The Investing for Beginners Podcast - Your Path to 241m1k

Welcome to the Investing for Beginners podcast. In today’s show, we will answer two listener questions and discuss our thoughts on valuing companies: Is it better to pick one or the other of ETFs, S&P 500 or Total Index fund? Can we use the VTI to evaluate REITs and how does the Little Package of Valuation work? What are our thoughts on valuation For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com Today’s show is sponsored by: Medcline As someone who recently struggled with acid reflux after my recent heart attack, I was concerned because the symptoms are similar. And not to mention the struggles to sleep while suffering from acid reflux. I found something to help you like it’s helped me, Medcline. That’s right, whether you suffer from painful nighttime acid reflux, shoulder pain, or both, the MedCline patented pillow system is designed to cushion your body in a sleeping position that is supremely comfortable, doctor-recommended, and clinically proven to provide effective, natural acid reflux or shoulder pain relief and a better night’s sleep. In fact, 95% of patients reported an overall improvement in sleep quality when using MedCline. Now get 20% off when you go to Medcline.com/investing and get a better night’s sleep today.  SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein You can find the transcript of today’s show below: IFB241  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. I love this podcast because it crushes your dreams and getting rich quick. They got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast by Andrew Sather and Dave Ahern with a step-by-step investing guide for beginners. Your path to financial freedom starts now. The post IFB241: How to Start Valuing Companies appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we chat with Jake Taylor, CEO of Farnam Street Investments and co-host of Value After Hours: How did Jake get started in the investing world? How does Jake think about value investing and has his perspective changed over the years? What are Jake’s thoughts on projecting future results How to think about base rates Jake talks about some of his investing mistakes from base rates, and what he learned from those mistakes Jake’s opinion on DIY investing and how investing information flows learning to deal with those ideas What the market needs to generate good returns How Jake uses Journalytic to help him keep track of his investment thought process For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com   You can find more from Jake here: Twitter Journalytic Farnam Street Investments Value Investor Hours Today’s show is sponsored by BetterHelp: BetterHelp is the world’s largest therapy service, facilitating over 5,000,000 video sessions, voice calls, chats, and messages every month. BetterHelp set out on a mission to ensure everyone has easy, affordable, and private access to high-quality therapy. As someone who struggled with mental health earlier in life, therapy helped me better handle my struggles. If you consider giving therapy a try, BetterHelp is a great option; it’s convenient, accessible, affordable, and entirely online. When you want to be a better problem solver, therapy can get you there. Visit BetterHelp dot com slash INVESTING today to get 10% off your first month. SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein You can find the transcript of today’s show below: Jake-Taylor-s-Us-to-Discuss-Value-Investing-and-the-Importance-of-Journaling  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. The post Jake Taylor s Us to Discuss Value Investing and the Importance of Journaling appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we talk discuss what you should not buy the dip on in the markets: *Avoiding expensive stocks *Avoiding value traps *The potential of crypto and the minefield that exists in the sector *Avoid IPOs and SPACs For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein You can find the transcript of today’s show below: ifb240  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. The post IFB240: What Not to Buy the Dip On appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we talk to Brad Thomas, one of the leading REIT analysts on Seeking Alpha. *How Brad started in real estate, and what is a REIT? *How REITs can provide advantages for individual investors *How investors can get started investing in REITs *What areas to look for to take advantage of REITs *An overview of the REIT sectors *The Impact of Power Centers and locations + product mix For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein You can find the transcript of today’s show below: Brad-Thomas-REITs  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. The post Brad Thomas s Us to Discuss REITs appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we answer two plus great questions: *Explaining Fibonacci retracements and why we don’t use charting as an investing strategy *The drawbacks to trying to time the market and holding cash waiting for the perfect opportunity *How to research companies or industries in emerging markets or industries and the struggles you might encounter For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein You can find the transcript of today’s show below: IFB239-Podcast .  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. I love this podcast because it crushes your dreams and getting rich quick. They got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast by Andrew Sather and Dave Ahern with a step-by-step investing guide for beginners. Your path to financial freedom starts now. The post IFB239: Why Time in the Market is More Important than Timing the Market appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we answer three great listener questions: *How to get started as a young investor under 18 *Should I invest totally in my 401k with 100% stocks, or use a different allocation, if I am under 30? *How to treat your 401k match For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com Today’s show is sponsored by Medcline: As someone who recently struggled with acid reflux after my recent heart attack, I was concerned because the symptoms are similar. And not to mention the struggles to sleep while suffering from acid reflux. I found something to help you like it’s helped me, Medcline. That’s right, whether you suffer from painful nighttime acid reflux, shoulder pain, or both, the MedCline patented pillow system is designed to cushion your body in a sleeping position that is supremely comfortable, doctor-recommended, and clinically proven to provide effective, natural acid reflux or shoulder pain relief and a better night’s sleep. In fact, 95% of patients reported an overall improvement in sleep quality when using MedCline. Now get 20% off when you go to Medcline.com/investing and get a better night’s sleep today. SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein You can read today’s transcript below: IFB238  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post IFB238: Using Your 401k Match to It’s Fullest, and What is the Best 401k Allocation? appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we chat with Brian Ferodli about finding quality companies and the importance of valuation: *What he sees in the markets today *How to profit from investments in a way that you can use today. *The quality filters he uses to find great investments *The Importance of potential and finding companies with the potential to grow 5x to 10x For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com Today’s show is sponsored by: Shopify is a platform designed for anyone to sell anywhere, giving entrepreneurs like myself the resources once reserved for big business – customized for my needs – with a great-looking online store that brings my idea to life and tools to manage my day-to-day and drive sales. Go to Shopify.com/beginners to start your FREE trial and get full access to Shopify’s entire suite of features. SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein You can find the transcript of today’s show below: Brian-Feroldi-Quality-and-Valuation .  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 today at stockmarketpdf.com. Until next time have a prosperous day. The information contained just 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 disclaimer at einvestingforbeginners.com. The post Brian Feroldi Discusses the Importance of Quality and Valuation appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we answer some great listener questions: How do we feel about investing in companies with ESG concerns? What are our thoughts of investing in precious metals or metals? How does the Proxy statement work, and voting for our values How do we deal with companies losing money over a year? For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com Today’s show is sponsored by: Allegiance Gold SUBSCRIBE TO THE SHOW Apple | Spotify | Google | Stitcher | Tunein Transcript I love this podcast because it crushes your dreams and getting rich quick. They got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast by Andrew Sather and Dave Ahern with a step-by-step investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right, folks, welcome to investing for beginners podcast; tonight, we have episode 237. We got two and a half great questions that we’re going to go ahead and read today. And we’re going to work through those. And Andrew and I will do our usual give and take. So I’ll go ahead and read the first question. So we have; hi, David. Andrew. I’m new to investing, and I found your podcast very informative and entertaining. Thank you. You’re welcome. My recent investment research has suggested that industrial and precious metals could be smart investments, especially during a market slowdown or recession; looking into large market cap metal slash mining companies, it appears that they almost all raise human rights and environmental concerns. I don’t want to invest in an unethical company. If you either view holding stock in a metal company or have any other thoughts on this topic. Thank you in advance, crystal. So Andrew, what are your thoughts on Crystal’s interesting question? Andrew 0:55 Really interesting question the skin completely become a can of worms. And I think it’s an interesting thing to think about for sure. It’s tough because I think you can dig deep enough and find something wrong with pretty much any company that’s out there. You know, obviously, you see the stuff that gets in the headlines. But if you dig down to the surface, the business world is an imperfect place. And there are bad actors, probably at every company. And so, depending on how specific you want to get on unethical, your definition of unethical company, it could take that too far could lead you to not investing in anything ever. And I would never advocate for that. That said, you know, there is something to be said about ethics and investing. And I know that’s something that’s gained a lot more popular as of late. And so, as somebody who’s taking responsibility for your own investing, you kind of have to answer that question for yourself. I mean, I know for me, I feel like a fiduciary to the people who subscribe to my newsletter, as I’m picking stocks for them, even if I’m not, by legal definition, I feel that way. And so my thoughts on how I interpret a company’s ethics might be different than your own. And that’s completely okay. And so you have to balance, you know, whether you’re fiduciary of other people’s money, that’s one thing, or if you just for one reason or another, just don’t like a company, there’s nothing wrong in not doing that if you’re just talking about managing money for yourself. That’s kind of my initial thought. I don’t know whether you think, Dave 2:30 Yeah, I would tend to agree with pretty much everything you’re saying; the hard part about when you start talking about investing, and some of the ethical questions, it can become a slippery slope. And I think you have to invest where you’re comfortable with your ethics. I’m not advocating for somebody to go out and buy something just because it’s gonna go up. But you absolutely hate what they stand for, or hate what it is that they do, or, you know, any of those kinds of things that just, you know, are gonna keep you up at night. It’s kind of the same idea. You don’t want to invest in companies like that. But think for me, I think it has to be a personal decision on how what you think about different ethical treatments. I think when you look at some of the human rights complaints and discussions around the world, some of those are certainly valid. And I don’t know enough about them to comment either way. But I do know that you just have to follow what you think is right. And one of the things that I like, I guess, about the ESG idea is the idea of focusing on some of these things, but I guess I I’m not a big fan of the gaming of it that some of what’s been going on recently. But I think you have to put your money where you’re comfortable putting your money; it’s kind of like trying to impose my ethics on Andrew and vice versa. I think, by and large, yours a lot of things we’re going to agree on. But you know, some things maybe won’t affect us as much as other things. But I think the bottom line is you need to put your money where you feel comfortable putting it, whether it’s human rights, complaints, environmental complaints, or whatever other concerns that might be out there, whether it’s with the management or whether it’s with staffing issues, whatever those may be. And I think you just need to do what you feel comfortable doing. Having said that, it’s really hard, like Andrew said, to find a perfect company; there is no such thing. And there’s always going to be some could potentially be some bad actors, or there may be something about their business that you are a huge fan of. So I think it’s one of those things; I guess you just have to give some thought and decide what you’re comfortable doing and kind of go from there. Andrew 4:43 Thanks, a lot of sense. What do you think about the other part of her question or she? I mean, it wasn’t really a question, but she kind of said her recent research suggested that industrial and precious metals can be smart investments during a market recession. Do you agree with that, or do you, You know, have other alternatives for somebody in that spot? Dave 5:03 Yeah, that’s a very interesting question. So I guess I have a couple of thoughts. Some of it is a, I guess, bird’s eye view of knowledge. So take it for what it’s worth, I have done some work, trying to learn more about kind of the lithium idea, as well as a little bit about copper, because those relate to renewables and relate to energy and electricity in particular. And so I thought maybe that would be a way that I could dip my toe into those sectors. And after looking at some of those kinds of companies, I found things that just made it really hard for me to want to invest. Part of it is the base metal that you’re dealing with; I think a large part is commodities. And so, the commodities market is not something I’m comfortable with. B know that much about so they’re weeds the uncomfortableness and part three is I don’t really know what I’m doing. And so, for me to invest in a miner like Albemarle, I would really have to understand the lithium market and the commodity market to understand the pricing of it because it fluctuates wildly, first of all, and that’s going to affect the bottom line of a company like Albemarle who was one of the leading lithium miners in the world. And kind of the same idea when you look at Copper Freeport McLaren, I think back around. Yeah, thank you. I butchered that. So they’re a very big copper producer. And it’s kind of the same idea. They’re very good at what they do. That’s certainly not in question. But the nature of the beast of the fluidity of copper and the pricing make it hard for me to understand what I’m really buying. And so so there’s that, then if you look at some of the other metals that are involved in these lithium-ion batteries, cobalt, which is mostly mined in Congo, which leads us back to crystals, concerns about environmental and human rights concerns because there’s a lot of concerns about those mining operations, as well as some possible shakiness with legalities. And so that whole thing just kind of makes me a little bit nervous; I just kind of stay away from it; it’s not something that I feel comfortable playing in. And gold is not something I’ve ever invested in. And I, frankly, don’t know much about it other than that shiny, and it’s worth a lot. That’s about all I know, Andrew 7:27 I’ve noticed that a lot of the column Doomers, these people who constantly will tell you the world’s going to end tomorrow, you typically find them touting precious metals, and gold, and silver. And they’ve been doing that for years and years and years ever since I started. First, paying attention to investing, you hear the same messages, different characters, same messages, they’re correct, maybe once every decade or so, you know, a broken clock is right, at least twice a day. So the idea of precious metals can be appealing because you think that you have protection, and you’ll be the only safe one, and every while the world’s going to chaos, and you’re going to be the one who’s safe from all of that. So there’s like that kind of psychological lore behind that. But if you really break it down to what you’re, if you’re talking about buying gold, precious metals, and trying to essentially shield yourself from a slowdown or recession, you’re basically playing a timing game because over the long term, businesses and the economy are healthy, and they do well. So not only do you have to be right, but you have to be right once a decade. You know, we don’t get recessions that often. And the number of years we’re in recessions is generally short. So the odds are against you in that regard. The companies who, like Dave, you are saying doing research into the companies that are involved in the mining, those can also be looked at as favorable during recessions, for all the same reasons we just said, because their prices might hold better during a slowdown, but not only do you have a lot of the human rights issues and environmental concerns, as you mentioned, there’s also regulatory costs that come with a lot of that stuff. There’s a section in every company’s annual report where they have to report and disclose some of the mining in some of those conflict countries, right? So there’s just more kind of paperwork that goes along with that. And just a generality, a lot of these companies have to spend a lot of capital in order to mine these materials. That’s not all of them. And some miners are very long-term plays, and maybe our outlay and capital now to have decades and decades and decades of cash flows. But a lot of the very volatile precious metals are stuck in that very difficult circumstances where they have to put a lot of capital in. And then they’re dealing with these prices that are so volatile that I don’t even know how you plan a five-year business plan. If the price is up 100% or down 75% In a couple of years makes, it is hard to make a consistent, steady profit, which is how a lot of wealth in the stock market has been built by a lot of people. Dave 10:21 Those are great insights. What are your thoughts on like investing in gold or silver? Is it something that you would ever consider doing? I we talked to Vitaly A while ago, and he was like, I’ll never do this. And then he ended up buying it for, I think, at least a little while. Andrew 10:37 Yeah, I’m in the camp of if it doesn’t generate if it doesn’t produce anything; I’m not interested in only that I want assets that produce. So like Buffett calls a farm or business, you know, in my case, I’m not buying farms. So I’ll buy stocks. Dave 10:52 That’s a good point. So I guess, did we go there with crypto and whether that’s a replacement for something like this? Andrew 11:00 I guess people have made that argument with Bitcoin, that it’s digital gold. And I don’t really have an opinion here or there on it that would be any more credible than anybody else. I think there’s a lot in the crypto space that actually probably will be productive one day. But there’s so much more that’s not that you better be like an expert in that stuff, or don’t even touch it. Dave 11:23 Exactly. We’re definitely very early innings with crypto and all the use cases that could come out of it. But I think one thing that we’ve learned over the last, I guess, year or so is that it moves in tandem with the stock market, at least at this point. And so the idea that it was a digital gold or that it would be kind of de pegged, in other words, it wouldn’t move in the same way that the stock market moves. It’s kind of proving that maybe that’s not necessarily the case. So it’s early innings; I’m by no means an expert. So you kind of take that for what it’s worth. I guess one nugget I would like to throw out there for you, Crystal, is we did an episode back in August of 2021 with Martin KATUSA. And he’s a really smart guy in precious metals and just metals in general. And so he would be something that if you wanted to learn something about, I think he does YouTube videos as well. And so he would be a cool person for you to check out. If that’s something you’re really interested in learning more about, I would highly recommend him. Andrew 12:22 Awesome. Well, let’s move on to the next question, then. So this one, this person says hello; Dave and Andrew have a question. I know one of Andrew’s hard and fast rules is to sell if the company has negative earnings. But would you sell immediately even if you’re at, say, 20%? Loss? So I guess the first part of that question is kind of addressing me; the easy answer is yeah. Dave 12:45 Would it matter if it’s a 20% loss? Or would it matter if it was, you know, a 5% loss? Or would it matter if you were up 10% And they had negative earnings? Would you still say bye-bye? Andrew 12:57 Yeah, so it’s not what the stock has done that’s making me want to make a sell on negative earnings. It’s simply the fact that negative earnings historically have been tied with bankruptcies. So an overwhelming majority of the major bankruptcies we’ve seen in the last 20-plus years have also had negative earnings. And the simple idea that why do companies go up? Why does the stock market grows because companies are growing? How do companies grow? They take their profits; they reinvest them, and those profits become bigger profits. When you take profits, you reinvest them. And now instead of more profits, you have negative profits, you did something wrong, most likely, sometimes it’s not your fault, right? The market can, or the economy can be brutal, you know, and one day, I may make an exception for the exceptional company, but I haven’t found that to be the case yet. And so I’ve sold every time I’ve seen negative earnings because I want to compound. Dave 13:57 Just to clarify, it’s not like a quarter of earnings. We’re talking like a full calendar of 12 months straight of negative earnings. Yes, thank you. Some people may think, oh my gosh, you know, they had one bad quarter, and he’s dumping the company, you know, it’s like 12 consecutive months of negative earnings. And in sometimes that could be, you know, two quarters or Okay, and then the other two are really bad. Something like that. I you had to sell Disney. I think it was not too long after the pandemic started because they shut all those parks down, and they ended up having negative earnings for the year, and you had to sell them. I that. Andrew 14:29 Yeah, that one in particular. They basically said that we had made these capital outlays. I think it was related to their amusement parks. So imagine you spend $2 billion or whatever it is on these amusement parks, and you’re expecting cash flows to come from that; the capitals aren’t coming in. So the amusement parks are just sitting there rusting. So you know that the 2 billion we just spent is lost, that’s not going to compound. So their stock price, I think, kind of followed the idea; it’s been flat because they haven’t had much free cash flow. Dave 15:03 Exactly. Those are great insights. And that’s a great way to think about it. So all right, let’s tackle the second part of the question. So what if you see something you don’t agree with in a voting proxy, and you are totally against it and feel good overall, hurt the company? Not today or tomorrow? But if the wrong person steps in, would you sell for a loss? So what are your thoughts, I guess? Let’s talk a little bit about voting proxy and maybe how that impacts our decisions to continue to own or not own the company. Andrew 15:31 Yeah, so a proxy is a form that management sends out to shareholders every year; there are a bunch of details in there. But the details, I guess, that I tend to care about is who are the board of directors and who owns how much of the company; those details tend to be in there. So as an example, if we were to take Berkshire Hathaway, as an example, Warren Buffett is the CEO and chairman of Berkshire Hathaway; he also owns 30% of the stock. So for whatever reason, Buffett decided he didn’t like himself; as CEO, he could vote people onto his board of directors, and then the bar directors would pick a new CEO, but because he owns 30% of the company, he has 30% of the vote for who is on the board of directors. And then, you know, he basically can decide, keep himself a CEO, because he has a pretty strong vote there. But that’s kind of the idea, if you think about checks and balances in businesses, is you have the shareholders who have a voice. And then you have a board of directors, who a lot of times can be more independent. So they’re almost like an outside third party to basically, I won’t say, like regulate, but basically, keep the CEO able. So if the CEO messes up, the board of directors can do something. And if the Board of Directors messed up, the shareholders can do something. So those details of how that kind of goes and who’s been reelected every year for the board. That’s all in the proxy statement. Now, do you want to tackle the voting proxy, that’s the overall proxy, and then, as part of this whole process, every year, they’re doing the proxy, they’re electing the directors, they also will hold shareholder votes. So every year, shareholders will vote on pretty standard things that tend to be just voted through all the time. For example, did the CEO earn his compensation for the year? Or do we approve his compensation package? Most of the time, shareholders will vote yes; yes, he did. Or she did. But sometimes, you do see; actually, shareholders vote no if they feel like the CEO did a poor job. That’s one way that shareholders can police themselves against the CEO who does a bad job by not approving their pay package. Other things that they’ll vote for would be to change the structure of the board of directors, change how they meet, change who the company’s auditor is, and the ing firm that that looks at the books. So it’s a lot of jargon, a lot of stuff that generally just kind of gets flown through no problem. But you do see the occasional company, which is something I ran across with my investment and Griffin, where you get into a proxy fight. And so somebody who’s a shareholder who owns a significant stake can basically propose a vote that other shareholders can vote on. And so you basically say, hey, I want the board of directors, or I want the CEO to be doing this. And then they’ll send out proxy vote materials, and then everybody votes. So I don’t know if that kind of explains how that process works, hopefully, on the surface level, without getting too into the nitty gritty. Dave 18:54 I think it definitely does. Didn’t add this last year with the Berkshire meeting. I think one of the larger shareholders; I think it’s a pension fund. I think they were pushing to get Buffett removed, as was the CEO or chairman, or maybe it was both. I can’t what, but it was kind of comical. Andrew 19:13 Yeah, I think they wanted to split. And they said that Buffett should not be the chairman and CEO. It should be two separate roles, which is completely ridiculous because it’s Buffett’s company. And there’s a ton of Chairman CEOs out there. It’s not like this is an uncommon thing. And it’s not like Buffett has done a bad job like he’s been trouncing the s&p, especially lately; it’s just an absolutely ridiculous idea. Dave 19:37 It’s pretty comical. So I guess let’s ask the question, then. Let’s say that you see something in the proxy or you read about it from other shareholders. Would that be something that would give you pause to continue to own a company? Or would it be something they’re like I’m out, you know if they vote something like that in as whatever it may be? Andrew 20:00 Yeah, our favorite two words over the last few months, right? It depends. So I’ve seen, I don’t know, I get so into the weeds with this stuff, like, I just don’t know how applicable this for, for the average investor, but I’ve seen like board structures where there’s like a document that tells you how all of the details of the board go and how they get elected and all of these things. And so sometimes the board can be designed to basically keep the CEO and his buddies all in place. And so even if you are a shareholder who comes in and makes a big ruckus about it, you can make the ruckus, and we can do the votes. But it actually doesn’t mean anything because he and his buddies still have their committee that decides who the CEO is; I’ve seen I’ve run across that. And so I did not sell a stock exactly because of that. But as one of many factors is kind of how I saw it, where, and I’ve said this before, but basically, if you’re a manager, or a CEO, and a company I’m investing in, I’ll give you the benefit of the doubt, right? It’s like innocent until proven guilty. But once you make a questionable decision, and a huge capital outlay that looks questionable, or did not perform well, or something in that nature, or he didn’t have a good track record. Now, as a shareholder, you’re starting to think, Okay, this guy is obviously screwing up. Is there going to be somebody that comes in and replaces him? And then if you dig deeper, and you look into the proxies, and you see that, actually, there’s no way for somebody that come in and clean things up, then that’s probably a situation where you’re gonna want to sell. But it’s because you have both the entrenched management and you have management doing bad financial things and not allocating capital. Well, I do invest in companies where it’s like, basically like a family business, and they have majority ownership, and they’ve locked that all up. And there’s nothing you can do about it if you don’t like it other than walking away and leaving. But they have good track records. I like the way that they present themselves. And I trust the things they said, and I’ve seen them do good with the money, and I trust they’ll do that in the future. So that’s why I say, you know, solely on the proxy statement, I wouldn’t sell or do anything crazy like that. But it could keep me from buying. But you do want to factor them as one of the other factors and kind of paint the whole picture. Rather than make a generalized statement, I would agree with, Dave 22:31 I think one of the things you have to think about is you have to kind of keep it all in relation to the overall company. And when you buy a stock, you’re buying a part of a business. And part of buying that business is Pai is buying the management that’s going to be running it, and you have to trust that they’re going to do what’s best in the best interest of you, as well as the business. And if they’re just looking out for themselves, you’ll discover it pretty quickly; you’ll see it either in their compensation packages or the way that maybe they glorify themselves above the business; there are all kinds of ways that you’ll discover all these things that it’ll become evident. And then you can decide if that’s something you want to continue to have your money involved in or not. And it’s all part of the package. Sometimes you can have a great CEO but a horrible business. And sometimes it could be vice versa. It was that phrase by a company that’s so great; a monkey could run it because someday one will. So it’s kind of that idea. And it’s all part of the learning process. And I think really, the only thing that would really ever make me go out is if the company is obviously doing poorly and is losing money. And the management is voting themselves huge pay raises, you know, something like that would tell me that, hey, these people are just trying to glorify themselves on the way out of the business as it goes, you know, to zero. And I don’t want to be involved in that. Because, you know, they’re obviously not trying to turn around the business; they’re obviously just trying to suck as much out of it as they can. And that’s, unfortunately, this is a, I guess, a generalization. But if you see a CEO or management team that job hop, a fair amount, kind of, I guess, be a little bit wary, if you see them come in, like if you notice that their track record is that they’re with a company for three or four years, and then they come in and they’ve done that a lot, chances are they’re not going to be with that company that you’re talking about for a long time. So it’d be something you’d want to kind of keep your eye on to make sure that you know, let’s say that this the industry standard is the CEO gets 2 million a year, for example. And all of a sudden, this guy’s granting himself 14 million a year, including all of his options and stuff. He’d be like, you know, maybe not. So, again, those are all part of learning about the company and understanding the management and how they pay the management. And those are all parts of checklists that you can add to help you kind of weed out some of this stuff. You should vote. Anybody that owns stock has the ability Need to vote. And it’s super easy. Now you can literally do it through your brokerage . I did this last year through fidelity, and it was a breeze; it just went on there and clicked a button and voted; it was super easy. So, you know, it’s what we pay for is one of the rights to do that. So I strongly encourage you to do so. Andrew 25:17 I would say, again, the danger, insane generalities. But in general, the bigger the company is, the less of that you’ll see; almost like some of the really small companies, you have to be careful because the CEOs can kind of skate under the radar and pull heists like that, or they are just pillaging the company. Eric’s line kind of talked a little bit about that with our interview with him way back in the day. So something to keep in mind. I think it’s good that he’s, you know, this listener is looking at the proxy, but at the same time, don’t get so caught up in it. I think the business is the most important first and foremost, and then innocent till proven guilty unless something looks completely egregious like just because managers paid a lot, I wouldn’t necessarily disqualify a company for that. It would need to be multiple factors 26:06 Good. Good points. All right, folks. Well, with that, we will go ahead and wrap up our conversation for this evening. If you have any questions about anything that we talked about today, please check out our website e investing for beginners.com. We have a great search bar at the top of the page that can help you find all sorts of topics that we discussed today. Proxy statements and things of that nature to help you learn a little bit more about negative earnings, for example, all kinds of stuff that you can learn more about, and it can help you on your investing journey. So without any further ado, oh, good and sign us 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. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post IFB237: The Impact of Proxy Voting and Investing in Money Losing Companies appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we chat with Ferdi from the Dividend Growth Investor: How did he get started in dividend investing, and why dividend growth investing? How does he finds companies to buy, and what his criteria for investments are based on? The differences between Dividend Aristocrats and Dividend Kings What kinds of resources does he use to find the best investments How he handles dividend cuts and portfolio management The importance of changing your perspective and investigating other approaches You can find more from Ferdi here: Dividend Growth Investor @dividendgrowth Dividend Growth Investor on Seeking Alpha Portfolio-insights.com Today’s show is sponsored by: BetterHelp 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 I love this podcast because it crushes your dreams and getting rich quick. They got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast by Andrew Sather and Dave Ahern with a step-by-step investing guide for beginners. Your path to financial freedom starts now. [00:00:00] Dave: All right, folks. Welcome to Investing for Beginner’s podcast. Today. We have a very special guest with us today. We have Ferdi from the Dividend Growth Investor. He’s ing us to talk about, I know, shock dividends and other great stuff. Ferdi has been writing for Seeking Alpha and his blog, and also new outfit portfolio insights. And we’re gonna be talking about all those great things, as well as dividends. I know, big shock again, and this is gonna be Andrew’s favorite episode ever cuz he loves dividends as well. So Ferdi, thank you very much for ing us today. We know it’s very, very early where you are. You’re in the bay area. So it’s what seven o’clock in the morning. So we appreciate you getting up this early to come to talk to us. [00:00:37] Ferdi: You’re welcome, and I’m happy to be with you guys. Awesome. [00:00:43] Dave: Well, I guess, could you kind of, maybe we could just start off like, explaining how you got into dividends. How did you get into investing in dividends? I’d really like to know that story [00:00:52] Ferdi: Well, in 2002, I came to the United States from South Africa to Pixar, where I’m currently working as an effects artist. And we basically started over, you know, I just turned 40 at that point. And you know, we, we realized we have to start thinking about saving for retirement. And so we took a financial course, and in the beginning, I didn’t know anything, you know I. Do you know what a mutual fund is? Well, then I, I, I would just Google that and, and learn that way over time, just that came up, that I just didn’t understand or know about. I just did research. And then I started, you know, just following some newsletters, investing actually more. Trading. And then, I discovered the idea, the concept of dividend investing about 2012. And that just made total sense to me, and I stopped trading, and I started thinking more about long-term investments, quality stocks, and so forth. I followed some other dividend growth bloggers. And then thought it would be a good idea for me to track my own progress and write my own blog; never written a blog before. And so, I started DG grow in 2013, and you know, I’ve been almost ten years now. [00:02:21] Andrew: Wow, so you’re a designer, a writer, and an investor. You have many talents. [00:02:26] Ferdi: Yeah. And, you know, and a computer scientist and a, and a visualization expert and things like that, you know, but it’s you know, it’s, it’s a fun hobby. It’s, you know, it, it’s an interesting way of thinking. It’s a way to sleep well at night and not worry about what the stock market is. And things like that. So that’s why you know, I love dividend growth investing. [00:02:50] Andrew: Oh, I mean, I love it too. I think people will love this episode with just the, I, the fact that you’re a hobbyist, you’re doing it on the side. You’ve been there. You’ve been doing it for a long time. There are obviously lots of different reasons to get excited about dividend growth investing. If you had to laser focus on one or two, that just makes you the most excited. This kind of investing style. How would you describe that? [00:03:18] Ferdi: Well, for me, it’s really about growing an income stream. There, there are two components to dividend growth investing. Obviously, one is dividends, you know, you get paid for owning a little share of a company, which is so cool. You know, if you, if you own ten stocks, you own pieces of 10 companies, which is, which is. So I own a little bit more than 10, but, nevertheless, it’s, it’s fun to drive by, say, McDonald’s or Home Depot and know that you own a piece of that company. But the second component is the growth component, and you know, IVA, dividend growth companies, meaning these companies pay dividends, but they also raise their dividends every And so you have this built-in income growth, which is, which is super awesome. And it just means that you are almost guaranteed to raise every year, and you can make money. You can increase your income. You can invest more using that dividend. And sort of do compounding in two, you know, in two ways. You get the growth from the dividend growth stocks, but you can also get growth by just reinvesting that income flow into more, more stocks. And it’s sort of a double-compounding EF effect, which is fantastic. [00:04:45] Dave: Yeah, you’re, you’re speaking to Andrew’s love language, cuz that that’s, that’s what we’ve been talking about for almost five plus years. So it’s, it’s nice to hear it. It’s nice to hear it from another voice, that’s sure. [00:04:58] Andrew: Do you find that there are misconceptions around dividend growth and investing things that investors should think about? Use it to maybe pay more attention and not write off dividend growth and investing as some stereotype. [00:05:22] Ferdi: Well, I, I think one of the, one of the things to really understand is that there, you know, as I mentioned earlier, there are two components, and as a, as a beginner, I made the mistake of chasing yield. And I think a lot of dividend beginners and dividend growth investors make that mistake. And it turns out that you know, about you know, a very large percentage of very high yielding stocks are actually not very good stocks, you know, very high, you know, high-quality stocks still. So it’s really important to see the quality. In in, in, in dividend growth, because the idea is to try and invest in something for the very long term, you know, years, decades, you know, if you, if you have that long. And so it’s important to choose the best, the highest quality stocks. And I think the other component to this is that you want to try and stay with a company and stay with the stock because that gives you the best opportunity to, you know, to grow your income stream. And you know, I think if you come to dividend growth, investing with a, with a trader’s mentality, then, you know, there are things that are at odds. A trader wants to, you know, buy low and sell high. A dividend growth investor wants to buy low and collect income, you know, from a sort of a value standpoint that gives you the best opportunity to grow. But for me, I would rather buy a high-quality company even at a small than buy a substandard or mediocre company at a discount. For this reason, is that you know, you’re gonna be in the stock for a very, very long time. And with high, you know, with, with high-quality dividend growth stocks, the so-called blue-chip dividend growth stocks, they rarely trade at a, you know, at a, at a huge discount, just precisely because they’re, they’re really good stocks. And as soon as their yield climbs, people get into it and drives and drives the yield down And so, therefore, you know I have a, I have a system where I, where I look at the quality, you know, through a, through some metrics do a quality assessment and for the highest quality stocks, I’m willing to pay up to 10% above fair value. Because I realized that to get into those very high-quality stocks, you have to pay a bit of a . [00:08:00] Andrew: Can you give us an example of your mentioned metrics to determine quality. Can you give us one example of that? [00:08:09] Ferdi: Yeah. There, you know, there are different metrics. I use a system developed by a Seeking Alpha author called David Vanette. And he had this snapshot quality, quality assessment. Uses five metrics. And over the past three years or so, I’ve really grown to trust this system as a way to filter really good quality stocks things like the S and P credit rating Morningstars, moat rating line has, has. Quality metrics that contribute to this, to this score. And then one that I’ve also grown to trust a lot is Simply Safe Dividends dividend safety score. So there are five of these, you know, five of these elements that contribute to making up a score that I then utilize to, to fit, too, too, to pick candidates for investing in. [00:09:07] Andrew: So you’re leveraging other people’s ideas, and research sounds like it would save a lot of time. [00:09:13] Ferdi: Oh yeah. You know, as a hobbyist, this is not my full-time job. Right. So I think it’s important to look at resources, you know, that, that, that are available and use them as, as smartly as you can. Even, even for. Assessing a company’s fair value. You know, I’ve in the past, I’ve done, you know, the dividend discount model and so on ways, but I’ve, I’ve realized, and I’ve found that for the type of research that I want to do, I want to look at hundreds of companies and to do that kind of analysis on a hundred plus companies is, you know, beyond. My ability and time. But there are great resources out there that publish their assessment of fair value. And if I can access those trusted third-party sources and their fair values, I can create sort of a survey approach to fair value assessment. And that’s what I do. [00:10:18] Dave: Yeah, that’s interesting. So, I like the way that you’re using those resources to help you get to where you need to go. So I guess if, if we’re, if somebody was to come to you and say, I wanna start building, you know, a dividend growth portfolio, how would I start? How would somebody start, you know, deciding what companies to look at and then, you know, kind of going from there? [00:10:45] Ferdi: My first inclination would be to, you know, to just read a lot, you know, Seeking Alphas, a fantastic resource. There are other similar resources just read about, you know, dividend growth, investing, follow a few bloggers as I did in the beginning. And See what they do, see how they do it and what their approach is. One of the exercises that I did along the way that I wrote articles about is to survey other dividend growth bloggers. A lot of them actually publish their portfolio. Mm-hmm right. Like I do, I have a public portfolio. People can go and look at what I own and what other different growth bloggers do. And you know, people that have been long, you know, for in this, in this sort of dividend growth investing for a long time have established portfolios. And so what I did is I just surveyed all of them, made a giant spreadsheet, looked at which stocks are more, most popular, and those become great candidates for, you know, for further research. That’s how I would start. And then, you know, start small, you know, buy one stock and you know, when you have, when you have money next month, you know, buy another stock and so on slowly build up your portfolio over time. You’re not gonna get to 24 or 40 or, or a hundred stocks immediately. But that’s what’s great about investing; you can just bide your time. You know, and add slowly and learn as you go. I’ve never been a proponent of making a watch list. I like to dive in and, and, and, and get hurt when I make a mistake, cuz that’s how I learn best. [00:12:34] Andrew: Yeah, don’t we all, don’t we all. So, you mentioned the portfolio. Can you give us an example of one of the names in there that really excited you or really excites you when you think about it today and why? [00:12:50] Ferdi: Well, my favorite stock right now, for various reasons, is Texas instruments. TXN. Preach great company and great management. They are, you know, they’ve been around since the thirties, 1930 they’ve changed the business model significantly over that time period. And then and now they are really focused on, you know, on increasing free cash, which, which is the most important component for, for dividend growth. And for the state, you know, for shareholder-friendly operations, they’ve bought back shares for a long time. And you know, they’re a really good company [00:13:33] Andrew: For somebody who’s newer into investing. Why is free cash flow so important? [00:13:41] Ferdi: well, free, free cash flow is really, the money that the company has available to either grow their own business or to, you know, or to return to, to to, to, to shareholders. And. The ability to generate and increase over time, slowly increase the free cash flow is, is, is one of the best measures that, that you could look at when, when you’re considering a candidate company, you know, I think earnings growth is important. Revenue increasing revenue is important, but in the end, it is. What the company retains once they, once they have disposed of all the responsibilities that, that, that that determines how much they can pay in a dividend or how fast they can grow that dividend. [00:14:38] Andrew: It’s really not reinventing the wheel. I mean, you mentioned some of the resources; I’m familiar with all of them. Those are some good resources. You’re mentioning metrics yield. Free cash flow growth. These are all pretty fundamental stuff. And it sounds like it just kind of works, right? [00:15:00] Ferdi: Yeah. You know, there, there are obviously other metrics that I, that I look at, you know, for a company, for example, the sustainability of their dividend depends on how much of you know money, they assign to the dividend. So if you take the dividend and divide it by the earnings, you get the payout ratio or dividend divided by free cash flow. You get a payout ratio that payout ratio cannot, cannot be too high, because if they, if the company, for some reason, internal or external, run into a problem. And they don’t generate enough earnings or enough free cash flow. For a few years, then their dividend would become, would come under pressure. So free cash flow is one of the metrics that I look at, but like I like to look at consistency. You know, consistency is, for me, the most important thing that I look at. You know, if I look at a ten-year graph of earnings, I want to see it, you know, consistent growth in that, in the earnings, the same for revenue free cash flow doesn’t need to grow, but it needs to be you know, it needs to be positive for most of the, of the ten years. And then things like, I really mentioned the dividend safety score, somebody else from have. You know, I have a system and a service that you can subscribe to and get safety scores. I trust that source is a good third-party source for assessing safety. And so I look at that, you know, then things like yield and the dividend growth has proven dividend growth over the past five years. Those are important components. And one of the metrics that I then use is and, and this is an old Seeking Alpha trick, is to add the dividend yield and the five-year dividend growth rate together, to come up with a so-called chowder number. And the chowder number tells me. What I can expect from a dividend growth stock over the next few years is a high chowder number means, in all likelihood, this stock is gonna, is gonna do well. And then there’s something like the called five-year yield on cost calculation, which is basically just a metric that says how high can my yield on cost grows. If I invest in the stock now in five years, that number is important for me because I want my portfolio too, you know, to generate income, but that income needs to be high enough. And so I look for at least a 4% five-year yield on cost. In other words, all the stocks that I invest in. In five years, I want at least 4%, hopefully more but yield on cost of at least 4% in five years’ time. [00:18:08] Andrew: So how do you approach it? You mentioned the dividend consistency, raising it every year. How do you approach a company in your portfolio? And if you have a specific example, that would be awesome. Who either cuts the dividend completely or. Pauses their growth. How do you deal with that kind of situation? [00:18:28] Ferdi: I’m fairly brutal when there’s a cut, you know, company that cuts. I feel, I, you know, I got I feel in that case I’m, I might have made a mistake in of figuring out or trying to determine if this is a company that really believes in dividend growth. And paying shareholders a continually growing dividend. A company that’s that pauses or even, you know, just don’t, don’t grow their dividend for a year or two. I look at the reason for that. And so for example, one of the first companies that I invested in was Intel. And as soon as I invested it, they decided not to increase their dividend. And I thought, man, did I make a mistake here, or what’s going on? And there was a very good reason and, while published, a reason for them not to increase their dividend for a few quarters, but then they resumed, and Intel is one of my best investments because I stuck with it. Another example is CVS. They made some large acquisitions, stopped increasing their dividend for two or three years, and then resumed. And my re and I stuck with CVS and my returns are now over a hundred percent. My so-called home run, home run stock. One of my home run stocks is one. Returns all of my money, a hundred percent, you know? So CVS is one of them. And then, you know, in the, in the COVID inspired their market, a lot of companies paused, and you know, and even suspended their dividends. Disney is one of them. They decided not to pay dividends anymore, but a company like TJX. They cut. They suspended their dividend, and I stuck with him. And when the COVID, you know, when the concerns around the COVID pandemic started to ease, ease up a bit, they went back to their old pattern of, you know, paying, paying a dividend. If you look at their chart, it’s really interesting. It’s a beautiful, you know, upward. Curve, and then there’s this, you know, this one year that there’s just nothing, but I’m, I’m pretty positive that they’re just gonna continue with that. And, and, you know, if we, if we kind of put our finger over that one year, then it looks like a nice. You know, rising chart [00:21:01] Dave: So if you had owned a Disney, I guess during that period, I’m not sure if you did, or I didn’t, but if you had, would, would what happened? Cause you to say, okay, we’re done here, or would you have given them a, a because of what was going on with the business and, and then, the world at the time? [00:21:21] Ferdi: So I had maybe a handful, like five. Yeah, five or so stocks in my portfolio that suspended their dividend, including, by the way, I also owned Disney at that point. And so I decided, you know, this, the big market drop happened in late February and March. Oh, wait. I decided to wait till December and see how things turned out. One company that I did own that I never went back to was Ross Ross stores. Because it didn’t, it didn’t appear to me like they were going to resume their dividend growth history, which is so sad because they, at that point, that 49 years. Wow, of dividend growth. It’s like, why didn’t you stop one more? Just one more, and you would’ve been a dividend king. And you know so I, so I decided to wait a year, and with Disney, I also waited until the end of the year. And then it would; it became apparent that Disney was not gonna pay dividends anymore. And so I, I sold my shares. And TJX indicated that they would resume their dividends. And so I stuck with that. So of the five, five or so stocks that suspended or yeah, that suspended their dividends. I, I still own a couple. [00:22:43] Dave: So, can you, I guess you mentioned dividend Kings, can you kind of talk through like dividend aristocrats and dividend Kings for those listeners who are not familiar with those ? [00:22:59] Ferdi: Yeah, so dividend growth investing in, in dividend growth investing, we have a lot of sort of model portfolios. And the two that you’ve mentioned are, are, are St you know, are examples of, of stellar companies. Dividend Kings just broadly is 50 years of cons, you know, 50 years streak of dividend increases. Mm-hmm, that’s amazing, you know, 50 years takes you back to, you know, the seventies and, and some of these stocks. Now I think there’s one that’s now 68 years. , that’s older than I am, which is, you know, my whole life, this company has been increasing their dividends. That’s amazing. The dividend aristocrats is a, a more sort of a more select which, which sounds interesting because it’s only 25 years, but it’s, it’s a little bit more select because there are. Criteria for becoming a dividend aristocrat hip of the S and P 500 are a certain market cap and trading volume. And then they also look at sector balance and things like that. So sometimes you can have a dividend king or stop being a dividend king, but not a dividend aristocrat. People get confused about that, but there are other criteria for becoming a dividend aristocrat. And then you know, the list that you know, Seeking Alpha use s and readers would know very well is the so-called CCC list, which is dividend champions, contenders, and challengers created by the late David fish. He tracked these dividend growth companies. The dividend champions are 25 years or more. The dividend contenders are 10 to 24 years of dividend consecutive dividend increases. And then the dividend challengers are five to nine years. And we’ve been, you know, we’ve been tracking a similar list ourselves on portfolio inside site called dividend radar that is automatically generated from, from data that we get from S and P [00:25:24] Andrew: yeah, speaking of portfolio insight, can you let us know what, what is that? And what’s your role in helping with that? [00:25:33] Ferdi: So, a few years ago, I was approached by the founders of Portfolio Insight. And we collaborated on creating a dividend radar. They were interested in, in my, you know, by that time, my expertise in dividend growth stocks. And so we, you know, I helped him to create dividend radar. Because the one thing with the CCC list is, you know, it’s a manual love of labor, but there is, you know because it’s such a, you know, such a large number of stocks we’re talking about over 700 stocks, it’s really hard to do that manually. And so the founders of Portfolio Insight had a very good engine that they could utilize to create something that’s automated. And so now we produce dividend radar on a weekly basis, and it’s updated every Friday. And it’s automatic, you know, which is great. And there are rules for hip of dividend radar and, you know, we have a very little manual in input or in, in, you know, in insight into how that is generated. It’s just based on these rules, which makes it easier to some extent to track, you know, dividend growth stocks, and that’s published, and it’s freely, freely available to anybody who wants to it. [00:27:00] Andrew: So what’s the URL for that for people interested? [00:27:03] Ferdi: The Portfolio Insight is portfolio-insight.com. And then, you can just look at one of the tabs at the top. Dividend, you know, dividend radar. [00:27:18] Dave: That sounds like a great tool. That sounds like that would be very helpful, especially for people that don’t have a lot of time to sift through 700 companies to decide, decide which one’s gonna be a good fit to yeah. To do some research on. [00:27:35] Ferdi: Yeah. And yeah, the spreadsheet that you has, you know, a lot of metrics that, that, that is useful too, to, to do a. You know, a sifting of, you know, of companies that match certain criteria. So we, you know, we have a lot of people that actually use that data. And then, you know, portfolio inside kind of you know and they, they continued, you know, we can continue our collaboration, and I advised them on creating. These are the kind of tools that I, as a dividend growth investor, would like. I’m a very visually oriented person, so I concentrated and helped them to create some really good charting, charting tools, and things like the dividend yield channel, about which I wrote an article on Seeking Alpha a few years. The idea with dividend channels is it gives you a sort of a channel of overvalued and undervalued regions. And as long as the stock, you know, is inside of that channel, you know, it’s, it’s a, you know, it tells you that you can either, you know, holds the stock or, or don’t buy. But when it goes outside to the, to the lower side, it means now it’s an opportunity to buy the stock. So, you know, because I’m a visual person, I look at charts a lot just to see, you know, consistency, momentum, and so on. And with a dividend yield channel, for example, it tells you, Hey, this is a great opportunity to buy this stock. Reversion to the mean this whole idea that with a dividend growth stock, if the yield goes too high, people are gonna start buying the stock, and it’s gonna force the yield back down. Reversion to that means is, is a, is a, you know, is a so-called dividend yield theory principle that a lot of people have built investment services around. [00:29:37] Dave: Yeah. That’s cool. [00:29:43] Andrew: I like how it, you know, you mentioned it’s on the chart, and it’s, I I’m trying to visualize, I’m basically visualizing almost like a channel. And so it kind of implies that these values are changing over time as the financials inside the company change. So it’s not like some static thing when it comes to. Evaluating stocks. It’s, it’s something that’s dynamic, and it changes. And it’s good to have those updates when things do change. [00:30:15] Ferdi: Absolutely. You know, there’s a similar chart built around earnings, right? And every quarter, a company comes out with new earnings and also earnings estimates, you know, for the, you know, for the next one or two financial years. And as we get those earnings with portfolio insight, it updates the chart, and it tells you whether, you know, with the new earnings, it is still a good company to be in, or maybe a good company to invest in? Again, visuals for me is, is really important because I can look at a lot of stocks, you know, 10, 20 stocks quickly and, and just kind of browse. You know, load a ticker and keep it on the same chart and then just load new tickers and, and see the same, you know, see the same chart for, for a selection of, of candidates that I’m interested in. And, and that’s, you know, that’s really helpful to me. Numbers, you know, numbers talk, but you know, there are ways of visualizing those numbers that, that make it easier for us humans to, to understand what’s up, you know? [00:31:23] Andrew: Yeah, totally. Do you have any parting wisdom for somebody? Maybe they’ve, you know, you have a long experience doing this, so I’m sure there’s gotta be ebbs and flows when it comes to. Doing this as a hobbyist. Do you have any parting words of advice for somebody who’s maybe further along the path and they’re frustrated or discouraged for whatever reason? Have you ever been there, and what would you say to them? [00:31:52] Ferdi: Well, I, you know, I think there’s maybe two, two components to that answer. One is if something is not working, change, change the change, your approach. If something is working, but then there are external forces that are, you know, that are attacking your strategy, stick with it. You know, if it, if it’s working and you’re confident in that strategy, just stick with it. Be patient, you know it’s you know, it’s like the old joke is how do you eat the elephant? Not that I, not that I eat an elephant, even though I’m from Africa, but how do you eat an elephant? Well, you know, one bite at a time. So with dividend growth investing, it’s, it’s a really long-term game, you know, just one step at a time, one bite at a time, and just be patient, you know, but if your strategy is not working. Then investigate other approaches, determine if your approach is maybe fall falling short a little bit, and make an adjustment. And then, you know, once you’ve made an adjustment, give it, give it some time, right? You bid some time to play out and be patient because that, you know, dividend growth investing is a, is a very patient and a very long term. And don’t worry about, you know, the traders that are making, you know, hundreds of percent on a, on, on a, on a trade in a, in a, in stock, they are also losing, you know, hundreds of percent sometimes. So you know, it’s interesting to hear, you know, somebody made seven, six, 700% on a stock. That’s not a sustainable thing, at least in my experience. So I’m much rather be sleeping well at night. And not look at what the stock market is doing every single minute of every single day. Because quite frankly, if the stock market takes a dive of 10, 15%, that’s a good time for a dividend growth investor because you can buy more shares for the same money. Then you did yesterday when everything was more expensive. So from that point of view, I think dividend growth investing is, is, is great. It, it, it, you know, you, you just don’t have to look at the stock market every day. And you can, you know, you can be, you can feel safe with dividend growth [00:34:28] Dave: and yeah, that, that’s, that’s some amazing advice. [00:34:35] Andrew: I agree; well, Ferdi, we wanna thank you for being generous with your time and all of your insights. It was really a great conversation with a lot of great advice, and I know people will get value from it. So you mentioned portfolio insight, portfolio, insight.com. Where else can people learn more about you and the things you have going on? [00:34:56] Ferdi: My blog is at, at dev grow.blogspot.com, and you know, people can look at what I, what I do. I publish articles every week on my blog. Some of them obviously are links to Seeking Alpha articles, but I have a monthly review of my portfolio. I just wrote one for July. It has a lot of charts. So for us visual people, it’s, it’s fun to look at. [00:35:23] Dave: That’s awesome. Well, Ferdi, again, thank you very much for your time today. We really do appreciate it. And thanks for all the knowledge that you share, not only with us but all the people that read your blogs. And I know they’re getting a lot of great value from all your insights. So we appreciate all that you do, and we appreciate your time today. So thanks again for ing us. And I guess without any further, I’ll go ahead and sign us off. You guys. Go out there and invest with the margin of safety emphasis on the safety. Have a great week. We’ll talk to y’all next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post Discussing Dividends with the Dividend Growth Investor appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we take a bird’s eye view of IBM: We talk about the top line or revenue growth of the company Next, we discuss the operating margins of IBM Andrew and I talk about the different margins of companies, ie. Visa and Costco We look at the acquisitions and cash flow statement for IBM Final verdict on an investment in IBM 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right, folks, welcome to Investing for Beginners podcast. Tonight, Andrew and I are going to do a bird’s eye view of IBM International Business Machines; we’re going to talk about the company a little bit, maybe some things you can look for, talk a little bit about a hurdle rate for me, that would prevent me from looking further into a company like this possibly. For those of you new to the podcast, we might discuss some things that are a little above beginner today. If you are not familiar with these , please check out our episodes 43 through 47. These are a great foundation to give you a base for learning what stocks are and all the great stuff. And that’ll help give you a better understanding of what we’re going to discuss tonight. So without giving it away yet, I thought we could talk a little bit about that. So Andrew, what are your, I guess, initial thoughts on IBM? Andrew 0:50 So similar to what we discussed in the first bird’s eye view, which was Walmart, I want to look at the company’s top-line revenue, and I want to see growth and growth that’s tracking pretty well. And so when I say pretty well, I mean, it’s at least getting close to GDP or somewhere around there. And that’s in most of the cases. So when I look at IBM, that’s definitely not the case; there seems to be this very long-term trend; if I pull up on quick, fast on that from 2012, all the way down to 2021, revenues went in half. And that line has looked pretty consistently lower. I mean, there are a few ups in there. But it’s not a good trend, at least over the last ten years. So for me, that’s something that I don’t consider further when I look at a company like this. But what stood out to you when you first pulled up IBM? Dave 1:45 Well, that obviously was one of the first things that I noticed right away because when you look at the income statement of a company, that’s obviously the top line is the first thing you’re going to notice. And I’m looking at a smaller snapshot here. So I only had like five years to look at. And it was down a fair amount in the five years. So that wasn’t encouraging. But it may not be a deal killer quite yet. But as I look farther down the income statement, so as we kind of go down the income statement, and you talk about the revenues, the cost of goods sold, which are what it costs for the business to, you know, generate those sales in materials, typically, or things of that nature. And then, we look at the operating expenses. Such things as r&d, or SGMA, which stands for selling general istration or marketing. So any of those kinds of things, those are generally what you look at to kind of determine the operating income of the businesses, so you take the cost of goods sold and the operating expenses. And that’s how much it takes for IBM to generate revenues. And that’s the profit that they have left over after they pay for those expenses. Because every company, as great as they are, including Apple, has to pay for those expenses to generate the revenues that they do. And so it’s also a bit of a proxy, if you will, for free cash flow. And we can talk about that a little bit later. But when you’re looking at a company, one of the things that I always try to want to look at is see if the company is profitable on an operating income level, and then I also want to see if that’s going to generate if that’s going to translate into free cash flow. I don’t; I personally don’t look at earnings a whole lot because there could be some gobbly gook in between the operating expenses and the net income that can sometimes make it a little questionable. And I’m not saying that there’s out-and-out fraud, but there’s just that sometimes things can be manipulated a little bit. So anyway, when I’m looking at a company like IBM, the first thing that jumps out at me when I look at the operating income is I see their margins. And their operating margins have dropped from 17.7% in 2016 to the latest 12 months at 11%. That’s not a good sign. And so it kind of matches that the revenues are going down. But here’s an interesting thing. If you look at the percentage of the year-over-year change, it doesn’t match the drop in revenues, which tells me that they’re not controlling their expenses very well. So, in other words, when revenues drop, they’re not adjusting for that in the other expenses that cost them to run the business. And sometimes things like r&d will fluctuate a little bit or may even be going up if the company is really trying to ramp up a product or a project or something. I get that when you see those numbers consistently going up versus the revenues coming down. That means that the operating income that the company generates is going to be on a steady decline. And that’s not something you want to see. So for me, if I was, you know, screening for companies, and I saw something that like I do with IBM that would be from yard . I’m like, Oh, we’re done here. I know. Need to dig any further because that’s not what I want to see. Andrew 5:03 It makes sense. You know, I’m not like a growth stock expert. But I’ve kind of noticed just from afar; it seems like you want them; you generally want to see the opposite. So gross stock investors don’t really care if the margin is small, just as long as it’s getting better over time. Well, you’re describing it as the opposite case where the margin is getting worse over time. At the top of my head, I can’t think of a situation where that’s something investors want to see. No, because even if, if you’re sacrificing margin, so they say you should see revenue, going up to basically say, Hey, we’re spending that we’re at least growing sales because of it Dave 5:43 Yeah, exactly. And I’m not a growth investor, either. I certainly read about the stuff, and I understand the concepts to a certain extent. And it’s not something I generally adhere to, but one of the things that I do know is you kind of want to start to see some form of operating leverage, where you see that the company is able to leverage those costs, those expenses to generate more revenue. And ideally, people can’t see my hands here but like to see the revenue go up. And the operating expenses either stay flat or go down. That indicates that the company has operating leverage, which means that they’re able to more efficiently use the expenses and costs that they have to generate higher margins, which gives them more money to do other things, whether it’s reinvested in the company, whether it’s buyback shares, pay a dividend, depending on where the company is in their lifecycle, the world is their oyster, if they have, you know, bigger margins. And that’s what makes a company like Visa, for example, so ridiculous is that you know, they have 80, or 90%, gross 85 90%, gross margins, and 60% plus operating margins, which means they have lots and lots of money to play with to figure out how to do things. And a company like IBM is kind of on the opposite spectrum of that, right now, where you see the margins contracting, which means that they have less available money to go out and do the things that they need to do to grow. And that’s what makes it hard when you see those kinds of things. And, you know, IBM is a legacy company. I know; they’ve been trying really hard to work towards becoming a bigger player in the cloud. But Amazon and Microsoft, and Google have already kind of beaten them to the punch. And they’re kind of Johnny to come later and that but doesn’t mean it’s they don’t make good products. But you know, you can see it in the numbers. Sometimes my buddy as well, Dumbledore and likes to say that the numbers tell us a story. It’s our job as an analyst, depending on what level of analysts we are, to interpret those numbers and figure out what that story is they’re trying to tell us. And I think when you look at a company like IBM, the story is telling me that things are probably going in the wrong direction. I’m not predicting any sort of bankruptcy or anything like that. But it just looks like the company is not trending in the right direction. And that they’re either living on their past, or there are the products and services that they’re offering people just started enticing to people and are having trouble selling them to people to make it relevant. Andrew 8:14 I think it’s a great example because one of the reasons a company could have revenues that fall is because they could be splitting off parts of their business. We touched on that with the AT and T episode, where we talked about the spin-off for TNT. So sometimes you’ll see businesses do that where they’re breaking pieces off, and they’re getting smaller, but they could still be executed well if the margins are going in the right direction. So you know, seeing that not happening, at least now as we look at it today, makes for another good way to screen out for companies that maybe aren’t going to give you the growth that you’re hoping for. I like the example with Visa having a really high operating margin. So we talked about the trend and operating margin. And then we also talked about kind of higher low levels. In your opinion, which of those is more important? Is it the trend and operating margin? Or is it the operating margin level itself? Or does it depend on our favorite two words? Dave 9:10 It depends; it really comes down, I think it really comes down to the business that they’re in. And let’s take opposite ends of the spectrum. If you look at VSA, because of the nature of their business, it’s a very asset-light, very capital-light type of business; most of the foundation that they run off of was established a long, long time ago. And so, at this point, they aren’t really in a position where they really have to innovate a lot. They do to keep their edge, but they’re not really out there, really pushing to really, I guess, create something new. So they are investing a ton comparatively, and their margins are huge. Likewise, on the flip side of that is a company like Costco, which has really, really well Oh margins; because of the nature of their business, they’re a retail business that basically sells everything for was it 14% Above cost or something crazy like that, I think they have like a set margin that they offer to do really, really well. And so and that includes, that doesn’t include it compensating for employees, insurance power, the building’s an all the stuff that goes into that 14%. So I don’t know, off the top of my head, what Costco’s margins there are, but I want to say four or 5%, somewhere in that range. And maybe a little higher than that. But they’re low, and especially low compared to a company like Visa. But if you look at a company like Costco, you want to see those margins stay even or even creep up a little bit depending on whether they some of that for Costco is going to depend on their subscription model if they raise those prices, that could help them increase that operating margin, it’s a very well run company, they’re very cost efficient. And they’re very focused on that because they understand that there isn’t a lot of room for error for them because of the nature of their business. And we looked at Walmart a little while ago; they’re kind of the same kind of idea where they, they’re a low-cost provider. So, they offer things for a very, very small margin, and Amazon, their retail side, is kind of the same idea. It’s just a very, very small margin. So there isn’t a lot of room to play with. So I guess it really kind of you have to; for me, I was trying to look at it through the lens of what kind of business they operate in; if it’s a payments company, it’s going to be a lot higher than if it’s a bank. And if it’s a retail, it’s going to be lower than, let’s say, some sort of technology company and like an apple, or something or Microsoft just because of the nature of what they’re looking at. But if you look at Microsoft versus, I don’t know, CrowdStrike, CloudFlare, aka snowflake, any of those companies, then you get a better sense of maybe how they’re doing margin-wise. So that’s, I guess that’s kind of what I look at. Andrew 12:05 What about you? Yeah, that’s a great answer. I mean, I would, I would basically say the same thing, you got to take the margin in context with the other competitors and its industry. And also as IT trends between itself is it getting better, stay in the same getting worse. Those are all really important things. The only thing I’ll add is this was a pretty big epiphany for me when I realized it because Costco is a good example of, you know, their margins are so small that we’re talking about hundreds of billions of dollars in revenues every year. Now, when your operating margins like 3% on that, let’s say that’s on 200 billion, I’ll use a 2% to make it easy. That’s 4 billion, right? So if you improve that just by 1%. And what I mean by that is you get from 2% to 3%. You’ve just added another, basically 50% growth. I don’t know if those numbers make sense just hearing them, but basically, you go from 4 million to help me here, and you go from 4 billion to 6 billion. Thank you, yeah, 4 billion, the 6 billion are adding the 2 billion, which is a 50% increase, correct Visa where to go from 68% to 69%. It’s the same 1%. But because it’s startling that 68% It’s not making a difference to profit. So that it doesn’t move the needle, so that’s why with lower margin businesses, you’ll tend to see more of an emphasis on that kind of stuff. And then higher margin businesses like Netflix or Facebook, everybody’s focused on the top line, because I don’t really care about the costs, because the margins are so high that the difference in costs generally is not going to be that much. Dave 13:44 Yeah, exactly. That’s a good insight. How do you think a pricing power would impact an operating margin? Or would it? Andrew 13:52 Yeah, it would, it should, depending on the environment, right? If you have high inflation, as we’ve seen lately, you just need pricing power to just kind of keep up with inflation; then the operating margin stays the same. If you have an environment where inflation isn’t that bad, you still have pricing power. Now you get that operating leverage that you were talking about earlier, where we couldn’t see your hands, but the revenue was opening up while the expenses stayed down, and you’re getting this nice shark by mouth opening up and really unlocking. That’s where you can get the multiplication of our needs. And I know Coca-Cola in the 80s was late 80s. Through the 90s. Warren Buffett had serious growth from the operating leverage. Dave 14:37 It’s when you find a company that has that that those are some of the things that you really want to focus on. And it can help you find great investments that compound your returns over long periods of time because the market will reward companies like that. And when you see that kind of thing, and that’s something you really want to pay attention to, the pricing power directly affects the gross margin and also flows to the operating margin as well. And the more that Apple can charge for an iPhone, the more it’s going to help their operating margins and their gross margins along the way. And that’s, that can help the company really improve their earnings as well as our returns. And that’s really what we want. And that’s why finding these strong companies that have that pricing power, as much as we hate paying an extra dollar for our Domino’s Pizza, we love it when we see that on the income statement of the company because that means it’s translating to more money for the company, which means they can, if it’s good management, then it translates to better returns for the company, which in turn, translates to better returns for us. That’s why a lot of the stuff that we talk about is kind of so interconnected. You know, finding companies that have strong finance, finding companies that have strong products and pricing power, that they can improve their prices without affecting how many people buy their units, you know, Netflix, when they raise their prices? Does that really we don’t know? Does it affect how many subscribers I have? It’s kind of hard to tell right now. But that could be something that’s going on right now is that they have raised the prices over the last year or so. And they’re also losing subscribers. So maybe Netflix doesn’t have pricing power, maybe it’s not essential that we all thought it was, we don’t know. But these are all questions that you need to ask yourself when you’re looking at a company, whether it’s IBM, or whether it’s Texas Roadhouse, or whether it’s Texas Instruments, or whether it’s Costco, a, just the kind of have to, those are all questions you have to kind of try to factor in when you’re looking at it. But it also goes back to the management as well. Because if you got this great company that’s doing awesome things, and generating all this income, from, you know, a great product, a great design, a great service, whatever it is that they offer, but then management kind of mishandles, that money, then you know that great product over a period of time is not going to be so great because they’re going to have to keep reinvesting keep it where it is or to keep it better growing and make it relevant for people otherwise, that’s going to be money squandered. And that’s why understanding and having a little bit of knowledge about management and whatnot can help you a lot Andrew 17:12 to kind of take that idea a little bit further to try to unpack, like, what about IBM? Why are their margins declining? I’m not an expert on IBM; I’ve looked at the company I’m aware of generally what they do. Something that stood out to me, though, is if you look at their cash flow statement, they spent $31 billion on acquisitions and 2019. That was Red Hat. And people generally look favorably on that because they basically injected new life into an old tech stodgy company. And they finally brought something into the business that actually grows basic basically, well, if you look at 2021, they made another pretty splashy acquisition. I don’t know if it was one; I think it was several acquisitions. But basically, in the cash flow statement, it’s saying $3.1 billion towards acquisitions. And so you start to wonder, you’re talking about how management’s using money, and obviously, management’s going to do things to try to turn things around. But you start to wonder if you’re making acquisitions, and the margins not going up, it’s going down after the acquisition, if you don’t have revenue growth on that, that’s really strong and compelling. Are they potentially even squandering? What little is left? I don’t know the answer for IBM, but just in general, that could be another thing to think about Dave 18:25 That’s a great insight. And for those of you that aren’t quite following what we’re talking about, when you kind of look at the three big financial statements, the income statement, the balance sheet, and the cash flow statement, the income statement flows into the cash flow statement, which flows into the balance sheet. And so the net income that’s at the bottom of the income statement goes directly to the top of the cash flow statement. And if you follow along with us on your favorite website, whatever that might be, you’ll see that the net income matches exactly what the net income was on the income statement. And at the bottom of that is a line item called cash from operations. And that basically tells us how much money or how much cash IBM has generated from that added income from the income statement. And think of the cash flow statement; I guess an easy way to think of it. I’ve always thought of it is its kind of like a checkbook of the business. It’s the money going in and the money going out. And the money left over is money we get to use to spend on other things. And so one of the things that a lot of companies will do is they will use that cash from operations, which is kind of a quickie way of seeing what kind of cash flow the company can produce. And if we want to look at cash flow, just in general, you’re looking at cash from operations, fewer capital expenditures. And if you look at those two line items, that’ll tell you what kind of free cash flow the company is generating. And generally, once they have that number, they have choices to make. With all that stuff now, Andrew is just pointing out acquisitions. So if you notice on the cash flow statement, it’s trended downwards over the last five or six years by a lot. And that’s not good. That’s never good because the free cash flow is what the company really can reinvest back into the business. And like Andrew was saying, it looks like they’re choosing to buy other companies in an effort to try to stimulate growth. And one of the things about companies that make acquisitions, there’s the good, and there’s not so good. And there’s not a whole lot in between. And so a lot of serial acquirers companies like constellation software, or Roper technologies, or Danaher, or Thermo Fisher, these are all companies that buy a lot of companies, they have teams that work for them that their whole job is to integrate these businesses with their business. And they have systems; they have processes, they have people that have been doing it for years, decades. So they have lots of experience, they’re very good at it. And they’re also very good at finding companies that will be a good match for their company, as well as being able to integrate well with the current culture. And so it’s not just about, you know, hey, let’s go out and buy this because this will be a great addition for our business if the culture is completely opposite. And the systems are completely the opposite. It’s going to take lots of money and lots of time to integrate that; meanwhile, you’re paying for all of the costs of buying that business like they bought Red Hat for 32 billion or so and had to take on a lot of debt, to do that, as well as using some of the cash flow that they generate. So it became a very expensive proposition. And if they don’t see, like Andrew said, if they don’t see revenue growth from that in a relatively decent amount of time, then that’s not a good thing. And that’s what sets some of these companies that acquire companies and integrate them really well, apart from the ones that do not. And I think McKinsey did a study, and I think it’s what 6070, maybe 80% of all acquisitions don’t achieve the goals that the CEO state that they’re going to state, most of them are either revenue synergies, which means they’re going to be able to integrate the business and, and see a lot of revenue growth from it. Or it’s cost efficiencies, like eliminating doubled-up sectors and that kind of thing. But most acquisitions don’t achieve either one of those targets; it ends up being a costly mistake for shareholders. And that’s why companies like Berkshire Hathaway, with Warren Buffett, or Google and Microsoft, and all the other ones I mentioned, those are really good companies that make great acquisitions that do a good job of integrating, for the most part, the acquisitions, and they end up performing well for the parent company. And so I think that’s one of the things about IBM is I think the jury is still out on this Red Hat acquisition and whether it’s going to pay off for the company, and the CEO, in essence, save their bacon over the next few years or not. And I think that’s what people are kind of maybe treading water on the company waiting for to see. I don’t know; it’s an interesting observation. Andrew 23:12 Yeah, that’s a very good one, and a lot, a lot of like wisdom unpacked there. I hope people use that to look at margins, take margins seriously, and also take acquisitions seriously because they can be great ways to grow. And they can also be great ways to kill value. Absolutely. So what’s your verdict on this one? Dave 23:36 And he, it’s obviously a hard path, this is gonna be a no. And it’s kind of interesting that we chose us because I’ve been kind of starting to go down the rabbit hole of cloud providers and some of that. And so I’ve been reading about some of these companies. And this is totally anecdotal. So take it for what it’s worth. But I read somewhere not too long ago that people that can’t get real jobs like Google and Microsoft and stuff go to work at IBM. So I don’t mean to offend anybody that works at IBM. And please, I don’t have any proof of any of this. But that’s just. I read somewhere that some analysts said that about IBM. So I guess you take that for what it’s worth. A Andrew 24:11 After that type of investing, I do. I mean, I’m sure there’s going to be investors out there who can know when IBM is cheap, buy it quickly, when it’s cheap, sell it quickly when it gets expensive. That’s not really my thing. I like to buy and hold for the long term. So for me, it doesn’t for all those great reasons that Dave said. D Dave 24:28 Alright, folks, well, with that, we will go ahead and wrap up our bird’s eye view of IBM. And I hope you guys enjoyed our discussion on the company as well as the ideas behind operating margins, operating leverage, cost of goods sold, free cash flow, acquisitions, and all kinds of the fun stuff we talked about. If you are new to the podcast, we have beginner episodes that you could go back and listen to. I would highly recommend you do that just to kind of give you a good base for all the things that you’re going to learn as you listen to our show, their episodes 43 Read through 47. You can find them on any of your podcast players. And I would strongly encourage you to listen to them. If you’re like, I have no idea what you guys were talking about tonight, that will help give you a good basis to kind of start learning about the stock market and everything that we are trying to teach. Also, we have a website, einvesting for beginners.com, that has this huge search bar at the top that you can not miss that has; you can find almost everything that we talked about today on our website, operating margins, operating leverage acquisitions, we have articles about all that stuff to help you learn a little deeper about some of the things that we talked about. You can add those to your toolkit of analysis. So I hope that helps you guys. And without any further ado, I’ll 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. We’ll talk to you all next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post Bird’s Eye View of IBM appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we chat with Nick Maggiulli, author Of Dollars and Data and the new book: Just Keep Buying: What drew him to dollars and data, and why did he start his blog, Of Dollars and Data? The impact of fees on long-term results How to improve your savings rates and some of the things holding people back from saving more Nick discusses the importance of raising your income Nick’s thoughts on debt, what kind of debt you have, and its impact How to flip the narrative and keep investing during downtimes The importance of dollar cost averaging or DCA How to start investing in your 401k as a younger investor Today’s show is sponsored by: BetterHelp 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right folks, welcome to Investing for Beginners Podcast. Today we have a special guest we have Nick Maggiulli, who is the Chief Operating Officer and data scientist at Ritholtz Wealth Management. He also is the author Of Dollars and Data.com, which is one of my favorite blogs. It’s amazing. If you guys have not checked it out yet, after we’re done with this interview, you’ll understand why. He also has written a great book called Just Keep Buying that we’re going to talk about today, as well as other things. So Nick, thank you very much for taking the time to come us today. And talk to us about your book, your blog, and all the great things you got going on. So we’re really looking forward to our chat today. Thanks. Andrew 0:38 Yeah, thanks for ing us, Nick. So can you maybe take us way back to when you first started the blog? Why data and dollars, what really compelled you to write about that kind of stuff? Nick 0:51 So my prior job, I was a litigation consultant, which is just a fancy way of saying we did a lot of data analysis for lawyers. And basically, I just learned how to do a lot of cool data stuff. And the job was great. There’s nothing wrong with it. I had a nice career path. It was nice and smooth and everything, at the same time, that my heart wasn’t really in it. I knew I really liked finance and personal finance and stuff. I said, Hey, why don’t we take the data skills I learned here and just kind of apply them to this problem, right? Like, there’s like a lot of data that, you know, that we can look into. And I can maybe do things that haven’t been done before, especially with the charting visualization, stuff like that, where I had a little bit of an edge. I think most people today in the space are using Microsoft Excel, which is great if you only make one chart, but if you need to make like 100 charts, it’s not that great, right? So I was like, Oh, I basically use a for a loop. You know, I built a lot of charts and a lot of cool stuff, cool visualizations, okay, and maybe I’ll just write about this stuff. And so I kind of just started it from there; it started as you know, I love data, and I love personal finance. And so they that marriage, there’s kind of dollars and data. The name came from Of Mice and Men; there’s this time back, and I was trying to come up with all these names. I was like coming with like money mining, mining money, all these things, this pre Bitcoin and every before I even knew about what Bitcoin was, so I didn’t know anything about that, like, and I was like coming up with names. I was like, ah, these are also stupid. And then when I saw the Steinbeck, I said, Wait, have something said about dollars and data. That’s like a perfect marriage. It sounds nice. It’s kind of that, and I was okay, that’s perfect. So that’s how it worked out. Andrew 2:08 That’s awesome. That’s cool. Can you get maybe take us back? I don’t know; it feels like it doesn’t have to be one of the first blog posts you ever did. But something where the data shows you something really shocking about personal finance, or something that maybe people should put their mind on that you wouldn’t really understand until you saw the data? Nick 2:30 Yeah, so the first blog post I ever did was actually kind of an interesting result because what I was showing was, you know, the fees and how much have to pay attention to fees, especially over the long haul. Now, you guys have probably seen this; you heard this analysis 100 times ago if you know if someone’s charging you 2% A year versus 1%, or half a percent. You know, that difference is huge over a lifetime. Right? You’ve probably heard this before. But I think what really exemplified this, as I said, I looked at the typical two-in-20 hedge fund fee structure. And I said, it doesn’t matter how much money you start with your client of this hedge fund, within on average, 20 years that hedge fund will have more money than you, you could have $100 million, they could have zero. And if they’re just taking your fees and reinvesting in every year, within 20 years, they’d have more money than you, which is kind of shocking to think, right? But I said, okay, well what happens if you did the same thing with like a Vanguard Index Fund or something, right, or just a low-cost index fund, we don’t have to use Vanguard, it just doesn’t matter. You can use State Street; you can use whatever BlackRock, all those other ones out there, you use a low-cost index fund, which is charging, let’s say, like five pips or something right, five basis points or point 5%. That would take 1500 years before they had more money than you. So 20 years versus 1500. Right. And no matter what, like if you think about fees, what they are like fees are kind of like friction, imagine your car going down like highway fees or like friction, like it’s kind of a slow, like a brake pedal on you, right? And that friction, you know, that basically slowing you down relative to the other vehicle, which is like the fun collecting the fees. So at some point, they’re going to you, right? If you’re going 99 miles an hour, and I’m going 99.1, no matter how far ahead you are, I mean, I will eventually you at some point, right? But with a hedge fund, it’s like you’re going 99 miles an hour, and they’re going 500 miles an hour, right? They’re gonna you much more quickly because they’re just taking so much in fees. So that was the analogy I like to think about, but I thought that was kind of a cool, interesting result. And it just means, like, yeah, fees are important, especially at the high end, right? That doesn’t seem like I’m paying, you know, ten basis points or five basis points is kind of small, doesn’t really make that much of a difference. But the difference between like 2% And you know, 50 pips or ten pips or something that’s huge. Right? Those are huge differences. And those really add up over time. Dave 4:26 That’s interesting data. So do you think that the reduction of fees to invest now with like Fidelity and Schwab, for example, making it zero? Does that kind of have the same impact? Do you think? Nick 4:37 I think there are different types of fees; there like transaction fees. There’s, and I think this is I mean, for example, transaction fees going to zero say that’s a good thing, right? That’s like fewer fees. Well, if you’re doing a buy and hold portfolio, that is true, just that’s going to be better for investors. However, the counter to that is, well, with no transaction fees, that encourages people to trade as much as possible, and that may change their behavior to a point where they actually hurt themselves more. It makes it worse for them just because of how they’re acting. But I’m saying if you’re just doing a long-term buy and hold approach, like, the lower fees are clearly better, right? Always question, though, is if you change your behavior because of those lower fees, that’s where you can kind of get into trouble, right? You can see you imagine people trading in and out, and they’re more likely to make mistakes; day traders or not, something like 95% of day traders isn’t profitable over the long run. So it’s very unlikely you’re gonna be in the 5%. And even if you are, it’s going to be difficult to know if that was just luck or if you actually do have skill. Dave 5:28 Yeah, that’s a good point. All right. So let’s talk about the book. And let’s talk about savings. So I worked in the banking industry for about five years before I got into what we’re doing now. And I saw firsthand how little people were actually saved by having to have customers in front of me and seeing, you know, people with literally no money in their s. So tell us about saving and like what the crisis is if there is a crisis, and I guess, where do you think we can go from here? Nick 5:55 I think the thing was saving the big issue there is I mean, there’s basically two schools of thought, the first school of thought is like, Oh, the reason people can’t save money is that they’re spending too much right, which I, technically at some point is always true, right? If you had no spending, you could save all your money, right? But that’s impossible; we have no spending, we need to eat, we need to shelter, like, you need to spend money, right? So that’s the first school where people are spending too much. The other school is people are making enough income, right? If they had higher incomes, they would be able to save more, right? And that’s the school of thought that I . And that’s the school of thought that the data in a huge way. And I think the strongest correlation out there between savings rate is your income, right? Like the people with the highest incomes have the highest savings rate like that’s across the board. Now you can be like, well, I know a rich guy that doesn’t save that much, right? He’s like, he blows all his money. It’s like, yeah, how many people do you know like that name, maybe you have three, four or five, like, Guess how many I can name every other rich person, like, you have a handful of people that are just that are taking their money and doing this right. I think that’s why I hate those stupid examples of celebrities that blow their money. And they use that as proof that, like, oh, it’s all about mindset and stuff. And don’t get me wrong. Mindset matters. But like, as I said, you have like five celebrities, you can name I have every other celebrity that is rich, right? It’s clear you’re using great examples. But my example says much bigger than yours. Right. And so I think it’s a trick that the financial media plays on people. And it’s like, oh, the reason you’re poor is that you’re spending too much. And for some people, that’s true. But for most people, I just don’t think it’s there. And especially what you just said, Dave, about, you saw these people didn’t have money in their s like I’m yet some of those could be obviously spending it, but you can see the flows, or you can see how much money is actually coming in, right? And so even if like, okay, they come in every month, they have to spend 1000 on rent or whatever. It’s like, where’s the money coming from? Like, as you can’t get out the math, your way out of insufficient funds, or you can’t mindset your way out of insufficient funds. And that, at the end of the day, that’s my big argument here. And the data s it, and I’m just tired of this. Cut your spending; don’t get your lattes type stuff. It just doesn’t it’s not doesn’t move the needle enough. Dave 7:45 So how do they save more? So how do you go from, you know, what I saw to a better situation? Nick 7:51 Do you have to raise your income? I mean, there’s no way to, I mean, you’re saying, well, that’s so easy, Nick, I wish I could I just flip my fingers and raise my income. No, it’s not easy; actually, it’s much harder, but it’s the only sustainable path out, and you have to either get a side job, get a second job, get a side hustle, like start building something and do it, and you have to spend time, and it’s not easy, right? It’s better to start when you’re young and that. And I’m not trying to guilt trip people into doing that. You shouldn’t; you can never enjoy your time off or not spend time doing something. But at some point, like, if you’re in a tough spot financially, it’s the only way out question is how much does that matter to you? Like, if you don’t care about having that much money, you don’t care about that, that’s fine, and don’t do that. But like, if you are worried about it, it’s causing you stress, it’s like, it’s gonna be far less stressful in the long run, if you get out of that hole than if you just sit there and say, Well, I don’t want to work another job. Well, I don’t know what to tell you. I can’t, you know, find another skill that may be and level up your current job where you can get paid more your current job; there’s a lot of things out there. I mean, there are people, I seeing these Twitter threads, people just like yeah, I learned like 10 Excel functions. And now I can go in there. I’m, like, better than most people know how to use Microsoft Excel. And there are jobs you can get in ing and stuff like that pay like, you know, 40 50k a year, which is not a ton of money, but it compared to a minimum wage job. It’s kind of a big boost, right? And so even if you have to start there, like I, you know, I feel like people can learn Excel. This is not rocket science. I think most people can learn most of these things and get a decent-paying job. Right? I think it just takes time, and you have to put the time in, and there’s no excuse for that. There’s no kind of way around that. Right. It’s like I wrote on the internet for three years and made $0, Right? And then I’m now my blog is actually making money off ments and stuff like that, because I said, Hey, I can have ads now. But it’s one of those things where you have to do that. I did do 10 hours a week for three years for nothing, right? And I’m not saying you need to be doing 10 hours or you could be making far more money just even working a minimum wage job, right? But I’m just saying that’s an example of something that I just happen to love doing. Just find something you love to do that you could hopefully get paid for. Dave 9:37 Yeah, I think that’s a great resource. So I know that during tax season, you know, for example, I know that h&r block looks for people to help with filing taxes; now, you don’t necessarily have to be the person filing them, but there are other jobs that you can do there to help with that. So I know that you know, I think that’s a great idea that trying to help people find other things to do to that’s a big reason why I’m here because that’s what I did. I started the kind of the same ID Yeah, I started the blog and started the podcast. And you know, while working in the restaurant business, it wasn’t easy, sometimes staying up until two or three in the morning too, you know, edit podcasts or write blog posts. But it was something I loved to do. And, you know, here I am. So it’s definitely doable. I love that idea. Nick 10:16 Yeah. And now with the gig economy, there are so many things, you know, popping up things you could do on part-time do on the side, or there’s tons of stuff out there. And I think that’s what’s important is to realize, like there are options out there right now, it’s very difficult because obviously, gas prices are going up. And the question is, are the prices of those underlying services going up to match? And hopefully, they are, but that’s one of those things where like, You got to, you know, just spend time doing research and looking to what might work for you. Andrew 10:39 So Nick, do you have a take on investing? Let’s kind of stay on this person who feels like they just can’t save. Do you have a take on investing versus raising your income? Should people do both? Should they focus on one versus the other? What kind of mindset do you think needs to go there? Well, of course, Nick 10:57 I always encourage people to like, learn more learn about investing, things like that. But for someone who’s like not, if you can’t save money now, like, the most important thing is raising your income. So you can save money, right? And I think the example I gave, and this isn’t the first chapter of the book, I think it’s the core piece of the book, like understanding the structure of it. And I created something called the Save invest continuum; everyone’s on this continuum. And all you have to do is give me two numbers from your life; from those two numbers, I can then tell you where you are on the continuum and what you should be focusing on, basically. And so the first number is, how much could you save in the next year? Right? So I’m gonna just use a simple example. Let’s say you could save 500 A month over the next 12 months; that’s six grand a year, right? The next question is, okay, how much can your investment portfolio earn you in the next year? Let’s say you have ten grand invested, right, and you can get, let’s say, I’m going to just be conservative and say, 5% return, right? So that’s 500. So the first number was 6000, the second number was 500. Obviously, 6000 is much bigger than 500. Therefore, you know, you need to focus on that part, the 6000, to try and raise that get that invested. So that the other number goes up over time, are you imagine if you had $1,000 10,020 50 100, as that second number gets bigger, it’s going to overtime, you should see this shift to the point where your investments earning you more than your income is providing. Now the example you provide, Andrew, I’m guessing this person has basically nothing invested, right? And their savings aren’t high as it is; maybe they can save 100 bucks a month, right? In that case, the only thing they should even be spending any time on, I think, is their income, right? Because they could spend all the time in the world on investing. So I’m going to put this $100 getting invested in that degree; I don’t think that’s a bad thing to do. But it’s not going to move the needle, like getting a second job or something, right? Because you imagine this was an example I gave when I was 23. I spent all this time analyzing my investments, which should be 5% bonds and 10% bonds; I was like very neurotic and didn’t know exactly what to do with my asset allocation. And I didn’t think, well, it’s only $1,000 invested at the time, even a 10% return for me, that’s $100, right? Like, even if I could double that, like, you know, I’m gonna get a 20% return, so good. It’s 100 extra dollars I just earned from spending all these hours doing this; I would have been far better suited to go get a side job or go be a bartender or something and pick up those eggs in one week, I can make more than that. $100, right? So for a lot of people, all that time you are spending on investing right now it’s not worth anything, especially when you control for the number of hours; you’re probably getting paid to $3 an hour on like what you could actually earn. Now, obviously, if you have 100,000, a million, whatever invested that, then those hours can add up. But for some the doesn’t have a lot of money, it makes almost no sense to be spending that time on investing. It makes almost all the sense, though, to use that time to work and earn money that then you can invest. And then in the future, that you know, it’ll make more sense. It’s like, where are you getting the most leverage, right? Where’s your lever the most powerful for you? If you have very little money invested, that lever is so small; it’s useless; you need to use the lever, which is your time, which is going to be able to, you know, earn you more than your investments. Well. So I hope I know that’s a long rant. But I hope that kind of gives you an idea of where people should focus. Dave 13:46 Yeah, it definitely does. So I guess let’s talk about debt. I bet you have some interesting thoughts on debt. I’d like to hear what you think about debt. Nick 13:54 Yeah. So I think a lot of people in the personal finance space think debt is always bad. And I think there are certain types of debt that can be bad; it depends on how they’re used. And there are a lot of contexts that matter. I don’t think debt is necessarily bad. I think it’s how you use it. And the second most important thing is the type of debt that matters. And you know, do you actually need the debt? The people who actually use debt the best are the people that don’t need it. It’s very ironic; for example, I can give a very extreme example here, Elon Musk and a lot of other rich people do this Elon Musk thing; instead of actually selling his Tesla stock and using it to fund his lifestyle, he borrows against it. And this is at a point when you know, interest rates were lower than they are today, but they’re still relatively low. So instead of having to sell his Tesla stock, which he expects to go up in price, he can just borrow against it and pay back at, you know, whatever two 3% interest rate, which is basically nothing, right? So it’s one of those things where the people who benefit the most from debt are those who don’t need it. The other thing to keep in mind, I think they’ve done tons of studies on this, and mortgage debt doesn’t tend to bother people psychologically as much as other kinds of debt like financial debt through credit cards or something like that, or even student loan debt. But the main thing to keep in mind there is just that like you need to know yourself and like maybe you’re one of those people who don’t want any debt. So you don’t even want mortgage debt. So you shouldn’t be a renter. And that’s fine. I mean, there’s anything wrong with that? You need to know yourself. And so that’s kind of what’s important. But yeah, I would just kind of look into that. And you know, figure out like, know yourself, and then figure out what debt might suit you, and then go from there. But yeah, I would try to avoid credit card debt. Obviously, there are cases where if you have no money, and you need to use it, I recommend you; to do it right, you need to do it. So to survive, right? There’s no other choice, but I just try not to get caught up with that. Andrew 15:26 So you mentioned the psychological part of personal finance. Do you have views? I mean, being the data guy, having looked through tons of data, maybe in your own personal life or just what you’ve observed from talking to people who read your blog? Is personal finance a psychological game? Is it a numbers game? Is it somewhere in the middle? What do you think about that? And how do you think people should frame their personal finances like that? Nick 15:49 Well, yeah, it’s definitely both problems I have with the psychological parts of money, it’s hard to prove, and it’s hard to test, right? Like, I can’t do an experiment as I could, where I can’t look at, like empirical data like I can with like income versus savings rate, for example, I can be like, oh, people with a million dollars in income have a much higher savings rate than people with, you know, $10,000 in annual income, right? And you can see that clearly in the data, right? So because if you just have more money, you’re spending tends to go up more slowly than your income, right? So that’s where the savings go up, right? But with a mindset is really hard to test that, right? I can go and give people a million dollars and see how they behave and see if they save more money, right? I can’t necessarily say, Okay, I’m going to switch your mindset. And I’m gonna have these ten people, this mindset and these ten people this mindset and control a mind is like, how do you control a mindset? Maybe, you know, 100 years from now, we’ll have something where we can actually test the mindset and all sorts of stuff like that, but we can’t really do that. I mean, the AIDS, is that even ethical, and then B? Is it? Could we even do it like, technologically, right? So because it’s kind of falsifiable, you can’t prove that it’s false. It’s really difficult for me. So there’s like a lot of big leaps that you have to make with the psychological parts of money. Of course, they matter to say they don’t is foolish, like I think we all know, like, you can change your mindset about something, and it’ll completely change your life. Like, I think we know that that’s true. The question is, it’s hard to show that it’s only mindset; it’s not something else. So I kind of want to keep that open to thinking about what we can prove versus what we can’t prove. And that’s kind of debate here Andrew 17:09 . Yeah. Makes a lot of sense for you personally. Do you have things you go kind of against the data? Because you like the mindset? Or do you kind of set your mindset based on the data, like for yourself personally, with the way you look at personal finances? Where do you fit? Nick 17:24 I think, like, I have no, I have my biases, like, I’m kind of biased against real estate as an asset class, not because there’s anything wrong with real estate, I know a lot of people have made money in it. I know you can get rich in it. And I do own some through just real estate investment trusts, which is just like the public, just real companies that basically own slices of a bunch of different buildings, right? And so I just own it. I’m just a shareholder of all those basically buildings, and there’s like a management company, etc. But I don’t own personal property. And I haven’t because I just think I live through I was in one of those cities; I had one of the biggest housing booms and busts in the United States. I was in Riverside, California; if you guys can look that up, that area had one of the worst housing busts during a way, and both my parents lost their homes during this crisis. So I saw a lot of bad stuff happen. And I’m very biased against Real Estate. That’s an example where my psychology is overriding what I know about data and where I know like, Oh, of course, real estate’s generally safe as a class of this and that, but I’ve just seen so much stuff with it that I haven’t touched it yet. Now, of course, don’t hold me to it. Ten years from now, five years from now, I could be buying a house; who knows? But it’s one of those things where that’s an example where just from a personal bias I have another one too is sometimes you’re just like convenience is more important than ever than maximizing dollars. I think an example of this is something like rebalancing. So if you have a portfolio, I’m just gonna make it very simple 60% of US stock and 40% US bonds. And the question is, well, how do you should have 60%? Where should you have your stocks in? Like your taxable ? And then your bonds and your non-taxable like your 401 K? or how should you like allocate those across your s? are this called asset location? Where do you put your assets? The optimal thing to do is to put all the high-growth assets into your non-taxable into, like your 401, K’s IRAs, and ever because they grow very quickly. And so you want to avoid all the tax on all that growth. Generally, that’s the correct solution. I don’t do that, though. I just have all my s basically look like carbon copies of each other because it’s easier to rebalance across the s, right? There’s just that’s just ease of use. It’s easy for me, and so even though I know the optimal solution, I still decide to behave sub-optimally because I’m not I don’t want to spend the time to like, Okay, I have to move all this into there. It’s just not worth the headache. So I just like to make them copies of each other just because it’s easier. Andrew 19:24 I think there’s a lot to be said to having things that encourage behavior with investors and people managing their finances versus doing what scientifically is the right thing to do but may do more damage than good if dissent advises people from actually doing what they’re supposed to do, which is save and invest kind of related to that, which I think when you look at the title of your book, this idea that, you know, people can get really paralyzed when they see the stock market down a lot. And you know, there are fears about inflation, people think, you know, there’s a full Question. So nobody’s gonna have money, so nobody’s gonna spend money. So stocks are gonna go down how other people get away from that kind of a mindset, one that’s maybe psychologically will hurt your behavior. And instead, look at the optimistic part of the stock market, which is, you know, the data says over the long term, it does very well. And we know we should be investing in the stock market. How do investors make that flip? Nick 20:24 So I think, I mean, what I do is I use history, and I just that helps with that. But the other thing it’s the data. It is not great right now. But my counter to this is, what other options do you have? This is actually my counter-argument I use, like, if you look at the data after inflation goes up after we have like a yield curve inversion, which we had, I think, earlier this year or something, it’s it doesn’t look good, right? Like, if you look at it, stocks perform worse right than they do when there’s not a yield curve inversion, or they perform worse when inflation is higher, right? So we know that I expect to stock the stock market to perform worse going forward than it would in any other random 12-month period throughout history, right? I know that. The problem is that every other asset class performs even worse than stocks, right? At least the of the ones I’ve tested, like bonds, cash, those things that you like, really like, oh, I want to hold these because, you know, I’m gonna move and wait until it’s clear, the coast is clear, then I’ll jump back in the problem of the stock is, if you had done that, you would have actually performed worse than if you just stayed in stock. So it’s like, we’re in a bad spot, but there’s not much we can do about it. So that’s really like the only message I can provide to people. Because, like, you know, even cash is getting killed. A lot of things aren’t doing great right now. But that’s the kind of takeaway there. It’s like; it’s we’re in a tough spot. But there’s not much we can do, unfortunately. And yeah, I wish I had a better answer. But like, sometimes that’s how life is, and you have to accept it. Like sometimes. That’s what the data says. That’s what the data said; historically, of course, this time could be different. We’d be hitting all-time highs three months from now, which would be amazing in its own way. But I don’t expect that I don’t know; I obviously have no idea what’s going to happen. But so you have to keep in mind. Dave 21:50 Yeah, that’s all great. Andrew 21:52 Can we dive a little deeper into that? Just maybe the basics of some of these like, Man, this finance stuff, this economic stuff? It’s all confusing to me. Why would stocks be the best place to be in? What would be your answer to that, Nick 22:04 I mean, because you’re owning a portion of all of the public businesses in the United States and the earnings that are going to provide into the foreseeable future. Alright, so you have every person working for every public company working for you. And then, if you own a diversified global index fund, you have everyone globally working for you in some small, small, small way, right? Obviously, the percentage of your ownership of their labor is very, very, very, very small. But the point is, it’s kind of true, right? If you think about those companies that are working to earn a profit. And that profit is eventually either paid to shareholders through a dividend or through a buyback or through just retained earnings that are reinvested in the business. There are different ways this is done, but basically, you, as the owner, you’re getting a benefit from that right from that behavior. And so this is an ownership society, this we live in a capitalist society, you know, people can debate that, and it’s own but given, you’re in a capitalist society, right, where, you know, you should own capital, that’s the name of the game, right? And just keep buying is about acquiring capital over the long term. Right? So I’m just trying to teach people how this actually works and what it means to own capital. So why is that better? Generally, then being someone who’s, you know, you’re giving out money? You’re someone’s borrowing from you. Why is that generally better? Why is it better than buying a bond? Cash tends to be inflated over time, which means that its value of it goes down as it goes to zero, but it just slowly, slowly decreases, right? You know, you we could back in 1910, we could have got a sandwich and a soda for a nickel, right? Or something like that, right? Today, you need to spend like, you know, six $7. Maybe depends where you are, right? But that’s, that shows the change in money over time. So because our money supplies because the value of $1 is dropping consistently over time, the only way to fight back against that is to invest in assets that will ideally grow over time. And that’s what you know, stocks do their own and businesses, right? So it’s talking about the only thing you can do that with real estate, you can do it with other income-producing assets, such as you know, if you own a royalty collection of a bunch of music that’s that people listen to, and that’s always paying you because they’re getting streams and it’s being used in movies and stuff like that. There are a lot of ways to do this. I’m not. I don’t think that the stocks are the only game in town. But they’re a very easy game their game it’s easy for a lot of people to understand, and they historically have done well. And so that’s why I recommend them. But you know, figuring out the right mix and what right what works for you, it’s gonna be different for every person, some people will be like, I don’t even touch the stock market, I own a bunch of properties, and that’s fine because they want to physically see it and touch it and, and that’s fine. Some people need that. I don’t personally need that. Like, you know, I think something like 99% of my net worth is in financial assets like I don’t own any of even my apartments furnished like I don’t even really I always my mattress in my clothing. Like I literally, I own nothing except financial securities because I believe in them, I believe in them for the long term and what they will produce for me, so yeah, that’s, that’s my little rant on income-producing assets. Dave 24:42 That’s a good rant. So I guess what your thoughts are on? Like, you see a lot of stuff on social media about buying the dip and how to invest in a crisis. And you can argue whether we’re in a crisis, you know, if you want to use the R-word or not, how do you think people should kind of use them? View what’s going on right now. And how do they just keep buying? Nick 25:02 I mean, I think the key here is, like, we can just do a little bit of math to show like when the market drops, you know, it needs a bigger gain to get back to even right. So let me do a very simple example; let’s say the market was valued at, let’s say, $100, a share, whatever; I’m just using that to make this easy. If it drops to 50, that’s 50%. Drop 50% decline. But to get back to 100, to go from 50 to 100. That’s a 100% gain, right? So the gain needed to get back to even as larger than the percentage drop, right? So if right now, let’s say so right now, the markets down What 20 Something percent, you’re gonna need, like a slightly larger than 20. You know, if it goes down 20%, you need like a 25% gain to get back to even, So that’s roughly what that means right now if you just can estimate how long you think it’s going to take the market to recover. Of course, this is not easy. No one knows the future, all that disclaimers. But let’s say you think, Hey, two years from now, I think we’ll be at a new all-time high. That means right now you’re looking at roughly 25% return over the next two years; you try and annualize that it’s a little bit under 12% is probably like 11% a year, something like that love and a half maybe, right, the question I have for you is, Do you want an 11 and a half percent year return for the next two years? If you really believe it’s going to hit a new all-time high within two years, and there’s nothing saying it will. But if you believe that is true, then by you not buying stocks today, you’re basically saying is if you do believe it’s gonna take two years and you’re not buying, you’re saying you don’t want 11.5% return, which is higher than the historical average for the record. So like, that’s the way to think about it. And I think what was really cool was, I mean, not cool, but like it was interesting, the math how it worked out during COVID, we were down 33%, you know, which is a 50% gain to get back to even I asked people on Twitter, how long do you think it’s going to take until we kind of recover and hit a new all-time high. And the median estimate was somewhere between two and three years. So let’s just say three years to make the math a little bit easier. 50 divided by three, that’s not exactly how you do the math; you have to actually compound it. But let’s just I’m going to linearly just divide just because it makes it simple. You know, you’re looking at like 16% a year. And that’s way above the historical average of, like, 10%. Right? So it’s like, everyone, even if you said three years of recovery time, you should have been buying like mad because like in three years like it’ll be back to even right, I’m looking at a 16% return from here. What actually happened was within six months, it was back at a new all-time high for March 2022. Like, I think September or August whenever hit the new all-time high. And that was 100% over 100% annualized return over that period. Right? That you got that 50% return in less than half a year, which is like one of the greatest returns of all time that you’re ever going to see one of the greatest like rallies, right? And so when you think about that, it’s like we I didn’t I obviously had no clue that was going to happen. But you think about the math there and think about, okay, what’s happening right now? We’re down 20%. Like, if it takes even if it takes five years to get back to even five years is a long time, you’re still looking at a 5% return here, which is not great. It’s below average. But we’re also gonna get 5% A year right now. Do you have something else? Can you name something else I can give? You know, the bond can do that cash is losing as of right now. 9% a year? I’m not saying it’s gonna do that forever. But you see my point, right? Like, where else are you going to get 5% A year right now? There’s no place I know. So like, that’s why wouldn’t you be buying? You know that’s, that’s, that’s my counter. You’re like, oh, because you can go down more? Okay, then buy more. You know, it goes down forever. What does it matter? Anyways? Like, if it all goes to like a stock Mark goes to zero, we’re gonna go con guns, canned goods, gold, whatever, you know, different banded tribes? I mean, how much are you gonna make a fire? Maybe by survival kit? You know, I don’t know. Like, where I mean, you see the analogy, it’s like, it’s really just a call option. On the upside. It’s just a real upside option. I can’t really look at this and say like, I can’t think of a downside scenario except for Armageddon. And in that case, it doesn’t matter if I had bought or what I had done anyways. Right? So Andrew 28:27 I find it funny that you did a great example of the 2020 little mini bear market we had, where literally if you put yourself back in that timeframe, it did look like the world was ending. Like, I don’t know how businesses were even expected to function and survive when everybody’s locked up at home. And now you fast forward two years. I don’t see anything nearly as scary as on the horizon, personally. And yet, you know, investors don’t want to buy this dip, either. Nick 28:58 Yeah, I mean, I’m actually gonna be writing about this pretty soon. Just a blog, like, is this worse than 2020? And that’s the question. Now, obviously, 2020 was clearly like, you know, scary or like everything. We thought the economy was literally shutting down flights or stopping oil went negative, like the stuff that happened was just absurd. But it made sense, though, like everything. I think it was one of the most rational crashes I’ve ever seen. 2020 made a lot of sense to me. 2021 made no sense at all. Like, I don’t understand 2021 was the craziest thing I’ve ever seen. I mean, I was around in 99 when I was nine years old, so I don’t really count that. But like 2021 was the craziest investment you’ve ever seen. 2020 was just like, oh, this made perfect sense. The world’s like; literally, the economy was shutting down as we should. I’m surprised we didn’t go lower. Honestly, I was actually surprised we didn’t go lower. And we recovered as quickly as we did. So that was the kind of shock for me and 2020 Andrew 29:45 What was it about 2021? That really just like threw off your rocker? Nick 29:50 Just the prices just got so high on just crazy things. There are pictures of these NFT rocks that were selling for $2.3 million. Same as a nice property, you can get like a B beachfront property like in Florida, like, just in rent, now those things are selling for like 50k or something, maybe 80k. You know, which still is, like, kind of a high for a picture. But you know, it’s still like one of those things were like $2 million for a picture, right? No, no, no piece of art, you know, it’s like a JPEG, right? And so I don’t know, it was just there was this small growth, stock tech stocks and went to the moon, all this just crazy stuff. The Gamestop thing became something started all that was really when it was like guys, casinos open for the year, and I had no idea. I had no idea when we came to 2022. That was all over. But I think people just woke up after that and said, Yeah, we’re not doing that again, and my prices adjusted accordingly. Andrew 30:38 It’s funny, you know, just to kind of hit on that a little more. It’s funny how to go living through that time period; it was never necessarily clear that that was not what I call the top of a peak, but that, that there was something really different about that time period. But that’s kind of the thing about history; Ray is when you look back, you can kind of make these conclusions after the fact. And so, if we’re able to make conclusions about 2020 or 2021, obviously, you don’t have a crystal ball, but I’m guessing I know what the answer to this question is. But if you look back at 2022, are you going to wish you had bought stocks? Say we’re looking whether it’s 2023? Or 2026? You know, my guess is you’re saying yes, I’m gonna probably wish I bought more. Nick 31:23 Yeah, I would say so. But you never know who could have a bad deck. I will say this by 2042. I can almost guarantee you wish you’d bought stocks today. Now, can I say in 2032? Highly likely, but who knows? I mean, we could still be below there in 10 years. It’s possible. It’s happened before, so to say it’s never happened. But by 2042. I’m very convinced that I will be like, Yes, I should have been loading up more. Why didn’t you know, but the question is, you know, how long until then? It’s crazy. I have to wait 20 years. Are you kidding? I have to live in real-time. Can’t wait 20 years, right? But that’s how the game works. Right? You’re trying to do this to earn some extra money. That’s how it works. So Andrew 32:01 Yeah, that’s really great wisdom there. Dave 32:03 Yeah, it is. So if you got a friend that’s kind of on the ledge, how could you talk them off the ledge to get them to start investing in the stock market today? With all the craziness we’ve experienced over the last couple of years? How do you get them to take the step to start, Nick 32:19 just start putting money away? And just I would say, don’t look at it, that’s probably the best thing to do. For example, I sent my sister up with her 401k. And I said, Yeah, her name’s killers at Kelly, they’re just gonna take, you know, this amount of money out of your paycheck, you’re not gonna see it, you’ll never know. And now she has over five figures. And it’s been a couple of years just from saving fingers. Like, how did I get that much? I was like, that’s how it worked. Kelly, you don’t even look at it. We weren’t monitoring it. I just said, Hey, get I said, How much do you think you have in there? Right? So I don’t know, like, you know, $2,000 like, no, it’s this month, she was like, what? How did I be like, That’s exactly how it worked. And then, as the market did incredibly well, it did decently well, you know, for in 2021. But like, still, it’s one of those things where that’s what happens, even with the current crash, you still have like done decently well, just from saving a little bit every month for the last couple of years. And so it’s one of those things where, if you’re worried about that, I think the more, the more important thing for most people who are starting Yes, get started. That’s important. But really like your true like financial, like the big financial levers are going to be your income. And if people don’t talk about it enough, I’m an investing person. I know investing inside out; it’s like really the thing I really care about; I love more and am really ionate about far more than the personal finance side. But I know at the end of the day, income is the real lever for most people, and it’s how you get started. So you can start getting into investing, right? You know, I’m gonna be very honest, I was very privileged that I, you know, I went to a good university, you know, and as a result of that, I got a very high-paying job. So I could save a lot pretty early, right? And so I was I’m one of those people, I’ve been able to save a lot not because I had good financial discipline, or because I made a budget. No, it just ice had more income. And that’s the truth that most people won’t talk about that the financial media refused to talk about it. But I will say like, Hey, I was privileged because of this. And that’s why it made it very easy. I’ve never made a budget in my life; I’ve never had to think about that. Obviously, I’m not out there being extravagant, you know, doing like, you know, flying first class all the time, or, you know, getting bottle service every night at the club, or and I’m not doing anything like that, or buying super fancy watches and things like that, like, I’ve been very, you know, mellow and my consumerism, but at the same time, like, I do know that like, that’s what matters is like, I didn’t have to create a budget I had I And and that’s the important piece to Dave 34:16 . Yeah, that’s, that’s great advice. So I guess we’ve kind of danced around this. Can we talk about dollar cost averaging? I know this is one of Andrews’s favorite subjects. And you wrote this fantastic blog post recently about it. And I wanted to give you an opportunity to pound the table a little bit about dollar cost averaging because I think it relates to 401k. Is that what you were just talking about with your sister? Nick 34:35 Yeah, so I want to say this because this is a big confusion in the community. There are two definitions for dollar cost averaging, which mean very different things. And the first one, which is the original one, I think Ben Graham, called it that’s called $1. cost averaging is just buying over time, like as soon as you have money like so you get money, you get paid in your 401k you put you know, you take your money home, but some of that money goes in your 401k, and you invest right as you get paid, right you’re buying As soon as you have the funds available, that is the first time or dollar cost averaging, that’s what just keep buying is about that someone I . The second definition which is used is if you have a large sum of money, let’s say you have, let’s say, you know, you sold a business, and you have $100,000, or you got an inheritance from someone, right, you have 100 grand, and you don’t want to put it all into the market right now, you’re going to slowly average into the market that is also called dollar cost averaging. But as you can see, those are two very different things. That second thing is something that I do not because you’re slowly getting into the market; generally, on average, the market goes up. So you’re technically buying it at higher and higher prices over time; it’s usually better for you just to get invested right away, right? That’s what the map shows; the data shows that it’s shown that in every asset class; I go over this in the book, too; I cut the day in a bunch of different ways. But that’s basically the main takeaway there. So the thing I’m talking about here, the first definition, dollar cost averaging, is the one I want to focus on. And I think it’s incredibly important because that’s how most people shouldn’t invest. And it’s the only way to kind of it’s a disciplined approach, it gets your behavior in line, and it just works over the long term. Even, you can look at snapshots of like, Oh, if you had bought here, and it was still down ten years later from here, right? But is your going to really be down ten years later? Not necessarily. Because what if you’re buying over time, if you put a snapshot, yes, that can be true, let’s say you bought at 100. And then ten years later, it’s at 95, you’re like, Oh, I would be down not necessarily, depending on the path it took to get to 95, you could actually your value could actually be up because as you’re adding more money to it, you could actually earn more than what you put in. So that’s what matters. It’s like the path is what’s important. And generally, the path is upward and to the right. So that’s the long story short because, you know, declines are quick and swift. So usually, you have that quick thing happen. And then after that, they usually kind of recover in some fashion. Andrew 36:38 So I hear this almost like, to me, it’s like a distortion of the idea. But you hear in the crypto worlds where you’re; you’re just averaging down. So what’s the difference between averaging down in something like crypto versus dollar cost averaging in the stock market? Nick 36:55 Here’s where we’re getting into income-producing assets versus non-income-producing assets, right? Like, I would argue, averaging down in crypto or averaging down in buying like art, or wine or something where there’s no intrinsic income associated with those assets. That’s only based on what other people are going to pay for it, right? And so if, in the future, someone is not willing to pay more for that crypto, you are buying an asset that may never go up in price again, right? That’s the issue. The difference is, I believe, generally, that stocks and businesses and things like that, I mean, of course, not every business is going to go up forever. No, a lot of businesses go under. In fact, most businesses will go extinct. The half-life in the US stock markets, about ten years, half of the companies will get their acquired merge, go to zero bankrupt, whatever, within ten years, that’s like the half-life, there’s a great book on this called scale by Jeffrey West, I recommend it to scale. But the key to this is if you’re diversified, you own the whole pie; the winners tend to outperform the losers. And so you make money. And that’s all we’re doing is diversified investors, right? I’m not trying to pick which one’s going to be the winner, which one’s going to be the loser; it’s very difficult. I just own the whole basket. And on average, as long as there are enough winners, more winners than losers, and you make money. And that’s how the stock market returns, you know, eight to 10% a year, the US stock market returns eight to 10% a year. So what I would say for those people in crypto, they’re averaging down; there’s no guarantee that that’s going to come back. Of course, there’s no guarantee that the US stock market’s going to come back either. But you know, the US stock market has a history businesses have some at least there’s some fundamental like, you know, weight to a business to owning a business, right? You can imagine it as like, imagine if I had a suitcase with $50,000 in it, and I’m selling it to people. At some point, you should never go below $50,000. Because there’s something worth like, there’s something in there that has weight, right? At the end of the day, crypto is like you’re selling a suitcase, and it might have 50,000 and may not, and everyone’s telling you what’s in the suitcase. And I’m not saying that it’s worthless. I’m not saying that because there can be value here. The problem is that value is not going to be realized in the future. We’re going to open the suitcase 20 years from now. And that’s either going to be, you know, 50,000 20,000 or a million or 10 million or Well, who knows. Right? And that’s the issue we don’t know the value of this thing until the future. I own some crypto. Personally, I have a small percentage of my net worth in there because I’m hedging against this right. I think because it’s so volatile, I don’t know what’s going to happen. I own some of it. So in case it does really well, I make money. If it doesn’t, I lose a small amount. It’s not going to; it’s like a paper cut. Right? So that’s the way I think about that. And so for someone who’s very heavy into crypto right now, if you haven’t lost everything already, I mean, a lot of people have lost a lot of money in this, unfortunately, like, just try and think about other things like try and just get diversified if you want to if you’re like always 100% Crypto, go to 50% Crypto, then like cut off some of it and put some of that into some income-producing assets. Just try and do something that’s going to actually, I think, build wealth over the long term because, I don’t know, with crypto, you can get fantastically rich with it. Or you could end up poor, and that’s the thing. I’m trying to compress those incomes and get more of an average result that will probably be better for you in the long run. Andrew 39:44 As much as people want to, you know, be skeptical of things in general, at least a lot of the companies in the stock market are forced and regulated to tell you what’s in the briefcase. There could be fraud every once in a while, but it’s far less than Certain versus the I like the briefcase idea because I’m just thinking of dealer no deal if people have ever seen that show the ladies open the briefcase and you just either you tear law, or you get really sad crypto does I think that’s a really great illustration of how crypto can be for a lot of people. You don’t know what’s in the briefcase. Yeah, exactly. Dave 40:19 Yeah. So I wanted to ask you a question. So I have a future daughter in law that is going to graduate from college. And so a little hypothetical for you. So she’s 22, she’s going to be a nurse. So she’s going to have a pretty decent income. I’ve been talking to her about 401 Ks as a way to get started. And what would you tell somebody that wants to start investing in a 401k? What direction should they go? Because depending on the company, you could have 50 things to choose from, or you could have five, and it can be overwhelming for some people. So, where did they turn to learn more about their choices? And how to get started with something like that? Nick 40:56 Yeah, so the first thing, let’s there’s a couple of different things, we can talk about how much you are actually putting in. So your contribution, amount, or rate? That’s the first thing I would say, at least to your employer match. If you don’t have a match? That’s a separate discussion; we can get into that. But let’s, let’s wait on that. So kind of more of a specific, what are your goals type question? Because if there’s no match, then it’s the question of like, well, do you want to buy a house if you want to buy a house in the next 510 years, you probably should be saving outside their 401 K, maybe you shouldn’t be putting away in there and find a different retirement vehicle. That’s the first thing. The second question is, okay, well, you’re saying if there’s five versus 50, the next filter I use is cost. Look at the fees, right? Because they’re if there’s 50, I guarantee there’ll be some in there that are one 2% annual fee, which is high. And there’s I’m hoping there’s no guarantee, there’s gonna be some in there with a fee of like, you know, 2030 basis points point 2% point 3% or lower, ideally, lower, right. And if you have a good plan, you’ll have ones that are low, right? So it’s a question of finding where that first thing, I’ve used the cost filter, just to say, Okay, let’s look at cost. And then, within that, look at asset allocation, right? Because I would rather you be in a, you know, less diversified, something that is lower costs than something that’s like far more diversified, we have to pay a lot more; usually, that’s not the case. Usually, if it’s very diversified, it’s also cheap, which is good. So I would say yeah, get diversified. So have broad equity exposure have some bonds, right? Think about, like, your asset allocation, your risk. That’s, what’s the answer? No one knows. They say 110 minus your age. So if you’re 20, you should be 90% stocks. If you’re 30, you should be 80% stocks in that case. I don’t know if that’s right; every person is different. So kind of feel it out and see what’s going on right now. If you were investing in 2020, this person wasn’t investing in 2020. If they were this, they kind of know their risk tolerance now because they saw the market, you know, dropping 10% in a day. So it is kind of nice that we kind of now knows how much risk tolerance we have as investors. But yeah, those are the things I would say is, like, think about how much you want to put in for a second, just try to go low cost and then try to get diversified. Like, those are the three kinds of core tenets. I hope that kind of steers the conversation in the right way. Dave 42:50 Yeah, for sure. That’s great advice. Great advice. So I noticed the last chapter in your book says, The most important asset, what is the most important asset? Nick 43:00 Your time? Without a doubt? It’s your time. Yeah. And so how you using your time, that’s why even how I wrote the book was like, you know, where should you be focusing your time? And why is that important? Right. And I think there’s this there’s belief that oh, you know, there’s never enough time in life and stuff like that. I’m kind of against that. I kind of more of the Seneca Seneca kind of change me on the shortness of life, he has this great book, which is very good. It’s like; it’s not that we don’t have enough time; it’s just we’ve spent so much time wasted. I even do this, too; I would consider myself a very productive person; I would say I’ve been relatively successful in my life. And I’ve was

Welcome to the Investing for Beginners podcast. In today’s show, we answer three great listener questions: The differences between investing in mutual funds and ETFs Why we advocate for investing in individual stocks How to deal with dollar cost averaging into a company that has grown beyond its fair value How to start building your portfolio following Andrew’s eLetter picks and the importance of a time horizon 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right, folks, welcome to Investing for Beginners podcast. Tonight we have episode 236. And we’re going to answer three great listener questions we got recently. So without any further ado, I will go ahead and read the first question. And then Andrew and I will do our little chat between ourselves. So here we go. Hey, guys, I’m an 18-year-old from Minnesota, and I’ve been a listener for about two years now. I am very interested in the world of business, and I’m majoring in finance. And next year in college, I have recently started putting $150 a month into a total market index fund for my paycheck. My dad and other people have told me that I should be investing in mutual funds. But it seems that you both advocate for investing in individual stocks more. Do you have any advice on which path I should pursue? Thanks for all you both do. So Andrew, let’s unpack this a little bit. What are your thoughts on this? Great question. Andrew 0:49 Maybe we can start breaking down? What’s an index fund? What’s a mutual fund just in case somebody’s tuning in for the first time? So how would you define each of those and, like, super basic ? Dave 1:00 super basic . Okay, so I’ll take a stab at this. So here we go. Index funds, generally, are a fund that matches a particular index, with the most common one that most people are familiar with would be the s&p 500. So anything that matches the complete s&p 500 would be an index fund. You could have them for the NASDAQ, you could have them for the Dow, you can have them for international funds, there are all kinds of mixing and matching you can do, but they’re generally ive funds. They’re designed to match the returns of those particular indexes. And to kind of equal those returns. And so those are generally what those are index funds also generally tend to have lower fees than others, but not necessarily the egoless. Mutual funds are actively managed funds that a fund manager puts together, and then they pick and choose the different kinds of things that they’re going to mimic. Sometimes they will mimic the s&p 500. Sometimes they’ll mix and match different things. And the fees tend to be a little bit higher because it’s an actively managed fund. There are other differences between the two. But I think that’s kind of an overall theme, I guess, a generality of both funds. Andrew 2:12 Yeah. So basically, groups of stocks are packaged nicely together, or the other path is picking individual stocks, which the listener mentioned that you and I both advocate for. I know for me; personally, I’ve never bought a mutual fund unless that was the only option I had in a 401k. To me, given a choice between a mutual fund or an index fund, I will always pick the index fund because those fees are lower. And I would rather when it comes to funds; I would rather have something that just mimics the index versus having to be actively managed. How about you? Dave 2:51 Yeah, I would tend to agree; I think I might have had a mutual fund for a bond fund in my 401k. Before but everything else was an index fund. And I tried to stay away from mutual funds simply for the fact that the fees tended to be quite a bit higher. And there’s been all kinds of studies that have shown that a lot of the mutual funds, by and large, there are obviously exceptions, but by and large, the industry underperformed the market over long periods of time. And I think that’s why people started moving away from mutual funds and more embracing ETFs and index funds, partly because they got better returns. And partly because there were lower fees and a great podcast episode we’re going to release here soon, with Nick lazuli, and he talked about the impact fees can have on your returns and how crucial that really can be made. I think a 2% or 1% is a big difference. But over a long period of time, it could definitely eat into your returns that Andrew 3:45 1% does eat up if you’re talking about your life savings talking about you know, if that’s 10s of 1000s, hundreds of 1000s of dollars, maybe you hit the million dollar mark, you’re talking about 1000s 10s of 1000s of dollars in fees every year, that adds up that 1% on top of one per se it’s snowballed just like everything else in investing. So you do have to be careful with those fees. Now, before we move on to the next question, I do want to talk about the mentioned that we both advocate for investing in individual stocks more. So I will say I feel like I haven’t really talked much about that in a while, if ever, so maybe I could use this opportunity to do that. It’s something I feel really strongly about. And so, in my opinion, probably a significant portion of listeners are probably better served just buying an index fund and calling it a day. And there’s no shame in buying an index fund calling in the day. Because it’s simple. It’s really fast and easy to do. And you don’t really have to think much about it with a caveat. The problem is it’s simple if you do it the right way. So one of the pet peeves I have in this industry, in particular, is people will tell you just buy an index fund and forget about it. It’s true. But that advice does not work when things start to fall apart, and they start to fall to pieces. And it’s hard to continue holding firm and stay strong and hold on to those index funds, which is what you need to do when things get tough. It’s hard to do that when you don’t really understand what is even in an index fund. And what is that all about? So, you know, just because Richard across the street said, I should buy an index fund and hold it. That sounds great; when the markets are going up, where two years from now, when Richard move, and I don’t have any way to ask about an index fund, I’m gonna freak out and sell right. So that’s why I think if people want to index funds, they should, but they really need to spend the time and learn why those work out. And through learning about everything we try to teach here, the stock market, what are the basics of the stock market, what’s the basics of an index fund businesses, it’s going down the street and seeing customers being served and being happy. Those are the basics behind what makes an index fund work and why it will work over the long term. To me, if you don’t hear that message, I think there was research somewhere saying if you didn’t hear a message takes you seven times to hear a message before you internalize a message. So all of these things that pop up when investors panic and they sell too early, or they sell because they’re scared, whether it’s inflation, or it’s the feather, it’s the economy, by the way, recessions do happen all the time, right? All of these little things that people don’t think about. But that’s why you need to learn about getting to the basics. And make sure you’re doing that before you’re investing. So that’s kind of like my piece on I think a lot of people should do an index fund; probably, they should forget about it and move on. So I personally do individual stocks. And the reason why I do is that it is very inspiring. For me, it’s personal, and I’m able to tangibly see where my money is going, and when I’m able to do that, it really incentivizes me to save and invest more and more and more. So if I were to give an example, take a store, like Dick’s Sporting Goods, I think most people probably should be familiar with a Dick’s Sporting Goods is a bunch of sporting goods, it’s cleats, you know, baseball bats, but that’s the one right, they have golf Galaxy inside most of these Dick’s Sporting Goods. And so when I go inside the Dick’s Sporting Goods, I can go in there, and I can see somebody leaving with a new set of golf clubs. And so I can see, oh, look, this business is making money, I can go down to the top golfer, the drive shack, these places where it’s like, you have to wait hours sometimes to get a bay to be able to go play all these new golfers young millennials who are taking up the sport for the first time, I can see that and then see them going to Dick’s, see them having to buy new golf clubs, new golf shoes, new golf balls, all of that stuff. And so, for me, as an investor in Dick’s Sporting Goods, I can see that playing out with my own eyes. And to me, that’s very tangible. And it’s a way to see how my investment is kind of working. And oh, by the way, four times a year, every three months, I get a nice dividend that goes straight into my brokerage . And that’s Dick’s Sporting Goods, say, hey, we sold a bunch of golf clubs, here’s a portion of that back. So to me, it’s like a feeling of being able to see and experience what investing really is and being able to internalize it; I found that so motivating ever since the first time I bought Microsoft, it was a similar idea. Like, I saw how much my brother, who spent so much time playing video games, how much he loved his ex-Xbox. This was back in 2012. And I knew Microsoft, oh, next Xbox. So I could. It wasn’t the greatest analysis back then. But it was enough to get me in the game and get me participating in that. And so, for me, that gets me really excited. And it’s more tangible in that way than the kind of just feeling like a cog in the machine. To me, of course, I also the reason why I pick individual stocks is that I do believe I could beat the market. Of course, there’s that too. So you know, you have to have the ion there. I think otherwise; there’s no point in really trying. I’ve found that when I look at the way we talk about stocks, Dave, it’s hard to find other people who are most 99% of people probably aren’t as ionate about this stuff as we are. So I think that plays a huge advantage. You’re like one of my secret weapons here. I mean, we’ve talked a lot, and ever since I brought you into the process, it’s done great things for the stocks I’ve been able to pick and see. So that’s why I pick individual stocks. And I can see other people choosing that way as well. Whether you follow the pics, I do, or you do it yourself. But that all said, you know there’s no shame in buying an index fund and being happy if you’re happy with 10% a year doing that and not worrying about a lot of the other things as long as you’ve internalized what’s really important, the principles and the fundamentals of what’s going to give you a good chance to do well, in the future. Dave 10:07 Yeah, amen. I love the idea of understanding the basics and the fundamentals before you go on and do other things. And if you watch just about any sports movie, they all those coaches that are so famous, they just pound on the fundamentals before they can start doing the fun stuff. You know, the Titans, you know, they’re talking about all the fundamentals throughout the book, and you know, we’re going to be, you know, a strong fundamental team. And it’s the same thing with investing in; it doesn’t matter what you’re investing in, it’s still you have to understand the basic mechanics of how the stock market operates, what you’re buying, what’s involved in buying what you’re buying. And so you can take advantage of those things. And also, it can; as you said, it can give you some comfort when things are maybe not going as well as they have been for the last five or six months. And that’s normal; it’s part of the process of investing; it’s not always going to go up into the right; there are going to be times where it’s going to be sideways or down. And if you don’t have the basics, and you don’t kind of have a grasp and understand how the market works, and what it is that you’re buying, and what stocks are in those index funds, or those mutual funds or the ETFs, then you’re not going to understand why those things are going down. And when you don’t have that basic knowledge, it can lead you to make some emotional choices. It’s already challenging enough emotionally to deal with some of the roller coasters. And so I agree with you, for some reason, there’s a stigma about, you know, picking individual stocks versus, you know, picking index funds, and it’s all investing. And the basic foundation of all of it is the same. And it really comes down to what you’re ionate about, like Andrew and I are both very ionate about individual stocks; we love learning about companies and how they operate and all the ins and outs of them. And it’s fascinating, it’s endlessly fascinating to me, and I know it is to Andrew and a lot of other people out there, but some people don’t have that ion. And that’s great, you know, each to their own. You know, some people like this kind of music, some people like that kind of music. Same with the food, you know, it’s just everybody has their own individual tastes. And there’s also the fact that some people don’t have the time to spend the time necessary to look at individual companies. And it’s not looking at something and reading it for a minute and a half and deciding, hey, this is what I’m going to buy for the next, you know, few years. A lot of times, you know, unless you’re following somebody, a lot of times, you know, there’s work that needs to be done. And sometimes, you know, buying ETFs or index funds works better for people’s lives. And for a lot of people, that’s just a better use of time, because they got four kids, three jobs, a wife, you know, a boyfriend, a husband, you know, significant other have some short, you know, they just have so many other things taking up their time. They just don’t have the time to devote all that. And so, you know, looking at individual stocks may not be the best use of their time for the bang for their buck kind of thing. But still, understanding the basics of what you’re doing is still fundamental to that. I wholeheartedly agree with everything Andrew was saying. And so I think I’m going to stop. So because he did a great job. And you know, I have nothing else to add, so unless you’d like to tag on, why don’t we go ahead and move on to the next question. Andrew 13:21 Yeah, let’s do the next one. That was good. So Hi, Andrew and Dave. I’m Jason, a 19-year-old worker student in Italy. I started listening to your podcast a while now. I opened a brokerage and started investing monthly in the s&p 500 and dividend stocks. I find value investing really interesting. I’m diving more into it every day. But there’s a question I need to ask. Let’s say I found a great company that gives dividends. I think it’s undervalued; I buy it, and reinvesting it monthly after five years is still growing, and the same for the dividends. But then that stock price rises for reasons XYZ, and the intrinsic value that I give to it is far lower than the current stock price. In this situation, should I continue to dollar cost averaging and get good dividends? So maybe that first part of the question, if I understand it correctly, he’s buying the stock; he thought it was undervalued. Now, are the stocks way higher than what he thinks it’s valued? Should he continue dollar cost averaging into it? Dave 14:23 That’s a great question. And it can be a tough one to answer because I hate to use this term. It depends. It’s such a lame phrase; it really does depend. So how about I’ll take one side, and then maybe Andrew can take the other. So if I was going to say, I’d just use a company, let’s say you’re buying a company and it is I’ll pick a How about Adobe. So Adobe is a company that I bought at the time the stock market crashed; I thought it was undervalued, I was able to get a great company, and it was paying me a dividend, and it kept going up. At some point, the company would get at a high enough valuation that I don’t think that it could keep growing. But I don’t know if I want to keep putting money into it. And at that point, I would want to try to find a better use of my money and try to find a better idea that I think could grow faster. Because at some point, every company will it’ll meet gravity, and so that growth should slow down doesn’t always mean it will. There are always those exceptions to the rule. Amazon, until recently, Costco is a great example of a company that just keeps going up, and it just keeps defying logic. And every time you look at it, you think, why didn’t I buy this, and it just keeps going up, because it’s too expensive, but it keeps going up, you know, it’s just one of those things. But let’s say that our example Adobe keeps going up. For me, I will start to look for something that maybe offers me a better return over a longer period of time because maybe that’s more undervalued. And if you keep adding to that position, Adobe, as it keeps going up, you’re going to reduce your you’re going to increase your cost basis, which means in time, your return might slow down. And that would that could harm you. Now, I guess I’m going to be curious to hear what Andrew has to say, maybe on a different tact of that. Andrew 16:11 So one of the quotes I’ve heard from the great Peter Lynch, Peter Lynch, was this all-star investor for fidelity. And he said, selling your low on a butcher, I know what you’re gonna say, selling your winners and buying your losers is like watering the weeds and cutting the flowers, something like that. And so it’s this kind of like this idea that the stocks that are going up are probably going up for a good reason, probably because the company’s doing a great job. At the same time, the stocks that are going down might be going down because the business is actually really struggling. So you can always look at the two sides, just like Dave was saying, where I’ve added two winners and then saw the price came down. And I was like, Oh, I was trying to water the flowers; flower turned into we’ve also added and then ended up being a great time to add even though the price had gone up a lot. Because the company continued to grow, continue to grow. So you really, I think, have to look at the company itself, how that reflects in your whole investing plan. I mean, I’m sure people probably do it differently. I always try to find a new stock every month. So I can get diversification through the next 12-month period that I might have. Sometimes I might break that rule. But in general, I tried to do that. But for somebody else, maybe they’re doing that a lot less frequently. So you really just have to balance between what’s your personal dollar cost averaging strategy? And then what are the opportunities that are right in front of you right now. I think that’s what makes investing so interesting. Because Apple stock, for example, was a great time to buy it when Buffett bought it. But if you bought it when it was super, super expensive, it might not be a great time to buy it. So we’re looking at the same stock in two different time periods; you really just have to take what opportunities are in front of you. That’s why I think you have to look at why did the stock price rise? What are my other opportunities? And how am I gonna make that decision? So to me, I can’t really say, Well, yes, you should dollar cost average or yes, you should. Dave 18:18 Yeah, I would agree with that. And the thing about value investing is there are so many different shades of it. And there are some people in the value investing world that will buy something that’s undervalued, and then they will hold it till it becomes what they think is very valued. They’ll sell that, take those proceeds and use it to buy something else, kind of rinse and repeat, rinse and repeat. And just keep doing that. And there are a lot of people in the value investing world that do that; they swear by it, and it works great for them; I guess I fall into the camp of the Peter Lynch idea of trying to keep watering my flowers and cutting the weeds kind of idea. It can make it a bit more challenging. But Charlie Munger also said something great, he said, never interrupt compounding, you’ll never stop compounding and unnecessarily, that’s one of the great tragedies of investing is sometimes getting out, you know, before the train gets used a roll down the road. And I think that’s one of the things that he and Warren Buffett have done an amazing job with is their mindset of being able to stick with a company like American Express or a Visa or any of these other companies that they’ve owned for, you know, Coca Cola for, you know, multiple, multiple, multiple decades, and it just keeps rolling down the track. And a lot of other people would have sold out a long time ago, but they would have lost all that compounding that they’ve gained. And so that’s part of the metal part that can make it a big challenge. But I prefer to follow Peter Lynch’s idea. I think it works better for me personally. And so I think it just really kind of comes down to what you’re comfortable with. And if you’re not comfortable holding after you think the company has a fair value, then follow that path. You want to keep trying to what are the roses then, you know, by all means, you know, think about that as well. So I hope that helps answer Jason’s question. All right, well, we will go ahead and move on to the next question. So we have Hello; I have been listening to your podcast for a few weeks. And I’ve learned a lot. Just subscribed to your E letter yesterday. I would like to follow along with your investing strategy. I have just gotten interested in buying stocks, and I’m trying to play catch up with my retirement portfolio. I am 50 years old and was wondering if I could significantly benefit from following your model for 10 to 15 years. My other question is, do you recommend just starting the purchase of recommended stocks going forward? Or should I be looking at purchasing the ones currently in your portfolio, your guidance would be much appreciated. Thanks, Angie. So, Andrew, this is right up your alley. So what are your thoughts on Angie’s Great question? Andrew 20:44 That’s a great question about the time horizon for me, and I just wrote a blog post about this recently. So it’s pretty timely; I like to look at trying to hold stocks for 10 to 20 years. That’s a good goal to shoot for. We’ve had several guests on who have talked about why that’s the case; you can take the history of the stock market, which spans many, many decades; by the way, you can look at 10, year five, year 15, year 20-year time periods. And as you expand that time horizon, the better your results have been if you bought in the stock market, regardless of how much you pay. And so especially that 10, year, 15 years 20-year time horizon, that has a pretty good chance that each thing you buy being profitable. When I look at a stock, I look; obviously, nobody can look into the future. But I try to see, at least for the next ten years, can I reasonably estimate what kind of profitability I think this company is going to have. You can never do that perfectly, which is why you buy multiple socks. That’s why you diversify. But over the next ten years, what are the things that make me think the company can grow this much, can get this much more profitable, and see that reflected in the stock price over the long term. So the longer you hold the stock in general, the more of a chance that the market will catch up with what the business is doing. Because the markets are very emotional like we’ve taught before, Mr. Markets, a manic depressive monster, and things will go in and other fashion, things go in and out of trend. And investors run away or run to lots of ideas really quickly. So that can make the stock market hard. But if you look over longer time periods, 510 15 years, the stock market starts to reflect more on what’s going on with the businesses. So that’s why I look at what the business is doing now; what is it done? What does it look like it can do in the future? And that factors into why we buy a stock and why we hold the stock. So I would say a 10 to 15-year time horizon, I think, is right in that sweet spot, though I would probably recommend if it was me personally, I would look into like bonds to like, just to have that into my mindset. When do I want to start putting into bonds for retirement for the next 10 to 15 years, though? Yeah, stocks look great as far as when subscribers enter the leather. So I have my monthly newsletter; I’m making a stock pic every month; I always recommend just buying whatever we are buying that same month. And it goes for that exact reason. I said in the last answer we could be looking at Apple stock; it could have been a great time to buy it; when Buffett bought it, maybe you bought at the top, and those too expensive that might not have been such a great time. Again, it all depends; every opportunity is different every month. And so in my mind, I tried to do this blend of like, I want to buy a great company, I want to hold it for a very long time. But I also don’t want to pay a ridiculously high price for it because that could take years off of my compounding. So that’s why I’m doing that; you really have to pick your spots, be patient, and just take what the markets are giving you, something you like to tell me all the time. And I constantly need this reminder like sometimes you just got a fish where the fish are, right? Like I always like want to model my portfolio a certain way. But then you’re like; I’ll tell you like, Man, I want to go for the stock. But it feels like I’ve been buying a lot of these kinds of companies; you gotta go where the fish are. So you just have to take those opportunities where they are. And so when you subscribe to a service like the leather, there’s a bunch of positions in there already. They may not be great purchases anymore. That’s why you have to take each situation as it appears. That’s why if it was me, I would be looking just to add each one over time as it came in. Dave 24:41 Yeah, that’s the perfect way to do it because it will allow you to build a portfolio over a period of time. And he also in the letter will tell you about different companies from time to time that is offering an opportunity now. So even though it’s been something that he bought in the past, it’s a good value to buy now as well. And I guess the other thing to think about too is, you know, he spends a lot of time working on this. So we were talking off the air before; how many hours do you think you spend on a pic a month, at least? I’d say that’s an understatement, Ali. Yeah, that’s all the time, the reading of the financials, trying to find companies that are opportunities, as well, as you know, he and I talk about this a lot. And you know, he’s reading books, he’s listening to the transcript, earnings calls, he’s watching videos, and all these things go into it all compounds. And so companies he may have picked six months ago, the learnings he learned from that company apply to today; it’s all part of the process of learning how to do all this. And that’s why he does this. And that’s why he spends all the time writing it out, too. It’s not the write-ups are not just a, you know, a couple of words, you know, hey, buy this stock. These are all the reasons why. And all the logic behind it and everything. So there’s a lot of effort and a lot of work that goes into, you know, just pick one company. And then again, that kind of goes back to the earlier conversation we have about the time spent to do something like this, you know, it’s not, you know, if you want to pick individual stocks, you know, doing something with Andrew, falling his picks on the USA is a great way to do it, because he’s doing all that work for you. So he’s making all the time and effort spent. And I can attest to all the hours spent because I’m not there doing it with him. But we’re certainly talking about it, texting each other, going back and forth on different ideas or whatnot. And there’s been a lot of companies where he’s talked to me about different things, and I’ve kind of tried to poopoo it as much as I could, because like he said, You know, sometimes you really want to buy something because you really liked the company, or you really want to go in this direction. But sometimes you do have to fish where the fish are. And these things are all things that can help you, especially if you’re nervous and you’re dipping your toes into the water for the first time. You know, these are things that you can lean on to help you get over those, that anxiety and those fears. So I would definitely check it out. It’s definitely worth your time and effort. Your ranking case, you guys are wondering, that’s a little joke from the Warren Buffett and Charlie Munger show from their shareholder meetings. Whenever Warren gives a really long answer, Charlie, always, a lot of times, in the end, will say I have nothing else to add. And then he moves on. So it’s just it’s a little funny. Little funny. All right. Well, without any further ado, I will go ahead and sign us off. So again, thank you, guys, for sending out some great questions. We really enjoy talking about this stuff. If you have any questions about anything that we talked about, you can either reach out to us or you can check out our website, einvestingforbeginners.com; we have a great resource there. There’s a search bar at the top of the page that follows you wherever you go on the page. So if you have questions, if you’re looking to find out more about dividends, dollar cost averaging, any of those kinds of things, mutual funds, index funds, we have all kinds of resources to help you learn more about all these things, as well as the fundamentals. If you’re new to podcasting, if you’re new to investing, go check out our investing for beginners series. It’s episodes 43 through 47, I believe Andrew 28:06 in okay. It’s not 43. It’s either 42 or 43. You’re probably Dave 28:12 good our podcast page on our website. It does tell you all the beginner episodes there and walks you through all the beginning episodes is a great resource for you to kind of get your feet wet and learn. So without further ado, I’ll 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. We’ll talk to you all next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post IFB236: Differences Between ETFs and Mutual Funds, and Investing in Companies Beyond Their Fair Value appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we chat with David Stein of Money for the Rest of Us podcast, and the book of the same name: David explains Closed-End Funds to us Differences between open and closed-end funds and ETFs The best strategy to invest in closed-end funds Good resources to research closed-end funds What are the best s to use for closed-end funds We get David’s take on the commodity market 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right, folks, welcome to Investing for Beginners Podcast. Today we have a special guest; we welcome David Stein. He’s the host of the terrific podcast money for the rest of us and the author of the book of the same name. He’s here to educate us more about money, how it works, how to invest, and how to live without worrying about money, which is a great topic to know about. So David is here to talk to us about closed-end funds, as well as other fun stuff about investing in the stock market. So David, thank you very much for ing us today. We really appreciate you taking the time out of your day to come to talk to us. And we’re very excited to learn more about you and all the great stuff you can share with us. It’s great to be here. Thanks for having me. You’re welcome. So I guess, as I mentioned in a little intro there, let’s talk about closing funds. I guess for those investors out there that are not familiar with that term. Can you kind of help educate us a little bit about what those are? David 0:54 Sure, sure. So a closed-end fund was the original mutual fund. It’s a commingled investment vehicle where you have shareholders; you have a professional money management team that is selecting the underlying stocks that could be bonded and could be equity REITs. But what’s unique about closed-end funds that differ from an open-end mutual fund or an ETF is an open-end mutual fund, for example, is what we’re most familiar with in a 401k plan. It trades at the end of the day. So the fund sponsor figures out who wants to buy shares, who’s who wants to sell shares, they net out, they figure out the price of all the underlying assets. And then you exit or enter that fund. The market price equals the net asset value, which is the total assets divided by the share prices. Closed-end funds work; differently; they trade on an exchange, just like an ETF does. But there isn’t a mechanism to make sure that the value of the assets, the net asset value per share, equals the market price. And so there are some advantages to that. Because then the fund sponsor has this set pool of capital, they can invest in maybe some more illiquid securities; they can use leverage. But the challenge or the opportunity for us as individual investors is that we can buy these funds at discounts to their net asset value. So you could buy a bond fund that sells at a 15% discount on the net asset value. They’re a smaller market. So what I like about them is they’re not a market that hedge funds can play in; you don’t see a bunch of institutional investors buying them because they just can’t get the liquidity. So most owners of closed-end funds are individual investors, which means one of the things that I’m always asking about, and in my book, I talk about this, is to ask who’s on the other side of the trade. Because investing is it’s a competitive game. And we want to know, who’s selling us a particular investment? Just like when we buy a house? Who’s selling us the house? Or who’s selling us a car? What do they know that we don’t, and with most investments, typically, if hedge funds or bots or institutions are involved, they know more than us; it’s individual investors, but with closed-end funds, it’s other individual investors, and they tend to panic in a market environment like today. And so they sell these funds, they’re not sure necessarily what they’re owning. And so then you see these discounts widen. And then that becomes more of an opportunity for us. Andrew 3:33 That’s really cool. So I guess, you know, mutual fund space, ETF space, I think of the big names like Peter Lynch and his mutual fund from the 90s that had crazy returns. Today. It’s like Cathy wood and the Ark fund. Are those close on funds? Are those open then funds? Whether the difference or similarities between those more popular funds and the ones you’re talking about? David 3:59 The Peter Lynch fund, the fidelity those are open in mutual funds; Ark is an exchange-traded fund. And I should probably extend my analogy to exchange-traded funds. So they exchange-traded funds, or like closed-in funds is, in that they trade on an exchange. And you can see the price disconnect from the underlying net asset value. Or with ETFs, you have what is known as authorized participants, basically institutional investors that are always looking at the price of the ETF compared to the net value, which gets published every 15 minutes when the markets open. And then they can buy and sell the underlying securities or what’s known as a reference basket, as well as the underlying shares that can short them, and so all that arbitrage allows ETFs basically to stay in line, the price to stay in line with the net asset value. And so, Cathy Woods Ark innovation ETF, I think it’s ARKK that’s an ETF now with its distinct because it’s an actively managed ETF, whereas most ETFs are ively managed. They’re seeking to track a specific benchmark. But Ark is heavily active, very technology focused, certainly down 60% year to date, but its price will stay close to its net asset value, whereas a closed-end fund won’t, and I mean, some of the big sponsors are closed in our Blackrock Nuveen. I mean, there are a number of big-time sponsors, and one of the other differentiators with closed-end funds is they tend to be leveraged. So they’re borrowing money to leverage up the underlying assets to magnify the return. So they tend to often be more income oriented. So you’ll see distribution yields of 678 percent. And that’s where they can be attractive as we can pick up a yield at 6% to 7%. In an asset class that you know, it’s selling at a discount to its underlying value of 15%. Andrew 6:00 Is it as simple as finding those closed-end funds that are trading at a discount and buying them and selling them? When are they fully valued? What kind of a strategy Have you found tends to work? Well, when talking about these kinds of investments? David 6:17 Well, what type we’re trying to find is a closed-end fund whose discount is greater than average. And so if you go to a website, like C, F Connect, you can screen-free, you can screen based on the biggest discount, and they calculate what’s known as a z score. And it’s basically a statistical measure. And Morningstar reports the same thing. Basically, just how big is that discount relative to its average? And so when I’m investing in closed-end funds, I’m typically looking for a z score of negative three or less, in other words, so it’s negative four, negative one, you probably don’t get more than negative four. But generally, it’s more negative than negative three. And that typically shows that the discount is greater than average. So that’s an opportunity. And then the other thing to consider is this just recognize is their dividend sustainable. So if they’re, they have a six or seven 8% yield. Now that dividend has to be funded somewhere, either out of an income or at a gain. And so it’s just, you know, just like if you’re going to analyze a company to invest in a stock, and there is some due diligence required on closed-end funds, just to understand whether that income is sustainable, or that dividend sustainable. Dave 7:32 Yeah, that makes sense. So I guess, to help educate people, and I get myself to with closed-end funds, do you have the same kinds of choices of baskets that you could choose from? Or is it a smaller asset class, and there are fewer choices than you would have with ETF? So if you’re looking to invest in, you know, just technology versus commodities versus maybe real estate? Do you have different closed-end funds that focus on those kinds of areas? Are they more a broad range of like, you know, the NASDAQ and the s&p and the Dow kind of idea? David 8:07 Now, they’re all different types of asset classes, bet 60%, or more fixed income, just because that focused on the distribution yield, but there’s equity. I mean, there’s value, there’s growth, there’s technology, there are their debt funds, there’s even, and one of the holdings that I own is the bearings. Corporate investors fund the tickers MCI; they basically do private market lending. So they’re lenders to private companies. And you know, that’s an example of a fund that is available within close in funds in that this is private debt. And so it’s not necessarily valued every day. It’s not illiquid. But this is a way that individual investors can get access to private investment. And that isn’t necessarily available, but within a public market category, when we don’t want it any more than we can sell it. So it’s sort of access to illiquid investments in a more liquid way, Andrew 8:59 Kind of along those lines as a venture. Do they have venture capital and private equity as well? David 9:05 I’m sure there are the ones that are in sort of private equity type companies because they do exist; they tend to have much wider discounts because it’s so difficult to value those companies with something like private debt; this particular question from the bearings, corporate investors, they strike their net asset value quarterly. So they’re able to lease value the debt quarterly, and that’s the other thing with these closed-end funds, if they’re holding private assets, you want to dig into the financial or the annual report, the semi-annual report the perspectives just to understand what is their valuation policy, like, how are they valuing the assets in order to come up with the net asset value? Andrew 9:45 Okay, yeah, I could see how that can be really helpful. I was telling somebody to go research an ETF. I know there are websites like etf.com where people can go, and there’s almost like a database of, I don’t know if it’s every ETF, but this seems like any of the ETFs that you would think of seems to be on that website. Is there anything? I know you mentioned the website earlier, but is there anything like that for closing funds? Is it just a matter of I’m going to Google this fund and kind of have to do my own independent research based on what they’re disclosing? What’s the research process behind that? David 10:19 So Cefconnect.com is the main one that I use that provides some profiles that allow you to screen Morningstar covers closed-end funds. So you, I mean, they you can get the returns and some basic information. No, typically after, if I look at Morningstar, see connect, then go to the sponsor’s website and get the fact sheet or look at the underlying documents. And in that sort of process, we do have on our website of free investment guide on how to research closed-end funds and explain more about them, which could potentially be a helpful resource to listeners. Cool, what’s the website where I took money for the rest of us.com/closed End funds? So closed hyphen, n hyphen funds, and I’ll send you the link; you can put it in the show notes. So that’s kind of a guide we wrote a couple of years ago. That’s, that’s helpful. Dave 11:10 So a question that kind of springs to my mind is, what kind of investment vehicle would be best to invest with these funds? Like, oh, versus a traditional or Roth or a brokerage ? Where would be the best place to put those, or doesn’t matter? David 11:27 Well, because they have higher distributions, you know, sometimes in a tax-deferred vehicle, an IRA or Roth IRA can be helpful. But the reality is, one’s wealth growth is they can’t put all their assets in. In tax-deferred vehicles, I have exposure to closed-in funds, both my taxable s as well as my tax-deferred s. Andrew 11:49 Okay. Yeah, I think that’s helpful to kind of think of; it’s like, if there’s a focus on distributions, kind of treat it like you would any investment that generates higher income. Right. So that’s definitely a fascinating option. And something I know doesn’t get a lot of press in the investing world. And so we appreciate you breaking down that kind of an investment option for people. I know you had; this is gonna like completely shift gears here. But I know you had an interesting podcast episode talking about commodities, and how just to give like a few background commodities, if you think of oil, call gold, any of the basic building blocks of the economy, really, the price of those have been doing very poorly in the last couple of decades. And so I know, there’s been a lot of talks out there about how maybe, you know, the economy is moved past commodities. And, you know, it’s all a technology-type company economy now; what are your thoughts on commodities, and give us like a breakdown of what you covered in that episode, and kind of what you’ve been observing in the world lately around commodities? David 13:02 Sure. So we have been in a commodities bear market, really, from 2011. So coming out of the great recession, we had a peak in 2008, and then commodities sold off, and then they really peaked again in 2011. And then, really, from 2011, through May 2020, we’d really, I think you’d call it the bottom because if you recall, in May 2020, the price of oil went negative; there was a lot of press regarding that. And it wasn’t oiled itself; it was oil futures. And we’ll get to that because it’s important to recognize that as investors, we cannot go buy a barrel of oil. And so we, as individuals, and even institutions, unless you’re buying a ship of oil, you’re investing in commodity futures, which is very different than investing directly in a commodity. If you go out and buy gold, you can buy a gold coin. But for most commodities, we can’t access that. And so when we think about commodities, we’ve had a boom in commodities over the past several years. And much of that is certainly the Russian invasion of Ukraine. I have been part of that because a big part of the supply now has sanctions, and that’s caused some issues. But another issue within commodities is when we went into this bear market, oil companies just didn’t invest as much. Their shareholders demanded they pay higher dividends and be more disciplined in their investment in oil. And as a result, we had really come under-investing in oil for about a six to seven-year period. And then as we came out of the pandemic, and as there were supply constraints, and we had this under-investing in a lot of different commodities that shot the price of commodities up, and so then the big question is, are we in a new bull market for commodities or is this just a temporary thing? And it’s an incredibly difficult question to answer. Because unlike 20 years ago, when you can look at these very long cycles, we now have this energy transition going on with the electrification of autos. And so, at some point, you’ll get more and more EVs online that obviously don’t use oil; they’ll use other ways to generate electricity. So, you know, in an episode, we kind of went back and forth and looked at both sides, is there a new commodities boom, because of the underinvestment, or is this a temporary thing, and because of the energy transition, you’ll see, and because China’s economy is slowing, and they were a big consumer of commodities in the prior bull market, and their economy is transitioning, and so you have all these pieces going on. At the same time, the hardest thing about commodities, when you think about commodity futures, when you buy an ETF, such as the Deutsche Bank, commodity tracking ETF, or some other commodity ETF, let’s say just an oil, they’re buying commodity futures, and a commodity futures a promise to take delivery of a specific commodity. In the future, the prices of those futures are based on the consensus of what investors believe the price of that commodity will be 30 days from now or 60 days from now. And so with commodity futures, the only way to make money, if you’re investing in ETF that’s investing in commodity futures, or you’re doing it directly, is the commodity price has to do better than what everybody already expects; it has to beat the consensus priced into those contracts. And that’s why where you can see somebody investing in oil. And as they roll over that contract, it loses money every month because the future price was too optimistic. And then it’s called what’s known as negative role yield essay on our website about how that works. But basically, you can have this investment in a commodity and lose money unless we get a period like we just had the past two years where the commodity prices spiked way more than anybody thought. And that’s why commodities are up 35% year to date. So it isn’t just that they went up; they went up more than what everybody expected, which is priced in the futures contracts. Andrew 17:24 Almost like whoever is selling these features are the only ones who are making money off, this doesn’t seem to help the companies; it doesn’t seem to help commodity traders. I mean, just to be like, completely oversimplify something that it seems like whoever is selling these contracts is making a killing, David 17:39 We could sell a contract, I mean, commodity markets, a zero-sum game, if you are going long a commodity, there’s not like a Vanguard selling it to you. It’s somebody on the other side of the trade that believes that commodity will fall in price, or they’re just, they want to take the opposite, and just take the short the commodity every month, and then they’ll capture that negative role yield, and that ends up being a positive return. And so yeah, it and then I mean, you have oil producers that are hedging, there are uses for commodities to hedge your production cost or something like that. But much of it, I agree with you, Andrew; it’s speculative. But it’s people speculating on both sides of the trade, which is why commodities are an incredibly difficult way to invest. Because it’s a zero-sum game, you have to be smarter than the consensus to think things are going to do it. And if your view is we’re in a commodities bull market, in the consensus is wrong, we’re going to continue to the prices are going to go up even more than people expect, then you go along, but you mentioned, you know, earlier gas prices and gas prices have fallen some, so commodities are off 15% In the last month, so if an investor decided I’m gonna go long commodities invest in DVC. They’re down 15% already, and it’s only been a month, so they can be very volatile. Andrew 19:03 So, you know, obviously, we could get into all of the angles of, you know, whether what’s going to happen in the future with commodities, but just let’s just like side step that and let’s just assume that somebody believes that we do have a commodity supercycle ahead, that whatever is happening now is something that seems like it would persist. It sounds like you’re not going to recommend buying and holding these contracts. Where would you think an investor should start to look if they want to position their portfolio for some sort of commodities bull market, the way David 19:40 That I had invested in the past that we did when I was an institutional investor? It is the Deutsche Bank commodity tracking ETF, so dBc is the ETF; what’s unique about the ETF it tries that it doesn’t necessarily just buy the front month contract. So the one with the one that’s 30 days out, it can vary which contract It buys in order to try to minimize this drag or this negative role yield. I don’t own commodity futures right now. And I wish I had bought them back in May 2020. But we’re in the midst of the pandemic. And again, so I’m looking at these futures curves. And I could see all right, the front month contract is negative, but the word assume I don’t know, I think it’s like $20 a barrel for oil for the next month. So then you say, Okay, we’ll go up 20 bucks in a month like I don’t know. And that’s the challenge with commodities that I don’t typically like to invest in a way that I have to do better than what the consensus already thinks. And with a zero-sum game, that’s exactly what you’re doing. And that’s what commodities are speculation, something as discussion on the show, as well as the book, you know, what’s the difference between investment, the speculation and the gamble? The speculation is commodities where there’s disagreement and what the price should be; see if people short the commodity and people go long, somebody’s going to win, not everybody with an investment. It has a positive expected return has cashflow. It has something some income. And so your returns are expected to be positive. And then a gamble is something that has a negative expected return. And so, as an investor, I prefer investments versus speculations; although I’ll have some, I have some gold, have some bitcoin, etc. But most of the workhorse of our portfolio should be investments with positive expected returns. Andrew 21:30 So what kind of allocation? What are you talking about? When do you mention the Dulwich commodity basket? Just ballpark kind of how is it invested? David 21:38 Or how like a typical investment? Yeah, I mean, generally, speculations should be kept less than 10% of your portfolio; I have seen this problem speculations, people just get so excited, and they’re so confident they’re going to be right, without really understanding it, I have a family friend that basically lost their farm, betting on commodities. And it was so frustrating because he showed me this fund; it was a private fund investing in commodities; he was very excited about it. And I noticed they closed that one fund, and then they started a new one. So there was like a break in their track record pointed out to him, and as I did more research because they lost all the money. So here’s the private commodity fund that had to shut down and then started a new one. And the guy still invested and lost his shirt and lost their farm. And so keep it less than 10% of your allocation. Like in the case, you know, I only have about three to 4% of my net worth in gold, gold coins, I mean, their hedges, their protection, but their zero-sum games, they’ll only go up if people are willing to pay more. There’s no cash flow associated with it. Dave 22:49 So how do the commodity prices affect investments that we could make? So, for example, I noticed the other day that the price of copper has dropped, you know, as oil did in 2020. And with him has kind of gone the other way. And so when you think about kind of the Evie coming revolution with cars, it’s hard to look at some of those companies and try to figure out whether you think a company like Albemarle is going to be a winner in the long run versus a company that’s mining copper. And both are important to electric vehicles. But it’s kind of hard to figure that out. That’s what I struggle with. David 23:27 Well, it is, which is why I purchase individual stocks because I spent 15 years researching hedge funds managers, and long only stock managers came away disillusioned in the sense that the smartest investors in the world, most of the time, they’re wrong or they might be right about something. But then something complete surprise happens. And so, you know, my approach to investing is how do I invest in a way that I don’t have to know what’s going to happen. And but even though everybody else still thinks they know what’s going to happen, and that’s what gives you opportunities, like within closed-end funds, or I’m gonna be at the end today, we have to make an investment. And so I mean, there are areas of the market that can become more attractive, they get cheaper, but I’ve always been an asset allocator focused on baskets of securities, versus individual securities, you know, sort of once a Tuesday unless, you know, it’s something credibly simple like an AI series I savings bonds or something like that. Andrew 24:31 Can you give us just a taste of how you make those allocation decisions? Like, what is it over, let’s say a five-year period that makes you say, I’m gonna allocate more here, or I’m gonna allocate more there. Can you give us an example? David 24:44 Yeah, so this is what we did to show investors. It’s what I do on my websites; when to do my personal investing is come up with expected returns for different asset types. So in the building blocks of that is what it’s called. So yield can be dividend yield. It’s a bond yield. If it’s preferred stock, its dividend yield, I want to look at what that cash flow is. We want to come up with an estimate of how fast would that cash flow growth over time. Now, if it’s a stock US stock market, for example, we can look at the dividend yield. It’s one and a half percent right now; if we assume that earnings grow over 6%, that’s the second element of it. And then the third thing that drives returns is what are investors willing to pay for that cash flow stream today versus five years from now? And so that we’re looking at price-to-earnings ratios for different markets. And so that’s the approach I use for all different asset classes and then look at and decide, okay, this area is more attractive. We want to add more there. But I’m also cognizant of the risk, and the risk that we use in our approach is maximum drawdown. So as institutional investors, we focused on volatility, but the reality is that volatility is not something that is intuitive to investors. And we don’t care about upside volatility. Yeah, if it goes up more than everybody expects, that’s great. So I focus more on maximum drawdown, how much could we lose stocks historically have lost worst case scenario is 60%. So I want to scale my allocation to stocks, assuming they could lose 60%. And in that, that 60% loss is bad. If you’re a young investor without much money, fine, you just write it through. But if you’re nearing retirement, then it can impact your lifestyle. And so the idea is to scale your investments based on not only the downside risk but the impact of that risk on your lifestyle. And then I’m just diversified on dozens of different types of investments and asset classes, both public and private. But I’m generally more of a risk-averse, conservative type investor because I am older than many. So I’m not a young pup anymore. So the reality is that I don’t need to take the risk because I’m financially independent. So in that case, like, I’m gonna be a more conservative investor, but it’s still going to be diversified and, and still take advantage of opportunities as they arise. Andrew 27:15 Yeah, I do like that really big-picture approach and appreciate you sharing your wisdom with us. Okay, the last thing is, before I wrap up anything else you guys want to discuss before we wrap it up. I thought that was a good place to end unless you guys had something you wanted to add to that. That’s good. A lot of good stuff there, David, and we really appreciate your time. In your ing us, you have a great podcast called Monday for the rest of us. Just even scrolling through the episode list, you can see a wide variety of topics. And I think that has an attractiveness all on its own just based on that. So you have your podcast; where else can people go to find out more about you and what you’re doing online? David 27:58 The main website money for the rest of us.com. So I’m there occasionally to dip into Twitter @jdstein, but most of our free investment guides, such as enclosed in funds. So when I mentioned negative role yield or investing in commodities, you can find that money for the rest of us.com in the menu item is guides. Dave 28:19 Cool, awesome. Well, again, David, we really really do appreciate you taking the time to come us today and help educate us on all the great topics that we discussed today. So without any further ado, I’m gonna go and sign us off; you guys go out there and invest with a margin of safety, emphasis on the safety. Have a great week, and I’ll talk to you all next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post David Stein from Money For the Rest of Us Podcast Discusses Closed-End Funds and Commodities appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we discuss: What is an average investor or beginner? What are our thoughts on Robo-advisors? Thoughts on companies that pay a static dividend? How do you approach the risk-free rates for valuation models 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right, folks, welcome to Investing for Beginners podcast; tonight, we have episode 235. So tonight, we’re going to answer three great listener questions we got recently. And we’re going to do our little give and take. And we have some interesting topics to discuss tonight. So I will go ahead and read the first question without any further ado. So I have Hi, my name is Alicia. And I started listening to your podcast a few weeks ago; I am a pretty linear person. So I just listened in order. I have some questions that you have probably already answered on the show. So I’m not sure if it would be useful for me to ask them or just keep listening. Some questions I had, number one, do you talk about how this is targeted to beginners and your average investor? Could you give me an idea about what the average is considered to be? I am a beginner, and I’m lucky enough to be in the tech field. But I’m curious if this was realistic to someone who makes $50,000 a year. So let’s maybe we will answer that first part. Now we can touch on the second question. So Andrew, take it away. What do you think of Alicia in the first part of her question here? Andrew 1:03 I would say first, first and foremost, thank you for writing in, and don’t ever feel like a question doesn’t deserve to at least be shot in the dark towards us. I don’t mind re-answering questions sometimes, especially because we get people who are listening for the first time and maybe didn’t hear about the question. So it turns out we haven’t answered this question before. And I’m happy to, I would say, two or three years ago, before we redesigned the blog. And then we redesigned it again; there used to be this graphic on there with these words that basically said, Hey, if you were, you know, in your 30s, if you had the median income, and if you saved for this amount of time, you would have this amount of money. And at that time, just a few years ago, the median income in the United States was around 55,000 a year, I believe. I mean, that could have changed in the last couple of years. But to say, like, at $50,000 a year by an average investor, I would say yeah, why not? Average is all relative, obviously. But I think what’s a trend that we’re seeing pickup nowadays with the advancement of the internet and all the great brokerages who have lowered their commission fees down to basically zero, and more and more information just being spread through the internet, through podcasts, all of the channels, people are just getting more educated, they’re getting more interested. And they realize that you don’t have to have a ton of money to start. And the sooner you put money in, the faster you can get a snowball effect to work on your wealth. So I would if I was somebody making 50,000 a year; yeah, it’s a great time to start. And if you’re making 100,000 a year, even better, but I would say anybody in that range for sure it applies to you. If you have extra money to put away, it applies to you, regardless of what your income is. Dave 3:00 Exactly, it really comes down to the money that you can start investing. And like Andrew said, the sooner you can start, the sooner you can start compounding that wealth. And like Andrew was saying, with all the brokerages reducing their fees, in many cases, making them zero, there’s a lot less friction to people starting to invest, and with the additional benefit of adding partial shares to so many companies that you can buy. I mean, Amazon is now $109 A share after the stock split recently. And Spotify, well, after their unfortunate big drop is Shopify, I’m sorry, after their big drop in share price is now, I think, and their stock split. It’s like $30 A share. Amazon just did theirs; Google’s going to do theirs this week, I believe, and or maybe next week. And so that’s going to be in the 100 $200 range a share, you can still buy partial shares of it, you could have bought them before. So it’s a great way to get started. And it’s a good way to get your feet wet. It’s a good way to experience the thrills of buying your first stock. I still the nerves and the shakiness that I had when I bought Microsoft way back in 2013 or 14. And so it’s, you know, that was almost ten years ago, it’s kind of crazy to think about, but the sooner you get started, the better. And a beginner is a beginner, and it doesn’t matter what level of income you’re starting at. We’re all starting at, you know, the first time you start, you’re a beginner, and so it doesn’t matter what level of income you’re starting with; the more important factor has the money to invest in creating a budget. And finding that money so that you can start investing is really the best way to go. So, Alicia, I’m glad you’re interested in doing this. And I’m glad you’re starting because it’s going to pay dividends, no pun intended, well, maybe a little bit in the long run. So keep it up. All right, so let’s move on to the next part of the question. So she asked what do you think of Robo advisors? I was thinking about We’re starting there just to start somewhere. So thank you, Alicia, for that question. Andrew, what are your thoughts on Robo advisors? Andrew 5:06 I don’t like them. That said, in the context of if the decision is, do I do Robo advisors? Or do I just whether Charlie and Warren say suck on their thumbs? The question is, between those two, yeah, definitely at least do something. I, just in general, don’t like Robo advisors for a ton of reasons. Dave 5:26 I had a mixed experience, I used the Betterment a while ago, and I had kind of a mixed experience with it. It was convenient; it was easy to put money in there. So that was great. And it was easy to get started. There weren’t a lot of choices. So they didn’t have like information overload. But the frustrating thing was when the market started to turn on me, and I wanted to try to change my allocation or take some of the money out, I couldn’t do it. And so that was a little bit frustrating for me, I couldn’t change where the money was going in. It just automatically put money where my allocation was, and I wasn’t able to change it. I didn’t like that. So for me, it didn’t allow enough control. But I think in the right circumstances is probably perfect for people that want to get started like Andrew said, if it’s a choice between not are doing, I would rather have you do than not, Andrew 6:16 I would 100,000% Rather you buy an index fund. It’s just as simple and easy. Arguably, you could do something like the SP y, which just you’ll buy the entire market, which is the entire s&p 500, Top Biggest 500 biggest companies in the world and just do that. And you’re invested. And you don’t have to worry about whether you want to pick for your very first investment because you’re just buying the market. Dave 6:43 Yeah, exactly. Yep. I 100% agree with that. That’s a great point. Andrew 6:47 And you don’t have to yell at any robots when one of those, right? Dave 6:49 Yeah, you don’t have to get you’re gonna get frustrated at the computer. All right. All right. Let’s move on to the next question. So we have Hi Indra. Dave, what are your thoughts on investing in companies that give the same dividend amount regardless of performance? For example, the United States Steel Corporation ticker X has given the same five-cent dividend every quarter for almost 15 years. Besides, certainly a pandemic and recovery went to a penny to me; you are limiting yourself on the upside when your investment could have a record year and still the same dividend. I’d love to hear what you guys think. Thanks for everything you guys do and for teaching beginners how to be more active in planning for their future, William. So Andrew, what are your thoughts on the dividend and paying a dividend? And I’d like to hear from the Drip King on this. Andrew 7:37 Well, I agree with William; I don’t like flat dividends either. I want to buy companies that are increasing their dividends, year after year after year; I wouldn’t say that I will not buy a stock that has a flat dividend. I’ve done it in the past; I’ll probably do it again. And one day, I mean, we’ll see in video look is starting to look attractive if it comes down another 50%, Maybe, right? I agree that it’s it would be frustrating to me to see a company get a bunch of profits and keep their dividend flat. And then you have to wonder what they are doing with those profits. Dave 8:16 Do you? So I guess the question that kind of, I guess I think about so the company that he used for this example I’m not super familiar with, but it’s in the steel industry. And that’s very cyclical, correct? And I’m just guessing, based on some of the conversations that you may have had about that industry, that the earnings are probably a roller coaster, up and down quite a bit. And so I would wonder if paying a flat dividend for a company like that, which, to me, is a very secure company in that industry. Yeah, that would be growing. But if their earnings are all over the place, it would probably be hard for them to grow the dividend, too, though, wouldn’t it? Andrew 8:55 That’s a very good point. And maybe it is smart for that situation, you know because they do know that like, at any given year, things are going to be feast or famine. And we got to be extra safe in case things dry up. Right? Right. But as an investor, nobody’s putting a gun to your head to say, hey; you have to invest in this boom, bust feast, or famine industries; I very generally tend to stay away from them. There are plenty of other companies who don’t have that problem. And so you get those dividends that grow every year, and it’s like, gasoline on your snowball when you get those dividends. A company’s good at growing them like that, Dave 9:38 right? Yeah, exactly. That’s a good analogy. So I guess a couple of other things kind of along the lines of thinking about dividends, especially with a company that’s paying flat dividends. In the counter-argument. I’ll give you a company constellation software, which is a company that’s based out of Canada; they have paid a flat $1 dividend for the last ten years it hasn’t grown at all. But the flip side of That is the company’s share price has appreciated around 30% annually, compounded over those same ten years. And so the company has done a great job of reinvesting and has grown exponentially, but it still pays the same flat dividend. And so shareholders are actually pushing back on the company saying, Stop paying us the dividend, we don’t want it, we want you to reinvest the money because you do a better job of reinvesting the money than giving us $1. And so the shareholders are actually upset that they’re paying a dividend. Because the company has done such a good job of reinvesting the money on their own, they can earn a better return on that dollar that they give investors than the investors do by getting the dividend. So it’s kind of an interesting juxtaposition; I think it’s kind of it’s a little bit along the same lines is why Berkshire has never paid a dividend. Because Warren can reinvest that money, so much better than giving us a dividend, and he can use that to grow the value of the company. So it’s kind of a, I guess, it’s kind of an interesting reversal compared to a company like us steel. So that’s, I guess, something I was thinking about. Alright, let’s take a dividend idea a little bit further. So if you have a company that’s paying a flat dividend, also they cut it, how do you react to that? Is that a negative? Like US Steel dropped it from five cents to a penny? If Microsoft did that, would that be something? You’d be like, Okay, what are we doing here? Andrew 11:26 It definitely gives you concern of a potential red flag because it very much signals to investors that we need to conserve our cash for a number of reasons. So yeah, it would definitely raise that red flag to say, hey, let’s look at what’s going on here. Dave 11:44 Right? If you saw a company that was paying a flat dividend, would you look further into their capital allocation? In other words, the money that they’re reinvesting? Would you look further into whether they’re doing maybe a higher percentage or a growing percentage of share buybacks? Would that be something that could offset that? Andrew 12:02 Yeah, it totally could. So my thought on the dividend, which is not a very popular one, we’ll put it that way. People that are experts, like the buff dog himself, have said how much they prefer not paying the dividend for Berkshire. So for me, I see it like a guardrail, just in the same way I see dollar cost averaging and diversification, balanced position sizing, as guard rails, it’s like, I’m pretty confident that I can make good decisions, right, I’m pretty confident that I can evaluate management’s and their capital allocation. And I’m pretty confident I could do all those things. But I’m gonna put the guardrails up just in case to limit from throwing it into the gutter. And so, for me, I agree, there are always exceptions to the rule. Constellation Software’s obviously an exception to the rule, I mean, growing the share price, 30% years, ridiculous, the kudos to them. The same thing with Warren Buffett, you know, he’s been like just the greatest of all time, a capital allocation, but we could probably count on our couple of hands-on our fingers, how many people are actually that skilled at capital allocation. And so where I like the dividend is it kind of puts a little bit of a guardrail on; at least a CEO cannot come in and completely spend everything, and I have nothing left. And we’ve seen some CEOs like that lately; I’m not going to name any names, but we discussed on our podcast that CEOs are making questionable investments. So I like the dividend for that purpose in that it forces discipline on CEOs. And if I were to take a group of 20 CEOs, I don’t think 20 of them would be as good as Buffett or constellation software. And so, as an overall philosophy, I like doing that with a group of companies. Dave 13:57 I think that’s a good philosophy. And I like that idea, the guardrail like he used to, as you said, they can’t come in and spend all the money because a good portion of it, depending on the company, is already spoken for. So they can’t, they can’t dip into that piggy bank and, you know, make a poor choice by an AOL or, or Yahoo or something like that, and you know, completely, you know, below $550 billion, or whatever it was, I guess they still could five it or 50 of you, Andrew 14:23 I guess they still could five it or 50 of you; you could still throw the ball over the guardrail, by the way. CEOs weren’t gonna do it. He’ll do it. Right. Yeah, not gonna stop. Dave 14:33 I suppose that’s right. They’re desperate. If they’re desperate enough, they’re gonna go out and borrow as much money as they need to buy things. That’s true. That’s a good point. Yeah, that’s a very good point. All right. So why don’t we move on to our last question of the evening? So we have let me first say thank you guys for all the great information you share with others via the website and the podcast. I have a question. For the podcast that I don’t know has been touched on before in detail, I’m starting to make my own valuation models that DCF and a dividend discount. Based on your guys’ posts slash website, I noticed that at times you guys differ on the risk-free rate used in the post; you guys had both used the average s&p gains of 10%. And Professor Damodaran’s rate is currently 5.23%. The difference can make drastic changes to evaluations. So I was curious to hear your guys’ thoughts on what rate you choose to use and why. Thank you for your time; much appreciated. So, Andrew, I’m gonna let you serve first on this. So what are your thoughts on this? Andrew 15:36 Okay, so first off, it feels like a lot of jargon. Yeah, it is a lot of jargon. So this is really, really advanced. And we’re starting to dip our toes into like corporate finance and valuation. So if you’re a beginner and you don’t even know what we’re talking about, don’t maybe you can just turn off inserted for next week. But basically, what you were trying to find with the risk-free rate is what he’s talking about the discount rate or the risk-free rate? Dave 16:03 Yeah. Well, it was, I think it was a little both a little bit. He mentioned both. Yeah, it’s a little both. Andrew 16:08 Okay, well, the risk-free rates are not really a debate; what the discount rate is trying to do is it’s trying to say, look, if I have a burden to hand, is that worth more than two in the bush, basically, if I keep this $100, for myself, Now, does that give me more satisfaction than let’s say, $10? In 20 years, okay, so that’s gonna depend on a couple of factors. One is like, how bad is inflation going to get? Is the money I’m getting in 20 years gonna be worth enough to be able to give me the same amount of goods and services that could buy the $10 could buy me today? So that’s part of what the discount rates are trying to do discount rates, also trying to for the fact that there’s a risk when you buy stocks. And so, as an example, if I know I could go and put money in the bank at 3%, and you’re gonna give me a stock that only earns 3%. That’s not a good trade-off for me because I took a bunch of risks buying that stock. And I didn’t even beat what the bank was offering. So that’s where you get the discount rate. Because the discount rate says that you expect more than just the 3% that you could get from the bank, you expect more than that because you’re taking on more risk. And so that’s why discount rates change. All of the time, interest rates move daily. And if you’ve been following along with what’s going on with residential real estate and trying to get a mortgage, or even just car loans, credit card loans, all the things that are tied to interest rates, they’ve all been moving, and they moved a lot in the past couple of years. So will see when you go online and you read other people’s valuation models and their discount rates, keep in mind that those things change as interest rates change. And so you know, if Professor Dominador news the 5% discount rate in the middle of 2020. And we’re if I’m using like a 9% discount rate today, it’s because interest rates went from basically zero to, you know, the ten years at like 3%. Now, it’s a big difference. And that’s why you’ll see big differences in the discount rate. So that will, I guess, would be the first way I would try to explain an overall one-on-one on discount rates. Dave 18:21 And I think that’s a very good explanation. I like the comparison of putting your money in a bank or buying a stock because the risk that’s involved in those two investments is really the telling difference between what discount rate you use to offset that risk because there is unquestionably more risk in buying a company than there is putting your money in the bank. And the kind of the same idea when you think about a risk-free rate. That’s really what it is. Is it supposed to illustrate that this is the minimum investment I can make without taking any risk? Ergo, the term risk-free rate. And if you invest anything above that, you have to for any of that risk; it can be a risk investing in the business, it could be a risk investing in the company or the country, it could be a risk investing in the economy, or maybe even a sector that you’re buying. Because if you think about the different kinds of industries, they’re going to have different risk levels, investing in something that’s a lot more speculative. Whether it’s a cryptocurrency or whether it’s some newfangled technology that hasn’t been fully adopted, that’s going to have a lot more risk than investing in something like Walmart or a bank. Because those are more mature businesses that have been around for a while, have stable businesses, stable cash flows. And so the risk of investing in Walmart versus we’re risking investing in something that’s more speculative, like a web three, and I’m not bashing on the crypto, I’m just saying that that’s just it’s just a more speculative investment. And so the offset that they set discount rates higher or lower, depending on each business that you have invested in. And you do that to for that additional risk because you have to look at that $100 that you’re investing in crypto versus a Walmart, and five years from now, that money will be worth, there’s gonna be more risk, which is going to increase the level of discounting of that $100, you know, five years from now, which means that money is worth less to you today than it would be in five years. And so it just means that’s, that’s really kind of how the whole theory works. Now, discount rates can be a very controversial slash polarizing subject, sometimes among investors, and you’ll see differing views and opinions on what is the best way to go about doing it. I’ve seen, and I’ve read about, investors that will set a really high hurdle rate; they call it a 10%, or 12%, a 15% hurdle rate to invest, and they use that as their discount rate to discount those cash flows into businesses. And in theory, that’s not a bad idea. But the flip side of that is, you know, in today’s environment, if you throw a 50% discount rate of valuation model, you’re going to come back with almost nothing to invest in because you’re going to be so far below today’s current prices, good luck finding something to invest in. And if you do, you might want to be afraid of the things that you’re going to find some pretty big value traps. So there’s that to consider. There’s also the consideration of the fundamentals of the business that really drive the returns of the business. And in the stock market, eventually, those will make an impact. In the short term, it’s going to be a voting machine. In the long term, it’s going to be a weighing machine. Ben Graham said that Warren Buffett has said that, and what that really means is that you have to look at how the business is reinvesting to grow. Every business, even Apple, has to reinvest to grow its business. And so to Andrew and I, one of the things that we like to do is we like to look at the fundamentals of the business. And when we think about discount rates, you know, I’m not going to speak for Andrew. But my personal preference is to look at the fundamentals of the business and base that on how the company reinvests and what they use to invest. And you really have kind of two choices, well, three choices, you have debt, you have cash, and you have equity. And those are the ways that you can reinvest in the business, and not ing for those in a discount rate compared to the investments that the company makes, I think, is not always the best choice. And that’s the way that I like to do it. But investing is personal finances; it can be personal. And so choosing what discount rate you think is going to be best can be personal. But I have really studied Professor Dominador. And as well as Michael Mauboussin’s writings a lot. And they really adhere to using the fundamentals to dis to determine a discount rate for investment, which means that every company that you analyze is going to have a different discount rate as you go along. But the components are going to be the same along the same lines; I hope that helps. Andrew 23:09 Yeah, I really liked the breakdown and the way you tied the discount rate to risk and value. You know, a higher discount rate means the value that you’re estimating is going to be lower. There are two things I just want to clarify. So one is you do get different, there are different disagreements on the details of discount rates. But most good investors have like a common set of principles that they all agree to. So a good example was like the 15% discount rate, I think even some of the investors that I can think of who have done that haven’t bought stock in years, so it’s not really practical to me. So you kind of have like these high and low, like super low discount rates, like a 4% discount rate. That’s pretty ridiculous, too. So there are bounds and limits to the discount rate. And there are actually two types of discount rates, which might be confusing. If you’re like picking and choosing which blog post of mine or Dave’s you’re reading because there are two different ways to come to the same valuation. There’s free cash flow, the firm which takes the whack or the free cash flow, and the equity, which takes the cost of equity. And so those are two completely different discount rates. They eventually get to the same place, but they’re two different ways to skin the cat. And you have to add and subtract things to make them take the firm’s equity and or to keep equity to equity. So I think you use the 30-year for your risk-free rate. And that’s probably a Damodaran thing, right? I know a lot of analysts on the street like to use ten-year treasuries. That’s what I use, but those rates for the risk-free rate are so similar that it’s really almost like you’re pinching pennies at that point. But I mean, it’s funny we had a discussion literally before coming on we were talking about we did the valuation and so yeah, what you won’t agree 100% with somebody on some of this stuff, especially around discount rates. And I think Charlie Munger has said that the best quote was, I’ve never heard an intelligent conversation about discount rates. So, you know, maybe know enough to like, understand the general concept. But don’t get bogged down in, oh, my goodness, my discount rates, you know, half a percent different than somebody else’s like it really you’re pinching pennies with the end result, what the estimate intrinsic value is, yep, totally, Dave 25:30 I think when you think about trying to value a company, there are a couple of things you want to keep in mind. First of all, you’re never going to find the exact number. And so please don’t get bogged down in the minutia of spending all this time. You know, like Andrew said, equipping about six and a half percent versus 6.75%. For a discount rate, it’s not that important. What’s more important is understanding the business and understanding how inputs impact the DCF or the valuation model because that is going to go much farther in helping you determine a fair value; it’s better to find a range to look at once you have a model built, it’s really easy to just adjust some of the numbers to kind of give you a high and low. So if you’re really optimistic about this company can grow by 15%. And now, if you are Okay, great, here’s the value of the company. Now, maybe it doesn’t hit that; maybe it only hits 10%. Okay, so here’s the value. And let’s say things really go south for whatever reason, and it’s only going to grow at 8%. So here’s a value. So now you kind of have a range. And then you can kind of work with your analysis to determine whether you think those are likely. You know what viable numbers to work with. And that’s more important. The other thing that I think is really important is looking at the difference between the reinvestment of the company versus the cost of those reinvestments. And so looking at return on invested capital, or return on equity, versus the cost of capital or the cost of equity, because that’s really what’s going to drive the growth of the company in the future. One of the reasons why Microsoft and Apple are so ridiculously valuable is because they have these huge returns on investment versus the cost of making those investments. Just give you a simple example, if a company’s worth, its return on invested capital is 40%. That means for every dollar that it invests, it actually grows $1.40. In return, that’s huge. That’s huge. And so, if the cost of that is only 7%, then the margin is even higher. So that’s really where the value of the company comes from. Looking at those two ratios, you can’t just value the company on those; you have to understand the components of them. But if you understand the relationship between the discount rate or the cost of equity or capital, whichever one you prefer to use, and the returns that they generate from those costs, that’s really going to help you give a good sense of how valuable that company is going to be. That’s why companies like Visa and MasterCard and Apple and Amazon and Google are all such valuable companies because they have these huge returns on their investments. That’s something that you want to look for as well. So don’t quibble on the final number. Don’t get so tied down into minutiae, you know; it’s my growth rates got to be 12.24%. Okay, you know, it’s ultimately not that important. And also, keep in mind that Warren Buffett does all this in his head. So the dude’s got a computer in his head; he can do all this in his head; I can’t, I need Excel. I’m not that smart. And so, you know, just kind of think about, you know, that the inputs you put in are important, but don’t get bogged down in the minutia. Andrew 28:49 Very well said. Dave 28:51 All right, folks. Well, with that, we will go ahead and wrap up our conversation for this evening. I want to thank everybody for taking the time to run through those fabulous questions. We really appreciate you guys taking the time to send us those. Those are great. Please keep them coming. And it’s a lot of fun for us to talk about those things. If there’s anything that we discussed today that is a little bit over your head, you’re like, I’ve heard of the cost of equity. I don’t know what that is; go to our website, there’s a great search bar at the top, type in the cost of equity, and you’re gonna see a whole bunch of articles that will help explain all that to you. So it can be a very helpful tool for you to learn more about what we’re talking about or dividends or anything else that we discussed today. That’s https://einvestingforbeginners.com. All right, so without any further ado, I will 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. We’ll talk to you all next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post IFB235: Static Dividend Payers and Risk-Free Rates in Valuation appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we chat with Vitaliy Katsenelson about his new book, Soul in the Game: The Art of a Meaningful Life We ask Vitaliy if he is an investor who writes or a writer who invests. What drove him to write this new book? Why everyone should write, it helps you think better; plus, as an investor, it acts as a journal concerning your decisions. How writing can help you help you change your mind; as you grow, you learn, and writing can help you grow your thinking. How to develop better habits, start small. How to develop the skill of meditating. What he means by “Soul in the Game.” The importance of Stoic philosophy and how it gives us an operating system for life. You can learn more about Vitaliy and his investment firm, IMA, here and read all of his articles here. 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right, folks. So welcome to investing for beginners Podcast. Today we welcome back our special friend Vitaly Kasenelson, CEO of the Denver-based investment firm IMA, an award-winning writer known for his common sense, great storytelling, and wisdom. He’s written for Financial Times and Barron’s, and his articles are published on my favorite website Contrarian Edge. Vitaly is ing us today to discuss his third book, Soul in the Game. Vitaly is easily one of my favorite writers, and I’ve been enjoying these articles for years. They bring wisdom, great insights, and fantastic stories to investing and life. So Vitaly, thank you again for ing us today. We appreciate you taking the time out of your busy day to come to talk to us. And we’re really excited to talk to you about your book and all the things that you’ve got going on. So I guess my first question is, do you consider yourself an investor who writes or a writer who invests Vitaliy 0:52 Wow, well, first of all, Dave and Andrew, thank you so much. So in the past, I was somewhat embarrassed that I wrote so much. And I would say, I am an investor who writes, and now I am just looking at myself as a person who also invests, but quickly things through writing, because investing is just one of my identities, you know, it’s my main occupation has spent a lot of time doing this. But I’m so much more than just an investor, right? Writing is now an inseparable part of my personality or my identity because bizarre writing, my IQ, you know, would be 20 points slower, and I need Mike needs all the help I can get. Dave 1:36 So that’s awesome. So I guess what prompted you to write this great new book, Soul in the Game? Vitaliy 1:43 Over the years, I would write articles would send them out to my readers. And a lot of times, some of my articles were button investing, most of them are who were, but there were, over time, bigger and bigger. No, I started to write about non-investment topics. And people would reach out to me and say, Vitaliy, you should take your non-investment articles and put them into a book. And I was somewhat resistant to that because I still was certainly kind of conflicted about my identity. Right. But then I wrote this article about Tchaikovsky and about the struggles he had writing, you know, this beautiful, six that four strings. And when I wrote this article, I realized that the struggle Tchaikovsky had composing that beautiful music is very similar to the struggles anybody who writes goes through as well. So after it was damaged, this article hit me over the head that somebody who reads it will know actually who wants to learn how to write or who is struggling as a writer would really benefit. But more importantly, I realized I had written so many articles over the years, just like that, on somebody that could help others. So my goal was just really to take all the articles I wrote, but live, put them into a book. And that was it. But then I kind of did that. And then when I was almost done with the book, and when I say almost, I think, literally work in the last chapter, I stumbled on stoic philosophy and ended up, you know, telling my editor at Herrmann house that I needed to break and I just really want to I want to study, so philosophy. And I ended up writing almost a third of the book about stoic philosophy completely out completely for this book. And in all fairness, I ended up going back and writing a lot more new articles, new essays, or chapters for this book and rewriting an old one. So it’s a lot more than just a collection of my articles. I hope you guys can tell me what you think about that. Dave 3:43 So yeah, I definitely think it’s more than just a compilation of your articles. And I think, you know, the thing that I enjoy about your writing in general, but just about the book, too, is you do such a great job of weaving stories and wisdom kind of together. You’ve had an interesting life prior to coming to the United States, as well as some of your adventures here in the United States. And I think that the kind of the juxtaposition of the, I guess, the two separate lives, and then coming to the United States, and kind of how you look at those things through investing to me has always been very interesting. And because I’ve been reading your writing for so long, I feel like I kind of know you, and I know your family. And even though I’ve never met your kids, I feel like I know your kids really well. And I know the stoic philosophy became very important to you because you could see it in Twitter to kind of change your Twitter threads or your post change from more investment related to pretty much focused on stoic philosophy. And so it’s okay that he’s definitely going down that rabbit hole. So I wonder where that’s going to go. And so that was why it was kind of cool. When I got the book and was able to start reading, it was okay; now I’m getting that now I understand where that’s kind of going. Vitaliy 4:54 I think it’s actually gonna give me a Twitter thread. It’s a kind of reflection of what I’m reading or doing at the time. Um, if you see what I’m reading or doing, follow me on Twitter; I’d say you get a very accurate picture. Dave 5:08 Yeah, yeah, for sure. Andrew 5:10 I was wondering, Vitaly, thanks for coming on. If you could maybe expound for people who aren’t familiar with you and your great emails, what is it about writing that makes your thinking so clear when it comes around investing? And do you think it’s something that average investors who are trying to manage their portfolio should try to implement in their process? Vitaliy 5:34 Okay, that’s a great question, I think a very important question. So let me tell you about how I write first. I wake up about it; it depends on the time of the year. But let’s say about five o’clock in the morning, I make a cup of coffee. And then I basically write for two hours straight. I try not to get distracted by other things; I put my headphones on, put classical music on, and write. And I do this every single day, with very rare exceptions. So now, if you think about it, what is writing? Right is focused thinking because you’re thinking about a subject, and your mind is just focused on that. So if you think but I’m involved in focus, thinking 720 hours a year, at least, that’s a lot of focus thinking. Okay. So for me, I think it’s very important because I was a scatterbrain. And for me to have thought that they were all the parts are connected together. That’s what writing does. It basically connects all the elements of the soul together. And now I have a thought that I can share with the world. Also, the process of discovery, the way I look at writing, is basically, it’s a creative process that connects our conscious and subconscious minds. We kind of know what you think, like, at this point in time, on almost any subject, that’s knowledge, we have an unconscious mind, that’s accessible to us. But the subconscious mind is this huge reservoir of knowledge that the only way I can access is by sitting down and doing focused thinking. Now, this whole conscious of the conscious mind is kind of it’s some people may say it’s kind of a wudu concept or something. But if you think about this, when you read the book, you read what 80,000 words, you don’t , like, you the concept generally, right, but you don’t every single word you read, right? But I would argue a lot of that information, some of it was retained in the conscious mind, and a lot of it is deposited into the subconscious mind. And I don’t know if you guys had this experience, but I had an experience when I would write. And suddenly, I’m using a word that is kind of new to me, even though I just wrote this word. And it’s just; basically, they’ve, you’re laughing, but you probably have probably happened to you, right? And because what happened was, at some point in time, in some book, I read that word, and it was deposited in my subconscious. And then when I was writing, it, just, you know, kind of floated to the surface. So I would argue everybody should write, again, I’m a biased person because that’s, that’s it has been very helpful to me, as an investor, I think, well, first of all, I think when you buy a stock, or we sell a stock, you should write a journal of why you are buying stock, and why you’re selling the stock. Because what it does, it truly fleshes out your thinking, and then you will be able to see when you have to express put your thinking on paper, you’ll be able to see all the deficiencies or the holes in your thinking, and then you actually decide not to buy the stuff. Okay, because that’s almost like exposing your thinking to another evaluation; I guess I think everybody should write; I wish I wrote a journal. And if I did not write for two hours a day, I would write a journal. And I highly advise other people to do this. At some point in time, I need to create this new habit. I may write I started in my journal in the evening before I go to sleep. But I think journals would I write so much that I just, I think, I wrote a journal for either two weeks or a month. But I found that it was all I did in the morning. And it was always competing with other things that I wanted to write. So that’s why I’m not writing the journal. But I would highly advise people to start. Chris was writing a daily journal. Andrew 9:22 I think I really liked that advice. And especially the part you’re saying where you’re trying to figure out whether you want to buy a stock or not. I’ve had newsletters, Dave, you know, this where I pretty much got to the end and then decided I wasn’t going to buy the stock. And like you said, photonic, just kind of want to double click on that idea. Because it’s so key, I think you’re really filling in the holes that you don’t even realize are in your thought process about the company until you have to. I mean, I’ve seen it with myself where I’m fleshing out an idea, and I’m like, Well, what is the data that s that idea? And then, you have to go through the writing process to find that data. You might have never thought about that until later on because you were forcing yourself to go through this writing process of fleshing out your thoughts and putting that subconscious into the conscious. Absolutely. So how often do you, I guess, in your writing, look back at things that you have written about? And how often are you changing your philosophy or your ideas, or some of the ways you think about the world, one of the things I really liked that I read in one of your emails, which I tried to, at least if I can’t read all of them, at least skim them, because there’s always a valuable nugget in there, it seems, is you talked about how we make these biases based on our circle around us. Of I see my five friends doing this thing. And so I think the whole world works this way. So you know, that’s kind of like this, I feel like an advanced idea that maybe, I don’t know, if you were maybe aware of it all your life, or if you never knew it existed, and then you discovered it and then wrote about it. But like, how often are you coming across those discoveries? Or maybe like changing your mind about certain ideas? And is it going back to your old writing? Or is it just kind of trying to learn as much as you can, and it just kind of naturally happens? Vitaliy 11:11 So I think you’re talking about the myopic circle’s idea. Yeah. I think I have changed my mind. And a lot of times, in my experience, as you grow, you learn, hopefully, right. And my goal, I’m happy to change my mind when I’m in the future. And what I’m thinking today, if I arrived at that in a kind of very thoughtful way, right? So I think it’s important to go back and look at your thinking and look for a couple of things. Number one, you’re looking for the assumptions you made. Like now I’m talking about the same way in stocks, like, oh, look at all the assumptions I made in the past. And ask yourself, are they still true, I also look for the logic if I had a flawed logic or if that thinking was just flawed based on the information I had at that time. And if the world has changed, and now I need to update my thinking on the subject, the like when I wrote the biopic circles, so let’s talk about that my epic circles, I think it’s a very interesting framework. So let’s let him expand this a little bit. So I don’t smoke. I used to smoke when I was 21 years old; I quit when I was 21. And at the time, if I look at my friends today, none of them smoke. So and because we are attracted to people who are like us who share similar values, you know, I’m not judgmental, but people who smoke are just their values. Usually, smoking comes with other values that usually conflict with my values. And therefore, it’s very easy to think to have this myopia that people don’t smoke, right? Well, in reality, 14% of Americans smoke, so statistically, we know it’s not true. But here’s the interesting part, if you find somebody who smokes, and those people, most likely their friends, also smoke, because they’re attracted to people who smoke. So like, I have a circle that I have in this life where my experience is limited to my understanding of the world. And I assume that the word is as I see this, but the word is actually that more than what I see, right? And there are a lot of people who have different experiences than I do, etc. So there isn’t for the smoking companies. Like how it’s very easy for us to think that I’ll give you one example, we will realize any company that does money transfers from the United States to Mexico. So my first thought was when I started as a company, while this company is going to be out of business. Why? Because who needs the services if you can just send money by PayPal, Venmo, or whatever? When I started to do more research about the company, I actually had to go and like so this company focuses on the Mexico corridor, so people who send money from the US to Mexico, most of these people are migrant workers that come to the United States. So I actually ended up going to Mexican neighborhoods in Denver and observing this person, and I realized they live in a different world. They rarely use credit cards, and a lot of them don’t have check s, United States, most of the relatives in Mexico don’t have checking s. They live in a cash economy. And so, therefore, they don’t even know how to spell PayPal. The point is that they don’t use PayPal. And they probably won’t be using PayPal for a long time. So me going in exposing myself to the New World, kind of expose I Opia that I know that I have, and so now when I’m analyzing a company, I’m thinking is my experience to that company’s service limited by my kind of limited experience. I’m constantly thinking about that. Dave 14:41 And that makes a lot of sense. So I guess when you’re thinking about those things, you know, how do you research some of these ideas? Like I’m thinking in particular about the like, the stoic philosophy, like, you know, will you sit down to write for two hours? You know, we all know you open a computer, you look at the blank screen and like, oh, how do I put stuff on there? Where do you go gather the research to fill the head to start putting stuff into writing? Vitaliy 15:05 So before I wrote about stoic philosophy, I probably read a dozen books, at least I listened to, I don’t know, 50. I can’t even tell you how much how many podcasts I listen to. I did in the, you know, I love learning. So if I can write about something, the first thing to learn this right. And writing helps me to learn better. But I wrote this book, like a good example; I wrote a book about more series of articles about Tesla. And by the way, your listeners and viewers can get the free version of this book at Tesla analysis; that calm was a 9000-word essay, or something a 15,000-word essay about Tesla and AI, which is a very deep dive into Tesla. Well, I spent probably a month learning about it; everything I could; I read Malcolm’s biography, I read as much as I could, I watched a lot of YouTube videos, listened to our podcasts ended up doing a lot of reading. So that’s a prerequisite to writing to write it. Dave 15:57 Yeah, I love the idea of having to research all that information to be able to put it down; I think it is very, very helpful. I think sometimes people feel like that; it just comes to you. But you know, they don’t realize that there’s a lot of work that goes into, you know, those two hours that you’re spent, and Vitaliy 16:13 you know, it’s what’s important to understand this knowledge is cumulative. In a sense, when I was writing about Tesla, I had to use my knowledge from owning Apple stock, or like all the research I did on Apple, or the research, I did not know care because I was using Apple Nokia as an analogy. So like, this is good. This is what I love about investing. The longer I do it, the better I get because this knowledge doesn’t go away. It just accumulates. Andrew 16:38 So I’m thinking again about maybe some of these turning them for the first time, they don’t know anything about business models, maybe the idea of Tesla or the idea of Apple excites them. So can you give a basic overview of that analogy? And why does that like make sense for investors? Vitaliy 16:56 Yeah. Okay. When I was analyzing Tesla, a lot of people were comparing Tesla cars to kind of traditional what’s called internal combustion engine cars, ice cars. And they were basically saying, while it can be very easy for General Motors and others to make electric cars. And I use the analogy of a dumb phone smartphone analogy. Okay. So when Nokia came out, I ed, so I will Nokia. So it’s gonna give us a small story. I owned Nokia in 2004. And Motorola came out with a flip phone. And Nokia kind of struggled for a few months, and they didn’t have a flip phone, and Nokia struggled for a few months, the stock declined. And then, six months later, the commodity was a flip phone. And I doubled my money. It’s great. So that’s not the lesson. The lesson was when Apple came out with iPhone. I was like, Well, I know how there’s no last time this happened. I made a lot of money. So I bought a Nokia. And the problem is this was not a change in the way the phone looked. This wasn’t a four-factor, right? This was a complete change. It’s the phone that went from one domain of dumb phones to a smartphone, which you know, was the first one was there to make phone calls, and have maybe a little bit computing power a little bit? Well, we’re smartphones; we’re really just a computer that does 200 Other things, plus also makes phone calls. So and I made a mistake, you know because I did not recognize the difference. I did not recognize that we shifted into a new domain, from dumb phones to smartphones domain, which is basically all the knowledge that you have, in a dumb phone business, actually; most of it is actually going to hurt you. Because think about Nokia at the time generalizing now, if you think about DME for its 90% hardware, 10% software, or whatever. And the smartphone, the software is important as the hardware. I’m not sure if it’s 50/50 or 60/40. Doesn’t matter. But this software is incredibly important. So that means Nokia’s workforce was big Nokia was designed for a very different product. So, where iPhone could just focus from a blank slate perspective on focusing on the smartphone, Nokia basically had to let go of a whole bunch of engineers, which was one need to design hardware, a brand new talent, which he didn’t have a training system. And to make things even worse, Nokia had its operating system CBN, which was basically created for dumb phones. And what it tried to do because it has a lot of similar engineers tried to adapt their operating system for smartphones. And it failed miserably because, originally, it was not designed for that. So this is one framework. Now, if you think about electric cars versus t cars, so the Tesla is a lot More than just a car that has an electric motor, right? It’s first of all, think about General Motors. I don’t know how many engineers it has that are trying to squeeze extra efficiency from IC engine from the IC. Now, the internal combustion IC engine, well, it won’t need any of those engineers; it doesn’t need any of those engineers for the electric motor, right? And also, the electric car, the Tesla car, is a lot more the software is so much more important that car than it is in the old cars. So my argument was that transition is going to be a lot more difficult for the traditional manufacturers. And Tesla, actually, the fact that it’s never made, I see cars, that’s a huge advantage. Andrew 20:46 I like that a lot. Because, you know, to a certain extent, you’re right, it’s not the I’m gonna rag on value investors being one myself, a lot of value investors look and wanted to value it as a GM or a Toyota or Ford when it’s not any of those cars. And, you know, we’ll see what happens in the future. But you do have to kind of think of it in a different way if you’re going to have the conviction to hold on to a stock like that for the long term. Vitaliy 21:13 Let me make a couple of extra points about Apple, which is kind of, you know, that’s important. If you’re an Apple stock, let me tell you, um, today, I’m going to be talking about all the mistakes I made. So we own Apple stock, and we made a lot of money. So we actually ended up selling Nokia; I think we took a 40% loss in the summer, the second type of person has double the money, the center, and the second title, basically, I think we lost 40%. And then we bought an Apple in 2012. And we made a lot of money in this. But then I made an assumption on models that the iPhone prices would decline. Do you know why? Because every single time you had a consumer electronic, the prices per unit declined? No? Well, Apple didn’t think about it actually raising prices, and the demand hasn’t changed. And so my mistake in my analysis was that I know it’s a, I looked at it in the world where you have a company of a consumer electronics became a commodity for the most part. Well, Apple, because it’s really just hitting us, please market share with Android. And once you buy an Apple phone, you’re very likely to switch to Android; Apple actually has a lot of latent, which has increased. And you asked me about if I go back and look at money, I’ll my assumption, you know, what I wrote? Well, that was a mistake. That was a clear mistake in my analysis. And so we sold apple 100% ago, like, you know, double since since since we sold it, and the decision was wrong, that part of the decision was wrong, because earnings power, we’re not for the right reasons. Andrew 22:44 Gotcha. That makes a lot of sense. As the guy who wrote a great book called active value investing, are you looking at companies like Apple and Tesla as the market seems to keep falling? Are you even allowed to say with your fund? Vitaliy 22:57 Can I look at anything I want? No, of course, no, I’m looking at a lot of companies that have fallen and initially attracted to them, especially in, you know, high-quality businesses at the right price and big capital, you know, Apple again, and probably Tesla as well. It’s at some price. Dave 23:12 Yeah, All right. So I’d like to switch gears a little bit here. And we talked about like getting up at five o’clock in the morning every day to write. That’s a habit. And you talk a lot about your struggles with sugar, your struggles with meditation, and being able to do it, and I do it. So how do you develop better habits? Vitaliy 23:32 Okay. It’s great. This question is because I think I figured something out a couple of days ago that I want to share with you guys. Dave 23:40 Okay, good, because I’m dying to know. Vitaliy 23:43 So the best way to develop habits is to start small. If you want to start writing, just start writing five minutes a day, start with a sample of something very easy, in just keep coming back by doing this. If you do this long enough if I think to forget that if you do it for three weeks or four weeks, it is going to turn into a habit. Okay, and just try very, very hard to keep this habit. In fact, don’t try. Say I’m a person who writes. And when you say this, that becomes your identity. Now to create habits, it’s also important to link them to something else or snack habits. So I’ll give an example. And this is the I meditated the whole year without a single skipping a day by linking meditation to my walks in the park. So I walk in the park every single day. In any weather, almost any weather. Okay, so I meditated for year results. Keep it in there, but you know what happened? And then it fell off the wagon. Do you know how it happened? I just figured it out. Finally, I think this winter, when I went to work in a park, it was incredibly cold for a few days. And I could not sit and meditate on this; it was just too cold. So guess what happened? I kept meditating for a few days. And then now I’m trying to get back into it. And I’m gonna, and since I tell myself, I’m the person who meditates, I’ll get back into meditation again. But I realized that like, at least, my habit of walking in the park, which is fine, works all the time, except two or three times. But those three times were enough for me to know, to kind of fall off the wagon. But that’s how you create your habits, all Dave 25:24 All the small steps and kind of stacking, I think, yeah, is that the kind of the idea that James Clear was talking about and, Vitaliy 25:32 And I think I highly recommend a book; it’s a phenomenal book. And I got it from him; I actually worked in and pivoted a little bit. So I’ll give you this analogy, this thing I do, I found, maybe I forget, when it may be, I think was six months ago, maybe a year ago, I lost track of the time that I drink too much coffee, I literally found myself drinking the six cups of coffee a day. And I like coffee, maybe the first cup of like, because of how it makes me feel. But the rest, I just kind of like the flavor, which is I just drink black coffee. But what I found that maybe a second or third or sixth cup, is really, I consumed the mindlessly I just wander in to make coffee. And so what I started doing, I said, Okay, for every cup of coffee, I need to do 30 Push Ups. And so now my consumption of coffee dropped to three cups of coffee a day, and I do push-ups, you’re gonna get healthy, and you know, my, and I got healthy, you don’t have to do you can do crunches, if you’re on whatever you want, you have to do push-ups. Everybody wins, right? Like, you know, because I drink less coffee. And again, I’m healthier. In another thing, for anything you do, create what I call a minimum measurable unit and a road bicycle. And every time I wrote it, my MMU was just getting out and riding, then was to get out and ride for 20 minutes, then was ride and have at a certain speed or have so many revolutions per second. And every single time, I would increase it. And that became my main four units. When I walked into the park, it was the same thing. But then I hurt my back. And may I still force me to work. But just for as long as it can bear the pain, but just have something you can fall back to. Okay, I’m going to do at least that. Dave 27:17 Did you have like a checklist or something? Are you one of those people that like to have like a notepad or something that you know, so you can cross off the whiffs or you can track your progress kind of thing? Vitaliy 27:28 It’s I know, it helps some people it doesn’t, if I was keeping track of a lot of things, and I would advise somebody not to do this. Just keep it simple to just a few things. But like, you know, Jerry Seinfeld has this streak thing where he every day he had to write a joke. And that’s fine. If that works for you. You know, I don’t need to do this because I keep it in my head. But again, just a few things a day. And he but if it’s if it helps you just you know, maybe we can close on the calendar when you know, I did this day. Dave 27:54 Right? As somebody that’s a failed meditation. What would you tell me to improve that I’ve tried and it just never took for me? I’ve tried it two or three times. I read actually about your struggles with it early on. And it just didn’t work for me. So I guess what you would tell me? Vitaliy 28:12 So I think I failed with meditation first before I succeeded for at least a year. The reason I failed was that I had run images of meditations. Okay. You know, like the images you see of this beautiful skinny woman sitting on a cliff on the mount and looking at this sunrise or sunset, and she had a ponytail. And I realized, oh my god, for me to meditate, I need to find something like this. Well, in reality, you really don’t. You just you can read that you can actually some people can meditate in a very loud environment. Next to the jackhammer kind of sounds like a jackhammer, so you can really meditate anywhere. And that’s number one. Number two, the reason people get frustrated with meditation is that they try to sit and breathe and not think, and when they try not to think, they fail that miserably, okay, and they basically say, Oh, I can not think; therefore I’m not going to meditate. What they don’t realize is that that’s a feature, not a bug; you try not to think and fail. You’re creating a new habit of observing your thoughts. And like when I meditate, my MMU is one man. I just tried to get this one minute of perfect meditation out of 10. Okay, and I failed, even though it’s one minute now have the time, okay? But what you do when you close your eyes, and you try to breathe, and this thought comes to you, and you want to notice that thought, and that observation of this thought is incredibly important. The fact that you notice that thought, that’s a skill you want to train. Here’s why that killing itself will make you mindful. When you’re driving in the car and you are upset. Somebody told you something. You’re upset about something, and you observe this thought that you are, you realize, oh, I’m upset about this, for this reason, just observation of the thought, you know, basically diffuses that thought, and reduces your pain that makes you mindful that makes you observe your own thinking. This is why I think if you want to start start with three minutes or five minutes, it doesn’t matter. Start with something. And actually, but when I say this, I’m really speaking to myself as well because I need to get back on the wagon again, in a way that they will be two or three times a week right now, but I want to do it every single day. So I’ll start with Dave; if you do it, I’ll do it. I’ll do three minutes a day if you do three minutes a day. So but that’s, that’s my advice. Andrew 30:47 I’m gonna ask the dumb question here in the room, what are the biggest benefits that you’ve seen from meditation, Vitaliy 30:53 I think they, some people, would say it makes you calmer. I didn’t observe that. Like, it didn’t make me more; sometimes you get into the zone as it happens, rarely get into the zone where you’d say, almost like you’re high on. I can’t even explain that it’s very difficult to explain. But that’s not why you do this. It’s what it is described; it’s that you, you basically training yourself to observe your own thoughts. And by observing your own thoughts, reduce a lot of negative emotions that are constantly in the back of your mind; you don’t even notice them anymore. I think that’s probably one of the biggest benefits to me, too. Also, like when you sit down, you’re trying to control your breathing, you know, it’s of course, it’s going to come down to, but that’s not why I do it. Dave 31:37 So does meditation help you remove some of the self-talk, the negative self-talk Vitaliy 31:42 with helps to neutralize helps neutralize the negative self-talk? Yes. Because bye, bye, bye. So what happens when this negative, something little happens? And this self-talk, negative self-talk, just kind of blows it up more and more and makes it larger? By us diffusing it, we’ve reduced that we reduce it, and therefore it has become a healthier life. Dave 32:05 I guess that makes a lot of sense. So can you explain to me what Solon the game means? Vitaliy 32:11 Soul in the game? Well, let’s have skin in the game. I had skin in the game when you share both upside and downside when you’re doing something for somebody else. Like when you call me cam. So when I manage money or buy liquid net worth invested in the same stocks as my clients, so, therefore, I have skin in the game; if I make a mistake in buying a company, then it’s going to hurt me, it’s going to hurt my clients. But it’s you know, oh, the easiest example is when a cook eats his own cooking. Yeah, that’s the other speaker, the skin in the game. So the game is a kind of the next celebration of this, where the activity has so much meaning to you, that you love this activity, that it basically becomes indistinguishable from your identity. And if you think about people who are incredibly good at what they’re doing and who are dripping with emotions when they’re talking about what they’re doing those people or do you notice people like if you want to take your kids to the doctor, you want him to take it back to his son in the game who’s not just doing it, because he’s trying to pay for his student builds. You know the same thing with any activity in your life. When you go to a restaurant, and you have this waitress who has this incredible personality who really wants to take care of you. Now, this was formula Hassan again. So it could be inactivity. But that’s basically what’s going on in a high-level game. Dave 33:37 I love that concept. And I love that was probably honestly, my favorite part of the book was the soul in the game chapter because I think that’s something that has always attracted me to people and different things is when you sense that soul in the game, I guess I’d never put that connection together. But the soul and the game that I think that’s something that I always found attractive, whether it’s athletes, musicians, you know, investors, writers, you know, a waitress, anything that was easily my favorite chapter in the book, Vitaliy 34:05 This became part of our culture at AMA. So when we do something like people say, oh, you know, we got to have a solid game. We’ve been told this or just don’t do it. So yeah, so this is, yeah, that’s very important to us. Andrew 34:18 I liked how at the beginning of the book, you read a little thing you said to my children, and you had their names. And you said because you never read my emails. So hopefully, they will read your book. Could you summarize? Yeah, good. Maybe for any parents out there who maybe want to maybe they have kids, your children’s age, and maybe they want to give a book like this to them? What would be some of the biggest parts of the book that could be helpful for those parents and those children? Vitaliy 34:47 That’s a good question. I was talking to a reader a couple of days ago who read my book, and he was raving about it. And he said, You know, I think every person who graduated from high school should read this book. I was flattered by this song. Yeah. I wrote it for my kids. Because in this book, I ed all the thoughts, all the things that I wish I knew when I was their age. Okay. And when they are older, like, I wish I knew them when I was when I became a parent. So I think stoic philosophy is something that could help anybody at any point in their life. Actually, my eight-year-old is probably a little bit too young for that, but my 16-year-old daughter and 21-year-old son our prime for that, and we talk about stoic philosophy all the time. And more importantly, I consider myself practicing stoicism; what does it mean? I try very hard to live by those ideas. Now, I fail all the time. And that’s because I’m trying to rewrite the behavior that’s been formed for most of my life, so it’s very difficult to rewrite. And so when I fail, I talk to my kids about it. And I say, here’s what I did. Here’s what I did wrong. This is how I should have done it. And I find that to be extremely important. Because my kids realize that it’s okay to strive for that, and it’s okay that you’re not going to succeed every single time. But if you do this long enough, then you’re going to rewrite your habits, and you’re going to start in the world; it’s going to become easier to go through life. Let me just clarify what stoic philosophy, philosophy is; basically, it’s a 2000-year-old philosophy from Grace; when the store you’re gonna stick philosophy sounds very scary and intimidating. But really, it’s really not. It’s a beautiful philosophy, very simple. And I look at it as an operating system for life. There isn’t a color printing system for life. Because when you’re born, you’re not really given. The way we behave is formed by our parents, by our friends, you know, my life, right? I don’t think we are really told the stoic philosophy provides this curriculum that helps you to deal with life and remove these kinds of negative emotions. It lowers the volatility of negative emotions; how’s that? And therefore, I think it could help anybody. And that you’d have this it doesn’t, you know, it’s not a religious philosophy. So it doesn’t conflict; if you’re religious, it is going to help you; if you’re not religious is going to help you. And it had a tremendous impact on me. And I’m still learning. I’m still practicing. I’m trying to improve. And hopefully, next time we talk, I’ll be better at that. Dave 37:30 Yeah, maybe at least three minutes a day, at least three minutes a day. I’m gonna start tomorrow morning, I promise you, I’ve been trying to. Vitaliy 37:39 Actually, here’s the thing actually let me point something out. And I make this mistake all the time myself. So this is when you say I try. It’s the one thing that you need to get to say; I’m the person who meditates. I’ll give you an example. And this is actually from James Clear Book. When somebody offers you cigarettes. And you say, Oh, I tried to quit smoking. That means I can promise you that means that you get as you fall off the wagon in about a week. Okay, when somebody offers you a cigarette, and you say, I don’t smoke, right? Then you are the person that actually tells you that that’s the behavior, my identity, okay? And the person who doesn’t smoke. So what you need to like, when I say you live, it’s you and me. You need to get back to the point where we say; I’m the person who meditates; three minutes a day doesn’t matter. Ten minutes a day, nowadays, but I’m the person who meditates, and then that will become part of your identity. But anything you do like this, I’m the person who doesn’t need sugar. Therefore, when somebody offers me a cake, it doesn’t matter. I don’t need you to know; it’s a non-decision decision because I don’t need sugar. Dave 38:45 Right? Yeah, I agree with you. 100%. It kind of goes back to the whole Yoda quote in Star Wars, right? There is no try. There are doers who are not? Yeah. So the famous stoic philosopher Yoda. Vitaliy 38:57 Let’s try, though. I listened. Dave 39:02 So we’ve talked a lot about the different parts of the book and everything. And I would be remiss if we didn’t discuss, you know, music. So I know music is obviously a very big part of your life. So I guess what we can learn from classical composers? I mean, how, how do you tie a lot of the book into music? And what can we learn? You know, even if it’s somebody that doesn’t necessarily listen to classical music, what can we learn from like Schubert and Chopin and some of the great others that you mentioned? Think about, Vitaliy 39:31 they were all writing music, okay, I’m composing music, writing, investing. Those are creative activities, right? Creativity. And therefore, we can look at how their life stories and their struggles and realize that this would we can learn from them. Let me tell you this funny story. There’s this composer Hector Berlioz, who grew up in , and he fell in love I have with this Shakespearean actress. I think her name is Harriet Smith. He loves her, and he writes her love letters, and she never replies to the letters. And he was so devastated. He rented an apartment across the street from her apartment. He decided he was going to write a symphony just for her. It became called Symphony Fantastic, which is one of the most famous symphonies out there. The interesting part, Hector Berlioz started to study music late in his life, while late, all relative when he was 12 or 13 years old. That’s relatively late. And therefore, he did not receive as much classical education as many other composers. And therefore, when he was breaking the rules for music composition, he did not even know them. Now, there is a theory that he was completely high when he wrote the music. I’m not advocating for that part, but Him and not knowing the rules or why this is important. Or he may be observing the rules and saying those rules are not. It’s not like they are those rules are just data conventions. It doesn’t mean I have to follow them in a way that requires mindfulness. We’re talking about meditation, you’re doing this, and you say, Well, I’m supposed to do this, this, and this. And then you say, Who said I’m supposed to? Anyway, so let me give an example. Let me talk about sympathy for the stick because that’s important. Before Hector Berlioz, there were no program symphonies. What is program symphony means? So program music is music that basically has a story inside of it. So the simplest example would be a musical, right? Or an opera, an opera has, there was a story, a play, and then there is music on top of that. Okay, so, and that music kind of follows the story. Well, it was never done before with symphonies; the character Berlioz, he had, this love was raging the side of him, and he wrote this very dark story about, you know, dark story, and the role of the symphony around the story. Okay. And that simply became an incredible success because people were not used to it, and they loved it. So here it listens; yes, it was not the premiere. But she listened to the Chicago Symphony; she started to take him seriously, and they got married. And another thing Korea kind of went downhill, and you know, the marriage fell apart. But now we have the symphony for the stick because of her. So you can see how there’s so much we can learn from Berlioz. In whatever activity we’re doing. There’s a whole bunch of shortcuts; there is a lot of dogma that says you should, this is how you do this. Okay, like, let’s go back to Tesla for a second. Elon Musk, when he was making fillip to the car, the fact that you know, he didn’t really know when they actually have any, any experience of making traditional cars was a big benefit to him because he looked at it and said, Well, instead of waiting to make a four-wheel drive car, instead of having this complex transmission, I’ll just put two motors on the front axle and the back axle. And that’s how I’m going to make a forward drive car. So that’s an example of somebody looking at it. And ignoring the dogma when not influenced by how things have been done before. Another example if you look at the model three, at the interior of the Tesla Model three, it’s a completely different design. It’s not like it’s a revolutionary, not evolutionary, design. I mean, in the sense that there are no buttons. And if you are a General Motors engineer, or interior designer working for General Motors for the last 20 years of your life, you’ve been just changing the shape of buttons or their locations. Kay, the idea of actually creating the screen like an iPad and putting all the controls there was just completely outside of your domain, right? We talked about how you go from dumb phones to smartphones; then he has different domains, same thing. And so when you look at Tesla car model three, he basically completely changed how the car looks inside. And again, like Barry loans when he wrote Symphony for the stick, Dave 44:17 That’s great. I love that idea of, I guess, breaking the rules, partly because they don’t know the rules. When I was a musician, well, I am a musician. But back in the day, I came across a gentleman who played in a big band that was from Australia. And he came from the Outback in Australia. He didn’t know the rules. And so he came up with a completely different way of playing the guitar that made him very unique. And it was because he didn’t know the rules, and when you sat down and listened to him, it was just amazing. And I love to play guitar. I went to college, got a degree in music, played in bands for years, did it until I wanted to have a family and you know, I wanted to actually sleep in a bed So, Vitaliy 45:01 it is very hard to earn a living as a musician; my niece graduated from Royal College of Music, which is kind of Juilliard of Europe, and viola, and now she’s teaching a whole bunch of eight-year-olds, you know, vibes and knows basically, what’s your issue? Dave 45:24 Yea, It’s a challenging life. But there’s a lot of great things that come from A to you certainly learn a lot of discipline and a lot of patience. And, you know, my grandmother used to have the saying that I’ve bored Andrew with a few times, that water dripping on a stone eventually makes an impression. And you know, that was my guitar. That was my guitar; you could Vitaliy 45:43 relate to a lot of the stuff I wrote about classical music and creativity. You could really relate to it, I guess. Dave 45:49 Yes, yes, absolutely. Yep. Yep. It was fantastic. All right. Well, Andrew, do you have anything else you’d like to discuss? Now? This was great. Awesome. Batali. I do have to share a personal thing. You talk in the book about a trip you took; I believe it was with Mia Sarah to San Francisco. And I’m gonna, okay, I’m sorry. You’re talking about just having moments with your daughter and how those are precious to you. And that’s something that you guys will for us. Do you live . And that little bit has stuck with me, and I have an eight-year-old daughter. And there are times when I’m doing things with her that I have to to focus on what it is we’re doing and try to connect with her. Because those moments will stay with us for the rest of our lives, and it’s not about the things we do. It’s just about the time we share together, and I really enjoyed that story and really is one Vitaliy 46:43 A thing so thank you so much for this exercise. Let me just tell you a new story. Yesterday, we had a little scare, and I took my daughter Hannah to the hospital and ended up not being fine. Everything was fine. But it was, you know, the first hour was kind of somewhat scary. And then we once she felt better. We may just love we just made it like a very fun-loving experience out of the whole thing when she was hooked up to the machine like to all the other monitors. At the yards, the machine started to beep. I said, Hey, you gotta be careful; your IQ is dropping. Like I’ll tell you this, that experience with her again, obviously, it’s a good thing that it’s you know, it had a very good ending, but we even tried to make fun of, you know, kind of that was a meaningful experience for us. That’s good to know. But thank you. Thank you for that. Yeah, absolutely. Dave 47:36 Yeah, you’re welcome. Andrew 47:38 So Vitaly, we want to thank you for coming on. We’ve got a ton of great resources, and you have your new books all in the game. People can also check out your blog, contrarian edge.com. And you have a great email newsletter as well; anywhere else, people should check you out. Is that pretty much where they should go? Vitaliy 47:56 Well, no, that’s a great question. So a couple of things. First of all, I could not stop writing this book after it gets published. So I already wrote five new chapters, actually, finishing two more. So if you go to Soul in the Game.net, there are instructions where after you buy the book, you can send you can basically get five new chapters I wrote since so, so check out Sony game that net, and you’ll be able to subscribe to my articles there as well. Or people who listen to this podcast or watch it probably like to listen as much as you’d like to read. We have a podcast where basically, my articles are read to you by a professional artist. So it’s a podcast; you can find it on Investor.fm or just go. Oh, just look for an Intellectual Investor podcast, or you look for my name, and you find the podcast. And if you want to follow me on Twitter, it actually kind of gets into a glimpse of my own what I’m working on right now. Or thinking about it now. It’s my first name. And last initial VitaliyK. Yeah. Dave 49:02 Cool. Well, Vitaliy, again, thank you very much for your time. We appreciate you sharing all your insights and your time with us. We know your time is valuable. And we do really appreciate that. And it’s all of his stuff. It is fantastic. I’ve been a big fan for a long time. I’ve really enjoyed his writing. You’re welcome. And I’ve enjoyed his writing and his ideas, and it’s all worth checking out. You’ll be better at it. So without any further ado, I’ll 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, and we’ll talk to you all next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post Vitaliy Katsenelson Discusses Having Soul in the Game and the Importance of Habits appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we chat with Braden Denis of Stratosphere.io: Braden talks about what excites him in the markets currently, including focusing on KPIs (Key Performance Indicators). The ability to get started and how much easier today than it was five years ago, with lower fees, better products, and more information available. How he uses KPIs to simplify his investment process and use them to track your company’s performance. Using KPIs to compare companies and the usefulness of the comparisons. Creating a simple checklist using KPIs to help them narrow down their investment choices. 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right, folks, welcome to Investing for Beginners podcast. Tonight we have our favorite friend from the Great White North, Braden Denis, to us today. Braden, for those of you unfamiliar with him, the two or three of you out there, he runs Stratosphere.io, one of my favorites; actually, my favorite investing platform, as well as the Canadian Investor podcast, which is become my favorite show that I listen to every week, I’ve been driving across the country. And so I banked up a few of them the other day, so I actually got to listen to Braden and Simone. Talked for almost two hours. Braden 0:32 I’m sorry to hear that, Dave. Dave 0:37 So Braden is here to talk to us about all things stocks. So Braden, thank you again for ing us; we really appreciate you taking the time to come talk to us. So tell us what’s going on. Tell us what’s been exciting you or turn in; you’re excited about stuff. Braden 0:50 Well, Dave, and Andrew, I always love coming on this show. And I’m not just saying that, you know, you like go on a podcast and you’re like, thanks for having me on like the kind of cookie-cutter thing. I really mean it; you and I’ve been doing this for a long time now. And it’s always fun; nice chatting with you guys. And thanks for saying that about the show. I really appreciate that. What’s been exciting me recently is how the stock market keeps going up and up and up. Have you guys noticed that? Like it’s, it’s crazy. Andrew 1:18 Your screens are upside down, right? Your monitor, there’s one of those new ones that have a hook, and I think your screen? Braden 1:25 Yeah, it’s curved. So like, it kind of gives this nice portrayal. You know, what’s been exciting, just working on new projects, you know, the engineer and me like building things that people use and find valuable. So my best effort in doing that is to give people the best financial data they can find on the internet. And we’re going to talk later about, like, specific metrics that really move the needle for these public companies that I think are more important to focus on now than ever, given stocks keep falling. And you know, in a bear market, it really tests your conviction day in and day out, like, and you keep adding to your portfolio, and you know, it just keeps grinding sideways or lower. While this is completely normal in bear markets, both professionals and retail do it yourself; investors can’t be immune to how that feels. And it really continues to test your conviction all the way down until you find the complete mode of desperation where the scale has gone from extreme greed to extreme fear. And then eventually, the bottom of the market finds a bottom there. But it tests your conviction until it does so. And I think that investors are feeling that today. And they’re going to feel it again sometime in the future because bear markets happen. You know you can break clocks, right, twice a day. And you can just keep saying that bear markets are gonna happen more and more, you know, and again and again. And that’s because they do, and it is so normal, it is so healthy. It is part of the economy that is expanding and contracting over the long term, though investors do quite well. Andrew 3:02 So talk to us about we talked a little bit about this off the air, but for whatever reason, you know, you have the big companies in the stock market, Apple, Microsoft, Amazon, Google, and then you have Netflix and Netflix, for whatever reason, I guess Facebook, too, would also be in that camp. But Netflix has taken the beating multiples compared to a lot of other stocks. So what have you seen there? And what is the explanation for why a stock like that got hit so much more than the others? Because they’re, they’re all big, and they’re all tech. So yeah, what’s going on? Braden 3:37 Yeah, it’s an excellent question. And investors have to keep asking themselves, is this a bear market with a reason why my tech stocks are down 70% like Netflix today is down over 70% from its peak in October of last year, which is dramatic for a company, you know, that was once worth hundreds of billions in market cap. Like we’re talking about one of the largest companies in the world. And so today, you know, that 84 and change in market cap and erased almost all of its five-year gains. Now mind you, even after this, what looks like falling off a cliff, investors have done exceptionally well if they’ve held the stock, you know, since people first heard about the service, and so just paying attention to that kind of thing matters. But back to your question, they grew revenue in their latest quarter, almost 10% year over year, and on the surface, you go, How on earth does that warrant the stock to drop 36% on its trading day after releasing earnings at the close? And that is a legitimate question like how is that possible? Is this, you know, is it because you know the market is in extreme fear? You know, every company reports earnings are going down, but why is Netflix getting absolutely desperate, made they grow revenue by almost double digits? And the reason for that is they had, for the first time ever, the net churn of subscribers not like growth is slowing or anything like that, which is probably true as they reach like, you know, somewhat maturity. But actual net churn more cancellations, the new ads, and that are like a disaster for SaaS companies. And for subscription-based companies like net churn, it like makes me like, feel sick as a technology entrepreneur, like That sounds terrible. It’s like the end like your company is falling apart, right? And that’s not true for Netflix’s situation. But what is true is that for the first time, they faced net churn, and if you look at the top line growth of 10%, and for the first time ever, net churn, it brings you to the most important point, which is these key company key performance indicators are what usually drives the business fundamentals behind the scenes. And that’ll come out, and GAAP ing, of course, it’ll come out. But you know, I’m raising money for my company right now and doing venture capital meetings all the time. And they don’t ask me, of course, they’re asking me what the revenues are. But they’re asking important questions like, how many API calls a day? How many monthly active s, you know, when someone comes on, like, how sticky? Is it? Like, are they using it? Like, are their power s, these types of actual key performance indicators, and how many searches are being done on the platform a day; these are what are actually important, and we track them internally. And so, on the top of every press release of each company, when they report earnings, usually above revenue before profits, are the metrics that matter; Spotify is a perfect example; you might be listening to his podcasts on Spotify. At the top of the press release, Daniel Eck doesn’t say, here’s our revenue; Daniel says, here are the subscribers, here’s the freemium subscribers, here is it is in total here, how it’s trending, here’s where we think it can go. This is where it was last year, in the table before profit, free cash flow, that GAAP ing stuff. And so, yeah, I’ve just been on a mission to try to build out this database of all these key performance indicators because I think that they matter. And I think that they’re hard to find, in aggregate, for these publicly traded companies, Andrew 7:22 they are hard to find. And it’s cool to see resources like yours popping up. Because I know for me personally, I do this full time. So I invest quite a bit in different tools and databases to save time so I don’t have to hire people to go through the databases for me. And so those tools have not been available for all that long. And so to have a platform like yours, to have a lot of functionality and a good value for retail, do-it-yourself investors, I think that’s very, very cool. I mean, to give an example, you know, you mentioned Netflix with their net churn; a lot of the times when I’m looking at different companies, I will want to compare different metrics that the company also has; it might not be at the top of the press release, but they will be if you go down, and you look. And it does not that say it’s buried, but it takes some work to get there, right? So like, if you’re looking at retailers, you’re looking at same-store sales, if you’re looking at restaurants, same-restaurant sales, and you compare how a company is doing in those key metrics, compared to their competitors. And you can sometimes see where a company is a leader in their field when you have apples-to-apples comparisons with other companies. And that doesn’t always show up in the financials; as you said, revenue or profits doesn’t always show up year to year because there are so many moving pieces. But some KPIs can be so important. What’s hard about it is it’s different for every business. And what we think is a KPI doesn’t always mean a driver. But that doesn’t mean you don’t ignore them. Right, you have to certainly look and see what the KPIs are and how I can use them to make better-investing decisions. Braden 9:09 Yeah, it drives a lot of valuable insight. And like you said, there are some of the ones that will be buried; one that we really like, which sits on page 186 of Amazon’s 10k, Is their warehouse square footage. So this tells a really interesting story, right? Their footprint in of, like, real infrastructure has exploded to over 600 million square feet of warehousing space. And so it’s on page literally like 186; I think it is on their 10k on their latest one. And we think that that’s a really interesting story to track because it speaks to their competitive advantage, which is this distribution and infrastructure competitive advantage. All the other metrics, like how do you really quantify that story, right without talking about something like You know, wow, look, they have 600 million freaking square feet of warehouse storage, like how do you compete with that, like, look at the CapEx spend on that, like it drives a moat itself, like in CapEx spend as much as we love, like, asset-light compounders. I mean, it’s just it’s a real thing. It’s hard to replicate. Yeah. So I think like, bring it back to, you know, this is the investing for beginners podcast, a lot of new investors will look out there, and you are so blessed. And this is not a promo of my own product, like; you’re so blessed from a fee perspective, a reduced friction perspective, a data accessibility perspective, to get this stuff that is so small, it used to be so hard to find. Completing a trade like 1020 years ago was impossibly hard like the friction has dropped off a cliff. It is a wonderful time to start an investor to be an investor today, especially if you can get prices at, you know, compressed prices like they are today. I just think I’m just very optimistic about the future. And I’m very optimistic about people who are just getting started. Because the education, the information, the fee structure, the cost, the ability to get started, the way that the ability to connect your entire financial life is just so much better than it was even just five years ago. I just think it’s wonderful. Andrew 11:26 Yeah, that’s really cool, man. You know, when it comes to magic pills, I’m always skeptical whether you’re talking about somebody who thinks value investing is the only way or bitcoin is the only way. Well, there are some ways to make sure that we’re not putting too much reliance on a KPI and putting it put KPIs in context with an overall stock picking approach. Braden 11:49 I just think it’s part of the process, right, like I’m talking about right now because I’m literally all consumed by building this out right now. But of course, it’s just part of the process and part of the thing to . And you know, what, I think that the most value in it is tracking, right? Like, for me, this is how I track my positions; I have like just three, sometimes even just one metric that I track for the 17 individual equities that I own today on 17 individual equities, and I track just those specific ones. And so, bringing it back to the Spotify example, it’s just subscribers. And that really helps you simplify your process, especially if you own a lot of names. I know a lot of people, tons of names; I’d probably just index if that was me, but a lot of people in lots of names and start tracking it; back to your question around. Like, it’s not the only thing to look at; of course, you’ll get blindsided if you’re only looking at one metric. It’s the same with any if you’re looking at just one valuation metric like if you’re like only looking at price to earnings, you’re gonna miss a lot of stuff. Or if you’re only buying companies with a PE less than 15 because Ben Graham’s the intelligent investor, the Bible of value investing told me to do so. Well, you’ve just been underweight, good companies, you’ve just you’ve underperformed the market, and underweight quality and underweight pricing power, basically, is how I would put it. And so there’s just really no right or wrong way to do it. What I will say I’m quite confident in is the right way to do it is to think long term, buy great companies think like a business owner, not a trader; I’ve still never been convinced that anyone can trade profitably for like more than ten years straight. I literally just, I’ve been doing this for so long. And I have never once been convinced trading is a profitable endeavor. And sure, you know, someone’s listening to this, like, Dude, I doubled my money on some stock yesterday, like you idiot. If you do it for ten years straight, and you can prove to me, I’m all yours. I’m seriously all yours. I’m an open book. I love being convinced wrong of my own biases and actually mean that. But I have yet to be convinced that other than buying great assets, whether it’s the entire index or individual securities, and holding on for a long term, compounding is truly the best way to make money in the stock market. And I’m not just saying that like to be all stoic, like, don’t trade, you know, like, like some old guy. I’m saying this because I think that’s how you actually make a life-changing wealth. And I truly believe it. Dave 14:27 Yeah, totally agree. I think the thing that I love about what you’re building there and how much it helps is that when you kind of combine the analysis of the financials with the KPIs, it gives you a better sense of the actual business. That’s right. And you know, a perfect example is if you look at Visa, of course, we can’t have Braden on and talk about Braden 14:48 It would not be an episode of me on the IFP podcast unless we talked about the payment rails. Dave 14:54 And the thing is, if you look at Visa and fees, just look at the revenues. He may be a little bit underwhelmed, or he may even go, you know, it’s not doing so great. But then, if you look at the KPI of the cross-border payments, which is so huge to their business and their profitability, and you don’t understand that those are actually increasing faster than their revenues are that you’ll start to understand, okay, this is how Visa operates. This is what really impacted them during the pandemic. And this is how they’re rebounding from the pandemic. It’s also an illustration of the strength or weakness of the economy because so many people are using Visa and MasterCard to make payments, buy groceries, buy food, in some cases, pay rent, buying gas, but not as much here right now. But anyway, those are all indicators of bigger issues and bigger things that you can look into. And it can give you comparisons of how the company is doing and how it could be doing. And you know that to me, I think, is it really beneficial for retail investors, whether they’re retail or whether they’re institutional investors, to have access to the information. And like you said, sometimes they don’t make it the easiest to find. Visa does first to a certain extent. But there are companies out there like Amazon that will hide things and make them harder to find, Braden 16:11 totally. And if you look at it like I’m just on here, right now, I typed in V on the platform and got their total transactions, and the total transaction volume for this company has gone from 6.3 trillion to almost 14 trillion in the past ten years, in of total transaction volume on the visa network. Like it’s unbelievable, like, trying to get context for that level of scale is unbelievable. And of course, they’re taking just a tiny take rate, like you know, less than, like 0.14%. It’s kind of like a death by a million paper cuts type business model. But on that tiny take rate, we’re talking about, like what, like 70% EBIT on margins, it’s so stupid, like, it’s silly, good. And so these are the types of things that get me interested in of like trying to own the best businesses in the world. And these are the types of things that tell that story. Because if you’re just looking at GAAP metrics, and you say, Wow, this thing has grown really well over time, like it’s pretty surface level, you don’t understand their moat, their competitive advantages, the durability, what drives that in the background. And so I think that all of those things make this game more fun as a business, like someone who studies businesses, like even if I was fully indexed, which I think is a great option for beginner investors. Even if I just was like, this stuff excites me, right? This stuff makes nerds like you and me excited, focusing on these kinds of things, understanding business models, and maybe you take some of that and some of that information and build your own business with it or your own side business with it. This is what gets me really excited about the world Dave 17:51 today. I think the other thing that I like about it, too, is when you’re looking at businesses, and you want to compare Shopify to Amazon, if you just looked at the GAAP financials, sometimes those relationships are hard to see, really where somebody may be eating into another person’s, you know, market share or not. And so by looking at like gross merchandise value, or because I’m not super familiar with those companies, but I understand enough about how the businesses work, that if I wanted to look at those and see who was growing faster, how they’re growing, and all those things, those will all relate to the financials in the business model and will help illustrate in greater detail whether the company does have a moat, whether the moat is eroding, and maybe some potential things that you could see coming in the future that could help you maybe get out of a position or think about whether this is going to be viable for the next five to 10 years. Braden 18:45 Yeah, that’s a perfect example is like, you know, a lot of E-commerce companies published that GMV number you just talked about, and it does help give people context. I mean, you have to factor in take rates and margins and figure all that stuff out, like, is it a marketplace? Or is it like, you know, fee-based transaction, like that kind of stuff? Those are questions that we can figure out later. But it really helps us gain context of scale right out of the gate, like, how much are people actually moving? Or let’s look at another eCommerce company like Etsy; okay, there’s one comp, I don’t own it, but my co-host on my podcast does, and he’s owned it for a while; he like he noticed, right? He’s made lots of money on it. He’s known that notice, like, my wife really likes this interplay at the marketplace and check it out. And he’s like, wow, it’s actually a really cool company. And by the way, lots of good ideas come from just like paying attention in your own life. That’s like the old Peter Lynch thing like channel checks, go into the mall and see what’s see what people are spending their money on, like classic stuff like that. And you look at that, and the most important metric to track is, in my opinion, I’m not shareholder my opinion, is active sellers on the platform because that will show the health of the no system of people selling on their marketplace, like if sellers are turning off because they’re not making enough money if they start an Etsy shop and like, I’m going to start selling, you know, necklaces or some other crafty goodness. And like, I’ve been doing this for a couple of months, I’ve sold nothing. And I’m no longer an active seller, which, in my opinion, defines the health of the ecosystem of the marketplace. Better than active buyers, in my opinion, because these are people that matter. It’s like, an Airbnb example. How many hosts are on the platform is that host number going up or down, or are hosts churning off to go to VRBO, their competitor, or doing direct listing on like, making their own website, and doing direct listing? You know, maybe the economics are better, maybe they don’t have to deal with Airbnb that defines the health of the ecosystem, in my opinion, more so than anything else. And so I think tracking those things matters. And it may only be one thing that you can implement this into your portfolio where, you know, say you do own Airbnb, its tracking gross booking value, just over time, or tracking active hosts on the platform nights booked. Or maybe you’re really excited about the trend of people living on Airbnb. Over time, the amount the nights booked on an Airbnb continues to trend up because people are like, Screw it. I’m living in Costa Rica remotely and working remotely for three months. And I’m booking this Airbnb for three months at a time. This has massively skewed the average number of nights booked on the platform. Interesting trend, like not only as an investor but like this is a real thing that’s happening; people are living on Airbnb, people are doing this whole remote live from anywhere type thing. And so maybe there are some other interesting takeaways there. And I don’t know; I just think it’s cool. Andrew 21:46 If you’re talking to like a beginner who wants to be a DIY investor, there are so many KPIs like, where do you even start? Well, you again, Braden 21:54 it’s so nuanced, depending on the business, it’s not, like, necessarily a good place to start for trying to find ideas. But it’s a good place to do more research on the company, like, say, you’re already interested in Airbnb as an investment and then going on to the platform typing in a b&b. And then you know, I don’t think it’s a great place to start per se, but it’s a good place to your investing thesis and do more continue to monitor over time, as well as just regular sales are right like I have a rule for my investing framework that don’t buy companies that don’t have growing revenues, six simple rule, right? And that’s going to be on any GAAP ing statement; you find that information anywhere. It’s just, like, so simple. I like that it goes back to these very simple questions you have to ask yourself, Do I think this company is going to be bigger, better, and more profitable in the future? If not, like, I would know it for 10 seconds, right? Like in 10 years? Like, is it gonna be better, bigger, more profitable, more defensible, more durable, and more market share in 10 years? And if not, and not interested? Like, move on? Right? Like, it’s pretty quick. For me, I think a lot of people get caught up in low or low value like they got caught up in value traps. Next thing, you know, they’re buying some 10% dividend-yielding CO that saw a 15% decline in their sales in the past 12 months. I think that’s a quick way to go broke. Dave 23:14 Yeah, I would agree with that. And I guess something that I think is kind of interesting about what you’re saying is, I think it goes back to just kind of understanding what it is you’re buying. And it also is, understanding what your goals are and what you’re trying to do. And I think having like that simple checklist, you know, especially for beginners, having a simple checklist like that will help people understand what it is they need to look at, for the different companies so that they can get a better sense of what it is they’re going to be buying. Because again, when they buy a company, they’re buying a piece of the company, and they’re not just buying a ticker on whatever their investment platform is, it’s actually a company that they’re buying, you’ll find beginners, I think, understanding some of those simple ideas, and then looking at what the company is telling you, a lot of times will reveal what those KPIs are, whether it’s the earnings calls, whether it’s the press releases, whether it’s at the top of their financial forms. A lot of those times are your interview here; even if you hear the talking head go on CNBC, the things that they’re going to focus on are the things that are going to be important to the company. And those are things that you can take back and look at and see and see how those can impact your investment. Braden 24:26 It is the best way to focus on real signal versus noise. Because if you look out there today in financial media, financial news, and the internet, you know your watch list; you see tickers going up and down for each reason you get some notification oh the worst thing ever. You get some notification on your brokerage that the stock you own is trading at high volume or like down five plus percent in the day, which happens all the time. I mean, minus the bear market, that is so much noise and can really take away from people focusing on fundamentals, especially if you’re new to the market, especially if you’re new to the market. If you’re brand new to the market, and the stock you own goes down, which is very normal happens all the time, you will be can trick; you’re going to be tricked into thinking that there’s some new development you don’t know about. This is one of the biggest scams of daily mark to mark pricing of assets on the market as liquid as the stock market, the stock market being liquid and being able to share it like exchange shares as you know, I can go out there and buy shares, sell shares, like in an instant, is amazing. It’s like one of the best things like it’s just pure brilliance, really it is. But it comes with a scam of people thinking that every day, there’s something to pay attention to, in of every single equity moving around. When each company really reports its results on a quarterly basis. Maybe they do some updates on guidance here and there. Maybe they have some investor day. But other than that, what else is there, right? Like this some news? Or some company does this; some company does that. Sure. Those might be important. But day-to-day movement on stocks with no real relevant, fundamental change in the company is a real illusion to tracking what matters. And so as soon as you can recognize that, I think you’ll do a lot better in of being an investor, because that is like one of the biggest mistakes I see right out of the gate is like, there’s, you know, I’m new to this. There’s no way I’m smart enough to the people who are selling this stock; they must know something I don’t know. And I think that that’s a bad way to go. Suppose you think like a business owner and not like trading some imaginary tickers. It’ll help you a lot. Dave 26:58 So why do you think a company like Facebook is so unloved right now? Because I think all the things that you were just talking about, if if you took the financials up, if you block out the Facebook part of it, and just look at the financials of the company, almost every investor will go I want that. Braden 27:13 Yeah, especially at the valuation, Right? Like, yeah, right. Dave 27:17 He’s just all those things, but that you put that the meta or Facebook on there, and you put Mark Zuckerberg icky, right, and it becomes tricky. So why is that? Braden 27:26 Yeah, it’s a good question. It’s a wonderful question. Because if you’re gonna like run a model on, like, growth at a reasonable price, I think you might get maybe the best-looking company I’ve ever seen in of my entire career of like, Ev / EBITA versus EBITA growth. Like, when are you ever going to see this giant disparity? I don’t think in my entire career, I’ve seen anything quite like it. And you’re right. It’s such an icky thing to own. You know, some people have their thoughts about the Zuck; you know, he’s still a founder-led business, which, by the way, I’m a big fan of, not necessarily him, but I’m a big fan of founder-led businesses actually think he’s okay, people hate on I think he’s alright, Facebook is in a weird situation right now are starting meta correction. Meta meta is in a situation right now. I believe that hundreds of business books are going to be written about it. It is a pivotal point in the company, where no pun intended, they are pivoting in of their messaging, things that they’re focusing on, you know, you wonder, as an investor, you’re like, hey, this thing’s still run by the founder. He has no real financial motivation anymore. That guy’s worth over $100 billion. Well, maybe not anymore. But any like, is this ADHD killing the company? Like, should they focus on what they’re good at? or is this really Zucker, Berg brilliance? Focusing on this next computing platform in Oculus, and it’s just such a hard question to answer that no one has the answer to, and you know, what investors hate when they don’t have the answers. Investors hate uncertainty. They hate not knowing the answers. And that’s why you’ve seen complete destruction in the multiple, even though I mean, yeah, I mean, you look at daily active s on Instagram and Facebook, and everything looks fine. Everything looks good. You know, you look at the top 10 most ed apps on the App store and a lot of meta assets. And you have this like completely on monetized WhatsApp, like the most used messaging app platform in the world. Like from a daily active s perspective. People are just glued to this stuff. Like it’s unbelievable. And then you look at it, and you’re like, is this Metaverse thing going to pay off because it’s no longer what I think I was wrong about is just some distraction. If you look at the Oculus Reality Lab spending, which is a KPI we track, it is in the 10s of billions of dollars each quarter. So if that didn’t work, we are talking about one of the greatest capital incineration I’ve ever seen. Do you see what I mean? That’s a lot of money. Yeah. So we’re talking about a pivotal point in the company that hundreds of business books will be written about as the greatest movie of all time or the complete destruction of a trillion-dollar asset. And I don’t know which way it’s gonna go. But we’re definitely watching this Oculus spending over time. And I think that it’s become divisive for investors who currently own the company. They’re like, Dude, we just want you guys to keep making these addictive advertising platforms. Right, like, just questions to be answered. That’s the main thing. Dave 30:41 I think all that is super interesting, Andrew, something you want to do. Andrew 30:44 So, Braden, you’ve got these KPIs that we’ve been discussing today; it is a feature in your platform. stratosphere.io, you guys also cover some of the biggest businesses; I know you have scores for quality growth value. And then obviously, the KPIs too. So tell us a little bit about all of that. And when people first go on the site, that’s like the ideal way that you would tell them to navigate if they haven’t used the site for the first time. Braden 31:16 Yeah, thanks for the; if you go to stratosphere.io, and you don’t even have to make an , you should; you’re gonna unlock everything; it’s free. But you can Seeing is believing, right, like, in five seconds, you can perform a search, if some company you own are interested in and get all ten years of financial statements if it’s a large-cap company, we’re gonna have all their key performance indicators, we’re gonna have the entire s&p 500 By the end of August, which is the promise that I’ve kept, kept strong with, and we are ahead of schedule. So this is good. And you’re gonna go from knowing nothing to everything about the company, I think, pretty quick. And so I’m trying to make the process easier for professionals, people who are new to this, and someone in between all ranges of the spectrum, to make fundamental research easier because it has been people have been tricked into thinking that you have to be a professional do this, people have been tricked into thinking that they have to pay expensive management fees to do this. And I don’t believe that all of that is true. With the caveat that you are actually buying, companies are holding them and not gambling in the stock market. Because the stock market is not a gambling machine, sure, you can make money on its trade and stuff in and out. But I truly believe that life-changing wealth is made by holding great companies for a long time. And so we want to make that easier for people. And so that’s basically what it is; you do a search, and you can navigate through the different tabs. I’m very biased. But I think that the UX and the UI are quite beautiful. I’m really happy with how it all looks and feels. Andrew 32:55 That’s pretty cool. So you know, obviously can’t argue with that idea. You got to buy good companies; you got to hold them. And that’s how you’re going to build wealth with the companies that do the work for you after you’ve laid some groundwork. So, Braden, it’s been great to have you on all of this time. I know you’re a super hard worker. And you’re really ionate about technology. And it’s cool to see another platform out there that can really bring a lot of value to people in the mean if it’s free, but you got to lose at least check it out. Right. So people again can go to the stratosphere.io; they can also listen to your podcasts. Where else can they find out more about you online? Braden 33:31 Yeah, for those Canadians or Canada? Obviously, if you’re not even from you’re not from Canada, I think the podcast is at least somewhat interesting. For some reason. Dave listens to it for hours on end while he’s driving. I’m very sorry to hear that. I couldn’t listen to my voice for that long. It’s really. Yeah, I co-host the show there. Its episodes come out on Mondays and Thursdays. It’s called the Canadian investor. We talked about stuff like this news, all kinds of fun stuff. We’ll try to keep it fun. Yeah, that’s pretty much it. Dave 34:00 Yeah, it’s awesome stuff. And as a frequent flyer on the platform, as well as the podcast, it’s definitely worth your time to check out. And there’s a lot of great information there that can help you learn more about the companies that you’re trying to buy. And that’s really the bottom line, and the KPI stuff is newer to the platform, but it’s just Braden 34:19 Twenty-four hours old, to be exact. Dave 34:23 But I love it. It’s super easy to use, and it’s very illustrative. And as a visual person, it helps me a lot to kind of visualize and see things, and I couldn’t recommend it enough. So, Braden, again, thank you for taking the time out of your day to come to talk to us. We do appreciate it. And everyone out there, go check out his website, go check out the podcast. Alright, folks. Well, with that, we’ll wrap it up. Everyone goes out there to invest with a margin of safety, with emphasis on the safety. Have a great week, and we’ll talk to you next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post Talking About the Importance of KPIs with Braden Denis of Stratosphere appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we discuss: A Bird’s Eye view of Walmart Starting to learn the company via the 10-k; if you understand the business, move on to the rest of the 10-k. Focus on the top line growth or revenue growth Understanding the process of analyzing a company and using that knowledge to compare it to other companies. 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right, folks, welcome to Investing for Beginners podcast; tonight is episode 235. And we are going to do something a little new. Today we’re going to do a bird’s eye view of a company called Walmart; you might have heard of it; it’s rather large. And we thought we would just kind of talk through how we would look at a company for the first time if this was our first time looking at Walmart. And so Andrew and I will kind of take turns just kind of walking through what we would look at and kind of how we would start, I guess, the process of starting to analyze a company, and it might be informational for you. And we thought we started with Walmart, which is a big Easy Company that most people are familiar with, I think out there. And I know that I’ve shopped there a time or two. And so yeah, I thought that would be kind of an easy way for us to start. So Andrew, would you like to be the first to go? Or would you like me to be the guinea pig? Andrew 0:55 Well, when you phrase it that way, I’d love for you to be the guinea pig. Dave 0:58 Okay. All right. Fair enough. All right. So I guess when you’re looking at a company, I think one of the things that a lot of people are always curious about is kind of how you start. And so I think this would be a good chance for us to kind of talk about maybe how we would start. And honestly, it goes company by company for me. And sometimes, if it’s a company that I’ve come across on a screen, or it’s something that maybe I read about online, or maybe Andrew mentioned to me something that came into my universe, I want to learn more about the company if it was a company that I wasn’t familiar with, or I didn’t know what the business model was, or any of those kinds of things, I would immediately go to the 10k. And for me, I would start with a business description of the business. And I would just start working through that to see if I could understand the business. And if I can understand the business, then I will proceed farther into the 10k and start learning as much about the company as I possibly can. If it was a company like Walmart or Amazon, or even Google, I would have a better basis of knowledge of what it is they do. I mean, Walmart is not super complicated. They sell stuff, either in the store or online. And it’s one of the largest retailers; I think it’s the largest retailer in the world if I’m not mistaken. And I’m familiar with it; I shop there, I know what they sell, I understand their business model, and my ex-wife actually used to work for the company as an HR person. So somewhat intimately understanding the business model. So I don’t need to spend a lot of time doing that. So when I would look at a company like Walmart, then I would just jump to looking at something like the metrics or looking at a brief overview of the metrics. Our friend Braden Denis has a great website that can help us a lot with that. And so that’s kind of what we’re, I guess I would start. So, Andrew, I guess, before we kind of dive into the company, if you are going to start with a company, how would you start? Andrew 2:56 For me, it would be something very similar. You got to think about it. There’s what 7000 8000 stocks that you could buy on the New York Stock Exchange, or NASDAQ. So you’re gonna have to figure out really quickly how to cross companies off of your list. And so the first thing I want to do, I think the business model is really important. And you want to have a basic understanding of that. For me, I first want to look to make sure the numbers are attractive enough to make me consider investing time and the company further. So Braden, actually, when we interviewed him recently, he said this. And I think it’s a really good rule of thumb to think about if you’re the type of investor that has a similar approach to him or like myself, where I like to buy things and hold them for a long time if I can find the right companies. And so one of the first things you can do is look at the revenue, and that’s going to be what they also call the top line. And where is that going? Is it trending up? Or is it trending down? And if it’s trending down, that doesn’t fit your style? What’s the point in looking further? So I would look at revenue for me. Personally, I also look at the return on invested capital, ROIC. So that tells me we’ve had lots of conversations about ROIC; Mark Lamonica explained that well as Todd Wenning; thank you. His example was super, super good. But yeah, basically, this company can help them grow and create profits without needing to invest a ton of cash. And so those can tend to grow better, faster, easier. So I will tend to look at those, and I like to look at longer timeframes. So for this Walmart example, I have four websites pulled up, okay? Maybe if it’s your first time you got four, maybe if it’s your first time you start with, like, just try to use one. And then, as you look at more and more companies, you can add more websites into the mix. So I’ve got stratosphere.io for the KPIs, I’ve got finviz. For the valuation, I got quickFS for the overall financial picture, so quick fs.net. I like them because you can just put the ticker in the search, and it gives you the ROIC. Right there. It’s the first thing you see in you can see how it’s grown, if it’s grown, or if it’s gone down, how it’s moved over 20 years. And I like that visualization a lot. And then I also like how right below that chart, there is sales, the revenue, and that top line, and I can see exactly what that growth has been from year to year, what percentage growth has that been from year to year. So that’s like the tool I’ve been using for quite a while. I’m very comfortable using it. So that would be the first thing I would look at. And if those two things look good, then I’m like, Okay, now, the world is your oyster, you could go a million different ways and how you want to understand this company. For me, Dave 5:55 that’s great stuff. And I think, let’s talk about the revenue part of it first, for just a second. If you’re looking at a company, is there a finite number that you have to like? Is there a hurdle rate that the company has to get over? Like, if you see the company growing at 2%? A year every year? Is that okay? Or are you looking for a higher number than that? Is that something that helps you screen out the companies? Or? And I guess kind of along the same lines with ROIC? Are you looking for it to expand? Are you looking for it to kind of stay steady? Or are you looking for it to not decline? In essence? I mean, are those things that kind of help screen out whether you’re going to continue looking at the company? Andrew 6:36 Yeah, those are great questions. So for revenue growth, I definitely, I would say, two percent is pretty low. So I don’t have like a cut-and-dry like this is the bottom limit to what I would want to see. But if you’re new to the market, and you’re kind of new to how it works, to the 3% a year that’s like inflation, if a company is growing at that rate, they’re not a great company, they’re just kind of growing along with inflation, the economy itself grows around four, the 5% range over the last 25 years. So some of them are in that range, right? Growing alongside the economy, I kind of liked that as a sweet spot in the sense that a lot of companies tend to grow in that range. And then obviously, if you can find it at a good price, you want higher than that 6789 10%, and then anything higher than 10, or 11, or 12, I just kind of assume that it’s going to eventually return to something like 10, nine, eight, so the if the average, we know the average stock market returns around 10% a year over the entire stock market. So part of that, not all of that’s just revenue growth, by the way. So to have 10% growth, what I’m trying to say is a top 10% growth is really outstanding and definitely makes you an above-average company. And that’s super, super hard to maintain. And not a lot of companies can maintain it. So obviously, you don’t penalize somebody for being great at growing. But you kind of temper expectations; in my mind that I’m kind of looking for as long as it’s above inflation, that’s probably what I’m looking at. Dave 8:17 It’s an interesting discussion because I think, you know, for me, one of the ways that I look at the top line growth when I’m trying to assess if this is going to be something that I want to consider doing more work on is whether or not we’ll kind of where the company is an in their sector, or niche or industry. And number two, how old is the company how long have they been in business? And if you’re looking at, you know, we’re kind of looking at Walmart here briefly, and Walmart has been in business for what 50 Some years is a long time. Whereas if you’re looking at a company, like let’s just pull it out of my hat CrowdStrike. You know, they’ve been public for a few years. And so the expectation of revenue growth for a company like CrowdStrike, which is a much smaller, completely different industry, versus the one that that Walmart is in or is, you know, my expectation is going to be different. And so I guess, for me, that’s one of the things that I kind of use as a not necessarily a hurdle rate. But something that I definitely consider is thinking about where the company is in our lifecycle. And what kind of business is it in and what kind of niche is it in, you know, what is that industry because the growth of Wells Fargo versus Microsoft, it’s not apples to apples. And so I can’t expect Wells Fargo to grow as quickly as a company like Microsoft would just because it’s the nature of its business. And so that’s something that I always try to keep in mind when I’m looking at these numbers just in general, but that’s something that kind of helps me weed out. You know, if I’m looking at a company that is in a faster-growing niche, and younger kids company and it’s only growing at two or 3%. Okay, you know that for me, that might be okay, that’s a , Andrew 10:06 I guess how you would know? Outside of like age? How would you know if an industry is more mature? Or if it’s in its high growth stage? What would it be? Dave 10:15 I think some of it is too addictive. And some of it is variance, and then some of it also, is you won’t know. And so if you don’t know, then it just becomes that’s a question I got to answer. And I’ve talked about this before in the past; it’s easier to look for reasons why not to buy the company than to buy the company. And sometimes, you’re going to come across things that you just may not know the answer to right away. But that just means that, okay, I got to put that on a list of things I got to figure out. And I’m going to learn more about that. So if it’s not something that comes to me intuitively, or based on my experience in past knowledge, then it’s just a question I’m going to have to dig a little bit deeper on to find more about. Andrew 10:56 So at the risk of like cutting this bird’s eye view episode really short, I mean, frankly, does Walmart that hurdle rate for revenue growth for you? Dave 11:08 So, if you take a look at the business and what it’s done, if you look at the last ten years, the financials of the company, it really is not growing that quickly. And if you look at just the last couple of years, it’s been skewed because of COVID; Walmart was definitely a beneficiary of everything that happened with a pandemic because there is one of the few places that were opened, one of the few places that sell groceries, it’s, you know, I think, the largest grocer in the United States. And so you have all those perks or benefits for the company, and so they were able to capitalize on that. But I think as we’ve come out of the pandemic, or are coming out of the pandemic, depending on where we are in the world, then you’re starting to see that revenue growth that they were experiencing over the last year and a half or so is starting to slow. And then the other aspects of the business, if you look at the other parts of the business, like Sam’s Club, for example, the Sam’s Club has seen pretty stagnant revenue growth over the last ten years, it did see a little bit of a bump during COVID. But now it seems to be leveling out again. And so that doesn’t, those two things don’t inspire a lot of confidence in me that this is an investment, that, is it going to go bankrupt, right away? Heck, no. I mean, Walmart’s not going anywhere for quite some time. But is it the opportunity cost of putting my money in Walmart versus Company B? I think I have a better opportunity and company B than I would accompany in Walmart. And so for me, it’s not something. Is that a bad investment? I wouldn’t say it’s a bad investment. But it’s not something that I would want in my portfolio because it doesn’t fit my needs. It’s not is not growing, and I don’t think we’ll grow fast enough to get to the next level. And in large part because of the nature of what it does and how it does what it does. It’s basically a low-cost provider that sells things at very thin margins. And so the opportunity to grow margins and to continue to innovate the business, I think, is more restricted than another company. And so for me, that’s, if I just look at the revenue, part of it, that would be a for me. So how about you? Andrew 13:21 Yeah, I mean, actually, it’s this, it’s a similar story. For me, I look, again, if I look at Quick Fs, and I look at some of these revenue growth numbers from one year to the next 1.6% point, 8% 3%, like a lot of numbers below 3%, below inflation, doesn’t inspire a lot of confidence for me. And so I, you know, I don’t do a perfect job at it. But I do like to try to get into as many companies as I can that I know can at least keep up with the economic growth. And so if a company is not keeping up with economic growth, that signals to me, either maybe they are losing market share, or they’re just the end markets they are in are just not keeping up with economic growth because they are maturing, essentially. I mean, one way I really like to, this isn’t like in a textbook or anything, so take it for what it’s worth. But like, if you think about like the price trends of spices, like over the very, very long term, like they’ve gotten like stupid cheap now, right, it’s just basically become commoditized. And it’s so cheap and easy for these spices to be delivered to the stores. To me, that’s like a tough market to kind of be selling out of, just as one example. Some of the other foods can kind of sometimes turn that way too. And so, you know, one of the blessings of the economy and the way that it’s really helped people is it’s reduced some of our essential expenses. Innovation has saved our time. We don’t have to spend time hand washing our clothes right, and we spend A lot less these days on essentials than we did back in like the 1950s, for example. So that stuff’s great for the economy, but it’s not great if you’re a business that’s getting your profits innovated away and competed away, and, and all of that. So it’s not a perfect science, but you just got to try to look for those industries that are growing and have a good growth rate. And I wonder if just their mix, like you, said, kind of just being low cost and really having a lot of everything. And just being such a big size? I mean, it’s hard to grow when you’re 500 billion, and like, where else can you grow to all of those things just kind of make it tough to see a turnaround in that. And so that’s where the revenue growth becomes a little bit doesn’t fit, what I’m looking for. Dave 15:50 That makes a lot of sense. And I think if you look at some of the things that the company has been trying to do, and is trying to do, kind of see where they can expand. And I’m going to kind of get to my point here in just a second. But if you look at its international growth, it has not done well. And if you look at some of the investments that they’ve been making, they’re not core competencies for the company. And a perfect example of that is they’re really trying to expand the financial services that they offer for customers as well as the outside of people shopping at the store. And that’s not in there. My concern about that could be I could be completely wrong. But my concern about that is not in their core operating procedure. That’s not an area that they’ve excelled in over the, you know, the last 50 years. And so this is something new, and you know, the investments don’t rise to the same level of like metals investment in the metaverse and everything they got going on. It’s not that extreme. But if that’s one of the things that they’re banking on to take them to the next level, I don’t know if that’s really going to get them to the next level. And the other part of that, too, is, by and large, a lot of that’s not hugely profitable, as far as like operating revenue and margins. By and large. Banks are not known for their, you know, generous operating margins just because of the nature of how they operate. And so those are some things that kind of look at like. And then the other thing that you mentioned is expansion. So I think the opportunity for them to open more stores, and that continues to be an opportunity for them to grow into the future, I think is far more limited than Costco. So they’re not an apples-to-apples comparison, but they kind of are a little bit. And so, if you look at Costco, Costco is still growing. And their footprint is still allowing them to continue to grow. And they’ve been starting to expand overseas, and the few stores that they put overseas and Canada and China that come to mind immediately have done extremely well. And so it just seems like their business model is translating better outside of the United States than Walmart is. And so that gives me more confidence that a company like Costco could do better five or ten years from now than Walmart would necessarily. And so I think sometimes when I’m looking at a company like Walmart, I’ve also tried to think about competitors, too. And how will this company stack up against, you know, Costco, Kroger, and anybody else that I can think of? I don’t know as much about Kroger, but you have to kind of think about those things. And I guess that’s, you know, where Walmart falls short for me is that I don’t think that they have the same, you know, a runway for revenue that Costco will. Andrew 18:45 It’s a great point. And I mean, even when you look, I think it’s super critical to look into the industry, if you can if you spend time on a company, and the thing with Walmart is I think a lot of us can observe, they kind of compete with Costco, but they also sell a lot of things that Costco doesn’t sell. And similar to they kind of compete with Target, they also sell some things that Target doesn’t sell. And so the way that target and Costco derive their profits is actually much different than the way Walmart does, even though they’re, quote-unquote, in the same industry. And so that’s not something necessarily you would know, right off the bat. But that’s something as you gain experience, you learn, but it doesn’t, you know, one last thing about this process, and then maybe I’ll shut up, but you know, as you go through these companies, and you kind of say, You know what, I really don’t like this part of a company, I’m gonna . That doesn’t mean you have to on the company forever. It just means, Hey, I’m gonna invest my time on something more exciting and interesting at the moment. But let’s say something changed with Walmart, and all of a sudden, the revenues look great, and it looks sustainable. Well, now you gotta take the step to compare it to target and Costco, and even Amazon. And if the revenue is kind of matured at one Walmart, but you do not see similar maturation at Target, Costco, and Amazon, you have to ask yourself why. So it’s possible that maybe the industry has not matured, but Walmart has hit maturation. And that’s something that considers too. Dave 20:16 That’s totally right on the mark. And I think the idea that when you’re studying a company or you’re looking to start analyzing a company at any level, just because you on a company doesn’t mean that you haven’t learned something valuable about that company, because you can take that information and use it for another company. Let’s say you are looking at Walmart, you decided to , and you’re trying to look at other grocers, well, any information that you’ve learned about Walmart, you can transfer to Kroger, and you can transfer to you know, Amazon if you want, or even, you know, target or Costco, any of those companies, you can look at any of them. And if anything, it makes you not want to buy that, for whatever reason, that knowledge compounds upon itself. And so, you know, I’ve read through, I don’t know, half a dozen of Costcos, 10, K’s, and I’ve read through, you know, dozens of their earnings calls, and I’ve looked at their financials many times, and I’ve valued the company because I want to buy it, but it has been too expensive. But my point is, is that the just because and I haven’t bought it because of that. But I’ve also learned a lot about Costco. And then when I look at Walmart, I mentally compare that and go, Okay, if I had to buy one or the two, which would I rather buy? I’d much rather buy Costco than I would Walmart. And these are the reasons why it kind of applies to everything. If I look at Wells Fargo versus Bank of America, I’m going to use the same rationale; I’m going to look at this and look at this. And if I’ve read about a bunch of different companies that are in the same sector, then it just gives you information that you can use for other things. And so I think sometimes people may get a little frustrated because I’m not finding something that really fits my criteria. And part of it is a process. And the other part of it is you don’t have to say yes to everything. And we don’t have to swing at the first pitch. You can find things; sometimes you get lucky, you can find something right out of the gate that’s like, Oh, this is awesome, perfect. You know, oh, it’s great. But you know, there are other times that this just like, you gotta shuffle through a lot of stuff to get the, you know, to get to the company. So this would be an interesting question. When you work on making your pick for the month, you may not have this number, but just guesstimate how many companies you would possibly look at over the course of a month. Before you finally decide on the one you pick? Is it five? Is it 10? Is it 50? I mean, there’s probably a lot of shuffling, Andrew 22:44 I’m guessing. Yeah, there’s, there’s a ton of shuffling. And that’s the thing about it is like, no matter how much of a workaholic you are, you only have 24 hours in the day and however many hours in the month, and there are so many stocks. So I’m trying to constantly; I will sort through the 1000s of stocks, and you try to find the ones that have the numbers that you want. And so that’s what the screen is for; we’ve had previous episodes in the archives ing the stock screener. So you really narrow down the list as much as you can. And then from there, I’m like running valuations on a lot of companies too, because it’s like, you don’t want to go through all the work only to find out it was too expensive. And so you just kind of wasted that time too. So I do a lot of that. And it’s really hard to say it really is like reading a lot of 10 Ks, let’s just say that, and the sifting through a lot of the 10 ks and trying to get brain dumps and figure out what’s the big picture of this. And the list just keeps growing. It’s like this library of stock tickers is like compounding, like a snowball. And that’s kind of what’s worked for me, really similar to what you’re saying. It’s like sometimes opportunity Is there, and it’s like hard to see any reason not to buy it. But that’s pretty rare. Like I have to turn over a lot of rocks. And you do have to be diligent, in my opinion, that you can’t let your standards down just because you’re getting desperate to find something that you want to buy or you feel like I’ve just gone through 10 companies and none of these are attractive. You just got to keep flipping rocks until you find something that you know because the big thing with the research, in my opinion, is like you do the research upfront. That way, when you get challenged later on, and the stock comes down, later on, you’ve already done the work, and you’re ready, mentally prepared to hang on. If the stock goes down, I think that’s really important, and it’s so much easier the panic and panic sell if you haven’t done the work on why you own this company. Dave 24:45 That’s a great insight. Alright, folks, well, with that, we will go ahead and wrap up our bird’s eye look at Walmart and a kind of introduction to how we start to look at companies. So without any further ado, I’ll go ahead and sign us off; you guys go out there and invest with a margin. Safety emphasis on safety. Have a great week; we’ll talk to you all next week . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post IFB235: Bird’s Eye View of Walmart appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we discuss: Whole life insurance and how they work as a general rule How much should you have for an emergency fund before starting to invest How to decide on which ideas to dollar cost average in a portfolio, new investments, or current holdings? How quickly should you dollar cost average, should you hold back until market conditions improve? 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 Alright, folks, welcome to investing for beginners podcast. Tonight we have episode 234. We’re going to answer three great listener questions we got recently; we’re going to focus a little bit on dollar cost averaging. So if this is something that you are unfamiliar with or would like to learn more about, this episode is all for you. So I’m gonna go ahead and read our first question. And Andrew and I will do our usual give and take. So here we go. Hello, I am 35 years old. I know I have a little while before I retire. But I know you need an emergency fund. How much would you suggest to have before start putting some on the market? I’ve also been hearing a lot about the whole life insurance that gains interest and has a cash value. I’m curious to what your thoughts are on it. And I just caught up on all your episodes on the podcast; I love it. I just need to figure out the formulas to evaluate the company’s thank you for all you do in trying to better people’s lives. There isn’t enough of that in the world anymore. You guys do a great job of breaking it down into understandable . Matthew, as well. Thank you very much, Matthew; we really appreciate that. So Andrew, what are your thoughts on Matthews? Great question concerning the emergency fund and whole life insurance. Andrew 1:04 Let me tackle the whole life insurance first. First, Matthew, Thanks for writing in; this was a great question. Glad you’re finding our stuff useful; whole life insurance, you can get a bunch of people to give you all sorts of opinions on it. Basically, the idea is, if I were to die tomorrow, and I had whole life insurance, it would make sure that there’s family leftover for my spouse and my kids. So that’s kind of the big idea for life insurance. In my view, it’s basically the difference between you investing yourself for your spouse and children or an insurance company doing it for you. Depending on your age, it’s going to be different. So somebody who’s maybe close to their retirement might find great value in the life insurance policy; they answer the question and be like if I were to die tomorrow, would I have left enough money for my spouse or my kids? And if the answer’s no, life insurance is a pretty small price to pay for that. I guess the younger you are, the more chance you have to kind of build that up. So maybe if I don’t die tomorrow, but if I die into the three decades, do I think I’ll have enough to leave to them. I guess it is kind of not only a math problem, and like a logical problem, but it’s also an emotional problem too. Like, does your spouse have the ability to make money? What if you die? Or are they going to be having to go to school? And are they a stay-at-home mom having to go to school or stay a home dad having to go to school. So those are all kinds of factors into it, right? So life insurance, in general, is expensive; you’re basically paying the insurance company to invest for you. Ideally, you can invest for yourself so that you don’t need to pay a life insurance company to do it for you. That’s obviously better from a math standpoint. But there are other factors such as, you know, what’s your personal situation? What’s your spouse’s personal situation? What’s your kid’s situation? Those are all factors that go into that decision. Dave 2:57 Yeah, that’s great advice. And I don’t have a whole life insurance policy. But I do have a life insurance policy. And I took it out when my daughter was born. And that was kind of the advice I got. And I think that’s less something that I heard when I was younger that until you have children, it’s you should wait and get life insurance. I don’t have really strong opinions. Either way, it’s just something that I did to make sure that my family would be protected. Suppose I ed away before they were able to care for themselves. For all the reasons that Andrew was talking about, schooling having enough money for living expenses, and things like that. So that’s why I did it; I will give you one word of caution. Make sure you’re healthy. And make sure you’re younger than 50. Because once you get above 50, the rates go up. And if your health is not as great, so I’m a type two diabetic. So that causes me to have a higher life insurance policy. So just a little word of caution, take care of yourself, especially as Matthew, you’re younger, you’re 35. So please take care of yourself, not only for the life insurance policy but obviously for everything else in life. But those are some things to keep in mind as you’re looking at any sort of insurance policy. Andrew 4:05 Yeah, I guess you could go down the whole rabbit hole of whole life versus term. I don’t think that’s something we should do. If it’s something you’re considering, I would recommend doing more research. I know, in general, most people do not like their whole life. And they recommend term life because it’s much, much cheaper. It sounds like that’s what you did. So yeah, exactly. In general. I think that sounds like a good idea. I guess emergency fund. How would you answer Matthew’s question on the emergency fund? How much should he have before starting to invest? Dave 4:34 Oh, yeah, that can be a bit of a slippery slope. It really comes down to what you’re comfortable with. I think the standard operating procedure is three to four months of living expenses saved up before you start to invest. I think everybody is going to be different in of personal finances personal. So it really depends on what you’re comfortable with. And I guess it also depends on what your income situation is. What’s your employment situation? As you know, where you are with any sort of debt that you might have, whether it’s a home or student loans, credit cards, any of those kinds of other things that life throws at us. So those, I think, all have a bearing on it. For me, I was comfortable enough to start once I had a couple of months’ worth of it, and then I continued to build it up after that. But that was kind of how I did it. But, you know, again, personal finances personal. So I don’t know that there’s any hard and fast rule. I’m curious what Andrew has to say about that, Andrew 5:28 I guess I have a bit of a different opinion in the sense that I know what it’s like to not have money; I know what it’s like to really struggle paycheck to paycheck from life circumstances. And so I know how difficult it can be to save up huge amounts for your emergency fund, like three to six months might sound outrageous. And if you’re a person in that situation, it can be very hard to think you’ll ever get there. And it could cripple you from investing for years. So I think if you’re maybe in a situation where for one reason or the other, you have these huge monthly expenses that really make it difficult to save, I’ve heard this is something from Dave Ramsey’s podcast, just get to $1,000 emergency fund, which is more than a big percentage of Americans have, by the way, but just $1,000 that that will hold you over from, let’s say, your car breaks down and or you got to blow out on the freeway or something, then you need to buy new tires, at least having $1,000 will help you keep from dipping into credit cards. And then you can build that up and then use the rest for investing. But if you’re like really strapped for cash, and it looks like you’re going to be that way for six months, maybe two years or more, at some point, you got to try to do it, you can at least get into the market. And then, hopefully, your situation will change later on. But at least getting started just because the power of even a small amount can really compound to great amounts over time. $150 a month, as an example, can become a lot over time. So if you can do that and have an emergency fund where it’s like, well, I might have to make some sacrifices if something bad happens to me, but at least I’m still making progress towards investing. I really like that because, in my situation where I was really strapped, it helped me get through that. Dave 7:14 And that’s great advice. I think those are really good suggestions. Andrew 7:17 Cool. Well, let’s move on to the next question. Hopefully, that was helpful for you, Matthew. So now we’re gonna dive into dollar cost averaging. We got a couple of questions on that. So this one comes from Williams Z. He says, Hi, Andrew and Dave, in today’s market, when every stock is down and on sale in quotes, how do I know when I should be putting my monthly money into a stock, I already own dollar cost average. Or when I should be purchasing the new stock that meets all the criteria you guys have laid out to diversify my portfolio more. Thanks for everything you guys do. As someone that started less than a year ago, your teachings have been monumental, and keeping my head in a positive place despite the downturn in the market. Thanks again, William Z. Wow. Dave 7:59 Thank you, William, that’s really nice to hear I. We really appreciate that. That’s why we’re trying to do all this is to try to help everybody as best we can. Investing in the stock market is an important thing. It’s not discussed enough. And sometimes, it can be a hard place to be, especially when there’s lots of doom and gloom around us all the time. Seems like that’s all we’ve experienced over the last few years, isn’t it? But so we’re hopefully getting on the other side of at least some of the bad stuff. So anyway, this is a really interesting question. And I think this is something that we could really explore. So I think, again, this is going to be personal preferences. And I think Andrew and I probably will have a little bit different takes on how this goes. But I think for me, the way that I would look at it is I would look at, let’s say, that I have a portfolio built, let’s say it’s 10 to 15 companies just for example. And I’m looking at, you know, putting my money in right now, everything is air quote down, and it’s all on sale. And you know, there are lots of opportunities out there, the thing you have to assess, is you have to look at each company on an individual basis and decide whether putting more money into that is a better opportunity for you ten years down the road than investing in something new. And it’s always fun to buy something new because it’s a shiny new object, and you get super excited about the new company that you invest in. We all fall in love with whatever our new baby is. And I’ve fallen trap to that, you know, many times, and it’s easy to get wrapped up in the excitement of a new company that you invest in. But sometimes you just have to kind of step up to take a step back and think about what it is that you’re buying and why you’re buying it. And it kind of goes to being comfortable with what it is that you own and understanding where those companies are in their lifecycle and their business cycle in how they’re positioned in the markets, how they’re positioned in their sector, and just really understanding the business. And I think if you have a firm grasp on that, then you can look at other opportunities. But if you don’t, if you don’t understand kind of where your businesses are, and you don’t know where they’re gonna be in five or ten years, none of us know for certain. But if you don’t have a good sense of how well the company is going to perform via their financials and then management and opportunities that could come along for the company, I think it’s a lot harder to start venturing into other companies because you don’t really have a firm grasp on what it is that you own it, to begin with. Now, if you do, then you need to decide what a better opportunity cost for my money is? What am I going to get a better return on? If I get to get a better return? I’m just going to use a couple of aid-named companies just to make it easy. Am I going to get a better return investing in Apple? Or an Amazon? Just as an example? This is not financial advice. But am I going to get a better return on Apple? or Amazon? And what do you think? I mean, Andrew, what do you think? What am I gonna get a better return on Apple? or Amazon? Which, you know, if you had to bet on one of them, which would you bet on? Andrew 11:03 Yeah, obviously, Apple, since I’ve revealed a long-term holder of that, right. And I have not bought Amazon yet. Dave 11:10 Yeah, exactly. So. And I think, you know, if you understand the apple business, and you understand the Amazon business, and you want to invest in Amazon, you have to decide, is that going to give me a better return than if I put my money in Apple? And if the answer is yes, then buy Amazon. If it is not, then you buy more of Apple if that’s something you already own or vice versa. And I think that’s kind of the easiest way to kind of work through it. I saw this great quote, on Twitter, from Andrew Kuhn, who is one of the guys that runs focus compound, a great podcast. And he talked about kind of how to configure your portfolio. And one of the things that he talked about was looking at your portfolio. And if you look and see companies in your portfolio that you think are going to do worse over the next five to 10 years, but those high on the list of companies that you want to replace and other ones that you think are going to succeed really well over the next two 510 years, but those at the bottom of the list of things that you would want to turn over or change. And then you can kind of work from there. But it all comes back to kind of understanding what it is that you own. And if you’ve taken the time to build up a portfolio, chances are you understand them to a certain extent. If you haven’t, too, then that would be a good time to look at those things. And if the companies are being beaten down, or if they’re undervalued, then reinvesting in those is always going to be great for you in the long run. Because the more you can buy of a company that’s going to succeed over the next five to 10 years, the better your position you’re going to be. But it all comes back to opportunity cost and what you think in the long term is going to earn you more money in the long run. Okay, now that I’ve talked for a long time, I want to hear what Sir Andrew has to say. Andrew 12:54 Yeah, that’s really great advice there from Dave; I’ve really liked that concept of tracking your portfolio and thinking about which companies you want to replace because I’m looking at my portfolio all the time to see is there anything that’s not fitting the bill? And how I can make my portfolio better. So I’ll give my perspective. So first, I guess I have the luxury of being able to do this full-time. So I have a lot of time to get to know a lot of businesses. So I guess that gives me a certain advantage. I also have; I don’t know if you call this the luxury or the privilege to have made some really bad mistakes as I was building my portfolio. So I’ll give you two examples. One was American Eagle, and one was a company called Neville brands. And so I bought these in 2018 and 2019. If you’re a subscriber either, you can go back and look. And so it’s an example of companies where I maybe had more confidence in how I thought the future was going to turn out for them than what really ended up happening. So for American Eagle, they really took a hit during the pandemic; it was able to recover, and I was able to get out with a pretty nice game. But that was like probably the most painful game I’ve ever had. Because it was brutal to see that thing dropdown. As far as it did. I mean, I think I went. I think I got out somewhere in the high 20s. But it got down to like $6 a share. It was so painful. I think I’ll that roller coaster for the rest of my life. And I in Newell brands; it was really painful. And I did not recover from that in the sense that I had to sell at a loss. There was a big loss, and there was a lesson learned move on. So in both, what kept those examples, what they had in common was I had dollar cost average into them multiple months in a row. And in hindsight, that was probably not the best thing to do because even though I felt like they were great opportunities, they continue to be great opportunities. The fact of the matter is I ended up being correct on one and not correct on the other, And so, in hindsight, I wish I would have diversified a little bit more in that case, whereas if I had waited on the American Eagle, for example, I could have gotten that $6.02 years later, or a year and a half later, I instead kind of allocated all of it all at once and didn’t have any more firepower to go back into it, if that makes sense. So when you’re building a balanced portfolio, you really want to make sure everything’s pretty even, depending on how strongly you feel about certain stocks and how strongly you feel about your own abilities and ability to be right. So it’s a constant balancing act. And I think there’s everything they’ve said about like prioritizing your portfolio and reviewing it constantly. I think that’s 100% True. And that’s really where your focus needs to be; the only thing I would caution is that I would not buy Apple 10 months in a row, even though I feel super strongly about the company, because there’s a chance there’s something I missed, or something out of our control happens to apple that nobody can predict. And so that’s why you diversify. So I use the examples of American Eagle and Newell brands to hopefully try to illustrate that it’s all a balancing act. So don’t take one extreme, don’t take the other, and try to find that happy medium. And it all depends on your own abilities, what you’re trying to achieve, and how you’re gathering information. And that’s really how I would look at it. I think Williams’s mind is in the right place here. I love these questions. And it’s not easy to answer. Because, you know, today could be a great day to buy Apple. And then maybe next year, you buy Apple twice in a row. And there was a bad time, where this year could have been a great time. So it all depends. I know people probably don’t like to hear that. But it really all depends. And that’s why you just got to take it month by month. Dave 16:51 Yeah, I totally agree that that’s great advice. And I think those are all great lessons. And I think if you kind of listening to the whole answer for both Andrew and me, I think it really encapsulates how you can think about trying to build your portfolio, learn from mistakes that you make, and then also continue to, you know, do the work that you need to do to stay on top of what companies you own and try to find good ideas. And a lot of times, the best ideas you can find will be within your own portfolio. And yes, I would agree do not buy Apple 10 months in a row; that’s probably not necessarily the best decision, but you know, there to each zone. Anyway. Alright, so let’s move on to the last question. So I have; hi, I am 52 years old and new to investing; other than I’ve been contributing to the 401k of the company, I work going back 15 years or so. Over this time, I’ve made substantial progress toward paying off my condo and have accumulated a pretty good chunk of cash. I would like to get serious about investing even though I only have 15 years or so until I retire. And right now, the timing seems right. I’ve been looking at historical trends regarding past bear markets to see if I can find any clues pertaining to how quickly or slowly I should be dollar cost averaging into the market. But these numbers may not be precisely right as far as I can tell. the.com crash bear market lasted for about two and a half years. And the housing crash lasted about one and a half years. It took over seven years from the start of the.com decline for the market to recover to its previous high s&p, and five and a half years for the housing decline. I am leaning towards taking a slow approach with this. Would you agree? So Andrew, what are your thoughts on this question? Andrew 18:29 A lot to unpack, obviously speaking my love language and stock market history. I love looking at stock market history. I love seeing what we can learn from the history of the stock market. That all said, I would be highly cautious about looking at the past and what the markets did in the past and extrapolating that into the future. Because of the reality of the stock market, if we really take it back to the basics, the stock market is the economy. Basically, it’s all the businesses in the economy. So the economy, even ten years ago, when there was a housing crash, was way different than the economy we have today. Back then, everybody thought it was normal to have two or three homes like that was just what you did. Everybody said housing will always go up. That’s it could never go down because it never had. But when you had too many people in the economy who thought that way, they bid up housing to this incredible amount. The banks just lent out so much money, and it became unsustainable. So if we have something like that today, in another area of the economy, it’s going to be hard to say until the dust settles. And so we don’t know if there’s going to be a crash like there was in the housing. I mean, you can argue there’s been a crash that has been really slow. But there are too many factors, right? There are too many things going on in the economy. We have a way higher technological economy now in the sense that so much has moved to the internet and the cloud, and you certainly did not see that ten years ago. You don’t know If we did not see 10s of billions of dollars being made on the internet ten years ago. And so that means economic policies from 10 years ago aren’t going to affect the economy the same way; you will see cycles, you see major trends, right of economies and stock markets. But you have to be very careful about taking that way too far and saying, Well, you know, this crash was two and a half years; last crash was one and a half years. That means today’s crash is going to be two years; you got to be really careful with that because there’s no science behind it; there’s really no rational way you could justify why that should be the case other than trying to take historical patterns and extrapolate that into the future. It sounds pretty, and it could potentially work. And people always find ways to try to make that we’ve had lots of crashes, lots of bear markets, I mean, I could go down the list, you know, 87, the 60s was not a great time, in general, late 60s. Yeah, the Great Depression, there are so many different crashes, you just you don’t want to extrapolate it; I feel really strongly about that. Because I’ve tried to do that for so long. I’m just telling you, it’s, there’s just too many moving pieces, it’s impossible to try to predict. So I would not try to make investment decisions based on past cycles and trying to predict future cycles, even though it’s really, really fun to even like, talk about or think about. Do not make investment decisions based on that. Dave 21:21 I would agree with that. Intellectually, it’s a lot of fun to think about those things. It’s a lot of fun to think about history and to think about the cycles and everything. And I know Andrew is fascinated with that subject. The stock market history is one of his untold ions. And I think he really enjoys learning about that stuff. But I think the thing I read this somewhere, I think the only thing you can really predict about the stock market is that at some point, it will go up. And at some point, it’ll go down, we will have market crashes, and we will have recoveries. And I think that’s really about all you can really predict. I could be wrong about that. But I think it might have been Charlie Munger that might have said something like that. That sounds like something he would say. And I think one of the things that’s interesting about the stock market is one of the things that I guess we’ve talked a lot about in the past; it definitely pertains to dollar cost averaging is timing; the market matters more than timing the market, none of us know what the future is going to entail. We don’t know what’s going to happen tomorrow. And there’s just no way that we can predict what exactly is going to happen. You know, we’ve said this before, and nobody could have predicted COVID Nobody saw that coming. And all the impacts that it’s had on the world since its inception. And none of us could have predicted it’s still going. And it’s still impacting the world. And none of us could have predicted that. And the impact that had on the market and the impact that the market crashed really quick and rebounded even faster. Nobody could have predicted that. And now we’re going through whatever it is we’re going through. And again, nobody could have predicted that. So there are definitely people that could look at the trends and maybe see some of this coming. But you never know how deep any of this is going to be. You don’t know how quick the recovery is. I mean, none of us thought the market was going to recover as quickly as it did in March 2020. I certainly did. And I thought the world was coming to an end. And I didn’t think that anything was going to rebound that quickly. I mean, that was just shocking. But anyway, the point of all that is, is that investing is more about timing the market than timing the market and dollar cost averaging the whole idea behind it is to gradually put money into the market to work for you over a period of time, even though you’re talking about 15 years, that’s related till the time you retire. But there are a lot of studies that have talked about you need to continue looking at investing beyond when you retire, because most of us, oh, hopefully, a lot of us will live 30 years after we retire, then that won’t be unusual. And so usual, I guess a way of investing, it might be changing because our living patterns are longer than they were 20 years ago, 40 years ago, and a lot of these rules were established. And so there is some thought now that you need to think about to kind of beyond the time that you retire, and how are you going to continue to generate income beyond that. And whether it’s through your investment portfolio, your 401k, or social security or whatever that morphs into, and you know, any other things that could be out there. So those are all things to consider. But I would encourage you to if you haven’t started and if you want to start slowly and start with small amounts, by all means, you have to do what’s comfortable for you. What’s comfortable for me was the kind of flow Andrew may not be comfortable with for you. That’s okay. Inertia is always the hardest thing to get over. Once you take that step off the diving board and jump into the water, then it’s a lot easier to get out of the water and keep doing it. But until you do it, it’s a lot harder to do it, and so, study after study after study and study have shown the timing of the market matters more than timing the market. So I don’t know how many times I can say that, maybe five more. I think that’s something that you should, you know, consider all the history is great. And understanding it is awesome. And intellectually, it’s a lot of fun. But I think coming back to the just kind of the basic idea of the sooner you get started, the sooner you’re gonna get where you want to go. Andrew 25:20 I think that’s great advice. There is, I think, a risk in a lot of investors will talk about the tuition risk of there seems to be this recurring pattern of people who and I fell victim to it just like anybody else, thinking that the stock market was easy, getting walloped by it, getting humbled by it. And then either, at that point, you either quit or you continue on and maybe become a better investor. But a lot of investors will talk about this tuition. And so when you’re starting out, and you’re in your 20s or 30s, you don’t have much to lose; that tuition potentially won’t be that costly. If you’re in your 50s or 60s, and you’re investing your entire life savings, you throw it all into a firm or something like some crazy company like that, and your entire life savings is in there, and you get whacked, there’s no recovering from that. So I think a shorter time horizon might be a little more tricky. And there’s no shame in going to find other people who are more experienced than you. And leveraging their resources and their knowledge, and their experience. Because the stock market’s really similar, the I love people out there like to play poker, I like to play poker, if you’re a poker player, you can put a lot of your money into a hand. And people do that. And if the odds could have been bad, you could still win the hand and feel like you’re a genius. But that’s probably not something you wanna do with your life savings; you probably want to, but you only want to make bets that the odds are with you. And so doing so, when you put time horizons into the mix, James can all have a really great illustration of this. And I hope I get that right. But it confirms I’ve seen similar findings in my research too. But he said, you know, if you’re looking at the stock market, in a day, there’s like a 5050 chance that you’re going to make money. If you expand it out to five years, there’s a 75% chance you’re gonna make money. If you expand it out to 20 years, there’s a 100% chance you’re gonna make money. So in 15 years, you’re not quite in that 100% chance. And I think the bigger chance is not so much what the stock market does, but what you do if you get punched in the mouth, so you have to be very careful that if you haven’t paid that tuition yet, whatever that looks like, be very careful about putting your entire life savings into the stock market and being way too aggressive with that. And there’s no shame in finding professional help, particularly if this is huge stakes for you. Dave 27:45 That’s great advice. I think that is something that everybody should listen to. And there’s no shame in asking for help. And that’s what Andrew and I are here for. But there are resources out there that can help you as well, especially if you’re in a situation like the last question that we answered. And I agree with Andrew and cautious, and the tuition is something that, unfortunately, we will have to pay sometimes. And being cautious is always a better way to go about it than throwing it, you know, gambling the whole life savings into one company. Unless you’re Charlie Munger or Warren Buffett, that’s a hard way to go. Andrew 28:19 Yeah, I was just gonna like make a hypothetical. Like if there’s like a hybrid of the two pieces of advice, we gave, like, a third example would be somebody who sets aside enough, you know, where doesn’t need to be overly cautious or overly aggressive. Okay, do it. I think the biggest thing we’re trying to get listeners, the takeaway here number one time in the market, means way more than timing the market. So the longer time in the market you can afford to have, the better your chances, the better your odds, and the better your results; because you give the companies the best chance to let your money compound at the same time, you have to be careful on the other side of that, that you’re not making terrible mistakes that you can’t come back from, I think a happy medium, the way I kind of see it. And if I was in this person’s shoes, I would look at how much can I afford to lose? And what’s that number? So as an example, let’s say it’s 50%, right? 50% of my life savings, I could keep maybe in a savings or in bonds and know that no matter what happens in the stock market, I can myself, let’s say ten years of retirement. Okay, maybe that’s 50% of my life savings. The other 50% I don’t necessarily need in the ten years for retirement. So maybe I know that the time horizons are longer because I’ve just said I have enough money for ten years during retirement until I’m 75. So now I have 50% of my life savings, which now has a 25-year time horizon, right? If I’m all, I guess in his case, 52 has a 23-year time horizon. That sounds really nice even compared to 15 years, and So that could, in my mind, the way my mind thinks, and based on what I’ve seen, I would feel really, really comfortable knowing that, alright, for a certain percentage of my life savings, I know that has a much longer time horizon, I can really let that thing ride, let the stock market do its thing. In the end, I’m so covered for the first ten years, whatever that number is for you, that you have enough saved for that. I think that could potentially be ahead of the meat breed hypothetical. And I think that’s a really good way of thinking about it. It’s not kind of one or all; it’s to be a mixture of different strategies to help you get to where you want to go. All right, folks. Well, with that, we will go ahead and wrap up our conversation for tonight. Want to thank everybody for taking the time to send us those fantastic questions; keep them coming. Those are awesome. These are a lot of fun for us to answer, and hopefully, you guys get some good takeaways and some good information from all of this. 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. We’ll talk to you all next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post IFB234: Deciding to Dollar Cost Average into New Ideas or Current Portfolio appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we chat with Katie Gatti from the Money with Katie podcast and blog. The advice that everyone should buy a house is completely wrong, and how she thinks about housing, owning vs. renting Deep dive into real estate and how to find something you can comfortably own How to start investing in 401k and setting your budget to allow you to succeed early How to set up your investment s to take advantage of the tax savings What are some of the bigger mistakes beginners make with 401ks, and how to avoid them Uncovering a Target Date fund and how they work Why aren’t there more women in finance, and how to change that status 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 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 investing guide for beginners. Your path to financial freedom starts now. Dave 0:00 All right, folks. Well, welcome to investing for beginners podcast. Tonight we have a very special guest. We have Katie Gotti with us today. She is the host of the extremely popular podcast money with Katie. By the way, if you have not heard this, I highly recommend it. It’s a lot of fun. And there’s a lot of knowledge that she brings to talking about money. Katie also runs a Personal Finance Blog and is ing us today to discuss all things investing personal finance, and some other fun stuff. So Katie, thank you very much for coming to us today. We really do appreciate it. And I guess, if you don’t mind, could you kind of give us a bit of a background? Like how did you get into the personal finance investing bug? How did that bite you? Katie 0:37 Yeah, who the heck are you? Yeah, so my background is professionally in something totally different. It’s in public relations, marketing, experience, like kind of ran the gamut. But I got into personal finance the same way; I think a lot of people get into personal finance, which is out of sheer necessity because you have a paycheck, and you’re like, I don’t know what to do with this. So I got really interested in it early on, probably six to 12 months into working full time, because I very much had that realization of the kind of like, I’m like wasting this money and should probably be doing a little bit more with it. But the difference between, I think, my experience and most people’s is instead of being like, Okay, I’m gonna learn the bare minimum. And then, like, move on with my life. I was like, Oh, actually, I’m obsessed. So I really just dove headfirst into personal finance, world investing, economics, and taxes; it all just fascinated me. And to this day, I’m not even really sure why but it just really gripped me. And so the more I learned, and the more interested that I became, I kind of was like, Alright, I’ve been reading and learning about this stuff for a few years; I would like to add my voice to the conversation because I feel like I have some things to say. And there are some things that I disagree with, right about the fundamental advice that we’re all told and some additional nuance that I think I can bring to the table. So money with Katie was born in April 2020. But I think I didn’t really like to start consistently posting and treating it pretty seriously until around July 2020. So about two years ago now. And it’s just been one heck of a ride. We started with the blog. And that added kind of the social media presence. And I say we like it was more than just me, it was me, but and then I added the podcast most recently back in October. And that’s been fantastic and a lot of fun. So it’s just slowly evolved. Andrew 2:27 That’s awesome. Well, thanks for ing us. Katie. I’m curious; you mentioned some of the things that maybe you don’t, some things that you maybe disagree with? I’d be curious if there’s one year like that really fires you up, or it gets you really angry that you could just hit us right out the gate. Katie 2:45 Oh, for sure. All right, let’s alienate half the audience immediately. So we’re the one thing that comes to mind, really, there are other things about, you know, misconceptions that kind of get under my skin. But I think the one thing that stuck out to me early on was this advice that everyone should buy a house as quickly as possible. When I was starting my career and starting to have some money in starting to pay rent on my own, I felt like I was badgered, but that message pretty frequently and pretty heavy-handedly, that you need to own property as quickly as possible. And so I would calculate, like all the money I was throwing away on rent, and oh my god, I can’t believe this, that if I rent for X number of years, and then I’ve spent $90,000 on rent over the next decade, whatever. And so I started looking to buy a condo in Dallas, Texas, and I’m like, alright, well, you know, I’m arbitrarily deciding how much I can spend based on I don’t even know what it was based on, to be honest with you probably a number that I thought was reasonable. At the time. I think my budget was like 250,000. Well, in Dallas, even back in 2017 and 2018, when this was that gets you a rundown two bedroom condo, you’re not gonna get anything, you know, single family for 250k in Dallas. And oh, by the way, the property taxes are 2% per year of the property value. Oh, and by the way, the insurance is expensive because they’re, you know, Dallas is known for foundation issues and floodplains and whatever. So I basically quickly realized, like, oh, I, under no circumstances, can afford to own even a cheap condo. And I’m going to be spending way more to own that condo than I’m spending on my rent. And I think that was one of the first like riffs that I got into with like traditional money advice and the way reality actually is for homebuyers in the, you know, two decades into the 21st century, and just all the associated unrecoverable costs that conveniently get swept under the rug, whether that’s maintenance or taxes or insurance or interest, what have you. So that was one of the first ones I think that really got me fired up. And I definitely made some enemies early on with very anti-ownership rhetoric, and I’ve since come back to a more reasonable position. Yeah, that was. I I published something that was like hot takes, keep renting, or See something like very click Beatty, but that was definitely one of the first things. Dave 5:03 So what do you recommend people do now, then? So at first, you are more revolutionaries. What is your take now? Katie 5:09 Yeah, I think I’ve come back to this sense of like, I think the right time to buy a house is when you can comfortably afford to do so regardless of what the market is doing, whether it’s down or it’s up, if you can comfortably afford it, and you really want one, then great. But I do think about a home as prepaid consumption; I don’t think about it like an investment in the traditional sense, first and foremost, because there’s really no guarantee that it’s gonna go up in value; it’ll probably keep pace with inflation. And depending on where you live in the world, it might go up in value. I mean, someone in San Francisco who bought in the 2000s like probably scoffing at this, but the reality is that my parent’s house and Kentucky, it went up like two or 3% per year; they owned it for 25 years, and they lost money on it. So I think this concept that we have this recency bias, that real estate only goes up and it goes up 10% per year. And if you don’t own a house, you’re never going to be wealthy. Like, I think those are all things that very much keep the lucrative real estate, machine running, and rental property investing totally different story, but I don’t consider a primary residence and investment, I think, you know, you’ll probably get your money back out. But I wouldn’t think about it or go into that decision thinking like, Oh, it’s okay, if I spread myself really thin because it’s an investment. I think we forget that those associated unrecoverable costs are also proportional to the value of that property. And so I think it’s just one of those decisions where you really have to run the numbers and not be biased one way or the other; I think I’m still a little bit biased toward renting because we are able to rent really nice places where we live for a lot less than we would have to spend to buy, particularly in this market. And I do think that for young people who have no equity right now, it’s a hard market to buy into. So I get nervous about people who are like, oh, I’m gonna cash out my 401 K to buy a house. It’s like, oh, I don’t know that. That is when I wouldn’t suggest doing but to each their own right, like people’s priorities with them. Andrew 7:06 I think that’s a super valuable thing, maybe to dive deep down, especially right now, with home prices, just, you know, it seems to have cooled off now, and people seem to have chilled out. But you have lots of stories about people offering crazy amounts above asking, and a lot of just FOMO fear of missing out; I kind of get the sense that maybe if you’ve been thinking about this for a while, you have other creative or, you know, like, it seems to be such a black and white conversation, you rent, or you buy, and you’re almost like, subject to whatever market you’re in. But I mean, you mentioned San Francisco with about, like, Southern California, where I was born and raised; I see a lot of friends and family first starting their careers and being like, this is insane. I don’t know what to do. What would you speak to somebody who’s in that situation? Having been somewhere similar, you know, five years ago? Katie 8:01 Yeah. So I think if you want to get like really conspiracy theory about it, sorry, my cats attacking me, this is what we do all day long. Because I sit here and try to work, I think a large part of the prices we’re seeing right now. And obviously, this is going to be exacerbated in the desirable places to live right where I use the Bay Area because it’s just like the most kind of stereotypical example of, like, really inflated cost of living. But I think it all comes back to 2008. And I think the great financial crisis and the response from the Federal Reserve and the government to the right of the mortgage-backed securities and kind of bailout the economy; things would have gotten much, much worse had they not done that and written off all that bad debt. But I think as a response, it introduced this period of monetary policy where the response to everything was money printing, and it’s like, I mean; obviously, they’re not literally printing more money, but injecting more liquidity into the system to try to keep things propped up. And I think what we saw post-2020 2021 was the Federal Reserve and the government basically saying, you know, the entire global economy is screeching to a halt, or did screech to a halt. We need to inject liquidity so that things don’t collapse. But then they kind of overdid it, in my opinion, you know, this is my subjective opinion. But I do think that, you know, they kind of overdid it, and they overreacted a little bit. And so all of that money found its way into assets, both stocks and home prices. And I think the real estate market does lag the stock market; it’s less real-time. But I think the same kind of downturns and softening that we see in equity markets are gonna play out in the real estate markets as well. I think it just takes six months or 12 months. It takes a little bit longer for that to really, like, infiltrate in the same way. But I do think that the reality that we’re facing now is that those who did not already own homes before the money printed print thing started and didn’t benefit from that asset inflation are now further behind the starting line. And so I do believe that there might have to be a bit of a recalibrating of expectations. And whether that means you are living in a place like Southern California or the bay area, or New York City. And you might even have the fancy tech job or the hedge fund job that pays hundreds of 1000s of dollars a year, even though you may feel like you cannot afford real estate. And I think that is the position that you know; it feels really unusual and really paradoxical. To find yourself with a really high income objectively and still kind of being like, I make $250,000 a year; I can’t afford to buy a house. But that is kind of the reality of those cities. And I think, in a lot of the cases, particularly San Francisco, if we look at the price-to-rent ratio in that city, the price-to-rent ratio is 50, which means for the price you could pay to rent for 50 years, that’s how much you would need to buy a house, as opposed to like Detroit, Michigan, where the price rent ratio, I believe, is six, where you could rent for six years, or outright purchase a home. So I think it’s such a hyperlocal decision that that price-to-rent ratio is really, really helpful for localizing it and helping you understand, like, whether or not it is actually net cheaper to rent, or not cheaper to buy. And I know it sounds really counterintuitive that it would ever be net cheaper to rent anywhere. But really, if your price-to-rent ratio is at or below the low 20s, like at or below 22 will say or you know, maybe all the way up to 25, then it’s probably going to be cheaper to buy. But if you’re gonna price to rent ratio that’s in the 30s, 40s, 50s, almost under no circumstances should you be buying if you’re really worried about like the financial implications of that decision. And I think you could say that the longer you stay somewhere, the more it kind of evens out. And I think that’s fair, like if you intend to buy a home and then pay it off and live in it for the rest of your life. All right, that’s a different story. But we know that that’s not how Americans actually typically live. Like, I think the average time in one home is 13 years. And I think for the first 10 or 12 years of owning a home, your payments are primarily interesting anyway. So you’re really just relying on appreciation, outpacing kind of everything else, because you’re really not paying much towards your principal. At that point, you’re not making much of a dent in the first ten years. So I think timing obviously plays a really big role. But I really liked that price-to-rent ratio metric for helping to localize in those situations where it’s like, okay, it feels like, you know, a lot of the appreciation in this area has already happened. And sure, it might continue to go up. But if your price to entry is ten times higher than the person that lived there before you, Well, that means it has to go up a lot more for you to get the same types of returns in the future that they got. Andrew 12:52 So kind of like a shot in the dark. I mean, you’re talking about flexible expectations. So I don’t know if this is something that you have an opinion on one way or the other? Is it possible maybe if you are stuck in an area like that, where you feel like there’s no way you’re gonna get into a home is a possibility, maybe putting more into a 401k and thinking, hey, I can maybe be a homeowner much later stage of life than traditionally, people have always said you should buy a home. I mean, we look at like the stereotypical 1950s where it was like, you know, you had one breadwinner, and everybody seemed to get a home with any sort of job. That doesn’t seem to be the reality today. So, you know, can maybe people think about recalibrating in that way and still not be a financial feel like they’re behind the ball financially? Katie 13:44 Oh, 100%. I think that I love that you phrased it that way. Because I think it is very reflective of, like, America has evolved, the prices of things have evolved, whether that’s thanks to late stage capitalism, or monetary policy, like whatever you want to call it. We live in a very different time. Now, we don’t own any property; we have a million dollars in the stock market like I would, under no circumstances, consider myself financially behind because I don’t own any property. And I know I’ll own a house eventually when I decide, you know, I’m ready to settle down and live in it for 10 to 1520 years. But at this point in our lives, we move around a lot still, like every couple of years, we’re moving somewhere else. So I think the difference really between the 1950s family and the family of today, the modern American family or person is that in the 1950s, you couldn’t click a button on your phone to invest in a cheap broad-based index fund. The index fund didn’t even exist yet. So in some ways, we have far more wealth-building options available to us today than any other generation in history. It’s never been easier. It’s never been more accessible, and you’ve never needed less money to get started. So I think the reason we get that kind of traditional conventional wisdom from generations past that, like the home is the ultimate wealth-building machine, is because, for them, it was that was true for them. For us, I don’t really believe that that’s true anymore. And I think you know, the benefits of investing in something like the stock market where your capital is a liquid, you’ve got that flexibility. You can deploy it when you want, how you want, you are not tethered to one place, like, I can’t really even fathom the, you know, the only way I can build wealth is if I live in one place for 30 years, like how limiting is that? I think in a lot of ways, we have it better than previous generations did. But I know that that’s hard to kind of reckon with or except if, you know, you’ve been socialized your entire life with this idea that unless you are a homeowner, you have somehow failed at adulthood or failed at like this big financial stuff. You have to Andrew 15:55 I love that idea. Wow, that was great. That’s great. Oh, thank you. Dave 15:58 So if you were talking to somebody in there, so I have a future daughter in law that is going to graduate from college next year. And, you know, gonna be 22 getting out of school, and she’s going to be a nurse, so she’s gonna have a pretty decent income. How would you tell her to start building her wealth? I mean, we’ve kind of talked about kind of the housing situation, and whether you rent or whether you buy, you’re gonna have to have a roof over your head. So that’s, I mean, one way or the other, you’re gonna have to pay for that. But beyond that, how do you suggest that people kind of start moving in that direction? Because, as you said, there are, it’s never been easier today than it was five years ago. Ten years ago, I was the oldest person in the room. So I know that it’s gotten easier as I’ve gotten older. Um, so yeah, what would you tell people? What would you tell my daughter-in-law? Katie 16:45 Yeah. So I would say that I think it’s a pretty simple three or four-step process; I think, first, you know, she’s got the source of income locked in, that’s great. That’s sometimes the biggest hurdle; right is like getting the job and getting the paycheck. From here, you’re kind of uneasy, straight, because I think First things first is figuring out how much of your income you need to create a lifestyle that is amenable to you. So I think most 22-year-olds probably are not going to be, you know, flying first class to Tahiti and living in the penthouse. I know I wasn’t. But I do think that there are some good rules of thumb that we can use to follow, especially when we’re in our early 20s. Early in our career, we’re probably not making a ton of money yet. I don’t know what you study to become like the 23-year-old consultant who charges $300 an hour; I definitely did not get that degree. But I was, you know, looking at my income. When I started working, I was making $52,000. And I was gonna have a roommate. So that I think the number one thing when you’re young has a roommate is objectively more fun in your early 20s. And it takes a huge financial burden off your shoulders. So I had a roommate, and it was actually a guy from home, my girlfriend, who made a lot more than I did; I think he made twice as much as I did. And when we were looking for a place, I didn’t know how much to spend. This was a pre-personal finance awakening; I didn’t know what was like a reasonable amount of money to spend on the roof over my head. And I had friends that were making very similar incomes to me. So 52,000, give or take, who were spending 1500 1600 $1,700 a month on these one-bedroom apartments, it was eating up in some cases; one of their two paychecks was just going to rent. And so that was kind of the baseline I was starting out of like, Alright, maybe that’s normal, like spending half your income on rent. And then I talked to him; he’s like, I’m not spending more than $1,000 on my half of this apartment like it needs to be under 1000. So then that recalibrated me completely where I was like, Okay, well, if he makes over 100,000 and doesn’t want to spend more than 1000, that means I need to be spending way less than 1000 if that’s going to if I’m going to be kind of in parity with him. So I started looking for two-bedroom apartments that were cheaper and maybe not in like the hottest neighborhood and didn’t have granite countertops. But it’s like you’re 22, like you probably just moved out of a dorm room. So who cares, right? I think like not feeling like you need to immediately ascend to like the nicest apartment and drive the best car. It’s like if you can keep those structural expenses low and have housing be 25 to 30% car less than 10%. And then, you know, at least try to be setting aside like the minimum 10% into the 401 K, you know, whatever else you can manage to save, you’re not going to be probably rolling in it, but I think that’s where a lot of young people go wrong early on is they like handicap themselves right out of the gate by g the most expensive least they can possibly afford to get the new car and like just diving headfirst into like consumerism. I think that even just delaying that by seven Real years can give you such a good head start. So I definitely think that’s where it has to begin getting those structural expenses and like baseline spending to a point where you are able to save 10 to 20% of your income, because I think if you can do that from the beginning, you’re never going to save less than that, hopefully, your Savery will only continue to go up as you earn more. But if you come out of the gate with the Mercedes and the fancy apartment, one bedroom with the view, it’s like, you’re gonna have to be working pretty hard to get to the point that you can even feasibly afford those things comfortably. And you’re just, you know, kind of hurting your progress in the long run. So I think that’s kind of, that’s what I would have told myself and what I would have driven home for myself even more at the time. And I do think that one of the best things that I did at my mom’s constant badgering was just day one of work, putting 10% into the 401k. And like never even allowing my full paycheck to hit my , like the temptation was never even there. Because from day one, 10% was going into the 401k. Andrew 21:03 Pay yourself first, right? I can say from personal experience that once you sign your name to something, whether it’s the car or the apartment, whatever it is, it’s very hard to kind of undo the consequences of something like that. And it’s much more painful to go back a step or two than it’s fun to go up a step or two if that makes sense. Katie 21:27 Exactly. I always say that, like lifestyle, a little bit of lifestyle group is okay, but you better be careful because it’s really hard to go back like you are going to adapt to your circumstances. When we first moved into this house, it was three bedrooms; we came from a two-bedroom apartment. Oh my gosh, the first week I lived here, I was like, I live in a palace and live in a mansion. Oh, my God, look at what I think the kitchen is now. I’m like; this is just my house; I could go bigger like, you are going to get used to whatever you introduce yourself as the baseline. So it’s like just be very intentional about what you are kind of committing to. D Dave 22:04 That’s great. So I guess moving to the investing part, we talked a little bit about the 401k. I mean, I think that’s an underused asset for people. And it worked in the banking world for a little while. And I would constantly talk to people about if you start nowhere else, start with a 401k. For whatever reason, people think they have to go dive right into buying stocks. And that’s the only way that they can invest. But the 401k is such a great vehicle. And by and large, most companies offer a match. And if you’re not taking care of, you know, the advantage of that match, what what are we doing here? So I guess what your thoughts on the 401k are? And how can people embrace that to the best of their abilities? Katie 22:41 Yeah, love the 401k. So in my mind, I think I want all the tax advantages I can get right. Like I want to capitalize anything the IRS is telling me there’s a limit, I’m like, That is a signal to me that this is some good stuff. So I prefer the traditional 401k over the Roth 401k. Personally, because that high contribution limit means you can sock away 20,500 and defer taxes on that amount. I think that we don’t talk about that enough. And I like coupling the traditional 401k with the Roth IRA to get the tax diversification and take full advantage of those two buckets that the IRS is going to ignore for the time being. I think, especially during your mid to high earning years, I think it makes a lot of sense to focus on the traditional pre-tax , like the 401k 401k being the most popular one. If you earn an income in the 24% tax bracket, for example, you are going to save over $4,000 Every single year on your taxes if you max it out. That is huge to me. And so often, we do emphasize that employer match is like the best part of a 401 K. And that is part of your total compensation. So you should absolutely be getting it. But I think that tax break is oftentimes just as substantial, if not more so in some cases. And I think illustrating that more emphatically for people is something I’ve tried to really drive home because if you think about it if I can create another $4,500 of investable income every year just by being able to allocate 20,500 to this pre-tax , you’re getting immediate like 20% bump or 25% bump on the money that you’re putting into that 401k Because now the taxes that you would have paid on that income stay in your pocket, you can turn around and invest that in a Roth IRA and get damn near close to maxing that out too. So I love the 401k, and it drives me crazy when people disparage that lovely pre-tax . Dave 24:45 The thing I love about it is it’s so easy, and it also helps you know we were talking earlier about creating that habit of setting aside money for the 401k. Like you said earlier, it allows you to invest without seeing the money. It’s a lot harder once it’s in your checking , too. Yes, set it aside, and save it for later are all the excuses I heard when I was talking to customers. That’s what I love about the 401k is it automatically takes the money out. That’s it for you. And it creates that habit of investing and saving money, and the company does it for you. You don’t have to literally have to do anything. And it’s just anything that being said, what are some of the bigger mistakes, you see people with 401 K’s? Who? Katie 25:28 Yeah, big mistakes, I think; well, the obvious one is not using it or not utilizing it enough. But if you are using it, I sometimes think what I noticed is I would talk to people about the 401 k’s, and they’d kind of be like, I don’t know what to invest this in. I don’t know what to choose. And I think that is a kind of an ironic problem if you think about it because I feel like, in every other area of life, we have this paradox of choice where we have too many options. 401 K is kind of the opposite; you usually have like four to 12 options within a 401k that you can choose. And I think I’ve seen both people through no fault of their own. So like, definitely not asg any shame, blame judgment whatsoever. But I think the thing to look out for is, when you sign up, there may be a like, Oh, do you want the professional help? Or do you want this to be actively managed for you where it’s like an add-on product where you, unbeknownst to you, are paying a manager 1% per year? I think that’s something to look out for. So high fees and the 401 K plans, which you really don’t have control over because you know your company is, are managing it for you. I think the other thing would be too conservative of holdings. So young people that are in 50% bonds are in like a target date fund 2040 or 2030. Because they just don’t know what they’re choosing. They don’t; they aren’t adequately educated about their choice. And so they’re picking things that are way too conservative. And I think when we talk about like risk tolerance, in general, within this broader conversation of like in a taxable , then you’ve got a lot more wiggle room, right, because I don’t know if, like you, Andrew needs that money in five years from now or 50 years from now like we’d have to have a conversation about that. But I’m pretty confident for a 401k for a 25-year-old, like, pretty sure you’re not going to be using that for 25 or 30 more years, like pretty sure you can, you can be a little bit riskier. So to speak, in that , you probably don’t need a 50% bond allocation. And I think it can unintentionally temper the growth in those s, just because people are maybe investing in things, you know, haphazardly that really isn’t a great fit for them. So I am a fan of target date funds; I just think you want to pick one that has an adequate risk profile for how old you are and when you’re going to like your retirement timeline. But I think you get a lot of goodness in the target date funds. And most 401k providers custodians like have those as an option. So you’ve got your domestic and international stocks, a few bonds, and then that glide path to where you do not have to do the rebalancing yourself. I think it’s really good, like 8020 solutions. And I think Vanguard did a study where they looked at 401 K plans that were within their kind of purview and were like people that were in target date funds versus people that picked their own stuff. And I want to say the target date funds outperformed by one or two percentage points per year, the people that, rather than people that had the target date funds outperformed those that did not buy one or 2% per year. So as Chris Peterson says, he came on the show recently, and he said, you know, we criticize the target date fund as if it’s like an off-the-rack suit, but most people look better and an off-the-rack suit than nothing at all. Andrew 28:43 That’s funny. Can you maybe for some of these tuned in for the first time, or have they opened their 401k? And then closed it because it was really confusing. Can you give us just the basic nuts and bolts? What’s a target date fund? And what’s an example one that’s like, Alright, maybe this is too conservative, and maybe, you know, if somebody’s like 35 years old, what would be a good target date? Totally? Katie 29:05 That’s a really good question. So a target date fund is effectively a mutual fund that a brokerage is putting together where they are baking in the diversification for you. They’re picking the fund allocations on your behalf based on how old you are and how long you have until retirement. So when we talk about index funds, like the s&p 500, that’s something where like, that’s I’m using that one because it’s probably the most common or the most familiar. That’s something where it’s the, you know, the 500 largest companies by market cap, and you’ve got the bigger companies like Apple and Google, and you know, the thing companies are making up a lot of I think the s&p 500 Today is like 30% tech out of all 500 companies or 504 companies that are in it. The target date fund, on the other hand, is going to have something like that in it. But it’s also going to introduce other things like international stocks and domestic bonds and international bonds. And the intent there is that you are getting some diversification. And they can toggle things up or down based on how conservative or how risky you want to be. And typically, how you know, your risk tolerance is determined by how long you can stay invested in the stock market. So even though every 20-year period that you could find in the market, I think you would lose money 0% of the time over a 20-year period, it’s a pretty safe bet in the long run. If you’re talking six months out to a year, that’s like a coin flip whether or not you’re gonna make money or not. So I think when we think about something like a target date fund in assessing risk, and how risky we want to be, whether we want to be heavy in equities, or heavy in bonds, something that’s like a little bit less risky, we just are really focused on the year, which is why most target date funds have the goal retirement year, in the name of the fund. So, for example, I’m 27, I’m going to not even make myself too fast math here, I’m just gonna do some quick keyboard math; if you assume that I want to retire at 65, prayers up that I can retire a lot sooner than that. But if you are saying, okay, Katie’s retirement at age 27 is 38 years away. Well, it’s 2022. Right now, in 38 years, it’ll be 2060. So the year 2060 is probably the appropriate time frame to be telling this brokerage ; that’s when I’m going to retire. And then the name of the fund itself would be like, for example, Vanguard target date, fund 2060. So you really just want to think about the year that you would be approaching traditional retirement and tell, you know, that’s what you would go in and kind of look for on your list. So if you’re 50 years old, and you’re going to retire in 15 years, well, then you’re looking at target date fund 2037, or 2035, maybe, or 2040. So that’s where the numbers come from. And that’s how someone could assess which one might make sense for them. And if, if you want to be even riskier or more conservative, you can fudge it a little bit. So I might be like, Well, yeah, I’m gonna retire in 20 years from now, but I don’t think I’m even going to be tapping this by then. I’m gonna continue to let this ride, and I’m going to use another first; well, maybe you can choose 2070, then like you can push it out and really personalize it and customize it in that way. Dave 32:33 That’s awesome. So I guess the question that springs to mind for me is, let’s say that somebody is looking to start investing with a 401k. But maybe the target date fund is not something that they want to pursue. I know HR, but from my experience, they can’t give you any guidance. And depending on where you work, I don’t really have anybody that can really give you advice. So, where can we point people? Where can people go to learn more about, you know, these are the options they have? What can I do? Katie 33:01 Yeah, so a couple of things come to mind. I think first and foremost, if you don’t have access to a target date fund in your 401k, kind of like a workaround, that’ll get you similar results, I think would be doing like a 90, and this is again, for someone in the 20s 30s age frame. But you know, if you say you’re setting up a 401 K for the first time, you could do something like a 90% total stock market fund and a 10% bond fund or 95%, total stock market 5% bonds, if you have something like a small cap value or something with that small cap moniker, and the fees aren’t too high introducing that can be interesting, too, from a risk perspective, because over time, small-cap value has outperformed the large-cap growth funds like the s&p 500 in the total stock market, but it is more volatile. So like, it is a riskier choice. I think the best research that I’ve seen and some of the most easy-to-digest research comes from Paul Merriman. And the thing is, the Merriman Foundation for Financial Education is the name of his organization. But he wrote a book recently called we’re talking millions. And I think that’s a really good place to start. Suppose someone is trying to understand asset allocation. He has a lot of work on it too. Like if you just went to his website, I think he does some really interesting work, and Chris Peterson and his team with respect to running backtest to see what asset allocations I’ve done over time, and you can kind of educate yourself that way. But I assume if someone’s listening to this podcast, they are interested in educating themselves. I think if you were like, I just want the easy answer and then never think about this stuff. Again, I would say you probably will get decent results just by going, you know, some combination of the total stock market index fund and bonds. But if you are interested in digging deeper, I think their work is very interesting. Dave 34:55 Alright, so I’d like to segue into something completely unrelated; one of the things that have always puzzled me is why aren’t there more women in finance? And how can we encourage more women to get into finance? And when I was in the banking world, I noticed that kind of, I guess, strata, like a lot of the tellers were women, and less of the bankers were women, and even less of the financial advisors, slash personal bankers were women. And just kind of as you went up the scale in the retail banking world, there were fewer and fewer women. And I don’t know why that is. And even in my own life, talking to family and friends that are female, they’d have little to no interest in it. And I’m curious what your take is on it. And I’m also curious, how can we change that? Because it needs to change? Katie 35:43 Yeah, well, the first thing I’ll say is that what you observed is true of every industry, where like you have mostly women in the bottom and mid rungs. And then, as you get, I think, 4% of CEOs in the US are women. So it’s, it’s definitely pervasive. But it’s an interesting question, right? Because I think if you surveyed a representative sample of men and women, they would be equally interested in having money. I don’t think men like money or want money more than women do. But I do think we should divide it into two questions. Because I think it’s like, why are there more women in finance as a profession? And why aren’t there more women retail investors, and Deloitte did this study where they found that 24% of leaders in financial services are women? Whereas when you zoom out and look at the female leadership, like in the broader workforce, across every field of aggregate, it’s actually only around 21% are leaders. So the financial services industry has more female leaders than the aggregate, interestingly enough, and this is, of course, you know, specific to the United States. In China. Women hold 51% of leadership roles. So they’re far more egalitarian from that standpoint. Those latter statistics come from Forbes, by the way, in case anyone’s curious, but so yes, women are underrepresented in the financial services industry. But I would argue like no more underrepresented than they are in every other professional field. And at a professional level, I think women in financial services are up against the same challenges that women in all careers are up against, which is just that, relatively speaking, we are newer to the industrialized workforce than our male counterparts are. And I think there’s still a motherhood penalty that persists for women in a way that like there is really no commensurate fatherhood penalty like women are statistically more likely to do the unpaid and underpaid labor of maintaining a household and raising a family alongside having a career, they typically bear the brunt of child-rearing. And that often takes them out of the workforce for months, if not years; if they choose to take a break when their child is younger, they can stay home. And I think in the aggregate, that means women earn less over time and progress more slowly through the ranks, and may get taken out of the workforce before they have the opportunity to continue ascending. So I think you rarely hear a man wringing his hands and being like, Oh, should I prioritize my family are my career in the same way that women are kind of faced with that false choice. But on the retail investor level, I looked into a few studies recently that were thinking 2021; they found that 48% of women in the US invest compared to 66% of men, but that women investors tend to outperform male investors by roughly 40 basis points per year. And I think we have these narratives around women that women are not risk takers or that we’re not interested in money. And I think those narratives place the blame on the women. And there will always be some level of like personal responsibility and agency that you have to assign, right? Like you have to take responsibility for yourself at the end of the day. But I think you get a more nuanced and interesting picture when you zoom out and you look at this broader environment, that these things are happening within and these decisions are being made within because women have not traditionally been encouraged or socialized to build the wealth of their own in the same way that men have. And I think, up until 1974, a woman couldn’t even open a line of credit without her husband’s signature. And even earlier than that, in the 20th century, women considered property like women were an asset that a man owned themselves. So I just think it takes time to achieve parity and that true equality, and I think we’re making strides, but assuming that only after, you know, a few decades really of being in the workforce, accumulating wealth through things like homeownership or through stock ownership, and feminism kind of becoming like a mainstream noncontroversial perspective that like women and men should be equal. I think it’s just wishful thinking to think that we’re going to level the playing field, you know, just after 20 or 30 years. Well, okay, more than that. But you, I think you understood what I’m saying. But I think the more that we frame wealth acquisition as something that is for everyone, and not just for a certain type of person, the more progress I think we’ll see. But at the same time, I want to caution this idea that, like, wealth acquisition in itself is progressive. Like, I think that idea is capitalism’s way of fooling all of us into just working harder, and it’s worked pretty well on me; all I do is work, but that’s not great. So I don’t think individual wealth acquisition is the answer and how we achieve a more egalitarian society. But I do think when people of all races and sexes have commensurate levels of wealth at the aggregate level; then you’ll start to see the shift. And I say all of this, wanting to emphasize, though, like this is not to vilify the white man; I don’t think that’s productive. But I do think you can realistically look at the history of our country and say, from day one, there has been one race and one gender that has historically always been valuable. And over time, as we’ve progressed to begin recognizing people of color and women as equals, like, that has been wonderful. But we haven’t had the same 250-year headstart in the same way that our white male counterparts have had. And that’s not to say that there’s something wrong with them or evil or wrong about our male counterparts. But just that if you have always been historical, the most important, or the only important one, the only one that got access to opportunities, that compounds over time, and it’s going to take time for us to achieve that equality of opportunity for everybody. And I think sometimes I’ll hear pushback that like, well, not all white men are rich. And I think that that’s true, but most rich people are white men. And I think that’s the key, like if you look at the upper strata like they all kind of look the same by and large. And I think it’s just going to take time for, you know, the rest of us to catch up, frankly, like at an aggregate level. Dave 42:08 It’s interesting, very interesting. Andrew 42:10 Yeah. Well, Katie, I want to thank you for your time. This was a lot of fun. Yeah. And I find it applicable for a lot of people, especially with the environment we see today. With the economic uncertainty, we see the craziness in real estate and the opportunities there in the stock market today that people hopefully are taking advantage of. I know you have a great podcast. Can you talk about your podcast, and like a 32nd? Elevator Pitch for what you tend to cover on your show? Katie 42:41 Yeah, sure. So on the Money with Katie show, I try to focus on the topics that will have a substantial impact on your life, whether financial or otherwise. And so, you know, my show is not the one where we’re going to talk about like ways to save money on your car insurance. But we are going to talk about childcare, and how that impacts your average family or the healthcare system and how you can navigate that to avoid medical debt, so I really tried to focus on the big picture stuff and talk about things that I don’t necessarily hear in the personal finance realm elsewhere. So we do get into spending habits, financial psychology, taxes, investing, all of those good things, but we do tend to try to broaden the conversations a little bit and bring in more nuance than just kind of the math and the numbers. Dave 43:32 As a listener of the show, I think you do a great job of that and educating people about all those important topics. You’re welcome. I know that I appreciate listening to your show. Because, you know, the more you can surround yourself with smart people, the more I can help you. So I want to hear you also have a great blog. You’re also on social media, Instagram, Twitter, and all the important places. Katie 43:55 Yes, unfortunately, I’m everywhere on social media. Dave 43:58 So again, Katy, we do thank you for your time; this was a lot of fun. I learned a lot, and I know our listeners will as well. And if you guys I’ve said it before, I’ll say it again, if you guys haven’t checked out her show, please absolutely go check out her show. It’s definitely worth your time. So without any further ado, I’ll 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, and we’ll talk to you all next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. 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 protected] until next time have a prosperous day. The information contained just 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 protected]. The post Talking Real Estate and 401k with Katie Gatti from Money with Katie appeared first on Investing for Beginners 101.

Welcome to the Investing for Beginners podcast. In today’s show, we discuss retirement planning with James Canole of Root Financial Partners. Some common misconceptions about retirement planning. How to plan for having security in your retirement. How to develop safety or security in your retirement Avoiding working too long and retiring when you are ready Does the 4% Rule still apply? 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 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 investing guide for beginners. Your path to financial freedom starts now. DD Dave 0:00 Alright, folks, welcome to Investing for Beginners podcast; today, we have a very special guest with us. We have James Canole from Route financial partners. So James is here to talk to us about helping people that are close to retirement and other fun stuff. So James is calling us all the way from San Diego, California, very jealous. And he’s here to talk to us about some cool stuff. So, James, thank you for ing us today. We really appreciate it. And maybe you could give everybody a quickie overview of the kind of who you are, where you come from, what you want to be when you grow up, that kind of thing. James 0:33 Yeah, be happy to. And thanks, Dave, for having me. Thank you, Andrew, for having me. And, well, quick overview. There’s so much, but yeah, I think. So I’m the founder of Financial Partners, which is a firm that really is helping people make that transition into retirement, whereas we’re planning and investing and doing these things that look different for different people. And so I founded this firm because, yes, investing is crucial. And financial planning is crucial. But understanding that there’s not a one size fits all approach. And as you kind of start going through different portions of your just even investment career of your life, you need to start thinking about different things so that you can be ready for whatever life throws at you, but what you want life to look like. And I think that retirement, in the way we talk about it, is really a sense of financial independence and that freedom to do what you want to do. And so, how do we put our best foot forward as we’re deg an investment strategy and a financial plan to use our investments to help us accomplish what’s actually most important, which is the freedom to do whatever you may want to do in retirement? Andrew 1:35 And that’s really cool, James, so can you maybe start with what is something? You know, we talk a lot on our show about people who are just getting started. What about someone who’s getting started, and they’ve got, let’s say, five years or less until retirement? Are there common misconceptions or things that people don’t even know that they should really put as maybe a priority or something to really think about? That’s maybe not thought about much? James 2:05 Yeah, there are so many; I think there are a couple that I can hit upon. One is there’s almost this sense of, there’s always our whole lives, there’s the supposed to lose, okay, you’re supposed to get good grades in high school so that you can go to college, you’re supposed to get good grades in college, so you can get that entry-level job, you’re supposed to do a good job there. So you can you start moving through this conveyor belt and all sudden retirements approaching, and there’s no, you’re supposed to say Wow, all of a sudden, there’s no work, there’s no school, there’s really no shouldn’t say any expectations, there’s always expectations. But there’s this wide open, next season of life. And it’s totally up to you as to what that needs to look like. Because I’ll say that so many people I see financially may be perfectly ready. But emotionally, they’re dramatically unprepared. And it’s because there’s this sense of you’re always understanding what’s next. And then you retire. And hopefully, have a good sense of what you want life to look like. But I think the biggest misconception for most people is that retirement is just a financial thing. It’s just once I hit this dollar amount in my portfolio, once I can create this level of income, then I’m good, and everything is easy. Deeper than that, there, you will want to make sure that you’re retiring into something that’s by design that you’ve intentionally created, not just hoping for the best we make it happen. So that’s one thing. And then the second big thing is, particularly as it pertains to investing, there’s this thought that, okay, I’m going to retire, and I need to get super conservative with my investments because I can’t, I’m no longer saving, I’m no longer adding to my 401 K, I’m no longer putting money into my investments, I’m now pulling money out of my investments. And there’s this misconception that investing is really risky, and cash is really safe. And I’m using kind of the extremes here. And I think both are needed for a good plan and retirement because the reality is the risk for most retirees. Isn’t these temporary downturns there, the markets always gonna be the market, there’s always going to be jitters, there’s always going to be things that give us concern and that are scary. But those are temporary. The biggest risk to most retirees is are they getting enough growth on their investments to not just meet the expenses they want to retire but also in the fifth year in the 10th. Year in the 20th year of retirement as inflation has gone up and up and up. And they are sometimes too conservative to protect against a short-term decline. They end up missing the biggest risk, which is the long-term erosion of purchasing power. And that’s a really difficult thing to it’s a difficult position to be in. Andrew 4:32 Interesting. I mean, it’s kind of counterintuitive. You would think the big mistakes are made by not getting out quote-unquote soon enough, and you’re saying it’s often quite the opposite. We do have this environment where people seem to be living longer; quality of life seems to be getting better. Healthcare seems to be getting better. So I guess from that standpoint, it does make sense that people should prepare for not that you’re preparing for the worst because I think it would-be loggers. Generally accepted to be a situation of preparing for that, rather than thinking I got five years. And that’s it. James 5:08 Right, right. Yeah, absolutely. It’s understandable that people are more concerned and fearful of their portfolio going down in retirement because, as I said, they’re no longer earning an income; they depend on their portfolio, in most cases, to at least supplement their income. But when you can start to reframe the risks involved, there’s no investment without risk. Even people talk about cash or bonds, all the risk-free assets, well, there’s risk there, you’re just kind of kicking the risk down the road because inflation is going to continue to be a thing. And if you’re not outpacing that, there’s a tremendous amount of risk if we’re, if we’re too much in any particular thing. So it’s about how you create this balanced approach so that you can meet your goals over time and have the purchasing power that you need but also protect against some of these downturns that certainly are scary and certainly are part of everyone’s retirement journey. Andrew 5:54 So obviously, you can’t give individual advice, but maybe we can make it a little tangible. As you said, it’s going to be different for everybody. Right. But we’ve I feel like Dave, and I have gotten several questions like this in one form or the other, where somebody says, Hey, I’m like, 6062, I’ve got my life savings, maybe middle six figures. And they’ve never even considered the stock market before; they have no idea what, what any of that means. Let’s take that stereotypical person. Can you walk us through, maybe? What should we think about? And, again, as you said, it depends on what you want to do. What’s that quote? And Alice in Wonderland, where do you want to go? James 6:33 Oh, you read? We’ll get you there. Something like that. Andrew 6:36 Yeah, exactly. So let’s say you want to have security in retirement, where this hypothetical person has five years left until the ideal-typical retirement age; what would you say? Kinda to start off, James 6:49 I like to start with an example. And just to kind of paint a picture of what are the risks here? And so let’s say Andrew, you come to me and you ascites Okay, Andrew, I’m going to offer you four different investments, you choose which one you’d like, investment number one goes up in value 52% of the time, investment number two goes up in value 75% of the time, investment three goes up in value 85% of the time and investment number four goes up in value 100% of the time, which investment Do you want? People pause or miss? Right? This is kind of a dumb question. I want investment number four; who doesn’t? And they say what’s investment number four. So what’s the same thing as investment numbers one, two, and three? They’re all the exact same thing. They’re all the s&p 500, the returns of the s&p 500, just looking at different time horizons. So investment number one is the frequency of positive returns on a daily basis in the s&p 552% of the time it’s up in value, the other 48% of the time it’s down. So it’s really not much more than a coin flip; very likely that you could be up or down on any given day. The second is the s&p 500 Rolling returns over a one-year time period. The third is rolling returns over a five-year time period. And the fourth is rolling returns over a 20-year time period. So as you look at that, I think it starts to help people understand, okay, there is a lot of risk in the short term. You know, when people talk about investing, there’s I don’t want to discount, there’s tons of risk in the short term, if you’re defining risk as just the uncertainty and that your investment may be up a whole bunch or maybe down a whole bunch. But over time, Jeremy Siegel has a great book called stocks for the long run. It’s almost boringly consistent how frequently stocks hit their long-term average or very close to it when you give them enough time. So when that when we’re doing that, Andrew, you want to retire in five years? Well, great, too. We know that, on average, in a bear market, the stock market might go down. And it might take a couple of years to recover on average. So what do we want to do? Well, we need to have enough money that’s conservative, that stable. So if we go through a bear market or downturn, do we have 345 years worth of living expenses set aside in something that is very conservative? Maybe that is that cash or those bonds or some of their conservative type of investment? We need that. If we have too much of that, now we’re just kicking the risk down the road; we’re not reducing our risk; we’re actually increasing our risk or putting it out into the future for our future selves to deal with it. So once we have enough to weather those short-term downturns, and by and short term could still be a couple of years, then with the remaining amount of our portfolio, do we invest that in something to grow so that we know when you want to buy groceries and when you want to pay the utility bills. And when you want to go on a trip ten years from today, 15 years from today, your income has been increasing not just to keep up with inflation, but to outpace inflation, so that you can continue to meet your needs. Andrew 9:38 That makes a lot of sense. I like the way you kind of bucket those into what do you need in the closer term, immediate future? And then what can you kind of set aside to increase those chances of making money? I mean, 75 to 25 odds are pretty good, and five years over the long term. It isn’t that long. James 9:57 Right? Right. Exactly. Dave 9:59 So I guess a question that I was thinking about while you’re talking about that how would this differ if you are five years from retirement versus five years into retirement is it the same idea? Do you work with the same idea? Or is this? Do you kind of change the strategy as you get closer to the day? And then, after the DAY, it changes to another type of strategy? James 10:20 Yeah, absolutely. There are other factors to consider as well here too. So it’s not just this, kind of I’m oversimplifying a bit. But it could be I’m always looking at the time horizon as the number one thing, what’s the time horizon until you need this money. And so, for example, let’s assume that you’re five years out from retirement, and you have social security and a pension and rental property. And that’s generating all the income that you need. You could look at this and say, you maybe don’t need anything in conservative investments if you’re emotionally okay with the ups and downs because your basics are covered by non-portfolio income sources versus someone who’s five years in, but they’re totally dependent upon their portfolio. There are other factors involved. But yeah, I absolutely always believe in that buckets approach kind of that you’re talking about of Do you have a bucket. And there’s an approach that we want to take where that bucket is constantly being maintained. Think of that bucket almost as the emergency fund for your portfolio. Where look if you’re working, you’re not relying upon your savings or your investment to pay for your groceries and your utility bill and your cards; your income is paying for it. Well, think of almost like stocks as being like your income in retirement. But a downturn is like losing a job; can we want to rely on stocks anymore? We want to tap into our emergency fund. Well, if you’re new, tap into your emergency fund, and then you get another job; what’s the first thing that you do? Well, you replenish your emergency fund. So you always want to keep that base there. If for nothing else, just a peace of mind of knowing that when we’re going through these downturns. You’re going to be okay; you have five years, six years, whatever is a living expense to cover this. So do the numbers change? Do the numbers probably change based upon less? Are you five years into retirement or five years from retirement? More? How much do you need from your portfolio? And how is that changing along the way? Andrew 12:05 That makes a lot of sense. I’m kind of curious, just selfishly, almost. But what we saw with everything with the pandemic, a lot more people are working from home. And that seemed to have continued, you know, moderated somewhat, some people are coming back to the office, but a lot of people work from home now, a lot more jobs are less labor-intensive on your physical body. Are you seeing that people who may be originally planned to retire at 65 are now doing some sort of like hybrid retirement where there may be working part-time? Or maybe doing some job from home? Or is that just my fantasy idea of, like, how retirement could be? James 12:45 Yeah, I’m not seeing it as hugely adopted; in fact, the people who are continuing to work in this, you know, there’s a risk of retiring too early, there’s no doubt about that. If you retire too early and don’t have enough money, you could very well run out of money. But my biggest thing with clients is, how do we create the just best possible quality of life? How do we create the best possible future for you? Too often, people are working too long not because of remote work, not because of the ability to be more flexible with it. But just because there’s this fear of retiring. And there’s this sense of what if I don’t have enough, and there’s a sense of okay, I thought that I needed this amount. And the goalposts moved, and then the goalposts move, and we’ll do a plan, we’ll make a projection, I’ll say, Look, you have enough to retire two times over, but the people keep telling themselves when I hit this amount of money when I hit this, and that keeps moving. And there’s a very real risk of working too long. And I see that far more frequently, of people continuing to work and missing out on time with grandchildren missing out on time to travel when you look at it, it’s really those first ten years of retirement, where you’re going to have your energy, your health, the ability to do what you want to do. So one more year of work doesn’t seem like a whole lot in the grand scheme of things. But when you frame that, as that’s 10% of your best years gone by working one more year, it starts to look different. So I do encourage people if work is productive and meaningful and purposeful, and you’re still able to enjoy family and trips and activities and hobbies. I encourage people to keep working because I think there is a real tangible benefit to it. And these things like we’re seeing now with remote work and the flexibility of work and the ability to do things from all over the country. I think that’s contributing to that. I hope it continues to do that more and more and more. But its retirement is in money and investing. It’s so much more personal; it’s so much deeper than just the dollars and cents. And it’s about how we align what we’re doing, not just financially, but everything that we’re doing with creating that version of our lives that we want most. Dave 14:42 Yeah, that makes a lot of sense. And I like the way you put that. I think a lot of people look at retirement as a goal-line they have to cross, and then they don’t really like having a plan beyond that. And I like what you’re saying about trying to make sure that you know not just financially but mentally and psychologically way that they’re ready to do all those things. So how does the whole 4% figure into all this? What are your thoughts on that idea? Then, I guess the time-old tradition of reducing your portfolio by 4% kind of idea? James 15:12 Yeah, I think it was wonderful research. And it first came out of there’s this question always, okay, I’m retired. So what can I take 10% of my portfolio year? Can I take 2%? Like how, what’s a safe amount that I can feel comfortable spending, knowing I’m not going to be on the street or under a bridge in 10 years? I want to know I can spend today and spend in the future. So Bill Bengen, with this research, said, Look, let’s look at a portfolio 50% large-cap US stocks, 50% intermediate-term treasuries, so just government bonds, what’s the most amount of money you could potentially take out? And the thing interesting about the 4% rule is people think, Oh, that is the most you can take out. It’s really not. He looked at many, many, many years of if you look at retiring in a great market environment, if you look at retiring in a horrible market environment, what’s the highest return or highest withdrawal rate that you could take that would allow you to have at least 30 years of income regardless of when you retire? That doesn’t mean that every year for a person solely amount you can take out; it just means it’s almost like a lowest common denominator; If you retired in 1975, for example, you could have ed a seven and a half percent withdrawal rate. So if you’re only taking four, you’re kind of leaving a lot of money on the table. But it’s so much dependent upon things outside of your control, which is what the markets are doing. So I think it was wonderful, wonderful research to start because at least it gives you just a simple starting point to Okay. Use a round number; I have $500,000 in my portfolio, 20,000 per year can come out, and I’m probably going to be okay, assuming I’m invested this way. Later, research was done by a guy named Jonathan Guyton, who said, Well, what if we don’t just have large-cap US stocks in intermediate-term bonds? What if we diversify further, but there’s also some international? What if we do value and growth? What if we add some small companies? What if we do real estate, and what he saw was, look, you can actually increase that up to about five and a half percent, give or take? And if you’re following certain rules, rules, like where do you take income from first? Do you just take income proportionately? Or do you take income from the asset classes that performed the best? What if the markets go down? Do you give yourself a cost of living adjustment? Or do you freeze your withdrawals for that year? What if your portfolio is performing really well? What are the metrics by which you can actually give yourself a pretty substantial bump so that you don’t just keep spending the same amount and end up dying with way more money than you want to die with? You can actually enjoy it over the course of your lifetime. So I think the 4% rule is a really, really wonderful starting point because up until then, it’s kind of like this, what do we do, even Bill Benue with that 4% rule when he went back and added small company investments into the mix, so you can actually probably increase that closer to four and a half percent. So I think it’s a very good starting point, people; there’s so much complexity in this world that it’s nice to have those simple foundational points to start from; I think people can do better, and better doesn’t just mean, Oh, have more money, it means to have more life, have more trips, have more impact, have more just able to do what you want to do. But I think that the 4% rule is a great place to start, Andrew 18:09 I gather from a lot of this conversation that there seems to be a lot of value in having a personal conversation with somebody who can look at your situation. Because when you’re withdrawing funds from retirement, you have taxes to consider you have your living situation to consider. And so it’s almost easier to build a portfolio and almost harder to take it down in that sense. What do you say the people who are maybe skeptical of the historical trends and are worried about interest rates going higher, I listened to one of your podcast episodes where he talked about dividend stocks and the other great way of explaining it for beginners but also having some in-depth analysis into some of the pros and cons of that. So I guess when it comes, it’s obvious to me that you know your stuff when it comes to stocks. So what do you tell the people who are maybe worried that we could see a very long uptrend and interest rates when the past? You know, for the 80 years, I’ve seen a steady downtrend and interest rates? And does that affect how you withdraw from a portfolio at all? James 19:14 Yeah, we very well could. Now we’re at historically low-interest rates right now. So in some ways, we’re probably going to expect some reversion to the mean, you know, how high do we go? Where do they end up settling out? Who knows? I think as investors, it’s normal to be concerned about that because I think in the short term, it causes a whole bunch of movement in the ups and downs of our portfolio. I will say for long-term investors, in some ways, inflation being high is absolutely not a good thing that needs to get under control, but with interest rates being higher in some ways, it helps us withdrawal rules, because bonds a couple of years ago, a year ago, were paying absolutely nothing in interest with bonds as part of your portfolio. It’s almost just glorified cash as part of your portfolio. So I am always thinking a bit there; the reason I do financial planning with clients is to say, can you create a strategy that isn’t dependent upon current trends? Or what’s currently happening or the news cycle of the day? Can you build a strategy where this works, regardless of what happens, because yesterday, it’s inflation and interest rates and concerns about a recession? A couple of years ago, it was COVID. And it was an election season. And it was the greatest health crisis in the world being shut down, and just Oh, my gosh, what’s going to happen? That will always continue. And so I think an investment strategy that’s based upon current events is misguided. I think it’s focusing on something that can’t be predicted. I think, in some ways, the benefit of a financial plan, in many ways, the benefit of financial planning and creating an investment strategy. That is almost like an all-weather strategy is just for peace of mind. And I don’t mean all-weather strategy in the sense that, hey, this is going to perform positively every single year. But look at the markets down. Do we have conservative stuff to draw from that’s not gonna be impacted by the market as much? If the markets go up? Wonderful, can we draw from investments that have gone up? It’s almost just I’m oversimplifying, of course. But when you look at markets, there’s this sense that you’re just investing in, you’re gambling, you’re just putting money in, and you’re hoping for the best, and we hope that rates don’t crush what we’re doing. And we’re hoping inflation isn’t crushed what we’re doing. The reality is we’re investing in wonderful companies that are going to find a way where the rate rates are rising, or rates are falling; they’re going to find a way to be profitable and to stay in business. When people say well, what if this doesn’t recover? What if this is the end of things that walk down your street? Next time you get a chance? How many Fords Do you see are General Motors? Do you see your Tesla? Do you see, okay, those are all publicly traded companies? Are you walking past a Bank of America or Wells Fargo? Or publicly traded companies? Do you see a McDonald’s on the corner? What about the prescriptions that you’re taking? What about the jeans that you’re wearing, Levi’s, those are all publicly traded companies, these companies Levi’s isn’t gonna go out of business I’m who knows, because of interest rate risk, McDonald’s isn’t gonna go out of business because of rising rates, Apple’s not gonna stop producing iPhones and MacBooks. And Apple Watches, because of rising interest rates, it’s gonna cause prices to fluctuate quite a bit in the short term. But when you understand what you’re investing in, and what you’re investing is really the just the most amazing human ingenuity captured just in these companies taking not just dollars, but taking everyone’s quality of life, on average, higher and higher and higher. That’s going to continue, and I’ll get off my soapbox in a second. But there’s all this negativity when you watch financial media of here’s why things are going to be horrible. And here’s what’s going wrong. And this is why you should go to cash or get out. There’s so much incredible stuff happening. If you went back 20 years ago, there was no Airbnb; Tesla wasn’t public, there was no Shopify; there was like, you can look at these companies that have led to a tremendous amount of not just dollar gains, but job creation, progress, higher standard of living, we couldn’t do this podcast 20 years ago, we couldn’t have this conversation. That’s always happening behind the scenes. But we’re never, we never see progress because progress happens slowly, but it builds like crazy over time. Whereas negative news, Morgan Housel talks about this in a really incredible way in his articles and books. It happens fast. It’s the health crisis that happened overnight. It’s the recession that all of a sudden is here; its inflation has now caught up to us. There’s always progress happening underneath, but we just, we don’t see it. And when we do hear it, we’re just quick to forget it because we’re so much more hardwired to focus on the negativity. So sorry; I know I kind of went in circles with that question. But investing is just it’s a natural byproduct of almost the human condition. And what we’re doing here, as people are looking to better their lives and better their family’s lives over the course of time. Andrew 23:46 That doesn’t mean that it’s a really great explanation, you do have to go back to the basics, and people layer on the complexity on top of the stock market and finance, and when you talk about it as you are investing in the greatest companies around us, that should bring a lot of comforts and knowing that, hey, you can go alongside them and invest in progress. I think it’s a perfect way that I’ve kind of summed that up. Yeah. Well, James, this was a fantastic conversation. I think there’s just enough in there for people if you are nervous about being close to retirement; these are all great things to nibble on. And maybe take that next step further into understanding that there’s hope for you either you can find great solutions, and people like James are out there to help you along with that. So, James, you have a great podcast. It’s called ready for retirement. I suggest people check that out. And where else can they learn more about you online? James 24:40 Yeah, thank you ready for retirement is a big place that’s obviously wherever you listen to podcasts. YouTube is a place where we’re we’re doing a lot more content on top of that, and that’s actually under my company’s name, which is route financial partners. So route like a tree route, our OT financial partners in between those two sources. That’s a great place to start. This is what we do to help people with that transition into retirement. So all the content we create it’s not hypothetical. It’s not what-ifs. It’s really practical stuff we’ve, we see and have seen with clients. And so we want to help share those strategies with everyone because it’s scary, and good financial planning can make it a lot less scary. Dave 25:18 Awesome. Well, that’s great. Well, James, again, thank you for your time. We appreciate you taking the time out of your day to come to talk to us and help educate our listeners more about as they get closer to retirement and into retirement and how you can help them, and it was great stuff. I learned a lot. So I’m the closest one here in the room to retirement. So it’s stuff that I can take away from for sure. So without any further ado, I’ll go ahead and sign us off. Everybody goes out and invests with a margin of safety emphasis on the safety. Have a great week. We’ll talk to you all next week. . A  [email protected] to on Investing for Beginners podcast. The Investing for Beginners podcast is part of the Airwave Media podcast network. We hope you enjoyed this content. 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