A Masterclass on Investing in Individual Stocks with Brian Feroldi

Transcript:

 

On this episode of the personal finance podcast, we're going to talk to Brian Faraldi about how to invest in individual stocks.

Everybody is welcome to the personal finance podcast. I'm your host, Andrew founder of master money. co and today on the personal finance podcast, we're going to be talking to Brian Faraldi all about how to invest. And individual stocks. If you guys have any questions, make sure you hit us up on Instagram, Tik TOK, Twitter at master money co and follow us on Spotify, Apple podcast, or whatever podcast player you love listening to this podcast on.

And if you want to help out the show, consider leaving a five star rating and review on Apple podcasts, Spotify, or your favorite podcast player. Can I thank you guys enough for leaving those five star ratings and reviews. They truly mean the world to us. Now, today we're going to be talking to Brian for Aldi.

All about individual stock investing and Brian is one of my favorite follows on Twitter. He has some amazing content learning how to invest in individual stocks. And so today we're going to get into how he goes out and find stocks and screens for stocks. We're going to talk about how to dive deeper once you screen for a stock and look at financial statements.

We're going to talk about his stock checklist on how he screens. Every single transaction that he makes before he buys a company, he actually has a stock checklist that he goes through that is very detailed. We're going to go through that. We're going to talk about buying stocks and managing your emotions when you own those stocks and when is the best time to sell a stock.

And we're going to go through a bunch of other questions like his best investments, his worst investments, in addition to how his portfolio is actually structured. So I am really excited to have Brian on. Brian is the second two time guest that we have ever had on this podcast. So really pumped to have him on.

Every time he comes on, you guys absolutely love it. So without further ado, let's welcome Brian to the personal finance podcast. So Brian, welcome to the personal finance podcast, Andrew. Thank you for having me back. It's great to be here. We are so excited. I think you are our second two time guests that we've ever had on the podcast.

So I am really pumped to have you back your first episode. People absolutely love, because we talked about the basics of the stock market. We talked about your book, everybody really, really loved that episode. So I'm excited to have you back, but if people did not hear your first episode, tell us about yourself and maybe how you got into investing.

So I've been investing in the stock market for about 19 years. Now, I graduated from college in 2004 with a degree in business. And despite focusing on business in college, I was taught absolutely nothing about the stock market or investing or 401ks or really. Any of the basics, um, that are now so easy to look up, uh, thanks to the power of the internet.

However, when I graduated, my dad handed me a copy of a very popular book at the time called The Rich Dad, Poor Dad. I devoured that book in a few days and it just, A lit a fire in me to learn everything I could about money, personal finance and investing. So I've just been on a 19 year binge, essentially finding and consuming as much financial content that I could possibly get my hands on about eight years ago.

I became a full time financial writer for the Motley Fool. I've written about 3000 plus articles for them. Uh, and more recently, as you pointed out, I've become an author, published a book that kind of explains the extreme basics of how the stock market works. And that is absolutely amazing. Rich dad, poor dad is one of the books that really ignited a fire in me too, very early on between that and a million next door.

That's really what got me going in and interested in finance, personal finance, all of those things. So I absolutely love that piece too. Now on the last episode, today I want to try to talk through, you know, individual stock investing because that's one thing we haven't touched on a ton on this podcast.

And it is something I absolutely love to do and I use a small portion of my portfolio to invest in individual stocks. But last episode we kind of talked about individual stock investing may not be for every single. So what type of investor could this be for? So I am a huge fan of investing in the stock market and I myself am a huge proponent of buying individual stocks.

However, the only reason that I say that is because I am personally extremely interested in the process. Of investing. I literally enjoy reading through financial statements, digging into SEC filings, listening to company conference calls, taking companies through an investing checklist that I've developed.

I love talking to other investors. I love listening to podcasts about investing. So I personally love the process of investing. I am willing ready, willing, and able to do the work necessary to vet and pick my own individual stocks. Most people, I would say even 99 percent of people are not like that.

They're not willing to do any work and they have no interest in doing any sort of research related to picking individual stocks. That's perfectly okay. If that's you, you can still take advantage of the power of the stock market by simply investing in passive index funds. It's a wonderful way to go. But if you're the type of person that is just interested in business and interested in learning about how the stock market works in more detail, I do think there are reasons, there are good reasons to buy your own individual stocks.

Absolutely. And I think that's the key is you got to love the process. You got to actually be able to do the work, which we'll talk about how to do the work today. And you have to actually love those things. And one big thing that I used to do when I would really, really intensely. for individual stocks is I would listen to podcasts and read a bunch of different resources and find some of those individual stocks and get some of these ideas before I dove deep into, you know, looking into the company.

So what are some resources that you utilize to maybe go out and find companies that you want to invest in? Investors today are spoiled. It is never. Ever been easier in history to find and research stocks. I mean, the tools that we have access to today for free would literally cost tens of thousands of dollars to access 20 or 30 years ago.

So some resources that I use continuously that I'll plug a one is called whale wisdom, whale wisdom. com. Uh, what you can do with that tool. Is you can track the portfolios of some big famous investors to find out what stocks they've been buying and selling, uh, in their portfolios. So if you want to track big investors like, uh, Warren Buffett, Charlie Munger, uh, Terry Smith, uh, Chuck Acre, uh, those are four investors that I hold in high appeal by signing up for whale wisdom.

You can literally get notified by email every time they have to publish their portfolio, which is about every 90 days. That's That alone can be a great place to start your investing research process because if the stocks interest them, they're highly likely to meet the criteria that you're looking for.

You can also use any of the social networks that are out there. You can get ideas on Twitter. You can get ideas on edIn. You can get ideas on podcasts. You can even get ideas on. Tick tock, uh, for finding, uh, individual stocks. It's not hard to come up with ideas. One other approach that I use is to use simple screening tools.

Uh, the best free investing screening tool that I've ever found is called finviz. com F I N V I Z. com stands for financial visualizations. It's just a massive free database of. Thousands of publicly traded companies, and you can easily sort on there by market cap, price to earnings ratio, valuation metrics, and more.

So those few tools right there should have you with a massive watch list if you want to use them. And that is why I absolutely love all the tools that are available now because you named the whale one is one big one for me. I used to watch Warren Buffett because I'm a huge Warren Buffett guy. And Charlie Munger.

And I would just kind of see some of the stuff that they are doing. That would give me a ton of ideas to kind of dig deeper and go through that entire process. Now, since we have so much information that's out there right now, there's obviously so many different companies that you could be looking into.

Are there any quick metrics that you look at to kind of weed out some of the stocks that you don't want to invest in? Yeah. So before I can answer that question, it's first to understand what type of investor I am, because the metrics that you're going to use to weed out companies from your investing process really depends on the type of investor.

You are. My style of investing is primarily High quality growth. So I am mostly attracted to companies that are just barely profitable. They are rapidly growing their top line. They're taking advantage of some market opportunity that they see out there. And I see them as having some sort of competitive advantage.

Those type of investments would not. Interest Warren Buffett at all, they would simply be too high risk, uh, for him, uh, to consider. So while I always look at Warren Buffett's portfolio, uh, we have different screening criteria. Conversely, if you were a swing for the fences type of investor and you just wanted to do a buy nothing but stocks that had.

50 X potential or more. And you're very willing to strike out the criteria. You would have to think and invest like a venture capitalist who have completely different criteria than I would use. Uh, however, uh, with that, there are a few things that I use to, um, find companies. Uh, the first thing that I look at is market cap.

Uh, this is the total dollar value of a company's equity. I'm primarily interested in companies that I think. Can deliver a multi bagger returns for investors. One impediment to doing that is just the pure size of a company's a market cap. So because of that, I'm primarily looking for companies that are on the relatively small side of the market cap.

So I like to invest in companies that are between 2 billion and 30 billion in market cap value. That's big enough that they've. Proven that their business model works, but it's still small enough that the company could two, three, five X, and they still wouldn't be gargantuan in size. So market cap is a quick metric to look at.

Another one that I look for is I like companies that are profitable, although they don't have to be extremely profitable. So if you just screen for PE ratio above zero. I don't care what the number is. It could be 500 or a thousand, but if they have a P E ratio, that means that the company has crossed into profitability.

Another thing that I like to look for, I like to invest in companies that have already beaten the market. They've already outperformed the market since they came public. That's backwards. A lot of people think you want to invest in companies that have. Underperform the market or companies that are cheap.

I'm actually a big believer that companies that beat the market have a much higher likelihood to continue beating the market moving forward, because it means something about their business is working. So I actually like to look at the all time high list for stock ideas, as well as the best performing stocks over the last year.

If you believe that winners tend to keep on winning, that's a good screening criteria. I love how strict your criteria is and how you actually have this mapped out. And for investors, I love that you brought that up, that, you know, there's different styles of investing for value, investing to dividend, investing to growth, investing.

There's obviously different criteria underneath each of those categories as well. So if an investor is trying to figure out which category or what type of investor they want to go forward with, how do they actually think through that process? And then how do they put together maybe like a mission statement or something that actually allows them to stay within that criteria?

Yeah. So this is a very important question for every investor to answer for themselves. Uh, before you start buying or selling any investment, the first thing you need to ask yourself is when do I need to use this money? When do I need this investment to pay off? If the answer is in less than five years, which it could be to pay for college, to buy a car down payment on a house, pay for some big, big purchase in your life.

That is money that should not. Be in the stock market. The stock market is simply too unpredictable in the short term, which again, I define as less than five years. If the answer is more than five years from now, that's capital. That could be, that might be allocated to the market. The next question you have to ask yourself is what are you most interested in optimizing for?

Are you most interested in. Optimizing for upside potential. Uh, that means that you're probably going to have to look at the riskier investments, the higher growth investments that have a much higher probability of flaming out. If you're more interested in optimizing for dividend income. Or a smooth ride.

So a low volatility, a ride, then you should probably optimize for things like dividend income, a stability of profits and earnings and those kinds of things. But the only way to figure that question out is two things. One is to ask yourself, what are you optimizing for ahead of time? And then two, through just sheer experience, a whole bunch of people, millions of investors started their investing journey in 2020.

And the lesson that the market taught in 2020 was buy anything. The riskier, the thing, the faster, the return that you're going to get. And a whole bunch of people thought, wow, investing in the stock market is easy. I mean, I earned a 50 percent return in 2020. How brilliant am I? I'm the type of investor that wants risk.

Like bring on the risk. And what those same investors saw in 2021 and really in 2022 is the opposite side of that, of that coin. A lot of the companies that were high flying delivered huge returns in 2020 and 2021. Came crashing down back to earth in 2022 as interest rate, uh, rose and markets fleed towards safety.

So it's, it was very easy to convince yourself that you were a high growth investor in 2020, and it was an entirely different thing to actually live through the volatility of being a high growth investor in 2022. So if you thought you were a high growth investor in 2020, and only later did you discovered this is not for me.

That's fine. Your investing style will be refined over time as you get more experience. And that's the key here is that your investing style can evolve over time. And mine has very much evolved over time as time has gone on, where as I get busier with businesses, things like that, I become more passive than I used to be.

Before. And I think that's just one of the things that happens naturally as an investor. And if you started in 2020, you probably went through the investing school of hard knocks because that is the, you know, the highs and all the lows, but it's probably one of the most valuable lessons that you can have.

If you started in 2020 as well, cause you saw both sides of the coin. So I love that thought process and going through this. Now, as we go through this initial screening, we have our criteria of how we want to kind of invest. We put this. You know, some of the, the, the big pieces together of how we want to invest.

Why is it so important to actually understand the things that we are investing or why is it so important? What Warren Buffett calls the circle of competence to have the investments in your circle of competence. So if you go out and you make any investment, because you heard it on CNBC, your friend said to buy it, or, you know, some investing guru out there, you saw that own it and you do no research.

That might sound like a smart investing strategy because you're essentially outsourcing your investing research to a third party. And if you trust that third party, you might think, Oh, investing cheat code. I don't do any research. I'll just buy what fill in the blank person is buying. The reason that doesn't work is if you don't understand the why, the reason why the person bought that investment in the first place, you won't have the conviction to, or the knowledge to whether or not you should continue to hold that investment.

Once the price starts going the wrong direction. And if you hold. Any investment, especially ones that you expect to outperform. You can be guaranteed, guaranteed that at some point that stock, that business, that asset price will go in the wrong direction. And if you don't know why you bought it in the first place, if you don't understand the core reason why you expect that asset to appreciate in price, you are going to have huge questions going through your head.

Should I sell it? Is the thesis broken? Should I buy more? Only way to know the answer to those questions, which you will eventually be faced in is to know the reason you bought the asset in the first place. It's a terrible idea to get investment ideas from other investors. It's a terrible idea to buy those assets without doing any research.

So this just reminds me of a story I had when I was in college, where one of the first stocks that I ever bought was a penny stock, of course. And, um, I bought this penny stock off of a tip that somebody gave me. And I went in and put my entire, my entire savings into this one penny stock. This is one of the biggest investing mistakes I ever made.

Uh, but it was a great lesson. And so put all my money in, in one day in 24 hours, that entire investment went down to zero. And I had no idea why, because all I did was listen to one specific tip from someone else. So what Brian's talking about here, a lot of people, you can make this mistake. If you're just listening to other people.

You have to understand what you're investing in, have that understanding of why you're doing what you're doing. And we'll talk about some other reasons on how to track that as well later on here on this podcast. But I think it's so important to understand that piece. Another big thing that you talk about, and it's a big principle from Warren Buffett and Charlie Munger is economic moat and making sure that the companies that you're investing in have some sort of economic moat where they can kind of, you know, keep competitors out of the way and make sure that they are growing profitably over time.

So can you kind of explain economic moat and why it's so important? Yeah, Warren Buffett has this great quote, which I'm going to butcher, but the essence behind the quote is essentially the key to investing is not to figure out how much a company is going to grow or how much it's going to impact society.

The key to investing is to figuring out what kind of competitive advantage a company has, and most importantly, the durability. Of that competitive advantage, a competitive advantage is something, some attribute that one business has that makes it hard to compete with. A classic example would be a company like a Visa.

A Visa is a, one of the most well named known brand names in the world. If you have a credit card or a debit card, the odds of you being a Visa customer are extremely, extremely high. A Visa sits in the middle point between banks, merchants, and consumers, and is a payment processor. That business has a natural barrier to entry with size and scale, but they also have a competitive advantage called the network effect.

The more places that accept visa as a payment that attracts more businesses to offer visa, and that also attracts more consumers to want to have visa as their card. It's a natural cycle that goes around. So if you were trying to create a business that competed with visa. Good luck to you. I mean, it would have cost billions upon billions of dollars and your odds of succeeding are extremely low.

That gives Visa a durable, competitive advantage that allows it to maintain pricing, increase its revenue and profits over time, and deliver huge returns to shareholders. This is why Warren Buffett's portfolio is filled with companies that he thinks has a durable competitive advantage. His top holdings include companies like Apple.

Apple is his number one holding. He has a bunch of banks in there. He has a bunch of oil companies in there. He has candy makers like See's Candy. He has insurance companies in there. These are companies that he thinks has a durable competitive advantage. That durable competitive advantage. It is a, basically a law of capitalism that a company that is successful, that creates something successful, competitors will see that company's success and do their best to match whatever product or service that company is offering and try and steal their customers away without a moat in place.

The business that has that product will be forced to lower prices or give things to consumers in order to keep that business in house. And that costs the companies a profits. So a moat is really a long term protection against the forces of capitalism. And that is one of the biggest keys. If you can find companies with these large economic modes, you can really, really have a huge competitive advantage.

When you start investing, you add that to your circle of competence. You have great management in those companies and you're finding some really, really good gyms that you can dive deeper in. So one big thing is as we start to dive deeper into some of these companies, we want, may want to invest in. We need to understand financial statements.

And this is one big piece that a lot of people who are not individual stock investors may not be willing to do the work on this part, because this is really, really key. But like you said, a lot of. process of going through financial statements, myself included. I think it's one of the fun things to do is to dig deep into some of these things.

So can you kind of explain the three financial statements that people need to understand and maybe a high level view of what each of these things mean and what they do? Absolutely. Uh, this, uh, learning accounting was probably the highest value skill that I learned in college. So many other things in college I completely forgot about, but learning the language of business, which is accounting is a skill that I use in my regular day life.

All the time. So broadly speaking, there are three major financial statements that all public companies in the United States are required by law to produce and report to their investors. The most well known financial statement is called the income statement. What this statement answers is basically the question.

Are you profitable or not? It's a lot like your personal budget. So think about your personal monthly budget for a second. You have income at the top, you have expenses below that, and then you have your savings rate. As like the bottom line, like, did I save money this month or did I spend more than I made this month?

Which would be bad. The exact same thing happens for companies on the income statements. The top line is revenue. How much sales did the company pull in during this period? Usually a quarter, which is 90 days or a year, which is 365 days. Below that, they list out all of their expenses on something called accrual accounting basis.

Research and development expenses, cost to make and manufacture the product expenses, cost to market the product expenses, income tax expenses, interest expenses, all that kind of stuff. And then they get the profit that the company generated during that period or the loss. So that's the income statement.

Statement number two is called the balance sheet, which should really be called a net worth a statement. Uh, if you ask somebody what's their net worth, they're gonna say, well, here's everything I own, subtract out everything they owe, all their debts, and the difference is their net worth. That is a balance sheet.

So on one side of the balance sheet, a company reports all of its assets, so everything that it owns, uh, cash, buildings, uh, intellectual property, etc. And the other side of the ledger is the company's liabilities. So that's all the debt that it owes, all the money that owes to suppliers, employees, the government, et cetera.

And then below that is something called shareholders equity, which is just another way of saying the company's net worth that they has. So the balance sheet is a really important statement to understand. The final statement is probably the most confusing of the three and the lesser known, but I think it's actually probably the most important.

That's called the statement of cash flows or the cash flow statement. Uh, this shows how much the cash movements of a business during a period of time using cash accounting. Think of this the same way that you would think of your checking account. It's just a list of all of the money movements that you had in your checking account during a period of time.

So it supplements the income statement to show the difference between how much profit a company made in theory using accrual accounting and how much cash a business generated in reality using a cash accounting. But learning to understand the nuance of reading all three statements is critical if you're going to invest.

And understanding these is really, really powerful and a lot of things in life as well. And I actually, we're looking at boring businesses right now. We're going through a lot of processes of looking at laundromats, things like that. And I have them send me these statements and it's so easy to read these now because I did it for so many years looking at different stocks and the stock ones are obviously much more complicated than some of the ones that we have now that we're looking at.

And so it's really valuable to be able to actually understand the language of business, like you said, which is accounting. So this is one thing that I think people definitely should be investing their time and just to understand at least the basics and how these statements works because it's so incredibly powerful for your financial education going forward.

Now, if people want to learn more about this, you guys have some programs that kind of teach people about this. Is there a place that they can go learn more about those programs? Yeah. So I teach a cohort based course that kind of shows people these how to read three financial statements. If they're looking for a more formalized format for doing so, you can find that by signing up for my newsletter, which is just brianforalde.

com backslash newsletter. We have alrights in there for it. Awesome. And Brian's newsletter is amazing. We read it every single week and we recommend it to all of our readers as well. So Brian, that's amazing. We'll definitely alright that up down below in the show notes as well. Now, the next piece is you put together a stock checklist and you go through this checklist before you buy a lot of different companies to make sure that it fits your criteria.

What led you to kind of develop this checklist and how long did it take you to develop this? Uh, yeah. So what caused me to develop it is I finally became smart enough to realize that I'm too stupid to keep everything in my head prior to developing a checklist for myself, I was vetting and looking at dozens of investment ideas.

And every time I'd be like, Oh, I like that. This company has a high gross margin and it's. Profitable and has a good manager, but I like this company is growing faster and it has a better balance sheet, but I like this company because it has a bigger mode. And I was like, but I like this company cause it's beat in the market.

Trying to keep all of those factors in my head was just a stupid thing for me to do. So one day I decided, well, maybe I should write some of this stuff down so that I outsource some of the thinking to a spreadsheet. So I created a list of, uh, investing criteria that I created and over a period of a few years, and thanks to a review from other investors, I narrowed down my checklist to a list of items that I think are most important to finding investments that best match my unique investing style.

So now that I have this checklist created, whenever I come across a new, a stock idea, I can just run it down my checklist. And see how good of a match this particular investment is for my investing criteria yesterday, for example, Instacart came public and as part of their coming public, I basically took Instacart through my investing checklist, and I discovered that this company has actually a lot of attributes that I look for in a long term investment, but what's so powerful about developing a checklist for yourself.

Is it's consistent or you can do it again and again, but most importantly, you don't overlook things or you don't override the rings in your investing process by putting it down on paper, which is the same thing. Warren Buffett does. Charlie Munger does. Peter Lynch does. Terry Smith does. If those super investors use investing checklists, maybe you should too.

Exactly. I think that is why it is so powerful. So you don't forget things. And it's the same things like for real estate investors that listen to this podcast, if you're running the numbers before you buy a rental property, it's the same thing you're going through a checklist to make sure that you have all the factors factored into play before you're actually buying these businesses.

And I think that's what you really have to think about here is you are an investor who is buying a business. And it's really, really important to make sure that you are going through all of the metrics before you actually buy that business. So what type of things have you added to the checklist over the years that you may not have had?

Previously, that are big ticket items that you look at now. Yeah. So I've bought dozens of stocks over the last 20 years. Many, many of those stocks have lost me a lot of money. And each time I learn a new lesson, I go and I update my checklist to make sure that that never happens again. A one that comes to mind immediately is something called customer concentration.

This is basically asking the question. How many customers does a company have? And are any of those customers are responsible for an outsized portion of the company's revenue? Why is this important? Well, if a company has one single customer, that's responsible for 40 percent of revenue and that customer chooses for any reason.

To stop buying from that business. It essentially blows a hole in the investing thesis for that company. So I bought companies that I thought were safe. I thought looked really good. And I learned the hard way that when one of those customers, one of those big customers pulls away, the company's financial statements just fall apart and the thesis falls apart.

And when that happens, a wall street really punishes a stock by sending it down. Another thing that I've learned the hard way is the impact that dilution, uh, can have on investment over time. Uh, previously I paid no attention to stock based compensation or the dilution rate that a company has. And only by buying companies that had egregious stock based compensation practices and egregious dilution, did I realize that, wow, the market really does not like when a company overly dilutes its shareholders.

So I now add that as a checklist criteria for myself. Another one that I think is really important is the quality of the revenue that a company has. All types of revenue are not created equally. And as a broad statement, revenue that is high margin, recurring, and recession proof is far more valuable than revenue that is low margin.

Cyclical and not recurring in nature. So I would much rather invest in a company like a software company that has repeat purchase customers that I wouldn't like a patio furniture maker where you buy patio furniture and then you don't buy from that company again for 20 years. So the quality of revenue and the relationship between the business and the customers really matter to me.

And those were all lessons that I had to learn the hard way. That's why it's so powerful to have this because you have these lessons, these things that you learn over time and you remember to add them to the checklist and it just helps you avoid those mistakes going forward, which is the number one thing that you really want to be doing when you're investing in some of these individual stocks.

If somebody wanted to check out your checklist, where's a location that they can go look for it? Yep. So I make my checklist freely available to anybody. It's just Brian for all the. com backslash checklist. I encourage people to download my checklist. I do have instructions in there for how to use it, but most importantly, delete what you don't like, add what you do and make the checklist your own.

So I can give you a starting point. You're free to use mine, but I really encourage you to think through each of the items that I have on there and ask yourself if those criteria matter to you. That is great. I think that's absolutely perfect. And you definitely need to make sure that they fit within your criteria for sure.

So when we go through our checklist, maybe we screen these stocks. Now it's time to buy one of the stocks that we are looking at. We went through all the different financial statements. We went through our screener, we went through our checklist. So once we buy, how do we decide how much capital to allocate to that stock and, or, you know, how many shares we want to purchase?

Yep. So this again, totally depends on the type of investor you are, uh, whether you're a fan of concentrating your portfolio or whether you're a fan of diversifying your portfolio. Um, so as I said before, my investing style is primarily to put my capital behind companies that I think have multi bagger potential.

I avoid the highest of the high risk stuff, but I do put my capital into fairly risky investments that have a higher than average likelihood of flaming out. I'm okay with that trade off because while I do buy lots of stocks that have a high likelihood of going down, occasionally I buy Netflix, I buy Amazon and I buy Tesla and the gains from those stocks dwarf all of the losses that I have from my losers combined as a broad general statement.

The more conservative of investor you are, and the more you lean towards big profitable wide moat cash gushing companies, the more comfortable I would be with concentrating my portfolio. If you invest in Warren Buffett style companies, I would be comfortable with Warren Buffett style concentration.

However, if you invest at the other end of the valuation mindset spectrum, if you're after small, high growth money, losing businesses, I would, um, not concentrate my portfolio. I would think and act like a venture capitalist venture. Capitalists have dozens. Of companies that they invest in, and they know going in that they're going to lose money on the vast majority of them, but they're also trying to get the next Facebook, the next Airbnb, the next Snapchat into their portfolio.

And if they can do that, it's going to dwarf all their losses combined. So the more high risk you are, the more I would stress diversification, the more low risk and the more value invested you are, the more I would be comfortable with a concentration. And one big thing that you touched on earlier was that you want to hold these investments for a longer period of time.

You said five years or more. I think Warren Buffett's famous quote is if you're not willing to hold it for 10 years and don't hold it for 10 minutes, something along those lines. So why is it so important to make sure that we are long term investors when we are investing in some of these companies? If you look at any of the most successful investments of all time, even the most stable, mature, boring businesses out there, and you look at their history, each one of them, each one of those mega winners has put their investors through some type of huge drawdown.

Think about Coca Cola for a second. Coca Cola. It doesn't get any bigger, more stable, more predictable, more boring, more slow growth than Coca Cola out there. And yet, if you look back at Coca Cola's operating history from peak to trough, it has fallen more than 50 percent on multiple occasions, and that's for a big dominant, slow growth, steady, a company.

The exact same thing can be said for Berkshire Hathaway, by the way, Berkshire Hathaway is extremely diversified. It's got the best CEO in history at its helm. It gushes cash in good times and in bad and Berkshire Hathaway peak, the trough has fallen more than 50%, I think more than four times in its history.

So volatility is not a bug. It's a feature of the market. And you need, if you're going to invest in the market, you must, you must, you must have a plan for dealing with that volatility. The best plan that I know for dealing with that volatility is one, keeping your personal finances extremely conservative so that the market gyrations no way impact your, your day to day life, but to investing with a multi year, a time horizon that is the correct.

Time period to put your money into judge the performance of the stock market by it's not in days. It's not in weeks. It's not even in months. The correct timeframe to judge your investments in the stock market by is in years. So if you're going to invest, you have to have that kind of horizon. And your book, why does the stock market go up has some great data on this as well, in terms of it went through the S and P 500 and talk through, you know, if you hold the S and P 500 for certain amount of timeframes, the likelihood of you losing money goes down to almost zero past 20 years.

So I think that's really, really cool. You know, how you can look at some of these longterm investments and then making sure that you deal with this. Volatility and volatility is obviously very hard for new investors, especially when they don't have a financial education. So what is one way that investors can manage emotions through volatility?

There's a few ways that they can do it. Probably the easiest way is to never think about volatility by simply dollar cost averaging in the index funds and not looking at their statements until they retire. I mean, that sounds like almost like a cheat code or you're cheating by not looking at the volatility.

But my wife has been doing exactly that for years. She could tell you nothing about what the stock. Mark has done this year or next year. She couldn't tell you anything about her 401k, how it's performing. So she can deal with the volatility simply because she's not aware of it. And if you're going to be a passive investor, that is a perfectly fine thing to do.

If you're going to be a more active investor, or if you're just interested in the market, the way to deal with volatility is to study. Market history is you study market history. You see how volatile the market has been in the past, and you realize that market volatility is completely normal. It is completely normal for the stock market to plunge 10%.

In fact, that happens about once every 11 months. So once a year, you can expect the stock market to pull back about 10 percent about once every four years, the market falls about 20 percent or more. Once every six years, it falls 30 percent or more. And once a decade, you can expect some type of market crash.

Now I've been investing for about 20 years and in my lifetime, I lived through 2008, which was something else to be investing through. But I also lived through 2020, which is when we saw the fastest bear market. In the history followed by the quickest rebound in history, we also saw extreme volatility in 2022 is interest rates, uh, rose that much.

Now that's never fun to live through. Living through that volatility is never fun, but because I've studied market history and I understand the reasons for owning the stocks that I do, it doesn't make it easy to hold through that, but it makes it easier. And those are some great tips there. Cause I think, Hey, your financial education comes into play huge when it comes to this, because really now when the market goes down, I kind of look at it as a way, Hey, maybe some stocks are on sale that I really, really like.

And it's one thing that if you really get worried about this stuff, one thing I tell a lot of people to do is to pull out your phone and take out the stock market app, you can look at the Dow Jones, the S and P 500, whatever, and put it on the longest time horizon you possibly can turn that thing sideways, put it on the longest time horizon you can see.

And what direction does that market go in the long run? It goes in one direction, which is up in the short term. You're going to see it go up and down, but in the long run, you're going to see it going in one direction. And that is one good reassuring thing that you can kind of look at if you're really getting discouraged or stressed out or anything, when your emotions come into play, when you're investing.

Now, one big thing to think through as we start to invest in individual stocks is we want to hold this for a long time horizon, but is there ever a time or an indicator that you look at where maybe it's time to sell a stock? Absolutely. There are numerous reasons that an investor should sell a stock.

The number one reason that you should sell a stock, the number one reason to sell a native indigenous is you were wrong. The thesis, the original reason why you bought that stock are no longer valid, which again, reiterates the point of, you must know. Why you must know the reasons why you're investing in something, right?

Just saying, Oh, fill in the blank, a big investor bought this company. That's not good enough. You have to know the reasons why that investor bought the company, because if those reasons cease to exist, that's how you know that it's time to sell that investment. Another reason to sell is you have a better place, a better use for that money.

It could be, you want to make a different investment, a different stock investment. You want to invest in real estate. You want to invest in some sort of a different asset class. That can be a great reason to sell a stock and plow the money into something else. Or how about my absolute favorite reason to sell an investment, which is you want to use the money in your personal life, which is.

The whole reason we invest in the first place is to have our money grow and take that capital and buy a new house, a new car, a vacation, or whatever you want to do with it. So there's lots of reasons to sell investments, but the number one reason by far is you were wrong. And that is the key. And I know you have a, you know, like a journal or something where you write down the reasons why you buy investments and things like that.

And you can go look back and reference that and make sure that, you know, your thesis is exactly the same. And if it's not, then you go back and realize that you're wrong by kind of reading through that and having that available. So I want to kind of shift gears here and kind of go through some other questions that we have.

So what are some of your biggest investment regrets or failures that you've had? Oh, God, so many. It'd be hard to make a true list for them. But to be honest, I mean, I should say I have bought things and then those things went down in value. And I have lost money doing so. Each time I do that, it never feels good.

But I would say the lessons that I learned from doing that again, again, and again, are just the tuition that I have To pay, uh, to become a better investor. So I've bought dozens of stocks that have lost me dollars, but the lessons that I've learned from losing that money, I think just make me a better investor and will pay off truly, uh, in the longterm when it comes to actual, like.

Personal finance. Uh, one thing that I'm pretty proud of is I've never been a risk taker with my personal finances. We've always eschewed debt. We've always focused in on developing high incomes and having multiple sources of income. We've always had a high savings rate. We've always kept a big cash position.

So I haven't made any huge personal finance blunders, but I've made plenty of investing blunders. For sure. And I think that's one big thing. It allows you to take a little more risk in your investments because you have your personal finances in place. And I know you and I agree on pretty much everything when it comes to personal finances.

I've seen your checklists and things that you have for personal finance. So I think that's really, really great for a lot of people to look into as well. What are some of your biggest wins that you've had when investing? So I've bought several companies that have gone up tremendously, uh, in value. I was an early investor in Netflix, in Amazon, in Mercado Libre, and my number one biggest winner of all time was Tesla.

Believe it or not, Tesla is closing in on an 80 plus bagger for me. So thanks to my investment acumen, I've been able to pay off our house completely, and now I own a Model Y. So, uh, those are two big investing wins that I would say. That is incredible. And it shows the power of learning how to do some of this stuff and why the time may be worth it.

And speaking of time, how much time do you actually spend on your portfolio every week? So that's a great question. When I was first starting out, I spent a lot of hours of my life studying investing again, the category and the idea of investing just. Enthralled me. So I spent a lot of my free time reading investment books, talking on investment discussion boards, listening to investor conference calls, and learning about investing more recently, I've taken more of a hands off approach with my investment.

I've made my investment bets and I'm very happy to see how those investments perform over long periods of time. So I don't spend a lot of time managing my. I do spend time following along with how those companies earning supports are doing, but I've done that so many times now that I can quickly glance and earning support and judge is the thesis on track or not on track.

So the maintenance that I have for my portfolio is dramatically lower now, but that's because I put in a huge amount of time up front when I was learning about investing. Love that. And I think that is one key that a lot of people need to understand is once you have that foundation, just like anything else, then it can take less time over time as you start to do this.

Now, you and I, we've talked about this a ton already, but you and I are huge fans of Buffett and Munger, and it is one of the big principles. And one of the things that I learned even about personal finance is from Buffett and Munger, a lot of the principles that they have. So are there any lessons that you would love to share about Buffett and Munger that maybe you learned along the way?

Thank you. Yeah, both those guys are worth studying in detail. Uh, read every single Berkshire Hathaway annual letter to shareholders. There is gold upon gold in there. Uh, read books about Buffett and Munger. Two of that I will call out. First off, uh, there's a wonderful book out there called Warren Buffett.

And the interpretation of financial statements, if you want a primer on accounting, that one is fantastic. It was written by Buffett's former daughter in law, and it basically goes through every line item of all three financial statements. And it shows you how Warren Buffett thinks about that particular number.

It's a wonderful education in a small book. The real big lesson that I learned from Charlie Munger is the psychology of human misjudgment. I would say that Charlie Munger has mastered the mindset of investing. thing in all the ways that investors can do themselves in is a wonderful book that he wrote called poor Charlie's almanac, which is like kind of like the timeless lessons that he has learned all the way.

If you're not a reader, there's a wonderful talk on YouTube called the psychology of human misjudgment, where Charlie Munger kind of riffs on. All of the biases that are built into our brains that make us, that cause humans to make poor decisions, not just investing decisions, poor decisions. He was the first one to open my mind up to the eye, to all the biases that I have when it comes to decision making.

So I would say those two resources are really fantastic. They truly are. And poor Charlie's almanac is a book that it's starting to get become harder to find. I've noticed, but it's an expensive book, but it is worth every single penny. Last time I looked, I think it was like 100. I think I got mine used for like 84 or something like that.

But it is a fanned tastic reading and is one that I go back To all of the time. So I think it is one that a lot of people don't talk about, but it is a very, very powerful book for sure. Now, if we were to look at a pie chart of your investments, how you invest your money, what would that look like in terms of individual stocks or any mutual funds or anything else that you invest in?

Uh, so the assets that I own are, I own my house outright. So that would be a decent size. That's my only quote unquote real estate portfolio. If you will, I am not a real estate investor. I think it's a great asset class. If that fits your personality. Doesn't fit my personality. That's why I don't use it currently.

I hold a bunch of cash. Interest rates have gone up a bunch and I don't know what the near term outlook for the global economy has a lot of question marks in it. So I have about 10 percent of my investable portfolio just held in cash. If we see some volatility or if something goes crazy in the world, Russia and Ukraine come to mind that could be deployed strategically.

All of my retirement funds are just an index funds purely for a simplicity. So we dollar cost average, both my wife and I into index funds and our retirement funds again, merely for simplicity, but every dollar in taxable and that's in my taxable brokerage account is invested in individual stocks. So the lion's share of my net worth is an individual.

Love that. And I think that's a really, really cool perspective for a lot of people to see as well. So Brian, I want to ask you one last question before we wrap up here. And this is one that I think we talked about last time as well, but this is one that I love to ask each and every single guest and it is, what does wealth mean to you?

To me, the highest form of wealth or the thing that money can buy is essentially complete. Control over your calendar, the ability to do what you want to work on what you want with who you want for as long as you want, and you can make a change at any time without any impact on your family's lifestyle.

In a word, it's a financial freedom to me. That is the ultimate luxury. It's the number one thing that people should be saving and investing. For us so that they can buy complete control of their future time. And that doesn't mean that you stop working. I still work just as hard as I have for years, but it does mean it.

Once you have complete control of your calendar and you control the projects that you work on and the people that you work with life just gets a measurably better. So that to me is true wealth. Exactly. There's nothing better than having complete control over your time. Brian, thank you so much for coming on.

This has been absolutely amazing. Where can people find more about you, what you have going on and everything else? Yep. So I'm on all the major social platforms. I'm most active on Twitter, AKA X, so you can connect with me there. I'm at Brian Ferraldi. Awesome. That's fantastic. I highly recommend you follow Brian on Twitter or X now.

It is one of my favorite follows and I literally read every single one of your tweets that you put out because they're so incredibly valuable. So Brian, thank you so much for coming on. We truly appreciate it. Andrew. Thanks for having me as always. Great to be here.