Why YOU Have an Advantage as a Small Investor with Brian Feroldi

Transcript:

On this episode of the personal finance podcast, why you have an advantage as a small investor with Brian Feraldi. What's

up everybody. And welcome to the personal finance podcast. I'm your host, Andrew founder of master money. co and today on the personal finance podcast, we are going to be talking about how you have an advantage as an individual investor with Brian Feraldi. guys have any questions, make sure you are signed up on the mastermind newsletter and you could respond to that newsletter.

And that is the best way to get ahold of me. And if you guys are getting value out of this episode, make sure to follow this podcast and leave me a five star rating and review. Can I thank you guys enough for leaving those five star ratings and reviews. And we are so pumped. You all are here today. So that.

You can invest in yourself because that's exactly what you're doing. When you listen to this podcast. Now, today we are going to be talking to Brian Feraldi, who is our first three time guests on this podcast. And we are going to be talking through individual stock investing and we get into where Brian gets his information.

Right now. We talk through how to research stocks from scratch. We go through economic moats. We go through high quality revenue versus low quality revenues, stock market highs, which we're seeing a lot of right now. We talk about why the PE ratio actually sucks. We're going to go through stock buybacks and a bunch of other questions for Brian as we dive deep into individual stock investing.

So this is an action packed episodes without further ado, let's welcome Brian back to the personal finance podcast. So Brian, welcome back to the personal finance podcast. Andrew, it is good to be here. Thank you for having me again. You are the first three time guests. So I'm really excited to have you back because you have some of the best investing insights, I think that are out there.

Uh, and today we're going to be talking about everything, investing from, you know, investing research to some personal finance stuff as well. So I'm really excited to, to kind of dive in today. But first thing I want to do is. Sort of talk through where you get some of your information, because there's a lot of misinformation that I've seen out there as of late.

And a lot of people will maybe watch, you know, investing media, and they'll get some of their information off of that. So do you actually consume any stock market or investing media? And if you do, how do you filter out all the garbage? Most of the investing content that I consume now is in podcast format.

And I think that consuming something through a podcast is by itself a pretty good filter because typically only the most relevant news kind of makes it into a podcast form. You don't get a lot of click bait and stuff like that in podcasts. So that's thing. Number one, I am a heavy user of Twitter. Um, and I have made done a lot of work to curate, um, and call the people that I follow because And like you said, or I'm not interested in up to this second information about what is happening with the stock market.

I really don't care all that much about what the jobs report is or what the Fed is saying or doing or the latest news story of the day. I do subscribe to a couple of newsletters that do keep me, um, abreast of kind of the most interesting stock information of the day, but I can quickly kind of sift through that stuff and actually pay attention to the thing that I do care about.

But yeah, 20 years ago, the biggest problem that investors had was getting access to information. Today, the biggest problem that investors have is filtering out the noise from all the information that they're getting. Exactly. And that filter has to be something where you kind of have this financial education that you're putting together and you are continuously learning so that you can actually filter that bad information out.

And that's one thing I remember learning very early on when I was younger and I was a teenager, I first started investing. And the first thing I invested in was a penny stock because I thought that was the way to go a, I didn't have a lot of money, so it was cheap. But B, I also would get these investing newsletters that were probably the wrong newsletters for me.

And I would They would say, Hey, here's the hot penny stock of the day. And I remember I put my entire net worth as a teenager. I think it was like 600 into one penny stock and lost the entire thing in one day. So that is the power of not having that filter is making sure that you kind of understand some of this bad and misinformation that's out there.

So as you go through this, you mentioned Twitter and you mentioned some of the newsletters that you list and in the podcast that you listen to as well, where do you get some of your investing ideas or how do you think through that? There are no bonus points in investing for doing extra hard work, none at all.

So to me, the number one place that I get investing ideas is by stealing investing ideas from other people that I respect, you know, before you start investing, it seems like it's really hard to just come up with names of companies to invest in, or even just good ideas in general, once you develop a system for kind of finding and extracting ideas.

The problem then shifts to becoming, well, how do I prioritize all these ideas that are coming my way? One simple idea that I will throw out there is to subscribe or use one of the free stock services out there that tracks some of the investing whales or the super investors out there. I'll throw out three of them.

So one is called whale. Wisdom. com whale wisdom. com. If you sign up for that, you can create email alerts for whenever a 13 F filing comes out, which is basically a quarterly report that shows what some super investors hold in their portfolio. So you can get notified every time Warren Buffett's portfolio comes out, or every time a Terry Smith's a portfolio comes out, or every time Dan, from Poland capital management, his portfolio comes out.

Those I read through every single time they come out as soon as they come out, because I want to know what stocks or what investments investors that I respect are putting a significant amount of their capital to, because those are pre researched, pre vetted ideas. Now there is an extra step. You have to know which mutual fund managers are worth paying attention to and which should be avoided.

But to me, the way that I screen for that is I'm looking for high quality. Long term low turnover portfolio managers that have a history of outperformance. And there's like five or 10 that I follow. So that is thing one, steal ideas from investors. You admire a idea too. I will throw out there is to use exchange traded funds.

So let's say you, um, Andrew are interested in cybersecurity. You're like cybersecurity is a market that I think is going to grow in importance, has competitive edge. And I'm interested in. Well, it can be really hard to come up with ideas of cybersecurity companies that are publicly traded. However, there are so many ETFs out there that specialize in sectors of the market, such as cybersecurity.

So one of them is the ticker is H A C K. And if you just. Pull up the components or what stocks those ETFs hold. There is going to be a ready made list of companies that are in cybersecurity that could be worth researching. So between cracking open ETFs and studying other investors, that right there is an unlimited amount of free, uh, stocks that, that I can use to build my watch list.

And I love those two tips because the 13 F thing is that something I've been doing for a long time, especially when it comes to Mr Buffett. He's one that I just love to read through exactly what he's doing because it gives me a bunch of insights. But like you said, you only need a small batch of big time whale investors to really get a bunch of good ideas.

And then the E. T. F. I. D. I absolutely love it. They get through things like AI right now or some cybersecurity. Like you said, these are some great options for companies out there that may be available, that you can kind of start to get ideas. Now, one big thing about ideas and this, a lot of people fall into this trap is they get into analysis paralysis, where they start to research some of these ideas and do all this extra work, like you said, and they kind of dive into some of these stocks and then they just never can pull the trigger.

They can never figure out which way they want to go. So how do you avoid analysis paralysis when you start to do some of this investing research? I have a feeling you know what I'm going to say, but the answer there is to build yourself an investing checklist, write down on paper, or in my case, in a Google spreadsheet, what criteria you are want to see an investment.

And on that same list, what criteria you don't want to see and in an investment, and then take companies through a process that you develop to figure out. Is this company a match for my investing style or is it not? And if a company is a match, what that is telling you is that you have found an investment that according to your own process, you think should be worth with owning.

Now. You will never ever in any investment have all the information you need to make a decision. Um, an investment in any, uh, stock is always a bet on what that company is going to do in the future. And the future is always unknowable. So developing a process to come up with the criteria that you think is worth it for you to make that investment is absolutely Absolutely critical because if you don't have a process, you can do exactly what you just said.

You can continue researching and continue waiting until you find that next piece of information, or even worse, if you don't have a process and you don't have a filter, you'll just buy the first idea that comes out your way. Uh, both you and I did that. It sounds like when we first started, we had no idea what we were doing.

We bought socks that immediately went down. I bought penny stocks too, and that was a tuition that. I am very glad I paid because it was painful at the time, but it just shows the importance of developing a process for yourself. It's something all, all great investors do. Absolutely. And it is one of the most important things that you can do.

And Brian has a great investing checklist. And I think we talked about it on the last podcast as well. So we'll link that up down below so they can check that out. Cause I think that is one of the most powerful things that you could do is kind of see some of the parameters that you need in order to make some of those decisions.

Cause that's going to really, really dictate the outcome. How you make those decisions, what I think is so incredibly important. So when it comes to researching a stock from scratch, that's one thing I kind of want to talk through where, you know, if you were going to start over and you had all your investing knowledge now, but you had a brokerage account with zero dollars, how would you kind of think through that?

And how would you build your portfolio? Sure. So we're specifically in this scenario talking about my brokerage account is 0, but I'm going to start by assuming that my personal finance situation is exactly the same that it is today because I am a firm believer that your personal finances come first.

Your personal finances are the bedrock that your investments sit on top of. So I'm going to assume that in this scenario, I have 0 in my brokerage account, but I have lots of money in my bank account. I have no debt. I have multiple sources of income and all that kind of stuff. So how would I build it from scratch?

First thing to do is to ask yourself, or I'd ask myself, when do I need this investment to pay off? When do I need this money back? I'm going to assume that money going into this brokerage account, I won't need for my personal life. For at least five years, hopefully 10 years or more. So that is absolutely step one.

When do I need this investment to pay off any money that I've identified that I don't need to fund my lifestyle for 10 more years. I want that money in the stock market, specifically the U S stock market, because that is the place that I know the best and provides the highest return for investors over long periods of time.

The next thing I would do is define what I am looking for in an investment. I'm going to be taking actions that do something differently than the index funds. So therefore, that's what I want. In my case, I'm going to want higher than average returns than the index funds delivered. What I'm going to give up for those higher than average returns is much more research and much more, um, much more time spent finding and calling my own portfolio.

So I'm, the thing that I want is higher than average returns than index. What I'm going to give up is higher than average research into those investments. Then I'm going to define what stage of the business growth cycle I am most interested in, in investing in. So my investing style is to look for.

Companies that just recently became profitable that are relatively small, that are fast growing, that have a wide or a building a wide moat with founder led management teams that have great unit economics and a long life. Growth runway ahead of them. So companies that I look for tend to be between two and 20 billion, um, in market value, growing revenue, 15 percent or more per year have relatively high gross margins are free cashflow positive with a clean balance sheet and have, like I said, a long growth trajectory ahead of them.

I would look to slowly add to my portfolio over time, a bunch of companies that meet precisely that criteria, because that is where I think the strong returns for investors can be earned. If you build a portfolio around that style of investing. Now that's my style of investing and the thing that I want is higher returns.

So I'm willing to give up higher volatility and I don't want any dividend income. That's just not my investing style. Uh, but that I think is a step that so many investors. Skip over, they don't define for themselves what they're looking for in an investment and what they're willing to give up in order to get it.

And I think that's one of the most important things for listeners to kind of see as you're talking here is that Brian knows exactly what he wants. If you can hear how he's kind of describing this exact step in this exact scenario, he knows exactly the checklist is really, really important, but he knows exactly what he wants and what he's looking for in some of these investments.

So it's defining a, what type of investor are you? And obviously you have to have your personal finances set first, but what type of investor are you putting together that criteria so that you can have that investment plan in place and make some of these decisions is really, really important. Now you mentioned.

And companies with strong moats earlier, and I think that's one big thing that a lot of people need to think through. The first time I learned about economic moats is because Warren Buffett literally talks about them all the time. And so every Warren Buffett book I would read, he would always be mentioning some of these economic moats.

So can you explain what moats are and why they're so important? It's one of the most important topics to understand. If you're going to go through the process of buying your own stocks, whenever a company creates a product or service that is having success in the market, you can be guaranteed that over a long enough time horizon, Other companies will notice that company's success and do whatever they can to steal business from that company.

So a moat is a competitive advantage that one company has over its rivals that allows it to continue to generate revenue or even better grow its revenue, even in the face of intense competitive pressure. One great example of this would be a competitive advantage called a network effect. Network effect is when the users that are using a product, the more users that there are on that network, the more benefit there are for all existing users.

The simplest one to think about would be A social network site like Facebook, why are people on Facebook answer? Because all their friends and everyone they know is on Facebook. It would be incredibly challenging for me to start from scratch, a rival social network that would try and steal. Deal customer attention away from Facebook.

There have been so many well financed companies that tried to do just that, but Facebook's incredibly strong network effect has prevented competitors from successfully stealing those eyeballs away from it. So that allows Facebook to charge very strong rates to its true customers, which are advertisers, by the way.

Um, and it can earn very strong returns. Uh, it had very durable pricing and earn very strong, predictable revenue from its customer base because it's network effect is protecting it from the likes of competition. Now, network effect is one type of mode. Some other modes that are out there are switching costs, which is when it would be painful for you to switch from one service to another, for example, when's the last time you changed banks.

Uh, for me, it's been over 20 years simply because it's such a hassle to change from one bank to another. That's switching costs. Another one is low cost production. When you can produce something, a good or service internally at a lower cost than your rivals, uh, can. Good luck trying to beat Costco on price.

Like good luck trying to do that. That gives Costco a permanent, a durable, competitive advantage. So before you make any investment in any business, this is a critical thing to understand. What is this company doing that its rivals can't? And that's a huge, huge factor. And I can even think of companies like trying to further their economic moat.

You can think of the iPhone, for example, where it's blue bubbles versus green bubbles when you send out a text message and they're trying to further that moat so that the people within their network and within the iPhone, it's very hard to send a picture from an iPhone to an Android right now. Uh, and so that's just another example of someone trying to further their moat that they already have.

So those are some fantastic examples. And I think it's really, really important to look at that stuff. And a lot of the boring companies you can find with economic moats as well, from railroads where they have specific contracts. So there's all these different modes that you can have out there that I think is super, super interesting.

Now, one big thing also that you talk about, and I love one of your threads that you have on this is high quality revenue versus low quality revenue. So can you explain the difference in how this kind of. What is the thing that drives value for shareholders over time? Um, I've looked at several studies that have studied this fact, and one of the biggest drivers of shareholder return over a period of decades is revenue generation.

Revenue is the engine. Revenue growth is the engine that produces profit growth and profit growth is the engine that delivers returns for shareholders. So a company growing its revenue consistently is a very, very important thing for you to know before you make an investment in that company. Now, before I understood that concept, that.

Revenue was good. What I didn't understand where there are different types of revenue and not all revenue is created equally. So, I define high quality revenue, the revenue that I really prize as Recurring first and foremost, meaning the company doesn't sell a customer one thing one time. Like for example, um, patio furniture, how many times do you buy patio furniture in your life?

Like once every 15 years. So, okay. So if I was buying a company that sold patio furniture, that's a one time sale, very low quality revenue. Uh, compare and contrast that to your electric bill. I don't know about you. I pay my electric bill. Every month, whether I have income or not. So that electric bill is recurring revenue.

Something that I'm paying every single month. So there's a huge difference between one time revenue and recurring revenue. Recurring revenue is much higher quality. The second distinction. High margins. So if I pay 10 to a company, uh, how much does it cost that company to give me the thing that it's selling for 10 for?

Does it cost the company 9 to produce that thing that sung to me for 10? That would be a very low margin sale. But what about that same company? It only costs them 1 to create that thing that they sell to me for 10. That is a much higher value. Uh, sale. And you might be thinking, are there companies out there that Sell things that literally for 10 that literally cost them a 1 to make the answer is yes Software, uh, for example has very high margins It costs the company next to nothing to sell one more customer software.

Uh, once it's it's made Another distinction is the company's revenue recession proof or at least recession resistant is what the customer is buying. Can that be deferred? If tough economic time comes along recession proof revenue, like Toothpaste and soap and electricity and water, uh, all those things that you're buying, no matter what is happening in the economy, that is much higher quality revenue than cyclical revenue that you can delay or you can cancel altogether if you don't want to, um, the final distinction between them.

High quality revenue and low quality revenue is high quality revenue instantaneously becomes cash. Customers pay for that product or service instantly and give cash to the company. Low quality revenue becomes accounts receivable. In essence, their customers are paying on credit and it takes extra effort for the company to collect that revenue from its customers.

So high quality revenue is recurring. High margin recession proof and becomes cash. Low quality revenue is one time, low margin cyclical and becomes accounts receivable. They might look the same when you're looking at just an income statement, but there is a world of a difference. If you understand those differences.

And that is a very important thing. I think, you know, most people should have that on their checklist, obviously to kind of look through, is it high quality or low quality revenue? Because it's really, really important, especially in all these scenarios. And recession proof is a big one for me too, that I always love to look at because I think that is so important.

If we do have a recession, we don't know when a recession is coming. It is coming, but we just don't ever, never know when. And so when that does happen, you want your businesses to have that recession staying power. So I think that's really, really important. But I love talking through that high quality and low quality.

Cause I think it's a really powerful thing to think through. Even if you're a business owner or something like that, that's just really important to know that stuff, uh, and understand it going forward. Now we've had stock market highs a few times this year already. And this is something where I'm getting this question constantly.

Now, should I wait to start investing because the stock market is high? Now you and I are going to completely agree on this. And we've probably talked about it a bunch of different times, but if someone asked you that question, should I wait to invest because the stock market is at an all time high, what would you say to them?

Well, the first question I'd ask is mostly what type of investor are you? Uh, are you in the 99 percent of investors that don't care about the market? Don't want to pay attention. Don't follow the ups and downs of the markets, uh, closely. If you're the type of person that just wants investing on autopilot, right?

Which I think is the default right choice for the vast majority of people. You should absolutely. Absolutely. Continue to invest during stock market highs. You should set up your investment portfolio to be by on a regular schedule, monthly, quarterly, uh, bi weekly, whatever system that you have. And you should buy when markets are high.

You should buy when markets are low. You should buy when markets are sideways and in between. Take the market timing decision. The equation set it up to be automatic. So you don't have to think about it. That is the right choice for the vast majority of people. Now, if you're in that 1%, that enjoys following the market and think that you can time the valuation of the market, not the price, the valuation of the market.

I see nothing wrong with taking a small portion of your portfolio and trying to use it strategically to add when the markets declined 5%, or whatever you want to do. Um, but even if I was trying to time evaluations of the market, I would still still set up automatic buying in the background so that you're continually adding to markets no matter what the current condition is.

It is so easy to talk yourself into not investing. Because markets are at highs and just put off setting up a plan. That is a massive mistake because if the market continues to do what it's done for the last 150 years, today's prices will look like a bargain 10 and 20 years from now. Exactly. And I think that is, uh, one of those things where most people just need to understand if you dollar cost average, you put a, you know, a specific amount every single month that you automate that process, take your willpower out of the equation, just automate that process and allow those dollars to invest.

And this automatically happens if you're investing in a 401k or something like that, but you need to do this with most of your accounts so that you can just over time, allow your money to grow and compound because as Brian and I always talk about time is the most important factor when it comes to investing for a lot of this stuff, especially if you're investing in index funds or things like that.

And then for those 1 percent investors, and I'm one of those folks who likes to do both as well, where I just love having extra cash on hand. I like to pretend I'm Warren Buffett, even though I usually, you know, I'm not as good at Warren Buffett, but, uh, it's one of those things where I love to just kind of figure out and play with some, a small portion of my portfolio as well.

And that's one that is really, really important to me where I'm using my checklist. I'm using my investment plan to try to figure out, Hey, where can I allocate this capital? And how can I do it in a specific way? So I love that. Uh, Talking through both sides, because I think it's really, really important for a lot of people, um, to actually think through that.

So really, really cool stuff there. Now, one big metric that I used to look at, and this is when I first started investing, this is kind of the first thing I learned about was the P E ratio. And ever since, you know, a couple of years ago, I realized very quickly, and it's probably from a lot of stuff that you've written too, that the P E ratio is something that is not as great as I once thought it was, where it used to be.

The first thing I would look for is, Hey, where the heck is that P E ratio? I want to see what that is first, before I start investing. But now it is not one of my favorite numbers out there to consider. So can you kind of talk about the PE ratio and why it actually sucks? Sure. Uh, the price to earnings ratio, the PE ratio is one of the most commonly cited valuation metrics that is out there.

Uh, in layman's terms, the price to earnings ratio compares the price per share of a company's stock. To the earnings per share of that same company's stock. And it is a very quick shorthand for figuring out, is a company cheap? Is a company fairly priced or is a company expensive? For example, if the entire market is trading at a price to earnings ratio of 20 and the price earnings ratio of a company you are looking at is fairly cheap.

50, your first inclination would be to say this company is incredibly overvalued with PE ratio. Higher is worse. Lower is better. Conversely, if you came across a company that was trading at five times earnings, a PE ratio of five, your natural inclination would be this company is incredibly cheap. So with price to earnings ratio, you want a lower number, not a higher number.

Historically, one reason why the price to earnings ratio has been used and is so widely credited is because it was one of the few metrics that was actually printed in the newspaper. So it was an easy number that people could actually look up for figuring out evaluations. The trouble is the trouble with the P E ratio is I actually love it.

Love it. When the price to earnings ratio is accurate and it works, the problem is there are a whole bunch of reasons why the E the denominator in that equation, the earnings can actually be incredibly misleading. There's a variety of accounting reasons and business readings. Why a company's earnings can be understated.

Or overstated. And if the earnings of a company are understated or overstated, just because of that simple division, the price to earnings ratio is going to tell you the wrong answer. Real quick, a real quick example. A few years ago, FASB it's called, who sets the accounting standards in the United States, changed the rules about the way companies report earnings.

One change that they made is that if one company. owns stock in another publicly traded company. That company now has to report up and down their earnings based on the stock performance of that other company. Real simple example, Amazon Owns 10 percent of Rivian's stock. Rivian is an electric truck, electric car maker.

And a few years ago, Rivian came public. So now because Amazon owns 10 percent of Rivian when Rivian's stock price is. Increases, Amazon has to say, we made a profit. Our earnings went up. Conversely, when Rivian stock decreases, Amazon has to say, we reported a loss. Our earnings went down. Now that has nothing to do with.

To do with the economic earning power of Amazon, the company, especially because Amazon isn't selling its stake in Rivian. It is, it has been holding it this entire time. But because of this accounting change, Amazon's earnings are now forever going to be impacted by Rivian's stock price, which Amazon has.

No control of at all. So when Rivian stock price declines, Amazon's earnings are going to decline and that's going to make its price to earnings ratio skyrocket. Uh, and the inverse is also true. If Rivian stock goes up a lot, that by its very nature is going to cause Amazon's PE ratio to decline. Even though in both cases, Amazon, the business is largely unaffected by what is happening with Rivian.

That is one of many nuances that investors need to understand if they're going to lean on the price to earnings ratio to make a decision. So as I said, when a company's earnings are clean, the price to earnings ratio can be a very useful metric for making decisions. The problem is there are a bunch of reasons why the earnings.

Are not going to be reported cleanly. Exactly. And if you're going to use that ratio, you really have to dive into all those nuances. It's really, really important for each individual company. It's very, very different. So it's very important to kind of look into those pieces. So that was a perfect explanation.

I think of, you know, exactly why we need to dive in as well. And I think that's really, really important. So another thing you talk about though, is stock buybacks. And I remember I used to set little alerts to see, you know, which companies are buying back their stock. Cause I always thought it was, you know, a good indicator.

You know, when companies were buying back their stocks, because that means they believe in their company and they want to own more shares and that type of thing. But can you talk about why stock buybacks may not always be a positive thing? So let's talk about just what the heck a buyback is in the first place, because this is something that confuses a lot of people.

And I think just generally speaking, the media has made a big deal about stock buybacks and have vilified them as if they're a tool. Terrible, terrible thing. When in reality, as always, the truth is far more nuanced than what you would believe. So a buyback is when a company takes cash that it has in its balance sheet and uses that cash to repurchase shares of itself on the open market.

When it does so it takes ownership of those shares and the company has the legal right to cancel or delete those shares from existence. That reduces the number of shares that a company has outstanding, thereby increasing in theory, at least all of the remaining shares claim on the company's profits and business moving forward.

Here's one way to think about it. Let's say you have 10 children, 10 children, and you have a net worth of a million dollars. And you want to give everybody an equal share of your profits. So every kid gets a hundred thousand dollars. Well, if I went to one of my children and said to you, I'm going to give you a hundred thousand dollars today, but in exchange, you don't get a claim on any of my profits when I So instead of me having 10 kids to split my pot with there's now only nine children to split my pot with.

So think about stock buybacks that way. They're reducing the number of future claims that they have on their profit, which gives everybody else a larger piece of the pie. Now, stock buybacks can be a fantastic way for investors to return capital to shareholders if they're done the right way. The right way would be to buy back their stock when they believe it's trading below the intrinsic value of the company.

In other words, when the company is making a good investment in the company. In itself, the problem with stock buybacks, there are two primary problems. First management teams have a horrible track record collectively of timing, the value of their Spock as a general rule, management teams are bad investors, uh, public stock market investors.

They buy back their stock in bulk. When their valuation is high and they cease buying back stock once their valuations are low, like during, before the great recession, when 2007 stock buybacks were at a record, and then in 2008, they fell to a trough. So management teams are buying back their stock like crazy in 2007 and stopped altogether in 2008, which is literally buying high and not doing anything when the, when the stock is wrong.

So that's problem one. Most management teams. Buy high and stop buying when they should be. Problem number two is a lot of companies buy back stock simply to offset the dilution that they're putting on shareholders through stock based compensation. To go back to my other example we had about the children, let's say I have 10 kids, but I'm having another kid every year.

So if I'm paying off one kid, but I'm having a new kid every year, the number of kids I'm having. Isn't changing. It's holding steady. Well, uh, management companies can do the exact same thing. Money of them buy back stock only enough to offset the dilution that they're, they're causing by issuing stock to shareholders.

This is one thing that Nvidia is doing right now. For example, Nvidia is a fantastic company in a bazillion ways, but it's taking a huge amount of its profit and effectively using it to buy back stock that it's giving to employees. So that buyback is not. a good program in my opinion, but if a company can buy back stock at attractive prices and reduce the number of shares over time, that can hugely benefit shareholders.

And exactly. And I keep bringing up Warren Buffett over and over again, but he is one that is actually really good at kind of allocating some of this capital back into Berkshire Hathaway. And he's one that, uh, is a great example of someone who is good at it. But like you said, most CEOs or most managers and, uh, Folks who are managing companies, they are not very good at allocating that capital in terms of investors.

So they're just not that great of investors. And so it's really, really important to understand that, uh, as you go through as an investor. Now, I want to shift gears here a little bit and ask you just a couple of other questions, and then we'll go into some rapid fire questions if we have time. So, uh, you've said that investors who manage their own capital have an unfair advantage.

Can you talk about why that is and why that's important to understand? If you look at a lot of studies that are out there done about stock ownership and mutual fund management ownership as a group, fund managers underperform the market over time, which is one of the biggest pluses in the case of just investing in index funds.

If most, if like 90 percent of mutual fund managers underperform the index, uh, what chance do you have as an individual, uh, investor? I think that that is slightly, there's slightly more nuance to it. Okay. One reason why it is so hard to outperform as a mutual fund manager is you are managing somebody else's capital.

And every decision you make as a fund manager has to be made through the eyes of capital. Can I explain this investment to my investor base or what are my investor base going to think about this decision? So there's an extra bit of thinking and an extra fact that you have to consider before you are making an investment.

Overcoming that pressure is extremely challenging, is extremely challenging because if you don't overcome that pressure, some investors can pull their money away from your, your fund. Uh, if they don't like the way that you are investing. One quick example, uh, one of my favorite investors of, of the modern day is a guy named Terry Smith.

He runs a fund called fund Smith. And in 2021 or 2022, he was buying. Facebook stock hand over fist when it was going through that huge decline. It felt like 75 percent and Terry Smith was buying like crazy. He said the number one question that he got from shareholders is why are you buying this awful business?

So he had to resist the pressure. Because he knew that Facebook was a great investment. Fast forward to today. That was a fabulous use of capital because that Facebook stock has basically quadrupled since he started buying it, but he had to have the gusto to resist the pressure that his own investors were putting on him for making that investment.

As an individual investor, the only person you have to answer to is yourself. You're not going to fire yourself if you make a bad investment. You're not going to fire yourself if an investment takes two years to pay off versus six months to pay off. So managing your own capital sounds like a small thing.

It is a massive, massive advantage. And I completely agree. You could see all these large fund managers say, you know, when they were individual investors, their performance was so much higher because they were able to kind of invest in some of the, you know, whatever they want. And they didn't have the pressure coming down on them.

And you can kind of think of being in their scenario, doing some of these contrarian things, like you said, buying Facebook, things like that in 20. 21 and you can think through that and all the pressure coming up on you. And it's really hard. You probably start to second guess some of your decisions and kind of think through some of that stuff in a different way.

If you have all this pressure coming on you. So I think that's one that I think is really, really important to think through as well. Now we're in a higher interest rate environment and I think. You know, cash is a conversation that a lot of people are having right now in terms of, you know, are you holding more cash or what do you do with your cash right now with these higher interest rates?

So how do you think about cash in higher interest rates environments, or you just kind of continue on with your same old investing plan that you've always had? Yep. So in my personal case, I have always kept always six months of cash in a savings account. That has been my personal emergency fund. We could debate.

All day about, is that too much? Am I, am I wasting money by doing so that helps me sleep at night? So I think it's a fabulous use of capital beyond that in my investment portfolio. I'm at about 9 percent cash right now. I typically like to keep my cash portfolio between 1 percent of the low end and 10 percent at the high end.

Um, and I move that number up and down based on opportunities that I see, uh, in the market. I'm perfectly comfortable with a 10 percent cash. Like you said, it's actually earning, you know, 5 percent or so just sitting idly in my brokerage account. Um, that doesn't feel as good when the inflation rate is as high as it's been, uh, over the last, uh, few years, but I'm at about a 10 percent cash position and I see no reason to go below that unless we had a pretty significant drawdown in the market.

And no argument for me here. I think six months is the bare minimum that most people should have. We kind of talked about that on this show all the time as well. And, uh, I'm just in the six month camp as well. I think the three month camp is way too low for me. And that's just my own personal preference as well.

But I, I completely agree. And I love that, that one to 9 percent or the one to 10 percent that you have in your portfolio. Um, I think that makes a lot of sense as well. Uh, just having that available. So are there any stocks in your portfolio that you own that you don't think you will ever sell? Uh, I plan on selling pretty much every stock that is in my portfolio at some point.

Um, but the, I, I understand the, the, um, the thesis of the question, are there any holdings that you have that you are really believing and you think it holds for a long, uh, period of time? Uh, one that comes to mind immediately is C. Starbucks. Uh, I think, uh, Starbucks has a, a durable competitive advantage. I think they have plenty of places that they can continue to open up new Starbucks stores.

I think their rewards and loyalty program is absolutely fabulous. I think they can generate capital in good markets and in bad people will always pay for small indulgences and, and, uh, a Starbucks coffee is a habit for millions of, of people. There are absolutely things that Starbucks could do that would make me want to sell my investments, but Starbucks is a company.

See myself holding for many more decades. That's a great one. I think I've held it for about 10 years and I don't plan on selling that one either, which is fantastic. We don't give an investment advice here, but that's one that I just love as well. I love talking through some of that stuff. Um, is there any stocks that you've ever passed on that you really evaluated and you did a lot of work on and look through it, but you passed on and you didn't invest in it that you wish you did invest in?

Oh, way too many. The answer there is absolutely yes. I mean, I, it was, it was recommended that I buy Nvidia like 10 years ago and I said, Nope, don't understand semiconductors. I'm not, I'm not interested. And yeah, I think that's 150 X return. I'm, I'm currently missing out on it at this point, but I will actually say the one company that, Haunts me the most.

I put haunts in air quotes is a company I owned ever so briefly. Um, and then actually sold it after a couple of weeks that is currently up like a hundred and something X, uh, in value. That company is called Dexcom. The ticker symbol is D X C M. And that is a company that I knew Transcribed Intimately, uh, very well because I worked in the diabetes space and I saw how well that company's products and tech was performing in the real world as well as financially.

So I had all the information that I needed to make a pretty sizable investment in Dexcom. And I saw the potential of it. I knew the advantages of it and I just didn't. Do it. And as I said, that stock is up well over 150 X in value since I decided to sell it 17 years ago. So that's the one that I kicked myself about the most.

Those are the hardest ones, especially the ones that maybe you own for a short period of time and sell. I've had a number of those as well. And I think they're just some of the most painful things to kind of think through sometimes. And it's just your own investor psychology gets in the way and it kind of blocks off what you really should be doing, which is one of the most important and frustrating things.

Speaking of which, uh, what are some things that you do to strengthen your investor psychology? Because I think that's one big thing that a lot of people need to start doing if they're new investors and, or as you become a senior investor, Investor. It's still really important to kind of strengthen that psychology.

So is there anything that you do to strengthen your investor psychology? Yeah. One of my favorite Peter Lynch quotes comes to mind immediately, which is everyone has the brain power to make money in stocks. Not everybody has the stomach to make money in stocks. So the psychology that you apply to investing has a massive.

Massive impact on the returns that you will earn over your investing lifetime. So when it comes to strengthening your own psychological, uh, investing psychology, first thing to do is to study your own behavior, study how you act in past market Periods. The last five years have been a wonderful Petri dish for us all to look through.

How did you feel as an investor in March of 2020, when everything went straight down at the same time that the world was collapsing all around us, did you sell your stocks out of fear? Did you hold your stocks? Did you get excited by the declines that you were seeing? Uh, personally, I didn't sell at all during March of 2020.

So I know that I have the resolve to hold stocks, even as they decline. So that's thing one is just study your own behavior during periods of market stress. Number two is to study. History study history, study market history in particular, when you are living through something, that's something extraordinary.

It always feels unprecedented, but that just means you don't study history because the declines that we've seen or what we've experienced as investors over the last 20 or 30 years, there is nothing. Abnormal about that. I mean, heck, during the, the financial crisis of the, and the Great Depression, the stock market peaked to trough the entire market fell 89%, 80.

Crazy 9%. I mean, the 2008 crisis was bad, really bad, but peaked to trough that was 60. 60%. So imagine another, you know, 50 percent declined after that 60 percent decline. That's what investing during the great depression was like. So 2008 provide people with a lot of scars, myself included. It was nowhere close to as being as bad as it was in 1929.

So studying yourself and studying market history are the two things that I have done to strengthen my investing psychology. And I couldn't agree more. That's exactly what the same thing that I've done as well. In 2020, I got really excited when some of those stocks would drop and they became cheap. And I think that studying that history is the most important thing, because the more that you read about investing and the more that you understand how this history works, and you can really just go back and look at stock market charts.

Even one of my favorite things to tell people to do is. Open up your stock market app and look at the, you know, the short term time horizon, you can look at one year, two year, three years, and you're going to see, you know, a lot of volatility there, but then open it up to the longest time horizon. And what direction does that market go?

Well, historically it's gone up. And so that's one thing that you can do to reassure yourself as well. And the more, you know, and the more you understand about investing, your psychology will kind of strengthen over time and studying that history is one of the most important things that you can do. So I'm going to shift gears one more time here.

We're going to go kind of like a rapid fire style thing here. Okay. And just ask you a couple of questions, uh, here at the end. So what is the best personal finance tip that you have put into practice this year? So my personal finances have been pretty much locked in place for the last 20 years. So I would say I put a whole bunch of tips into practice 20 years ago, a whole bunch of good practices.

And I've really stuck to those. I've made minor modifications, um, uh, along the way about. Dialing in my savings rate and automating things. But from a personal finance perspective, I haven't made many changes to myself in 20 years. I absolutely love that because I think that is one of the most, it really doesn't change much and I think it's really important for a lot of people to understand that is once you have these systems into place, you don't need to change it.

You can stick to it for a long period of time and you really don't have to think through it a ton. Um, the next one is what is the best book you have read in the last year? Um, I'm going to cheat a little bit because I haven't read it, but I've listened to it and that is, uh, die with zero by Bill Perkins.

Um, that book has changed my money mindset thoughts about spending in particular, more than any other book that I've ever read. And that is the most original, um, and, um, thought provoking book on money that I've read in years. I think it is one of the best books I've read in a long time, too. I need to get Bill on here because I think it's one that, uh, is really, really powerful and it is, you know, just it, it changed my philosophy as well.

I think it's a really, really great book. Um, the next one is what is the number one thing you think people can do to change their finances long term? So I used to think very differently about this, and I would say really focused on cutting down on your expenses and hyper focusing on your savings rate.

One of my favorite financial writers today is Nick Maggiore, who wrote the great book, um, Just Keep Buying. And he has convinced me more than anything else, the number one thing that most people can do for their finances long term is earn more income. That is a very unsatisfying answer, but it is a heck of a lot easier and more impactful to make an extra 10, 000 per year than it is to hyper optimize minimal savings of differences.

So find a way to increase your income. It's the biggest thing you can do to impact your finances. I couldn't agree more. And Nick was on this podcast and we, that's the topic that we talked about the entire time. Cause it is one of the most important things that I think you can do. And I didn't really understand it until I started to earn more.

And then once you see that power of what you can do with those extra dollars and how you can allocate those extra dollars. Towards your financial freedom or towards the things that you actually value. It is absolutely life changing. I could not agree more with that, uh, whatsoever. So Brian, thank you so much for coming on.

This was again, another great episode. I know people are going to love this one. Where can people find out more about you, Twitter, everything else that you have going on? I'm on all the social media platforms, so Twitter, uh, LinkedIn, YouTube, uh, Instagram, wherever you are. You can follow me on, uh, at Brian Aldi And I do have a, uh, free, uh, five day course that people can take that is about, um, the stock market.

If you just wanna get some, some, make sure you master the, basically the stock market. That is a stock investing school. Stock investing school. Perfect. We will link up all that down below in the show notes as well so that you guys can check it out. Thank you again so much, Brian, for coming on. This was amazing.

Thanks. Right Andrew.