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00:01:34.640 | Hello, and welcome to another episode of All The Hacks, a show about upgrading

00:01:41.880 | your life, money, and travel.

00:01:43.800 | I'm Chris Hutchins, and I am excited you're here today to talk about investing.

00:01:47.960 | And we're joined by none other than Brian Faraldi.

00:01:50.800 | He's a financial educator and author of a new book called Why Does the Stock

00:01:55.600 | Market Go Up? Everything You Should Have Been Taught About Investing in School,

00:01:59.400 | but Weren't.

00:02:00.000 | It comes out April 5th, but I got an advanced copy and I really enjoyed it.

00:02:05.000 | Brian has also written more than 3,000 articles on stocks, investing, and

00:02:10.320 | personal finance for The Motley Fool.

00:02:12.240 | But I got to know his content through the detailed investing checklists he

00:02:16.400 | publishes and follows for all his new investments.

00:02:19.520 | In our conversation, we'll talk about current market volatility, Brian's

00:02:24.600 | counterintuitive investing philosophy, making an investor checklist,

00:02:29.040 | evaluating risk, figuring out when to sell, taking asymmetric

00:02:34.040 | bets, and a lot more.

00:02:35.520 | That is so much to cover.

00:02:37.600 | So let's jump in.

00:02:38.880 | Chris Hutchins works at Wealthfront.

00:02:40.680 | All opinions expressed by Chris and his guests are solely their own opinions and

00:02:44.480 | do not reflect the opinion of Wealthfront.

00:02:46.240 | This podcast is for informational purposes only and should not be relied upon for

00:02:50.160 | investment decisions.

00:02:51.080 | Brian, thanks for being here.

00:02:52.680 | Chris, awesome to be here.

00:02:54.320 | I'm pretty sure I'm a day one listener to this podcast, so it's cool to be on it.

00:02:57.640 | That is awesome.

00:02:58.600 | Thank you for your support and for everyone else here listening.

00:03:01.240 | So you've got a book coming out in a few weeks.

00:03:03.400 | Why does the stock market go up?

00:03:04.960 | And I was thinking about that this morning.

00:03:07.320 | And for anyone listening, we're recording on Wednesday, March 9th.

00:03:10.240 | I was like, gosh, in the last month, the market's down about 7%, but somehow today

00:03:14.720 | we're up two and a half percent, which seems like some wild volatility.

00:03:18.640 | You wrote the book.

00:03:20.080 | How do you make sense of all this?

00:03:21.560 | Yeah, the last two years have been fascinating to watch as an investor.

00:03:26.000 | It was February and March of 2020 when COVID was taking over.

00:03:29.360 | We saw the fastest bear market in stock market history, where over the course of a

00:03:33.880 | month, didn't matter what you did, whatever stock or fund that you held, it was going

00:03:38.400 | down and it was going down hard.

00:03:40.000 | And then immediately after that, with everything changing in the world, I would

00:03:43.960 | have predicted that it was going to be a terrible year for the market, a terrible

00:03:47.480 | year for investors.

00:03:48.600 | In fact, we saw the exact opposite, where stocks just shot up to the moon.

00:03:53.000 | And it was almost like the higher risk the stock, the better the stock did.

00:03:57.880 | I mean, the numbers were off the charts.

00:03:59.840 | Good. And then over the last year, we've seen kind of reversal of that.

00:04:03.760 | What a lot of the stocks that were left behind in 2020 have since caught up, things like

00:04:07.560 | energy stocks and real estate stocks and stocks that were the go-go stocks of 2020.

00:04:12.600 | Things like Zoom and Roku and Peloton have just been train wrecks from an investing

00:04:17.520 | perspective. But that's just how investing works over the short term.

00:04:21.440 | What determines the value of any given stock or any given indice is just the collective

00:04:26.360 | emotions of all market participants, how investors feel about the markets.

00:04:30.840 | And that is always so hard to predict and so hard to read.

00:04:33.960 | So I view the stock market, what it's done over the last couple of years as fascinating,

00:04:38.320 | but entirely normal.

00:04:39.360 | OK, and how do you think about calm times, volatile times?

00:04:44.240 | Are we in one of them?

00:04:45.440 | Are they all one in the same and you should just prepare for them at any moment?

00:04:48.480 | Yeah. When you're investing in the stock market, you never know what you're going to get

00:04:52.120 | over any short period of time.

00:04:54.360 | That's why the stock market is a great place to put capital that you don't need for at

00:04:58.680 | least three to five years.

00:05:00.160 | But it's a really poor place to put money that you're going to need in any shorter period

00:05:04.200 | of time. So if you need money in the next three years for college or for a house or for

00:05:07.960 | a car or anything like that, there's a reason why people say don't put it in the market,

00:05:11.840 | because no matter how good times see right now, that doesn't mean that the market's going

00:05:16.480 | to perform well.

00:05:17.520 | The inverse is also true.

00:05:18.880 | It looks pretty dark out there right now.

00:05:20.960 | We have a war going on.

00:05:22.200 | We have inflation going on.

00:05:23.640 | We have interest rates that are rising.

00:05:25.600 | Lots of high-growth stocks have been pulverized and are down huge.

00:05:28.760 | But there's still no telling what the near-term returns of the stock market are going to be.

00:05:33.000 | So it's really important that if you're going to invest in the market, which I think everybody

00:05:36.960 | should be doing with their long-term capital, you have to do so in a way that allows you

00:05:41.200 | to endure short periods of extreme volatility, because that is the norm for the market.

00:05:46.280 | What advice do you have for people who are just today thinking about, "Wow, we are in

00:05:50.320 | this very volatile time.

00:05:52.040 | Should they be investing right now?

00:05:53.480 | Is now a good time to get in the market?" or how do you feel about trying to time things

00:05:57.320 | like this?

00:05:58.320 | I never try and time things myself, because again, if you were to ask me what's going

00:06:01.560 | to happen in 2020, I would have said the market's going down.

00:06:03.920 | If you asked me what's going to happen in 2021, I would have said the market's going

00:06:06.600 | up.

00:06:07.600 | And I would have been wrong, essentially, on both accounts.

00:06:09.840 | So my own history with trying to time the market shows how poor I am at it.

00:06:15.120 | For that reason, I just say, ignore the timing and when to get in.

00:06:18.400 | Instead, just focus on being in the market and being a continual buyer of the market.

00:06:23.280 | It's just called dollar-cost averaging.

00:06:25.520 | If you can dollar-cost average for a long period of time, the timing of your buys becomes irrelevant.

00:06:30.880 | Do you think there's at least some argument to, if the market is down and you're able

00:06:35.680 | to see that that's the case, to get in now, like people who invested after the crash in

00:06:41.760 | 2020?

00:06:42.760 | Oh, absolutely.

00:06:43.760 | The best time to buy the market is when it's on sale.

00:06:46.640 | However, predicting when those sales are going to be is always an endeavor that isn't really

00:06:50.520 | worth the time or even that hard to do.

00:06:52.720 | However, if you are the type of person that has cash on the sidelines, saving it for a

00:06:57.040 | time when the market does fall, I think right now is a great time to put extra capital in

00:07:01.600 | if you have that ability.

00:07:03.200 | With the foresight being that you don't know what's going to happen next.

00:07:06.760 | I think we're down 20% from the highs last year, which is officially in bear market territory.

00:07:12.640 | But that doesn't mean that stocks can't continue to fall further.

00:07:16.160 | If you're in that fortunate position of having cash that you've been waiting to invest and

00:07:19.720 | you're looking to do so, one trick that I like to tell people to do is come up with

00:07:24.040 | a schedule for investing that capital.

00:07:26.080 | Let's say you have, to make things easy, $5,000 and you want to invest $1,000 a month over

00:07:31.200 | the next five months.

00:07:32.200 | You don't know what's going to happen to the market over that time, but you just create

00:07:36.480 | a schedule for yourself.

00:07:37.680 | Well, if by chance you invest $1,000 on the first day, and then the next week the stock

00:07:42.800 | market falls 5% or 10%, then accelerate your next purchase early.

00:07:49.060 | That way, you can take advantage of that temporary dip and then just stick to the schedule thereafter.

00:07:54.140 | But if the stock market stays flat or goes up, you just stick to your regular investing schedule.

00:07:59.720 | So that's one way that you can deploy capital more efficiently if you want to take advantage

00:08:04.820 | of dips.

00:08:05.820 | That makes sense.

00:08:06.820 | And we haven't really talked about what to invest in.

00:08:08.040 | So before we get there, how do you think about building your own investment portfolio?

00:08:13.520 | I know there's a massive world of investments out there, and we've had on some folks like

00:08:17.240 | Andy Ratcliffe and Ben Carlson, and we've talked about passive investing and index funds

00:08:21.480 | and that kind of stuff.

00:08:22.480 | But for you personally, how do you think about your portfolio?

00:08:25.200 | I'm a massive fan of index funds.

00:08:27.520 | Always have been, always will be.

00:08:28.760 | I think that index funds plus dollar cost averaging, as those gentlemen pointed out,

00:08:32.840 | is just a wonderful formula for building wealth over long periods of time.

00:08:36.960 | And that's what I personally do with all of my retirement funds.

00:08:39.960 | I set it up once to drip into index funds, and that's what I do.

00:08:43.400 | But with my capital in my regular brokerage account, I love analyzing businesses, studying

00:08:49.580 | businesses, and buying individual stocks.

00:08:52.160 | I've been doing that personally for about 15-plus years now.

00:08:55.680 | So, any capital that I have beyond my retirement funds, that's where I deploy it.

00:08:59.960 | So, at any given time over the course of a month, I typically buy a handful of stocks myself.

00:09:05.220 | And to do so, I just created a list of companies that I'm interested in, according to a checklist

00:09:10.560 | that I created, and prices are changing dynamically all the time.

00:09:14.880 | And what's so fascinating about, if you invest in the individual company level, what's happening

00:09:19.520 | at an individual company can be wildly different than what's happening with the market in general.

00:09:24.360 | When the market is down, there can be companies that are up.

00:09:26.600 | And when the market's up, there can be companies that are down.

00:09:29.180 | But when I'm deploying capital in my investment portfolio and trying to invest in individual

00:09:33.560 | businesses, what I'm trying to do is optimize, at any given time, for the best combination

00:09:38.640 | of high-quality businesses, according to criteria that I selected, times the highest long-term

00:09:45.520 | potential, times the companies that are trading at the most attractive valuation at any given time.

00:09:51.520 | So, it's really the combination of those things that I look to deploy my capital into at any given month.

00:09:57.040 | So, I want to get into those three things.

00:09:58.880 | But before that, how do you think about risk-taking?

00:10:02.120 | Do you think of your single stock investing more a portfolio approach, where you can diversify

00:10:07.440 | amongst stocks and it's actually not quite as risky?

00:10:10.800 | Or I think if you talk to most passive investors, they would say, "Gosh, if you go buy a stock,

00:10:16.240 | that's really risky.

00:10:17.240 | You don't want to do that.

00:10:18.240 | You want to bet on the market."

00:10:19.240 | So, your type of stock investing fits into general investing risk?

00:10:22.440 | Yeah.

00:10:23.440 | I think that they're actually two of the same.

00:10:24.440 | And it really depends on how you are investing.

00:10:26.840 | When most people think about investing in individual stocks or businesses, what they're

00:10:30.080 | really trying to think about is timing the market and trading stocks, trying to buy them

00:10:34.640 | when they're low and sell them when they're high.

00:10:36.680 | And I have no interest in trading stocks myself.

00:10:39.320 | I view the portfolio, the investments that I'm making outside of my retirement funds,

00:10:43.800 | as essentially building my own index fund.

00:10:47.080 | So, my style of investing is, I look for high-quality businesses that I think can grow for many,

00:10:52.640 | many, many years.

00:10:53.840 | I buy those companies and I try and hold them as long as they remain great businesses.

00:10:59.400 | So, I'm not trying to trade in and trade out of companies.

00:11:02.480 | I move my portfolio very, very slowly.

00:11:04.960 | So, what I'm trying to do is handpick, essentially, my own index fund and let those businesses

00:11:10.720 | grow for long periods of time.

00:11:12.360 | I know you're a fan of the investment policy statement.

00:11:15.440 | How have you used that concept, and for anyone who isn't familiar, maybe walk through what

00:11:20.280 | it is to guide your investing decisions?

00:11:22.880 | I think this is something that so many people overlook when they start investing.

00:11:27.440 | They don't really sit and write down why they're investing in the first place.

00:11:32.240 | They just think, "I have some money.

00:11:33.840 | This stock thing sounds interesting.

00:11:35.520 | I'm just going to do that."

00:11:36.640 | But I think it's really important to take a step back and ask yourself, "What is the

00:11:40.560 | purpose of this capital?

00:11:42.380 | Why am I choosing to invest it in any given way?"

00:11:46.200 | One tool that you can use to do that is just called an investor policy statement.

00:11:50.160 | It's just a very simple set of rules that you set up for yourself before you start investing,

00:11:55.400 | and you can use it to guide your decision-making over time.

00:11:58.280 | For example, my long-term investing goal is to grow my capital for as long as possible

00:12:04.240 | at as high of a rate as possible, while simultaneously assuming as little business risk as possible.

00:12:11.960 | Now, "business risk" means that the companies that I'm investing in, I actually think, are

00:12:15.960 | low-risk businesses.

00:12:17.880 | That doesn't mean that their stocks aren't high-risk and very volatile, but the underlying

00:12:22.300 | businesses that I invest in are actually fairly low-risk businesses.

00:12:26.480 | All capital that I put into the market, I don't plan on touching for at least five years,

00:12:32.080 | and all of my short-term capital needs are funded by cash that I have on hand and then

00:12:37.400 | income from mine and my wife's jobs.

00:12:39.800 | Because of that, we actually take a very conservative approach to our personal finances.

00:12:44.540 | We have a large emergency fund.

00:12:46.160 | We have a high savings rate.

00:12:47.820 | We have multiple sources of income.

00:12:49.600 | We have no debt of any kind.

00:12:51.580 | So, our personal finances are very conservative.

00:12:54.020 | That allows us to, essentially, with our investment portfolio, be 100% stocks and 0% bonds.

00:13:02.180 | That, in and of itself, means that my portfolio is going to be far more volatile than the

00:13:06.480 | average portfolio that has a mix of cash or a mix of bonds in there.

00:13:10.400 | However, I'm perfectly fine with that volatility because I know that any money that I put into

00:13:15.280 | there, I don't need to touch for a period of years.

00:13:18.160 | But I think that people could do so much better for themselves if they just sat down and asked

00:13:22.400 | themselves, "Money that I'm going to put into the markets, what's its purpose?

00:13:26.680 | What are my investing goals?

00:13:27.840 | And how long can I keep it in there?"

00:13:29.200 | I like that.

00:13:30.200 | Is there a place to get some examples, maybe your book or your website, of those policy

00:13:34.960 | statements and how to start thinking about writing one?

00:13:37.200 | Yeah.

00:13:38.200 | Now that you're saying that, I missed a big opportunity by not putting it into my book.

00:13:41.400 | But if you just Google the terms "investor policy statement", there's lots of examples

00:13:44.840 | online that you can use as a guide.

00:13:46.520 | Cool.

00:13:47.520 | Okay.

00:13:48.520 | And so, you've got your policy statement.

00:13:49.520 | And now, let's move on to this process of finding something to invest in, to start building

00:13:53.480 | out that portfolio.

00:13:54.480 | You're pretty well-known for creating an investing checklist.

00:13:57.400 | So, where did that come from and how has it evolved?

00:14:00.920 | And talk a little bit more about it.

00:14:02.280 | Sure.

00:14:03.280 | If you're new to investing, as I am, it's not hard to find companies to invest in once

00:14:07.040 | you know what to look for.

00:14:08.280 | There's so many places that you can get investing ideas, whether it's following some big famous

00:14:12.760 | investors like Warren Buffett or Cathie Wood, reading free articles that are online, cracking

00:14:18.320 | open exchange-traded funds, looking at your own life and seeing what products or services

00:14:22.440 | do I use or does my company use?

00:14:24.720 | It's like the list of potential investments that you can make is huge.

00:14:27.380 | There's thousands of publicly traded companies for anybody to invest in.

00:14:30.860 | When I first started out, I quickly became overwhelmed with choice, and I was essentially

00:14:35.520 | trying to think in my own head, "Well, this business, I really like because it's run by

00:14:41.000 | its founder and it has a great balance sheet.

00:14:43.000 | But this other business has great margins, high long-term potential, and there are all

00:14:47.480 | these factors that I was trying to keep in my head to weigh investments against each other."

00:14:51.840 | Turns out, that's a really poor way to do it because our brains are not built that way.

00:14:56.120 | Finally, I got smart enough to say, "Maybe I should write this down and create some rules

00:15:01.680 | for myself that I can use to guide my decision making."

00:15:04.920 | I would suggest that everybody that invests in anything beyond index funds goes through

00:15:08.880 | this very process themselves.

00:15:10.840 | First, write down all of the attributes that would make any investment, a stock investment

00:15:16.720 | for example, attractive to you.

00:15:19.320 | I did that, and I came up with things like, "I want the management team to have a high

00:15:23.880 | ownership percentage.

00:15:25.040 | I wanted the revenue to be growing at a very high rate.

00:15:27.800 | I wanted revenue to be recurring in nature.

00:15:30.080 | I wanted it to be profitable.

00:15:31.640 | I wanted the company's balance sheet, how much cash it has, to far outweigh how much

00:15:35.920 | debt that it has," etc., etc., etc.

00:15:38.480 | I made a list of 30 things that I really wanted in any investment that I made.

00:15:42.720 | Simultaneously, I made another list, which is, "What are all the things that I don't

00:15:46.620 | want to see in an investment that I make?"

00:15:48.640 | For me, that's things like, "I don't like it when a company gets the majority of its

00:15:52.560 | revenue from just a handful of customers."

00:15:54.980 | That's called customer concentration.

00:15:56.820 | "I don't like it when a company is operating in an industry that I think is actively being

00:16:01.560 | disrupted, like the oil and gas industry right now.

00:16:04.420 | I think it's primed for disruption over the next 10 or 20 years.

00:16:07.440 | I don't want to make any investments in that."

00:16:09.320 | "I don't like it when a company's stock-based compensation, the amount of options that they

00:16:13.240 | hand out to employees, is such a high rate that the dilution rate is high," etc., etc.

00:16:19.140 | So, I have my list of things that I'm looking for.

00:16:21.440 | I have my list of things that I don't want to see.

00:16:24.080 | And then I rank them in order of most important to least important.

00:16:29.020 | That's a tricky exercise to do when you really have to force yourself to rank things against

00:16:33.280 | each other, but it's so useful to do so.

00:16:35.840 | Finally, I have both of those things in place.

00:16:38.900 | And I just applied a very simple scoring system to weigh my criteria based on the factors

00:16:44.760 | that are most important to me.

00:16:46.680 | And the same goes for the factors that I'm not looking for.

00:16:49.760 | I just came up with a simple 100-point scoring system where I doled out 100 points in total

00:16:54.840 | based on the factors that I just listed.

00:16:57.080 | From there, I now have my criteria built out, so I can take any company that I come across,

00:17:03.500 | I can research it, and as I'm researching it, I'm filling out this checklist.

00:17:07.800 | And at the end, when this process is all done, I get to know whether a company is a match

00:17:13.200 | for what I'm looking for in investment or not.

00:17:16.000 | I've done this now hundreds of times.

00:17:17.880 | I have a list of companies that are very attractive to me as an investor.

00:17:22.480 | And simultaneously, I have another group of companies that there's just no way I'm going

00:17:26.240 | to invest in.

00:17:27.240 | So, the process of creating a checklist for myself, ranking it, and scoring it has helped

00:17:32.600 | to clarify my decision-making so much.

00:17:35.120 | I have so many follow-up questions right now.

00:17:38.480 | I'm like trying to take notes to organize them.

00:17:41.240 | So, a few things.

00:17:42.840 | One, you make this checklist of your own available on your website, correct?

00:17:46.360 | Yep.

00:17:47.360 | You can make it freely downloadable.

00:17:48.360 | Yep.

00:17:49.360 | So, we'll make sure we link to that in the show notes.

00:17:51.200 | But as you were walking through your criteria, it made me think, I'm not sure even I have

00:17:56.400 | an opinion on these things.

00:17:57.920 | So, is this something that takes years of playing in the stock market to build?

00:18:03.000 | Do I care about whether there are a lot of options granted to employees?

00:18:07.040 | These seem like things that the average person might not have an opinion on.

00:18:11.520 | Where do you suggest people get started?

00:18:13.640 | Or is it best to use someone else's list?

00:18:15.800 | Or is there a way to educate yourself on why you may or may not care about some of these

00:18:19.760 | things?

00:18:20.760 | The checklist as it exists today is a constantly evolving process.

00:18:24.680 | And what it is today is through trial, error, and most importantly, feedback that I've gotten

00:18:30.400 | from other smart investors that I respect.

00:18:33.000 | By studying the styles of great investors that I deeply respect, I find out what really

00:18:37.540 | matters to them.

00:18:38.540 | And then I took that and evolved it into what matters to me.

00:18:41.560 | But I don't claim that the version that I have right now is "perfect".

00:18:45.600 | It's just the best version that I've come up with so far.

00:18:48.860 | But to your point, all of these things do take time to research.

00:18:52.560 | If you want to go through the process of researching a stock, there's a lot that you have to learn.

00:18:56.940 | You have to learn accounting, you have to learn how to read SEC filings, you have to

00:18:59.560 | learn how to think about competitive advantages, studying the competition, thinking through

00:19:03.840 | the business model, studying potential risks.

00:19:06.360 | There's a lot to evaluating individual stocks.

00:19:09.020 | This is a big reason why so many people say, "Forget all that and just stick with index

00:19:12.600 | funds."

00:19:13.600 | Right?

00:19:14.600 | It's so much easier to do that.

00:19:15.600 | So this process, I think, is a good process if you're in that 1% or 2% of the population

00:19:20.880 | that is really fascinated by business the way that I am and is really interested in

00:19:25.240 | studying the subject.

00:19:26.780 | That's why I created this.

00:19:27.880 | I absolutely love everything about investing in research companies, but I'm right there

00:19:32.400 | with you.

00:19:33.400 | This is a time-consuming process and it turns off a lot of people.

00:19:36.280 | If there are specific companies that people listening to this are thinking about, I've

00:19:39.000 | actually gone and...

00:19:40.000 | Brian has a YouTube page where you actually break down going through your checklist for

00:19:43.480 | different companies.

00:19:44.480 | So I'll just give that a shout out because I thought that was really fun to go and look

00:19:47.920 | at a couple companies.

00:19:48.920 | I think Peloton is a great example.

00:19:50.480 | You did one and then you came back and did a recheck in because it had been an interesting

00:19:54.360 | adventure for that company.

00:19:55.600 | We got that one wrong.

00:19:57.240 | Yeah.

00:19:58.240 | That's why you're making more than one bet.

00:20:00.480 | But what you said about it taking a lot of time, if someone listening to this is like,

00:20:04.680 | "Index fund investing is fine, but there's some companies that I like.

00:20:09.160 | Is there a place for trying to invest in those stocks that whether you like them or you think

00:20:14.120 | they're exciting or the company has potential that doesn't need to take this much time?

00:20:18.640 | Or is your general advice, if you're not going to take the time, you probably shouldn't do

00:20:21.800 | it?"

00:20:22.800 | The best advice that I can give there would be always think about your overall asset allocation.

00:20:27.600 | Some people say that stock picking is a complete waste of time.

00:20:29.880 | They're not interested in it.

00:20:30.880 | Fine.

00:20:31.880 | Just stick with 100% index funds and call it a day.

00:20:33.720 | But I think there's room for a happy medium in the middle.

00:20:36.680 | There are some people that I think should put, say, 90% or 95% of their assets into

00:20:41.380 | index funds, but if they have a hunkering, or there's some businesses that they're really

00:20:45.120 | interested in or they want to research, I see nothing wrong with taking a few percent

00:20:49.420 | of your overall portfolio and putting it into investments that you pick out.

00:20:53.560 | So, if you can pick, say, five companies or something like that that you're really passionate

00:20:57.480 | about and put 1% or 2% of your portfolio in it, even if you're wrong, even if the process

00:21:02.540 | that you go through, or if you don't want to do the research, you just want to make

00:21:05.000 | an investment in those companies, even if you're wrong about them, well, 90% of your

00:21:09.260 | net worth is perfectly fine in the market.

00:21:11.720 | If you don't want to go through the research process and you just want to put a little

00:21:14.460 | bit of capital in, I think that's fine so long as you size it appropriately.

00:21:18.180 | As I walk through what you're saying, I'm realizing that you're presenting us all with

00:21:23.360 | an option for building a part of your long-term diversified portfolio on your own with stocks.

00:21:30.600 | So, I think some people listening might think it's okay to take some bets with 5% of your

00:21:34.800 | portfolio, but be safe with 95%.

00:21:38.420 | And you echoed that sentiment, but you've said, "Look, if you take the 95%, there's

00:21:42.280 | a different way than index funds that you could invest that 95%."

00:21:47.220 | And for you, it sounds like some of it is index funds, but some of it is building a

00:21:50.860 | portfolio of a lot of stocks that you spend time and research on.

00:21:54.980 | And if you're interested in that time and energy to do that research, you could treat

00:21:59.300 | your index fund portfolio, and you could split it apart and do two different things without

00:22:04.020 | having to feel like you're taking a significant amount of risk on your stock investing.

00:22:09.660 | Do you think that the type of investing you're doing is passive investing, or is it more

00:22:14.180 | like wild bets people often say they're taking with stocks?

00:22:17.440 | And I ask that because it feels like it actually is more like passive investing.

00:22:20.660 | Yeah, if you crack open the S&P 500, you might naturally think that you're diversified equally

00:22:26.220 | across 500 companies.

00:22:28.100 | That's actually not the case.

00:22:29.420 | The S&P 500 is weighed by market capitalization, meaning, the larger the company, the bigger

00:22:35.140 | a portion of the S&P 500 that is.

00:22:37.540 | Now, there's still 500 companies in there, but if you look at the giant companies that

00:22:41.340 | are in there -- Apple, Microsoft, Amazon, etc. -- they take up a pretty sizable portion

00:22:46.820 | of the portfolio.

00:22:47.820 | The last time I looked, they were at least 3% or 4%.

00:22:50.740 | If you're investing in the S&P 500, you have a higher concentration of your funds in those

00:22:55.020 | businesses just by the nature of investing in an index fund.

00:22:58.620 | To your point, with the vast majority of my capital, especially capital that's outside

00:23:02.620 | of retirement funds, I don't think that I'm taking on a huge amount of risk because I

00:23:06.740 | own a collection of a few dozen stocks, but the top 20 stocks that I have have earned

00:23:12.580 | their spot in my portfolio.

00:23:13.980 | Meaning, I bought these companies a long time ago, and I just got them right, that they

00:23:18.680 | just happen to be great companies that grew and grew.

00:23:21.140 | For that reason, when a company does very, very well on the markets, it's typically because

00:23:25.820 | the business underneath it is succeeding.

00:23:28.660 | One of my top holdings is Google, which I bought, oh, jeez, 13 years ago.

00:23:32.740 | It's grown into a top holding for me, not because I set out to make it a top holding,

00:23:37.300 | but I just bought it many years ago and have just held onto it.

00:23:40.700 | If you look at Google's business alphabet, as it's called Google's business today, it's

00:23:44.420 | an extremely reliable blue-chip company.

00:23:46.980 | The company has hundreds of billions of dollars that come in.

00:23:49.460 | It generates huge profitability.

00:23:51.780 | It has a war chest balance sheet, and it's still growing to this day.

00:23:55.380 | If you're invested in the S&P 500 index fund or total stock market index fund, it's a top

00:24:00.340 | holding for you, too.

00:24:02.100 | I don't think what I'm doing with my portfolio, since I'm diversified, since I'm buying good

00:24:06.080 | businesses and since I'm holding them for long periods of time, is all that drastically

00:24:10.340 | different than people that just invest in index funds.

00:24:13.180 | It's just more time-intensive, and that's OK with me.

00:24:16.140 | We talked a lot about different types of stock buying, but one thing I noticed you never

00:24:19.300 | mentioned you cared about, or at least I didn't hear, was what's the price of the stock right now?

00:24:24.160 | Is that even a factor when you make a decision?

00:24:26.580 | That is such a confusing thing about investing.

00:24:30.180 | In fact, when I first started investing, I had no clue about the relationship between

00:24:34.700 | price and market cap.

00:24:36.620 | Like so many people, I thought that the success in individual investing was looking for companies

00:24:41.780 | that trade at a very low share price.

00:24:44.260 | A lot of my first investments -- my investments in air quotes, because I had no idea what

00:24:48.100 | I was doing -- was in penny stocks.

00:24:50.500 | It turns out that penny stocks have the reputation they have because they're typically places

00:24:54.560 | that you can go to destroy capital.

00:24:57.080 | So many of my first forays into the market were buying awful businesses solely because

00:25:01.780 | their share price was really low.

00:25:03.940 | The way that prices work in the stock market is so different than the way prices work in

00:25:09.060 | every other consumer good that we buy that it's naturally very confusing.

00:25:12.820 | If you were to go in the market and find a company that was trading at $500 per share,

00:25:17.580 | and you found another one that was trading at $5 per share, and say, "Which one is more expensive?"

00:25:22.980 | Only in investing can you say, "Not enough information."

00:25:26.740 | The stock that's trading at $500 per share might be less expensive, a better bargain

00:25:32.780 | price than the stock that's trading at $5 per share.

00:25:36.500 | The reason for that is, the equity of a company is two things.

00:25:39.920 | One, the dollar price of a share, which is the number that's quoted everywhere that you look.

00:25:45.300 | You go on Google, you open the stocks app on your phone, what do you see?

00:25:48.660 | You see the price of one share.

00:25:51.160 | However, what you don't often see is the market capitalization of the company.

00:25:55.540 | That's the dollar value of the company's total equity.

00:25:59.420 | To find that number, you have to look at how many shares exist at a company.

00:26:05.260 | Here's something that not many people know.

00:26:07.380 | The number of shares that exist at a company is a totally arbitrary number that the company chose.

00:26:13.660 | A company can go out there and say, "I want to have a million shares of stock,"

00:26:18.060 | or that same company could say, "I want to have a billion shares."

00:26:21.300 | What we look at when we're looking at the price isn't enough information to tell us

00:26:25.820 | if that company is trading at an attractive number, or if it's cheap, or if it's expensive.

00:26:30.700 | However, that's such a counterintuitive thing that so many people assume the dollar price

00:26:35.520 | of a stock will tell you what you need to know about the company.

00:26:38.140 | Two follow-ups.

00:26:39.140 | One is, the valuation of the company or the market cap is something that you do pay attention

00:26:43.980 | to when deciding to invest.

00:26:45.620 | Is that what I'm hearing?

00:26:46.620 | Yes.

00:26:47.620 | I care much more about the market capitalization of a company than they do about the dollar

00:26:53.020 | price of one share.

00:26:54.740 | If I'm analyzing a company, one of the first things I look at is the market cap.

00:26:58.900 | That will give you a rough size about the total value of the business.

00:27:02.460 | The reason I focus on that is, when I'm looking to make an investment in a company, I typically

00:27:06.900 | want to buy companies or add companies to my portfolio that I think I can at least earn

00:27:11.340 | a 5X return on, or better yet, a 10X return on.

00:27:15.300 | The size of a business is going to show me how hard that is for that company to do that.

00:27:20.220 | For example, if I come across a company and it's trading at a $1 billion valuation, that's

00:27:25.800 | the size of the market cap, for me to earn a 10X return on that company, that company

00:27:30.460 | would have to grow into a $10 billion valuation.

00:27:33.720 | There's lots of companies out there that are currently worth $10 billion, $50 billion,

00:27:38.020 | $100 billion, or more.

00:27:40.560 | It doesn't take a huge amount of imagination to believe that a company can grow from $1

00:27:44.480 | billion to $10 billion.

00:27:46.600 | Conversely, if you come across a company like Apple, for example, Apple's market capitalization

00:27:52.540 | is currently enormous.

00:27:54.540 | The company is currently trading at $2.7 trillion.

00:27:59.220 | For Apple to grow five times in value from here, it would have to be essentially an $11

00:28:06.120 | or $12 trillion company.

00:28:09.260 | That is such a gargantuanly huge number that I personally have a really hard time seeing

00:28:15.060 | Apple ever do that.

00:28:16.240 | I'm not going to say it's never going to happen, but holy cow, is that a lot of market capitalization

00:28:21.340 | that has to be added onto Apple for its stock to 5X from here.

00:28:25.760 | That's why I'm really focused on the market capitalization of a company, not the dollar

00:28:29.680 | price of one share.

00:28:31.140 | How does that change over time?

00:28:32.400 | You mentioned one of your investments early on was Google.

00:28:35.980 | Now, even though it's clear that in the last 13 years, Google probably did 5X the business,

00:28:42.080 | but now let's say you're looking at it and you think, "Gosh, now it's a lot harder.

00:28:46.040 | It might be for Apple."

00:28:47.040 | Does that mean you have to get out?

00:28:48.640 | How do you think about exiting positions that you've made?

00:28:51.800 | When I first made an investment in Google, it was far, far, far smaller than it was today.

00:28:56.800 | The market capitalization was well under $100 billion when I started buying it.

00:29:01.920 | Today, I'm quite happy to continue holding Google, and I do not expect Google to 5X really

00:29:07.340 | in any period of time.

00:29:08.340 | Google is a $1.7 trillion company, so for it to 5X, it would have to be a $9 trillion

00:29:13.120 | company.

00:29:14.120 | I'd be very happy with that outcome, but I don't think that it's going to happen.

00:29:17.320 | Instead, I view Google as a part of my portfolio that is more of a bedrock anchor, something

00:29:22.960 | that I think can grow at a low double-digit rate, but I don't expect the company to deliver

00:29:28.420 | a 5X return from here.

00:29:30.460 | So, in general, while I'm very happy as a Google shareholder, I wouldn't approach it

00:29:35.140 | from a "I'm interested in buying this company today," I would be more interested and likely

00:29:39.240 | to sell it to fund purchases of other companies that I think have higher growth potential.

00:29:43.920 | But, I'm not going to sell a company solely because it's huge if I've owned that company

00:29:48.040 | for a long period of time, and I'm still happy to own it.

00:29:52.120 | It seems like with every business, you get to a certain size and the cracks start to

00:29:56.520 | emerge.

00:29:57.520 | Things that you used to do in a day are taking a week, and you have too many manual processes,

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00:32:57.760 | So when do you decide to sell?

00:32:59.320 | Whether it was a pick that didn't work out or a company that's worked out and now doesn't

00:33:04.160 | have that potential, I can tell people listening that I have some random stocks I've invested

00:33:08.800 | over the years, and I personally am struggling, like, when do you exit?

00:33:12.620 | How do you help people think about when's the time to either cut your losses if it's

00:33:15.880 | down or take your gains off the table?

00:33:18.520 | Yes.

00:33:19.520 | First off, let's acknowledge something.

00:33:20.520 | Knowing when to buy a stock is much easier than knowing when to sell.

00:33:25.080 | It's much more fun for me to research and think about companies that can grow in value

00:33:28.520 | than it is to be on the other side of the transaction.

00:33:30.580 | However, there are some reasons that I think a stock should be sold.

00:33:34.220 | First and foremost, the No. 1 reason that I sell a stock, and it's the most common,

00:33:37.840 | is I was wrong.

00:33:39.500 | So, I came up with a thesis for a company.

00:33:41.980 | I thought that the company was going to grow to take advantage of a blank market opportunity,

00:33:46.640 | and I thought the company had an advantage over its rivals.

00:33:49.940 | If that proves to be incorrect, if the company is clearly struggling to execute that and

00:33:55.200 | I am proven wrong, I have no problem saying, "I got that one wrong," and selling to be

00:34:00.220 | to play in my capital.

00:34:01.380 | Two, if I'm right about a company and it grows to be too large a position in my portfolio

00:34:06.620 | and I'm too concentrated in that company, that is a situation where I'm also happy to

00:34:11.280 | trim that company.

00:34:12.280 | More recently, I personally trimmed a little bit off of my position in Tesla, not because

00:34:16.840 | I don't think Tesla is a great company with a bright future ahead, but Tesla has grown

00:34:20.640 | to be my No. 1 position by far, simply because of how well that company has done, and I've

00:34:25.800 | been trimming my position surely for risk management purposes.

00:34:29.080 | That's a happy reason to sell it.

00:34:30.640 | No. 3, if you have a better use for that capital, if you're no longer interested in following

00:34:36.680 | a company or own a company, and it might be a lukewarm investment, but you find another

00:34:40.680 | investment that you're more interested in, I see nothing wrong with selling the one that

00:34:44.480 | you're not interested in to buy more of the one that you are interested in.

00:34:48.000 | And the best reason of all to sell is that you need the money for your personal life.

00:34:52.840 | The whole reason we invest in the first place is to grow our capital so that we can live

00:34:57.200 | a better life.

00:34:58.200 | So, I see nothing wrong with selling a stock if you need to use that money for a purchase.

00:35:02.280 | So I think one takeaway for me out of this is, the best I can remember, I'm going to

00:35:05.760 | go through the handful of stocks I own and try to write down why I invested them in the

00:35:09.400 | first place.

00:35:10.400 | And that'll give me a place to look to decide when it's appropriate to sell because maybe

00:35:15.360 | I don't believe in that thing anymore.

00:35:16.800 | One thing that I personally do and I'm a big advocate for, in addition to writing an investor

00:35:20.660 | policy statement for yourself, is to keep an investing journal.

00:35:24.360 | So every time that I go and I buy a stock, I just write down what stock I'm buying, a

00:35:29.400 | few words on why I'm buying it, and also the valuation that I'm paying at the time of my

00:35:35.000 | purchase.

00:35:36.000 | It can be time-intensive to do that, but so often, if we buy a stock, it's not all that

00:35:40.580 | uncommon for us to change our thesis over time as the business results come in.

00:35:45.680 | It's really helpful to have an anchor point to look back and say, "What was I thinking

00:35:49.820 | at the time of this purchase?" and to match up the reality that the business is doing

00:35:54.440 | against your initial predictions for those businesses.

00:35:57.160 | If those two things are mismatched for the worst, that can be a sign that company is

00:36:00.880 | no longer for you and it's time to sell that company.

00:36:03.240 | But again, broadly speaking, buying is much more fun than selling and knowing when to

00:36:07.940 | sell a stock is very, very hard.

00:36:09.800 | So we talked about buying.

00:36:10.800 | We talked about selling.

00:36:12.240 | What about adding to a position?

00:36:13.640 | Is that something you find yourself doing over time and how do you decide that you want

00:36:17.440 | to double down?

00:36:18.440 | I don't invest all the capital that I'm going to invest in a company up front.

00:36:21.760 | I tend to buy in small chunks over periods of time that are spaced out.

00:36:26.080 | I do so because I know from my own track record that I'm often wrong, right?

00:36:30.520 | A company can check a lot of the boxes that I look for in a business, but that business

00:36:35.000 | still has to go on and execute against the opportunity that it presents for itself, and

00:36:39.720 | sometimes new competition can come along, or the market can change.

00:36:43.520 | It's common for me to be completely wrong about a stock.

00:36:46.740 | So when I'm looking to add to a position over time, what I'm attempting to do is two things.

00:36:52.280 | First, I'm looking to invest in companies that are winning.

00:36:56.040 | That's a very counterintuitive thing.

00:36:58.440 | Most people think, "Oh, I bought a stock for $10, it went to $20, I can't buy any more

00:37:03.240 | of that stock. It was at $10 before, now it's at $20."

00:37:05.700 | Conversely, they buy a stock at $10, it falls to $5, and that's the one that they're interested

00:37:09.960 | in adding to because it's at a lower price.

00:37:12.760 | What I've discovered the hard way is that more often than not, it's better to take additional

00:37:16.680 | capital and put it into the company that's already doubled for you, as opposed to the

00:37:20.880 | one that's already halved.

00:37:22.680 | The reason that companies go up and their stocks tend to do well is because something

00:37:26.360 | about the underlying business is succeeding, and Wall Street is recognizing that business

00:37:31.480 | is succeeding.

00:37:32.480 | Conversely, if a stock is underperforming, that's a sign that the company is having a

00:37:36.240 | hard time succeeding, and it's not meeting investors' expectations.

00:37:40.280 | Broadly speaking, winners tend to keep on winning, and losers tend to keep on losing.

00:37:47.600 | So when I'm looking to add to companies, I'm typically looking at the companies that are

00:37:51.680 | winning in my portfolio first, and those are the ones I'm actually adding to.

00:37:56.400 | I think some people might hear that and think, "Wow, that sounds a lot like the opposite

00:38:00.640 | of the tried-and-true buy low, sell high.

00:38:03.620 | That sounds like buy high, sell low," which I think everyone says, "That's what you shouldn't do."

00:38:07.840 | How do you juxtapose what you just said with what I would say is pretty commonly-believed

00:38:13.740 | advice -- maybe you disagree with it -- of buy low, sell high?

00:38:16.600 | I think it's helpful to actually look at some studies of investing and how the market actually

00:38:21.500 | works, which are hidden from us if you're investing in just index funds.

00:38:25.880 | J.P. Morgan did this wonderful study where they looked at thousands of publicly traded

00:38:29.840 | companies over a period of 30 years, and they looked at the returns of those companies.

00:38:34.320 | What they found was that if you put your capital into 10 random companies, what you can expect

00:38:39.040 | is that four of those companies will suffer a catastrophic loss and stay down permanently.

00:38:44.800 | Three of those companies will go up in value, but they will underperform the market in general.

00:38:51.480 | That leaves three other companies.

00:38:52.960 | Two of those companies will be modest market beaters, and one of those companies will deliver

00:38:58.780 | multi-bagger returns.

00:39:00.380 | What actually drives the market forward over time is a very small minority of companies.

00:39:06.000 | It's really about the top 10% of companies that are literally responsible for 90% of

00:39:12.240 | the market's returns over long periods of time.

00:39:15.040 | When I've looked at that and I've studied some investors that have taught me this really

00:39:18.600 | counterintuitive lesson, what you actually want to do, it really matters that you get

00:39:22.320 | some of your portfolio to include some of those 10% of companies that are the mega-winners.

00:39:27.840 | What do mega-winners have in common?

00:39:30.040 | Their stocks have already gone up a lot.

00:39:33.780 | If you think back to some of the mega-winners that are today -- Tesla, Google, Apple, Netflix,

00:39:39.520 | Chipotle -- if you bought those companies after their stock doubled, tripled, or quadrupled,

00:39:46.200 | you then went on to earn a massive return, even after their stocks were up huge.

00:39:52.180 | That's why it can actually be a good sign if a company's stock is going up.

00:39:56.660 | That's an indication that the business model is working and that Wall Street is recognizing

00:40:01.680 | that the business model is working.

00:40:03.120 | Conversely, if you want to buy a stock that has lost badly to the market, underperformed

00:40:08.200 | the market, history shows that the chances are pretty good it's in that seven out of

00:40:12.760 | 10 stocks that is going to permanently underperform the market.

00:40:16.560 | So, I think the phrase "buy low, sell high" sounds really good in theory, but when you

00:40:21.760 | actually get into the practicality of investments, some of the best investments that I've ever

00:40:26.280 | made was buying stocks that were already up big and were at all-time highs.

00:40:32.220 | My conversation with Andy Ratcliffe was that some of the best investors are quite contrarian.

00:40:37.360 | I like that you're taking a different approach, and I'm glad we got to dig into some of the

00:40:40.960 | data about it.

00:40:42.520 | We talked a lot about ways to invest, but I want to ask what platform you're doing this

00:40:46.920 | on and if it makes any of the things you're doing easier.

00:40:51.240 | You mentioned buying a stock, maybe you want to deploy over time.

00:40:55.400 | But gosh, let's say you wanted to put $500 into Google today.

00:41:00.200 | There's not an easy way to say, "I want to put $500 over the next 5 months and then stop."

00:41:05.320 | At least I'm not familiar with one.

00:41:06.920 | Is there an investing site that you like or recommend that makes some of those kinds of

00:41:11.160 | things easy?

00:41:12.280 | I'm pretty sure that M1 Finance has done many of those things with, you can create a pie

00:41:17.920 | for your portfolio, and as you put capital into it, it automatically allocates, and you

00:41:22.200 | don't have to worry about things like buying exactly one share.

00:41:24.900 | You can buy fractional shares.

00:41:26.480 | We as investors are extremely lucky because there's lots of platforms out there that allow

00:41:30.120 | you to buy fractional shares of stocks.

00:41:32.200 | To answer your question, though, the broker that I use is called Interactive Brokers.

00:41:36.360 | I signed up with them 9 years ago, and what I liked about them is it's a hassle to use

00:41:42.200 | their system.

00:41:43.200 | It is a pain in the butt to log in, and once you're in, buying and selling is easy, just

00:41:48.160 | like it is on any other platform.

00:41:49.720 | But I actually like that there's friction to the platform.

00:41:52.360 | I don't use any app on my phone because the easier it is to buy or sell, the more tempted

00:41:57.360 | I would be to do it when I'm feeling emotional.

00:42:00.360 | If I owned a stock and that stock was down big or up big in response to whatever the

00:42:04.880 | news of the day, my decision-making skills would be compromised because of what I was

00:42:08.720 | seeing on the screen.

00:42:09.800 | I also use Interactive Brokers, and it's funny, it's one of the few products that I've probably

00:42:14.640 | never even mentioned I use on this show because I think most people would hate it.

00:42:19.880 | I agree.

00:42:22.560 | The interface is difficult.

00:42:23.920 | I'm often unsure of how to find things and have to read long manuals.

00:42:28.160 | But for me, the other big perk of Interactive Brokers is that if you need to borrow against

00:42:34.200 | your portfolio, the amount of interest many institutions charge is very high.

00:42:39.760 | So Interactive Brokers is quite low.

00:42:42.220 | At Wealthfront, we have a portfolio line of credit that's also low for index funds.

00:42:46.060 | And everywhere else I've seen is like 5%, 6%, 7%.

00:42:49.000 | So that's another plus on Interactive Brokers.

00:42:51.600 | But in general, I will say it is a confusing interface.

00:42:55.120 | I'm happy to put my referral link in the show notes, but I don't expect a lot of usage

00:42:59.500 | of it because of that.

00:43:01.320 | But it's funny, I also use that for my single stock investing.

00:43:04.400 | And I'm also not familiar with an easy way to say, "Oh, I want to invest $1,000 in this

00:43:09.680 | company.

00:43:10.680 | Can I do it over five months?"

00:43:11.680 | Because doing it each month manually just invites emotion to change the decision you

00:43:16.520 | made in advance.

00:43:17.700 | One other platform technology question I have, so often I see people say, "Gosh, I picked

00:43:23.000 | this stock and over the last month, it's down 7%.

00:43:26.640 | How should I feel about that?"

00:43:27.640 | I'm like, "The entire market is down 7%."

00:43:30.360 | So relative to the benchmark of the market, your stock hasn't gone up, hasn't gone down

00:43:35.800 | relative to the benchmark.

00:43:37.280 | Is that a way you look at things?

00:43:38.800 | Do you look at how a stock's done absolute on its own, or do you try to compare how it's

00:43:44.080 | done to the general market to get a sense of relative performance?

00:43:47.760 | I always like to compare things to the market.

00:43:49.720 | You have to have something to compare it to.

00:43:51.200 | I'm happy just to compare it to the standard benchmark, which is the S&P 500.

00:43:55.440 | But yeah, you can't look at stocks in a vacuum.

00:43:57.640 | What's even more confusing about investing is that there is a one-to-one relationship

00:44:02.940 | between the performance of a business and the performance of a stock over long periods of time.

00:44:08.420 | The reason that companies go up substantially over long periods of time is the underlying

00:44:13.440 | business that's underneath them has improved dramatically.

00:44:16.620 | Maybe revenue is up a whole lot, margins are better, profits are improving, they've made

00:44:21.320 | an acquisition, or whatever the reason is.

00:44:23.140 | There's a direct tie between what happens to a business and what happens to the stock

00:44:27.320 | over long periods of time.

00:44:29.080 | Over short periods of time, there's almost no connection at all to what a business and

00:44:33.800 | a stock are doing.

00:44:34.840 | What's happening in the macro environment can often so overwhelm the actual business

00:44:40.000 | performance of a company.

00:44:41.500 | This can be so confusing to you as an investor, because you can buy a company and you can

00:44:46.260 | say, "I think this company is going to become more profitable, its revenue is going to grow,

00:44:50.200 | and the stock's going to do well."

00:44:52.320 | You could be right about the business.

00:44:54.560 | When they come out with a quarterly report, they could say, "Revenue is up, profits are up,

00:44:58.500 | we're hiring more people, we're expanding, hey, we've got this new product that's coming out."

00:45:02.820 | And that stock can fall, and that stock can fall really hard.

00:45:06.620 | So, in the short term, there isn't always a direct relationship between the performance

00:45:10.460 | of the company and the performance of the business.

00:45:13.280 | That's why investing can be so trying on your emotions.

00:45:16.440 | However, over long periods of time, the performance of the business always is eventually reflected

00:45:22.100 | in the stock price.

00:45:23.240 | When I'm judging how my companies are doing, I'm almost never looking at just the stock price.

00:45:29.080 | I'm always asking myself, "How did the company do?

00:45:32.480 | What's the general direction of the business?"

00:45:34.340 | And I'm focused very heavily on the business itself.

00:45:37.120 | In those short-term scenarios where comparing how it's done to the benchmark is really helpful,

00:45:43.460 | right?

00:45:44.460 | Because you might feel like you got a dud, but really just the market, as you said earlier,

00:45:47.200 | it's down almost 20% from highs.

00:45:49.260 | Is there an easy way to do that online for someone who maybe wants to look at their portfolio

00:45:53.200 | and say, "Gosh, I invested in Square 12 months ago.

00:45:56.820 | How has Square done relative to the market?"

00:45:58.700 | Is that an easy calculation anywhere you know?

00:46:01.520 | Interactive Brokers gives me an overall portfolio versus the market over various periods of

00:46:05.600 | time.

00:46:06.600 | So, that's what I do.

00:46:07.600 | But you can use some very simple charting tools, especially ones that are on Yahoo Finance

00:46:10.920 | or Google if you want to look up an individual holding over shorter periods of time.

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00:48:40.520 | I just want to thank you quick for listening to and supporting the show.

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00:48:58.400 | Okay.

00:48:59.400 | We went a lot of places and we talked briefly at least a couple of times on asymmetric bets.

00:49:04.360 | And I think most people listening might've thought, "Gosh, Brian's this guy that invests

00:49:08.400 | in a lot of stocks.

00:49:09.520 | All he's doing is making a bunch of high risk asymmetric bets across his whole portfolio."

00:49:15.280 | And hopefully if they're still here, they've come to the conclusion that's not the case.

00:49:18.600 | That you're actually trying to do a different type of investing with the bulk of your portfolio.

00:49:23.320 | But I'm curious where those asymmetric bets do fit in.

00:49:26.440 | And do you take those much higher risk bets in your portfolio and how do they fit into

00:49:31.160 | everything?

00:49:32.160 | Yeah.

00:49:33.160 | The bulk of my individual holdings are in companies that are low risk businesses with

00:49:37.560 | strong competitive advantages. They're growing at an above-average rate.

00:49:40.960 | They tend to be profitable, free cash flow positive.

00:49:43.560 | They tend to be very high-quality businesses.

00:49:45.860 | I don't think I'm taking on a whole lot of risk by investing in those companies.

00:49:49.980 | However, with a portion of my portfolio, I also am happy to invest in higher risk situations,

00:49:57.560 | knowing full well going in that I'm assuming a whole lot more risk, so I better be compensated

00:50:03.080 | for that risk with the potential for higher return.

00:50:05.700 | I know you've talked in the past about making investments in crypto, like Ethereum and Bitcoin.

00:50:11.120 | I view those the same way. They're asymmetric opportunities.

00:50:14.620 | If you invest, say, $1,000 into a high-risk stock, the wonderful thing about investing

00:50:19.720 | is the worst you can do, assuming you use no leverage, is lose $1,000.

00:50:24.320 | You are completely wrong about the company. It goes belly up. You lose your $1,000.

00:50:29.000 | However, if you're right about that company, that $1,000 can grow into $2,000, $5,000,

00:50:34.920 | $10,000, even $100,000 if you are right about the business.

00:50:40.000 | Yes, those companies are extremely rare, but they are out there.

00:50:43.620 | So, with a portion of my individual stock portfolio, I'm happy to buy higher risk companies

00:50:49.580 | if I believe that I can earn 10x plus returns on them.

00:50:52.780 | When you're thinking about these asymmetric bets, do you try to limit them?

00:50:56.020 | Do you try to make them regularly? Do you have a way to come up with ideas for them?

00:51:00.160 | How do you find them?

00:51:01.120 | Well, I'm a stock market junkie, so one of my favorite things to do is to research companies.

00:51:05.940 | But to answer your question, I'm a contractor for The Motley Fool, so I get access to all

00:51:10.020 | of their recommendations, and that's one place that I go to.

00:51:12.880 | There's also tons of ways to find investments by looking at high-growth portfolios, high-growth ETFs.

00:51:18.760 | The ARK funds, for example, have become very popular with investors, although those things

00:51:22.920 | are losing very badly to the market over the last year.

00:51:25.500 | There's lots of asymmetric risk-reward companies that are in there.

00:51:29.060 | Finding potential ideas isn't the hard part.

00:51:32.160 | The hard part is vetting the ideas and asking yourself, "What kind of risk level am I taking

00:51:38.120 | and what are the odds that this company is going to go on to beat the market?"

00:51:41.800 | But finding ideas is really easy nowadays.

00:51:44.560 | Is the vetting process for these higher risk, higher return investments, is that a different

00:51:49.340 | investing checklist? Or how do you think about making those picks differently than you would others?

00:51:54.160 | No, I still take it through my exact same checklist, it's just that the companies typically

00:51:58.340 | score very poorly on my checklist for doing so because I value things like free cash flow,

00:52:04.680 | I value things like net income, I value competitive advantage, etc.

00:52:09.520 | I still go through the exact same process that I go to, but even after that process is done,

00:52:14.620 | if the company scores poorly, but I still believe that the potential is huge, I will

00:52:19.880 | go in and make an investment in that case.

00:52:22.160 | I just do so going eyes wide open that this is a high-risk, high-reward bet that I'm making,

00:52:27.520 | and I just size it appropriately in my portfolio.

00:52:30.040 | Cool. This is a question that I'm not sure I was going to ask. And I feel like I'll probably

00:52:34.280 | get some emails from listeners if I don't ask it, but I'll probably also get some if

00:52:37.880 | I do. But are there any companies right now that you're particularly excited about? And

00:52:43.600 | to be clear, this is not an investment recommendation from Brian or an endorsement by me. But if

00:52:48.800 | someone's sourcing ideas, are there any you want to seed out there right now?

00:52:53.240 | Sure. As part of the show notes, you asked me to come up with the 5 stocks that I like.

00:52:57.240 | I like stepping up to the plate and swinging, but to your point, I own four of these stocks.

00:53:01.240 | I don't own one of them, and I'll tell you which one I don't own. But I have confidence

00:53:04.520 | that all these stocks will beat the market from here. But going back to the percentages

00:53:08.040 | we talked about earlier, history shows that when I make 10 investments, I'm wrong about

00:53:13.220 | half the time. But that's OK, because the half of the time that I'm right, I do so well

00:53:18.280 | on just a few of them that the losses that I have and the ones that I'm wrong on are

00:53:22.560 | dwarfed by the gains that you get than the ones that you're right on.

00:53:26.040 | But to play the game, five stocks that I think are good buys right now are Roku, Pinterest,

00:53:31.640 | Zoom. How's that for contrarian? Fiverr and Upstart is the fifth one. That's one that

00:53:37.640 | I don't own, but that is a high growth, profitable company that I'm very interested in.

00:53:43.200 | For the second or maybe the third time with the disclosure at the beginning to say, "This

00:53:46.800 | is not a recommendation." Brian is not telling anyone here to go buy these stocks, but I

00:53:50.520 | love playing the game. I love hearing what's on top of your mind. Thank you.

00:53:53.880 | And what's fun about that is it's not hard to track ourselves. So I'll create a little

00:53:57.360 | spreadsheet for us right now on today's recording date. I'll put these companies in there so

00:54:01.280 | I actually can see how these companies do over time.

00:54:03.280 | Oh, that's great. Let's make it a Google sheet. Let's make it public. I'll put it in the show

00:54:06.480 | notes. And even a few weeks from now when this comes out, you will be able to see how

00:54:10.680 | it's been done.

00:54:11.680 | These are multi-year investments. These aren't multi-week investments.

00:54:13.840 | Oh, sorry. Sorry. I meant when this episode's out in a few weeks, people will see how it's

00:54:18.760 | done. But yes, don't judge them on their short nature returns. Okay, cool. Last thing on

00:54:23.400 | investing and then I have a couple totally different questions for you. One is on just

00:54:28.360 | books. People listening to this that think, "Gosh, I want to get more educated." I'd love

00:54:32.800 | it if you could throw out a few of your favorite resources. They don't have to be books, they

00:54:36.520 | could be online. Both for people who are like, "I need to brush up." And people who are like,

00:54:40.960 | "What are the next level books that I should be reading if I've read the basics?"

00:54:44.080 | Anyway, that's interested in individual stock investing, there are a couple books I'll throw

00:54:47.840 | out there that I think are wonderful resources. The first is called Warren Buffett and the

00:54:52.600 | Interpretation of Financial Statements. This is a book that was written by Warren Buffett's

00:54:56.720 | daughter-in-law, Mary Buffett. And it basically takes the three major financial statements,

00:55:01.780 | the income statement, the balance sheet, and the cash flow statement, and it goes through

00:55:04.920 | them line by line and it shows you how Warren Buffett thinks about those numbers. So, it's

00:55:10.500 | a wonderful book for learning accounting and thinking through how financial statements

00:55:15.400 | can be turned into investment decisions. So, that one is a hidden gem.

00:55:19.480 | Another one is called The Little Book That Builds Wealth. That one is by Pat Dorsey.

00:55:24.840 | Pat Dorsey is the former head of research at Morningstar. And that book really goes

00:55:29.680 | into how to think about competitive advantage in businesses and how to spot investments

00:55:35.520 | that have a competitive advantage. That's a very important topic that everybody needs

00:55:39.540 | to learn about. And the third one I'll throw out there is a fun book called 100 Baggers

00:55:44.020 | by Christopher Meyer. So, that's a study of public companies that returned over their

00:55:48.960 | lifetime, earned investors a 100X return on their investment. It talks through some of

00:55:54.060 | the principles that they had in common and what investors can look for. So, those are

00:55:57.920 | three under-the-radar books that I think are wonderful.

00:56:00.880 | That's great. Thank you for sharing those. The interesting thing I want to jump to, which

00:56:04.880 | has nothing to do with stock investing at all, but what reminded me of it was, I both

00:56:10.040 | heard you talk about it on another podcast, and I recently got an email from a listener

00:56:14.920 | asking about picking their mortgage. It'll draw back to investing a little, but they

00:56:18.240 | said, "Gosh, if you start from a 30-year fix..." They were like, "I could make a strong argument

00:56:22.760 | to try to get a 15-year mortgage to pay it down faster, but I could make an equally strong

00:56:27.360 | argument to go for an interest-only mortgage and take all the money that I would have put

00:56:31.600 | in the house and invest it, which I believe will outperform the low interest rates I'm

00:56:37.000 | facing now." I always fall on the, let's call it, financially rational decision of, "Well,

00:56:44.380 | you're going to earn a higher return here, so maybe that's the path. But I know you disagree.

00:56:48.560 | And so, I want to make sure a contrarian opinion makes it out here because I love giving people

00:56:53.440 | both sides to every story." So, what would your response be to a question like that?

00:56:58.600 | I love investing. I love stocks. I've earned a decent return since I started investing

00:57:04.180 | in the stock market, but I actually made the decision to pay off my mortgage fully aware

00:57:09.600 | of the math that goes into it. So, there is a very strong mathematical argument that you

00:57:14.480 | should never pay off your mortgage. You should leverage it as much as possible, and you should

00:57:18.740 | take the difference, and you should invest it into the stock market. You'll earn a spread

00:57:23.020 | on the return. So, why on earth would I pay off my mortgage if I do believe that? And

00:57:28.860 | it just, to me, gets back to, what's the whole point of money? Why do we invest in the first

00:57:33.980 | place? What's the highest use of money? The highest use of money is for us to live the

00:57:38.060 | life we want without my money being a financial factor. So, when I made the decision to do

00:57:44.360 | so, me and my wife made the decision to do so, what we asked ourselves was, "Does permanently

00:57:49.620 | eliminating our largest fixed monthly cost make our lives better?" Yes, it does! By paying

00:57:56.540 | off my mortgage, my future expense rate is permanently lower, literally, for the rest

00:58:02.400 | of my life. So, I don't really care that the money would be better spent by putting it

00:58:07.100 | into the market. What I cared about was lowering my fixed monthly costs forever. So, that way,

00:58:13.100 | the future amount of money that I have to make in any given month, the amount that I

00:58:16.820 | need to live on, is permanently lower. It gets back to what Morgan Housel, I think,

00:58:21.140 | said so brilliantly. "My financial goal is to make my finances unbreakable." I want to

00:58:27.180 | make myself immune to the economic cycle. I don't want to have to worry about losing

00:58:32.320 | my job or my family's life being disrupted at all for financial reasons. That's why I

00:58:37.340 | keep a pretty sizable amount of cash out there, and that's why I also have zero debt to myself.

00:58:43.400 | Doing so gives me a level of freedom and allows me to think and act long-term, and really

00:58:48.240 | helps me to sleep at night. Knowing full well that the mathematics of that decision is unfavorable.

00:58:55.320 | I would be richer today if I didn't decide to pay off my mortgage, but I would go back

00:59:00.240 | and do the exact same thing in a heartbeat.

00:59:02.480 | And just for all the credit card nerds listening, a no-debt lifestyle does not mean you don't

00:59:08.140 | use credit cards to earn points and cash back and then pay them off each month, correct?

00:59:12.560 | Oh, yeah. I love credit card hacking. I'm a big fan of credit cards. I'm just a bigger

00:59:16.860 | fan of living debt-free. So, like people say that are in the travel hacking world, table

00:59:21.260 | stakes is no credit card debt. Table stakes is paying them off every month. I think there's

00:59:25.940 | a way to use credit cards responsibly to earn higher rewards, like promote. So, yes, I also

00:59:30.220 | do that.

00:59:31.220 | I just have to throw it out there because I know there's the Dave Ramsey contingency.

00:59:35.340 | No debt means not even using credit cards. I don't want people to think, "Oh, Brian,

00:59:39.780 | this guy doesn't even believe in credit card points," because I know you play that game

00:59:42.900 | as well.

00:59:43.900 | So, to wrap us up, I want to hear some of your local recommendations for anyone who's

00:59:48.120 | taking a trip to Rhode Island. Would love to hear favorite meal or someplace people

00:59:52.740 | should go check out to eat, a place to meet up, grab a drink with a friend, and an activity

00:59:57.420 | that's not the most obvious thing for anyone to do. And take your time if you want to...

01:00:01.540 | Yeah. We're blessed in Rhode Island to have Providence, which has tons of great restaurants

01:00:05.920 | in it, no matter if you're into steak or seafood or sushi or Indian food or that kind of thing.

01:00:11.140 | But there's a wonderful restaurant downtown called Hemingway's, which is a perennial popular

01:00:15.960 | pick for seafood. So, I would say that's a great place to get a meal.

01:00:19.940 | Great activity to do. Also in Providence, at night over the summer, there's something

01:00:24.640 | called Water Fire, which is when they take gondolas and on the little river that's downtown,

01:00:29.500 | they do bonfires in the middle of the river up and down them. And it's right by Rhode

01:00:33.980 | Island School of Design, so RISD. So, there's all kinds of paintings and sculptures that

01:00:38.780 | are on display at the time. It's just a really nice way to spend the night, especially if

01:00:42.740 | it's a nice night out, walking along the river, watching these fires and seeing some kind

01:00:46.300 | of artsy things on the side of the road. Not something that many people know about Rhode

01:00:50.500 | Island. And the last one was a...

01:00:52.420 | Grab a drink after.

01:00:53.620 | Like many parts of the world, we have also seen an explosion of breweries in Rhode Island.

01:00:57.940 | So, Rhode Island is a pretty small state and I think there's like 17 breweries in our state.

01:01:02.820 | One of them that I'll give a shout out to is Tilted Barn Brewery in Exeter, Rhode Island.

01:01:07.260 | It's just got a wonderful atmosphere and some very tasty beers, if that's your thing.

01:01:11.060 | Awesome. Thank you so much for joining us on the show. I think in the last few years,

01:01:15.740 | there's been so much conversation about the craziness of meme stock investing and people

01:01:20.380 | taking wild risky bets with stock. So, I feel like it was really a breath of fresh air to

01:01:24.540 | talk about stock investing and what I'll call a more civilized and rational approach than

01:01:30.500 | just taking crazy bets. So, thank you so much for being here. Where can people find everything

01:01:35.420 | you're writing and the content you're creating online?

01:01:37.660 | Sure. The best place to connect with me is on Twitter. That's where I'm the most active.

01:01:41.700 | If you're interested in learning how to invest in individual stocks or my checklist, check

01:01:45.380 | out my YouTube channel, which is just my name, Brian Feraldi on YouTube.

01:01:48.700 | Awesome. Thank you so much for being here.

01:01:50.700 | Chris, thanks so much for having me.

01:01:52.580 | I really hope you enjoyed this episode. Thank you so much for listening. If you haven't

01:01:56.900 | already left a rating and a review for the show in Apple Podcasts or Spotify, I would

01:02:01.540 | really appreciate it. And if you have any feedback on the show, questions for me, or

01:02:05.620 | just want to say hi, I'm Chris@allthehacks.com or @hutchins on Twitter. That's it for this

01:02:11.700 | week. I'll see you next week.

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