Hunting_For_Unicorn_Stocks
00:00:00.000 | Hey guys, it's Sam from Financial Samurai and it's good to hear from you guys again.
00:00:05.040 | I took a nice little break to recharge, to rest, to do a lot more writing and I do appreciate all
00:00:12.320 | the positive reviews you've given me on iTunes, Spotify, Google Play. It's motivating and it's
00:00:19.360 | also very encouraging to keep on going because goodness knows it's a rough, rough time right now
00:00:26.080 | given everything is still closed in the middle of July. And frankly I thought things would be better
00:00:31.920 | by July. I thought more things would be open but at least here in California we're rolling back,
00:00:38.400 | I don't know, one or two phases. So now not even outdoor zoos are open anymore so that's a bummer.
00:00:44.800 | But what are you going to do right? What are you going to do when let's say your baby is crying at
00:00:50.400 | 11 p.m and wakes up your toddler and then after about 30 minutes of soothing your baby finally
00:00:57.600 | goes to sleep but your toddler's wide awake and then he just can't go to sleep and he's just
00:01:03.920 | playing around and then he bonks his head and he starts crying and then he wakes up your baby.
00:01:08.560 | It's like oh my goodness. I've talked to so many parents trying to just chuggle
00:01:15.680 | parenthood and work. I mean we don't have official work but we do like to write. I love to write.
00:01:22.560 | I love to address business opportunities that come my way on Financial Samurai and I like to do these
00:01:28.480 | podcasts but it's kind of crazy folks. Everybody really needs to take a step back and pace yourself.
00:01:36.320 | Pace yourself because there's just an endless amount of things you could do because you're
00:01:41.120 | just stuck at home. We're stuck at home and I'm thinking well why don't I work on the forums and
00:01:45.600 | the podcast and write posts and write a new book. We need to take a step back and think about what
00:01:53.120 | our priorities are so we don't push ourselves too hard and burn out and we don't feel too much
00:01:59.840 | anxiety. I definitely feel this anxiety like oh man I got to do this this and that or I just
00:02:06.880 | need to take a step back and think about the top two maybe three things I need to focus on
00:02:12.160 | and those two things are my children and writing. So if you're feeling a little bit burnt out
00:02:17.760 | I totally feel how you're feeling and to make yourself feel better and to make me feel better
00:02:24.800 | I think we've got to look at the bright side of things and one of the bright sides is the stock
00:02:29.600 | market. I mean the Nasdaq is up over 20% year to date. We're 20% higher than before the pandemic
00:02:38.000 | began. That's crazy and now the S&P 500 at 3200 is about back to where we started at the beginning
00:02:46.640 | of the year. So it's as if nothing has happened at all at least in terms of our public stock
00:02:53.040 | investments at least and frankly this feels really really weird. It feels like we're in this dream
00:02:59.520 | world where if we wake up we're gonna see devastation in the streets, buildings collapsed,
00:03:07.840 | and our true net worth down 50 to 80 percent and we're hoping we're hoping we don't wake up from
00:03:13.600 | this dream but the reality is this is real. This is real that the stock market is doing okay in 2020
00:03:21.280 | despite all that is going on. So one of the things I want you guys to think about
00:03:26.640 | is what the stock market represents. There are probably literally millions of variables that go
00:03:32.480 | into determining the value of the S&P 500 because there's 500 companies and each company has
00:03:38.720 | different variables to determine earnings and growth rates and forecast assumptions and so
00:03:43.200 | forth and it can get very very difficult and complicated to try to forecast the future.
00:03:48.800 | I've always told all of y'all to try to forecast the future six months, 12 months. It's very hard
00:03:54.480 | to do but it's a good exercise to think about the future so you can plan ahead and let's be frank
00:04:00.400 | the future is murky right now. It's maximum uncertainty. If you watch the news which I don't
00:04:06.640 | recommend you watch too much of or if you stay on social media especially Twitter you will see
00:04:12.160 | a tremendous amount of fear, terror, arguments, debates that have really brought to the forefront
00:04:21.680 | a lot of suffering if you pay a lot of attention. Now I don't know if this is good for your mental
00:04:26.880 | health. Actually it can be good for your mental health looking at this stuff all day long so I
00:04:31.840 | recommend you to take a social media break, take a news break, turn off your electronics, maybe
00:04:39.040 | listen to a more soothing calm podcast or read a book or something but I want to say that out of
00:04:46.320 | all the variables that go into determining the S&P 500 just pay attention to the one which is
00:04:52.080 | the level it is right now and the level it is right now is saying things are going to get better.
00:04:57.040 | Everything will be okay. There will be progress. Believe in capitalism and you know these firms
00:05:04.640 | like Moderna, Pfizer, Gilead trying to search for that vaccine to release by the end of the year
00:05:13.360 | or by 2021 at the latest. Things are going to get better folks and you have to believe it'll get
00:05:19.360 | better and there's really a good chance that the stock market knows something more than what we
00:05:25.600 | know, more than all the talking heads, the bulls and the bears out there arguing their positions
00:05:31.840 | and arguing their books. The stock market generally knows more than we do if you look at history and
00:05:37.840 | so I believe things will be okay. Now in terms of the stock market it's very interesting because I
00:05:44.720 | think most of us would agree that investing passively in index funds or ETFs is the way to go
00:05:52.080 | and we know this is the way to go because the data says it's the way to go. The large majority
00:05:58.400 | of actively run equity mutual funds and bond funds have underperformed their respective indices,
00:06:05.680 | their respective benchmarks. We're talking 80 plus percent of actively run equity mutual funds have
00:06:12.320 | underperformed the S&P 500 and other various indices. So with this data in mind you would
00:06:18.480 | kind of be a fool to invest the majority of your investable assets in an actively run fund. Yet
00:06:26.480 | despite the data actively run funds still account for something like 45-50 percent of all the funds
00:06:33.120 | out there and all the assets under management out there. So if you want to get rich, actually the
00:06:37.600 | better way is to study finance, to study investing, to study cash flows and income statements and
00:06:43.600 | balance sheets and try to be an analyst or a portfolio manager at one of these actively run
00:06:48.800 | money management firms. These folks make bank. They're talking hundreds of thousands of dollars,
00:06:54.640 | if not millions of dollars if you're a partner at one of these private money management firms.
00:06:59.920 | They're really going to get paid regardless if they underperform or outperform. Now obviously
00:07:05.600 | they're going to make even more if they outperform, but even if they're underperforming
00:07:09.120 | they're still making hundreds of thousands of dollars. And if you want to join the sell side,
00:07:13.440 | well it's also quite lucrative as well. There's this one fellow, a Tesla analyst at J.P. Morgan,
00:07:20.320 | and he has been negative on the stock and he's had a sell rating something like four years in a row
00:07:28.000 | and he just upgraded the target price to $290 a share when the stock is at $1,500 a share or
00:07:36.480 | thereabouts. We're talking about a 5x difference, folks, and he's still sticking to his $290 target
00:07:43.040 | price. Well, it's a new one. I mean, that's a joke. But he's still going to get paid probably
00:07:48.160 | a $250,000 base and he's probably going to get a bonus of maybe, I don't know, $100,000 to $500,000,
00:07:55.440 | maybe more. So the other lesson is never doubt yourself. There are people out there making lots
00:08:03.200 | of money every single day without the proper experience or the results. So you have got to
00:08:10.560 | believe in yourself because if you actually do deliver on incredible product, incredible service,
00:08:17.680 | you're actually going to do even better. So back to the original thesis of this podcast, which is
00:08:22.640 | what should be the right split between active and passive or passive and active. And I think we
00:08:30.640 | should all agree that the majority of our investable assets should be in passive investing.
00:08:35.840 | And so there's different splits for different types of personalities. I think the vast majority
00:08:41.120 | of people, the average person who is not a professional stock picker, doesn't work in
00:08:46.000 | finance and so forth, should probably have 80 to 90% of his or her investable assets in passive
00:08:53.200 | index funds or ETFs. And for the remaining 10 to 20%, you can invest in actively run mutual funds
00:09:02.480 | that have historically done well, that are 5 star, morning star rated, and so forth. In addition,
00:09:08.960 | you can use part of the 10 to 20% to actively invest in individual stocks. I've been doing
00:09:15.440 | this since 1996, I believe, when I first opened up my first online brokerage account. And the
00:09:21.440 | idea was quite simple. Why not invest in companies you love, whose products you use,
00:09:28.480 | and then invest a majority of your funds in an index fund. So it's an index plus or a passive
00:09:36.160 | plus strategy. I like this strategy a lot for several reasons. One, if you just invest 100%
00:09:43.200 | in the S&P 500, for example, you're going to ride the ups and downs of the S&P 500, which is great
00:09:49.360 | over the long term, because the S&P 500 has proven to return about 8 to 10% a year since about 1926.
00:09:56.160 | But you're not going to be able to outperform the masses who invest all of their assets in the S&P
00:10:01.920 | 500. You will outperform those who don't bother investing, who don't listen to Financial Samurai,
00:10:08.080 | or read any other financial websites or news sites. That's fine. But you're also trying to
00:10:15.840 | outperform the masses who do invest, because wealth is relative. And if you just stick 100%
00:10:22.640 | to index funds, you're always going to be part of the average person who invests in index funds.
00:10:27.760 | Now, if you can invest 10% to 20%, you have a chance. You have a chance of outperforming. And
00:10:36.320 | that hope and that chance is predominantly the reason why there are still so many actively run
00:10:42.480 | funds out there. People are hoping that they choose the right fund. The fund managers themselves are
00:10:48.960 | hoping that they outperform, because sometimes they will. 20%, 30% of the time, they will
00:10:54.720 | outperform in one year, or over five years, or three years, or whatnot. And so long as there's
00:11:00.320 | hope and as long as there's a chance, people are always going to try to risk their money into
00:11:06.160 | thinking they can outperform the market. But we all know we can't. Now, if you just allocate 10%
00:11:10.720 | to 20%, even if you lose all your money, which you're probably not going to if you have a
00:11:15.520 | relatively diversified portfolio of at least 5% to 10% positions in your 10% to 20% active investing
00:11:21.920 | allocation. Even if you lose all your money, you're still going to have 90% to 80% of your
00:11:26.320 | money left that's going to go up and down with the S&P 500. But there are chances. There are
00:11:31.840 | opportunities where you could be able to significantly outperform the S&P 500 if you
00:11:37.200 | invest in the right stock. And we all know that tech stocks have done tremendously well over the
00:11:41.760 | past 10, 15 years, actually for longer than that. There's names like Google, Facebook, Apple,
00:11:48.080 | Amazon, Tesla. And there will continue to be great outperformers out there. So why not go hunting?
00:11:55.280 | And if you go hunting, maybe you start with just one position, a small position. You learn about
00:12:00.000 | the company. You learn how to analyze the company. You learn how visionaries and leaders think and
00:12:06.800 | how they plan ahead. You might get better investing over time. You might get lucky.
00:12:11.760 | You might want to own the stocks or the very products you use every single day. As soon as we
00:12:17.600 | had our baby, we decided to go Amazon Prime. And we're thinking, "Man, Amazon Prime is a lifesaver
00:12:24.160 | because we don't have to go out and get stuff like diapers and so forth anymore. We just have
00:12:29.120 | everything delivered." So we started aggressively buying Amazon stock. And so whatever that company
00:12:35.040 | is, it actually feels great to use the product and then invest in the product and hopefully make
00:12:41.360 | money in the product to then pay for more of the product for free. Not bad if you can make it
00:12:47.440 | happen. However, we all know that we cannot consistently outperform the index, which is why
00:12:54.320 | we need to keep that active investment portion to a minimum. There was an interesting JP Morgan study
00:13:00.240 | that said that the average investor returned 1.9% between 1999 and 2018. So that's a 20-year period.
00:13:09.280 | 1.9% a year. I mean, that doesn't even beat inflation during that time or money market
00:13:14.880 | funds or the 10-year Treasury bond yield. So we investors, we retail investors, are terrible at
00:13:21.120 | picking stocks. Let's just be aware of that. And we also, most of us are not professional investors.
00:13:27.200 | We don't have time to wake up an hour before the stock market opens at 5.30 here on the West Coast
00:13:32.320 | and read up all the research, get on earnings conference calls and analyze income statements.
00:13:38.800 | We don't have time. We have other day jobs. We have kids to take care of. We have friends to
00:13:44.160 | hang out with. Well, maybe not too many friends now with the lockdowns, but you get what I'm saying.
00:13:50.240 | We've got other things to do. So let's not kid ourselves about being able to consistently
00:13:54.480 | outperform. Time and time again, folks, I have seen our investment winners get into our heads.
00:14:01.840 | We start suddenly confusing brains with a bull market, which is a classic saying on Wall Street.
00:14:08.080 | And then we start taking excess risk with our money. And then, surprise, surprise, things kind
00:14:14.880 | of shock us into losing money and bad things, exogenous things happen. And then we're left
00:14:20.880 | in tears trying to pick up the pieces. So 80 to 90 percent in passive investing, the rest
00:14:28.320 | in active investing. You know, obviously, do your due diligence, do your work, make calculated bets,
00:14:34.960 | diversify your portfolio and good luck to you. It is an absolutely absurd time in the stock market
00:14:41.520 | right now with tech stocks going up like crazy. The S&P 500 almost back to even and still so much
00:14:48.480 | uncertainty. So please, folks, be responsible when you're investing. Take calculated bets.
00:14:54.960 | The last thing I want you guys to do is lose more money than you can afford.
00:14:59.680 | Thanks so much, everyone, again, for all the positive reviews. It keeps me going.
00:15:04.240 | and I'll talk to you guys later from the hot tub hopefully in a week or two.