of something that at least one more recording this in 2021; this is a problem where it’s a very volatile market. And so, you know, when, when you, when you, when you. Put the word investment into, Anything with crypto it’s, it’s, it’s almost insulting because, you know, something that, that has this much volatility. Sure. That’s part of the whole thing. Right. And it needs this volatility, and I understand. Like Bitcoin’s supposed to have this volatility, and it’s something that’s good for them because it increases their reach and increases how much people use it and everything. And, and it’s, it brings it attention to it. And the more people that have attention to it, the more it will be used. And so it’s this really long-term thing, right? That’s the Bitcoin plan, but regardless, It’s, it’s not an investment because it is so volatile. And so, you know, The way that kind of, I look at investments is very old fashioned and very, very boring, almost where I want to buy things that produce a cash flow and I want to compound my capital. So what that means, I want my money put to work for me. And so that’s why I buy things like stocks and businesses, because. These produce cashflows, and those compound over time. And to me, that’s a lot more reliable than trying to figure out what the latest and greatest, and best innovation is. You know, there are people that are good at that. And then they’ll kind of leave that to those people and the entrepreneurs and the pioneers in that. But for me, what fits with my temperament, what fits with. How I look for a margin of safety. It’s, it’s really in cash flows. And so for, you know, he, he asks the question here, is that a good long-term investment strategy to help boost your portfolio? It could be, it could be a great hedge for a lot of people at the same time if it doesn’t fit your investment temperament, if it doesn’t make sense to you and fit your personality, then. The volatility is just going to kill you, and it will not help your portfolio. So that’s something that’s very personal. And what makes kind of crypto really different from a lot of the other types of investments is this volatility in these features and is the fact that it’s not the same as holding gold as an example. Dave: [00:12:45] And it’s, It’s, it’s compared to holding gold a lot. A lot of people will compare it to gold and the place it should have in your portfolio. And I know that when people have talked about it, it is a, it’s like the third rail. It’s, it’s one of those things you really don’t want to talk about on Twitter, for example, because it is so violent to the extremes on both ends. You know, the people that are so passionate about it. And I think it is the next coming of peanut butter. And then you have other people that think that it is the devil spawn, and it’s just so wrong. And so, and there really isn’t a lot of in-between you’re either for it, or you’re against it, and there’s not a lot of middle and. You know, the questions that I have, and I still have are things like, for example, a lot of people talk about it as potentially being the next currency. And Andrew was just talking about the volatility, and to be, that is one of the things that scares me off the most is the volatility. And I know myself well enough to know that I could not handle the wild swings that that kind of investment could have because. It’s trading. I don’t know. The last time I looked, it was trading around 38,000 for a Bitcoin and not too long ago. It was at 62,000, and it’s not unusual to see 10, 15, 20% ups and downs in a day, day to day, day to day, day to day. It’s not unusual. It’s also different than the stock market in that it trades seven days a week. So. It will; you’ll see wild fluctuations the, on the weekend. And, I guess the other questions that I have that just made me doubt the validity of the coin as a potential currency are facts are the fact that one person Elon Musk, my buddy, can make positive or negative comments on Twitter that can. Send this particular investment up 15% and down 20% in, in days, just by what he says about that. And to me, you know, I don’t know anybody in the world can do that to the dollar or the yen or any other currency that you can think of out there. I, I can’t think of any, I could be wrong, but you know, there, there are. I think that’s just those kinds of things. Just really, as Andrew said, put alarm bells in my head, and it makes me doubt whether this is something I could ever, ever do. Now, does that mean I’m right or wrong? No, but these are definitely things that concern me. The other thing that concerns me, and this is something that Andrew and I have talked about many times, is the governments are never, never going to give up there, the ability to tax us. Because that is where that’s where their power comes from. That’s where their ability to do all the things that we want them to do, whether you’re Republican or Democrat or somewhere in between, we rely on the government to do a lot of things for us. For example, take care of the roads and maintain the stability of our air travel. Just to name a couple, there are so many things that come from. The con from the government’s ability to tax us and generate revenue to do all those things. And there is no way no, how that any government is ever going to give up the power to do that. And to me, I just don’t understand that you know, again, I have not done any research on any of this. This is all just my opinion. And this is just me thinking. So I have no, no fact of basis in any of this. This is just my opinion. My opinion is that Bitcoin, Ethereum, any of those, if they ever try to Institute it as a currency to replace the dollar or any other form of currency, whatever the I’m blanking on the Chinese currency, who, who is what’s that. Yeah, the Yuan. So I just can’t see that ever happening. I can’t see China giving up control of their currency to something that’s decentralized that they have zero ability to control because China has proven over the years that they want control of what happens in their country, good or bad. And I can’t see them giving it up, and I can’t see the United States. Yeah. Can you imagine Donald Trump or Joe Biden giving up control of being able to tax us no way it will ever happen. So I just don’t see how this could become a currency just on that fact alone. I’ve never heard anybody argue that. And I’m sure there are lots of smart people out there that could tell me that I’m dead wrong, and I’d be happy to talk to them and listen to them about it. But that, to me, is just one of the big reasons why I could just never invest in it. That’s why I don’t invest in currencies because I don’t. I can’t stand the fluctuations and the volatility of it, and I don’t understand it. And so I just, that’s for somebody else more power to them. But to me, that’s why I won’t touch Bitcoin is because of that those few reasons. It’s just it’s untouchable for me. Andrew: [00:17:57] Well, and it’s, it’s kind of come up in public, like the big thing that happened, you, you touched on, it was the whole cyber hack and the fact that you know, they knocked down this pipeline. And so. A huge portion of the east coast gasoline supply was shut down because of this cyber hack on the pipeline. And so now we get a lot of these conversations about the government coming into Bitcoin. And, you know, I see like you, I don’t really do. I kind of did my little deep dive and decided that’s, that’s kind of out of my circle of competence. It’s something I see talked about a lot. Is this idea that you know, well, Even though Bitcoin is transacted illegally. Like we’re seeing where this, this company is holding up. Another company for, for, or these hackers are holding up this company for ransom, and they have, and they pay if their Bitcoin. So yeah, I mean, that happens with Bitcoin. Then people say, well, you know, the US dollar people also do drug deals in us dollar. And so, you know, That, you know, how could you say that about Bitcoin and you can’t say that about US dollar something. I feel like what’s missing from that conversation is the fact that, you know, if you’re, if you want to transact a huge criminal deal in the US dollar, you still have to get. To the fact that you know, you can’t just take a hundred thousand or a million dollars in cash and go to your bank and deposit it because there are regulations and rules and stipulations because the government put into place these things. And part of it has to do with taxes. I’m sure part of it has to do with criminal activity. And so, you know, maybe it doesn’t. Maybe there is some version of Bitcoin where you can do that, where you can limit the criminal activity without making it completely, whether its Bitcoin or another blockchain or another currency, whatever it is, you know, but I think the idea that it’s going to continue as it is now, I think it’s a bit naive and I could be wrong as well, but you know, there are reasons why there are regulations and stipulations in place. And I think we’re starting to see. Some of that, especially with these, these ransoms and, and to be able to pay millions of dollars anonymously to somebody else brings a lot of power to, to, to people with evil intentions that wasn’t really possible. I mean, you wouldn’t be able to. Do a ransom like that without having access to a huge money laundering kind of operation, right. If you want to take 4 million in cash, I think it’d be a lot easier doing Bitcoin than in cash. And so that’s why it gets this big Target on his head. And it has those; those are kind of big roadblocks for it. You have The taxing, which I think that’s a fantastic point as well. And so, you know, there could be things that, that. And, and I think that’s the argument that there will be things about Bitcoin where they can, the code can evolve or, You know, they can become more divisible over time, all of those sorts of things. But the truth is we don’t know how that’s going to play out. I think one thing that we saw during the pandemic is that. Human beings have this fantastic ability to adapt, and we have a great ability to innovate, and you saw how our society kind of had a hiccup and then it was able to continue and, and go through a lot of change really quickly, but adapt really quickly. So I think when it comes to crypto, my sense is something’s going to happen from it. And I think my intuition is telling me it’s closer to the Blockchain than it is to actual. Currencies. I could be wrong, but I think something probably will come out of it. But the thing is, we don’t know what that will be, but I think. The human race will adapt to it very quickly. And so to make that as an investment strategy makes it very difficult because you almost have to have a crystal ball to say, yeah, I know, I know what huge events gonna going to change the course of this. And I know exactly how people are gonna react to it. And I think that’s; I think that’s a tough sell. Dave: [00:21:55] I would agree. And I think the reason why it’s a tough sell is that there are so many different applications that I guess. You know, there’s kind of, I feel like there are two kinds of sides to the coin. No pun intended that there’s the currency part of it. And then there’s the technology part of it. And again, I don’t know enough about this. This is just me speculating. So, you know, everybody that’s getting, you know, if I’m stirring up a hornet’s nest. Okay. So it is what it is, but you know, these are thoughts that I have about it. And, and I’ve tried to think about it because. For me, it’s not something that I want to invest in because like Andrew; I’m, I’m a boomer, I’m boring, I want to buy companies, you know, I want to buy in companies that are gonna pay me over time and, you know, to, to quote some of the guys on. Twitter after Charlie Munger was bashing Bitcoin, you know? Yeah. I’m going to enjoy being poor, and whether rich, that’s what it is. So, so be it. But the, I guess the point being is that the, we don’t know what’s going to come out of all the technology. We don’t know. What’s kind of come out of the currency part of it. I think there are some valid questions about the currency, part of it that need to be addressed. There are lots of different theories about how the government is spending money and how they’re air quote printing money and all the stuff that’s been going on, really accelerating since the pandemic started. And it really seems to have kind of touched off all of this. And this is really when Bitcoin really kind of took off was during this period. And it’ll be interesting to see as things start to normal normalize around the world. Hopefully soon. It’ll be interesting to see how this continues to evolve. And I think there’s a lot of; there’s going to be a lot of instability in this going forward. This is not going to be something that’s going to be a gradual up to the right kind of investment. If you do decide to play this game, because there are going to be a lot of, there’s going to be a lot of announcements. For example, recently, Iran. Announced, they were going to forbid people from mining Bitcoin because it was putting such a strain on their electrical system. It was causing rolling blackouts in different parts of the country because it was sucking so much power. Whether or not, that’s true or not. That’s something I read on AP news a few weeks ago. Then there are the comments that you’ve heard out of China about creating their own digital currency, which could be a potential competitor to Bitcoin or not. Then there’s also comments about; I think the country, I think it might’ve been Guatemala and now so that they were going to start accepting. Bitcoin as currency transfers, primarily because they want to make it easier for Guatemalan citizens in the United States to transfer money back to citizens in Guatemala. And so there’s definitely an advantage to that because of all the things I was talking about earlier. So there’s, there are those thoughts, but then there’s also the ideas of the impact that’s going to have on the environment. So there’s lots of conversation in the news and politics on Twitter or Facebook about the green new deal and everything that’s going on with that and trying to reduce the carbon footprint and. Bitcoin mining takes. Apparently, it takes a lot of energy, and that energy puts a strain on the electric system, which causes more pollution to be put into the air, theoretically, which means it’s not necessarily as great for the environment at this current stage. How we produce electricity. So you have to take all that, all that into consideration. But the other side of this is that I think of my daughter, who, what is going to, is this something that I should buy for her? And, and so that when she’s. Twenty years old, this is something she can make a decision on. I don’t know. I go back and forth on that, but for me, I still come back to, I’d rather buy a business. That’s going to produce something that I don’t know what Bitcoin is going to produce. And I don’t know what a theory is going to produce. And I don’t know what any of the other cryptocurrencies are going to produce. And to me, it all comes back to basically investing in gold. And that’s not something I choose to do. It’s just not, you know, like Andrew, I want something that’s got pay cash. That’s going to. Generate cash do good for people, do good for the economy, and try to help make the world a better place. Gold doesn’t necessarily do much, but just sit there and be valuable. So it doesn’t really help much. And I don’t know the Bitcoin’s going to help much either in that respect; it may help with some of the income equality that needs to. Be discussed, but whether it’s going to actually produce that, I don’t know. I’m skeptical of all that there; if this is something that you’re really seriously interested in, you need to do your research. It’s like anything else if you’re going to buy Exxon Chevron or Tesla or for solar Albemarle or Google? You got to do your research, and if you’re going to buy Bitcoin, you gotta do your research. You got to learn as much as you can about it. You’re not gonna be able to value it like you would accompany because it doesn’t produce cash flows. It’s like gold. It doesn’t produce flows. You have to; there are different ways to figure out what it’s worth and what Bitcoin is worth. I don’t know. But is it overvalued? I don’t know. Is it undervalued? I don’t know. I don’t know the answer to that, but if you are looking to do research, there are a. Million resources out there. Preston Pysh, who from the Investors Podcast, is extremely bullish on Bitcoin; as a matter of fact, he left his award-winning podcast to do his own podcast, talking nothing but Bitcoin. And he thinks it’s the next thing. And you know, he’s a smart guy. I’m not saying he’s wrong, and I’ve listened to him. Talk about it. And he’s very intelligent, and he’s very passionate about it. I just don’t agree with him. And that’s my prerogative. Just like it’s his prerogative to tell me I’m wrong. But anyway, my point being is that if you’re gonna invest in this, if Ben, if this is something you really want to do, do your research, figure it out. Learn as much as you kind of bought it before you pull the trigger, and don’t just buy it because it’s the hot, new thing. Andrew: [00:28:17] That’s very well said. And the only thing I have to add, because you basically stated my case as well, for the most part, the only thing I’ll add is that I think, you know, you mentioned how a lot of these FinTech companies, Visa, MasterCard, Square, they’re all kind of positioning themselves for the possibility that crypto or Blockchain really. It takes us takes the world of finance and then the world of money to a different place. And so that’s kind of how I see it with investments too. You know, there’s a lot of people out there much smarter than me who are working on problems like this. I mean, you could look at some of the biggest companies; they’re all hiring blockchain engineers out of school for, you know, six figures plus. And so. Companies are working and, and they’ll be on top of it. And so, if it comes to a point where Bitcoin or any other crypto takes over the U us dollar, those companies are going to be there. So, you know, whether we’re talking about the US dollar, whether we’re talking about Bitcoin, whether we’re talking about Ethereum and you know, we’re doing transactions and those rather than in the US dollar, that’s still. Money. That’s still profits that the companies that we invest in that we are part owners and still going to participate. You might be a little bit late. If, if you know, some companies might be earlier or later than others, that means real become Bitcoin billionaires. I’m okay with that personally. I’m okay with it. So, you know, that’s something that you just kind of have to pick. You, you pick what you’re most comfortable with, and that’s how you invest your money. For me, I work hard for my money. I know a lot of the people who listen to us do as well. And so I like to go for something that’s a little bit more predictable, a little bit safer and something that you can look and, and you know, you, look, I look at a Target, and I see people going in and out of there all the time, you look at like, Like Cisco and, and you look at how they have their routers everywhere, and you know, you have wifi connectivity anywhere you go. You know, I’ve been a long-term shareholder of Cisco for years now. So these are, you know, you go to the grocery store, you see Hormel. I had Skippy for lunch as part of my snack today. Long-term Hormel shareholders. So these are all tangible things I can see that I feel comfortable with. And I know these companies are paying me dividends, and it’s compounding my wealth over time. And if it means, you know, 10 11, 12% a year compounded versus not getting 200%, three months. I’m totally okay with that. So it comes down to what you’re comfortable with. As Dave said, do your research; if it’s something, think that really interests you. But this idea that businesses are going to go away. I don’t see that happening. Can Bitcoin take over? Sure. Maybe we’ll be businesses go away. I don’t see that happening. And if it does, I don’t want to be there. You know, I’ll just move to a farm and forget about it. I’ll find some, some piece of land, and I’ll defend it. But, Outside of that, you know, when it comes to investments, it’s hard-earned money, and I want, I want to put it to work. And so that’s why personally, I don’t look at it as a good investment for me. And that’s kind of where I stand on it. Dave: [00:31:28] Yeah, I, I think that’s well said. And I think the idea of, of trying to, to find something that you can make you rich quick is it’s a really, really hard game to play and you gotta have a really strong stomach to do it. And I think if Bitcoin or the cryptocurrency market is, is something you want to dip your toes in; you don’t necessarily have to buy those particular. Coins to, to, to partake of it. There are investments out there. This is not investment advice, and do your own diligence before you go buy any of these. But. You know, companies like Square, which we mentioned before, they’re a big investor in Bitcoin. Tesla is a big investor. Well, he has been; there’s a lot of speculation of whether he still is or isn’t; who knows. It’s really hard to tell what you want. He’s, he’s a very mercurial guy, but, Coinbase, a company that just went public, That deals with Bitcoin and, and trading with that. So there are. Opportunities out there to invest in companies that have started to dip their toe in Bitcoin. If that’s, you know, if, if actually buying the cryptocurrency itself is maybe a little scary, but you want to maybe dip your toe in, into the field. That is one way to go about doing it. But again, I go back to what Andrew was saying. You really need to understand what it is you’re trying to do, and you need to understand your investment philosophy and what your theory is, and what your horizon is. And. If you want to use Bitcoin as a hedge to help solidify your portfolio, here to say you can’t. And can’t; it’s just not for me. And it’s not something that I want to do. And I think Andrew has said everything the way it needs to be said. All right, folks. Well, with that, we are going to wrap up our discussion on cryptocurrency. If you guys were really rattled or upset with my comments, you guys could contact us at @eainvestingforbeginners.com. And you can tell me all your horror stories and how much I upset you. It’s okay. I have thick skin. And, It’s all right. If we upset you, but hopefully, we helped educate you a little bit about some of the possibilities, but again, if this is something you really want to invest in, do your due diligence, learn as much as you can about it. And don’t listen to me because I am just spouting opinions. So take that for what it’s worth. So without any further ado, I’m going to go ahead and sign this off—you guys. Go out there and invest with a margin of safety emphasis on the safety. Have a great week. We’ll talk to you all next week. IFB Podcast Outro (1): [00:33:51] We hope you enjoyed this content. Seven steps to understanding the stock market shows you precisely how to break down the numbers in an engaging and readable way with real-life examples. Get access firstname.lastname@example.org until next time, have a prosperous day. The information contained is for general information and educational purposes. Only it is not intended for a substitute for legal, commercial, and or financial advice from a licensed professional review—our full email@example.com. The post IFB198: Two Value Boomers Talk Bitcoin and Crypto appeared first on Investing for Beginners 101.
54 minutes | Jun 10, 2021
Chinese, Japanese, and Media Stocks with Eric Schleien
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: Investing in Japan and China with Eric Schleien of Granite State Capital Management Details of the upcoming merger with Discovery and Time Warner Media The future of podcasting, plus investing in one of the leading podcasting platforms, Libsyn For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript Announcer: [00:00:00] What’s the best way to get started in the market—download Andrews ebook for firstname.lastname@example.org. Announcer: [00:00:13] I love this podcast because it crushes your dreams of getting rich quick. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern step-by-step premium investing guide for beginners. Your path to financial freedom starts now starts now. Dave: [00:00:43] All right, folks. Welcome to Investing for Beginners podcast. Tonight, we have a special return guest. We have Eric from the Intelligent Investing Podcast, who is also the founder of Granite State Management capital management, Brandon Granite State capital management. Yeah. Okay. Here we go. Got it. All right, great. And he’s back with us again, to talk to us about stocks and the markets and lots of great stuff. So Eric’s a smart dude, and this is going to be a fun conversation. So I’m going to go ahead and turn it over to Eric and let’s go ahead and have a Eric: [00:01:12] Cool, well, it’s nice to be back on how you guys have been. Andrew: [00:01:15] I’ve been good. You know, I did want to ask you before we jumped in because I follow you on Instagram. And I swear, it’s like once a week, you’re putting on some really nice looking piece of steak, whether it’s, you know, I, I think you mentioned my grass-fed or something like whatever it is and the way you’re seasoning it, it, it reminds me that I need to, I need to up my red meat game, you know, I don’t, I don’t know if you’ve ever watched the show survivor. I know Eric: [00:01:42] A long time ago. Andrew: [00:01:44] Yeah. Okay. So basically, they have a bunch of people starving on an island, and then they have them compete, and they’ll have them compete for food. So sometimes they’ll show like Outback steakhouse on there and, you know, they’ll get really emotional, they’ll start crying and, you know, that’s kind of how I feel every time. It’s about my time to have a ribeye. So, you know the question I have for you, where are you getting these steaks, man? Eric: [00:02:06] Well from several places, but my go-to is Costco, actually Andrew: [00:02:11] Love Costco ribeye Eric: [00:02:13] Yes. You know why Costco ribeye is So good. Good No, cause they blade tenderize. It it’s the only, it’s the only place that blade. Tenderizes their meat. Dave: [00:02:23] Interesting. Yeah. So that’s why it’s, so it kind of it’s soft and tender when, when you cook it, even if you eff it up a little bit. Andrew: [00:02:33] Yeah. Like a. That’s actually my parents’ secret too. When, when they, when they barbecue at home and, you know, I love, I love the different stakes at the different restaurants, but nothing beats at home. Costco, Eric: [00:02:46] Costco. I mean, I buy it from whole foods too, and I think Costco’s better. Most of the time. Andrew: [00:02:52] That’s interesting. Eric: [00:02:53] Yeah. And cheaper. Andrew: [00:02:57] Have you gotten the chance to get that that Waygu yet? Eric: [00:03:01] You know, so not from Costco cause it’s, I don’t really feel like spending like a hundred dollars on steaks even though that’s probably a good deal, but there’s a, I’m in Philly where, at where I’m at, there’s a local hot pot place called It’s somewhat, the chubby is something, and they have an, A5 Wagyu hot pot you know, all kinds of steak, ribeyes and short rib. And I mean, it’s not, it’s still expensive. You know, it’s like $35 when you get these like super thin pieces of steak. I did it once, and I will tell you. I had never had a before until like a couple of months ago. Oh my God. It just literally melts in your mouth. The fat is like butter. It’s unbelief. It’s unbelievable. So yeah, if you can find a hot pot place that has a fantastic, Andrew: [00:03:47] I would have never thought of that. Yeah. I know—To-do list. Eric: [00:03:53] Well, I asked, I asked the waitress; I said, is this going to be a waste of money? Am I going to taste any difference? It’s like a thin piece of thing in boiling water. She’s like, oh yeah, you’ll, you’ll taste the difference. And, yeah. Interesting. Andrew: [00:04:05] Well, you know, I guess kind of, kind of in that realm you had, we had talked before about. You know, international opportunities. Yeah. Eric: [00:04:16] That was interesting; that was a great transition from Japan. Andrew: [00:04:24] Talk to the average investor about what it’s like to buy stocks. Cause you know, Dave and I are primarily US stocks guys. And we know there are taxes involved when you look at companies outside of the US, so maybe you can talk about some of those implications. Eric: [00:04:38] Yeah. So for full disclosure, I am not a tax expert, so I’m not giving professional tax advice on the air on occasion you’ll, you’ll have some tax withholding, or there’s some special thing, but for the most part, it’s just, it’s treating it as capital gains. And if you do a current, when you convert to the yen, depending on how the US dollar conversion to yen goes, you might have some gain or losses. On the income. So you get like a currency sheet. So you have to declare income or losses for currency. But then you get 1099 with the capital gains on it. So it’s, it’s relatively straightforward. I think there was one situation that Israel rata have a whole ridiculous tax form. But that’s really been the only instance that I’ve been doing this for quite a while. Andrew: [00:05:24] So there’s no like, like let’s, let’s say it’s Japan for whatever reason. Like there are no extra taxes from the Japanese government and the US now. Eric: [00:05:34] No, I know. I hope not. Andrew: [00:05:39] Dividends dividends and capital gains. And the same as you in the US Eric: [00:05:42] the dividend, somebody you’ll see on the 1099 and as a dividend withholding tax. So it might take a little bit out of the dividend. I don’t know what the exact laws are for Japan. I know, like in Canada, I get that, but yeah. Andrew: [00:05:56] Do you see opportunities out there? How do you, how do you parse focusing on, you know, US stocks versus international opportunities? Are you just always looking at the whole, the whole kind of pot? Eric: [00:06:09] So always looking at the whole pot. Certainly, the lens that I’m looking at it is different. So like in Japan, Japan’s weird where historically and still to this day, it’s still pretty much like that. You know, corporate governance is really bad. And in Japan and South Korea, to an extent as well, companies aren’t always being run for the interest of shareholders. Sometimes there’s even, you know, in Japan, I, I might be getting this wrong. So I apologize if anyone Japan in Japan can correct me if I’m wrong about this. But my understanding is that, you know, a lot of people still look at it. Owning stocks is a form of gambling. And then in the Japanese market, specifically, some people tell us, buy stocks because the dividends are like these like interesting little gifts. There’s no word for it. I don’t remember the word, you know, where you might get like movie tickets or you, you get some little perk. So there are certain like social benefits to where you can say, oh, I’m a shareholder, and so-and-so company is a pride to it. And then a lot of Japanese companies. They’re being run for things other than shareholder value. So they might be being run for longevity and for, you know, the, you know, for honor, or there’s a big, it’s a big honor culture. So there’s a pride and honor of, you know, this is what we do. We’ve been in business for 673 years, and we own 19 golf courses and a fishery and, you know, but our main businesses and handbags or something. So you see a lot of weird stuff. Generally, the returns on capital or returns on equity are pretty low for a lot of these businesses because they own, say again, you have X, X of book value in the main operating business, then 10 X in real estate that doesn’t have just been on the books for 800 years. So you see situations like that all the time. So, the lens that I’m looking at, when I say buying Japanese stocks, I’m typically taking a basket approach. And I’m generally buying them really cheap, you know? So I always think it’s humorous. Occasionally I’ll come across one of these write-ups saying, oh, you know, the is trading it. It’s a quality business. It’s trading at 12 times earnings, and it’s hovering right around cash. So you’re, you know, Don’t worry about it. Cause you know, you had your cushion for cash. I was like, well, do you know how many times I’ve owned a Japanese stock trading at the low net cash? Like those, those things can change pretty quickly. And at that business ever has a, you know, a turn for the worst. You can easily see a stock trade below net cash in, in Japan. But generally, you know, if you, it’s interesting, if you look at, of course, this is backtesting whether if you look at like You know, during those few decades where Japan, the Japanese market went, nowhere, you know, if you had just bought, say a typical Ben Graham net-net stock approach in Japan, you would have compounded, you know, in the, in the low teens where the Japanese market did nothing. So that’s kind of interesting. I’d done pretty well in Japan. And again, mostly buying these businesses that are not very profitable. Not very interesting. Occasionally you’ll get one pop like 75% in a day, and I’ll, I’ll sell into the volume. But I, I take a basket approach. There’s there is one Japanese stock that I do own a larger position than that’s larger than just the typical basket. But in that case, you know, the management does have a good track record, and they’ve been very ethical and, and the stocks trading, it’s a growth company trading at like five times earnings. And that’s actually been one of my worst investments. I’ve owned it for a little over a year, and it’s gone nowhere where my basket has done a lot better than that over the last few years. So. Andrew: [00:09:32] How big is the basket. So, you know, people get a sense of the kind of this idea of digging in the trash and then finding really, really cheap stuff. Eric: [00:09:40] I’d have to look. It might be like 30, 40% of the portfolios that I manage are in these, these basket of, you know, microcap, cheap stocks. Andrew: [00:09:50] Like a number of stocks wise, are we talking like in the five to 10 or like 15 to 20 or for the basket? A hundred? Yeah. Eric: [00:09:57] Maybe like, depending on the client maybe like tend to attend to 20 to 25. Yeah. So there’s, there’s still, there are things that I’m looking for. I’m not just indiscriminately buying that next. So there are things I’m looking for. So, for instance, with Japanese stocks, and I tend to look for businesses that are not burning a lot of cash. They don’t have to be profitable, actually unprofitable, and that that tends to outperform profitably. Then it’s interesting enough, and companies that pay dividends underperformed companies that don’t pay dividends from the basket approach. But you know, they’re not burning a lot of cash. They’re not selling stock. That’s like a huge red flag. If you see a stock trading and below cash and they’re selling stock and then typically too, Yeah. So, you know, another red flag is said if they have a big a lot of their main operations might be in China. It doesn’t mean anything inherently. But by avoiding, say, Japanese stocks, with large operations in China, I’m removing a lot of fraud risk, and I mean, if you look at China over the last few decades, right. You know, Look, the news cycle is always especially today, right? The news cycle is very clickbaity. It’s always, how can I have the most negative headline possible to get the most clicks? Yeah. So typically, when you read anything about China, it’s usually pretty bad. I’ve just seen Chinese fraud where you can just get killed, and it looked optically cheap until they went to zero. Dave: [00:11:24] So, I guess keeping in the far east, we talked a little bit about off-air before we came on about Charlie Munger and some of his thoughts on China. So why, what you want to do you want to touch on that? Sure, Eric: [00:11:38] sure. that they’re doing something corrupt and, and, and the truth is like, there’s a lot of stuff that China does. That’s, that’s pretty bad. But there’s a lot of stuff that I’ve done. It’s pretty good. Especially the, you know, it’s become a lot more of a capitalistic society. There’s been, I don’t know the numbers, but the amount of people that have been taken out of poverty over the last few decades is staggering. So China is in a much better position. Financially the people are, have a much better standard of living on average today. Then they did 30 or 40 years ago. And I think that trend is just continuing. But it’s going to take time, right? I mean, they’re, they’re, they’re much newer to market than the United States is. So I think generally I, I agree with Charlie Munger that China has a great future ahead of it. But you’ll also notice that Charlie’s Most of his Chinese investments are done through a fund managed by Lu, who is, you know, known as Chinese he’s she’s Chinese and knows the culture and is able to, you know, have a much better peep on the ground. Understanding of China. And I think you need more of that because, I mean, I have seen situations; I’ll tell you a story, actually. So when was this? This might’ve been like 2000, I mean, like 2006, 2007. And I had invested in a company called China Media Express. And they had there; their business was, they made billboards for like buses, you know? So if you like to see those buses and blocked advertisements, And why I invested in them is that you know, they were very profitable, you know, huge returns on equity. I’m talking like 40, 50% returns on equity, large growth rates. And they were significantly more profitable, and higher ROE is higher margins than all their competitors also traded to below net cash. So I was like, this is a no-brainer. And there was a. Who was it? There was; there were some large other large investors that were well-known that were also invested in the company. So it made me feel a little bit better. And it just got weird. It was like, oh, why, why, why are the things trading on the cash what’s going on here? And I had called, you know, if you went to their website, they hit all their clients. And one of them was Coca-Cola. So I called Coke now investor relationships for Coca-Cola. And I didn’t really know who to leave a message for, but I would just say, Hey, there’s a company I’m invested in. Supposedly your client just wanted some, you know, more light on the relationship. Excuse me. And I’m the head of marketing for Coca Cola called me back. And she said, you know, we don’t, we haven’t heard of this company. But that doesn’t inherently mean we’re not working with them. It could be one of like our local, you know, Chinese bottling companies that work for them. I will look into it and see if there’s any sort of local Coca-Cola-related companies that might be working with them. She calls me back two weeks later. So it’s, you know, no, I can’t get in touch with anyone in China that knows this business. So I’m like, okay, that’s strange. And I sold the stock right after I heard this. I was like, you know that freaked me out. And then there was a Seeking Alpha article of some guy who, like, had gone to China and he was a shareholder, and he went to headquarters to like meet with the CEO. And he like walks in, and there’s like a few people sitting around playing like ping pong, but like, no one’s doing any work. And he was just like, what? Or it was a pool or whatever, but he did not compute to him, like what was going on? Like how could this be a real business? Right. Anyway, it turned out the entire thing was a fraud. Then, to the point that they fake the cash in their bank account. So the cash wasn’t even real. Wow. Oh, wow. Yeah. So that’s an extreme example, right. But. You see Chinese frauds all the time. And I actually did some research into Chinese net-nets, and I was thinking, well, maybe, you know, if you bought a basket, right, it takes it. You know, the fact is maybe you’re going to pay to take on that risk because, you know, as value investors sometimes, right. It just kind of like unprofitable in that S does better than profitable. And that nets, I thought maybe Chinese, and that’s actually doing incredible, and you have a few frauds, but the other ones go up a thousand percent. Well, it turns out. That owning a portfolio of net-nets. If you exclude China, you do better. So, right. So, so it’s, it’s just hard. I think if you’re not on the ground, it’s because there is still a lot of fraud. If you’re not in China or speak Chinese or have connections in China, it just makes, it makes the game harder. And. I think there are other opportunities that aren’t as hard and that you don’t, you know, you don’t get bonus points for making a harder investment. So I avoid China, but I’m, but generally, I’m bullish on the country of China. I just, as an investor, don’t invest in China. Dave: [00:16:49] So, what do you think of, like the Alibaba’s and the Tencent’s in any of that kind of stuff? Are you, what are your thoughts on any of those companies? Eric: [00:16:56] Yeah, I mean, they seem good. I don’t know. You know, I’m actually reading, I’m actually reading a book right now on you know, the founder of Alibaba, but, you know, I don’t know if that’s going to help me or not, you know, what an investment, but I just think it’s interesting, but I would imagine, right. Charlie speaks to Li Lu all the time. I would imagine there’s probably some insight that he has. Yeah. You know, when Charlie Munger said it’s just a replacement for cash, of course. He’s, you know, Charlie being Charlie, he’s going to play, play it down. He’s not going to just buy any random company’s replacement for cash. Right. He’s right. So obviously, there’s something he likes about it. Dave: [00:17:32] Yeah, exactly. Andrew: [00:17:34] I remember reading a; this was less than 12 months ago, probably. And it was. Not just some small no-name Chinese company either. It was luck in Luckin coffee. Coffee. Yes. Yeah, yeah, yeah. Awful. You know the fraud that they had with that, and I guess there were some boots on the ground firm that was kind of checking in on, on. Yeah, on the company’s numbers. And they’re like, there’s no way, like, even just looking outside of these coffee restaurants, there’s no way that with the flow of traffic, that, that they’re going to anywhere near what they were reporting. So this is not just like a one or two-off thing. This is—a big thing. And then what’s says is that was one of the companies I saw a lot around the internet of people saying, you know, get in on this. This is the Starbucks of China, and it completely blew up. It’s it’s awful. Eric: [00:18:24] Right? I mean, could you imagine if, like Starbucks, all of a sudden one day went away or McDonald’s, it’s like, that’s not going to happen. Andrew: [00:18:29] Right. Well, you know, everybody wants to call it the SEC the bad guy, but, but there are good things to having those kinds of regulations in place, which, you know, for me personally makes me kind of timid about going outside of the US but at the same time, like you’re saying if there are countries where that’s not a problem, like Japan. Yeah. Eric: [00:18:52] You don’t really, it’s not as much. Yeah. I mean, with Japan specifically, You know, if you were committing financial fraud in Japan, it would be a very dishonorable thing. And there’s, there is certain social clout by running a public company in Japan. So, but a lot of these companies, they’re not, again, not being run for shareholders; they’re being run for longevity. Andrew: [00:19:12] time, like you’re saying, if there are countries where that’s not a problem, like Japan. Yeah. Eric: [00:19:18] You don’t really, it’s not as much. Yeah. I mean, with Japan specifically, You know, if you were committing financial fraud in Japan, it would be a very dishonorable thing. And there’s, there is certain social clout by running a public company in Japan. So, but a lot of these companies, they’re not, again, not being run for shareholders; they’re being run for longevity. Hmm. Dave: [00:19:40] Great. So different, different ideas. Yeah. Okay, so let’s, I guess, let’s kind of do a really rough segue. All right. Let’s segue off of China and some of the fraud stuff. And let’s talk about the recent merger with. Discovery and the Time Warner and AT&T and that fun stuff, I would admit, I don’t know much about it, but it’s supposed to be like, you might, so maybe you could shed a little light on that subject for us. Eric: [00:20:08] Yeah, sure. So I’m also full disclosure. I’m a Discovery. Second time now around. So I had originally bought Discovery communications Just a few years ago, I actually saw the only idea I’ve ever gotten from CNBC, and John Malone happened to be doing an interview a few years ago and was talking about how he thought, you know, Discovery was probably pretty cheap at the time I was trading at a really low, multiple to free cash flow and it was just being valued as a melting ice cube. Right. You know, with all the cord-cutting and Discovery, legacy business being tied to cable. No, there was a, there was a concern I would just decline forever. But the thing that, the thing with discover that I liked originally, It’s a very capital, light business. You know, it doesn’t take, you know, you don’t need to hire actors. Right? You can film some animals in the forest or something like that. And GTA, you have like $500,000 in production costs. Are those zebra, zebra? Exactly. Don’t give anyone any ideas. You know, I, I joke, but there’s like, you know, some people I was just talking about a friend of mine the other day about this, where it’s like, you can come up some really bad. Like a government idea, there’ll actually be someone who wants to initiate it. So I don’t even want to joke about zebra units because there’s going to be some radical animal rights activists that say, oh, that’s a great idea. And we’re in the whole Discovery phase. But with disco, yeah. So, you know, very capitalized business, and it just spits off free cash flow. So that’s what, and it was trading at a very, you know low, multiple, basically. Like it was going to just be declined, declining forever. And I also liked the fact that John Malone was a controlling shareholder. So that’s why I bought it originally. The stock ran up a lot. I sold them to that run-up. I didn’t sell it the high where it got into like the seventies. There was the, you know, the big liquidation that had happened with that fund. But anyway, you know, on May 17th, discovering Warner media, which is owned by at and T. And announced they were going to be creating this global entertainment leader and combine. So the way the transaction would work is AT&T, but spinoff basically what shed, the Warner media assets and the Warner media and all Discovery would merge together. This would create literally one of the largest content libraries in the world with the direct-to-consumer distribution. Andrew: [00:22:23] So it was HBO. Bucketed into that. Eric: [00:22:26] Yeah, yeah, yeah. Yup. Yup. Yup. So I, yeah, you have HBO, CNN, you got sports rights. You get like the DC brands, like Batman, Superman, Wonder Woman, all of that. And what’s interesting is the combined company, you know, they’re, they’re on target to spend together $20 billion and to get sort of the extent of that Netflix is guiding for 20, 21 17 billion. So it’s kind of a big it’s. I mean, it’s a huge deal. If you’re combining, you know, HBO max with Discovery plus you know, I, I honestly think this is like a, you know, literally, you know, total home run here. I, I, I this is why I bought back into it now. I thought, what would happen? See, I thought I heard about it, and I, I assume the stock would shoot up a bit. And there was a temporary, I think like for the first day I went up, and it’s now below the, you know, when they announced the stock has just sort of drifted down to the market actually, doesn’t like this deal. I’m not going to get into that if you’d like, like yeah, I think that is why do you think that is? Yeah, so I think that’s; I think there are a few reasons. I think one of the reasons is time to completion. So they’re estimated some take two years. To do this deal and, you know, so, so if you’re an arbitrager on wall street, you know, this isn’t something you can do in two months. And if you’re someone who even just has a big job on wall street to have a sort of this uncertainty for two years of what’s going to happen. Cause a lot of things can happen in two years. I think a lot of people are not interested and maybe even be selling it because they don’t know what’s going to happen in two years. There’s also a possibility that it’s like just a technical overhang from the 18 T shareholders. Cause they’re not going to be getting their dividend from the new, the new entity. So what’s possible is I think there’s probably some fear again, I don’t know, but I then I’d say it’s probable that there’s a fear that once the merger happens, the AT&T shareholders might just indiscriminately sell the stock, which I’d be happy about it, but just buy more. I kind of hope that happens. But I think that’s a concern. And then I think probably the biggest one. Yeah. Andrew: [00:24:35] To be clear. So from what it sounds like, cause I don’t know the situation, it sounds like you have AT&T, and then they’re spinning off this Warner thing, and then they, the Warner entity, is gonna take over Discovery. Every shareholder, you’re getting shares. Eric: [00:24:51] Yeah. So as a Discovery shareholder, you’re getting shares and the Yeah. So, yeah, so you’re gonna, you’re gonna own a small percentage. Yeah. So let’s see B at, and T shareholders are going to receive 71% of the new stock. Okay. And discoveries going than the other, given the other. Yeah. But I think, I think the third reason is, you know, it’s going to be a highly leveraged business, and you know, they’re looking I don’t have the numbers in front of me, but they’re, they’re looking to. Do you leverage to, okay, so yeah, they’re gonna, they’re gonna look to the leverage deliver to three times EBITDA over time. But I think there’s probably some concern that you know, let’s say Discovery plus ends up being a flop that the company’s district to melting ice cubes that combined, I don’t think this is the case, but you know, if there were two melting ice cubes combining now it’s the gigantic melting ice cube. And now they have all this debt. And I think the concern is that because the company has so much debt, I don’t think that’s a problem. Cause again, this company spit out so much free cash flow. I was a Discovery shareholder when they merged with scripts just like a few years ago. And with the script’s deal, they had levered up to five times to get the deal Scripts, and they were projecting. They would get to about three and a half times leverage in two years. And then, once the merger closed, they had hit their leverage target in under a year, and the synergies were double what they originally projected. I mean, this is bigger, a bigger deal obviously, but I just don’t think there’s, I mean, Discovery plus has been, you know, a total home run as well for, for them. So. You’re getting a, a business very, very cheaply valued. You know, right now, the combined company would have, let me just take a look at my notes here, you know, would have the combined enterprise value of about 130 billion. And the, you know, the company is projecting in 2023 that they would have 14 billion in EBITDA. So you’re basically, You know, it’s, it’s, it’s going to go for like a little over eight times enterprise value to EBITDA right now. And it’s, it’s a that’s a pretty low valuation for a company that’s actually growing, and we’ll have synergies. You know, if you would value this. Yeah. So yeah, it’s a little over eight, eight times enterprise value to EBITDA for 2023, you know, 12 times. So, you know, if you just said, okay, I think this company should be worth 12 times EBITDA. You’d get about 75% upside. And let’s say there were real synergies and, you know, the synergies were really great, and the valuation went to 15 times, you know, you’re talking over 130% increase in the stock price. You know, I do think it’s interesting too. So John Malone, who’s the major shareholder. You know, for your listeners who don’t know who he is, you know, he is probably the best media investor in history. There’s a book. He wrote a book about him called Cable Cowboy, which I highly recommend. But he is someone who has used debt over the years to do a lot of financial engineering. And he likes to be in control of companies. He has actually come out in favor of the deal as a discover shareholder, and he’s giving up control, so for Malone to give up control of something that he owns. He must love the deal. I, so I do put some weight on, on his press release that, and he wasn’t interviewed on CNBC the other day as well, which I recommend checking out. Dave: [00:28:04] So I guess along those lines, some of the things that I’ve heard. Certainly mirror everything you were saying. A couple of concerns I saw on seeking alpha the other day was concerned about AT&T’s dividend being either cut or not being paid. And I think that was like rattling through seeking alpha, like an earthquake. And then there were also comments about the CEO. Time Warner would be actually leaving the company. And the gentleman who runs Discovery would be the one taking over. And I think there was some concern that maybe he was not the right cowboy to lead the company, so to speak. So I guess, what are your thoughts on those two ideas? Eric: [00:28:43] Yeah, well, I think he’s extra done a pretty good job Discovery. But again, they’re there, you know, Discovery plus has done a wonderful so far. You know, the companies, again, you know, lot, a lot of cash flow asset, light businesses. So maybe they find someone better when it didn’t happen. But even if they don’t, I think you’re going to do pretty well. Like it sounds, I think that’s very asymmetric that there’s a, there’s a lot of ways to win here, and it’s, it’s priced like a melting ice cube. So I think that the thing is, it’s so cheap that even if things just stayed the same, I would expect a higher valuation. And if the synergies work out. Oh, workouts better. Yeah, I mean, I think the valuation goes up. Dave: [00:29:24] Yeah. I guess one of the things I wondered, too as you know, at and T bought, bought time Warner for what? 73 million, not that long ago. And now they’re. They were kicking it out for 43 million. So, you know, it just seems like it’s like one of those; it’s like a basketball player that nobody really wants. They just seem to keep passing it between each other. So how, you know, how has that has any bearing on any of this? Eric: [00:29:49] Well, I mean, sure. But I, I D I think the combination though, of, of what you’re getting, I mean, you know, you look at Disney plus, right? I don’t know if you’ve ever used Disney plus. Yeah. It’s pretty cool. Okay. So, you know, I use the trial and actually watched a lot of the old stuff from when I was a kid, but it’s pretty cool. Well, just imagine how you, you turn on, you know, your, whatever it is, Discovery plus, and you have, you know, HBO, max and Discovery and wonder, I mean, it’s pretty awesome content. Again, they’re spending; they’re gonna be spending more on content than Netflix. So, and then there’s not a lot left. I mean, you don’t have, you don’t have much left, so. I mean, I guess you could have a situation where we’re Comcast could step in and, and, and say, Hey, we don’t, we wanna, we want to buy this stuff. Which would suck for what that would see. That would be bad for Warner media, you know, and actually, you know, in some, in some, some weird twisted away, if Comcast, if Comcast wanted to say step in by Discovery, break off the deal. And then let look, Warner media struggle for a few years, then buy it for even cheaper. That would be good, you know, but yeah, I mean, I think we’re, I think we’re in immediate needs someone like a discussion to merge with Discovery fine on its own right now, but it would be better, you know, some other content library. Yeah, that’s a good viewpoint. I, I like, I like your idea. I’m going to probably check into Discovery and see what I think about it. So, yeah. Yeah. And just to address your point with the 18 D dividend co too. So, you know, they’re spinning off the war assets so that new entity is not going to have a dividend. So. I mean, at some point and AT&T will pay, I don’t know about that. They will fully cut their dividend, but even if they do it there, they’ll pay it again and say, TMT, most people who are investing in that business are doing it for, you know, the income stream. So they’re not going to change that after, you know, a hundred years or however long they’ve been around. But I think the real concern is. Well, those AT&T shareholders than just dump the new stock because that’s not going to be getting a dividend. I’d say a lot of them, probably. Well, I mean, there’s a good chance. Yeah, that would be a buyer I buy from them at a lower price. Andrew: [00:31:54] Yeah. It’s a very good chance. It’s a; it’s a concept; Joel Greenblatt talks about what was his book? I think where a lot of times in spinoffs, the shareholders don’t want whatever’s being spun off, so they, sell it and it’s a great buying opportunity. Eric: [00:32:11] Yeah. The problem, the problem by just doing spinoffs though, and discriminately is ever since that book came out. The spin-up opportunity has been mostly arbitraged away. You know, if you had just been doing spinoffs since then, you actually haven’t done so well. So, and a lot of the spinoffs also, this is what the other thing, too, some of the spinoffs that are cheap is they’re actually intentionally spinning off the junk. Right. You know, in this case, there’s, there are certain tax benefits to buy by having a water meter to spin out. So they don’t have to pay taxes on it. It’s a, what’s it called? A reverse. Morris trust or something like that. And Andrew: [00:32:46] I guess in your case, if they do spinoff Warner and you look at it, and it’s like, wow, they did put a lot of junk in here. You can only sell it because it was, you know, you got shares, and you kinda got your payout because you got the premium as the company got bought out. Eric: [00:33:02] Yeah. Again though, I mean, there’s going to be so much cash flow coming from these two businesses. That I don’t think you’ll, you’ll do bad. You may not hit it out of the park, but I, I think you’re, I think your downside’s pre pretty like a, not investment advice, but in my opinion, I think the downside is pretty limited here. There’s also a chance that in a few years that then a new entity gets bought by someone else. Andrew: [00:33:24] Yeah. I mean, we see a lot of consolidation. There’s a lot of interesting things happening in the media industry. And I think if people are interested in it, The history of the media industry. Like I’m reading a book about Sumner Redstone right now and by a calm and it’s, it’s fascinating. Just, you know, just a couple of decades ago. Well, maybe more, a couple, but I mean, that used to be like the growth industry. And if you think of like, how. We look at the FAANGS now. It’s kind of how the cable operators were back then. And that’s just; it’s funny seeing that kind of life cycle. And so, you know, as you look around at all of the different changes in media, are there any other opportunities you like, whether related to media or media technology or anything of that nature? Eric: [00:34:07] Yeah. And I’m before I answer that, I’ll just leave with one thing too, where while cable, right. Legacy cable is slowly in decline; you know, the future is the subscription business. Hmm. You know, this is an opportunity for Discovery and Warner media to sort of supercharging that together and have some, you know, real synergistic relationship. But that, but that future is, is in the subscription business. And in terms of other technologies, that, I mean, podcasting is it, and we’re on a podcast. We are in the very early innings of podcasting. I think people might listen and watch old podcasts. You know, say 30, 40 years from now, the way that we watch, you know, like silent films, you know, whether that was like the big thing back then. So whatever, whatever we’re doing right now, we’ll look back at 20, 30, 40 years and be like, wow, this was, this was literally at the beginning. They had no idea what was about to come. But I think if you are in the podcasting business you were, you were writing some industry growth for many, many, many years to come. So I am personal, my largest personal position. So I own it for my clients too. But from my personal accounts, even a larger position, it’s in liberated syndication whose main business is Libsyn podcast host. And that is a really interesting situation going on right there. So I could talk about that if you’d like. Andrew: [00:35:23] Give us the elevator pitch of somebody who doesn’t know much about podcasting, like why would they be interested in a company like this? Eric: [00:35:31] So you have a business with a very, very sticky business with about 80,000 podcasters on it. One of the original podcasting hosts. So they have that first-mover advantage. It is being run in a very, very efficient and capable manner. Oh, there’s just been a big management shakeup. They’re finding a new CTO right now, but salaries have come down a lot. There’s an activist who shook things up and had the CFO and CEO removed from the company who were basically stealing from the company. It was, it was a very just, and you’re basically paying a very low, I don’t remember the exact number offhand, but it’s, it wasn’t much more than ten times free cash flow for a company. That, you know, could potentially be growing at 30, 40%, you know, for the next ten years. So you’re, you’re paying very little for a high growth stock. Andrew: [00:36:19] It’s like a pure-play on bike acetate. Eric: [00:36:22] Totally. Yeah. They also do own a pair of networks too, which does like website hosting, but their main businesses are Libsyn Dave: [00:36:33] so what makes podcasting so appealing? Eric: [00:36:36] Well, funny you ask on a podcast, you know, it’s yeah. I mean, look at this, right. We’re on a show right now, you know, so, you know, Andrew and Dave, how, how do you describe your show? Like, what’s your, what’s your show description? Dave: [00:36:50] Andrew. Andrew: [00:36:51] Just a couple of guys who taught themselves how to invest and are trying to teach other people how to get started. Eric: [00:36:57] And the target audience is mostly for, for more beginners. Right? So if I was someone who was interested in investing, you know, maybe a beginner just starting off, but also intelligent, like the vibe I get is like, you also, aren’t intelligent beginners, you have high-level conversations as well. So. There’s this very, very niche, specific audience. That’s listening to your show. And, you know, if you want to turn on the radio, you know, you kind of have to catch it when it’s on. It might be sort of tailored more to the masses. Right? So a lot of these, like, you know, Dave Ramsey’s and Susie Orman and more like financial planning, but you’ll have a very specific thing you do. And, you know, on my show, you know, well, shameless plugging, Intelligent Investing Podcastadvanced investors. And there’s this very specific niche of, I would say, highly sophisticated value investors that tend to listen to my show. So what’s really cool is you can micro-target and build these little communities around your show, which is not possible to do with radio, but it’s harder. So there’s, there’s a more personalized aspect to podcasting. It really brings power to anyone that has a message to share. And the other cool thing is that it’s, it’s totally a meritocracy. You know, I don’t have to be signed up to some big network to have my message share, but you know, if I keep sharing episodes and no one listens, you know, maybe I, I gotta either step up my game, or they’re not very good. However, have no budget and no marketing budget and nothing fancy, just a microphone and a laptop. You know, I can have people subscribe to the show and listen to the episodes. And so can you, and I think it really breaks up any of the bureaucracy, the corporate bureaucracy of radio and TV, and really brings the power to the host. And I think that does an incredible thing for society and listeners to send, tend to love it. Andrew: [00:39:01] I’m a hundred percent advocate on podcasts. I mean, you know, I was a podcast listener before I became a podcast. Host, everything I’m saying is. It’s amazing that the depth that a podcast can go into that, as you said, you won’t see on mainstream because they’re trying to appeal to so many people, whereas, Hey, there are other people like me who liked to really get into the nitty-gritty and get down and dirty. But you know, for whatever reason, that’s not something you would see on the news, because if there’s. You know, a hundred people, ten people, might find that interesting 90 people wouldn’t, so they’re not going to give it air time. Right. But now you have podcasting; you have YouTube; you have all these different platforms now that are coming out, completely revolutionizing the way we do media. And I think. I mean, I personally, I love it. You know, I love being able to kind of pick whatever I want to watch, whatever I want to listen to, and have a very specific Baylor, very tailor-made. And like you said, it’s good for society because it gives a lot of value, you know? You turn, you turn on some random thing and hope. To get a good investment idea. It can be hard sometimes, you know, but when you, somebody might be interested in China or Japan or, or, you know Discovery, like we’ve been talking about today and they could see that title on there, click on it and get way more information than they would have without the podcast is there. And that’s how it can be so powerful. Eric: [00:40:26] And to add to that, if someone who’s a podcast host listens to this episode, which, you know, a lot of listeners and a lot of hosts are also podcasts listeners. Someone can make an episode saying, Hey, you know, Erickson, idiot about Discovery, and he’s totally wrong about this. And here’s my view. That’s kind of cool. You know, this is, there’s a lot more of that, you know, back and forth, you know, we can post this thing on Twitter and then get comments and. Have a debate, right? Cause it’s, it’s a market, you know, I don’t necessarily have the truth. Right. I’m just one guy on the internet and has an opinion. And then has it has an idea. And clearly, when I buy stock, someone’s selling to me, and they might have a different idea. So I think it provides more of a conversational intimacy more so than you would get with a radio. And certainly, more than you would get with TV. Dave: [00:41:13] Yeah, absolutely. And you know, as somebody who is older in the room, so shuttles, shall we say I remember the days of radio and, you know, having a, you know, I’m this old that I remember I had to get up off the couch to go change the channel on the TV. So I know you guys don’t know what that’s like, but I remember what that was like. It was; it was awful. And you only had three channels. And, you know, sometimes you had to move the rabbit ears on the TV to get the reception to come in. I mean, yeah, it was, it w it was the dark ages, for sure. But anyway, it’s, you know, the opportunities to learn things. I mean, that’s how I got into podcasting. Listening was the opportunity to learn stuff. You know, I, love history and I came across this history podcast called the history of Rome by Mike Duncan, and that would just open my eyes to this. Whole podcasting thing and I was hooked, and I would listen to him at work. I would listen to them in my car and listen to them. I was walking my dog and, you know, it just became a thing for me. And yeah, it’s, there’s so much opportunity for people to express their viewpoints to learn things. And that’s what I really like about it. Eric: [00:42:21] Yeah. And that’s, yeah. That’s awesome. Yeah, it worked. We’re carving, you know, we’re carving the future as, as, as, as a pod. I mean, we’re all podcasts hosts here. Which I think is awesome. Right? It’s like, there are no rules in a sense like we’re literally creating the foundation. So it’s cool to see how, how this is going to unfold over the next few decades. It’s my thesis. And you know, we’re recorded. So we’re on record. My thesis is in 20 years; someone could watch this conversation. Like if they only knew what was about to happen, you know, and they’ll look at this as. You know, having to get off the couch to change the channel, you probably thought that was cool that you actually had a right. Dave: [00:42:59] Oh yeah, no. Yeah. I mean, yeah, we had a black and white TV, and that was my first TV. And so when, when they, when they went to color, it was like, wow, this is a big deal. So yeah, Eric: [00:43:09] I remember my, my grand, my grandfather talking to me about being able to watch the world series on TV. How cool that was. Yeah. Dave: [00:43:19] Yep. Yep. I was, I was the one I worked in the restaurant business. I was talking to the employee once, and we were talking about some sitcom, and I said, I remember when it was on every Thursday night, she said it was on once a week. She’s like, how old are you? Yeah, no, I agree. So how does this play into your idea with Libsyn? So I, you know, that really kind of where that took you. Well, it was so, so it was one of these situations. So, Le, I look at a lot of very tiny businesses and micro-caps, and Libsyn was this really interesting situation because here it was trading at about one times earnings a few years ago. This is the one; the stock was at one; it’s now at around four. And you know, I saw all this growth ahead of it. And what was keeping it down. It was actually so as a spinoff it was spun out of a company called Fab universal, which was a Chinese business, which turned out to be a fraud. Speaking off, this goes full circle. Eric: [00:44:20] And yeah, they had like kiosks where you could like get like movies and shows and watch stuff. And it turned out that the kiosks either weren’t, some of them weren’t real—a lot. Most of them didn’t work. The entire business was made up. But they ha I don’t even, but they happen to own the company that owned Libsyn. So when they spun it out, Fabulous, versatile ended up going to zero. There was a whole lawsuit, and there’s still litigation going on with the CEO and the CFO right now. And you know, how much did they know? And it was a pretty heated, public battle going on, but the activists, the management But it was, it was so ridiculous. At one time, the CEO was paying himself, you know, with like option grants and incentives. It was going to be like 50% of the income was going to go out of his pocket, which even then it was still was so cheap, like, cause it was a good business. But his name was Chris Spencer. So I’m getting Chris Spencer off getting the CFO, CFO. Who’s also making an egregious salary, getting them off. I think the stock is still super cheap, and there’s the overhang, you know, they just file an eight K, which was a total mess. Nothing to be expected, but again, these microcaps, you know, any bit of news can send the stock one, one or the other. So the stock sold off, you know, basically what happened. They had a restatement and said, Hey, you know, last few years, the financials are gonna be a little bit different, but if you’ve been following the story, you already knew that was going to happen. And there’s also the new CFO who just resigned. So people got freaked out by that, but again, you know, here’s a guy coming in to, you know, be the, you know, I don’t, I don’t know what the full story is because you could imagine here’s the CFO, he kind of comes in to take the place of this old, you know, horrible CFO. And now his entire job is like doing financial restatements. I mean, that’s gotta be miserable, and I don’t know if that’s necessarily what he signed up for. So, people, I think, got freaked out by that. But, and then there’s also the Chinese, Chinese shareholder. Who’s in jail right now who owns a little over 30% of the stock that he got through the Fab universal spinoff. So the company is now arguing that those shares were obtained illegally because it was for a fraudulent company. So they’re asking a judge to cancel the shares. I don’t know if they’re going to win that lawsuit, but if they do, that’s instant, you know, a little over 30% of the shares outstanding go away overnight, which is. Right, you know, completely accredited to shareholders. So another one of these situations, there’s a lot of ways that you can win a ton of uncertainty, and you’re getting a high growth stock at, at a, at a super low, you know, free cash flow multiple. Andrew: [00:46:51] It honestly, it does sound scary, though. And I would I would. Be worried about, you know, you talked about like melting ice cubes. This one sounds like a boiling pot water show. I guess that’s why we diversify. And you got gotta, if, if I think if you want to get something really, really cheap, you have to be able to weather some adversity. And so if, if this is stuff that’s already expected, You’re going to get it in at a low price. And then that’s where you can get the double triple, quadruple ten baggers from something that people found out it’s not as bad as it seemed. Eric: [00:47:25] Yeah. I mean, there was even a comment there were some comments online of, you know, oh, well the, they just did this pipe deal to raise some money, to make an acquisition. They just bought advertise cast, and people were annoyed that it was a pipe deal. And I was like, well, why didn’t, you know, Why did the activists do the pipe deal and know what’s a type deal. Can you explain that just for a second? It’s just a private raise of capital as opposed to just, you know, selling equity and people, you know, someone, someone online recently was accusing the activists of, you know, self-dealing and all this stuff. It’s like, well, no, you can’t really be selling equity. When you don’t even know what the financials are, You know, so, so you know, that’s not the that was not the ideal situation, but you know, the thing’s a mess right now. So they got to clean up the numbers once they clean that up. I mean, here’s what I think will probably happen. They’ll clean it up, grow the business, and then they’ll sell it to sell it, you know? Cause that, that company, again, you know, would you have 80,000 people. Using it, you have a larger company that can, can cut the costs, dramatically know, improve the cost structure. That would be ripe for a buyer, but they’re not going to; I don’t think they would sell it and told me they cleaned the numbers up, get a new CEO to show a few years of growth, and then sell it. That’s what I would do. But you’re looking right now at a $4 stock and even in normal evaluation for No, those kinds of companies, you know, it would probably be like seven or $8. They could probably give us out right now if they want to sell it right now. But if they grow the company for a few years, you know, you’re, you’re potentially looking at, you know, 15 point dollars stock. And I mean, I got one, so. Andrew: [00:49:10] That’s the key thing, right? If they Eric: [00:49:13] versus, I mean, these were statements aren’t going to be gigantic. It, it, it, a lot of it is just had to do with taxes and deals, CFO, not accounting for taxes properly, and all that. No, I mean, they’re a very profitable company. They’re a wonderful business. Yeah. There’s no question. They’re profitable. Yeah. If I made it seem like that, that’s not, that’s not the issue. These are very minute technicalities of just, what do we owe in taxes? They’re a very profitable business. Okay. So it’s like, it’s a, it’s what Mohnish Pabrai proprietor would say in a low-risk concert highlights, low risk, high uncertainty Dave: [00:49:49] Heads, I win tails. I don’t lose that much. Eric: [00:49:51] Yeah, yeah, yeah, exactly. Dave: [00:49:56] So, Eric, thank you very much for joining us tonight. So for any of those out there that would like to learn more about you and kind of what you do, where can they go to find more about you? Eric: [00:50:07] They can go to a G S C m.co, which is my website for Granite State Capital management. They can also just contact me either through Twitter or Instagram. Very active on both. And if you’re into steak, you’d like my Instagram as well. And both my handles is Eric Schlein tric, S C H L E E N. You know, people, people don’t always know how to spell it. If you want to put it in the show notes. I will for people. I appreciate it. Yep. Absolutely. I’m very available, and I respond to all messages. So even if you just have a question or, Hey, can you, can you talk to me about blah, blah, blah. I’m not going to give you stock advice, but I’m always happy to answer investment-related questions. Dave: [00:50:46] Awesome. Well, again, I thank you very much for coming to talk to us and spending some time and helping educate us on investing abroad, how to avoid fraud in China, and more information about Time Warner and Discovery, as well as Libsyn and all that. Just all the great knowledge you share with us. Plus Andrew’s comments about the steak. That was okay for podcasts. Eric: [00:51:07] So my pleasure. Thanks a lot. It’s been fun. Yeah. Dave: [00:51:10] You’re welcome. Thanks, Eric. Announcer: [00:51:15] We hope you enjoyed this content. Seven steps to understanding the stock market shows you precisely how to break down the numbers in an engaging and readable way with real-life examples. Get access email@example.com until next time. Have a prosperous day. The post Chinese, Japanese, and Media Stocks with Eric Schleien appeared first on Investing for Beginners 101.
37 minutes | Jun 3, 2021
IFB197: Green Stocks, ETF Problems, and Robo Advisor
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: Investing in Green stocks and some of the ways to go about finding alternative ideas to pure-play solar, wind, or hydro Some of the challenges and opportunities to investing in ETFs How a Robo Advisor works, and the pluses and minuses of investing with these vehicles. For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com Apple | Spotify | Google | Stitcher | Tunein Transcript Announcer (00:02): I love this podcast because it crushes your dreams and getting rich quick. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern with a step-by-step premium investing guide for beginners. Your path to financial freedom starts now. Dave: [00:00:31] all right, folks. Welcome to Investing for Beginners podcast. Tonight, we have episode 197. We’re going to answer some great lists of questions we got recently, and we’re going to do our best to answer them to our full capacity. So I’m going to go ahead and turn it over to my friend, Andrew. And he’s going to go ahead and read the first question. Andrew: [00:00:49] Thanks, Dave, this is a long one, but that’s a good one. I’m sure we’ll have plenty of chat about it. So this one says, hello, Andrew and Dave, first off before anything, I wanted to say thank you. Thank you for your advice, education, and guidance over your podcasts. With the emphasis on education. I really enjoy them and look forward to them every day. Most of my stocks I’ve researched a bit. To both of your advice and mostly have my portfolio is based on a possible future outcome. The future I am basing my portfolio on is a hopeful and cleaner future. I have stocks and wind and solar manufacturers and their energy companies, along with lithium mining and lithium manufacturing. I’m trying to establish a good long time investment portfolio with some of these companies. And I’m looking to have some non-energy-focused stocks along with them. I currently have several. And he has some in his wet wishlists; he’s looking into dripping or double double-dipping them and basically waiting for a good time for that. He says I don’t have anyone to talk to about stocks. I wish I did. And don’t know how smart or incredibly stupid these decisions are or how the outlook on this investment is. I’m hoping maybe perhaps you or Dave might be able to shed some light on this or steer me in a better direction. Dave: [00:02:06] Well, that’s a great question, obviously. And I don’t think that this is a stupid or foolish decision. You’ve picked some great, I don’t know, what’s companies because the companies aren’t laid out, but based on the sectors and the industries that you’re choosing, especially for the cleaner and greener, that is. Those are fantastic choices. If you were lucky enough to get into Albemarle at a good price, then bully for you because that’s a company that I would really, really like to own. And it’s definitely on my watch list. As a matter of fact, I made a little dream list, if you will, not too long ago. And that’s definitely one that’s on there. So after doing all of my research on the green field, in particular solar, that was something that I wanted to get into. I think there’s a lot of great opportunities out there and. Whether you want to talk about the ESG or any of those aspects of investing, I think there’s really little doubt that the economy, as well as the government, is wanting to move us towards a greener energy source. And I think that’s just the way things are going to go. It may take a little bit of time. But I think that’s definitely the direction we’re going. I know that I’ve bashed Elan many times on the podcast about Tesla, but you have to give him props for really kind of pushing the envelope and getting the car industry in particular to change course. And they really all have, they’ve seen, they’ve seen the light, so to speak. And I can’t think of a car company that is not proposing to be almost fully electric. So not that too far, a distant future with the new president really trying to move the economy towards a greener economy. I think this is something that’s really going to become a regular feature and a regular thing that people will we’ll talk about as far as trying to find investments outside of energy. Those are green. That’s going to be a bit more of a challenge. I think one of the things that you’re going to probably want to think about is looking at companies that I think are great investments that are trying to embrace this kind of idea. And some of them may be a little bit outside of what you would normally think of. And a company that I’m thinking of in particular is Berkshire Hathaway. So Berkshire Hathaway is famous, obviously for Warren Buffett and Charlie Munger and for their insurance industries and for their tremendous investing abilities and all the money that they have in our stock portfolios and all that stuff. But what a lot of people don’t realize is that they have one of the largest energy portfolios hidden within the side of the company. It’s one of their subsidiaries, it’s called Berkshire energy, and it is a massive, massive asset for the company. And. They have one of the largest wind farms in the United States. It’s based in Iowa. I know; go figure, Iowa. I can make fun of her because I’m from there. So bear with me for that, but not only beside the wind farm they have, I think the largest solar. Panel farm is being constructed outside in Nevada, and they are going to be the owner of that farm. And so that is going to produce enough energy. I believe for 420,000 homes in the Las Vegas, Southern Nevada parts of Arizona in California area. So it’s going to be a massive project. So anyway, all that to say, they also have a large natural gas. Capability, which is not as green, obviously, but it is way greener than coal. And it’s going to help not only Berkshire but other energy producers to move towards greener futures. And so, a company like Berkshire would be a great opportunity, but there are other companies outside of that as well that have really kind of started to embrace this idea. Amazon has. Recently proposed that they are going to try to be carbon neutral in, I think, the year 2030. So they’ve already started investing in solar farms as well as wind farms to produce. Enough power to power their systems, not only their factory and the factories, their warehouses, but also their server farms where they run their Amazon web services from. So Jeff Bezos has really embraced this idea and is really pushing the company. In that direction. There are other companies that have embraced this idea as well. I know target has been working on putting solar panels on top of the roofs of their buildings to generate electricity. It was so helping them become greener. There are also companies out there in the construction field that are exploring ideas. Of carbon capture in cement. So using building a cement that will enable them to cap capture carbon when they’re weighing cement for foundations, as well as sidewalks and things of that nature. So there’s a lot of technology out there that’s really, really being embraced outside of the normal. I guess avenues that you would think of for energy. And so I think to really kind of look at some of those things, I would strongly encourage you to, it was a simple Google search. Honestly, I just, I just typed in what are some green companies outside of the energy sector. And some of these companies started popping up, and I think what you’re going to find. Is over the next few years, you’re going to see more and more of these bigger companies starting to embrace that. I think Facebook is starting to embrace this, as is Microsoft, which makes sense because of, you know, bill gates before his scandal is focused on all the, all the green energy that he was really trying to embrace. So I think you’re going to see more and more of this in just air quotes, regular companies as you go along. So I think you’re going to have more opportunities to try to kind of. Invest along those lines. So I guess those are some of my thoughts. Andrew, did you have anything you’d like to add to my little epistle there? Andrew: [00:08:10] It was a good epistle. I think something we can learn from it is, and something that’s key is it’s you don’t have to invest in uncertain situations and are there to ride the trend. So if we think of something that was kind of pushed, well, let’s look back in the fifties. The government had a big push to establish all these highways back then; they spent a ton of money on it. And basically, you had. A lot of different businesses would benefit from that just by kind of riding that wave. So that’s how McDonald’s really made its name by putting a restaurant on every corner. And that’s where you started seeing the gas stations and that little convenience centers where people would gas up and get snacks. And that’s how those businesses really boomed. And so, you know, you mentioned some great companies in there. Berkshire being one target, which I’m a long-term shareholder of them being actually one of the biggest solar producers out of some of the big corporations, that’s pretty crazy for a retailer. And so like, as they’ve said, there’s a lot of avenues towards. Whether it’s owning your own buildings and invest in solar farms, and, you know, we haven’t even talked about what else could happen in the future with regards to, if. The technology gets cheaper and cheaper and cheaper because that’s what it’s continued to do. And so you’ll see a lot of things that will sprout from different innovations. And so I think it’s, it’s really hard to, to, to, try to pinpoint whatever the exact innovation is or whatever the exact kind of product will be. That will take—our economy to the next level. Obviously, every entrepreneur in the world is starting to do that. So I think like an investor, it doesn’t really make sense to try to do that. But if you can, maybe be intelligent about what companies are best positioned to ride that and move forward. And when I think of businesses like that, I think of businesses who are. Still growing, you know, businesses that are not the Cain businesses that are flexible and the ones that have strong enough balance sheets to be able to move or pivot to say, Hey, maybe this is a way business needs to be done. Now we need to go this way. So you want to have businesses that are strong and have great growth and a lot of flexibility because they’re able to adapt when things change. And that’s going to be true, whether we’re talking about—the impact of green energy or whether we’re talking about some other new innovation on the horizon. Dave: [00:10:43] Yeah. That’s, that’s a great insight. And other areas of things that you could look at are actually ones that you may not normally think of—one of the things that I tried and looking at as well with some of the big. Oil majors are going to have to adapt. And if they want to stay alive, a company like Chevron or Exxon or BP or Total, any of those big companies at some point are going to have to embrace this idea because, yes, we will need oil. For longer, probably than a lot of people realize or want to accept. It’s probably just, that’s just the way it’s going to be oil is not just what we use for gasoline, for our cars or a lubricant in our engines. It also produces plastics as well as other materials. So there’s, there are other uses for it besides just the gasoline that we. Think about cars and pollution, there’s also, you know, they’re going to have to embrace some of this. And so that may be an option down the road as well. You know, some of that, of course, will depend on how you feel about those companies and them polluting and any of those kinds of things. So I’m certainly not trying to advocate for anybody to go against their morals or what they are comfortable doing. I’m just trying to give. People other options to think about. So those are just some, some thoughts of, of different opportunities that may out may be out there. But I think. They’re going to be more and more opportunities as, as time goes by. So it’s not a foolish idea. It’s not a stupid idea. Those are all great choices. And I think those are things that, in the long run, will bear a lot of fruit for you. So I applaud you for embracing this idea and really going for it, and being patient is going to be key because some of those companies are going to have a lot of volatility. And if you really believe in a company like Albemarle, for example, then it sticking it out is worth it. So just, just be patient. All right. So let’s move on to the next question. All right. So I have; Hey Andrew, thank you so much for your content. I’ve really learned a lot from you guys over the past year, under the COVID lockdown. And it’ll hopefully keep on learning along my investing journey. I am an architect based in London and have been going through some of your and Dave’s reading lists recommendations, and I’ve come across a reoccurring theme in the advice from professional investors, for example, and Joel, Greenblatt’s The Little beat with the Little Book that Beats The Market and from Warren Buffett in the latest Berkshire Hathaway meeting. The general recommendation for does it yourself. Retail investors are to stay away from stock-picking and restrict themselves to low-cost ETFs. How do you square that with the outlook that you guys talk about? Thanks and regards, Sean. Andrew, what are your thoughts on his good question. Andrew: [00:13:32] It’s definitely a tough one. And it’s one I’ve thought about for a long time. And I’ve been thinking about it ever since we started the show. And even before that, I, you know, on the one hand, I totally get what Greenblatt and buffet are saying. You know, if you look at their extraordinary track records, you know, you’re talking about for the 5% annual returns in Greenblatt’s case, Buffett has had years of 25%, you know, just crazy, crazy numbers, right? And these are guys who have been doing it. Their whole life dedicated their whole life to it spent. You know, if not every week, an hour, every, every nine, the five hours that they have, and they’re extremely brilliant guys. And so I think w w when you hear somebody like that, say that, Hey, maybe what I’ve done, don’t look at what I’ve done. And try to try to repeat that. I think there’s a lot of wisdom there because. Admittedly, they will. They’ll be the first to tell you how lucky they’ve been and how many great resources they’ve had. And you know, how fortunate they’ve, they’ve been to be gifted with their different skills that being said. I think that a lot of the advice, not saying this particular advice, but just advice, in general, to just When people, when people get into investing in the stock market, and people tell them, just buy an index and just hold it forever. And then that’s, that’s supposed to be the advice, and then they walk away. I think that’s one of the worst things you can do for an investor because, as an investor, you need to understand. Everything we talk about on the podcast, which is, you know, the stock market’s very volatile. The stock market goes through these cycles. Like, whether it’s bear and bull markets, you’re not going to make money in the market unless you stay for the long-term unless you diversify. These are all principles we hone on over and over and over again. It’s very hard to get excited or even want to learn those things if you’re not actually putting skin in the game and having companies. So when I look at my portfolio, I see. Businesses that when I look around in my life, I can see them making money, and I know part of their profit is going to me. And so, for me, that’s something that’s very inspiring and encouraging to have that sense of ownership and to have gotten that very early, and it’s, and it’s really propelled me to get really excited about this. And so that’s, that’s what. I personally try to do this through our show to get people really excited about ownership of the stocks and the businesses that they feel comfortable with. They think they have a good grasp on and they see around them, and they know that they’re, they’re doing well. And it’s this tangible thing. Whereas like a, an ETF is just kind of, I don’t know, thousands of companies or 500 companies like it, it’s, it’s hard to like, To think that anyone company’s making a difference there. So, you know, I think, I think there’s a lot, a lot of value in having individual stocks in your portfolio and having that sense of ownership and getting excited about it. And I think a lot of investors can outperform the market if they do it in the right way. The problem is, is it’s very easy in this game to get overconfident and to think you have it all figured out or to go into it blindly and. And, and not really know what you’re doing. So I think I I’m sure that Buffett and Greenblatt have seen a lot of people who have crashed and burned. And so it’s, it’s safer and easier to say. You know, maybe, maybe you won’t crash and burn if you just go into an index. But at the same time, there’s a lot of benefits to the kind of going the direction that we preach on this show. And you know, a lot of that starts with understanding. I mean, if you listen to more than two or three episodes of our show, I’m sure by now ha you are equipped to be able to weather whatever storm comes. So I know. That a lot of you probably were able to hold through 2020, even though it was a very difficult time. People were freaking out. We thought the world was going to end. We didn’t know what was going to go on with the economy. Many of you held your stocks because you knew that this is what you do. And this is what happens if you don’t have that backdrop. And you start to try to learn about investing in the stock market when things. Are falling when the sky is falling, you’re not going to internalize very many lessons there, and you’re not going to be able to act appropriately. You’re going to freak out. And that’s what investors do all the time. So there’s a lot of value to understanding these principles, getting excited about them, and really internalizing them. And then from there, using that to try to earn excess returns in the market, that’s kind of icing on the cake. Announcer: [00:18:13] What’s the best way to get started in the market—download Andrews ebook for firstname.lastname@example.org. Dave: [00:18:23] That’s all great advice. I think. The idea of wording about the stock market when things are either extremely bullish or extremely bearish, which means their things are going great or not. So great. And I think is, is a really hard time to think about trying to learn about the stock market. And the reason why I’m saying that is because in both cases, emotions tend to run hot or cold at either time. And. Investing the best investors generally are people that have little to no emotion, especially about their investments. And because fear and greed are two of the emotions that rule the markets. And when you’re thinking about investing, one of the things that Andrew was talking about that I wholeheartedly agree with is understanding some of the basic principles—for example, thinking about. Think about dollar-cost averaging. So if you are not familiar with that concept or are just buying, I’m not saying just buying, but if you’re buying an ETF and you don’t understand the power of something like a dollar-cost average, then when things go bad, you’re going to do the wrong thing. And so out of your stock positions and then buy back when things are going well, and that is the exact reverse opposite of what you want to do. What you really want to do is buy more when things are going poorly. And I know that sounds counterintuitive to those of you who are not familiar with what I’m talking about, but what that really means is when you’re, when the stock market is going down, and you’re buying into the stock market, you’re buying at lower prices. The stock market will turn around at some point, and we’ll start going back in the other direction. So let’s just say that you’re buying an ETF that matches the S and P 500, for example. If the stock market took a turn like it did in March of 2020. And what started to go south in a big, in a big, bad way, very quickly. If you got scared and started selling out of your ETF that was matching the S and P, you would have lost all that opportunity to buy. When, when that price of that ETF had dropped by 15 to 20%, if you had bought on the way down and continued to buy when it went up would have gone back up. Then you’re making that much more gains over the period of time. And it’s basically what you’re doing is you’re reducing your, your cost average. So if you buy something far out, easy number, if you buy it for a hundred dollars and then you buy it for $50 now, instead of it being an average of a hundred, and now it’s a 75 and. When you buy, and it goes back up to a hundred now, instead of one share at a hundred, you have two at 75. So now you have double the power of that stock price working for you. So even though you’re air quote, buying an ETF and not an individual stock, it’s still the same principle. It’s still the same idea. So, although some of what I, I agree with what some of Greenblatt and Buffett say, Buying sometimes buying individual stocks can be a scary endeavor. And if you’re not willing to put in a little time and effort and to learn about the company, I think that’s where they’re going with those ideas is if, if you’re, if you’re not willing to learn about the financials of a company or learn what it is that the business does to make money, then buying that company is a bit of a risk. Whereas if you are passionate about that stuff. And you are curious about those things and want to learn about those things. Then that is going to give you a greater return over a period of time, but it really comes down to how much effort do you really want to put into this? And how much time are you really wanting to spend looking at these things and working on those things? Because the bottom line is not every single person wants to do that, and that’s okay. There’s nothing wrong with that. And buying ETFs is what. All of our 401ks do is buy ETFs, and we dollar cost average into those. Every time we have our paycheck contribute to our 401k, that’s exactly what the process is doing. And so we’re already familiar with that. If you have a 401k, and if you do, and you’re not getting your match, I’m going to come through the radio right now and smack you. You need to get your match. It’s free money. Don’t give it up anyway—side note. So. When Buffett and Munger and, and Greenblatt, and any of these other super investors are talking about those ideas. To me, that’s what they’re saying is that if you’re somebody that. They realize that investing in the stock market is something that they should do, but they don’t want to put the time and effort into it to learn at least some of the basics about the companies. So you kind of has a general idea of how you’re going to pick the companies that you want to invest in. Then yes. Going with an ETF or a mutual fund or index funds is probably the right direction for you to go because that is going to be the safest way for you to do it. Now, if. That is if you have an interest in this or you are passionate about numbers or companies and learning about business, I have to admit, I was reading through American expresses a 10 K today, and I was utterly fascinated by the business of what they do, because not only are they a credit card company where they have cards that they give people with. Lines of credit that they can buy and buy stuff with. And the company can make money from the interest on those loans and all that stuff. They’re also a processing company, like a visa or MasterCard, and they earn fees on that part of the business. And I knew that intuitively, but I guess until I read about it today, it was like, Oh, that is so cool. So it was just exciting to learn about the business. And to me, that’s a fascinating thing about learning about the stock market. And it’s something that I’m really excited about because when I get to learn about a new company, it’s like uncovering, you know, opening a new toy; it’s something I get to learn. And, you know, that’s something that gets me really jazzed up. So yes, I’m a geek. I get it. But that’s what I like to do. So my point with all this is, is that if those are the kinds of things that really appeal to you, then picking stocks is something that is definitely, you should explore. If you just want to invest because you have been told that you should do it and you don’t want to spend any time doing it, then looking at something like an ETF is the right choice for you. So I guess those are some of my thoughts. Did you have any other things you’d like to add, Mr. Andrew? Andrew: [00:25:10] Yeah, I think he really. I kind of honed it down there at the end. You know, if, if, if what if, if you’re, if you want to do it, then you’re going to want to do it. And you know, if, if, if all it took is one person to say, you shouldn’t do it, and now you don’t want to do it then. Yeah. You probably shouldn’t do it because you don’t have the temperament to actually being able to be successful with it. Dave: [00:25:34] Yeah, I would agree with that. And here’s another, another thought that just kind of crossed my mind. So I know some of these guys have talked about that viewpoint that people should just invest in ETFs if that was really the case, then why is he writing a book about how you can beat the stock market or the little book that beats the stock market? If he didn’t believe that people could actually do it. Then he wouldn’t be writing books, promoting people, doing that kind of idea. So I think he thinks that is possible, but I think it really depends on what you want to do. Andrew: [00:26:07] Yeah. I would agree with that. Dave: [00:26:09] All right. Let’s move on to the next question, gentlemen, big fan of the podcast and a new subscriber to the newsletter. Ironically, I recently bought some new shares of the recent Epick letter before I read your latest edition. Thanks to the advice I learned from listening to both of you over the last year. I have a question I am sure other listeners may have as well. What do you think about Robo or digital investing? I currently use betterment to manage my Roth IRA so I could set it and forget it. They only charge a 0.0 to 5% annual management fee for their basic plan, which is much lower than all the other managed funds. And the average return is around 8.8%. You could back this out; you could max this out and then use a brokerage account to buy other stocks. You have a nice margin of safety. This seems like the best of both worlds minus capital gains on the brokerage. Thanks, Jake. Andrew, what are your thoughts on Jake’s question? Andrew: [00:27:04] I mean, I’m, I’m really against Robo-advisors stuff, so maybe I don’t have the most unbiased answer for you. Let’s talk real quick about what that is. So basically, Robo-advisor would be like Terminator. Managing your portfolio or, or, or AI or whatever algorithm, however, you want, just think of it. But basically, the gist of most of that kind of stuff is you put in how old you are. So let’s say I’m 31 or 32 years old, somewhere in that ballpark. And you know, they’re going to say, well, because you’re. And you’re not quite 35 yet, but you’re above 30. Maybe we should put you in 90% stocks, 10% bonds. And then maybe you turn for the, and then they’re going to be like, okay, maybe we’ll, we’ll adjust you now. And you’ll go 80% stocks, 40% bonds. And they can kind of; they can adjust it that way through their formulas. Or you could tell them, Hey, I want to be a little riskier, or I want to be a little more conservative, and they could change the numbers that way. And that’s kind of how they do it. And so. You know, kind of going back to the whole ETF thing, you have that whole mix of it. But the downside to that obviously is, are you have no control whatsoever. Right? And so with that, you’re basically. At the very least, if you’re talking to a financial advisor or some of these picking socks for you, at least, you know, you’re able to trust them. But in this case, you just seem like an algorithm or, or, or a formula. I don’t know, like call me old fashioned, but something, something there. I, you know, I saw a meme the other day. The context of this is Bitcoin has been crashing lately. And so there was a meme, they put Elon Musk’s face up, and they had like Karen’s hair, and it was like, it was basically alumni saying, can I speak to Bitcoin’s manager, please? And, you know, and I think of that when I think of something like a Robo where it’s like an AI thing, in the end, you really don’t have any recourse in that. I just, I, I just don’t like anything about that idea, so I could never recommend something like that. Dave: [00:29:07] I have experienced with betterment. I used them; gosh, when I first started working for Wells Fargo, I wanted to open an account where I could put some money in and invest it and earn a better return than the savings accounts that the bank I was working for offered at the time. So I opened an account with betterment, and it was very similar to like the questions. It was a basic Roth IRA, and I believe I could invest $50 every paycheck, which would make the account free. If I had invested more than it would be free, but because I was starting out at the bank, I didn’t make a ton of money. So that was a better choice for me at that time. So that’s kind of what I went with and. They had several, I guess, menu choices that you choose from; as Andrew said, they were asking like what my risk tolerance was, how old I was, how soon before I retired, what my goals were. And then they. I allocated the money that I invested every month, every two weeks, into the portfolio that they set up. And so I hadn’t zero input in any of the choices, which at the time I was okay with, but then the stock market actually started to take a turn down. And so I kept investing, but it wouldn’t let me, it wouldn’t let me allocate to other things, into some of the ETFs that were down more than the other ones. So I felt trapped because I couldn’t, I couldn’t put the money in, I couldn’t take the money out because then I wouldn’t have to pay any capital gains on any gains I made because it had been less than a year. So I was like, ah, so I was trapped, but so I kept investing, but instead of putting more money into the ETFs that were down more so, I could. You’ll take advantage of what we were just talking about with ETFs a few minutes ago; it locked me into a stylized portfolio that I had zero input on. And so I didn’t care for that. And so when my year passed. And I could sell my positions and take the money out without having to pay any capital gains on the short-term money that I’d made. I immediately closed the account because I just, it wasn’t anything that betterment did that turn me off. It was simply the way that they had the portfolio set up that wouldn’t allow me to make adjustments to adapt to what was happening in the market. And I didn’t like that. It just made me feel trapped. And so I didn’t care for that. And. So that was my experience with it. Now I know Andy Schuler, our business partner. He had an experience with a Robo-advisor recently where the market he’s, I think younger than both of us and are close to it. And he, he was in a Robo-advisor and when the, when the market started to turn. It automatically started putting some of his money into it. They opened a bond fund for him, and it started putting money into a bond fund for him. And he was very against that. He did not want anything to do with that when the market was going down, and he wanted to put more money into the stocks because he knew that was what he should do. But the Robo advisor. The AI was taught the classic, you know, rotation out of stocks into bonds when things start to go south, and he didn’t want to do that. And he had no control over that. I know that was very frustrating for him. So there, there are some, certainly some benefits to it because like you said, it’s a set it and forget it. And it can earn you a decent return, but it also gives you zero control. And so if you’re okay with that, then, yeah, sure fine. But if you’re not, then I would; I guess I would either ask more questions about whether this would be a good fit for you, or I guess, think about this as something real that you want to really want to invest. Andrew: [00:33:12] Yeah. I mean, basically, I like to have my hands on the wheel, so I rest my case. Yeah. You want to be in control. Right? Right. Dave: [00:33:21] Okay. So another thought about the ETF slash investing. So let’s say that you really, really want to invest, but the idea of learning about companies and learning about the stock market and numbers and all that stuff, just overwhelmed. You. But you don’t really want to go the route of ETFs because that just kind of leaves you cold. So I guess which way do you go with that? Where, where do you go with that? What are your thoughts on that? Andrew: [00:33:50] Yeah, I mean, that’s, that’s where we’ve been trying to do with the eLetter and the whole thing of the mission of it, where if you just take $150 a month and if you’re able to invest over forty years, and if you’re able to beat the market by just 1%, you’d have a million dollars. So. That’s exactly what we’re trying to do and giving the best of all worlds. You can have ownership of some stocks, you get to use the research and, and really the passions of myself and yourself, Dave, and then our ability to be able to brainstorm on a lot of these ideas and able to use that and have the same, basically be invested in the same stocks that we’re investing in and not have to be blanket covered by an ETF. So that’s a lot, that’s a resource it’s really not. Available to a lot of people who don’t listen to our show as well. That can be another option if the other options above don’t sound appealing. Dave: [00:34:45] Exactly. You know, the other thing I like about it too, though, is it’s not just about the actual stock picks and following along with what we’re doing; it’s also about learning about all the other ideas that we’re discussing. So. It can be a great starting place for starting to pick your own stocks and then kind of branching out from there because there’s so much information and all the, in all the write-ups about each company that, that Andrew picks every week, there is a lot of great learning in there. I learned tons of stuff. That’s why I like to read them. I mean, it’s not just because it’s a great stock pick and because those are the things that and he and I have had. I kind of tried to hash out over the month, but there’s also lots of great insight that I don’t think about. So it’s just another angle of looking at things. So as a stock picker, it gives me other ideas of things that I can embrace for things that I’m trying to do. So. Not only can it help you get started, but it can also help teach you how to do it on your own someday if that’s what you want to do. And if you don’t, then that’s great too, because it just, it just gives you options. And for me, that’s one of the things that I always have, have liked is trying to have options, because I think if you have options, it gives you the ability to go in different directions instead of being forced to go in one direction because that’s your only choice. All right, folks. Well, with that, we are going to wrap up our conversation for this evening. I wanted to thank everybody for taking the time to write us those great questions. Keep them coming. We really enjoy answering these for you on the air. And hopefully, you guys are getting some good takeaways from all the stuff that we are trying to dispense to you. So without any further ado, I’m going to go ahead and sign us off—you guys. Go out there and invest with a margin of safety emphasis on safety. Have a great week. We’ll talk to you all next week. Announcer: [00:36:31] We hope you will enjoy this content. Seven steps to understanding the stock market show you precisely how to break down the numbers in an engaging and readable way with real-life examples. Get access email@example.com until next time have a prosperous day. The information contained is for general information and educational purposes. Only it is not intended as a substitute for legal, commercial, and or financial advice from a licensed professional review—our full firstname.lastname@example.org. The post IFB197: Green Stocks, ETF Problems, and Robo Advisor appeared first on Investing for Beginners 101.
44 minutes | May 27, 2021
Tips For Buying Cheap Land Remotely and Flipping It With Jessey and Kevin
Welcome to the Investing for Beginners podcast. In today’s show, we discuss: Land investing with Jessey and Kevin from REI Conversion What land investing is, and how to get started. Different approaches to finding and investing in the best properties, plus different management principles. For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript Announcer (00:02): I love this podcast because it crushes your dreams and getting rich quick. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern with a step-by-step premium investing guide for beginners. Your path to financial freedom starts now. Dave (00:32): All right, folks, welcome to the Investing for Beginners podcast tonight. We have a special guest. We have two gentlemen joining us, one from Vancouver, Canada, and the other one from Korea. Yes. All the way from Korea. I have Jessey and Kevin from REI Conversion. They’re here to talk to us a little bit about real estate and land. So I’m going to turn it over to you guys. And once you tell us a little bit about your origin story, if you will, kind of how you guys met and how you guys got started. It sounds like a story. Jessey (01:01): Yeah. Thanks again for having us on the show, by the way. Yeah, so both Kevin and I started in the land investing area. I actually started with houses first and then eventually sort of moved into investing in land. I actually met somebody by the name of Seth over at Ari tipster REO tips or.com. If you’re looking for a great blog on all things, real estate investing, land investing, that is a great resource. Seth puts out a lot of good content. Anyways, we got connected, and I eventually learned about what land investing was. And I, I took a stab at it. And w you know, within just a few weeks of hearing the term land investing, cause we can’t, we don’t have anything like that in Canada. You know, I was already profiting within my first month, so it was awesome. Jessey (01:55): And then ever since then, I, I, I come from a digital background on the marketing side of things, I started helping other land investors and then started building out websites and then eventually led us to build sort of our land management tool called pebble, which is part of the, the suite of tools that we have under REI conversion.com. So that’s sort of my story. And then me and Kevin in-between met there, but Kevin, why don’t you sort of share a little bit about how you got started? Kevin (02:24): Yeah, yeah. So a similar story kind of to Jesse I’m, I’m over here in Seoul, South Korea. And I was sort of listening to a bunch of podcasts, kind of like yours, about just how to invest. I was reading a lot of books about investment investing and kind of trying to figure out a game plan for what I was going to do kind of going forward. Kevin (02:49): And I stumbled onto a random podcast where some guy was talking about flipping land, where you basically buy parcels of land, and you buy them cheap and sell them on for, for a profit. And one thing that really stuck out to me was the fact that he said that you don’t have to be located anywhere near the land actually to do this. Whereas, you know, if you’re flipping a house and you need to do construction, you can do that remotely, but it’s a lot more challenging than the land business. So I thought, Hey, this sounds like a great idea. Let me just give it a shot. And similar to Jesse, within a couple of months, I was flipping with these just crazy profit numbers, and sort of the rest was history. I guess I’ve been, and I’ve been doing it for about a year and a half to almost two years now. And then my background is actually in software. So I started building some software tools to sort of helping me along the process, sort of managing my properties, and doing some automation around things. That’s when I got connected with Jesse, and he said, Hey, this tool looks really cool. We should make this into a product that other people can use. Dave (04:09): Well, that’s an interesting story. It’s a very interesting story yet. So as somebody that knows almost nothing about this, if I was too, I guess, kind of teach me the Padawan ways of how this works as somebody who doesn’t know anything about this, w what’s the difference between land and buying real estate? I guess we’ll start with that. Jessey (04:33): Yeah. Well, the land is a form of real estate. So the big, I think the big difference is sort of the way that you, you sort of run the business itself. The model is pretty set. You know, it’s bare-bones is quite, you know, basic, you know, buy low, sell high type of thing. But, it sort of comes down to the processes of how this all works. So the tip there, there’s sort of the, I would say the typical route that in land investor would go about building you know, his business getting, you know, acquiring property, you know, sending out what we call either direct mailers or a way to sort of acquiring property. And then once you acquire that property, that’s the other half of the business is to really just market that property and flip it for profit. I mean, that’s probably on the very, very basic side of things. Kevin, would you be able to add to that? Kevin (05:36): Yeah, I think it; it comes down to the fact that you know, in the US, there are literally millions of parcels of land. Every really every square inch of the United States is owned by someone. Sometimes it’s owned by the federal government, but in a lot of cases, it’s it is own. And one thing that I have discovered is that a lot of this land is owned by people who don’t really care about it in lot cases, the people I talk to, you know, maybe, maybe they had an uncle who owned 10 acres out in Arizona, and that uncle died and, and you know, gave this parcel of land to some, some nephew who’s living out in New York. Kevin (06:28): And this person in New York is like, well, I don’t care about 10 acres of land in the middle of nowhere in Arizona. And I’m just sitting here paying property taxes on it. I have no idea how to even go about getting rid of this thing. And I really just want it off my hands. If they get a postcard from me or a letter from me saying, Hey, I see you on this 10-acre property in Arizona, and I’m happy to take it off your hands. And here’s an offer price that I can give, give you for it. A lot of these people are, are really relieved to them. It’s a to them; it’s a, oh, this is something I don’t have to think about anymore. I can stop paying property taxes on this, and I can just get rid of it, and it’ll be off my hands. Kevin (07:07): And then and then on the flip side, I can take that parcel, and I can find people in the local area who really want land for either hunting or camping, or they’re looking to retire. You know, a big thing that I see now is that a lot of the baby boomer generation is retiring, and they’re looking to leave their city that they had a corporate job in and move out to the country. In fact, my parents did the exact same thing. About five years ago, they live in Wisconsin, and they bought 80 acres out in the farmlands of Wisconsin and built a ranch; and they love life. And that’s what a lot of people are doing. So a lot of people will reach out to me saying exactly the same thing they want. They want a place where they can retire to have some land, some space. Some people are just looking for a weekend camping getaway. Some people are looking for hunting plots, and they’re happy to pay, you know, good prices for these properties. So it’s just a matter of finding those people who are interested in selling; we’ll do so quickly and then finding the buyers. Dave (08:19): So Then, so how do you, how do you go from point a to point B then? So how do you guys, how do you guys source out the land, and then how do you find the buyers? Jessey (08:31): Yeah, one of them really cool things about the states are the fact that you have access to a lot of this public data of who owns the properties and all that information that’s usually kept with the county. So there’s a lot of ways that you can get this sort of data. And typically, a lot of people will start off with either contacting the county for, for the list of property owners that own land in, in that county, or there are what we call sort of data providers that have this information, which you can purchase a list from which essentially come from from the county, but they’ve sort of gone through and refine that list or, or, or, or basically organize that list a lot better than the county can. Cause sometimes the county honestly has things literally printed on physical paper or on like CDs and, and whatnot. Jessey (09:20): So getting that data from a data provider, and then I’m starting to get, get to work by sort of contacting these people typically by direct mailers. A lot of times, that’s typically the path there’s sort of this typical path that a lot of investors just follow, which is, you know, getting out your what we call our mailers or a direct mail out to these property owners, letting them know that you’re interested in purchasing their property. And obviously, you’re going to get a lot of people who reject you. And then from there, you know, you’re going to get some deals that some people are interested either you’ve made an offer on that letter, or you make an offer after they’ve sort of replied to a letters ex you know, where you express your interest in that property. And, and once you sort of negotiating that property, you end up acquiring it, and then, and then off, it goes to, to the marketing side where then you go and market your properties whether you’re listing it on the MLS or you have a real estate agent who sells it for you, or you, you know, a lot of us even use something like the Facebook marketplace to flip that property. Dave (10:36): So How, how quickly does this, how quickly does this process take? So like from the time that you buy the land to the time that you sell the land, is that days, weeks, months, years, like how, how, or does it depend on the location of the property or is I’m guessing there are lots of variables in that, in that question. Kevin (10:55): Yeah. Sorry, go ahead. Yeah, it depends on what kind of property it is. It is a lot of people going into this business like myself; we’ll start with kind of the lower dollar properties. You know, there are lots of properties out in Arizona, Nevada, New Mexico, where you can buy these prop plots for, you know, a few hundred dollars even. And you can go ahead and turn those around and sell them on Craigslist or Facebook for maybe double or triple your, the, what you paid for them. And in those cases, you can expect to be able to sell those in a month, maybe three weeks, four weeks is what I typically will typically do. Now some of the higher dollar properties, I think as you gain more experience, you kind of move up the ladder of gaining higher dollar properties. And typically, my turnaround is anywhere from a month to maybe three months; some, some take longer than others, just because they’re either bigger or they’re more niche, kind of, they’ve got a specific aspect of it. People are looking for. So it’s sort of all over the place, but I, I try to sell everything within six months if possible definitely. So that’s the timeframe we’re looking at. Andrew (12:19): I got a question for you guys. So is there any sort of selection process that you go through as you look at these properties? Or are you just kind of going down the list and just saying, okay, well, a hundred people said, no one person said yes, so I’m just going to buy the one that somebody said yes to. Kevin (12:39): Yeah, that’s a great question. So we definitely take a lot of time to do due diligence, and I’m certainly not buying every property that I get a response from. In fact, the majority I would not purchase either. There’s a huge amount of back taxes, or there’s some lien on the property, or there’s some other aspect of the property that makes me not want it for whatever reason. But you know, there’s of those people that get back to me, I’d say I’m purchasing maybe 20% off, of those that come back. And it’s it. You know it when you see a good property, check it out on Google maps, sort of figure out the lay of the land if it’s got good access and there’s no, there are no issues with the title then that’s usually a pointer that it’s a good property to, to purchase. Andrew (13:35): Okay, could you Dive a little deeper into that? Because like Dave, I’m, I’m somebody who knows absolutely nothing about this, this kind of stuff. Kevin (13:42): So you know, the only thing I could think of would be if our hypothetically wanting to buy a ranch, not by our answer, sorry, buy land to build my own ranch, I would want to make sure, you know, I had access to fresh water or something and maybe a way to plug into the grid if I wanted to, those are the only real things I can kind of think of what else is involved. Kevin (14:06): Yeah. So there are a few main things that people care about. As you said, access is probably number one, making sure that there is legal access to the property. The closer it is to a public road, the better. But some, some people actually prefer it to be a little bit off the beaten path, but just so long as there’s some way to access the property, legally, that’s sort of my number one filter criteria when I’m evaluating a property the number two is power and water. In some areas that U S water is a very difficult thing to come by. So you sort of have to; you have to know the area you’re working with and figure out what the options are for water. Whether it’s, some counties have different restrictions on what you can drill, what you can’t drill, if you can do if you can put tanks in, to have your own water supply. Kevin (15:04): But then some people, you know, even if there is no option for having water, there are a lot of people who still want just camping land. They just want to be able to come out and hunt into them. If it doesn’t have water, it doesn’t matter because they’re just; they’re just coming out there to go hunting on the weekends. So that’s definitely a few things. The terrain is one thing, you know, if somebody is looking for if you’re looking to sell to someone who wants to build a house, you need to have a property that is going to have enough room to do that. So there’s not some big cliff in the middle of the property, or you need to figure out if there are any setback requirements if it’s a really narrow property, and you need to figure out if there’s enough room with setbacks. Kevin (15:53): And so, it takes a little bit of digging, calling with the county, and just verifying that the properties are buildable. That’s definitely a thing to think about figuring out for as well, power yeah, and figuring out the zoning as well. You know, yeah. What kind of properties has certain kinds of restrictions? But a lot of times, the county or somewhere the county can direct you to, to, to find out the information on that property, depending on what you want to use that property for. You know, the best place to start is sort of start speaking with the county and asking them, you know, what can be done and on that property itself. So Andrew (16:31): I guess somewhat along those lines; you know you mentioned some of the factors involved when you’re personally looking for properties. So as it comes to who wants to be an investor, like, are there certain characteristics or certain things about the style of a way somebody wants to invest that would make you say, Hey, land investing would probably be a great fit for somebody like You? Jessey (17:00): I, I definitely think running, you know, being a land investor is really running a business. Eh, there’s, there’s, if you’re, you know, up for building processes and, and systems and, and that just because there’s so many, I guess we would call it steps to land investing. You know, you really have to be up for that. I always say real estate land investing is sort of like it’s like a; it reminds me of a very much of an e-commerce business behind the facade, of real estate investing. So it’s very unlike your typical real estate investing. But yeah, it, it very much is a scalable and a business that you can absolutely run remotely as well. So if you’re, if you’re looking to build something for yourself that you can, you know, work on remotely, again, both Kevin and I are out of the country, you know, land investing is definitely a great one. Jessey (18:08): And the cool part about it, too, is that there are so many different ways. You can; you can attack this. You can go for like what we’ve been talking about, which is being a retail investor where you’re buying properties and then selling them to the public, or you can hook up with some real estate agents, and you can partner with them to be the ones selling your property basically. So you can just focus on acquiring, and then you kick it off to your real estate agent to do the sales part of things that we know a lot of people that do that and save a ton of time doing it that way. You can also be a wholesaler to other land investors. You can; you can find the properties get them under contract, and then just sell them, sell the contract to a wholesaler for a, or as a wholesaler to another investor for a fee. Jessey (19:01): And then another, another really cool aspect. One that I’ve done quite a bit of myself is selling properties in terms of deals. This is a kind of cool way that you can generate more passive income and actually really boost up your return in the long term. And it’s basically just you buy the property as you would normally. And then instead, instead of selling it cash, you list it as, you know, some amount down and a payment per month. And so you can sell these parcels on, you know, five, seven, eight-year contracts, and you’ve now generated passive income for a number of years, and you can get a really good return on the interest rate on that as well. Announcer (19:48): What’s the best way to get started in the market, download Andrews ebook for email@example.com. Dave (19:59): Fascinating. So I guess it really is it’s, it’s, it’s, it’s frankly, it’s way more involved than I guess I envisioned. And so, as somebody that’s thinking about something like this, a so how do you, how do you decide how active you want to be in this managing that the business because as Jesse was saying, there are so many different steps involved in all this or falling kind of the idea that Kevin was just mentioning about the term deals and having more of a passive income, is it, is it, can you have a mixture of those? Can you just do one or the other, is it is a kind of a mix and match, or is it just kind of depending on your personality? Jessey (20:40): Yeah, definitely. You can definitely have a mix and match. I think a lot of people do kind of, you know, that they get it, it does get quite involved, especially at the start, you know, acquiring property. But a lot of, I think a lot of investors actually end up putting their properties on terms and, and sort of start building their portfolio that way and, and, and, and collect earnings every month basically, but still, you still sort of have to kind of go through the different steps to be able to, you know, acquire the property, you know, and then flip it either for cash or, or, or, or terms. But yeah, you definitely can eat. How involved do you want to get in is, is really up to you. We have a lot of land investors that we work with. You know, they’re, they’re doing a nine to five or whatever they, and they’re looking to sort of building their land investing business as, as their sort of retirement plan. Some, you know, we’ve got firefighters people, part of the air force, and all sorts of different things. So it’s, as, as involved as you want it to be, you know, the day, how much volume want to go through the type of thing, that’s, that’s for definitely for you to kind of decide on that. Dave (21:56): Another kind of a dumb question, I guess, so does land depreciate. So, in other words, do you buy a property and have to worry about it being worthless in five years? Kevin (22:08): Well, there are market fluctuations that you need to be aware of, you know, just like any other market or any other property, things are going to go up and down. You don’t have depreciation in the traditional sense on a, say up a home where you depreciate your you can, you can claim depreciation on your tax return based on the properties, you know, being used. So you don’t, you don’t have that benefit with land investing, but some of the plus sides are you get exempt from some of the restrictions around like doing terms deals is not a, is, can be more of an issue for, if you wanted to say, write a mortgage on a house that can be a lot more restrictive, whereas land selling land on a contract is much less restrictive. So there are, there are pros and cons to both sides. Kevin (23:06): Yeah. I think one of them, one of the cool things, you know, coming from the house side of things before, and, you know, and that’s why a lot of people that are in the vault, you know, with homes start seeing how appealing land is, is, is the fact that you don’t have to now deal with any structures. And the moment you have to deal with structures is, is it’s a whole different ball, game, little, a lot of different things that you have to worry about whereas land is land. Now, given, you know, you should probably take a look at your property before you purchase it. I’ve, I’ve made a mistake when I first started, but I remember me, I looked at a piece of property on Google, and I was still new to the whole thing. And it looked totally fine. Kevin (23:49): There was just a little, little pile of garbage there, but when I got my photographer out there to, you know, acquire the piece of property, and when I got my photographer to go out there, he’s like, are you serious? He do, you know what you just purchased? And it looked like literally a seven 47 just crashed five acres. So it was just a, it was a huge, huge mess out there. So but, but overall, I mean, the land is going to be landed. It’s always going to be there. No, is there like a max Andrew (24:20): Let’s say like a maximum value that you recommend for somebody who’s kind of doing it on their own. I’m sure you guys are aware of the crazy competition in real estate between real estate investment trusts, big private institutional investors, and everything like that. So are you like playing in a pond that’s small enough where those big guys won’t want to play, or are there some guidelines around that? Jessey (24:46): Yeah, I would say that compared to housing, it’s a much less competitive environment. And like, as Jesse said, there’s a lot of house people coming over to land because they see it be a lot more restrictive. I mean, if you, if you go to a real estate investing club and say there are a hundred people in the room, ask all of them, if you’re doing land and I guarantee nobody’s going to say yes, so it’s, it’s a, it’s a pretty niche market. It’s growing for sure because the profits are pretty crazy if you can find the right place to flip land, but certainly, you’re not dealing with those institutional investors. And some of that crazy competent that we’ve seen in the housing space, especially over the past five years. And, Andrew (25:38): You know, you mentioned having access to some people you’ve seen had success, or are there any commonalities you noticed or whether it was as a strategy, a lot of them tend to use or a way of doing things that, that tended to lead to success more than maybe your typical land investor. Jessey (26:00): That’s a good one. Yeah, consistency is definitely a big, big deal. Just having, having sort of a process in place where you have your deal flow coming in and going out, and then just keeping that consistent. So that’s, that’s what we teach a lot of the customers of our products is you want to sort of get your system set up and then you want to be mailing every single day, be receiving leads every single day, be working those leads every single day and sort of, and make sure that that sort of machine is going. And it’s once you build that consistency that can start sort of moving the lever is in terms of, do I want to do more deals next month or fewer deals next month, you can sort of dial-up your mailing rates if you want to kind of do more or do less. Jessey (26:57): And you can, as long as you can keep that stream, that pipeline flowing, you can sort of dial this thing into exactly the way you want. And we’ve got some people who are just doing this a couple of nights a week. They’re flipping a couple of deals a month, and they’re, they’re Jennings generating some high income, but they’re not treating this as sort of a full-time thing. And then we’ve got people making millions of dollars a year doing this whole time. So it’s, you can kind of decide how much you want to get into. Dave (27:29): So I guess a question that I have about this is there, is there a minimum that people need to have as far as a dollar amount to start with this and you know, is, and I guess the next logical question is somebody who worked in a bank for a while, do you have to have, does your credit have to be fairly decent to do this? Like if you got a credit score of five 80, is this kind of like, eh, I’m going to have to work on that first? Kevin (27:56): Well, if you, if you have cash that then your credit doesn’t really matter because you’re paying cash; nobody’s going to be asking for your credit score. So I’ll, I’ll tell you my story. I, when I first heard about this, and I talked to my wife about it, and we said, we wanted to try, try this out. I basically had saved up about $5,000. And I said I’m going to use this $5,000 to buy my first property, do the marketing, see if I could flip it. And if it works, it works. And if it doesn’t, you know, losing $5,000 sucks, but it’s not going to break me. So that’s what that’s sort of what I did. I know a lot of people do it for a lot less, you know, you can, you can go out there and buy squares of property out in the desert for a hundred bucks, a pop. Kevin (28:51): So you can, you can really do this for a lot less, but me personally, I said $5,000, and I made that back, and I think a month and a half from the time that I first bought my first property. So so yeah, I, I think, I think I started with just under, I mean, it was also cashed about, I spent about 200, 200 bucks on, on my first mailing and then acquired my first property, two properties for 500 apiece. There were desert lots that had no access. I was like, I don’t know how I’m going to get rid of this, but whatever, I’m going to give it a shot. It seems to be like the returns, and the barrier to entry into this is just so alive. I’ve tried so many different, you know, businesses and, you know, I tried so many different things. Kevin (29:44): I was like, what do I have to lose? It’s just such a low barrier to entry. And I mean, like, as I mentioned within, I think I listed it that weekend after I acquired it. And like, I had like three people who wanted to camp out on my desert lot, which didn’t even make sense to me—and then flipping, you know, for five grand within my first four weeks. And then two weeks later, just down the highway, I had the same exact thing. And you know, already within, now this mind you, this is going to happen to everybody. But that’s sort of like opened my eyes, like, wait a minute, this is a little bit crazy here. Yeah, the F the first major, like my first D first few deals were kind of, I was making money, but I wasn’t like killing it. Kevin (30:34): And then I think of around month three, I bought a property for $3,000, and I, I listed it. And within, I think a couple of weeks, I, somebody submitted a down payment on my website for $22,000. Yeah. So, so they put a down payment for four, 4,000. So, just their down payment paid for the property. And then they did a terms deal for the rest for the 20, 20 grand. So plus the yeah, so it ended up being like a five-year or eight-year term deal. And I was just; I was so shocked. I didn’t think it was real. I was like, I’m saying, must be a scammer. Like, there’s no way this works this well, this easily, I called the guy, and I was, yeah. I was like, are you sure? Like, you really want this? He’s like, yeah. Like my family lives in the area. Like I go hiking up there all the time, loved the spot, got a great view. I’m going to build a house up there. He was, like, super stoked about this. And he was like, and I’m getting it for such a good price. And I was like, okay. Yeah. Kevin (31:53): And yeah. And it worked; it worked out great. I’m, I mean, I made, you know, whatever that is 700% profit now. Not every deal works like that. I’m not saying that everything does, but when you do get a home run like that, you have to pinch yourself and be like, there’s no way that I just did that. But there it is like, money’s in my bank account. Like it totally worked. Dave (32:18): It sounds like you’re trying to talk him out of it. Kevin (32:20): I really was. I was like, now you’re sure, like, this is like a wooded lot. Like, it takes some work to put up a house in there, and he’s like, oh yeah, like, I know I got, I was like, I had my construction friend go check it out. He says it’s all good. Like, okay, awesome. Dave (32:37): Okay. Yep. No problem. So how many, how many properties do you guys generally manage at one time? Jessey (32:45): Yeah, that’s a good question. So, I mean, w you know, it really depends on again, what sort of bandwidth you have in terms of, we have, you know, users of our software that I don’t know, they’re over a hundred, over a hundred properties on terms. And there are people that, you know, may only have a couple of properties, and it depends on how long in the game you have been in there for, or it’s sort of all over the place. Again, it really depends. And there’s obviously, you know when you’re sort of starting to manage so many properties, especially on terms, you know, sort of looking at software and different systems to help you automate and, and sort of allow you to get back the time. You know, it, it becomes really involved is what I’m trying to get at. And so that’s why there’s sort of software and whatnot out there that sort of help you manage a lot of these properties. Jessey (33:39): So the same with the entire sort of deal flow as well. And as we sort of mentioned, a lot of this is, you know, they’re very repeatable steps. There’s sort of no magic to this. It’s like Kevin said, it’s sort of consistency. And, and that’s what sort of led us to build, you know, what REI Conversion with, with our tool, like REI Pebble, which is a land management tool for the entire deal cycle type of thing. So, yeah, again, to answer your question, it really depends on how much you want to take on. That Dave (34:12): Makes sense. So, you know, we talked about some of the ideas of how people can find success. What about avoiding failure? If somebody was just starting, let’s say tomorrow, what kind of a thing would you say, Hey, don’t do this outside of like, don’t buy a property that, you know, looks awful. Kevin (34:33): Yeah. There’s, you can certainly cut your teeth on smaller dollar properties. And that way, you can sort of just get the feel of the, of the cycle. And that’s the way I started out. And I would recommend anyone to do that. Just, just use the amount of money you’re comfortable with. And even if you’re not making huge profits, my, my first few properties, I, I made money, but it wasn’t, if you added up all the hours I was spending just trying to figure it out. I probably didn’t actually make any money. So those first few deals are just about a way to figure out the flow, and then, and then you can, you can sort of getting get amp it up. But in terms of avoiding failure, one thing that I did and this isn’t for everybody, but I paid for a course, an online course, just of somebody who had been doing this for years, and really did a great job of putting an end to end, like this is how the whole process works. Kevin (35:41): For me, that, that gave me a lot of confidence that I could do this and that I could follow these same steps and get this thing done. So for me, that was a huge thing I would avoid, you know, there’s, there’s certainly, there are some people selling major, like in-person training courses that are a lot of big investment and for some people, those work out, and I’m, I, if that’s something that if you need someone to really be there coaching you along the way, then that, that can be something, but I’ve also seen people kind of spend a lot of money on those courses and never really get to the point of actually flipping land. But there are some online courses that are really good and won’t break the bank. And then there’s, there are obviously ways that you can learn this stuff on your own and not need to, to do something like that. Jessey (36:33): Yeah, I, I too would, would say, you know, I, I, I get to chat with a lot of new investors and or, or people who want to get into land investing. And I think there, there’s just a lot of nuances to the whole sort of, I guess, what you call the deal cycle and, you know, going through someone’s course, and, and it’s easy for me and Kevin to say this, cause we’re not gurus, we’re not pushing any courses or anything like that. So I, I, to encourage you to know, if you wanted to get into this to look into some sort of education and because there’s a lot of nuances in, in, in the steps of, of, of doing this business and you know, when you’re starting out don’t try to reinvent the wheel just do it and stay consistent. Jessey (37:24): And as you sort of start understanding the different processes is when you can start experimenting. I, I, a lot of times I do meet a lot of people who are super excited and want to try all sorts of different things, to kind of get an edge over everybody else or whatever it may be. But, you know, they, they, you know, a lot of these, I guess these steps are, are tested about the battle-tested type of thing, and it, it works. And from there, you know, you’ll get an understanding of how you can start refining your process. Exactly. Andrew (37:56): The concept makes sense. And I can see how it can be an untapped potential and, you know, really, I haven’t really heard of it. And so it’s interesting just to hear your guys’ perspective and hear what’s possible if you’re out there willing to do the work and kind of put in the hustle. I was now staying in a cabin in the mountains last year, and I happened to pick up one of the local newspapers, and they had in the classifieds, they were selling a piece of land. And I was like, wow, that, that actually is a lot less on the dollar purse, purse percentage, not dollar percentage, but on the total dollar amount to like how many acres they were offering. And, you know, for all, I knew that could have been one of you guys, But you know, it, it Does sound like something where people can kind of pursue it and really, really go after it and, and cut their teeth. If it’s something, they’re interested in. So what are some of the things that you guys do to help people who are in that spot? Jessey (39:02): Yeah, so we have a platform inside of REI Conversion called Pebble or REI Pebble, which is sort of land management. You could call it a platform or a CRM system to help you from the entire deal flow of, you know, sending out your mailers automatically getting those out for you, because there’s no way you can get anything started without getting these mailers out, or these letters that have offers or that express interest that you’re, you’re looking to purchase their property to all the way to, you know, generating documents. We, a lot of us self close on those properties, and the system will sort of generating those documents for you; then it’ll sort of start helping you manage your marketing side of things whether they’re people interested in selling you their property or buying your property, all of that gets managed and taken care of inside of REI Pebble. Jessey (40:04): And then on the sort of front-facing thing, side of things, we also help our investors launch their websites, their websites to buy the property from people who want to sell. And then on, you know, on the other side, which is to sell their property to people who want to buy. So we sort of getting your entire system from a to Z set up allow, you know, allow it to sort of run and allow you to scale your business so that you can, you know, whether you want to send more mailings, start doing more properties it’s a lot easier to do. So, Kevin, do you have anything to add? Kevin (40:42): Yeah. Yeah, I think just getting educated, just there’s, there are a few books out there about this. Just learning as much as you can and sort of figuring out what you’re comfortable doing is an important first step. Kevin (40:58): Getting started, you know also we’ve got a podcast and, and again, I’m, I’m not an educator, I’m not a land educator or anything like that, but I do get a chance to, you know, speak to a lot of ordinary people who are getting into land and are doing really well in land in, in the land business. So you can always check that out also on our site REI conversion.com/podcast, or you can always find our podcast on iTunes as well. And again, just sort of hearing some of the stories and some of the different things that land investors are doing the sort of can shed some light on how this all works. Andrew (41:37): Ah, that’s cool. What was the podcast called again? Kevin (41:40): It’s called REI Conversion. So the three letters and then different word conversion. Dave (41:46): Cool. REI conversion. Okay. So yeah. Well, thank you guys for being generous with your ideas and your time. I definitely learned a thing or two I’m. Sure Dave did too. Dave (41:55): Oh Yeah. Kevin (41:56): Yeah, absolutely. Thanks for having us on the show. Dave (41:59): I learned a ton. Yeah, this was fascinating. Jessey (42:01): Yeah. If anybody has questions for us, you know, we’re always happy to chat. We’ve got a Facebook group and the website, and we’re happy to sit down and talk with you where you’re at, what, what kind of steps you might need to take to move forward? We’re not, we’re not here to try to sell you on our products, but we just really enjoy talking to people looking to get into the business. Dave (42:25): Yeah, absolutely. Yeah. That’s awesome. We really appreciate you guys taking the time to come and talk to us and to help educate us about those. Because again, like Andrew was saying, this is something we were not familiar with and we like to share these kinds of things with our, with our listeners, because you never know who’s going to be listening to the show and go, Hey, that is the thing for me. And if we can point somebody in that direction and pulling them towards you guys, because, you know, I think you guys both sound very knowledgeable and really know what you’re talking about. And I think you both care about trying to help people too, which is, which is awesome as well. So we really appreciate you guys taking the time and coming to talk to us today. Jessey (43:04): Absolutely. I was that person two years ago. Dave (43:09): We all, we all were; it was at some point you got to start somewhere. Right? Dave (43:12): All right, folks. Well, with that, we are going to wrap up tonight’s conversation with Jesse and Kevin. I wanted to thank both of them for taking the time to talk to us and educate us a little bit more about land investing. So without any further ado, I’m going to go ahead and sign this off. You guys, go out there and invest with a margin of safety emphasis on the safety. Have a great week. We’ll talk to you all next week. Announcer (43:32): We hope you enjoyed this content. Seven steps to understanding the stock market shows you precisely how to break down the numbers in an engaging and readable way with real-life examples, get access firstname.lastname@example.org until next time, have a prosperous day. The information contained is for general information and educational purposes. Only it is not intended as a substitute for legal, commercial, and or financial advice from a licensed professional review—our full email@example.com. The post Tips For Buying Cheap Land Remotely and Flipping It With Jessey and Kevin appeared first on Investing for Beginners 101.
31 minutes | May 20, 2021
IFB196: Investing in Companies with Wide Moats
Welcome to the Investing for Beginners podcast. In today’s show we discuss: Best way to think about moats and their impacts on business Some ways to find moats, plus ideas about protecting those moats Impacts of moats, plus buying beyond the best business, price you pay matters. For more insight like this into investing and […] The post IFB196: Investing in Companies with Wide Moats appeared first on Investing for Beginners 101.
60 minutes | May 13, 2021
Lessons After 40+ Interviews of the Greatest Investors with William Green
Welcome to the Investing for Beginners podcast. In today’s show, we interview William Green of Richer, Wiser, Happier: Takeaways from the book on life, habits, and processes Discussion on cloning, finding ideas, and how to win in the markets. How to fashion the life you want to live and discover what is important to you […] The post Lessons After 40+ Interviews of the Greatest Investors with William Green appeared first on Investing for Beginners 101.
37 minutes | May 6, 2021
IFB195: Stocks with Multiple Tickers, Keeping Dry Powder for Corrections
Welcome to the Investing for Beginners podcast. In today’s show we discuss: Thoughts on different classes of stock, such as B shares Reading through proxy statements and what to information you can learn. Different ideas around keeping “dry powder” in the event of market downturns. Today’s sponsor: NordVPN and their special offer for our listeners […] The post IFB195: Stocks with Multiple Tickers, Keeping Dry Powder for Corrections appeared first on Investing for Beginners 101.
37 minutes | Apr 29, 2021
IFB194: Thoughts on Heavy Portfolio Concentration
Welcome to the Investing for Beginners podcast. In today’s show we discuss: Thoughts on Palantir and heavy portfolio concentrations How dollar-cost averaging can help you when prices rise What to do as you approach the 15 to 20 stocks in your portfolio, where to look for other ideas, or reinvesting in your portfolio. For more […] The post IFB194: Thoughts on Heavy Portfolio Concentration appeared first on Investing for Beginners 101.
34 minutes | Apr 22, 2021
The Future of the Food Industry with Jim Mellon
Welcome to the Investing for Beginners podcast. In today’s show we discuss Moo’s Law with Jim Mellon: The coming disruption in the food industry from cell ag, or creation of meat products in a lab Impact on the dairy, meat, and seafood industry, plus how this all impacts the environment, the results might surprise you. […] The post The Future of the Food Industry with Jim Mellon appeared first on Investing for Beginners 101.
40 minutes | Apr 15, 2021
IFB193: Consistent Investing, ESG, and ETFs
Welcome to the Investing for Beginners podcast. In today’s show we discuss: The advantages of investing consistently and using dollar-cost averaging to your benefit The pluses and minuses of ESG investing and the ESG score ETF investing, pluses and minuses For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO […] The post IFB193: Consistent Investing, ESG, and ETFs appeared first on Investing for Beginners 101.
37 minutes | Apr 8, 2021
Clever, Simple, Fun Money Lessons for Kids with Ashley Clark
Welcome to the Investing for Beginners podcast. In today’s show we discuss with Ashley Clark from Sense 2 Cents: How using flashcards is a great way to teach beginning money terms to kids What are some of the most common misconceptions about money and why Ashley started working towards reversing those ideas. How we can […] The post Clever, Simple, Fun Money Lessons for Kids with Ashley Clark appeared first on Investing for Beginners 101.
45 minutes | Apr 1, 2021
IFB192: Navigating An Impending Crash, Investing Your Emergency Fund
Welcome to the Investing for Beginners podcast. In today’s show we discuss: How to navigate an impending stock market crash, and time in the market versus timing the market Building your portfolio with a mix of value and growth stocks A brief overview of commercial paper Different ideas to invest your emergency funds For more […] The post IFB192: Navigating An Impending Crash, Investing Your Emergency Fund appeared first on Investing for Beginners 101.
41 minutes | Mar 25, 2021
IFB191: 8 Common Beginner Mistakes with Braden Dennis
Welcome to the Investing for Beginners podcast. In today’s show we discuss: The list of common mistakes that beginning investors can make Avoiding these mistakes can go help us go a long way to our goals All of the common mistakes are easily avoided, once we are familiar with them. For more insight like this […] The post IFB191: 8 Common Beginner Mistakes with Braden Dennis appeared first on Investing for Beginners 101.
41 minutes | Mar 18, 2021
IFB190: High Yield ETF, Selling Disney, Finance As An Engineer
Welcome to the Investing for Beginners podcast. In today’s show we discuss: The benefits and drawbacks to high-yield ETFs Buying or selling Disney after an interesting year Getting started in finance with different backgrounds For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript Announcer (00:02): […] The post IFB190: High Yield ETF, Selling Disney, Finance As An Engineer appeared first on Investing for Beginners 101.
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