Using an Investing Checklist to Improve your Portfolio | Brian Feroldi

00:00:00.000 | What's happening at an individual company can be wildly different than what's happening

00:00:04.920 | with the market in general.

00:00:06.680 | When the market is down, there can be companies that are up, and when the market's up, there

00:00:09.860 | can be companies that are down.

00:00:11.920 | But when I'm deploying capital in my investment portfolio and trying to invest in individual

00:00:16.540 | businesses, what I'm trying to do is optimize at any given time for the best combination

00:00:21.640 | of high-quality businesses, according to criteria that I selected, times the highest long-term

00:00:28.520 | potential times the companies that are trading at the most attractive valuation at any given

00:00:34.080 | time.

00:00:35.080 | So it's really the combination of those things that I look to deploy my capital into at any

00:00:39.400 | given month.

00:00:40.400 | Hello, and welcome to another episode of All the Hacks, a show about upgrading your life,

00:00:46.040 | money, and travel.

00:00:47.680 | I'm Chris Hutchins, and I am excited you're here today to talk about investing.

00:00:51.600 | And we're joined by none other than Brian Feraldi.

00:00:54.800 | He's a financial educator and author of a new book called Why Does the Stock Market

00:00:59.020 | Go Up?

00:01:00.520 | Everything You Should Have Been Taught About Investing in School But Weren't.

00:01:04.280 | It comes out April 5th, but I got an advance copy, and I really enjoyed it.

00:01:09.080 | Brian has also written more than 3,000 articles on stocks, investing, and personal finance

00:01:14.400 | for The Motley Fool.

00:01:16.160 | But I got to know his content through the detailed investing checklists he publishes

00:01:20.520 | and follows for all his new investments.

00:01:23.520 | In our conversation, we'll talk about current market volatility, Brian's counterintuitive

00:01:28.640 | investing philosophy, making an investor checklist, evaluating risk, figuring out when to sell,

00:01:36.320 | taking asymmetric bets, and a lot more.

00:01:39.520 | That is so much to cover.

00:01:41.240 | So let's jump in.

00:01:42.240 | Brian, thanks for being here.

00:01:49.160 | Chris, awesome to be here.

00:01:50.160 | I'm pretty sure I'm a day one listener to this podcast, so it's cool to be on it.

00:01:54.000 | That is awesome.

00:01:55.000 | Thank you for your support and for everyone else here listening.

00:01:57.800 | So you've got a book coming out in a few weeks, Why Does the Stock Market Go Up?

00:02:01.560 | And I was thinking about that this morning.

00:02:03.520 | And for anyone listening, we're recording on Wednesday, March 9th.

00:02:06.000 | I was like, gosh, you know, in the last month, the market's down about 7%.

00:02:10.120 | But somehow today we're up 2.5%, which seems like some wild volatility.

00:02:15.320 | You wrote the book.

00:02:16.400 | How do you make sense of all this?

00:02:17.800 | Yeah, the last two years have been fascinating to watch as an investor.

00:02:22.560 | I mean, it was really February and March of 2020 when COVID was taking over.

00:02:28.140 | We saw the fastest bear market in stock market history, where over the course of a month,

00:02:33.000 | didn't matter what you did, whatever stock or fund that you held, it was going down and

00:02:37.480 | it was going down hard.

00:02:39.040 | And then immediately after that, with everything changing in the world, I would have predicted

00:02:43.240 | that it was going to be a terrible year for the markets and a terrible year for investors.

00:02:47.440 | In fact, we saw the exact opposite, where stocks just shot up to the moon, and it was

00:02:52.240 | almost like the higher risk the stock, the better the stock did.

00:02:56.560 | I mean, the numbers were off the charts good.

00:02:59.720 | And then over the last year, we've seen kind of reversal of that, when a lot of the stocks

00:03:04.040 | that were left behind in 2020 have since caught up, things like energy stocks and real estate

00:03:08.280 | stocks, and stocks that were the go-go stocks of 2020, things like Zoom and Roku and Peloton

00:03:17.680 | have just been train wrecks from an investing perspective.

00:03:21.400 | But that's just how investing works.

00:03:23.960 | Over the short term, what determines the value of any given stock or any given indice is

00:03:29.440 | just the collective emotions of all market participants, how investors feel about the

00:03:35.160 | markets.

00:03:36.160 | And that is always so hard to predict and so hard to read.

00:03:39.160 | So I view the stock market, what it's done over the last couple of years as fascinating,

00:03:43.640 | but entirely normal.

00:03:45.160 | Okay.

00:03:46.600 | And how do you think about calm times, volatile times?

00:03:50.680 | Are we in one of them?

00:03:51.680 | Are they all one and the same, and you should just prepare for them at any moment?

00:03:55.520 | Yeah, when you're investing in the stock market, you never know what you're going to get over

00:03:59.820 | any short period of time.

00:04:02.120 | That's why the stock market is a great, great place to put capital that you don't need for

00:04:06.520 | at least three to five years.

00:04:08.480 | But it's a really poor place to put money that you're going to need in any shorter period

00:04:12.360 | of time.

00:04:13.360 | So if you need money in the next three years for college or for a house or for a car, anything

00:04:17.400 | like that, there's a reason why people say don't put it in the market, because no matter

00:04:21.300 | how good times see right now, that doesn't mean that the market's going to perform well.

00:04:26.760 | The inverse is also true.

00:04:28.200 | It looks pretty dark out there right now.

00:04:30.400 | We have a war going on, we have inflation going on, we have interest rates that are

00:04:34.640 | rising.

00:04:35.640 | Lots of high growth stocks have been pulverized and are down huge, but there's still no telling

00:04:40.540 | what the near term returns of the stock market are going to be.

00:04:43.840 | So it's really important that if you're going to invest in the market, which I think everybody

00:04:48.360 | should be doing with their long term capital, you have to do so in a way that allows you

00:04:53.000 | to endure short periods of extreme volatility, because that is the norm for the market.

00:04:58.480 | What advice do you have for people who are just today thinking about, wow, we are in

00:05:02.500 | this very volatile time.

00:05:04.560 | Should they be investing right now?

00:05:06.000 | Is now a good time to get in the market?

00:05:08.120 | Or how do you feel about trying to time things like this?

00:05:10.360 | I never try and time things myself, because again, if you were to ask me what's going

00:05:13.840 | to happen in 2020, I would have said the market's going down.

00:05:16.200 | If you asked me what's going to happen in 2021, I would have said the market's going

00:05:18.880 | up.

00:05:19.880 | And I would have been wrong, essentially, on both accounts.

00:05:22.480 | So my own history with trying to time the market shows how poor I am at it.

00:05:28.040 | For that reason, I just say ignore the timing and when to get in.

00:05:32.000 | Instead, just focus on being in the market and being a continual buyer of the market.

00:05:36.880 | It's just called dollar cost averaging.

00:05:39.080 | If you can dollar cost average for a long period of time, the timing of your buys becomes

00:05:43.800 | irrelevant.

00:05:45.000 | Do you think there's at least some argument to if the market is down and you're able to

00:05:50.720 | see that that's the case to get in now, like people who invested after the crash in 2020?

00:05:57.160 | No, absolutely.

00:05:58.160 | I mean, the best time to buy the market is when it's on sale.

00:06:01.760 | However, predicting when those sales are going to be, it's always an endeavor that isn't

00:06:08.320 | really worth the time or even that hard to do.

00:06:10.880 | However, if you're the type of person that has cash on the sidelines, saving it for a

00:06:15.360 | time when the market does fall, I think right now is a great time to put extra capital in

00:06:20.520 | if you have that ability, with the foresight being that you don't know what's going to

00:06:24.800 | happen next.

00:06:25.800 | I think we're down 20% from the highs last year, which is officially in bear market territory,

00:06:33.320 | but that doesn't mean that stocks can't continue to fall further.

00:06:37.480 | If you're in that fortunate position of having cash that you've been waiting to invest and

00:06:41.040 | you're looking to do so, one trick that I like to tell people to do is come up with

00:06:49.100 | a schedule for investing that capital.

00:06:51.160 | Let's say you have, to make things easy, $5,000 and you want to invest $1,000 a month over

00:06:56.560 | the next five months.

00:06:57.560 | You don't know what's going to happen to the market over that time, but you just create

00:07:01.840 | a schedule for yourself.

00:07:03.080 | Well, if by chance you invest $1,000 on the first day, and then the next week the stock

00:07:08.560 | market falls 5% or 10%, then accelerate your next purchase early, and that way you can

00:07:15.880 | take advantage of that temporary dip and then just stick to the schedule thereafter.

00:07:20.760 | But if the stock market stays flat or goes up, you just stick to your regular investing

00:07:25.880 | schedule.

00:07:26.880 | That's one way that you can deploy capital more efficiently if you want to take advantage

00:07:32.120 | of dips.

00:07:33.120 | That makes sense.

00:07:34.200 | We haven't really talked about what to invest in, so before we get there, how do you think

00:07:38.540 | about building your own investment portfolio?

00:07:41.280 | I know there's a massive world of investments out there, and we've had on some folks like

00:07:45.000 | Andy Ratcliffe and Ben Carlson, and we've talked about passive investing and index funds

00:07:49.760 | and that kind of stuff.

00:07:50.760 | But for you personally, how do you think about your portfolio?

00:07:53.440 | I'm a massive fan of index funds, always have been, always will be.

00:07:57.440 | I think that index funds plus dollar cost averaging, as those gentlemen pointed out,

00:08:02.160 | is just a wonderful formula for building wealth over long periods of time.

00:08:06.660 | And that's what I personally do with all of my retirement funds.

00:08:09.520 | I just kind of set it up once to drip into, to steadily build into index funds, and that's

00:08:14.400 | what they do.

00:08:15.400 | And with my capital that I have in my regular brokerage account, I love analyzing businesses,

00:08:21.920 | studying businesses, and buying individual stocks.

00:08:24.760 | I've been doing that personally for about 15 plus years now.

00:08:29.280 | So any capital that I have beyond my retirement funds, that's where I deploy it.

00:08:34.840 | So at any given time over the course of a month, I typically buy a handful of stocks

00:08:39.840 | myself.

00:08:40.840 | And to do so, I just created a list of companies that I'm interested in investing in, according

00:08:47.720 | to a checklist that I created.

00:08:50.360 | And prices are changing dynamically all the time.

00:08:53.360 | And what's so fascinating about if you invest in the individual company level, what's happening

00:08:57.960 | at an individual company can be wildly different than what's happening with the market in general.

00:09:03.760 | When the market is down, there can be companies that are up, and when the market's up, there

00:09:06.960 | can be companies that are down.

00:09:09.000 | But when I'm deploying capital in my investment portfolio and trying to invest in individual

00:09:13.600 | businesses, what I'm trying to do is optimize at any given time for the best combination

00:09:18.720 | of high-quality businesses, according to criteria that I selected, times the highest long-term

00:09:25.600 | potential times the companies that are trading at the most attractive valuation at any given

00:09:31.160 | time.

00:09:32.160 | So it's really the combination of those things that I look to deploy my capital into at any

00:09:36.440 | given month.

00:09:37.440 | So I want to get into those three things.

00:09:39.600 | But before that, how do you think about risk-taking?

00:09:42.880 | Do you think of your single-stock investing as a more portfolio approach where you can

00:09:48.040 | kind of diversify amongst stocks and it's actually not quite as risky?

00:09:52.360 | Or I think if you talk to most passive investors, they would say, "Gosh, if you go buy a stock,

00:09:57.840 | that's really risky.

00:09:58.840 | You don't want to do that.

00:09:59.840 | You want to bet on the market."

00:10:00.840 | So how do you think your type of stock investing fits into general investing risk?

00:10:04.680 | Yeah, I think that they're actually two of the same.

00:10:06.760 | It really depends on how you are investing.

00:10:09.080 | When most people think about investing in individual stocks or businesses, what they're

00:10:12.200 | really trying to think about is timing the market and trading stocks, trying to buy them

00:10:17.680 | when they're low and sell them when they're high.

00:10:20.220 | And I have no interest in trading stocks myself.

00:10:23.000 | I view the portfolio, the investments that I'm making outside of my retirement funds,

00:10:27.480 | as essentially building my own index fund.

00:10:30.880 | So my style of investing is I look for high-quality businesses that I think can grow for many,

00:10:36.360 | many, many years.

00:10:37.560 | I buy those companies and I try and hold them as long as they remain great businesses.

00:10:43.240 | So I'm not trying to trade in and trade out of companies.

00:10:46.400 | I move my portfolio very, very slowly.

00:10:49.080 | So what I'm trying to do is handpick, essentially, my own index fund and let those businesses

00:10:56.440 | grow for long periods of time.

00:10:58.320 | I know you're a fan of the investment policy or investment policy statement.

00:11:02.840 | How have you used that concept, and for anyone who isn't familiar, maybe walk through what

00:11:08.280 | it is to guide your investing decision?

00:11:11.100 | I think this is something that so many people overlook when they start investing, is they

00:11:15.920 | don't really sit down and write down why they're investing in the first place.

00:11:21.280 | They just think, "I have some money.

00:11:22.920 | This stock thing sounds interesting.

00:11:24.600 | I'm just going to do that."

00:11:25.720 | But I think it's really important to take a step back and ask yourself, "What is the

00:11:29.640 | purpose of this capital?

00:11:31.440 | Why am I choosing it to invest it in any given way?"

00:11:35.560 | One tool that you can use to do that is just called an investor policy statement.

00:11:40.040 | Just a very simple set of rules that you set up for yourself before you start investing,

00:11:45.480 | and you can use it to guide your decision making over time.

00:11:49.320 | For me, for example, my long-term investing goal is to grow my capital over long periods

00:11:57.320 | of time for as long as possible at as high of a rate as possible, while simultaneously

00:12:02.760 | assuming as little business risk as possible.

00:12:06.720 | Now, business risk means that the companies that I'm investing in, I actually think are

00:12:10.680 | low-risk businesses.

00:12:12.800 | That doesn't mean that their stocks aren't high-risk and very volatile, but the underlying

00:12:17.040 | businesses that I invest in are actually fairly low-risk businesses.

00:12:21.660 | All capital that I put into the market, I don't plan on touching for at least five years,

00:12:27.260 | and all of my short-term capital needs are funded by cash that I have on hand, and then

00:12:33.160 | income from mine and my wife's jobs.

00:12:37.600 | Because of that, we actually take a very conservative approach to our personal finances.

00:12:42.820 | We have a large emergency fund, we have a high savings rate, we have multiple sources

00:12:50.200 | of income, we have no debt of any kind, so our personal finances are very, very conservative.

00:12:56.120 | By doing that, that allows us to essentially, with our investment portfolio, be 100% stocks

00:13:02.640 | and 0% bonds.

00:13:05.600 | That in itself means that my portfolio is going to be far more volatile than the average

00:13:09.960 | portfolio that has a mix of cash or a mix of bonds in there.

00:13:13.480 | However, I'm perfectly fine with that volatility because I know that any money that I put into

00:13:18.840 | there, I don't need to touch for a period of years, but I think that people could do

00:13:24.640 | so much better for themselves if they just sat down and asked themselves, "The money

00:13:28.760 | that I'm going to put into the markets, what's its purpose?

00:13:32.720 | What are my investing goals, and how long can I keep it in there?"

00:13:37.320 | I like that.

00:13:38.320 | Is there a place to get some examples, maybe your book or your website, of those policy

00:13:43.260 | statements and how to start thinking about writing one?

00:13:45.840 | Yeah, now that you're saying that, I missed a big opportunity by not putting it into my

00:13:49.760 | book.

00:13:50.760 | But if you just Google the terms "investor policy statement," there's lots of examples

00:13:53.960 | online that you can use as a guide.

00:13:56.320 | Cool.

00:13:57.320 | Okay.

00:13:58.320 | And so you've got your policy statement, and now let's move on to this process of finding

00:14:02.800 | something to invest in, to start building out that portfolio.

00:14:05.520 | I know you're pretty well known for creating an investing checklist.

00:14:09.160 | So where did that come from, and how has it evolved?

00:14:12.640 | And talk a little bit more about it.

00:14:13.960 | Sure.

00:14:14.960 | So if you're into investing, as I am, I started to research.

00:14:19.440 | It's not hard to find companies to invest in once you know what to look for.

00:14:23.360 | I mean, there's so many places that you can get investing ideas, whether it's following

00:14:27.420 | some big, famous investors like Warren Buffett or Cathie Wood, reading free articles that

00:14:32.440 | are online, cracking open exchange-traded funds, looking at your own life and seeing

00:14:37.240 | what products or services do I use or does my company use.

00:14:41.640 | The list of potential investments that you can make is huge.

00:14:43.840 | I mean, there's thousands of publicly-traded companies for anybody to invest in.

00:14:48.420 | When I first started out, I quickly became overwhelmed with choice, and I was essentially

00:14:52.960 | trying to think in my own head, "Well, this business I really like because it's run by

00:14:58.440 | its founder and it has a great balance sheet, but this other business has great margins,

00:15:03.400 | high long-term potential, and there are all these factors that I was trying to keep in

00:15:07.640 | my head to weigh investments against each other."

00:15:10.080 | Turns out that's a really poor way to do it because our brains are not built that way.

00:15:15.120 | Finally, I got smart enough to say, "Maybe I should write this down and create some rules

00:15:20.720 | for myself that I can use to guide my decision making."

00:15:24.360 | I would suggest that everybody that invests in anything beyond index funds goes through

00:15:28.520 | this very process themselves.

00:15:30.560 | First, write down all of the attributes that would make any investment, a stock investment

00:15:36.480 | for example, attractive to you.

00:15:39.080 | I did that, and I came up with things like, "I want the management team to have a high

00:15:43.880 | percentage of ownership percentage.

00:15:46.160 | I wanted the revenue to be growing at a very high rate.

00:15:49.120 | I wanted revenue to be recurring in nature.

00:15:51.440 | I wanted it to be profitable.

00:15:52.960 | I wanted the company's balance sheet, how much cash it has, to far outweigh how much

00:15:57.760 | debt that it has," et cetera, et cetera, et cetera.

00:16:00.320 | I made a list of 30 things that I really wanted in any investment that I made.

00:16:05.000 | Simultaneously, I made another list, which is, "What are all the things that I don't

00:16:08.800 | want to see in an investment that I make?"

00:16:11.200 | For me, that's things like, "I don't like it when a company gets the majority of its

00:16:14.960 | revenue from just a handful of customers," that's called customer concentration.

00:16:19.720 | "I don't like it when a company is operating in an industry that I think is actively being

00:16:24.840 | disrupted, like the oil and gas industry right now.

00:16:28.400 | I think it's primed for disruption over the next 10 or 20 years.

00:16:31.440 | I don't want to make any investments in that.

00:16:34.400 | I don't like it when a company's stock-based compensation, the amount of options that they

00:16:38.360 | hand out to employees, is such a high rate that the dilution rate is high," et cetera,

00:16:43.840 | et cetera.

00:16:44.840 | I have my list of things that I'm looking for.

00:16:47.080 | I have my list of things that I don't want to see, and then I rank them in order of most

00:16:52.120 | important to least important.

00:16:55.360 | That's a tricky exercise to do when you really have to force yourself to rank things against

00:16:59.940 | each other, but it's so useful to do so.

00:17:02.440 | Finally, I have both of those things in place, and I just applied a very simple scoring system

00:17:08.440 | to weigh my criteria based on the factors that are most important to me, and the same

00:17:13.960 | goes for the factors that I'm not looking for.

00:17:16.960 | I just came up with a simple 100-point scoring system where I doled out 100 points in total

00:17:22.320 | based on the factors that I just listed.

00:17:26.220 | From there, I now have my criteria built out, so I can take any company that I come across,

00:17:32.320 | I can research it, and as I'm researching it, I'm filling out this checklist.

00:17:37.460 | At the end, when this process is all done, I get to know whether a company is a match

00:17:42.400 | for what I'm looking for in investment or not.

00:17:46.300 | From there, after you do this, I've done this now hundreds of times, I have a list of companies

00:17:52.460 | that are very attractive to me as an investor, and simultaneously, I have another group of

00:17:57.360 | companies that there's just no way I'm going to invest in.

00:18:03.200 | The process of creating a checklist for myself, ranking it, and scoring it has helped to clarify

00:18:08.380 | my decision-making so much.

00:18:11.120 | I have so many follow-up questions right now.

00:18:13.680 | I'm trying to take notes to organize them.

00:18:17.320 | A few things.

00:18:18.320 | One, you make this checklist of your own available on your website, correct?

00:18:21.600 | Yep.

00:18:22.600 | I made it freely downloadable.

00:18:23.600 | Yep.

00:18:24.600 | We'll make sure we link to that in the show notes.

00:18:26.600 | As you were walking through your criteria, it made me think, "Gosh, I'm not sure even

00:18:30.520 | I have an opinion on these things.

00:18:34.000 | Is this something that takes years of playing in the stock market to build?

00:18:39.100 | Do I care about whether there are a lot of options granted to employees?"

00:18:43.460 | These seem like things that the average person might not have an opinion on.

00:18:47.920 | Where do you suggest people get started, or is it best to use someone else's list, or

00:18:52.800 | is there a way to educate yourself on why you may or may not care about some of these

00:18:56.360 | things?

00:18:57.360 | Yeah.

00:18:58.360 | The checklist as it exists today is a constantly evolving process.

00:19:03.320 | What it is today is through trial, error, and most importantly, feedback that I've gotten

00:19:08.840 | from other smart investors that I respect.

00:19:11.960 | By studying the styles of great investors that I deeply respect, I find out what really

00:19:17.080 | matters to them, and then I took that and evolved it into what matters to me.

00:19:21.960 | I don't claim that the version that I have right now is "perfect."

00:19:25.960 | It's just the best version that I've come up with so far.

00:19:30.840 | To your point, all of these things do take time to research.

00:19:36.760 | If you want to go through the process of researching a stock, there's a lot that you have to learn.

00:19:41.440 | You have to learn accounting.

00:19:42.440 | You have to learn how to read SEC filings.

00:19:43.440 | You have to learn how to think about competitive advantages, studying the competition, thinking

00:19:49.140 | through the business model, studying potential risks.

00:19:52.460 | There's a lot to evaluating individual stocks.

00:19:55.120 | This is a big reason why so many people say, "Forget all that.

00:19:58.000 | Just stick with index funds."

00:19:59.360 | It's so much easier to do that.

00:20:01.720 | This process, I think, is a good process if you're in that 1% or 2% of the population

00:20:08.200 | that is really fascinated by business the way that I am and is really interested in

00:20:12.560 | studying the subject.

00:20:15.480 | That's why I created this.

00:20:16.600 | I absolutely love everything about investing in research companies, but I'm right there

00:20:21.720 | with you.

00:20:22.720 | This is a time-consuming process.

00:20:23.720 | It just turns off a lot of people.

00:20:26.880 | If there are specific companies that people listening to this are thinking about, I've

00:20:29.600 | actually gone and...

00:20:30.600 | Brian has a YouTube page where you actually break down going through your checklist for

00:20:34.400 | different companies.

00:20:35.400 | So I'll just give that a shout out because I thought that was really fun to go and look

00:20:39.640 | at a couple companies.

00:20:41.320 | And then even some where I think like Peloton is a great example.

00:20:43.840 | You did one and then you came back and did a recheck in because it had been an interesting

00:20:47.860 | adventure for that company.

00:20:49.080 | Yeah, we got that one wrong.

00:20:52.720 | And that happens, right?

00:20:53.720 | That's why you're making more than one bet.

00:20:55.880 | But what you said about it taking a lot of time.

00:20:59.480 | If someone listening to this is like, "Gosh, index fund investing is fine, but there's

00:21:04.840 | some companies that I like."

00:21:06.600 | Is there a place for trying to invest in those stocks that, whether you like them or you

00:21:11.320 | think they're exciting or the company has potential, that doesn't need to take this

00:21:15.200 | much time?

00:21:16.200 | Or is your general advice, if you're not going to take the time, you probably shouldn't do

00:21:19.280 | it?

00:21:20.280 | The best advice that I can give there would be always think about your overall asset allocation.

00:21:25.200 | So some people say that stock picking is a complete waste of time, they're not interested

00:21:29.000 | in it.

00:21:30.000 | Fine, just stick with 100% index funds and call it a day.

00:21:32.880 | But I think there's room for a happy medium in the middle.

00:21:35.800 | There are some people that I think should put say 90% or 95% of their assets into index

00:21:41.920 | funds.

00:21:42.920 | But if they have a hunkering or there's some businesses that they're really interested

00:21:45.880 | in or they want to research, I see nothing wrong with taking a few percent of your overall

00:21:50.720 | portfolio and putting it into investments that you pick out.

00:21:54.800 | So if you can pick say five companies or something like that, that you're really passionate about

00:21:59.080 | and put one or 2% of your portfolio in it, even if you're wrong, even if the process

00:22:03.680 | that you go through, or if you don't want to do the research, you just want to make

00:22:06.800 | an investment in those companies, even if you're wrong about them, well, 90% of your

00:22:11.280 | net worth is perfectly fine and put in the market.

00:22:14.640 | So if you don't want to go through the research process and you just want to put a little

00:22:18.000 | bit of capital in, I think that's fine so long as you size it appropriately.

00:22:22.440 | As I walk through what you're saying, I'm realizing that you're presenting us all with

00:22:27.960 | an option for building a part of your long-term diversified portfolio on your own with stocks.

00:22:35.480 | So I think some people listening might think, "Well, gosh, the advice is usually it's okay

00:22:39.720 | to take some bets with 5% of your portfolio, but be safe with 95%."

00:22:46.240 | You echoed that sentiment, but you've said, "Look, if you take the 95%, there's a different

00:22:50.720 | way than index funds that you could invest that 95%."

00:22:55.040 | And for you, it sounds like some of it is index funds, but some of it is building a

00:22:58.680 | portfolio of a lot of stocks that you spend time and research on.

00:23:02.520 | Do you think that the type of stock investing you're doing is more like passive investing,

00:23:08.240 | or is it more like the kind of wild bets people often say they're taking with stocks?

00:23:13.880 | And I ask that because it feels like it actually is more like passive investing.

00:23:16.960 | Yeah, if you crack open the S&P 500, you might naturally think that you're diversified equally

00:23:24.320 | across 500 companies.

00:23:26.440 | That's actually not the case.

00:23:27.960 | The S&P 500 is weighed by market capitalization, meaning the larger the company, the bigger

00:23:33.640 | a portion of the S&P 500 that is.

00:23:36.680 | Now, there's still 500 companies in there, but if you look at the giant companies that

00:23:40.760 | are in there, Apple, Microsoft, Amazon, etc., they take up a pretty sizable portion of the portfolio.

00:23:50.600 | Last time I looked, they were at least 3% or 4% each.

00:23:54.700 | So, those businesses, the market is saying, "If you're investing in the S&P 500, you have

00:23:59.760 | a higher concentration of your funds in those businesses just by the nature of investing

00:24:04.620 | in an index fund."

00:24:06.400 | To your point, with the vast majority of my capital, especially the capital that's outside

00:24:11.360 | of retirement funds, I don't think that I'm taking on a huge amount of risk because I

00:24:15.560 | own a collection of a few dozen stocks, but the top 20 stocks that I have have earned

00:24:24.360 | their spot in my portfolio, meaning I bought these companies a long time ago and I just

00:24:29.560 | got them right, that they just happen to be great companies that grew and grew and grew.

00:24:34.040 | For that reason, when a company does very, very well on the markets, it's typically because

00:24:38.760 | the business underneath it is succeeding.

00:24:42.080 | One of my top holdings is Google, which I bought 13 years ago now at this point.

00:24:49.680 | It's grown into a top holding for me, not because I set out to make it a top holding,

00:24:54.200 | but I just bought it many, many years ago and have just held onto it.

00:24:57.920 | If you look at Google's business alphabet, as it's called Google's business today, it's

00:25:01.760 | an extremely reliable blue chip company.

00:25:04.820 | The company has hundreds of billions of dollars that come in.

00:25:07.360 | It generates huge profitability, it has a war chest balance sheet, and it's still growing

00:25:13.760 | to this day.

00:25:14.760 | If you're invested in the S&P 500 Index Fund or Total Stock Market Index Fund, it's a top

00:25:20.240 | holding for you, too.

00:25:22.440 | I don't think what I'm doing with my portfolio, since I'm diversified, since I'm buying good

00:25:26.760 | businesses, and since I'm holding them for long periods of time, is all that drastically

00:25:30.640 | different than people that just invest in index funds.

00:25:33.680 | It's just more time intensive, and that's okay with me.

00:25:37.260 | We talked a lot about different types of stock buying, but one thing I noticed you never

00:25:40.240 | mentioned you cared about, or at least I didn't hear, was what's the price of the stock right

00:25:45.240 | now?

00:25:46.240 | Is that even a factor in when you make a decision?

00:25:47.680 | That is such a confusing thing about investing.

00:25:51.760 | In fact, when I first started investing, I had no clue about the relationship between

00:25:56.080 | price and market cap.

00:25:58.720 | So many people, I thought that the success in individual investing was looking for companies

00:26:04.120 | that trade at a very low share price.

00:26:07.320 | A lot of my first investments, "investments" in air quotes, because I had no idea what

00:26:11.120 | I was doing, was in penny stocks.

00:26:13.480 | It turns out that penny stocks have the reputation they have because they're typically places

00:26:17.560 | that you can go to destroy capital.

00:26:20.260 | So many of my first forays into the market were buying awful businesses solely because

00:26:25.520 | their share price was really low.

00:26:27.640 | Again, the way that prices work in the stock market is so different than the way prices

00:26:33.640 | work in every other consumer good that we buy that it's naturally very confusing.

00:26:38.320 | If you were to go in the market and find a company that was trading at $500 per share,

00:26:43.160 | and you found another one that was trading $5 per share and say, "Which one is more expensive?"

00:26:48.880 | Only in investing can you say, "Not enough information."

00:26:52.120 | The stock that's trading at $500 per share might be less expensive, might be a better

00:26:58.280 | bargain price than the stock that's trading at $5 per share.

00:27:03.840 | The reason for that is the value of a company is made up of two things, or the equity of

00:27:09.400 | a company is two things.

00:27:11.080 | One, the dollar price of a share, which is the number that's quoted everywhere that

00:27:15.740 | you look, right?

00:27:16.740 | You go on Google, you open the stocks app on your phone, what do you see?

00:27:19.920 | You see the price of one share.

00:27:22.400 | However, what you don't often see is the market capitalization of the company.

00:27:26.880 | That is like the dollar value of the company's total equity.

00:27:30.740 | To find that number, you have to look at how many shares exist at a company.

00:27:36.640 | Here's something that not many people know.

00:27:39.920 | The number of shares that exist at a company is a totally arbitrary number that the company

00:27:45.000 | chose.

00:27:46.320 | A company can go out there and say, "I want to have a million shares of stock," or that

00:27:50.920 | same company could say, "I want to have a billion shares of stock."

00:27:56.160 | What we look at when we're looking at the price isn't enough information to tell us

00:28:00.420 | if that company is trading at an attractive number or if it's cheap or if it's expensive.

00:28:05.680 | However, that's such a counterintuitive thing that so many people assume the dollar price

00:28:10.360 | of a stock will tell you what you need to know about the company.

00:28:13.400 | Two follow-ups, one is, so the valuation of the company or the market cap is something

00:28:18.360 | that you do pay attention to when deciding to invest?

00:28:21.040 | Is that what I'm hearing?

00:28:22.040 | Yes.

00:28:23.040 | I care much more about the market capitalization of a company than they do about the dollar

00:28:28.960 | price of one share.

00:28:32.040 | If I'm analyzing a company, one of the first things I look at is the market cap.

00:28:36.200 | That will give you a rough size about the total value of the business.

00:28:39.760 | The reason I focus on that is, when I'm looking to make an investment in a company, I typically

00:28:44.200 | want to buy companies or add companies to my portfolio that I think I can at least earn

00:28:48.660 | a 5X return on, or better yet, a 10X return on.

00:28:53.680 | The size of a business is going to show me how hard that is for that company to do that.

00:28:59.280 | For example, if I come across a company and it's trading at a $1 billion valuation, that's

00:29:04.920 | the size of the market cap, well, for me to earn a 10X return on that company, all things

00:29:09.840 | else held equally, that company would have to grow into a $10 billion valuation.

00:29:15.320 | There's lots of companies out there that are currently worth $10 billion, $50 billion,

00:29:19.240 | $100 billion, or more.

00:29:21.840 | It doesn't take a huge amount of imagination to believe that a company can grow from $1

00:29:26.320 | billion to $10 billion.

00:29:28.600 | Conversely, if you come across a company like Apple, for example, Apple's market capitalization

00:29:34.560 | is currently enormous.

00:29:36.600 | The company is currently trading at $2.7 trillion.

00:29:44.120 | For Apple to grow five times in value from here, it would have to be essentially an $11

00:29:51.200 | or $12 trillion company.

00:29:55.120 | That is such a gargantuanly huge number that I personally have a really hard time seeing

00:30:01.000 | Apple ever do that.

00:30:02.720 | I'm not going to say it's never going to happen, but holy cow, is that a lot of market

00:30:07.160 | capitalization that has to be added onto Apple for it to stock to 5X from here.

00:30:13.360 | That's why I'm really focused on the market capitalization of a company, not the dollar

00:30:17.540 | price of one share.

00:30:19.040 | How does that change over time?

00:30:20.280 | You mentioned one of your investments early on was Google.

00:30:25.920 | Even though it's clear that in the last 13 years, Google probably did 5X the business,

00:30:30.880 | but now let's say you're looking at it and you think, "Gosh, now it's a lot harder.

00:30:34.800 | It might be for Apple."

00:30:35.800 | Does that mean you have to get out or how do you think about exiting positions that

00:30:39.920 | you've made?

00:30:40.920 | When I first made an investment in Google, it was far, far, far smaller than it was today.

00:30:46.600 | The market capitalization was well under $100 billion when I started buying it.

00:30:53.760 | Today I'm quite happy to continue holding Google.

00:30:56.600 | I do not expect Google to 5X in any period of time.

00:31:01.720 | Google is a $1.7 trillion company, so for it to 5X, it would have to be a $9 trillion company.

00:31:07.140 | I'd be very happy with that outcome, but I don't think that it's going to happen.

00:31:11.120 | Instead, I view Google as a part of my portfolio that is more of a bedrock anchor, something

00:31:17.160 | that I think can grow at a low double-digit rate, but I don't expect the company to deliver

00:31:22.620 | a 5X return from here.

00:31:25.260 | In general, while I'm very happy as a Google shareholder, I'm interested in buying this

00:31:31.720 | company today.

00:31:33.860 | I would be more interested and likely to sell it to fund purchases of other companies that

00:31:38.060 | I think have higher growth potential, but I'm not going to sell a company solely because

00:31:43.100 | it's huge if I've owned that company for a long period of time and I'm still happy to

00:31:46.500 | own it.

00:31:47.500 | When do you decide to sell?

00:31:49.300 | Whether it was a pick that didn't work out or a company that's worked out and now doesn't

00:31:54.660 | have that potential.

00:31:56.500 | I can tell people listening that I have some random stocks I've invested over the years

00:32:00.900 | and I personally am struggling.

00:32:03.220 | When do you exit?

00:32:04.220 | How do you help people think about when's it time to either cut your losses if it's

00:32:07.500 | down or take your gains off the table?

00:32:10.220 | Yes.

00:32:11.220 | First off, let's acknowledge something.

00:32:12.220 | Knowing when to buy a stock is much easier than knowing when to sell a stock.

00:32:19.620 | It's much more fun for me to research and think about companies that can grow in value

00:32:23.060 | than it is to be on the other side of the transaction.

00:32:25.620 | However, there are some reasons that I think a stock should be sold.

00:32:30.380 | First and foremost, the number one reason to sell a stock or the number one reason that

00:32:33.340 | I sell a stock, and it's the most common, is I was wrong.

00:32:37.220 | I came up with a thesis for a company, I thought that the company was going to grow to take

00:32:42.340 | advantage of a blank market opportunity and I thought the company had an advantage over

00:32:46.540 | its rivals.

00:32:48.160 | If that proves to be incorrect, if the company is clearly struggling to execute that and

00:32:53.460 | I am proven wrong, I have no problem saying, "Well, I got that one wrong," and selling

00:32:58.660 | to be deployed in my capital into something else.

00:33:02.700 | Two, if I'm right about a company and it grows to be too large a position in my portfolio

00:33:09.540 | and I'm too concentrated in that company, that is a situation where I'm also happy to

00:33:14.820 | trim that company over time.

00:33:17.540 | More recently, I personally trimmed a little bit off of my position in Tesla, not because

00:33:21.920 | I don't think Tesla is a great company with a bright future ahead, but Tesla has grown

00:33:25.700 | to be my No. 1 position by far, simply because of how well that company has done, and I've

00:33:30.860 | been trimming my position surely for risk management purposes.

00:33:34.540 | So, that's a happy reason to sell a stock, in my opinion.

00:33:40.640 | Number three, if you have a better use for that capital, so if you're no longer interested

00:33:46.720 | in following a company or own a company, and it might be a lukewarm investment, but you

00:33:50.640 | find another investment that you're more interested in, I see nothing wrong with selling the one

00:33:54.820 | that you're not interested in to buy more of the one that you are interested in.

00:33:59.580 | The best reason of all to sell is that you need the money for your personal life, right?

00:34:04.820 | The whole reason we invest in the first place is to grow our capital so that we can live

00:34:09.220 | a better life.

00:34:10.220 | So, I see nothing wrong with selling a stock if you need to use that money for a purchase

00:34:14.900 | that you have.

00:34:15.900 | So, I think one takeaway for me out of this is the best I can remember, I'm going to go

00:34:20.160 | through the handful of stocks I own and try to write down why I invested them in the first

00:34:24.660 | place.

00:34:25.660 | And that'll give me a place to look to decide when it's appropriate to sell, because maybe

00:34:32.060 | I don't believe in that thing anymore.

00:34:33.340 | One thing that I personally do, and I'm a big advocate for, in addition to writing an

00:34:37.240 | investor policy statement for yourself, is to keep an investing journal.

00:34:40.860 | So, every time that I go and I buy a stock, I just write down what stock I'm buying, a

00:34:46.980 | few words on why I'm buying it, and also the valuation that I'm paying at the time of my

00:34:52.540 | purchase.

00:34:53.540 | It's obviously time-intensive to do that, but so often if we buy a stock, it's not all

00:34:58.340 | that uncommon for us to change our thesis over time as the business results come in,

00:35:05.300 | and to your point, it's really helpful to have an anchor point to look back and say,

00:35:10.260 | what was I thinking at the time of this purchase, and to match up the reality that the business

00:35:15.740 | is doing against your initial predictions for those businesses.

00:35:19.700 | If those two things are mismatched for the worst, that can be a sign that that company

00:35:23.940 | is no longer for you and it's time to sell that company.

00:35:26.900 | But again, broadly speaking, buying is much more fun than selling, and knowing when to

00:35:32.220 | sell a stock is very, very hard.

00:35:34.620 | So we talked about buying, we talked about selling.

00:35:37.060 | What about adding to a position?

00:35:38.460 | Is that something you find yourself doing over time and how do you decide that you want

00:35:42.260 | to double down?

00:35:43.460 | I don't invest all the capital that I'm going to invest in a company up front.

00:35:47.020 | I tend to buy in small chunks over periods of time that are spaced out periods of months,

00:35:52.980 | and I do so because I know from my own track record that I'm often wrong.

00:36:00.580 | A company can check a lot of the boxes that I look for in a business, but that business

00:36:05.820 | still has to go on and execute against the opportunity that it presents for itself.

00:36:10.820 | Sometimes new competition can come along or the market can change.

00:36:16.020 | It's common for me to be completely wrong about a stock.

00:36:19.980 | So when I'm looking to add to a position over time, what I'm attempting to do is two things.

00:36:26.780 | First, I'm looking to invest in companies that are winning.

00:36:31.280 | That's a very counterintuitive thing.

00:36:33.000 | Most people think, "Oh, I bought a stock for $10.

00:36:36.340 | It went to $20.

00:36:37.340 | I can't buy any more of that stock.

00:36:39.540 | It was at $10 before, now it's at $20."

00:36:41.620 | Conversely, they buy a stock at $10, it falls to $5, and that's the one that they're interested

00:36:45.780 | in adding to because it's at a lower price.

00:36:48.700 | What I've actually discovered the hard way is that more often than not, it's actually

00:36:52.380 | better to take additional capital and put it into the company that's already doubled

00:36:55.980 | for you as opposed to the one that's already halved for you.

00:37:00.300 | The reason that companies go up and their stocks tend to do well is because something

00:37:03.860 | about the underlying business is succeeding, and Wall Street is recognizing that that business

00:37:09.380 | is succeeding.

00:37:10.380 | Conversely, if a stock is underperforming the market, that's a sign that the company

00:37:15.660 | is having a hard time succeeding and it's not meeting investors' expectations.

00:37:20.900 | Broadly speaking, winners tend to keep on winning and losers tend to keep on losing.

00:37:28.300 | So when I'm looking to add to companies, I'm typically looking at the companies that are

00:37:32.220 | winning in my portfolio first, and those are the ones I'm actually adding to.

00:37:37.660 | So I think some people might hear that and think, "Wow, that sounds a lot like the opposite

00:37:41.740 | of the tried-and-true buy low, sell high.

00:37:44.920 | That sounds like buy high, sell low," which I think everyone says that's what you shouldn't

00:37:48.980 | do.

00:37:49.980 | How do you juxtapose what you just said with what I would say is pretty commonly believed

00:37:56.540 | advice, maybe you disagree with it, of buy low, sell high?

00:37:59.620 | Well, I think it's helpful to actually look at some studies of investing and how the market

00:38:05.340 | actually works, which are hidden from us if you're investing in just index funds.

00:38:10.420 | JPMorgan did this wonderful study where they looked at thousands of companies, publicly

00:38:15.620 | traded companies, over a period of 30 years, and they looked at the returns of those companies.

00:38:22.140 | What they found was that if you bought 10 companies, if you put your capital into 10

00:38:27.740 | companies, 10 random companies, what you can expect is that four of those companies will

00:38:32.220 | suffer a catastrophic loss and stay down permanently.

00:38:38.360 | Three of those companies will go up in value, but they will underperform the market in general.

00:38:47.140 | That leaves three other companies.

00:38:48.700 | Two of those companies will be modest market beaters, and one of those companies will deliver

00:38:54.300 | multi-bagger returns.

00:38:57.420 | What actually drives the market forward over time is actually a very small minority of

00:39:03.420 | companies.

00:39:04.420 | It's really about the top 10% of companies or so, so one out of 10, that are literally

00:39:08.260 | responsible for 90% of the market's returns over long periods of time.

00:39:14.740 | When I've looked at that and I've studied some investors that have taught me, again,

00:39:18.180 | this really counterintuitive lesson, what you actually want to do is it really matters

00:39:22.700 | that you get some of your portfolio to include some of those 10% of companies that are the

00:39:27.740 | mega winners.

00:39:29.060 | What do mega winners have in common?

00:39:31.140 | Their stocks have already gone up a lot.

00:39:35.060 | If you think back to some of the mega winners that are today, Tesla, Google, Apple, Netflix,

00:39:40.860 | Chipotle, if you bought those companies after their stock doubled, tripled, or quadrupled,

00:39:47.320 | you then went on to earn a massive return, even after their stocks were up huge.

00:39:53.500 | That's why it can actually be a good sign if a company's stock is going up.

00:39:57.900 | That's an indication that the business model is working and that Wall Street is recognizing

00:40:02.660 | that the business model is working.

00:40:04.420 | Conversely, if you want to buy a stock that has lost badly to the market, underperformed

00:40:11.340 | the market, history shows that the chances are pretty good it's in that 7 out of 10 stocks

00:40:16.820 | that is going to permanently underperform the market.

00:40:21.060 | I think the phrase "buy low, sell high" sounds really good in theory, but when you actually

00:40:26.940 | get into the actual practicality of investments, some of the best investments that I've ever

00:40:31.620 | made was buying stocks that were already up big and were at all-time highs.

00:40:40.020 | My conversation with Andy Ratcliffe was that some of the best investors are quite contrarian.

00:40:44.940 | I like that you're taking a different approach, and I'm glad we got to dig into some of the

00:40:48.660 | data about it.

00:40:50.500 | We talked a lot about ways to invest, but I want to ask what platform you're doing this

00:40:54.760 | on and if it makes any of the things you're doing easier.

00:40:59.080 | You mentioned buying a stock, maybe you want to deploy over time, but gosh, let's say you

00:41:05.380 | wanted to put $500 into Google today, there's not an easy way to say, "I want to put $500

00:41:11.800 | for the next five months," and then stop.

00:41:14.880 | At least I'm not familiar with one.

00:41:16.800 | Is there an investing site that you like or recommend that makes some of those kinds of

00:41:21.040 | things easy?

00:41:22.040 | I'm pretty sure that M1 Finance has done many of those things with like, you can create

00:41:26.320 | a pie for your portfolio, and as you put capital into it, it automatically allocates, and you

00:41:31.800 | don't have to worry about things like buying exactly one share, you can buy fractional

00:41:35.560 | shares.

00:41:36.560 | To answer your question, though, the broker that I use is called Interactive Brokers.

00:41:40.680 | I signed up with them like nine years ago, and what I liked about them is actually, it's

00:41:46.360 | a hassle to use their system.

00:41:48.560 | It is a pain in the butt to log in, and once you're in, buying and selling is easy, just

00:41:55.000 | like it is on any other platform, but I actually like that there's friction to the platform.

00:41:59.920 | I don't use any app on my phone because I don't want trading to be an easy thing for

00:42:05.520 | me.

00:42:06.520 | The easier trading is, the easier it is to buy or sell, the more tempted I would be to

00:42:10.780 | do it when I'm feeling emotional.

00:42:13.080 | If I owned a stock and that stock was down big or up big in response to whatever the

00:42:17.800 | news of the day, I'm a human, I would be emotionally, my decision-making skills would be compromised

00:42:25.440 | because of what I was seeing on the screen.

00:42:27.520 | I also use Interactive Brokers, and it's funny, it's one of the few products that I've probably

00:42:32.360 | never even mentioned I use on this show because I think most people would hate it.

00:42:37.080 | Yes.

00:42:38.080 | I agree.

00:42:39.080 | (laughs)

00:42:40.080 | It is...

00:42:41.080 | The interface is difficult.

00:42:42.520 | I'm often unsure of how to find things and have to read long manuals.

00:42:47.120 | But for me, the other big perk of Interactive Brokers is that if you need to borrow against

00:42:53.120 | your portfolio, the amount of interest many institutions charge is very high.

00:43:00.080 | And so Interactive Brokers is quite low.

00:43:03.240 | At Wealthfront, we have a portfolio line of credit that's also low for index funds.

00:43:07.080 | And everywhere else I've seen is like 5%, 6%, 7%.

00:43:10.020 | So that's another plus on Interactive Brokers.

00:43:13.120 | But in general, I will say it is a confusing interface.

00:43:17.300 | I'm happy to put my referral link in the show notes, but I don't expect a lot of usage of

00:43:22.740 | it because of that.

00:43:24.400 | But it's funny, I also use that for my single stock investing.

00:43:28.680 | And I'm also not familiar with an easy way to say, "Oh, I want to invest $1,000 in this

00:43:33.840 | company.

00:43:34.840 | Can I do it over 5 months?"

00:43:36.680 | Because doing it each month manually, I feel like it just invites emotion to change the

00:43:42.360 | decision you made in advance.

00:43:44.600 | One other platform technology question I have, so often I see people say, "Gosh, I picked

00:43:50.560 | this stock and over the last 3 months, it's gone down.

00:43:54.320 | Let's take the last month.

00:43:55.320 | In the last month, it's down 7%.

00:43:57.600 | So how should I feel about that?"

00:43:59.760 | And I'm like, "Well, the entire market is down 7%."

00:44:02.880 | So relative to the benchmark of the market, your stock hasn't really done anything.

00:44:08.880 | It hasn't gone up, it hasn't gone down relative to the benchmark.

00:44:12.980 | Is that a way you look at things?

00:44:14.500 | Do you look at how a stock's done absolute on its own?

00:44:19.060 | Or do you try to compare how it's done to the general market to get a sense of relative

00:44:23.920 | performance?

00:44:24.920 | I always like to compare things to the market.

00:44:26.820 | You have to have something to compare it to.

00:44:29.400 | I'm happy just to compare it to the standard benchmark, which is the S&P 500.

00:44:34.720 | But yeah, you can't look at stocks in a vacuum.

00:44:37.360 | And what's even more confusing about investing is that there is a one-to-one relationship

00:44:43.000 | between the performance of a business and the performance of a stock over long periods

00:44:47.840 | of time.

00:44:48.840 | The reason that companies go up substantially over long periods of time is the underlying

00:44:53.600 | business that underneath them has improved dramatically.

00:44:57.000 | Maybe revenue is up a whole lot, margins are better, profits are improving, they've made

00:45:01.880 | an acquisition, or whatever the reason is, there's a direct tie between what happens

00:45:06.220 | to a business and what happens to the stock over long periods of time.

00:45:10.500 | Over short periods of time, there's almost no connection at all to what a business and

00:45:15.160 | a stock are doing.

00:45:16.420 | And what's happening in the macro environment can often so overwhelm the actual business

00:45:21.500 | performance of a company.

00:45:22.880 | And this can be so confusing to you as an investor, because you can buy a company and

00:45:27.800 | you can say, "I think this company is going to become more profitable, its revenue is

00:45:31.220 | going to grow, and the stock is going to do well."

00:45:34.540 | And you could be right about the business.

00:45:37.160 | When they come out with a quarterly report, they could say, "Revenue is up, profits are

00:45:40.640 | up, we're hiring more people, we're expanding, hey, we've got this new product that's coming

00:45:44.640 | out," and that stock can fall.

00:45:46.860 | And that stock can fall really, really hard.

00:45:50.300 | So in the short term, there isn't always a direct relationship between the performance

00:45:55.200 | of the company and the performance of the business.

00:45:58.240 | And that's why investing can be so trying on your emotions.

00:46:02.840 | However, over long periods of time, the performance of the business always is eventually reflected

00:46:09.280 | in the stock price.

00:46:10.480 | So when I'm judging how my companies are doing that I own, I'm almost never looking at just

00:46:17.000 | the stock price.

00:46:18.000 | I'm always asking myself, "How did the company do?

00:46:21.280 | What's the general direction of the business?"

00:46:23.120 | And I'm focused very heavily on the business itself.

00:46:26.320 | In those short-term scenarios where comparing how it's done to the benchmark is really helpful,

00:46:32.720 | right?

00:46:33.720 | Because you might feel like you got a dud, but really just the market, as you said earlier,

00:46:36.520 | it's down almost 20% from highs.

00:46:39.300 | Is there an easy way to do that online for someone who's maybe wants to look at their

00:46:42.960 | portfolio and say, "Gosh, I invested in Square 12 months ago.

00:46:47.400 | How has Square done relative to the market?"

00:46:49.280 | Is that an easy calculation anywhere you know?

00:46:52.300 | Interactive Brokers gives me a kind of overall portfolio versus the market over various periods

00:46:56.640 | of time.

00:46:57.640 | So that's what I do.

00:46:58.720 | But you can use some very simple charting tools, especially ones that are on Yahoo Finance

00:47:02.500 | or Google if you want to look up an individual holding over shorter periods of time.

00:47:07.080 | We went a lot of places and we talked briefly at least a couple times on asymmetric bets.

00:47:12.440 | And I think most people listening might have thought, "Gosh, Brian's this guy that's investing

00:47:16.560 | a lot of stocks.

00:47:17.600 | All he's doing is making a bunch of high-risk asymmetric bets across his whole portfolio."

00:47:23.400 | And hopefully, if they're still here, they've come to the conclusion that's not the case,

00:47:28.280 | that you're actually trying to do a different type of investing with the bulk of your portfolio.

00:47:33.000 | But I'm curious where those asymmetric bets do fit in.

00:47:36.160 | And do you take those kind of much higher-risk bets in your portfolio and how do they fit

00:47:43.080 | into everything?

00:47:44.080 | Yeah, the bulk of my individual holdings are in companies that are low-risk businesses

00:47:52.060 | with strong competitive advantages, they're growing at an above-average rate, they tend

00:47:56.000 | to be profitable, free cash flow positive, but they tend to be very high-quality businesses.

00:48:01.040 | And I don't think I'm taking on a whole lot of risk by investing in those companies directly.

00:48:05.920 | However, with a portion of my portfolio, I also am happy to invest in higher-risk situations,

00:48:14.880 | knowing full well going in that I'm assuming a whole lot more risk, so I better be compensated

00:48:20.180 | for that risk with the potential for higher return.

00:48:23.440 | I know you've talked about in the show in the past about making investments in crypto,

00:48:28.520 | like Ethereum and Bitcoin.

00:48:30.000 | I view those the same way, they're asymmetric opportunities.

00:48:33.880 | If you invest, say, $1,000 into a high-risk stock, well, the wonderful thing about investing

00:48:39.340 | is the worst you can do, assuming you use no leverage, is lose $1,000.

00:48:44.560 | You are completely wrong about the company, it goes belly up, you lose your $1,000.

00:48:49.920 | However, if you're right about that company, that $1,000 can grow into $2,000, $5,000,

00:48:56.480 | $10,000, even $100,000 if you are right about the business.

00:49:01.760 | Yes, those companies are extremely rare, but they are out there.

00:49:06.080 | With a portion of my individual stock portfolio, I'm happy to buy higher-risk companies if

00:49:13.880 | I believe that I can earn 10x plus returns on them.

00:49:17.400 | When you're thinking about these asymmetric bets, do you try to limit them?

00:49:21.440 | Do you try to make them regularly?

00:49:23.680 | Do you have a way to come up with ideas for them?

00:49:25.520 | How do you find them?

00:49:27.120 | Well, I'm a stock market junkie, so one of my favorite things to do is to research companies.

00:49:32.480 | But to answer your question, I'm a contractor for The Motley Fool, so I get access to all

00:49:38.680 | of their recommendations, and that's one place that I go to.

00:49:42.440 | There's also tons of ways to find investors by looking at high-growth portfolios, high-growth

00:49:48.560 | ETFs.

00:49:49.560 | I mean, the ARK funds, for example, have become very popular with investors, although those

00:49:53.680 | things are losing very badly to the market over the last year.

00:49:56.720 | There's lots of asymmetric risk-reward companies that are in there.

00:50:00.880 | So finding potential ideas isn't the hard part.

00:50:04.600 | What's the hard part is vetting the ideas and asking yourself, "What kind of risk level

00:50:10.000 | am I taking, and what are the odds that this company is going to go on to beat the market?"

00:50:15.880 | But finding ideas is really easy nowadays.

00:50:19.120 | Is the vetting process for these kind of higher-risk, higher-return investments, is that a different

00:50:24.220 | investing checklist, or how do you think about making those picks differently than you would

00:50:29.480 | others?

00:50:30.480 | No, I still take it through my exact same checklist, it's just that the companies typically

00:50:33.980 | score very poorly on my checklist for doing so because I value things like free cash flow,

00:50:40.280 | I value things like net income, I value a competitive advantage, etc.

00:50:46.360 | So I still go through the exact same process that I go to, but even after that process

00:50:51.320 | is done, if the company scores poorly, but I still believe that the potential is huge,

00:50:56.800 | I will go in and make an investment in that case.

00:50:59.880 | I just do so knowing, going eyes wide open, that this is a high-risk, high-reward bet

00:51:06.320 | that I'm making, and I just size it appropriately in my portfolio.

00:51:09.400 | Cool.

00:51:10.400 | This is a question that I'm not sure I was going to ask, and I feel like I'll probably

00:51:14.440 | get some emails from listeners if I don't ask it, but I'll probably also get some if

00:51:18.040 | I do.

00:51:19.200 | But are there any companies right now that you're particularly excited about?

00:51:23.880 | And to be clear, this is not an investment recommendation for Brian or an endorsement

00:51:27.760 | by me, but if someone's sourcing ideas, are there any you want to kind of seed out there

00:51:33.400 | right now?

00:51:34.400 | Sure.

00:51:35.400 | As part of the show notes, you asked me to come up with the five stocks that I like.

00:51:38.760 | So I like stepping up to the plate and swinging, but to your point, I actually think I own

00:51:45.160 | four of these stocks.

00:51:46.160 | I don't own one of them, and I'll tell you which one I don't own, but I have confidence

00:51:50.800 | that all these stocks will beat the market from here.

00:51:53.160 | But again, going back to the percentages we talked about earlier, history shows that when

00:51:57.680 | I make 10 investments, I'm wrong about half the time, but that's okay, because the other

00:52:04.080 | half of the time that I'm right, I do so well on just a few of them that the losses that

00:52:08.920 | I have and the ones that I'm wrong on are dwarfed by the gains that you get than the

00:52:12.960 | ones that you're right on.

00:52:14.160 | But to play the game, five stocks that I think are good buys right now are Roku, Pinterest,

00:52:21.400 | Zoom, how's that for contrarian, Fiverr, and Upstart.

00:52:26.720 | Upstart is the fifth one.

00:52:28.400 | That's one that I don't own, but that is a high-growth, profitable company that I'm very

00:52:33.520 | interested in.

00:52:34.780 | For the second or maybe the third time with the disclosure at the beginning, say, like,

00:52:38.640 | this is not a recommendation.

00:52:40.440 | Brian is not telling anyone here to go buy these stocks, but I love playing the game.

00:52:43.800 | I love hearing what's on top of your mind.

00:52:47.080 | Thank you.

00:52:48.080 | And what's fun about that is it's not hard to track ourselves.

00:52:50.640 | So I'll create a little spreadsheet for us right now on today's recording date.

00:52:54.320 | I'll put these companies in there so I actually could see how these companies do over time.

00:52:57.600 | Oh, that's great.

00:52:58.600 | Let's make it a Google Sheet.

00:52:59.600 | Let's make it public.

00:53:00.600 | I'll put it in the show notes.

00:53:01.840 | And even a few weeks from now when this comes out...

00:53:04.000 | Years.

00:53:05.000 | Years.

00:53:06.000 | People will be able to see how we've done.

00:53:07.000 | These are multi-year investments.

00:53:08.000 | These aren't multi-week investments.

00:53:09.000 | Oh, sorry.

00:53:10.000 | Sorry.

00:53:11.000 | Oh, yes.

00:53:12.000 | So when this episode's out in a few weeks, people will see how it's done.

00:53:15.740 | But yes, don't judge them on their short nature returns.

00:53:21.240 | Last thing on investing, and then I have a couple kind of totally different questions

00:53:24.760 | for you.

00:53:26.120 | One is on just books, right?

00:53:27.680 | People listening to this that think, "Gosh, I want to get more educated."

00:53:31.440 | I'd love it if you could throw out a few of your favorite resources.

00:53:34.420 | They don't have to be books.

00:53:35.420 | They could be online, both for people who are like, "I need to brush up," and people

00:53:39.320 | who are like, "Yeah, what are the next level books that I should be reading if I've read

00:53:42.960 | the basics?"

00:53:43.960 | Anyway, that's interested in individual stock investing, there are a couple of books I'll

00:53:47.440 | throw out there that I think are wonderful resources.

00:53:50.600 | The first is called Warren Buffett and the Interpretation of Financial Statements.

00:53:56.120 | This is a book that was written by Warren Buffett's daughter-in-law, Mary Buffett.

00:54:00.360 | And it basically takes the three major financial statements, the income statement, the balance

00:54:04.280 | sheet, and the cash flow statement, and it goes through them line by line, and it shows

00:54:08.720 | you how Warren Buffett thinks about those numbers.

00:54:11.720 | So it's a wonderful book for learning accounting and thinking through how financial statements

00:54:17.480 | can be turned into investment decisions.

00:54:19.960 | So that one is a hidden gem.

00:54:23.120 | Another one is called The Little Book That Builds Wealth.

00:54:26.860 | That one is by Pat Dorsey.

00:54:29.320 | Pat Dorsey is the former head of research at Morningstar, and that book really goes

00:54:34.320 | into how to think about competitive advantage in businesses and how to spot investments

00:54:40.840 | that have a competitive advantage.

00:54:42.760 | That's a very important topic that everybody needs to learn about.

00:54:46.120 | And the third one I'll throw out there is a fun book called 100 Baggers by Christopher

00:54:50.960 | Meyer.

00:54:51.960 | So that's a study of public companies that returned over their lifetime, earned investors

00:54:58.120 | a 100x return on their investment.

00:55:01.240 | It talks through some of the principles that they had in common and what investors can

00:55:05.000 | look for.

00:55:06.000 | So those are three kind of like under-the-radar books that I think are wonderful.

00:55:10.040 | That's great.

00:55:11.040 | Thank you for sharing those.

00:55:12.560 | The interesting thing I want to jump to, which has nothing to do with, I guess, stock investing

00:55:18.320 | at all, but what reminded me of it was I both heard you talk about it on another podcast,

00:55:23.800 | and I recently got an email from a listener asking about picking their mortgage.

00:55:28.760 | And it'll draw back to investing a little, but they said, "Gosh, if you start from a

00:55:33.320 | 30-year fix..."

00:55:34.320 | They were like, "I could make a strong argument to try to get a 15-year mortgage to pay it

00:55:37.920 | down faster, but I could make an equally strong argument to go for an interest-only mortgage

00:55:43.260 | and take all the money that I would have put in the house and invest it, which I believe

00:55:47.680 | will outperform the kind of low interest rates I'm facing now."

00:55:52.120 | And I kind of always fall on the, let's call it financially rational decision of, "Well,

00:55:58.680 | you're going to earn a higher return here, so maybe that's the path, but I know you disagree."

00:56:03.000 | And so I want to make sure a contrarian opinion makes it out here, because I love giving people

00:56:08.180 | both sides to every story.

00:56:10.080 | So what would your response be to a question like that?

00:56:12.560 | I actually made the decision to pay off my mortgage fully aware of the math that goes

00:56:19.440 | into it.

00:56:20.440 | So there is a very strong mathematical argument that you should never pay off your mortgage.

00:56:25.400 | You should leverage it as much as possible, and you should take the difference, and you

00:56:28.960 | should invest it into the stock market, right?

00:56:31.680 | You'll earn a spread on the return.

00:56:35.620 | So why on earth would I pay off my mortgage if I do believe that?

00:56:40.640 | And it just, to me, gets back to what's the whole point of money?

00:56:44.420 | Why do we invest in the first place with the highest use of money?

00:56:47.600 | The highest use of money is for us to live the life we want without my money being a

00:56:52.960 | financial factor.

00:56:55.120 | So when I made the decision to do so, me and my wife made the decision to do so, what we

00:56:59.460 | asked ourselves was, "Does permanently eliminating our largest fixed monthly cost make our lives

00:57:07.240 | better?"

00:57:08.240 | Yes!

00:57:09.240 | Yes, it does, right?

00:57:12.000 | By paying off my mortgage, my future expense rate is permanently lower, literally, for

00:57:18.920 | the rest of my life.

00:57:20.360 | So I don't really care that the money would be better spent by putting it into the market.

00:57:25.560 | What I cared about was lowering my fixed monthly costs forever, so that way, the future amount

00:57:31.640 | of money that I have to make in any given month, the amount that I need to live on,

00:57:37.680 | is permanently lower.

00:57:39.120 | And it really gets something back to what Morgan Housel, I think, said so brilliantly.

00:57:44.280 | My financial goal is to make my finances unbreakable, right?

00:57:48.060 | I want to make myself immune to the economic cycle.

00:57:53.120 | I don't want to have to worry about losing my job or my family's life being disrupted

00:57:57.500 | at all for financial reasons.

00:58:00.040 | That's why I keep a pretty sizable amount of cash out there, and that's why I also have

00:58:04.820 | zero debt to myself.

00:58:06.940 | Doing so gives me a level of freedom and allows me to think and act long-term and really helps

00:58:12.240 | me to sleep at night.

00:58:14.360 | Knowing full well that the mathematics of that decision is unfavorable.

00:58:19.260 | I would be richer today if I didn't decide to pay off my mortgage, but I would go back

00:58:25.420 | and do the exact same thing in a heartbeat.

00:58:28.240 | And just for all the credit card nerds listening, a no-debt lifestyle does not mean you don't

00:58:33.940 | use credit cards to earn points and cash back.

00:58:36.740 | Oh, yeah.

00:58:37.740 | I love credit cards.

00:58:39.380 | I love credit card hacking.

00:58:41.400 | So I'm a big fan of credit cards.

00:58:43.260 | I'm just a bigger fan of living debt free.

00:58:46.420 | So like people say that are in the travel hacking world all the time, I mean, table

00:58:50.200 | stakes is no credit card debt, right?

00:58:52.460 | Table stakes is paying them off every month.

00:58:54.780 | I think there's a way to use credit cards responsibly to earn higher rewards like you

00:58:59.300 | promote.

00:59:00.300 | So yes, I also do that.

00:59:02.420 | I just have to throw it out there because I know there's kind of the Dave Ramsey contingency

00:59:06.060 | of no debt means not even using credit cards.

00:59:09.880 | So I don't want people to think, "Oh, Brian, this guy doesn't even believe in credit card

00:59:14.740 | points."

00:59:15.740 | Because I know you play that game as well.

00:59:17.680 | So to wrap us up, I want to hear some of your local recommendations for anyone who's taking

00:59:22.840 | a trip to Rhode Island.

00:59:25.140 | Would love to hear favorite meal or someplace people should go check out to eat, a place

00:59:30.040 | to meet up, grab a drink with a friend, and an activity that's not the most obvious thing

00:59:35.140 | for anyone to do.

00:59:37.180 | We're blessed in Rhode Island to have Providence, which has tons of great restaurants in it,

00:59:42.560 | no matter if you're into steak or seafood or sushi or Indian food or that kind of thing.

00:59:47.920 | But there's a wonderful restaurant downtown called Hemingway's, which is a perennial popular

00:59:54.280 | pick for seafood fans.

00:59:56.420 | So I would say that's a great place to get a meal, a great activity to do.

01:00:03.880 | Also in Providence, at night over the summer, there's something called a water fire, which

01:00:10.360 | is when they take gondolas and on the little river that's downtown, they do bonfires in

01:00:16.440 | the middle of the river up and down them, and it's right by Rhode Island School of Design,

01:00:21.160 | so RISD.

01:00:22.160 | So there's all kinds of paintings and sculptures that are on display at the time.

01:00:26.320 | It's just a really nice way to spend the night, especially if it's a nice night out, walking

01:00:30.200 | along the river, watching these fires and seeing some kind of artsy things on the side

01:00:34.920 | of the road.

01:00:35.920 | Not something that many people know about Rhode Island.

01:00:38.440 | And the last one was a great place to meet up.

01:00:43.240 | Where to grab a drink after.

01:00:46.040 | Like many parts of the world, we have also seen an explosion of breweries come in Rhode

01:00:52.840 | Island.

01:00:53.840 | So Rhode Island's a pretty small state, and I think there's like 17 breweries in our state.

01:00:59.520 | One of them that I'll give a shout out to is Tilted Barn Brewery in Exeter, Rhode Island.

01:01:04.560 | It's just got a wonderful atmosphere and some very tasty beers, if that's your thing.

01:01:08.400 | Awesome.

01:01:09.400 | Thank you so much for joining us on the show.

01:01:11.360 | I think in the last few years, there's been so much conversation about the craziness of

01:01:16.440 | meme stock investing and people taking wild, risky bets with stocks.

01:01:21.720 | I feel like it was really a breath of fresh air to talk about stock investing and what

01:01:25.960 | I'll call a more civilized and rational approach than just taking crazy bets.

01:01:31.160 | So thank you so much for being here.

01:01:33.400 | Where can people find everything you're writing and the content you're creating online?

01:01:37.200 | Sure.

01:01:38.200 | The best place to connect with me is on Twitter.

01:01:39.920 | That's where I'm the most active.

01:01:41.240 | If you're interested in learning how to invest in individual stocks or my checklist, check

01:01:45.760 | out my YouTube channel, which is just my name, Brian Feraldi on YouTube.

01:01:49.280 | Awesome.

01:01:50.280 | Thank you so much for being here.

01:01:51.280 | Chris, thanks so much for having me.

01:01:52.280 | You're welcome.

01:01:53.280 | Thanks for having me.

01:01:53.280 | Bye.

01:01:54.280 | Bye.

01:01:55.280 | Bye.

01:02:00.280 | Bye.

01:02:03.280 | Bye.

01:02:06.280 | (upbeat music)

01:02:08.860 | (upbeat music)

Using an Investing Checklist to Improve your Portfolio | Brian Feroldi | All the Hacks #48

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