240- Quick Questions: Is an Event Required?

Automatic TRANSCRIPT

Everybody does this town and Danielle town and welcome to the investment. podcast cast where we are talking about well how to get invested in your life like. That's not really what we're talking about. Well it is really what we're talking talking about but only the text stuff talking about. What's the bull did text? The bolted text next is following the investing strategies of Warren Buffett. Ben Graham Charlie Munger people we call rulers because they I said there's only two rules of investing rule number one. Don't lose money rule number two forget real number one which means we are. We are learning. We're talking about we're teaching and ED investing strategy that says focus on not losing money. When you put your money into something and the way to do that is to know what you're putting your money into and what that thing is worth worth and that really is what it boils down to? Yeah and we've both been quite. Did we both been out. Let's put it that way in the last two weeks so thanks for very with us and we're very happy to be back. I'm very happy to be back. I can't see you all that well to be honest but even even Blurry Beautiful Dad. Oh honey that's so. Nice me to say that and I am so glad to be back from Some really hardcore back surgery. They fused two vertebrae in my spine and put in some hardware to make sure it stays there and the surgeon agent. Who did this a big shoutout to Dr Steven Ray at Piedmont in Atlanta is phenomenal. I mean I was in so much much pain for so long years. Yeah and which culminated in sort of bore up under it until something changed aged? I couldn't even stand up and this this incredible surgeon and his team got me in there and fixed it and I am like new. I have no pain. It's it's so awesome because back surgery scary it. It doesn't always come out as well as offer scary. Yeah so huge. Thanks to Piedmont and especially to waters pavilion where I stayed for three nine. You told everybody about it already. I did why must have been on drugs you lest we discuss our medical ailments for too long yet again. We are getting back to business here guys with our investing investing practice with our focus on buffet. Among our with our questions from you guys. We've been getting great questions and And we're I'm just excited to roll into the New Year. Going strong feeling healthy we were just discussing right before we started recording. How your health? If it's not good it just takes out the energy for anything else can start feeling good again and money is just like that. I swear it really is. It's like okay if you don't have your health that's consumes you right and but health is not the reason you're put on the planet not on the planet to be healthy. You're here for your Dharma by your here for what you WanNa do here for your passions money's the same way and basically if you don't have any you get consumed by trying to get it and and and that is so so difficult when you're when you're just focused on the money whereas if you had money you could focus on what you're doing your life. which is the holy and in the same way? You're not here to have money money as a means to an end it's a way to purchase things and experiences that thank you feel good and support you and your family so and you know we follow buffet in you you look at. This guy is just really a master. He's a great sort of Djeddai right master about so many parts of life and I think that one of the aspects it's most under sold with buffet because he's so successful as an investor Mr and he's one of the wealthiest guys in the world starting from nothing is the fact that he's an incredibly has incredibly integrity and really understands life as being very important apart from money and he doesn't really spend a lot he lives in a nice home but it's just a middle class home and anybody can drive by the fence. Look in you know. And unfortunately for him thousands do but he doesn't have extravagant tastes. He's not not trying to impress anybody. He says You know people tell me I should wear nicer suits. He says I buy expensive suits. They just look cheap on me. So he's just an example of someone for whom money is just a way of keeping score. You know more than anything about how well he's doing his his job so i. I think it's really important that you realize this. PODCAST is actually about a lot more than money. In the reason I say that we haven't talked about that a lot Ed and I would like us to because we both feel very strongly about that. I am really impressed with with an investor named Li Lu who we've spoken about out a number of times here who was Tiananmen Square went to Columbia saw buffet and became a fund manager and in the nineteen nineties in his now has a track record. I think over thirty percent per year compounded Charlie Munger has money with Lulu and he said something not too long ago at Columbia that I got a copy of that it was fantastic. which is that investing is about you? It's about what you love. What are your passions What are you good at? And he said did all you do when you're investing. Is You magnify that I agree with right on. That is so right on where people don't do that. That they get into trouble and they start trying to be somebody they're not and they start trying to Think that they understand something that they don't on actually understand and don't really like and don't really want to get into it or it makes you feel like a big shot and you Kinda WanNa feel like a big shot or it makes you feel like Oh. I'm like really sophisticated. I can understand something. That's really difficult and that makes us feel good. You know so there's reasons I think that actually leads us to a question that I would have to cover. Okay so guys remember. How many moons ago? If you look back back on your podcast episodes there's one called quick questions and we did it once and then we haven't done it since then but we have not forgotten about the excellent questions that you guys have left As little audio voice files And if you WANNA go ahead and leave a question you can do that at invested. PODCASTS DOT COM. There's a little thing on the side of the web page that POPs up and you can leave your Your audio questions. So we're going to play one today from from Santiago. Here we go. I didn't feel I wanted to say. Thank you for all the information and insights you sharing this. podcast have been really really useful for me. As a beginner in my invested Practice had a question eastern any event really necessary mandatory in my investing research. I've seen great companies analysis in the margin of safety price but any event hasn't happened and to say the truth. The company has never reach is a sticker price yet. I love to hear what you think. Drink thanks okay so to summarize. Thank you San Diego. First of all thank you Santiago. Well really a good question and and it it To summarize basically saying look I've got a company that I've seen that I'm pricing. I found the sticker price of it. And let's say it's fifty dollars a share sticker price but the company is selling for thirty five dollars a share and it hasn't ever been at its sticker the price and it hasn't dropped at all in any recent time so there's no going on into its margin of safety race. No it hasn't been too. It's sticker hasn't been value so the company has never gotten up to its value that he's Calculated it's it appears to maybe beyond sale but there's an let's say it's a fifty dollar company and sign for twenty five at appears to be on sale but it's there's no event there's nothing in the paper. There's the stock price hasn't gone down. It's actually at its highest. It's ever been at twenty five dollars and it's screamingly on sale and what he's asking is is this. Do I have to have an event or can I can. I just find companies that are actually on sale. That don't have an event and just haven't been to the peak. I interpreted it very differently. I maybe I just missed his question. The the question I have and I know a lot of people have all the time is what do you do. WanNa company just doesn't ever seem to get down to its margin of safety price. Maybe it's hovering around its sticker price but nothing is happening. That's making it go down but we his question is different. You're right it's It's it is at its margin of safety the sticker and there's no event. This is my first day back after surgery a little slow. Release the first piece of work that I'm doing that I'm back so give me a break. so He's saying Are there times when there are companies on sale without out in event the price that you can't explain right there you go. That's a nice way to put it and the answer is I would imagine on hindsight we could find really good examples of that particularly in the tech industry or pharmaceuticals or something where You would look at the company as a you know. I'm I'm going to assume he really understands this business really well and he looks at it and says but I think that that's that's the next that's the next thing is maybe that is a sign that there's a gap in the understanding which is kind of. Yeah here's the thing. There's kind of two options here right you either. Don't totally get it or you get it. And and then what so. Let's assume that he totally gets it. And then what okay. Let's assume you totally gets it. Any prices at our margin of safety analysis does a payback time analysis. Does the ten cap and it's on sale and in this. This is a really hard example. I think is that it's never been anywhere near it sticker price. It's not up. There has never been it. Hasn't been high is what you're hasn't been high and it hasn't it it's it's at its highest price historically ever and I do see these happen from time to time. Oracles like that Not not very long ago where it appeared to be by all All criterion margin safety as it appeared to be on sale and yet it was at its peak price ever historically and her husband another one. We've talked about that. It's been like that and other car companies. So here's the answer guys that unless you truly. You think you're smarter than all of these people who are Who are have gone through Goldman Sachs Training and they're all Harvard graduates? They're all Columbia Grad Radzi. Mitee unless you really think you're smarter than they are. It would be very dangerous assumption. that you are able able to figure out the value this business better than they can and he and Biota and you can buy it on sale. When they think it's fully priced that would be extremely dreamily arrogant and extremely dangerous? So I'm really pushing back on that very odd comment. We'll think about it Mr the in this example right. The stock is at historically high prices Oracle couple years ago historically high and I think it's on sale the tools. Say It's on sale then either. My tools are geniuses who are much smarter than anybody on Wall Street. Who are going? Are there going to push the price up. If the price is low may Mr Market is going to price this thing where it should be the only things that keep keep that from happening are basically an under appreciation of what's going on in that business or there's been an event and when a stock is already at its historical. Oh Hi then. We can't say it's there's no event there there's no of it so the only other possibility for Wall Street to be wrong. Is that all these super. Smart people are or simply under appreciating. What's going on and you the ruler investor? You're not under appreciate you got it. You know this company is going to grow. At this rate. It's going to end up with a P.. Right there your crystal balls way better than theirs and guys I just. Don't I'm not counting on you being that smart and I don't think he's you on yourself being that smart either just getting going on this city inference. Is that a stock a stock doc. Price Not a company's value but a stock price will buy what you're saying I can infer that it will Slide slide around up and down with the true price where it should be generally getting hit fairly regularly. Is that what I hear you saying not. I'm not going that far as to say that I'm saying that a company that is at its historically high price isn't it may be flopping around to get there but right now at historically high. It isn't as never been higher than this. And there's no event. How can we assume it's on sale? That's what I'm saying. So it's the historical high. That is really really getting you. I think yeah I mean the thing. Three years ago was at a hundred. And how's it twenty five. I got a whole another opinion for you here. But that's not what we're saying we're saying in this instance as with Oracle a couple years ago you can look it up on a chart it when it was at forty five bucks a share. It was I mean the market kit was holding it at forty five a share. It wasn't going up but it was at its historical high And so what that means is that although the numbers look really good when it's at historical high and you think it's on sale you think it's on sale because the numbers look good. You're projecting a good growth rate and a good pe ratio. Good the free cash flow if the market isn't taking this thing up to a reasonable value in this market which I mean man their price and everything higher. I WANNA pay. If they're not doing that on a company it's because they know stuff you don't know about where the future could be that means for example with Oracle goal they know the longtime founder. CEO is about to quit for example. It's generally called a value trap right. It looks cheap. But there's stuff out there going on or let's say Oracle for example huge questions as with. IBM Right the the can they shift to the cloud pro and be successful. Can they compete against Amazon's whole cloud based business business. Aws and now here comes Microsoft out of nowhere and boom. They have a big cloud business in there kicking everybody's butt and now at the same time the founder the energy behind the company is taking a hike. Oh Yeah and then the number two guy gets a heart attack and then you know you got this stuff that's piling up uncertainty the and the market is taking a big pause and take a look at it So unless you have a crystal ball that's a lot better than a thousand analysts who we're looking at that company take a breath step back and go find something that fits the rules. That's my view. Don't don't make the a mistake so when we teach because we do teach about this in class and our three day workshop We basically say to everybody on day one when they're out there trying to find find a company that that is something they understand. If you think it's on sale and I think this is one of the questions coming in at skype. Probably took our class if you think it's on sale and there's no event just assume it's not on sale just back off. You don't have a company that's on sale if there's no event and that's really to the heart the question and the reason for that go ahead go ahead. I see you rolling wondering looking thinking a lot about this this view that I I mean. It's it's a bit odd. You have to admit after so much. Focus on how the market is often wrong to say like well if the market hasn't figured figured it out then. You're probably not smart enough to do it. I just sort of fundamentally have a problem with that because I actually do think I'm smart enough to evaluate a company and if I didn't then I shouldn't I shouldn't really be doing this right so to say that it must be under appreciated urge. We have to assume that it's under appreciated by the market work in order to move forward Yeah I think we do and wouldn't the you know there's many opposite examples right of of companies that based on this is all based on forward growth rates so based on forward growth rates of what you think is going to happen with a company it could look decently priced to you and yet. The market isn't appreciating it because of short-term considerations I think of the Amazon back in like two thousand ten two thousand eleven when that stock price had no business being what it was because they weren't really making that much money but people there I've I've seen some presentations from investors from back then who saw the potential of it and obviously did amazing so but here but look at how the whole game that we're playing is that we're not super super smart. I don't want to get into game where I've got to be smarter than people that I am. Not Smarter than and those guys are smarter than me issue cares who do all those graduates from Harvard and Columbia. MIT are Super Smart. People and their careers are on the line to do exactly this kind of thing figure out whether Amazon is a good deal and the fact that some of them figured it out isn't doesn't mean anything about our ability to figure it out when it's hard which is why are I don't want you to go off and start violating basic think rule one strategy. which is we? Don't jump over six foot bars. We don't do that. Don't try to do that. It's a huge mistake to think that you can leap over a over a six foot bar. No job is is to jump over six inch bars and yet are also so to think about what's going to happen with a company in the future and the only way to do that is to take some guesses and invent things and and see what they plan to do and debate. If you think that they're actually going to do that thing and decide if you can really trust in the growth rate that you're picking right well. I don't love the idea of taking some guesses but I guess we always have a little bit of uncertainty about where this thing's going to go. What what but my point is is that you can do that on companies where it's pretty obvious or you can do it on companies where it's really hard? Your example of Amazon was too hard for buffet. So what you're saying thinking. Oh Yeah I can do this. No no no. You should not be thinking that you can do this because you will. You will take you make a because here's the thing. We're not investing the way most of these other people invest their their buying nine maybe one percent of their portfolio into a company. Okay so what we're doing is we're going in ten percent. We're taking a big bite of the Apple Apple. Whatever it is? We're going to do Wisconsin or you're not really sure right. This would be in the risky business section where it is like one percent. Okay okay. This is not what we're talking about. We're talking about the maze. I we're talking about Maine. Portfolio companies at its historical high I can't figure out a single thing wrong with it. It seems awesome. Which explains why it's at? Its historical high but my numbers are leading eating meat. I think that it should be even higher. Should be twice as I should be twice as high contour from Cox has all your favorites all in one place and with the contour remote. You can use your voice to fund them on live TV on demand and streaming APPs like netflix prime video and more see Cox dot com For details I mean okay so I'm going to give you. An example of a company. Bought was exactly that situation all right because I I do occasionally and it did go into the risky Biz portfolio. But that's Google so it came public. I don't know just under a hundred bucks or something something back in the day and I didn't really understand it so I didn't buy it at the IPO. Even though it had several years of track record was cash. Low positive is it if I bought it at two hundred so I bought it after it had already doubled once so he was at its historical high and I still bought it. So this is the exception that proves the rule in my view is that this is this was to me a pretty easy call because I use their product a lot and I came to understand it and I think understanding it was not something a lot of people had done yet. They didn't understand how it's business model worked and it was so new that it didn't fit the criteria for a lot of what fund managers put money in. So there's the exception all right. I'm I'm okay with that exception I could figure out Google and I still love it. It's still an amazing company. I couldn't figure out Amazon and neither could Buffett and Munger too hard even though some Wall Street people did all right. I couldn't figure out what they screwed up on that one. Yeah they screwed up on it. You're GonNa have to let some stuff go. You're going to realize that we screw up a lot more than than we want to say but our screw ups are are errors of omission. We don't do something we could have. Maybe done those are screw ups. I can handle. I don't mind not making money on something I wasn't sure are about even though it goes up and I'm telling you I have to deal with that all the time my my analysts will pick something and they'll look at it and they'll go. This is going to blast off. If I don't I don't get it. I don't buy it and then doubles right and I'm just like well. That's the way she goes when you're following this strategy of six inch bars you're GONNA have companies. You didn't buy into that took off. Yeah we did talking about that. I'm so so. Unity grasping has been. Are you agreeing with me here. That as basic strategy if that thing hasn't had an event that creates fear you're in all of those analysts as they jockey quarter to quarter for. WHO's the best within event? That's going to last a year to three years. It's GonNa kick almost all the fund managers out of that business because they don't want to be in it for a year of losing money. They are going to go and when they do. Then we've got something. It's more of a of a six inch bar. Not all of them are six bars but enough of the mar that we can make an incredible rate of return by being patient. And I'm not trying to be better than Mr Market at picking high prices and saying that they're on sale. Yeah I mean I agree. I also so think that there are a lot of companies that have been have been underpriced at points at which They may be didn't look underpriced. And I find those intriguing well. Yeah just don't intriguing into your portfolio. I mean this is. This is to to our our to our whole population of investors. There's who have a huge range of skills and a huge range of of Different kinds of passions and things are interested in that the basics of our style of investing are so fundamental. And if you stick with him you are going to get rich. There's no way you won't it's stepping out of the boundaries of of of our skill set. That's what gets you losses and the violation of rule number one where you think you know the thing is that high price but you think thank you know. What's on sale all right? So if you're GONNA do that sort of thing going to jump in and buy something you think is on sale Even though now the market is screaming that they don't think it's on sale just at least take a step back and be humble for a moment and say. Wow maybe be. There's something going on here. I don't understand. Maybe they know stuff. I don't know because they've got contacts in New York and they've got friends everywhere and they talked to venture capital guys who've whatever right. They totally are networked in ways. We aren't very different thing from being smart. It's it's just different information. It's an information symmetry. The point is that this whole thing about like how they are smarter than us is like so contrary to the whole thing of their dumber than us and therefore they miss price stocks. All the time and I'm just this whole sort of dichotomy constantly like who's smarter and WHO's dumber. I just feel like it's kind of silly and it's really about the amount of information that people have. I I think you and I and a lot of people listening to this. PODCAST are very smart and if we put our minds to it we can do this That's what I've learned and this idea that like these mysterious faceless. People are like dumber smarter. I just don't find that useful. But maybe maybe it's tasteful to other people. Well I think it's very useful. I think you should really listen to your dad really and be a little humble Lina situation to all the same schools. You're not intimidated by all these Ivy League. My Point my point is that you started out my education. Shen telling me that those people were dumb and we spent like a year debating whether or not they were dumb. I was arguing for their intelligence. And now so you're telling me they're really smart not trying to argue for their dumbness. But I'm trying to say we are just as smart well. I'm pretty sure sure I've never said that. Those Harvard graduates are dumb. A pressure teeth. Reassure her her in the context of fear they do dumb things and that's very different. Now I distinctly remember you say the people must be stupid. Why else would they do what they do if I said it it's hyperbole because I know they're smart people? It's just that fear makes people do dumb things. It really does not right. I mean when you don't have to be doing something you do it anyway or as we spent a bunch of time talking about it's not it's not dumbness or smartness or fear even or our bravery or whatever it's it's different incentives than what we have and I think actually here again I would would make the same point so in this situation. What you're saying is that people who are professional in the finance world tend to have maybe more sort sort of scuttle but talk on the street type of now you've got me using the word scuttle but scuttled the talk on the street type of information of like Oh so and so it was going to quit? But you know we're like Won't be at the company next year for whatever like gossipy reason and we who are sitting in our houses on Main Street. Don't have that information which is totally correct and again it's just different As an asymmetries instead of being incentives it's information mission and I think that that's really important to acknowledge and actually I'm really glad we're making this point that there is different information From what from what I have you know sitting in my house looking at the Internet and reading newspapers compared to To somebody on Wall Street it is different and sometimes times that information makes them act in your words dumb because because they go and they make decisions based on some week weekly thing or monthly thing or quarterly thing and sometimes it makes them take decisions that are in your words smart because it makes them. I'm not buy into a stock where the CEO's about to quit and And just being aware that that information is different I think is actually really important. I'm really talking about it and having a bit of an Aha moment right now. Okay so you could have this that Ben Graham so many years ago ninety years ago made an incredible sort of had incredible insight And that incites said that in the long run the stock market is away in machine. It is GONNA properly value each company but in the short run. It's a voting machine and by that he meant it's about momentum and emotion right in the short run and and so we know that because of momentum emotion momentum momentum down it can be momentum up an emotion is fear and greed the short run pricing on stocks can badly off of their value. So we know this is the general thesis that we follow as ruler investors. That stocks could be badly off of their their actual value for some relatively short period of time and over the relatively long pretty time. They're going to be properly balanced. They're probably priced. Which is why I think you you emphasize so much? The historical high part of that. He's exactly right because if the company is historically not gone above this price point ever and there's no visible event. Then where's the emotion coming from. There's no momentum carrying it forward forward at this point because it's peaked out. It's all been momentum to this point. Where's the emotion? Where's the fear? and where's the greed. It's drained out of the market and when it straightened out of the the market you're GONNA be looking at a company that Mr Market is looking at pretty objectively and it may be priced properly. He maybe Aby Wayne that company actually pretty properly for what's going on there so I really think we should wrap this this around a bit but I would love you to think more seriously. Disley take it more seriously that if you really don't identify the fear and the event that's driving the fear be very very careful. Roll before you pull the trigger on a company where it doesn't have that I've just written down for myself which I think might make it onto my checklist. Where is the emotion whereas the fear? Where's the greed? I'm not sure I've actually pinpointed like that. That angle to it. It's like. Oh what's the event what's happening with it. Why do you know whatever ever Blah Blah Blah but not like? Where is it like if you're looking at a company that's just been on a really lovely steady upswing whereas the emotion? It's like you're right there isn't there's no fear there's no greed is just sort of everything's great. Everything's good Except that accept that. Maybe it's not because Kerr not pricing higher. Well we got another question. Yes we next time another quick question. Yeah we're GONNA knock five or six of these in one shot but we don't so the next one I think is really cool and it's a really good question about Public companies in bankruptcy. Yeah all right so we'll be back next week with that and thanks everybody. Thanks for bearing with my brain fog. It'll probably be here for another few weeks with field guys. Thanks solicited to invest it if you enjoyed this episode and you want more information including show notes and more episodes visit us at invested podcast cast dot com. There's a special offer waiting for podcast listeners to attend my three day investing workshop absolutely free so just ahead to invest in podcast dot com everything discussed on his podcast. Either in my opinion or Danielle's opinion and is not to be taken as investing advice. This because I am not your investment advisor nor have I considered your personal situation as your fight Dushi airy this podcast is for your entertainment payment educational only and I hope you enjoyed it.

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