20 Episode results for "Mr Market"

I Noticed These Things About Bitcoin Prices: Chart Reading and Technical Analysis

The Cryptoverse

16:23 min | 2 years ago

I Noticed These Things About Bitcoin Prices: Chart Reading and Technical Analysis

"I beg is welcome back through the cryptovest with me, your host, Chris Coney now needs to make a separate video about this to make sure everyone knows about it, but you can be the best to hear about this since you are joining into this episode now that biness is backup ruining. I can offer you this for free offer one hundred ninety nine dollars. It's my own line calls on how to trade cryptocurrencies entitled creek to exchange mastery can get it for free by completing a very simple twenty four hour challenge. And if you succeed, you get the calls for free forever if you fail. Well, you lose access to the course until you pay one hundred ninety nine dollars to bite. So click on the link in the show notes to send you to the page will tell you all about it for now, though. Let's get on with the show. Here's a question for you. Why is the point of content creators, putting out technical analysis videos? And there's I can question is was the point of anyone watching them will my answer to that. And the reason I make these kinds of. Ios is to make up survey shins about the charts that you may not have made the res every chance that I notice a critical detail that you miss now missing. The old key detail is a natural human thing since we can't concentrate with retail, all at once our brain has the filter, everything that's coming in through the senses and filter it down to just a fraction of the original input. So conscious mind doesn't get overwhelmed. Right. I'm no exception to this rule. So I watch in content created by a couple of select content creators to see if they have noticed anything that I've based in my analysis, 'cause I'm a supposed smart enough to know that I'm also a human being inherently have this floor of missing things being biased, whatever. So if once I recognize that having other human beings of do a Senate check for me by watching that content helps me a lot now something that they noticed. Might mean that the risk I thought I was about to take on the trade. He's actually a lot higher than I realized and trading is fundamentally a game of minimizing risk ole times. So with that now established as the primary peppis of my technical analysis videos, we can proceed to look at the price movements without any notion that I'm giving advice over recommending, any particular trait. The best thing to do is to watch a few different analysts in make sure you haven't missed anything obvious manage your risk. And then only trade the very best setups. So back to the point all charts, they start off blank. And then we start like layering lines and indicators on top of them, which that intend creates kind of a unique lens which each of us look at the markets through. So I'm not going to share what the Mockus looked like three mile. It's I'm going to do that, with the bitcoin, USD chop. So let's stop with I was used the coin base price feed nowadays, which is what I'm looking at here. So let's have a look and BTC USD on the daily job. The volume is rolling over. If you notice I mean, this, this zoom fair that he if you watch on the video version, the run-up prior to consensus from the from the ninth of may every day, the volume against bigger and bigger and bigger, and it peaks on the thirteenth of may when we had a great big day twelve percent gain on the day, and then as the price is so slow down his continued to rise. But it slowed down the volume day by day has dropped. So that's why cooled rolling religion if you draw a curve, like rolling over the top the price is beginning to rollover, but the volume is ahead, the volume lookalike is already rolled over and gone back down to reasonable levels. And now the price is looks like stolen so this happened as the price entered a consolidation zone at mocked, by the following support resistance levels, so I might knees out so that you can draw them on your own shot. And then just stare at them in urine time to see if. They have any validity whatsoever. So eight thousand two hundred is the top and seven thousand six hundred is the bottom. Now I'm in the trade is mindset, rather than the whole of the mindset right now. Right. So I ditched my bias, I don't attached to a particular market direction. I have to check actually, to see if I'm secretly willing the market to go one way or the other. If I'm if I'm secretly unconsciously like willing the market arise rise as soon as that happens else dot hallucinating, and I'll stop in I risk missing when the muck gives me signals to the contrary. So if I'm secretly willing the market to go up, and there's some, you know, some key details on the that says, well, it's probably going to go down my mind, my brain will literally delete that information from my awareness. So instead, I say, okay BTC, if you break above eight thousand two hundred and hold. You'll tell me we're probably going to go higher. Right. And then by contrast if we break down below seventy six hundred you'll telling me, the probabilities are going low it. So when people ask me in the comments or on Twitter, whether I think, we're going down. Well, you're asking the wrong passant, the only person who knows the answer to that is Mr. market, and he's talking to his every minute of every day. Now Mr. market, that's not a flippant thing, that's something that you will find an economics textbooks, and so on. So I didn't make that up Mr. market, the thing to know about Mr. market, though, is that, while he never showed soap his mood can change anytime. This is why it's not wise to take what he said yesterday, and it seems going to say the same thing today. You have to keep your ears open. You got to be like, well spoke to him yesterday. And he said this and I said, now can stop listening to him. I suppose that's another reason to make technology and technical analysis videos, there is every chance that the conclusions. We came to about the market direction based on what the jobs were telling his yesterday has to be completely revised based on price day to that came out since then, so back to the price action here, a breakout of. Eighty two hundred for me would be a good entry into a long position, which them be written up to the next level at ninety four eighty six. So let's switch over to the bit mix jot now. Because that's where I got my fifth levels. I find this pretty useful actually having BTC USD on my watch list from due two different exchanges allows me to display in a different different analysis on the same SS. Now someone's gonna post in the comments and say Chris, that's a feature trading view in his here. So if you can load in different analysis, eliminate you do that. But I've never Adesina way of it. I just use bit mix for my financial analysis. Mike spinach, curve here and coined base roll, my support assistance levels, and so on. So the point is that the the thirty eight the eight point two percent Fibonacci retracement level is at nine thousand four hundred eighty six dollars which is why Gould at from. So if we if we if we break above the eighty two hundred for me that's a good entry point. To go long bitcoin on a on a trade right up to the next level of eight nine thousand four hundred eighty six. Today's episode is supported by nuns and their referral scheme. If you sign him for abidance account using my referral link that'll help to support the show with a bit over feral commission. So Bines is one of the leading cryptocurrency exchanges in the crypto space, and you can check it out by going to the cryptovest dot show scrolling down to sponsors, and then clicking on the by nuns bene-, then any trading that you do will an asset them out trading fees that will help to support the cryptovest the reason why I live by nuns. Pistilli is the great selection of coins, and they've got a almost impeccable security history. They have their own wallets called the trust wallets and stable coins. I like to trade with as well. So that's why violence remains my most favorite crypto currency exchange, and they also have trading view chats built right into the interface. Said that, that will save you some money if you choose to use that as well. So go to the cryptovest dot show scroll down to sponsors, click on the binary banner. And sign up for account today. Thank you very much feasible. Which reason is a reasonable point, white met tan around. Right. And squeeze all of the all the juice out of that trait so far. If we look back at the hourly. Go back to the triple screen here. If I look at the hourly, let's do this full screen, and get rid of the volume now, sir. Thaad that would have that trade would have stopped out twice about break. Even so what I'm talking about here is beginning arrow for anyone watching the video the. That was an attempted breakout in a fail on the fourteenth of may eight AM our the candle closed outside eight thousand two hundred fell Beck inside again, so that would have been like go long when it broke out. And then when it came back on again, it would be like, stop out. And then similarly happened again, there was that the is the fifty the may seven PM GNC broke out, Phil biking, Zayda against that was the second time. And actually, this is dead. One. The third one is soon enough to that which was one AM only sixteenth of may, it would look like it was breaking out, and then it failed Beckham do once again so that would be three failed traits. And each of them would have got stopped out at either break even or at a small loss. So three minor losses in an attempt to get that show up to nine thousand four hundred ninety six so while that would have happened for me that trade still remains valid, right? So another. Another attempt can be made as far as, as far as I'm concerned, right? I'm still stalking that trade. Again, it just failed to hold outside of the top brains that I'm still I'm still stalking that trait given that was still setting high lose. You even when we fell back in the five AM KENDALL. And today, it's still a high low than than the alley chop from the fourteenth of may the nine pm Kendall's. So it's still pushing up. So that's that on the short side if we break down below the seventy six hundred level, which is you can see on the you're looking at it on the video vision for me. That would be an entry point for short trade, and outright that down to the next support level of go at sixty eight thirty. So if you're on the video, let's see, it would be breakout here. And then I'll write it down down that so that would be a move. I mean you go away bit because we're eight thousand dollars right now. So actually, my friend Simon was complaining about this trade setup or the. Way did this analysis. Oh, you're gonna wait for it to full of four hundred dollars before it breaks out. Why don't you if you get a now you'll be able to ride the extra four hundred dollars down? I'm like, Nope. I'm not doing that because until the Mr. mock it tells me that it's going down. I'm not doing it the risks to high. Right. I don't want to be in position until Mr. Mahaney gives me like confirmation. But so this is like a ten percent correction down from seven thousand six hundred to sixty eight thirty now at that point, as the price approaches sixty eight thirty when I start to do is out outside a titan of my stop-loss in case that was the bottom, if k sixty eight was the button, it would ten round, stop me out at profit if it continued to full right, then my next target would be six thousand and then again, I would as so I'm gonna join us again, if it continues falling to six thousand. I would as it approaches that of titan must doubles even more again. In case that's the bottom, and then the price hands around at six thousand and then stopped me. I even bigger profit now if that hold trade, best case scenario, we break, down seventy six hundred and then we come out as a twenty one percent gain. And if if we did a bit mixed job and leverage that hope that could be a good old even five times leverage, like a double, my money on that trade. So anyway. That would be about as much as I'm willing to plan this trade really until Mr. market, gives me more information. Six thousand. In fact, I'm just get released EROs six thousand hasn't been properly tested, as far as I can tell. So let's pull back to the triple screen. Yeah. Used the six hour for this one. So zooming the volume once again, it's six thousand hasn't really been tested since we came out of it. We came out of it, it just walked, right? Passed on the ninth of may. But we haven't been been down to test his support that sixty three has been tested within within a day of his breaking up, sixty eight thirty. We came back tested at intake off all the way up to eight thousand four hundred odd. So that one's them that one's gonna fool hotter breaks, but six thousand one quite sure if that's a good floor. Not only if we do revisit six thousand make sure I'm already in short trade by then, which I've just explained and for the record 'em. Just be dumb saying this just because too many people have said, the same thing this is a very different short trade setup than the one. I talked about in my recent video cold. Why I'm thinking about short in bitcoin right now? If you remember from that video, the criteria full entering that trade was when the price on the daily chart. Crossed the exponential curve, which has not happened yet. So Mike Spencer, curves back on the bit mixed price on the daily jot. So pull that back up for you video, which is. This gift from the volume once again do this. So it is what I'm looking at hair is an exponential curve ope, which the price is just is, is even pulling away from the exponential curve. He's, he's rising really steeply an only gonna just this parabolic curve to fit, because I drew it and not sitting there and the red arrow, if you looking is on the on the video version, is reminding me that when we cross this exponential curve. That's a good show entry point. And as you can see from this, that hasn't happened yet. So ain't going in. Right. So that's that intrigue for the trade. It's, it's not there. So it hasn't happened yet. So I haven't pulled Detroit on if the market conditions aunt, high reward low risk is better to just wait. Right. That's the hobbit quite frankly, especially when prices are moving fast when prices are moving fast in the mind starts thinking, oh, could be profiting from this move. And that creates like this compulsion to just. On any old trade. And that's why most people lose money trading. A lack of discipline. So we'll find a little reminder then now the by the by nuns is back. Open running. I can offer you this for free. Oh, four hundred nine dollars. It's my own line calls on how to trade cryptocurrencies is entitled crypto exchange mastery, featuring by months to get it for free. All you have to do is complete a very simple challenge within twenty four hours of signing up for the goals, which is just a name and an Email name an Email you get access to the coast for twenty four hours. If you complete the challenge, we've been twenty four hours, you get to keep the cost for free forever if you fail, you'll lose access to the course again until you pay the hundred nine nine dollars. So click the link in the show notes. He'll take you to the pages onscreen right now Atlanta hot trae cryptocurrencies explains. The steps forget in the close for free, which is just basically the anti union name and Email so you can get your log in details, and then off you go with the challenge other than that, I will be back with the next episode of the cryptovest, so until then it's me, Chris Coney saying bye for now.

Chris Coney Mr. market stalking Senate USD Twitter Mr. market BTC Detroit Beck Mike Spencer Mike spinach Bines abidance Gould Pistilli Kendall trae cryptocurrencies Zayda
Rob Gilmour - Market Update Recorded March 18, 2020

Shares for Beginners

26:13 min | 1 year ago

Rob Gilmour - Market Update Recorded March 18, 2020

"They get I am welcome back to shares for beginners feel mascatello. I've got many interviews in Ken. Ready for release which suddenly done same very relevant as Warren Buffet said. Mr Market is a kind of drunken psychiatry. And he's particularly Florida at the moment of suspended normal transmission and will instead focusing on current market conditions as they unfold. We'll do that until Mr Market is safely restrained in a pet itself. So I've asked rob you're my guest on the very first episode to come back in and share his views as of today. Wednesday much eighteen just before the market opens. Can I get I feel good? So there's obviously a lot of noise at the moment but today we're going to discuss what's going on and how to look a little bit beyond all that noise. Look that's right. I think it is important to try and look through the noise and in order to do that. It's trying to get a good grip and understanding on what we're dealing with now. So what are we dealing with? You've got some some views they're really. There's probably three factors to what markets are trying to come to grips with what we generally as a society at trying to come to grips with and it started obviously with the health crisis and the the outbreak of corruption in China Markets. Quite sanguine for for a period of time while this was going on and highly complacent but the impact of the health crisis Israel. We've seen a lot of headlines saying it's just like the flu and for most people it will be. The numbers are bad eighty percent. There'll be just very mild but the real thing and the panicle concern here is is the other twenty percent where I've ten to fifteen percent will need high levels of care and then there's five percent that will need intensive care and when you stop to extrapolate those numbers off the back of a virus that can spread very very quickly because of the long incubation period and if you start to see numbers being infected in the millions then that ten to fifteen and five percent stotts to translate into some pretty serious numbers on the health system so governments have responded deserve result of that a pandemic has been declared normally when you get a pandemic declared the the focus switches from containment to management and I think a lot of people out there have underestimated what management of this is containment is obviously trying to to to lock down and stop it. Spreading management in this scenario to protect the health system is also degree of containment but trying to slow it and in order to do that. We don't have immunity to something like this. It's prime to spread very quickly so in effect. It feels like containment now that we're being told not to go to public events potential restrictions coming through in terms of tending pubs and restaurants in a real impact on on daily lives so that health crisis has brought about an economic crisis. You start to get that translating into the broader economy when people spend money and it has a real impact on business cash flow by seeing it in tourism. We've had the double hit from the Bush. Fis this is far worse. So when you getting the demand and the economy shutting down you having that impact on employment that is recessionary because because it's real it's much fear and you can tell from people That they they're really feeling the anxiety. Yeah and if you read the headlines. You've got to be very careful about reading the headlines because what you read in the press it's biased. It's data sell. Pipe is sensationalist. I think we've probably Obama a little bit guilty of underestimating nine now that it's hitting our shores and and the severity of the of the lockdowns. It's definitely more than the flu. But ultimately it's still a temporary short to medium-term shock to to the economy. That's going on and we'll get through it stronger on the other side. There will be a rebound in and will probably be a fairly quick rebounds. Markets have reacted very very quickly to. What's been a shock site shock but it took a while for the market to see it as a shock but have reacted very quickly to the downside and equally when the recovery comes. I think it'll be fairly swift in in the markets as well old enough to remember the last recession that we had an Australia. Not The last. I do remember poking saying the recession that we need to have I was in London during the J. So I say you saw this. I saw recession. And that's when I came back to strider and thought well it's a bit of a bubble. So what's what's it like because in my twitter feed? I've been talking to some younger people who are saying. Does anyone know what a recession is law? Can you tell us what it's like? Well I remember when Lehman Brothers collapsed in his basically people got their got the United Straightaway and they walking out. The door with the with the box and belongings are like instantaneously. Yeah I remember a run on the northern rock bank over in the UK and people queuing at the door trying to get this savings out of a bank because they thought the bank was GONNA file. I remember the impacted had on housing in in London the rental market in London luckily in the UK there were a lot of that had tracker mortgages and the mortgages followed interest rates. Down in some people actually had a negative mortgage quite a strange phenomenon now. The impact was widespread. It was widespread in Europe as well. It was pretty hard hit and oversee it was. It was tough in but in Australia we managed to ride it out through our relationship with China and yeah through a bit of a bit of luck but it was a very different environment and destroy when I came out compared to what we've been seeing overseas. I'm old enough to have gone through three recessions. I think in my lifetime but What I've been saying is in the last recession in ninety-one ninety-two that was when I started by recording Studio Business. A opened the doors as the recession was happening. I lost my major client. Just as the doors opened as well but still managed to last for eleven years and thrived at Many times in that period. That's right it's really. You GotTa ride that. Take the good times with with the bad and hopefully the bad any scenario. It'll it'll be short. We know the problem that we're dealing with. We know that it can be managed yes ultimately and life will get back to normal. We do know that at the moment it feels pretty horrible but it is a transition and they will be recovery on the other side. Unfortunately there's GonNa be a lot of damage. That's that's done in the meantime. And that's a result of companies out there that are over extended companies out there that have more susceptible to the drop in demand and then unfortunate wasn't repayable like on the same before that my daughter suddenly she hasn't gotten any work. She works in event management. There's no work. And that's going to impact a lot of a lot of young people and a lot of people who live from paycheck to paycheck absolutely and that that permeates through the economy not unemployment is is is going to spike and again it will be temporary but it will be hard that obviously has impact in a country where household debts fairly high as well very high. And we're seeing that we're seeing these huge Dr Gyrations in the market at the moment and they are quite unusual in terms of the history and the share market. We've probably seen the quickest onset of a bear market in history and that is naturally causing a lot of concern a lot of stress and panic. Selling we're also seeing a lot of things in the system unwind and it's being exacerbated by things like excessive leverage or debt so as soon as markets go down those in the market that have debts to cover half to sell. We're seeing brought by selling the result of exchange traded funds. So when people pull their money out it's everything it sold existed bite at fo the by some exchange traded funds leveraged so that existed bites the foles. And we've also seen an oil crosses threatening there as well. Yeah no beginning. The process which we discussed on the last episode. Yeah a Black Swan. Event Being Corona virus in the Second Black Swan event being an oil crisis. Now ordinarily the oil price and and what's going on would be capturing a lot of the financial market headlines but the reality is that's a side show compared to what we're seeing on the streets and the economic consequences of the current Ivars. That's looking behind the reasons for what's going on at the moment people listening to this program. What should they be thinking about in their own personal situation and they response to the way the markets are operating at the moment? Most important thing in these times is you need to panic. Sell your hold on and you're right it out. Hopefully you've got some but that's the main thing isn't it if you don't have to sell don't sell right now absolutely. That's pace of advice isn't it? Look that's one of the mistakes a lot of people major j when I saw the actually crystallized loss and when they sold I thought well we'll sell now. We'll wait until the coast is clear and then I'll get back into the market. Well the reality is if you're waiting until the coast is clear. The market's already gone and that was quite clear in the in the JC. So when you get to that point of peak via and when things are so bad then that's possibly time actually. It's uncomfortable but to invest. Now you'll never pick that about if you've thinking about things from a long-term perspective and your buying into this market because you can and you've got that long term view then okay you might buy an asset and you've got to be looking for quality in this environment you got to be thinking good assets good income something that you really wanted to volley for longtime if you buy now and I can market goes down another twenty percent. You've got to be prepared for that but thinking well if I buy this now I know in five or ten years time. This is going to be a great asset that I wanted my portfolio. So that you've got at a great price you got a great price. Yeah you don't get it at the lowest bronze. That's the reality. But looking through that noise and being selective through these period of time and keeping that long term view as an investor not a speculator is is really important and this Karen crosses is different Fundamentally to the GMC this is not dave say no the JC was a financial crisis and the GMC unfolded very very slowly. As a result of this contagion within the financial system brought about the American subprime collapse in mortgages every day and gradually it infected the whole financial system. And you're talking about a scenario there where the ten biggest banks in the world were insolvent. Or that didn't know whether each other was insolvent and so the banks the banks didn't trust each other and the banks wouldn't deal with each other because they didn't know the underlying exposures bank might have had and then based ends collapsed. Lehman brothers collapsed. And then that's where the central banks sort of realized. Oh we better step in and stop this and backup out banks and that unfolded. I very much longer period of time. But we're not dealing with that now. What would dealing with now is more of an economic cross its growth crosses. It's a demand shock brought about the health crosses and this is a different approach so he was seeing companies under stress not the banks at the moment the banks. Well capitalized much much much stronger than I would say. They have a lot of liquidity so the issue is not the banks. The banks can continue functioning and lining to the economy. Central banks are acutely aware of the importance of the financial system in the banks. And that's why we've seen the Federal Reserve the acting very very quickly to provide liquidity into the system and the Federal Reserve has recently come out with cuts to interest rights and massive amounts of the equity into the system to keep the financial system running. So they've seen this before in the AFC. They know what to do to keep the system going but even as the Federal Reserve is Donald. And I did that on the weekend. We saw the. Us market full twelve percent on Monday. That was a beauty. Wasn't that that that way used to sort of in the financial crisis the central bank coming in and providing liquidity though the bad news is good news because we know the central banks are going to pump the system and asset process. Again I go out. That's not what we're dealing with here. Because the markets are actually looking at the economy and seeing the damage done to the economy and the damage done to corporate earnings and the potential defaults that might occur in the credit markets so the markets are focused on the economy central banks of propping up the financial system and the banks. It's now up to governments to pull out the purse and support the economy and jobs and companies. So in this scenario we're going to be seeing company buyouts We're going to see fiscal policy being used to support households to get the economy through what is ultimately a transitionary scenario. As we over these crosses so it is a transitionary brings our guide to get bitter out by. They are absolutely are. We did have a model sort of a model in China. China was first team and their first out and the Chinese response to these has been excellent. But it's also very unique to China now. The fact that China was first union. I is really really important for the global economy because initially when we head fees around this virus it was with China makes all the goods if China shuts down where the goods gonNA come from. And that's going to be a supply side shocked the world and that's what we're worried about. China brought that virus under control and they getting back to work. Now that's really important. It's really important because it does take away some of that supply side chuck but it also shows that there is a I guess a template for how the rest of the world can handle it but I think ultimately the rest of the world particularly the United States want handle it as well as China and we would expect the rest of the willful type longer to get through that other side but it is ultimately a temporary conomic shock that we're facing markets at the moment done understand it and when they have uncertainty doesn't understand it they overreacted. I reacted very very quickly. And they will overshoot but ultimately when you start to see markets look through that and and begin to quantify what the economic impacts are. They will stop to look through it. The market improving. I've heard some investors saying that we can't possibly even start to look at moving back into the market until at least the next reporting season because until then we have clarity on the actual numbers. I don't think the mark will light for reporting season to respond. I think the market will react to other things. Like reducing infection writes all developments in treatments. I think the market expects results to be really bad I think the markets are pricing the worst case scenario and in actual fact perversely. You might see companies report results. That are horrible but it might be better than the market expects so you might say a rally when these results are reported. I think it's it's hard to say and I don't think you WANNA be trying to rush into the market too quickly. We are in a bear market. So so how should people be responding to this market? I mean there's everyone's saying I kind of opportunities. But what's the safest risk free way of approaching that well? Firstly the safest risk free way of approaching nieces don't sell obviously. They might be some people out there that are forced to and hopefully on in that position because dead and you've got a balanced portfolio. So that's probably real number one and people will probably be getting that advice and it's it's good advice in terms of approaching the market taking a long-term view is important and picking. The bottom is is impossible so I don't think you want to be rushing into this and I think it will depend really on your outlook. Tim's of what might transpire over the next month three months or six months and I think it will really depend on ultimately how long these guys on full. Now we know we've got the model in China where it it probably took a month for them to really get through the worst of it and he got back to work fulltime period. Isn't it ladies and China's back at about eighty percent now So they went into this in January back at about eighty percent and we know that from traffic congestion `electricity consumption pollution levels the Chinese factories of Getting back to which is which is great. Let's hope they don't stop to sing? Fiction rights takeoff again. That would be. That would be a terrible scenario but if you look at the timeframe that China's managed to do it if you believe all the numbers and I think you've always got to put a caveat on on numbers out of China but the reality is now getting back to work. You look at how they did it. I would expect the rest of the world. It will take longer because they've not got the same control and they noticed prepaid so China's probably base case scenario in terms of timeframe which you look at about a month ago or two bad China will probably have a good second quarter and you might see the rest of the world now. Have maybe bad two quarters at least as you as you get through it back to approaching the market. It's not either and we're we're probably now getting into the thick of the storm. Tombs of seeing me the real economic impact. But like I said earlier when things get really bad and really blew me. That's probably when the mock will will actually turn and think we need to. We need to look through this and forward and start to price in a bit of times in the third quarter in the fourth quarter of the year. So really isn't approach. It's about trying to pick quality assets in this period of time knowing that you'll buy a good asset for the long term produces income. A great business that you want to learn and you may not get it for the lowest price but if you gradually picking these up through a bear market you will do well. But it's about looking for that quality as you trying to navigate a very volatile market. Peaking the bottom is it is impossible and waiting for the bottom is an one of those scenario. Is that if you wait for the coast? Beclea markets have already taken off. So I think it's sort of a case of gradually averaging into do these market so you think dollar cost averaging as possibly a good scenario to start into this at the my mall if you've got assets there that you're really locked. Can you sing them at a lower price than averaging into particular Investments is absolutely a good way to do it Looking at Particular anomalies in the market was seeing listed investment companies with quality underlying assets trading big discounts nets not just equity assets. You know we're looking at fixed interest assets so we think big discounts on some of these investments because at the moment it's a propensity to just sell and there are sellers out there that need to get cash and then not just looking to get cash to put into equities so there are a lot of anomalies out there at the moment where you can pick up asset at a discount and we will look back at this time and say oh. Wow that was a great time to buy something like that. So I'll just I'll just mentioned at this point that on next week I've got Steve Bull coming in again. He's from Atf Watch blog about ATF's and that's one of the major major points that he's made in this. This current market at a lot of listed investment companies that the net net asset value can go up and down. And there's a lot of these at a Trading at a substantial discount to net asset value. Yeah and so if you can buy a basket of assets at a discount to what they're worth then that sounds like a great deal to me. Yep You do need to understand what the assets are and how they valued so. That's very very important. But the listed investment companies in particular tend to get hit hard in this environment. A lot of them are not as liquid as as other investments. And so when there's no buyers out there you do see a real downside shock like I said we'll have more in the next episode about listed investment companies. What about term? You're talking about getting into single stocks or single kind of assets but ATF's worthwhile thinking about it. This stage is a way of averaging in. Yeah absolutely yeah probably. The easiest way it is is is where for a lot of people especially. If you don't feed I know haven't got the research on a particular company that you can actually identify as being a great bargain at the moment. Yeah exactly and you'd probably want to be sticking to the big. Atf's staying away from the leverage ones and the synthetic ones but it's a great way of getting into a market and buying buying the market generally and it's very easy way of of averaging into the market. What's his wife identifying if it's leveraged or synthetic as opposed to a vanilla ATF. Well sometimes it will have leveraged written on the on the on the team side. There's a there is a leveraged S. and P. Five hundred. Atf out there. And basically what that is it uses to get the exposure and magnified gains but also magnified losses said they normally normally labeled as leveraged. And so you know that you're going into a guide or leverage product but for get for a beginner obviously a stock standard vanilla ATF. Let's just an easy wive. Getting downmarket really And you can look at different. Atf's out there that will buy particular market lot. The ICE IX two hundred the S&P five hundred and the Nasdaq or you can look at diversified. Atf's that are out there now that we'll just by one particular ATF. That has a balance of of different Underlying ATF STAYS. So you're getting a more balanced approach that might have some international might have some. Australian may even have some bonds in there so that's also a great why of effectively buying diversified portfolio of ATF's and there. There are a number of is out there now which are great way to get access to the market. Have you got a final message for listeners? Possibly one of optimism. Well absolutely. I think it's always important to have perspective. I think during this period of time most important is is this health and safety of our families and that we look after each other and take note of the precautions because the threat is Israel but it is also a temporary. And that's really important to focus on that we will look back on these period of heightened stress and FIA and we will get through it and we will probably get through it better and stronger. Economies do need to go into recession as part of the normal cycle and while it will hurt. And it'll be painful at the time we will come up giving an optimistic. He's agreeing with the. We'll come out with his better and the recovery will be there and the recovery will be strong will happen in markets and. I do think we are in a time where it is a great time to investing in the market where the risk reward is now much better than what it was a couple of ago. I tell you so. That's a reason to be optimistic. Even while they win dot coms at the moment. Rob Thank you very much for coming on and giving us this. Update pleasure shifts but begins for information and educational purposes only. It isn't financial advising you shouldn't buy or sell any investments based on what you've heard here any opinion. Coventry is the view of the speaker on the shades for beginning. This podcast doesn't replace professional advice regarding a personal financial need circumstances Bukharin. Situation thanks to Christopher Sue Lhasa Music production with that special curricula shes flavor remember. Musical waste flows even when the money went.

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248- Robert Shiller & The PE Ratio

Invested: The Rule #1 Podcast

36:22 min | 1 year ago

248- Robert Shiller & The PE Ratio

"BILLTOWN and Danielle town. Welcome to the PODCAST. Cast where we are learning how to invest not speculate but invest in spite of the fact that the market is not cooperating at all that may be my new favorite mature word spoken. Oh Gosh it is so funny like we were talking about last time you know the the ratio between the Wilshire. GDP and and the stock market pricing is is historically so skewed. Now it's over double where it needs to be to be a good deal. Yeah interesting point interesting point. 'cause you said it was at one hundred and seventy something and to be a good deal Etienne below. Yeah yeah so right more than more than double. What a good deal? So he really right now. If you were trying to find really good companies you might find yourself stretching to to make it work in your head to make Saddam yes projecting the magical thinking gene of. Please let this company be something I can buy out of the entire smorgasbord of companies. Out there that you look at and steadily get more and more depressed about how great it is and that you can't own it. It's like this degree Combo of like shod and Freud Freud for yourself or your like kind of enjoying that you can't that you found something you love but you feel sad you can't buy what is shot and Freud. Yeah well okay so shrodnr fresh or whatever commonly used term in the English speaking world as well what shot in Freud means and I use the edited. Take a Brad Pitt. Movie Inglorious Bastards Situation Pastor shot and Freud. I used it very very badly. What it means is to take pleasure in the misfortune of others? It's like when somebody else has some you know a flat tire and you don't like that person in your lake. Have a little bit of luck with joy about it that shot in Freud walk. That's seems very not nice. It's not nice now. Freud means taking pleasure in the suffering of others. It's like it's not. It's not a mean thing. It's like a small pleasure in the small small misfortune of others so it's not command. Cheese taking azure in torturing their prison not. Count a shot in Freud at on it would be something small. It's like it's that small little thing of like the example I just gave like it's it's it's a very German feeling of you know. Just a tiny bit of prick of joy and it just a certain moment when you see something they know what's happening. I have a feeling we all do this. But don't want to admit it. Well that's why it's a commonly used term in the English speaking world because we don't have word for that in English but it's a Greek word. It's a great word. So what I was referring to is like I used it very badly. A Self Referential Schadenfreude in a way of flight kind of being happy in your own misery. Oh man that is so deep and complex. It's way over my head. I don't think it's I think thank you. I think you've got it so when when you get that feeling of the now being able to find some or you find something but then you can't buy it. It's a bad feeling it sucks. It's depressing it is sort of although just finding something you really understand. Stick it on your watchlist. It's good knowing what price you pay for. It I find is just the the most wonderful thing it's just like. Yes because I know from doing this for a long time that will go on sale and that is just one one less thing I gotta think about. Maybe that's the method that you're about to tell us do this for a long time and you have our respective. You'll have perspective. I was actually actually thinking that when you find a company that is on sale in this market you should be very careful careful because when the market is priced more than double where historically Torque Li. It's been for something to be on sale in the market. Now this is a gross generalization because in all markets there are in fact great companies go on sale. There are in no matter how overpriced the market gets the market. Mr Market moves money around and it goes from one industry where it's likely to go up like crazy. And when that goes up like crazy than people sell out of it and sometimes it will go down much farther than it should or or individual companies are having a problem. They could have a problem and everybody bails out and runs away and that company goes on sale. But it's it's much more difficult and you should know it's much more difficult in a market like this one. Where in general things are double what they would be at a market where we think things are on sale? So things are really fully priced and then some okay well in that market when you see something on sale how you you should be careful because there are lots of people looking for sale companies right now and if you found one and the stock market hasn't founded the people at Goldman Sachs haven't founded Morgan Stanley hasn't founded and J. P. Morgan has invited. But you found it. You're the special official person that found it. That's really amazing. I just I've heard people say that a lot lately and I'm just not sure I totally buy it because it goes back to what we've talked about so many times about our own time horizon compared to other people's time horizon meaning that we have a very long term one and other people have a more shorter term one and I just I don't really buy in this market yes overall. It's harder to find stuff. I do agree with that. But Ed being able to find companies that are having events that are having things happen that are making. The price goes down for a short period of time. That's a situation that happens. Happens in any kind of market happens at bad Margaret Evans in a good market. I haven't been media market and those things usually are happening without being connected to the overall market. So if it's one thing to say like oh I found a company in the prices down own from where it was like. It's down from this very high market and that case it's probably still incredibly high and wouldn't be a good bye but but if it's if it's meeting the criteria of your own pricing methodology on its own independently Bentley not related to like. Oh it used to be high and now it's down then. I think that's something that you found and the reason other people are buying it. It's probably the same reasons that would be going on in any other kind of market. Now everything you say is totally true. That's exactly right. Went exactly how to think about it. Okay Okay what what I'm saying in terms of being very cautious is to make sure you understand why these people are getting out of that business. It's really important that you you selling to you. Who's yourself interesting point? I mean these are eighty five percent professionals who are unloading to you. uh-huh and they've got very good reasons why they are doing that. I guarantee you they have great good reasons. Sharon your point very well taken. Is that those reasons may have more more to do with a short term timeframe under which they're judged rather than the long-term final judgment on the company itself itself and if that's the case then more power to us the little guy that has this long term horizon and we can handle two or three years where it goes nowhere are no big deal right or it goes down even more so why. Be More cautious now. Because you gotTa make sure you really are not into something you're not about to buy is something that has a terminal problem in this market in other words there you just have to be doubly sure I. Maybe I'm wrong. Maybe maybe there's no big difference. You always have to be sure now. I can see what you're saying. You're saying because if we're if we're in a situation where the whole market has dropped there's been something that's gone on and the markets have been dropping. Let's say for six months and it's really been going down and companies are hurting gene and you're seeing which companies are surviving right like some companies are going to go away really quickly right. Somebody's going to be the pets.com. That's DOT com of this market and other ones are going to be the coke and be really well priced at the end of the day and are going to last for the next twenty years or the longer so you can see that happening to your point in a market that's dropping whereas in this market companies aren't being tested at all. They're getting getting easy money all the time. So right okay. You've done a great job of making my point. So that's what I'm here for. You see clear and then express it very well and so that's why we when when we're in a market that's it's really up there and everything is going good and people are buying anything for more than they should pay when they're selling it And they're not stupid. We just gotTa make sure that we know why. So you know the right now. Boeing for example is is a company. That's under a lot of pressure from a problem that they've got and they're trying to work their way through it they just fired their CEO. You know that's that's a big deal. It's a big deal. And I look at Boeing. I go man I would jump all over this at two hundred and fifty to eighty share. It's IT's selling for three thirty down from four fifty okay. So it's dropped a lot but hasn't dropped so much that is so good deal. I could just this jump all over it. I'm getting a ten count price. Just isn't there right. Because that's what Sony people look at. Its dropped forty percent or whatever that adds up it's dropped eighty percent from its high like that's what people say and seemed to care about and that doesn't actually mean anything on the is relative to what it was it's lower but when you see that just think you know the price of gold necklaces at a beachfront gold store. Eighty percent of we buy gold. Jeez yeah then. That's price just doesn't price just doesn't mean anything. It means what somebody somebody paid. That's all it doesn't mean value. It doesn't mean what it's worth it doesn't have a damn thing to do with it except in the long run eventually eventually the markets will price things where they should be. And that's what we trust will happen. And that's why we don't want to buy things that are expensive because the market's going to eventually price them where they should should be and even if they're gone they've gone up in ten years. which good company might you know if you buy it and pay too much you still gonNA come out okay? You're just not going to have a great great rate of return. You're just not going to get rich and what we WANNA do. Is We want to do an investment style that gives us financial freedom. We want to have enough money coming out of this thing with high rates of return and the ability to do that consistently that we don't have to worry about what's our job right where we WANNA go. Yeah so be careful. In this market because things companies tend to have their prices be inflated inflated and that can lead to not so great companies being propped up and it can also lead to good companies I'm being so overprice that maybe your own metrics get a little bit skewed inside your head. Which is the scary part? But we're GONNA talk about a method another method. Is this the method that you wanted to talk about. No this this is just sort of leading to that okay. So the second. We've talked about actually quite a bit here. There was was developed by Robert Schiller at Yale. WHO's the second did the Schiller? Pe Ratio. I have to say if anybody wants more information about this you can pick up our book. Invested which goes into excellent detail plug about pursue erase show. But you can listen to it here for free go ahead and what what show did it was so bryant was to find a method that shows that the market can be irrational from time to time and when it's irrational and you're buying into it and it's irrationally high your long-term rate of return by owning the whole market which is typically what people do in their 401k. They diversify across the whole market. You ready to return it in. The whole market is going to be very very low is going to approach zero for the next twenty years when it's too high long-term and when you have the market that's very cheaply priced your long term rates. Return even if you buy the whole market will be quite good. They'll be over ten percent and so this this chart that he's created is available by Googling Schiller S. H. I l. l. e. r. p. ratio. And it'll show you this chart. It goes all the way back to eighteen seventy and you can see very quickly that the average through all of the you know the last one hundred in twenty years up to the nineteen nineties has been about a fifteen sixteen. Pe ratio this is an adjusted pe ratio for inflation oughta skip cyclically adjusted pe Ratio Cape Cape ratio. So he got the Nouvelle Prize for this because he he and I am going to make this up a little bit. I haven't read the book although it's on my coffee table right now but I'll open at some point. He he came up with this method head of developing that particular. Pe Ratio Right. Yeah okay after researching every year versus the S. and P.. Five hundred in trying to understand. Say Sorry to interrupt you. P is price to earnings ratio. Just take the price of the stock divided by US earnings and you get a number but he tell me again what the Schiller ratio is with a Schiller takes into account a ten a year average. Yep and it's in other words it spreading the shorter term ups and downs in the market spreading spreading out over a number of years which softens the curve and it gives you a ultimately a better number to know. Where's the market dangerous in whereas it super good ed right and so this you can see that the market is typically averaging out around a fifteen or sixteen Schiller and? It's a really good time to buy stocks when it's at below ten fabulous because historically you've just killed it right so in other words when in nineteen in twenty one. If you've bought a bunch of stocks the Schiller was at five and you would have made a fortune in the next eight years and then if you're really smart art and he had the shoulder. Pe ratio which you didn't you didn't see that in nine hundred twenty nine Internet to quickly bring it on the Internet you would see that in nineteen twenty nine the Schiller pe ratio had gotten all the up to thirty. And you would notice that. That's a long way north of fifteen and you would have been very nervous and you would have gotten out of the market right and then you would have been able to buy back just a couple of years later again at a five. Pe ratio and you would have made another huge fortune. So the market's it gets very very up and down like this and what we've learned over one hundred and forty years. Is that when it gets up above you know twenty four twenty five. It's getting getting into dangerous territory and it's only been up there in all those years previous in one thousand nine hundred ninety eight twenty nine it got up there at thirty okay and then nine in ninety nine it got up there got clear to forty. Yeah and then again. In two two thousand eight it got all the way up to twenty eight and then collapsed and now it's thirty one so there's only only been three times in history of this ratio. Going clear. Back to eighteen. Seventy one was the great depression the second echo the collapse of two thousand the Big Tech Stock Crash and the third time is now so yeah I remember looking at the chart it could I remember looking at. I don't have it in front of me right now. I remember looking at it. And it's like the sort of zigzagging chart and then all of a sudden there's this like insane gene skyscraper from above everything else and that's ninety nine and then it's sort of zigzags a little bit for two thousand eight and nine. It's us and it's just like steadily steadily moving up to the right and by the way that one thousand nine hundred eighty nine hundred. Ninety nine skyrocket skyscraper was exactly the time when several investors who are world class superstars of this kind of investing that. We're talking about just quit it. I mean they their own investors. Were hounding them to get into this market when they were sitting in cash. Buffet is one of the he didn't and quit because he doesn't have fun. He has Berkshire hathaway and he could control it. But Oh man you know the. He didn't have any place to put the money and he was actively looking to buy back Berkshire stock during that Time Period Julian Robertson. Who has the second best track record I've ever heard of was actively bailing out of the market? He was all in cash and he finally quit his fund and I remember really clearly watching him on TV. Say and I just don't understand in this market anymore. It's nothing like I've ever seen so we're sort of back in that. Nothing like I've ever seen sort of market could be continuing to go crazy for another little while but looking at one hundred forty years of history we can see that a little while is really just a little while it may be a year or two but inevitably gravity catches up with a market. That's price like this. So that's the Schiller. Pe and some people argue that the Schiller pe isn't right anymore that things have changed and that the true facts of the Schiller. That's averaging in a lot of really high market. Pe's aren't shouldn't be counted because they were off. So I thought I'd just look up just the regular. Pe Ratio Right. Okay wait. The Schiller shouldn't be counted as a regular. PC's because it's a little off what well because the argument would be that in the last ten years. Let's let's say four or five years years ago they would say in the last ten years it's including some really high p e ratios therefore it's higher than it actually looks like the looks fire than it actually is but they can't say that anymore today. The Schiller P. is at thirty one and the actual pe ratio. The five hundred is at twenty four point two which is incredible guys. That's incredibly ably hi. It's incredibly high. There's only been the year two thousand and the year two thousand eight in excuse me and eighteen ninety five that have been that high. That's it even nine hundred twenty nine. Wasn't that high. Okay so we are are in a sky scraping crazy priced market right now and we've already talked about why right. The interest rates being extremely low not having alternatives is out there but it starts to build on itself and you start to get a bubble and just by saying you know you sort of have to be in the market. Everybody feels that way. There's nothing else you can do. Develop this market bubble mentality so we're trying not to do that. Market bubble mentality. We're trying to look at this soberly. uh-huh recognize it. It's we me and the mouse in my pocket okay. I didn't know if you meant like royal. We didn't know if you meant like We the American government or something like that. It's just we royally okay you I'm looking at this and and try I just trying to stay pretty sober about the whole thing right the night we know that this thing can't sustain because it never has but that's inductive logic gets the same logic that a chicken house when you know the farm door slams at six in the morning it gets fed every day for two straight months and then I think the door slams that you think he's going to get you know so we don't know for sure because we don't we can't read the future but we know that that historically this way of investing this way of thinking about investing of waiting patiently until the market greed goes away and market fear begins is the safest way to manage our money in the long run and I think so. That's how we do it. And I think it's pegged to actual prophets that companies make and as we talked about last time at some point these stock prices have to start reflecting the actual profits that companies make and the question. Make it a really good point There are some things that intrude in that reflection. Actually that are very important and right now. Two of them are manipulations by the companies themselves. Right so the probably the major one of those is that they're going to buy back their own stock Dr Stock Buybacks result in the stock price finding finding a bottom because the companies stepping in and buying it and making the price go up it can and and so that puts an artificial price on it. Ah they've got a lot of extra money and do they have a lot of extra money. Yes new and do they WANNA take a risk and by a different company at these high high prices or you know. Open a new branch when nobody's quite sure what's happening while they might want to do that. Because of interest rates but yeah. They're they're not. They're not taking a lot of risks with all their extra money risk and so it religiously and right now when we look at companies that are taking risks what we would expect expect to see. Is that capital expenditures. Go up that they're investing not just in stuff for how this year's going to go But in long-term investment they're putting railroad tracks or put it in airports. They're they're putting in warehouses and they're buying equipment. That's going to last this them several years. Those are capital expenditures. And we don't see that it's one of the real conundrums for president trump. Is that that the idea of cutting taxes for American businesses was to help them be more competitive to their bottom line but with the expectation that they would invest the money in more jobs by building warehouses and more capital expenditures. And they just haven't done that it said they bought back their own stock which is an artificial boost to the per share. Stock Price does nothing for the value of the company whatsoever. Yeah it's frustrating and it's happening so much that there are if you you want to take a minute and just google stock buybacks. There are some really interesting articles that have been written about how this works. And it's a fun like our of your life just read about the stock buybacks and how many companies are using them to help their stock price and to just just use some of this extra money what it's doing to the market and it's one of the ways we actually look to see if management is a good allocate or. I'm just thinking out allowed here. I really need to get that. That into the tool set the allocation of capital needs to be a judgment call. We look look at companies in our tool set of having good management if they're keeping their debt very very low two zero and if their return on equity return on invested capital sustain high and moving up then. We were like the way they're allocating capital but there's another allocation of capital very valuable and that is to look to see life if they're doing stock buybacks at a reasonable price totally so if they're if they're companies massively overpriced and they don't know that that's a a bad sign for allocation of capital if they're companies massive we overprice. They do know it in. They're buying back stock. That's a terrible allocation of capital. Because they're spending my dollar and they're buying fifty cents worth value for it. Yeah and that idea. And they're taking my money as a shareholder and using it in a way that's not optimal it's just. It's wasting the money that we have that they could be giving to me the and dividend which I would much prefer. You've talked a lot. We've talked a lot about how companies can use this extra cash. They can invested in Capital expenditures they can invested in buying other companies Through Manet they can give it as dividends to the shareholders and they can use it as has to buy back their own shares. And those. We've talked a lot about how those things are all kind of in theory equal. It's just a matter of toys on the on the part of the management And actually I think you've said a bunch like you would prefer that they not do the dividend option if the other options can be used well but prefer they grow it for me. Yeah but they have to use it well and instead what these guys are doing with five acts the stock prices so high is just wasting it and it's incredibly frustrating to see because it's giving buybacks a bad name to the point where now there's like politicians talking about legislation about it. Warren is out there with the platform that out to stop these foreign. I thought you meant Warren Buffet and you know to stop these sort of heinous buybacks and while I don't cheer on her method of doing it from the top down because there's all these unintended costs. Yeah Cheer on the Com motion about the content is like like. Yeah these morons I mean. IBM has been buying back. Its stock for the last ten years and you can may really make a good good case that they have been just wasting shareholder money. They might as well take those billions out in the parking lot and burn them all good in with his billions and billions liens and billions and billions of dollars. They spent on stock buybacks at one hundred eighty I share and hundred and sixty eight hundred fifty share and their stock one hundred and thirty. It's just for years so this is I mean go go read about. IBM's by and you'll see what I mean and just add up the billions billions and that money's Gone Gio any gone if this company doesn't get its act together so all it's done is support. The stock option prices prices for share for the management team. And that's just a heinous use of the money so the and then of course the the second way these guys prop everything up up is to borrow money and buy other companies so this is just one of the other ways you can do it you by another company and your company revenue goes up and you start to look like you're a bigger company and then the stock ideally goes up with that right so you get you get management teams that are bad alligators of capital making very bad judgments when it comes to acquiring other companies and again not to beat up on IBM too much but they've done a lot of buying a lot oughta stuff and it hasn't improved their position in the market while Microsoft came out of nowhere get handed. IBM It's hockey event. A success success story. That's been amazing to watch. I did not predict that. I don't know I don't know who did somebody started. But it wasn't wasn't anybody I know it wasn't the guys running Microsoft. They didn't know that was going to be this thing. Nobody knew somebody. He was going for sure. What's his name Such as something is the CEO. And I can't remember his name either right now but fabulous job Bob guys done is. IBM with more resources. By far and nothing is just struggling along with a very small percentage into that market so mergers and acquisitions I mean you can see companies do it man. But y'all stores the point that they borrow to purchase companies borrowed a purchase which is a threat then Tiki your money and purchasing companies which is different than purchasing companies using your stock. Those are three different ways. Three different ways and again you wanna see that the guys who are running their that women are running. The company are allocating capital sensibly. So if they're using their own stock to buy companies you really want him to be using stock. That's way overpriced. I want you to buy companies with stock priced at two dollars a share. When it's only worth a dollar by all the companies you can? I don't with stock price at fifty six dollar. Don't be spending it at fifty cents. So Oh and and the bad allocators do that all the time and so they instead of using our money then they'll go borrow money but you know uh-huh and that sounds okay except that especially when you're paying three percent interest except you guys when they borrow money at a corporate level they don't get it like you get it on your house for thirty years. They don't get a thirty year loan. They get a three year loan which means they are at risk for refinancing that money if they can't pay it off in three years and and you know they just mostly can't and dollar tree buys family dollar in a bidding war with dollar general and dollar tree wins the bidding war pain rain for more than it should have for. Family dollar borrows the money and it's it's trying to bury them now years later it's they're still L. struggling under the debt load. That's burying them. You're saying oh the deaths horrible and it's so hard for them to get out from under it and they've got all these stores that they paid too much for aren't doing well right so you've got to have people running. The business are really good at allocating capital. And then you see them spending money mergers acquisitions borrowing money increasing the debt. Buy Back stock at a high price. Those are bad allocators and we want to stay away from those guys especially in this kind of a market. We did a really fun interview with Jacob Taylor all about capital allocation and I would suggest going back to listen to that one and he wrote a great book that Charlie Monger himself recommended and So look up. Jacob Taylor's book on Amazon and check out our interview with him. I think that Kinda gives us today all right so we got at the Schiller. Pe and the Wilshire GDP ratio which are two methodologies. That we've talked about before but to point them out again and I think is really cool. I'm really glad that you brought them up again. It's a good way to start the year kind of know where we're at. Yeah give some context have have a little tether to what's gone before and then it allows me and this is ultimately personal right investing is very personal process and it allows me to feel more comfortable like okay. Maybe you know. Maybe I'm just not beating the bushes hard enough. Maybe I should be working harder. Maybe I I should be studying more. Maybe she'd be reading more. That's probably always true. Well that's true of course but then you just find you know that there's a frustration and you start to realize. Oh yeah okay well. The market is massively priced historically above its values historically and that gives me some comfort that I probably should be having trouble right now. Finding good stuff. Okay I got that now. Then what's three. What's what's the result of that is to remind myself to be patient Continue building the watch list. Like you said You'd find this wonderful company. It's frustrating because you can't buy it well there's another side of that coin and that is wow. I got another one. That's four my list that I can buy down the road another gym here. That's going to go on sale. And Yeah that makes me feel good when I can put one up there. I agree love adding to the wish list. All right thanks seventy guys. Thanks for listening to invested. If you enjoyed this episode you want more information including show notes outs. And more episodes visit us at invested. PODCASTS DOT COM. There's a special offer waiting for podcast listeners to attend my three day investing workshop absolutely free so just head to invested podcasts dot com everything discussed on his podcast. Either my opinion or Danielle's opinion and is not to be taken as investing advice. Because I am not your investment advisor nor have I considered your personal situation as has your fight do -ciary this past is for your entertainment and education only and I hope you enjoy it.

Freud Freud Robert Schiller Schiller IBM Mr Market Warren Buffet Danielle town CEO Saddam Etienne Brad Pitt BILLTOWN Boeing pets.com Pe Jacob Taylor
EP51 Common Investing Mistakes

Value Investing Podcast

20:19 min | 2 years ago

EP51 Common Investing Mistakes

"This is volume vesting. I'm your host June Kim in this podcast. You'll learn everything related volume best. Hello fall. Investors wall, come to another pursuit of value investing podcast. So into this episode. I wanna talk about common mistakes that a lot of all investors are making high put together this list based on my experience in also based on the books that I have read in the past. So let's just talk about them. I hope that you guys agree on what I'm about to say. And there are about eighty fern mistakes that I wanna talk about in today's episode. So before I guess started Limoges give you creek. Disclaimer. As always that this podcast is for that, they purposes only, and it is your responsibility to consult with your investment professional for any investment decisions. So without further ado, why don't we get started? The first mistake that a lot of investors are making is the tried to time the market. I think this is very common mistake. And it's something that we are letting knowing our head, and we have in Todd as volume Bester by legendary Besters like Warren Buffett, Peter Lynch, but we still try to time the market. And that's a huge mistake that I think that many people are making and when it comes to buying stock. I think that what we can do. He's to buy the stocks. They want to buy. If painter value seem to be a lot higher than Kerr market volley. You don't have to predict how the price is going to move next day or next week or even next year. Forget about this all short term price filtration, but focus on intrinsic value and only invest your money when you think that injuries value is higher than Kerr market volley and that provides large margin of safety. And that's what's important. But what happens is that you buy. By shares of stock that you're interested in and you think that the intrinsic value is a lot higher than Kerr market value. And next day, you check the price again, and you get depressed, if the price goes down further because you didn't really find the perfect timing when it comes to buying the stop, and I think that's really huge mistake because they end the short term the price can actually go either way, you know, it's just same as flipping the coin can go up or down and the next day or the next week. But in the long-term prices gonna conversion to intrinsic value if you assess insurance volume correctly, so what matters is the long-term prophet, and how you can make that long term profit, and as you'd make more and more investment decisions. So don't get depressive. If you are not, you know, right in terms of market direction over the next week or over the next month. Forget about market timing. And tried to focus on intrinsic value and having their large amount of margin of safety. That's what matters. The second mistake that I want to talk about his dead lot of people get influenced by the market. I know that we talked about the concept coal, Mr. market in the past episode. And but still this is also something, you know, but you tend to get, you know, influenced, and this is something that you cannot really control in some cases. So if you're a person who get influenced by the market a lot, then probably the stock market's not the area where you want invest your money because you to check your stock price every single day, and you're gonna get influenced by the market, and it actually just not healthy for you. It's not just healthy for you, mentally and physically so you cannot really focus on your current job and concentrate on other tasks and. Constantly checking your price because you wanna see how Mr. market values year securities? If that's similar to your situation. My recommendation is stay away from the stock market because you cannot really perform anything will for your life. Try not to be influenced by the market, and that's the device that I wanna give here and on this point. I just wanna talk about warmer thing. This a lot of people asked me in the past. How often they should check their stock price my answer to that. Is it all depends if you can actually maintain your calm, even after checking the stock price every day by all means you can do that. But if you're type of person who are influenced easily by the Mr. market, you should refrain from checking your stock price, very often laissez every day in. And also there are different variations into this approach. Because in some cases, you can actually check the stock prices of securities that you hold, but you don't necessarily go in and log into your brokerage account and check the total value of yours per folio. The reason why I mentioned this is because once you check how much you lose in how much you gain every single day it actually translating to something very reared. Let me try to elaborate a little bit further. So let's say you have a large perform you and your gain everyday gain in a loss is more than one thousand dollars. Then all of sudden, you kind of imagine what you could do with this one thousand dollars. You could say that, oh, I could have gone on vacation with this one thousand dollar, and I could've purchase iphone with one thousand dollars you start to imagine. What you could do with that money, and that actually is not healthy because that's gonna actually lead to more influenced by the Mr. market, and that's not really good. But in some cases, if you are passionate about doing I'm vestment research, you might have to go to different sites in order to do the research, and there's no other option other than checking the stock price frequently, and if that's the case, probably my recommendation is to just stay away from checking the total volume per folio and your brokers your count, but still checking the stock prices, probably that's alternative solution. And if you're one hundred percent comfortable, and you don't get influenced by the market just feel free to do. So cool all check in your stock price. But there's no really good benefit of doing that. If you wanna be a long term investor the reason why you're checking your stock price too often is because you want to time the market you. Want to see if you can sell or buy securities? Right. So that actually is tied to my first point which is tried not to time the market only sell your securities when there's significant hype in the security as a lot of speculation in the security yet, that's something that I wanted to talk. I mean, I can talk about a little bit more. But let's move onto the topic in the interest of time the next topic don't try to evaluate your performance based on the short term price movements. So this is something that I briefly mention so let's say you buy a stock today and the stock price is ten dollars and next day to stop price goes down to at no eight dollars. Right. So twenty percent drop then you going to actually get so frustrated than you're gonna actually beating yourself. But I think it doesn't mean anything just because the stock price goes down by twenty percent over the next. One week or net over the next one month off since your initial purchase doesn't really tell you much. It could be purely due to random walk and random our stock price movement. So what matters is how much earnings this company's gonna make how much sales this company's gonna make during the time fury that you're considering preferably more than three years. And that's what matters I think stop price will converge to insurance value if you made the right assessment for your intrinsic value. So that was the third mistake that I think there are a lot of follow investors on making. Let's move onto the next item. Don't think of money in your procra- count as real money. Oh, I also briefly mentioned this one in this episode five minutes ago. But if you start to imagine what you can do with the money that you have in your brokerage account, and that's real money. I know that that's real money. But if you start to do that, then you get influenced by Mr. market, and you're not gonna actually see things objectively, it's probably increased the probability of you selling the stocks inner fearful environment, and it's probably going to increase the probability of you buying stocks. When there's a lot of hype in the market. So that's exactly the opposite of what we wanna do as volume festers. So what I'm trying to do is that if I just put the money my broker's account. I don't see that as real money. I just see that as cyber money. I. Try to detach my emotions today stem possible from the money that I have in my brokerage account. So that allows me to see all the things holistically objective manner and make the decisions in in a rational manner, because if you think of the money in your berkers account as real money that you can spend on your vacation, and you know, on the items that you want to buy and this is true and this reality, but if you think that way, then you probably gonna have hard time to detach your emotions from the money, and you're going to probably make a huge mistake when you try to buy and sell your securities. So that's why I think that it's important for you to detach your emotions to the extent possible. Let's move onto the next side of the next item is don't follow others advice without doing your own home. Homework just use that as a starting point. Okay. So this is also good. I think advice because what I do normally is there's a website where you can see and follow a lot of legendary volume festers, I can probably put the link in the show. So that you guys can see on this website. It's a great source, and it's a great starting point. But what I want to emphasize is that. Once you trust someone less Warren Buffett. I think he's a legendary investor, but if you don't form your own opinion, a few don't actually do your own homework on just follow all the peoples advise were other people's portfolio. The problem is you never know when these people will sell their stocks, and you never know on there wa- circumstances. They purchase this scurity and stocks, and that's really dangerous situation. So my recommendation is always do your own homework. I think that's quite important. Because once you do your own Homer, you know, whether or not you purchase this security for long-term purposes, or, you know, medium term purposes because in some cases, people buy stocks cyclical stocks, and they tend to sell when the cycle turns of ROY. Round or buys cycle turns around so you need to as some point on tried to find out the right in a moment for you to get out or getting for certain securities, like cyclical stocks in other cases, you just buy and hold of for the recipe alive. So depending on the purpose, and depending on how you do now since you might actually come to completely different conclusion, and in some cases, certain perform, your managers tend to sell their stocks for tax purposes. And that's not something you wanna follow. So that's why I think that it's important for you to understand why you're purchasing certain securities, and you have to do on homework in order to do that. So that was one item. Let's move onto the next item. The next item is don't envy, just because people you think are not smarter than you are getting richer than you are. So this is interesting because you're gonna hack surely have a lot of lug in a lot of skill sets needed in order to be successful. But in many cases, you you're gonna see your neighbors or colleagues getting richer than you are and you kind of become envious of their wealth increase. This is not particularly good because this is also based on your emotions is not patient based on your rationale. So it's gonna probably lead to the wrong conclusion in wrong decision making process. So I highly recommend that you stay away from anything relating to emotions whether it's emotions related to envy, jealousy or anything like that or fear. And so on. Yeah. That's what I wanted to say. And let's move onto the next one. The next one is don't get too hung up on valuation and science valuation. A lot of people are trying to understand like all the sumptious relating to intrinsic value calculation. So you have many Vern approaches to any comes to intrinsic value calculation. I actually created a couple of episodes in the past with respect to intrinsic value calculation. You can actually go with racial pro-choice. You can go with discounted cash. Flow analysis approach you can go with you know, acquisition model approach. So there are bunch of valuation models out there. But the reason why I say that wouldn't get to Hong up on valuation science is because in many cases, you probably now under person. Sure, whether you should get into the position. If that's the situation. Just take a pass. You don't have to invest your money truly good investments, in my opinion will actually stand out without even performing any valuation. So if limited give you a metaphor. If you see someone really tall, do you really need to know exact height in order to say that that guy is toll. You don't have to know exact height in order to know someone is really toll by the same token. You don't have to know exac, intrinsic value of a specific security in order to know, whether or not this security is on the value. If the security is white undervalued and has significant margin of safety than you probably would be able to tell right off the bat just based on purely at an price to earnings ratio or price to cash flow. Ratio. You might have to do a little bit of exercise to understand whether earnings and cash floors are normalized and true, Representative of yearly earnings and cash flow. But once you do that exercise, you don't have to actually go through this this kind of cash flow analysis, the discount cashflow analysis of quite good in a sense that irrationally produce the Zach intrinsic value calculation, but it's also not good in a sense that you have to incorporate a lot of assumptions, for example, you have to know the growth rate of their scurity, and you have to know terminal value. You have to know how many months you on a forecast. Cash flow Goethe, and you also have to know what kind of discount rate, the you want to use for this physics curies Dera, just so many assumptions that you have to make in order to actually derive interest value from this kind of cash flow now says at the my. Is that if you just wanna go crazy, then then try to figure out all nitty gritty details about all these assumptions, I think you probably don't need to do that. And if you truly find something very on the value, you probably don't even need to go through all these things you can actually do the reverse this. But don't go crazy on that. And don't go crazy on other volume metrics in the past when I was taking finance classes before for my master degree while we actually did was we tried to forecast the balance sheet and income statement and cash fuller statement for certain securities. I think that's just too crazy. You know, how can you predict all items within the balance sheet inch and try to tie that to income state items and cash flow items? I think it's a good exercise for students. But I just think that it's useless in a sense that possible for us to forecasts. Every single lied. Him on the financial statements. But anyway, so my point here is that you're going to see on the valued security, and you're going to immediately know whether or not it's going to be on the volume within very short period of time, you might have to do some detail as I said in terms of the quality of earnings and quality of cash flows. But after at an a couple of hours of research, you should be able to determine whether this securities undervalued or overvalued relatively. And if it's quite undervalued, then you might not need to go through this extensive exercise of doing the valuation. Okay. So these other eight points that I wanted to discuss with you guys on today's show. I hope that you guys enjoyed his show. And just before I end this episode. I just want you to know that I have this value investing park has website. And also, I have another website called share investment, ideas dot com, where I post my investment ideas there, and I'll try to be little bit more diligent in terms of posting my ideas, and so on, but I highly recommend that you guys are also share your ideas on death, flat form and also you can actually, you know, request friend with me. And then I answer any questions that you have to comments. In. Lastly, just leave your comments and raiding reviews on whatever platform you listen to this podcast on upload his podcast, itin, Android phone various apps. So I try to actually read every single comments there on my website or on different platforms to thank you very much for listening and see Unix time.

Mr. market Warren Buffett investment professional June Kim Peter Lynch Todd wa Bester Vern Hong Representative Zach Goethe one thousand dollars
240- Quick Questions: Is an Event Required?

Invested: The Rule #1 Podcast

34:58 min | 1 year ago

240- Quick Questions: Is an Event Required?

"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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EP54 (Part 3) Emotional Errors  Behavioral Biases

Value Investing Podcast

28:55 min | 2 years ago

EP54 (Part 3) Emotional Errors Behavioral Biases

"This is volume vesting. I'm your host, June. Kim in this podcast. You'll learn everything related to volume best. Hello, follow investors. Welcome to another episode of volume vesting podcast over the last two episodes. We talked about cognitive airs stemming from belief perseverance and information processing airs on today's show. I wanna talk about another important biases which are coming from emotional airs. So it's going to be very interesting topic, so stick around, and before I get started. Let me just give you kick. Disclaimer as always that this podcast is for entertainment purposes, only, and it is your responsibility to consult with your investment professional for any investment decisions. So we offer the delay water we get started. So as I mention in the loss to be, so it's we talked about college airs the first episode we talked about conservatism bias confirmation bias illusion of control representativeness bias in hindsight bias. And in the Las episode, we talked about anchoring bias, mental accounting framing bias and availability bias. So if you haven't got a chance to listen to these two sorts, I highly recommend you go back and listen to these two episodes, I and come here, but this episode is going to be independent of these two other episodes. So if you just like to stick around and just listen to this episode it's also fine. So as mission, I want to talk about emotional biases, and these are biases that are really hard to correct. If you know they exist of this biases. So in-depth sense is different from cognitive errors because, as I mentioned in the last episodes, colony heirs are relatively easy to be corrected once, you know, the existence of those biases, but emotional biases are something that it's very hard to correct. Even if you know, so let's go over them and see. So why it is the case. So what I like to talk about is six different emotional biases today loss, aversion bias, overconfidence bias, self control bias endowment bias regret aversion bias status co bias. So these are the six emotional biases that I like to talk about on today's show since we have a lot of materials to cover. Why don't we just dive into materials? The first one that I like to talk about his loss of version bias. So what is it? Loss, aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains loss version implies that one who loses one hundred dollars will lose more satisfaction than on the person real gain satisfaction from one hundred dollars windfall. So you probably have this tendency. I definitely have this ten Tennessee as well. So whenever you are investing in the stock market. Even if you have some losing positions, you probably hold onto that position in the hopes of breaking even at some point in the future. But the problem is that if you tend to hold onto losing positions. There is a great probability that deposition would lose more money in the future. And what's more at risk? Is that you are, incurring opportunity costs as a result of holding onto that position because you have your capital strapped to that position and you cannot utilize capital. More efficient manner. Also want to say that loss aversion is not always the bad thing for investing. So let me just see how you can use loss, aversion in some cases, to your advantage. I if you have huge loss, aversion, you can invest insecurities, only when the odds are stacked hugely in your favor. In other words, when you have very large margin of safety, so you're. Our main goal is not to lose money. And in order to do that you own the invest your money into securities, whenever you have large margin of safety. So that's actually upside of having this loss aversion and use that to your advantage. And also, you can pass up a lot of investment opportunities, if you feel that they're not falling into your circle of confidence, and you can actually be successful even after having huge loss, aversion effect. And Lastly, I think I also wanna mention that you, can, you know, try to avoid any leverage, because once you leverage, your perform, your gain is going to be huge if things actually go in the right direction. But if things go in the wrong direction, then you'll loss is going to be also huge. So it's always symmetrical. So you have to watch out for any potential catastrophic losses again here. If you have large loss aversion than at this is something that you can use to your advantage by avoiding any leverage that is not necessary. And also tried to always have large margin of safety, whenever you buy into certain positions. So. So that's just my piece of advice. So that was loss aversion. Let's move onto the next bias. The next bias is overconfidence bias. So people tend to be overconfident in their judgment. And a study shows that eight out of ten people think that they are above average drivers, which is obviously not true. It doesn't make sense, but people have tendency to think that their skill sets are better than others. And also, let me just give you another example, a person who thinks he's invaluable to his or her employer when almost anyone could actually do. He's or her job. If that's the case, Dan debt person. My show, he's or her overconfidence by coming in late to work because this person thinks that he can not get fired and also like can be overly demanding about getting a raise and so on and nobody likes that kind of person. So this person is going to be at risk of being laid off at some point in the future, if he or she persists acting this way. So that's part of overconfidence bias. When it comes to investing people tend to think that they can beat the market, I including me, whenever you actually manage your money by yourself. That means you think that you can be the market. If you really think. That you can beat the market you want to make an assessment about yourself. What are your strengths what sets you apart from other people and what makes you think that you can beat the market? What makes you so special? Those are the type of cash is that you have to ask yourself in order to make of Jack assessment about whether or not, you can be the market. Also some people believed that they develop a special formula decking us to beat the market, and they really stick with that. And as probably, you know, I don't think that formula approach is going to work out. Well over a long period of time, because let's say you develop very special formula that could actually bring you very high rate of return, then deaf Omolo is going to be discovered by other people, and it's not gonna be useful anymore after certain time period. So that's why all Miller based approach. Is not probably a good idea, as far as investing is concern. But if you have that believe, and if you are overconfident about your -bility to use these formula, then you falling into trap of overconfidence bias, let's look at another example when it comes to investing. So people overlook the risks associated with specific stocks and assigned, the probability of losing money in stock incorrectly. So what can we do in order to avoid overconfidence? The first thing that you have to do is be humble of meat that we can all be wrong, anytime and seek out opposing views and be open to listening to other people because if you buy into one stock, then you probably have strong conviction that you're gonna make money here. But just take a look at, you know, short side of the story in opposing views. And try to understand if they have any married of proposing those ideas. And on thing that I also wanna mention is that don't concentrate too much in one specific. Stop you always have to strike a balance between the number of stocks that you hold and the return that you're gonna get. And if you believe that you have very high level of confidence in one stock. Then you can actually increase the stake in specific stop. But you may want to have some system where you don't invest. I don't know maybe more than twenty percent of your total portfolio. Diversification actually is very subjective. Concept, some people think that twenty percent of investment is, you know, well diversified all the people think that this is so concentrated. So it all depends on your situation. But rule of thumb is that you probably need six stocks at the minimum that are in completely different industries. So if you own six financial institutions that doesn't mean that you are doing the diversification. Because they are all in the same industry. So you want to have at least six different stocks in completely different industry, and that probably real provides some diversification effect. But if you want to invest in individual stocks and own laissez one hundred stocks, then you kind of lose sight of, like what the are, and what these companies are doing. So there's always a balance between the number of stocks that you own concentration versus diversification. Because if you diversify your performance too much, then you probably get rid of all, these eaters, credit risks, but you probably going to get just market return, which means you better off just buying index fund. So think about the balance, always everything is balancing live. So that's what I want to say here. So that's about overconfidence, and everyone is exposed to this bias including me. So let's just watch out for not getting into this trap, the next bias that I like to talk about today is self control bias. So this is human behavioral tendency that causes people to fail to act in pursuit of their long term overarching goals because of lack of self discipline. Many people are notorious for these plane, a lack of self control when it comes to money. So let me just give you some examples. Self control bias can cause investors to spend more today at the expense of saving for tomorrow in may cause investors to fail to plan for retirement. So this is a good example of self control bias. And this is not easy to control. Right. So it is very similar to losing weight. So people know exactly what they need to do to lose weight. There's only two things you need to do. Eat less exercise more. It's very simple, but it's not easy to execute. It's basically the same. So there's this like self control bias, so people have their money right now in their pocket, and they want to spend their money right now. They know that they if they invest this money in the stock market, or if they put this money in high ill savings account, then they can have more money in the future. But that's not what people really think in how they react, they have tendency to spend more money today, the expense of saving money for tomorrow. So that's self control bias. As far as investing is concern idea. Lot of investors. Check stock price too often. That's just my view and they know that it's not gonna really yield anything for them, and it's not going to result in any gains for them, but as they can't help but shaking stop price, every day even if they perceived himself to be alone or investor. And also, it's probably going to prevent you from becoming a longer investor, because as you check, stop prices, too often you're gonna get more influenced by Mr. market, and that's really not good for your mental health and physical health either. I don't know how to overcome this self control bias because, as I mentioned, this is similar to losing weight at there's just a lot of people who want to lose weight, but they can because they're electing self-discipline, or I mean there might be some of the issues that I'm not aware of, and it's just not easy because it requires a huge self-discipline for yourself and it's basically the same for investing. So regarding investing, you need to have, right. Temperament, that's what Warren Buffett has mentioned in the past, and right, temperament means that you need to be patient, and you need to control yourself, you shouldn't be stupid. When it comes to selling your stocks and buying stocks. What I mean by that is don't sell your stocks went stock crashes and don't buy stocks, when everyone is jumping onto the bandwagon. And those are the things that you have to always keep in mind. Because it's easy to fall into his traps. Why anyway, so that's about self control bias. I like to give some advice related to this feel, but as I mentioned, this is very simple. But not easy to execute. So I'll leave it up to you. The next bias is endowment bias, endowment bias describes a circumstance in which an individual values something already own more than something. They don't own yet investors, therefore and to stick with certain assets because of familiarity and confer, even if they are in appropriate or become unprofitable. Okay. So that's the definition of Dom bias, simply is basically saying that you volume wide, you have a lot more than what you don't have. So let me just give you an example. So there are two experiments on that. I like to talk about the first experiment is called the mouth experiment. So this study shows endowment fact, and scientists randomly divided participants into buyers and sellers and gave the sellers coffee mugs as a gift. They then asked the sellers for how much they would sell the mug and asked the buyers for how much they would buy the results showed that the sellers who already owned the monks placed a significantly higher value on the monks. Then the buyer stood there were willing to sell a mug for seven dollars. Approximately. While buyers were willing to pay approximately three dollars. So there's a huge difference between how sellers price the monk versus buyers because sellers already have these monks in their hands. So they volume LA more this in domino. Effect on other experiment is cold. The basketball team gets experiment. And here Duke University, conducts a lottery between fans that one tickets because there's not enough space for everyone after one of the lottery's occurred, the researchers called an ask that we nurse who got the tickets how much they would sell the tickets for then they called an ask the losers how much they would buy for the results revealed that the selling price point was almost fourteen times more than the buying won the lottery winners wanted. Two thousand four hundred dollars on average to give up their tickets. While the lottery losers. Who did not have the tickets were willing to buy them for only one hundred seventy five dollars. So this is quite interesting. The moment the lottery winners got their tickets. They volume to a higher degree and giving them up become much hotter. Right. That's kind of the opposite for lottery losers. So this is not a rational from any perspective. What about investing? So when it comes to investing, you could volume the stocks, you'll let you own a lot more than other stocks available out there. So this is problematic. If you have high opportunity costs, which is not investing in those other stocks. So you have to have objective views about why you'll let letting having performed yo versus while you don't have, you know, the performance you have to make us s in terms of how much level of confidence you have stocks in within your performance versus others. Make us -ment in terms of circle of confidence all these concepts, but all things equal you. You probably want to get rid of in dominant fact, by having objective use D other thing that you probably gonna go through. Is that once you buy a house, you leave there for no more than five years, and you attached to their house, and you have strong bonding with your house? And you want to maybe sell your house at some point in the future. What's going to happen? Is that in Dominy fag, it's going to take it back? And you may put your house off for sale at a price a lot higher than the market value because you think that it is really valuable because it's your own house. It's your own baby. But the Marquette participants or buyers potential buyers that think that way, they have a lot of auctions. So if this house is not sold for certain time period than you probably end up. Selling it at our low price because people think that there's something wrong with the house, and if it's not sold. Within certain time period. And if the house is listed for more than thirty days than people would lose interest of even looking at your house, so you probably will lose a lot more money if you don't actually price your house in L objective manner. So anyway, so that those are the examples that I can think of related to endowment bias. So let's move onto the next bias, next bias is called regret aversion regret theory states that people anticipate regret if they make a wrong choice, and they take this anticipation into consideration when making decisions fear of regret can play a significant role in dissuading someone from taking an action or motivating a person to take an action. So as far as investing is concern regret. Theory. Regret bias can either make invest. Easters risk averse or it can motivate them to take greater risks. So Limoges provide some examples for urine, the standing suppose that an investor buys a stock in a small growth company, based only on of France. Personal recommendation after six months, the stock falls to fifty percent of the purchase price. So the investor sales the stock and realizes a loss to avoid this regret in the future. The investor will ask cushions and research any stocks that he's friend recommends conversely, supposed investor didn't take the France recommendation to buy the stock, and the price increased by fifty percent to avoid the regret of missing out the investor will be less risk averse this time and we'll likely by any stocks that he's friend recommends in the future. Without conducting any background research of his own. So this is regret aversion example. And I think that this happens all the time and be no our motions, and even if he knew then sometimes we can help, but falling to this kind of trap. So another regret reversion case is that people really think that this is actually combined loss aversion, and people don't want to lose money as a result of that they avoid investing in stock market altogether. And I think that's a huge opportunity cost because over the long term stock market has produced six to eight percent return. And if you look at all their asset classes than you cannot find other classes like that other than a real estate's. So if you just invest based on your feeling STAN, it's a huge mistake. But if you can locate your capital as spread them out over a long period, and keep investing, regardless of market fluctuations. Consistently over time. I think you're gonna fine by investing your money in index fund, like SMP five under it a low cost index fund. But because of risk aversion a lot of people avoid the stock market and real buying a house altogether. And I think that's a mistake. Anyway. So let's move onto the loss biased for today's show, which is state us co bias status co bias is something that involves people preferring that things stay as they are, or that the current state of affairs, remains the same change can be a scary thing for a lot of people. I know this is the case, and even though it's probably going to cost them a log people try to stay where they are, and try not to change. So let me just give you creek examples of this status quo bias, a lot of people tend to stay in the current position, even if all their good opportunities arise, and also, they tend to, you know, leaving the same place and they try not to move to different places. And if you look at food, you probably tend to go to the same restaurants as before, and try not to experiment, you food. And so. On so these other status quo bias and also related to staying within your comfort zone. And if you wanna get out of comfort zone than it requires some more energy, and it gives you some stress and that's why people tend to stay where they are. But as you know, if you stay where you are for more than certain period, time when he comes to say your job, you're not learning you need to have some steep learning curve in order to improve yourself in your current job position. And if you just do exactly what you have done in the past, then you're not gonna you'd probably going to be an expert in that area, but you're not gonna learn anything you and you're gonna probably fall behind compared to the people. So if you wanna get ahead of the people, and you oughta make yourself per doubt the and you wanna be more competitive than you have to force yourself out of your comfort zone, and you don't go and do something else when it comes to jobs, and meeting new people trying new food. Food and go to different places, and especially if you're young, then you have to do all these things before you are established in one place. Anyway. So let's go to investing area and see what we have to do. So when it comes to investing people tend to stay with their current per folio, and actually this is not necessarily bad. Even though this is that a cool bias, you probably want to be a long term investor, and you can hold onto your current positions to become a long term investor. If you believe their fundamentals are still intact and only my strategy is only trade. My stocks are when fundamentals are actually different from my initial assessment, and deteriorates over time or if the market is self is very, very overvalue. So there's always opportunity costs associated with staking with your current portfolio. So it's always practicing a balance between becoming a long term investor and switching to different stocks. And that's always something that you have to think about an always have to take into consideration when it comes to investing your money. So there's no one solution that you always have to stick with. But always think about all these things and put it into consideration. And that's something that we all always have to worry about anyway. So those are the things that I wanted to go through on today's show. So let me just quickly COO over what we have this today. We talked to buy motions vices six emotional biases loss, aversion bias, overconfidence virus self control bias endowment bias regret aversion bias status co. Bias? So these six emotional biases, we discussed and as I mentioned, many times, emotional biases are not something that you can easily. Correct. So it's better to be aware all existence of these biases. But also think about what is the best way for you to overcome these biases and I can provide some advice, but it's all up to you, because each individual is different when it comes to handling their emotions. Some people can quit smoking, or drinking quite easily whereas other peoples cannot so because they have different this planet, there, they have different temperament, so there's no one specific solution that can fit into everyone's problems. So that's why I think it's important for you to be aware of this biases and try to explore the furnace Lucians that actually are suitable for your case anyway. I hope you enjoy this podcast and learn something out of this episode, and that's it. So if you haven't already done, so please leave your rating, or comments on whichever platform, you listen to this podcast is podcast is basically broadcast on many different platforms including items, Android phone apps, and so on. So I'll try to read them, and if you also want to listen is podcast from my homepage. I'm gonna leave link there in the show so that you can just go there and check it out. Thank you very much. And see you next time.

investment professional Kim France Mr. market basketball Tennessee Warren Buffett Duke University furnace Lucians Dan Omolo Jack Miller COO LA Dominy Marquette
Drew Dickson  Blending Behavior and Fundamentals at Albert Bridge Capital (First Meeting, EP.13)

Capital Allocators

53:28 min | 1 year ago

Drew Dickson Blending Behavior and Fundamentals at Albert Bridge Capital (First Meeting, EP.13)

"Today's show is sponsored by top. TRADERS UNPLUGGED DOT COM a podcast dedicated to quant based investing each week. You'll hear up-to-date conversations agents between host. Neal's Costra Larsen and Turtle Alumni Jerry Parker about what's happening inside quantum strategies real time as well as deep dive interviews with some some of the world's leading quant Legends Thought Leaders Including Turtle Mentor Richard. Dennis Ahl founders harding and look and professor Andrew Lowe Neil's also oh co wrote the book how to master managed futures with Catherine Kaminsky which explains the foundations of systematic strategies. His second book the many flavors of trend falling falling is available for free at top traders unplugged dot com slash capital. That's top traders plug dot com slash capital for a free copy. Hello I'm Ted Saudis and this is capital Allocators this show is an open exploration of the people and process behind capital allocation through conversations with leaders. In the money game we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up today by visiting. Capitol allocators PODCASTS DOT COM by guest on. Today's first smeeting is drew Dixon. The founder of Albert Bridge Capital and Chief Investment Officer of the Alpha Europe funds where he manages three hundred fifty million dollars dollars in European equities. Our conversation covers Druze early career across the Chicago School Fidelity and ox if and his perch in Europe we then go through Albert Bridges Investment Process Portfolio Construction Assessment of risk ward and client communication through blogging. Being and tweet all told Ju- offers a deep dive on how to blend fundamental research and behavioral finance in taking on the stock market. Today's show is sponsored by northern. Trust Front office solutions when I talked to investment teams in. CIO's they often echo the same concern that they spend too much time managing data and not enough time analyzing it two years ago. Northern Trust took a different approach to this problem and funded an internal startup called northern entrust front office solutions. They gathered together a former endowment chief operating officer a front-office technologist from Multi Billion Dollar Hedge Fund and Award Award Winning Design Team and a Fintech company founded by Quanta coded for Harry Markowitz himself working alongside dozens of clients to take on this shared mission and the result is a cloud based custody agnostic platform that empowers acid owners with better operations and technology support to meet their middle in in front office. NEEDS VISIT NORTHERN TRUST DOT com slash solutions. For more information. Please enjoy my first meeting. Withdrew Dixon ascend from Albert Bridge capital through Ritzy. How're you doing? I'm doing well how are you. I'm doing well. Why don't you take me through your background and start with how you first got interested in investing? I was even as a kid in high school. Captivated the stock market and they might I purchase I think they were. At and T.. Twenty two and a half dollars strike calls probably paid forty or fifty dollars in commissions for a two hundred dollar option premium and learn the lessons about how to overpay and what things not Divi. What was it that got you to option before stock? I didn't have enough money to buy enough shares of stock so I thought that the thing is going up might as well just buy some calls literally the first trade and that was all during this sort of this is going way back in college. The market's going crazy. It's eighty six eighty seven and then when the market crashed at that point I was hooked. We had they can original copy your security analysis produced library and go back and read through dad trying to build all these models. Try to see where markets you're gonna go and all the silly stuff which hindsight is stupid and naive but it was always helping the captivated me so as I think progress in my career. That was always broadly the focus. And where did you get the formative education beyond paying twenty five percent of the cost efficient. Yeah I've always been interested in financial theory. Why did things work the way they work and interested in psychology and in the mid eighties late? Eighties early nineties. There was a heretic group of economists. One of them being Richard Taylor who was up a cornell at the time that was they were poking holes in this what was known as the efficient market theory still is and Eugene Fama this paragon and pillar of efficient market theory. Thought it was really interesting. What he was doing and he had an idea in the mid nineties? Let's is trying to get Richard Thaler down at University of Chicago. Let's have this place be the battleground for this efficient market versus behavioral debate. And I wanted to go back to business school and as as soon as I saw that happen as it well if I can get into Chicago. That's where I WANNA go. I WANNA be a part of that. I was lucky enough to be one of the. NBA's was able to take Pharma's promised course which allowed me to take dictators course on behavioral economics. He also taught a course of the NBA's that was more decision-making took that too. So I got yeah pretty close to him there. It was during the technical by NASA. This is ninety eight ninety nine and so we worked a little bit together outside of class on some other things and got to know each other. So from that point. Forward sort of Morpheus neo moment where you take the red pill or blue pill and I really fell into this behavioral finance whole to get myself unplugged from the Matrix Matrix. Not that I didn't really enjoy the financial side of things. The theoretical side of things in Pharma. I mean this guy outside of maybe Douglas Hoffstetter and Carl Carl Sagan. He's the smartest guy I've ever met. He's a French major for crying out loud. He's not like even a mathematician he and he's using credible person to learn from in that experience grounded than me as well and I love having the debate about this is an efficient market risk. And that's why there's returns. This is a real thing and that is creating these excess returns or neither but having having the training from both of them was very helpful and then the whole behavioral economics movement was something that is in fact increasingly become more and more a part of my investment processes I of been in the industry over these years. Let's walk through. Where did you go from Grad school than so from Grad School? I started off. As an analyst with fidelity investments is. I started started off in Hong Kong for the summer between my first and second year and then I came to the London Office fulltime almost exactly twenty years ago this year and fidelity our approach was to sort of cover a sector for twelve to eighteen months. Get to know it and then just as soon as you got a grasp things would move to another sector and I love that. That's what a by a design. It helps you to see a lot of different types of companies across different sectors. It changed to become a better portfolio manager. Now other folks have been successful capital for example with this sort of analysts for life model auto where you become a specialist. It's not my approach to things. Now we we wanted to be specialized in sectors but we also want to remember what the ultimate job is here. It's to pick stocks. It's not to become an expert in in that particular field. My initial stop was at Fidelity fulltime in the London office twenty years ago and was London back then by design it was by design both personally personally and professionally professionally. Fidelity's office in London was the one that was really to me very exciting. We were back then it was remember it was still deutschmarks French francs Lira. The euro was just getting ready to start. You could see this equity culture. Developing the German banks on everything in Germany you could see things getting spat out and so there was going to be a big big chance to do some stock picking in Europe which was exciting to me. Hong Kong was also super exciting but it was a little bit more of a top down market the money that flow into our funds in Asia. US retail investors at the time mostly. And if they're gonNA invest in the Pacific basin funded because they want emerging market exposure. That it's interesting. I like macroeconomics as well. But that's just a bit more top down. I'm I'm not a top down guy more of a bottom up guy so the office was interesting professionally from an interest perspective and also from a fidelity perspective and my wife's wife's Italian as well so being in the UK was kind of a halfway house between Italy and in the US and that was twenty years ago thinking we might be there for three to five years and it's been twenty. So what was your pathophysiology. So I covered several different sectors and it was there for a few more years and then I got lifted out of there by the guys at ox if brought an analyst with me over there at the time ox was a much smaller beast than it became later and it was much more focused on merger Arben Risk Garb and a great experience with those guys the little difference in philosophy trips of difference difference between fundamental investing in some of the more event or callous oriented stuff and then with a couple of other fidelity alumni thereafter. We manage money for the man group group externally and then combining all those experiences starting with the failure behavioral backbone and the deep die fundamental investing of Fidelity and the sort of more nimble. We'll focused investing that you do it. A Hedge Fund we put together Alpha Europe and in two thousand eight we launched our big fund are small fund at the time. What was it like launching in your own fund while it's exciting? I had been doing it in something. Similar smaller versions previously with oxygen and with the guys from fidelity and the whole goal was just to and it still is actually does away. We can do this a bit better a bit smarter and I hope I hope in ten years I can look back to this day and say well. I've look stupid but I was ten years ago. And if you stay on that path to try to get better and learn more and so with that though there's always been this overriding view that hey we're in the business. Generating Alpha were not market timers. We're not going to be dialing our gross up and down because we have a few of the market. This is about bottom up idiosyncratic stock picking can we identify businesses offices where we can objectively analyze information. WE'RE GATHERING NC if they're gonNA beat numbers let the fundamentals lead you and then let valuation. Come in to help you size. The positions positions we started off with a long short fund. The WORST TRACK RECORD OF WINDOW LAUNCH FUNDS I launched Alpha Europe originally as an independent company three months before the financial crisis showed up. We launched Albert Bridge three and a half years ago two months before Brexit but as it turned out we did reasonably well back in the day we made money in wait no nine and grew the business nicely but we were lacking something and this is part of the learning process for us. We by definition have best ideas portfolio playoff very concentrated positions. And it's going to sound Sort of sacrilegious. Some folks but we almost seek volatility. We want to be exposed idiosyncratic stories where there's is a lot of risk and if we can objectively analyze where Mr market might be overreacting or under reacting to particular developments in the business because of some behavioral behavioral bias. Then we can really jump on our fundamental research and help to drive conviction so by design the goal is to generate significant excess returns over two to the three years. But the folks that you WanNa manage money for when you do that have to have similar time rights is in any pm you speak to longer term money. We went longer money but in in our case. When you have your top ten positions are or seventy percent of your fund assets in your top five might be forty or forty five? You really need to have two and three year your four year five year money on your side people with similar aligned interest and that was something that I didn't recognize the importance of until after the financial crash and after we got on our feet and from a business perspective and that's what led to the merger with Perella Weinberg until what was that plan of attack at the time. Well at the time and Prela they have a big big brand in the banking business and at the time they didn't have a huge abandoned asset management but it was a known group particularly here in the US and our target audience for what we do is the US university diversity in a dominant cadre of long-term investors and with the front office. They had some very good guys the marketing team and and a really big platform platform. That was going to take some of the operational burden off of us. We made the decision to not be independent anymore but with this sort of independent player returned Dixon Capitals Office into Perella Weinberg this European Asset Management Office and with that began having conversations with Some of these longer term thinkers and one of the first things we did as as a lot of other london-based base funds even funds over here at done is the long book. Its own investable vehicle. The combination of having discussions with the longer term thinkers and having this vehicle where people could get exposure to Europe and best ideas without paying for the Beta component of those returns was aligned with how we think the world should work and very much aligned with how they think in terms of their long term goals so that was one of the first things we did there. But why don't you touch on the evolution of the Hedge Fund product for you and want you saw change that caused you to eventually move away from it well to be totally frank. It was more driven by just demand of what the investors is wanted from us. And what we did. We haven't wanted to really change our process at all through this evolution ourselves so having these long short routes I think have helped us as we as we transition into focusing entirely along only product. Now even Benjamin Graham said it himself you know every single issue can be cheating. One range endearing another. We have a strong view. You you shouldn't get married to your companies that good high quality companies. You just buy and hold forever. That's not our approach at all. It's much more driven by the fundamentals in the intermediate term. And so if we can come at it with the diligence and the deep dive that you would have from longshore perspective but then also be able to use these. Longshore tools is to help device ourselves one of my favorite tools that we have to help us think more clearly as we deep dive short cases and everything we WanNa buy and this is certainly certainly. It's a wonderful tool just to memorialize of you and help us establish that internally at the firm but it also is a great debasing tool for me for the guys on our team because if you're able able to write down hey here's where this could go wrong and have a culture where it's okay to identify. Something is wrong almost encourage it. Then if you've predefined you defy work and it's going to go wrong you're looking for it and one of the biggest biases we all suffer from. Is this confirmation bias where I did myself as an analyst. I probably still do it without realizing it. But it's certainly as an analyst at fidelity or Anoxia or earlier in my career if you tell your boss that. Hey this is the greatest idea ever. And you've done a deep diving at the management of Kazillion Times huge models written a gazillion notes. Your ego is tied to it being successful. You think you're smart if you make money you think you'll be rewarded. If this particular outcome is a positive one and that's silly and that's been something that I've think I've gotten better over the years and recognizing that in the not it used to many baseball analogies but we're trying to bat six fifty. We're trying to get almost two out of three right and if you can flip that on its head. It also means you're trying to get one out of three three wrong and if you have a culture where we can look at the portfolio and second which of these things are going to be wrong. Would you buy this size position in this company today if we launched the fund today can be encumbered by where we bought the stock. When we bought the soccer is actually have nothing to do with why we own it? When you take the lessons you learned from Dick Taylor your your various investment experiences? And then you go to apply to Albert Bridge what if you internalize in terms of how behavior impacts the way you invest. Well it's twofold this is again hopefully a positive evolution in my career. If you would ask that question in two thousand and eight I would have brought off a lot of important things but mostly to do with Mr Market. Here's the confirmation bias. They're suffering from. Here's the ambiguity of Persian. Here's the representatives zennis bias. Here's here are the things that are preventing them from seeing what we see and we want to take advantage of that and that would be our approach and it still is. But we've you've now realize actually reading through thinking fast and slow. Dan Economists Book. This is the Baylor's mentor. And he's the one that came up with a lot of these things things that we all do as human beings and I remember the most interesting passage to me and the whole book was talking about. How even he still commits these same errors himself itself? And so if Danny comments commits these errors himself. How do Dixon not going to? So what can I do. I can try to set up a culture where it's okay to make mistakes. It's okay to recognize those weaknesses in have investors with similar time horizon so that you're not affected by other folks as much as even if you don't think you're being Troubled by someone. That's asking you how you're doing the first week of the month. It's affecting you so if you have folks that don't ask those questions. It just interested in the process not that particular outcome Of this position then it's okay for us to be more objective about things back to the point about launching it the bad time we're anchored by large university endowment for our our launch and we had brexit a couple of months later. It was As you know certainly for us it was terrible are invested. Didn't call us once didn't check in didn't say how you doing. We had an update call maybe late August or September aid you. I bet you found some great ideas. Yeah we did. It was nice to how things we did obviously recover. But it's those times those periods especially kind of environment that we're all in now and even the markets have been going dead up if you've had the wrong kind of factor exposures or if you've had the wrong positions you get a lot of all tilleke and you have to have a stomach Ford. It's much easier if you recognize that. Hey this is what your investors are in for the and for the long term and also you can we do things ourselves to be bias our own decision making so that maybe the down days the down months. The down quarters down years aren't as bad as they would. Because we're objective about identifying we're making fundamental mistakes. Let's start breaking down strategy. You're playing in Europe. What's different about stock? I picking in Europe from say the. US The behavioral stuff's all the same. We all make the same mistakes. I have the same biases that I try to shed. My team tries to shed. Mr Market has the same Bisi say overreact. To bad news vivid recent information they under react to things which confirmed previous theses. That's good in Asia or Europe or the US and from a company level we tend to focus on more mid to large cap companies. And so when you have these multinational businesses very little difference in stock picking from that fundamental perspective I will say hey there's some nuance across different regions in terms of when you do have conversations with management teams or with suppliers or competitors if someone says maybe in Sweden it means jazz if someone says maybe in the UK it means no So you do have have a little bit of experience with that over the years and we've been doing it for so long that you know in some cases we're on our fourth or fifth management team. So that helps to some degree but broadly accounting systems are fairly reasonably harmonized is to spend a Lotta time by diving down these rabbit Abbott Holes of trying to figure out the exact specific line item. That was going to make my some of the parts model. Look good or bad but the more you're in this business is the more you realize. Your success in these positions is more different by what's happening to the fundamentals over the intermediate to long term and is Mr Market cottoned onto that yet or not. And and he hasn't if you're buying stock for prejudice seller as you build your portfolio. You get to win. And that's the way we look at it do you. Biases in terms of the kinds of stocks are looking for the. I probably do have a little value bias when I'm looking for and maybe that's the time that we all grew up in the kinds of things we read at a certain age and I'm sure someone started their careers in in two thousand eleven has the opposite buys. Why would you do that? Why wouldn't you buy all these great businesses which are going are all ICEES and exhilarating rate? So I have to guard for that and even though I do guard for it we still in having a value we kind of portfolio but we've been able to outperform not just value but the market overall. But but I think that's just a consequence of a having a very concentrated best ideas portfolio rather than something that's more diversified and sensitive to those factors and be. It's having this back to this culture thing where we've defined where we might lose money in particular positions then we're looking for information and if it's okay for me or for the guys has on my team to hold their hand up and say you know what my conviction this is lower. I just saw this thing happened. We wrote about this as a potential threat to the to the case and I wouldn't have seventy five percent conviction in this probably closer to sixty five now. What does that mean for expected returns and if it turns out it means that we should known as much of the stock or any of it will go and that doesn't matter to us if we bought it five five years ago or five seconds ago? I think we're really good at making sure. We have the portfolio that we WANNA have today as if we launched the fund today. Where do your ideas this come from? So we have a European universe. That's basically got seven hundred fifty companies with mark of a billion dollars in higher. We eliminate innate about half those the ones that are more top down nature so with this never any minors or emp companies or banks even in the portfolio. We try to stick to sectors where there's a lot of dispersion of returns lot of winners and losers within a sector so that can be industrials consumer media healthcare equipment technology and the analysts on the team will be assigned sectors. Here's our sub sectors within those groups in the Gulf for us in our investment process is to go through our research by sector and try to generate what we call the Alpha Europe focused list and that focus list is going to be a group of sixty to seventy five companies which we think will be the most dynamic in those sectors could be good could be bad. Hey defining dynamic doc that's as much art as science could be new management teams. It could be a change in strategy it could be a huge profit warning wherever when those baby out with the bathwater. And oh well maybe that's no reaction. Let's have a look. It could be a company meetings where we're having meeting with the CEO of a company and increasingly these conversations. We have the companies the most value added from those is actually hearing them talk about others in their sector in the ecosystem. They're much more open and less biased. When they're talking to you about like that so we could ideas through that? Oh let's do some more work on that and we'll put it through what we call our game process. was you just a four letter acronym. GAM and in the gather stage were just meeting with company's competitors suppliers. Everyone does that everyone everyone you talk to every manager out there as what we do we meet. We kicked the tires. Yes so what we all do that but moving into step a okay was any of this information helpful in hey stands for what analyze just analyze the information. Can we take anything out of this. Fire Hose of information that we've been bombarded with and pick out the right bits that that matter One of the analogies I use of if we have a bunch of cards on the table that are turned up and we know which we think we do a pretty good job trying to identify which two or three cards of the ones that matter. It's never ten cards. It's never overcomplicated. It's always two or three cards that matter two or three fundamental things about a business. We'll pick those cards out and start working on it and part of that process is to see if MR market picks up the same three cards if they do. There's nothing for us to do. But they're picking up different cards ignoring our cards. Then we you have a chance to see if we can be more objective about how we analyze these things and it's hard again back. Not overly quote. Ben Grab another one of my favorite quotes from his which he wrote in nineteen eighteen thirty four by the way the analyst must not be misled by the availability of a massive information into making elaborate studies of non essentials which is a long winded way. They've saying watch out for information overload. This is in nineteen thirty four. This is before real time quotes before CNBC before everyone's barking at you on the cell sizing by this and saw that and that's a real trick for the good analyst sort of okay. That doesn't matter that doesn't matter that does let's work on it in that process of analyzing the information. That's in front of you. How do you balance than being robust and thorough with focusing on the few things that matter I think think again? That's it's it's as much art as science to that whole process when we do that. Analysis will. We're not just trying to figure out what the things that matter will will. Almost build to models will build. Here's what the financial model will look like based on these three key drivers if certain company is launching a product which is going to do this or if third divesting of this which might mean that and we'll build a shadow model. This is kind of the short side. How with this company be a great short and by doing those things you start almost started helping each other out a bit in terms of flexing things a modeling things and seeing how we get to the crux of what's actually driving the story? And sometimes the things which affect the short case are different different variables than the things which might be affected by K.. So that helps and then putting all those things together we effectively emerged with conviction figure. You know if I so one hundred of these I think we'd get sixty five percent of them right. Seventy fifty five eighty. We'll never go higher than eight even if we think we have a sure thing but those then become probabilities as for us. And then we'll assign a probability to the by case into the cell case and combined with a few other metrics that helps us to come up with this notion of okay which of these names and the focus list. I actually are qualified to be in a best ideas portfolio. What do you constitute a thorough analysis of a company? It's basically the whole game process ossis. So it's you have to have a strong sector construct knowing what drives the competition knowing that an Amex of WHO's competing against to when how each of these companies in the group makes money and then it's a matter of staying on top of that and maintaining this framework as competition happens and businesses evolve and management teams come as management teams. Go and when we find things which are basically just changes. Hey this is the way things used to be. They're going to be different now. That is the kind of thing that makes us when a dive in and understand what is going to be different and as we do that ultimately we wanted to be expressed in some change in a financial financial metric it could be sales lie it could be the margins it can be earnings something in a a year from now two years from now two and a half years from now where we see the earnings or cash or whatever is going to drive Mr markets appetite if we see them potentially markedly surprising. The consensus investor. Then we have a chance to take advantage of that. So that's going to be a lot of financial model. We build financial models for all the companies in the focus. That's the that's the modeling rolling. And that's a fidelity thing it's a lot of managers thing but that's the only thing we did a lot of FIDO and it's still a big part of me and that's how I get the the conviction again. We don't try to get too to bog down in rabbit holes and say Oh if you do this and they do that and then they do that and then this happens in this might work it just more about going through the lies okay if these products are successful in from the doing the look like they might Ip. What could happen to Ernie's happened gross margins? How much does that fill down? We've been successful historically in a large automobile manufacturer that with Gary Is. CEO that embarked on a campaign of value creation and it was such a shock to the system for the people that were perishing the company they refuse to process it and then if you looked at what they were doing in their footprint there were changing around the kinds of cars they were making and we'd just a very simple stuff. What does this mean for gross margins for this business and you could see the cashless Tesla be spit out? Once you identify that and you see a consensus investor which is refusing even acknowledged that information. Well that's that's the double whammy. Those are the things that were more likely to be accurate on than things without both components. Show alongside of the modeling that you mentioned. You've also written a blog post taking the other side of DC F- analysis. Yeah so when we do the modeling again. This is a big change from how I started at fidelity but you know I would just do the deep dive. DCF Get everything from every angle build a model of my own way or this is how they should stay earnings not how they do state earnings. This is what it it really looks like. Let me get to the free. Cash flows in do the valuation where he can do here and what you end up with is something. That's very interesting and helpful in the private equity World Great. But that's not what we do. This is public markets. There's a price up there that is reflecting everyone else's view about this company. And how on earth can I compare. Hear what. My view is to everyone else's if I'm doing an entirely different way so I very quickly switched to sort of. Let's see how the company presents their numbers. Now there's all sorts of work we can do in the footnotes to to see if they're playing games or see if they're we can match up the free cash flows to the EIB to see if they're capitalizing. RND are doing those traditional tricks of fooling investors. And we can yes. That's a great great stuff to identify. But broadly were building models. We can easily update when they report and see how they're presenting the information to Mr Market. So that then as we do our own modeling we compare to what what people think to see if we're ahead or for behind him. Let that lead the thesis as we do it and then that turns to your E in game. Yeah that's the final hurdle the most important one and this is where we spent a lot of time trying to evaluate the consensus investor. In every manager you will say. Oh Yeah we do contrary and things where we try to do things differently. And and and I think from our perspective we've just very much codified that a little bit more in terms of our approach and if we find a great management team that has a wonderful business that is spinning out tons of cash flows or eventually well. It sounds like a nice setup for a company but if there's no Delta if there's no difference between our view in the market's view then my views the price is telling you this already now. The price might get higher. That's just because investor appetite for certain factors. That has nothing to do with idiosyncratic stock. Picking for me we've got to find that Delta and that can mean finding a mediocre ochre business that the market thinks is terrible it can be finding an excellent business that the market only thinks is good. It's it's a change and so in that East Age. We're spending a lot of time trying to segregate segregate. Okay here's the sell side. Here's the buy side. The sell side is very transparent. We see what their views are. We can read the research and see maybe where they're focused on the wrong things with the right things the Bisai. We spent a Lotta time going through the stock loan desks around London. Here's where people are short. We might even talk to friends who short the same names so to get a view for why they are are why they are negative and if we find information that makes us less convicted in our thesis. That's great whether we've made money lost money in the position but it's just as having a sense of the kinds of things that we think important of the market and hopefully if we've been objective about it then it allows us to see why Mr Market agrees or disagrees with us us and maybe they haven't been objective in. That's the case that we have a chance. What's an example of a situation where you felt like the market was focusing using on the wrong things? There's one of these biopsies. That's called ambiguity aversion. Why combine that with availability bias but? It's more of an overreaction thing that happens in the short terms so if you remember. BP Deepwater Horizon Stock cratered and it was terrible and it was bad news. Volkswagen in the diesel gate scandal. In Twenty fifteen stock was killed killed. And that's a great example to the stock sells off to ninety ninety five euros a share from one hundred sixty and the worst fears of what kind of fines they would end up having to pay. Hey turn out to be true. But by the time they wrote the cheques stocks back to one forty five one fifty one fifty five people double and triple count bad news. They get really really really scared and very recently we thought we had potential situation like that with bear which we say buyer in the UK. So I might flip back and forth to say the wrong way here but growing up. It's bare aspirin over there. It's buyer but it was very similar kind of move. The stock goes down about forty percent peak to trough just like BP did psych. Volkswagen Swagger did and we thought ourselves. This is another potential ambiguity aversion case where people are just selling this thing down and it is unknowable. It's hard to know what will the Ultimate Litigation Gatien liabilities be from these California courts elsewhere over roundup lifeless which they acquired those liabilities when they bought Monsanto but to us it was like. Hey this is history is to repeating itself and we kind of wanted to believe it but after doing a bit deeper dive into it and seeing some of the behavior of some of the peer group like actually maybe not as much as baked in as we thought but that that leads me to my new favorite bias which I talked about the original prices. Look for my favorite one now. Is The bias bias. People are now talking about behavioral finance so much and a lot of relatively new to it. They almost WANNA start looking as if there's definitely going to be a bias here you're biased to find a bias and so that's something we'll have to be cautious of as well. What are the other ones that you incorporate into your worth the biggest one and this is common and diversity? One is confirmation bias so we they all tend to find information which supports views that we already have. It's almost echo chamber kind of stuff and I did it as an analyst at fidelity and and I catch myself doing it now an example again. This is hypothetical example. But if you're long sap begin prize resource planning software manufacturer Asher in Germany. And let's say I'm short. Sap and we have our reasons why we're short and then we see Oracle have a profit warning competitor in this space if you're long sap and you sort sap you might have to completely different reputations of that same exact data point. If I'm short it I'll be like Oh. This is great it enterprise application spending falling. These guys are saying negative like Sheehan Year this foretells bad news for their biggest competitor in the space. But if you're long you but like this is awesome. I knew it. They're finally taking share from Oracle and I've got data points these investors that are switching forward. Sap and that's why Oracle Oracle messed. It's about us being objective about the information that comes to us and that's one of my favorite parts as you go through this name by name. How do a u turn it into a portfolio? Well we make sure we're following the same process across the sectors this game process so from a portfolio management perspective. As long as we've we've each day followed the same approach to sort of what constitutes and Albert Bridge idea then. It becomes more of an apples to apples. Comparison for me as I decide where to put capital. If I WANNA take some capital out of this name. Because rallied in the expected returns a fallen. I don't need to stay in the same sector because we follow the same process to get this focus list or to get this portfolio. Folio is another one of the post the blogs we wrote was I think it was called. Kelly was right and it has to do with The Kelly criterion basically how people size bats when they go to the Casino Zeno. Well there's ways to do this where it's also somewhat similar when you aggregate multiple securities in a portfolio and constructed so that each extra dollar is allocated hid the right place with. I don't WanNa make to scientific. Because if our conviction level changes our time horizon changes we go to the company and a little bit of our model changes that could affect things but broadly the decision of where to allocate capital is driven by those expected. Return so back to earlier question about the kinds of biases. We're trying to find. It can be something. That's got a confirmation bias. Hero era disposition effect here or an ambiguity aversion there but it's all driven by the fundamentals getting better than the market realizes where the expected returns are and as long as we follow the same thing process to get the idea into the focused. Then it makes it less difficult to allocate capital wisely. It sounds like a lot of the conviction that will lead into position. Sizing within the portfolio is very subjective. So how'd you come up with position waits for these names. It can be subjective. The end of the day. I think everything's always more subjective than we think it is. So what can we do to make it sort of less. So one is to build this short model in this model so we have a reasonable gauge. What the upside and downside could like an great or terrible scenario now those are kind of binary? I'm talk about a distribution different outcomes. We're talking very simply. Here's what it's worth it for right. Here's what it's worth it for dead wrong and then it's about asking ourselves. How long would it take Mr Market to wake up to this thesis? Space is GonNa take twenty four months or maybe there's some events coming it might take fifteen or eighteen was take thirty six because it's a long burn but once we have those factors in we can come up with this notion of annualized potential expected returns. And that's how we basically raped companies that are in the focus list and make sure allocating capital to the ones with the highest returns and by design. We do not care about overweight or underweight some particular sectors or countries if it turns out that we're finding no healthcare equipment when ideas and Switzerland and we don't own any healthcare crimen ideas and Switzerland. It's just it just the ideas that come through in Germany we are paying a little bit more attention now. Obviously to geographic equates as it relates to brexit widow when I have eighty percent of the portfolio in the UK might be the right thing to do but as we move toward that finally. Maybe we don't want to have too much of exposure exposure there in case things are crazy one way or the other as the market is moving around. How do you adjust your position sizing within say a group of the same names in the portfolio? So even even if we look at the things that have been our biggest contributors over many years our biggest contributors have been in the book for five years but they might be a five. I percents position in that. Might go up to eight and back down to four and out to nine. That's all driven by their expected. Returns and by the expected returns of the things around it in in that portfolio. Is this notion of making sure that we have the mindset that this is the portfolio we would today we lost the fund today and find security. That's you think. One hundred fifty euros a share and it's trading at one hundred and it's got downside. Eighty come up with an expected return metric if the stock goes from one hundred to one twenty while the expected return just fell. Aw by definition it must be do less capital than it was before in that capital can be moved somewhere else. How do you sink up? This notion that you're going to move position. Sizes is based on risk reward. which have to do with upside downside? which is going inevitably to be tied to something that looks like diaw model where most of your focus on the DCFS UCF is sort of understanding consensus? I'm kind of wondering about how you deal with the possibility of false precision though my whole post about dcf was that you do get this false position and it can start to sing whatever tune you wanted to sing because some bias. You have going to manage your team while you're GonNa make your dcf or you don't like to manage is your team you dcss kind of looked lousy but the fact is the DCF's the right answer to actually what the thing is worth and all these other things are just proxies for that so my view you in my experience and certainly the way I do things sometimes an EDP dour price earnings ratio of some of the parts can be a better proxy for that DCF answer than the DCF itself because it's less complicated so as we ended up having positions for a very long time Reisen for us. It's still consists of a bunch of short term time horizons presence. Are they going to be numbers over the next year or two. That is the primary focus on driving. Its inclusion the portfolio and then the hell we size it will then we'd be driven a bit it more by the actual okay what it will be the result of that if this company beat earnings by twenty percent in Prince this number in two thousand and twenty one. What kind of multiple will the market could pay for that? There's an absolute number that will use just based on any market environment. Here's why she'd be worth from a free cash flow perspective or what will be worth more relative. Here's your peer group. Here's where they trade to the Detroit premium or discount. What's it done? Historically what will you pay for it if it prints that number what will the market pay for it. That's the number that matters and that becomes the thing that helps sets our upside downside. How do you work with your team so with the team? We assign this actress to each of us. I still work as an analyst myself. We try to be pretty into fidelity thing try to be pretty independent. Broadly people can go within their sector and spend time whichever companies they want and the goal is to come up with things that might be the most interesting or dynamic and then in my interaction were basically basically. My goal is to make sure we're following the game. Make sure we're playing the game. Gather Analyse Molly evaluate. I might press it more on the short case to make sure that we're really focused on on that and encourage them to realize in myself that say we get two out of three stocks back to that earlier point right and listening next year. Five of our names are Sucking Alpha out of the portfolio and that will happen even if we get seventy five percent right five of these names are going to be terrible. which five are they? Let's try to find. Find out now. We're in the business of getting swept three right one other three wrong. All of our trouble is already in the portfolio. Let's go out and look at it this way where we get this right or wrong and we try to prevent my i. PCs drift their thesis drift. We just ride a lot. We memorialize our theses all day long just for our own internal consumption. What is our by the case? What is the foundation? What are the reasons? We own this stock and again going back earlier in my career. Some of the biggest lessons or mistakes for me it would be owning things for a period of time time particularly when they do well. You think you're doing great but then you ask yourself why do I still own this thing. All the reasons I bought it for have happened. I'm owning it because it's it's kind of gone up. And meanwhile there's other things where I could be doing work and spending time would be better use of that capital so just continually stay on at monitor that in almost insists that we have that process around the group. How do you think of the split of your mind? Share between behavioral analysis of stocks and underlying business fundamentals of. It's a great question that's evolved to. When I started off at Fidelity I was ninety? Five percent bottom up deep dive stock picking five percent. What's the market? You're getting wrong as I moved through. Oxygen and into Albert Bridge in two thousand eight probably had moved down toward eighty five eighty today it is still vast majority is up deep. Fundamental dive. Seventy seventy percent of the reason. Why is talkers in the portfolio? Is that we have picked information out. That helps us be confident that they're going to be number but twenty five thirty percent of it is this mismatch. Can we find the mismatch. Can we find this area where Mr Market is not just disagreeing with us but can we understand ny. Some of the scary times for me are when we don't know why I. Why is the market not paying attention? This we don't see a particular bias. We don't see any overreaction action we don't see these guys actually already kind of like it if you can't see the mismatch then we don't have the behavior alleged and so it's that back to the earlier point is that e stage. That's that's the WHO you have to jump over. And it's a continuous process. You have to keep upping over it. Where'd you get that information from to sort of capture that information analyze the information? The information is what is the market think. What is the market getting different from? Yeah yeah so we can bring in sell side coverage so we have a strong strong sense of the number of analysts covering stock. The number buys sells and holds. We can wait each of those differently. Sexy quite different in Europe. A whole doesn't have the same flavor there's a whole here in the. US interest what the analysts say. But we can make some adjustments for that and we'll come up with the notion of sell side broad likes or dislikes the company we do something similar with the buy nightside. Obviously there's a buyer for every seller but we can at least get a sense of what's happening by looking at short interest. How stales it getting? which kind of money is long or short certain companies and and as we aggregate those things were able to I think develop a pretty good sense of the kinds of things that people are paying attention to and one point I would make and this has been just a change in the market and it might even be more exacerbated by Mifid to now which is kind of decrease the amount of folks that are covering companies increasingly? Anyway I think there's almost been more of a melting between the sell side in the cell sites clients so when we see broker notes that we call it reverse broking in the UK. It almost feels like it's one other big clients that has pushed this analysts to convince them that here's the pieces that matters and they're out marketing that and we can kind of tell that that's the case. So that's nice for us because the the side becomes even a proxy for the buy side in some cases but this a key for us and again we also were contrary and hey everyone likes the stock. It's trading on thirty five times earnings. Let's be short. Or Hey this dachshund four and a half times earnings with a twenty percents recast people hate. It must be a by and that's I level stuff off. That doesn't get the job done you. You have to have a view that things are GonNa Change that this is going to get better than fundamentals are going to improve in the market. Doesn't want to see it if you have that mentality. Then maybe you get to avoid one value chapter you might not have avoided before you spend time early in your career in Asia Group in the US and a lot of time in Europe. Have you been able to determine that any of those three regions are just use the word easier than others to find inefficiency and stocks. Yeah they're all the same. I do think over here. We have a view that maybe things are less efficient speaking specifically typically about Europe and can't really comment on Asia's much now but still in Europe. We have a view. The things might be less efficient there than here and I'll tell you this that Europeans have the same view of Americans arrogance and from our perspective. It's difficult to pick stocks in both places. A lot of these rules had Do good fundamental research objectively. How how to not pretend that you're smarter than everybody else but just thinking more? Clearly I think those apply equally in both places I really do. You've mentioned your blog a few times and I thought it was particularly interesting looking at some of your past quarterly letters. How the mode of communication with your clients changed? Yeah I was laid to this I've always been a big writer. A thought pieces and I had an audience of three people for that. It was basically two people on my team. And maybe my wife and we would send it to our investors and part of it was Cathartic thing for me to be able to write because I like to write about investments in financial theory and Decision Making Behavioral Finance and we started sending more of those pieces out to our investors and decided that you know with this platform that may be easier just to set up a blog so people could subscribe to it and they can automatically get it and it would also force me to every two weeks right something and help to communicate to our investors in one of those De biasing tools if we can into a good job communicating with our partners about how we think and what we do well that lowers their discount rate about us and about the kinds of things we do and so the the original goal there was to do it that way in the to use twitter as sort of another distribution mechanism for making sure people knew we'd updated a blog post and I have to say it's kind of gone beyond that for me. I've met a lot of really smart people in finance twitter and if Morgan House. Alright something I'm going to read it like now and it really goes to helping me sort of continue learning and continue. Hopefully getting better what we do but but the blog. It's a fun thing thing for me and I. It's hopefully been helpful for our investors as well. I think probably WHO's us to talk about the story that you put out that got the most attention of all the things you've done in finance. So why don't you talk a little bit about that post. Yeah well. That post was more of a personal post that I I put out back in June then about my son. He had gone through some hard times as a teenager and I hesitated a bit if I wanted to put it out on twitter but in this case I was like well. This is a nice form. Maybe to get the word out for folks and it's basically a story about a struggling teenager who is at the depths that I wouldn't want any other parent you have to suffer with their kids and how he got himself out of it. And I wrote that post he allowed me to share it thankfully and I think he and Another fella that we became key in the story of helped a lot of kids and parents with that story. What's the name and that's what people can stay in the game? Stay in the game. All right true turned couple of closing questions. What's your favorite hobby? Your activity outside of work and family. Well I'm terrible at it but I love playing my guitar. That's that's my downtime. And even though I'm twenty years past my prime if there ever was a prime I still get a lot of peace out of shooting baskets outside so those two things. Thanks those are the two I. It must be an Indiana thing. That's the stuff at. What's your biggest pet peeve? Taxi drivers that take the wrong route. Is that happened more in New York or London. I'm not in New York. That got much in New York. It happens all the time but in London. These guys actually know where they're going guys with the knowledge in particular but even still I find a way to get upset about it if they take the wrong way you can ask anybody. It's it's terrible habit. Your biggest investment pet peeve. I've quite a few there to my biggest one. Now is probably that. There's a lot of back testing folks go back and look the way things behaved. And they're calling anything factor like three hundred different factors as if these were state variables of a hedging concern like bomber talked. About what the I kept him. Factors are things that either have to have a risk story related to them. And that's why they behave a certain way or a behavioral story. It can't be that that's something had a certain behavior over some period of time and that somehow means it's sustainable and it lasts forever so get specific it. More academic about defining what factors are and then we can move forward. Is there a particular factor. You hate the most right now. That people are calling a factor that you know. Is this the number like I'm a WHO it was John. Cochran may be talks about the factors zoo. And and and there's some new factors which to me fascinating betting against Beta this flies in the face of single factor cap em and. That's what the guys that I call it. It's similar to the low vol vall kind of factor where people theoretically stocks with a High Beta are supposed to move more higher than the market as the Marcos turns out of the way around and and this is something for Gene Pharma in the fish market crew to have to grapple with and it does beg the question of which you'll have plenty folks say that the cap and the whole structure was wrong in the first place from my perspective if found in French introduce value and introduce the small cap bias in a three factor model and the Marque Carl Hart a few years later introduces momentum those are the key wants really momentous may be more input certainly more important than size and maybe more important than value and then you get this slow vall betting against Beta stuff and the theories tougher for me to come up with why that might work quality qualities and other went. I is that a behavioral story or is that a is that a restore. It's tough. They seem to work the momentum. MM stuff I am convinced. There's no risk story for and that is an under reaction bias where people just refuse to process information which just confirms there. PBS News whether you're long short Hong Lemon Stein. Roe paper years ago called bad news travels slowly if you get information that doesn't jibe with what you believe before you just. I don't care I love seeing that. What reading you almost never miss? Well it's back to Morgan houses if he writes anything. I don't miss it and help me keep track of anything that I WANNA. I WanNa make sure I'm staying on top of I visit. Wisconsin abnormal returns website every single. It's the one thing I religiously if I go on holiday if I'm away I come back and I'll go back through Tuesday's links Mondays link Sunday's links make sure I see that because he's the world's best curator of the kind of information at least in the finance world and and other areas that interests me teaching from your parents as most stayed with you. It's teaching by example and it's civility and it's fairness it's having in civil discourse. My father's always been that way. My Mom's been that way now. I fail there all the time you can ask London taxi drivers but I'm working on it but the fairness one that on. I don't like it when things aren't fair. And that's been an overriding theme for me forever. That can be someone we call it q barging in the UK jumping the line. Someone jumps in front of your line at starbucks. That's not fair. Someone jumps in front of some kid at line to get into Yale because his parents often bunch of money. That's not fair either. I hate that kind of stuff last one. What life lesson of you learned that you wish you knew a lot earlier in life? I thought I knew it earlier in life but I didn't know it to the degree I do now. And it's the importance of relationships and of spending time with smart people. PEOPLE SMARTER THAN YOU. You can keep learning you. You can keep developing developing when you have. That is easy to in our industry. You can get bogged down in your world with your team and to the extent that you read that helps ups but by hanging out with smart people. It's just fun. It's invigorating and That's been something that I've I think. Even more important than I realized ten years ago drew. Thanks so much all right thanks for your time man. Thanks for listening to this episode. I hope you've found a nugget to take away and apply in your investing and your life life. If you'd like what you heard. Please tell a friend and maybe even right review on I. Tubes you'll help others discover the show and I thank you for it. Have a good one and next on this podcast is for informational purposes only and should not be relied lead upon us a basis for investment decisions all opinions expressed by guests on the show are solely their own opinion and do not necessarily reflect those their firm managers appearance on the show does not constitute an endorsement investment recommendation by Ted or capital alligators.

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TIP289: Intrinsic Value Assessment of Berkshire Hathaway by Jake Taylor (Business Podcast)

We Study Billionaires - The Investors Podcast

51:57 min | 1 year ago

TIP289: Intrinsic Value Assessment of Berkshire Hathaway by Jake Taylor (Business Podcast)

"You're listening to Ti on today's show. We have Jake Taylor from Farnam street investments to talk to us about the intrinsic value for Berkshire Hathaway although this conversation was recorded prior to the aggressive market selloff today at the end of March Berkshire hathaway currently has one of the top twenty enterprise values relative to its earnings power for the entire. Us Equity Market during the show. Jake talks about buffets recently released shareholder letters in. He also gets into all the reasons why Berkshire is currently trading at an attractive price relative to all their stocks on the market so without further delay. Here's our conversation with Jake Taylor. Listening to the investors podcast. We studied the financial markets and read the books that influenced self made billionaires the most. We keep you informed and prepared for the unexpected guys. Welcome to the PODCAST. I'm your host brought us. Ns always accompanied by my co host Preston Pysche. We are here today with Jake Taylor. Ceo of Farnam Street investments. Jake thank you so much for joining us here today. Thanks for having me on the show guys so jake on today's show you'll be pitching. Berkshire hathaway and you will provide you a summation of the intrinsic value of the company. But before you pitch. That's your more. Bot your investment framework. Could you please elaborate on your stock selection process and how has or hasn't been influenced by Warren Buffett and Talamante her. My investment process is kind of difficult to explain because it tends to be just looking for things that makes sense to me and that there's no real morningstar style box that you can check. That says you know buying things that make sense to me so I ended up being very opportunistic and going into a lot of different places whether it's just buying outright cheap assets when they're available like a net net all the way up to hang up a little bit more for a good company that has good cap allocation and along runway to redeploy capital at essentially high return. So obviously buffet early on was very quantitative based investor and off only very cheap things and for most of my career. I've been more that way and it's only until recently that I felt a little bit more comfortable paying up for a good culture. And what am I thinking is evolved in that is one. I think you have to read a lot and been in the game for quite a while to have the trust in yourself that you can recognize those kinds of opportunities. The other problem is that it's very difficult to get to that point in this particular market for me because it seems like that's kind of whatever one is realizing recently compounders have become very popular and for good reason it makes business and investing sense is just the price is. I feel like maybe have gotten the little out in front of what might project into good returns for a lot of these businesses so while I recognize it I've been pretty slowed actually implemented because the price I felt like hasn't quite been there yet. Another interesting thing I've been thinking about lately on that Front. Is Everyone's looking for companies that have really high returns on invested capital and? I've been wondering if perhaps that you might be better off looking for ones. That are more moderate. Maybe like the ten to fifteen percent range. My thinking of that is that few have extraordinarily high returns on capital that is a signal that other entrepreneurs may WanNa come and compete those away from you and or at least share in some of that high return maybe at the ten percent range your side of flying under the radar and you're able to compound for a really long time at ten percent as opposed to a short period of time. Let's say fifty percent and the better bet is to take the longer duration ten percent one most likely so it's Kinda like I've heard Peter. Thiel talk about how companies who are actually monopolies. They don't advertise it. They're trying to hide it. Google will talk about how they're only a certain percentage of the entire advertising industry. They won't frame it as online advertising or search even worse right so in the same vein maybe the editor bet is to look for more mid range kind of Roi. See and see what you can find there. As opposed to like the highest flyer ones so jake on February twenty-second buffet sent out his annual shareholder letter. And I'm just curious what your key takeaways. Where from the letters this year? I thought it was interesting that he removed the Book Value Column. For the first time. Which kind of tells you how much value maybe as a metric for Berkshire has decayed in buffets mine. He's been talking about it for a while but he finally stopped reporting on that. I mean you just look at that. Market value though from nineteen sixty five to twenty nineteen at twenty point three percent return versus the SMP's ten percent and it's like it's such an amazing testament to doing something right for a really long time and the just the obscene compounding that can take place. It's just truly incredible to actually see it. Spelled out look at the float number nineteen seventy thirty nine million dollars today. Hundred Twenty nine billion dollars absolutely unreal. How Big Berkshire has got? And then my last one was interesting to see him. Say That g chain and Greg able will be more involved in the meeting this year which I think gives some hints about succession. Planning and I thought it was actually a little bit odd that todd and Ted wouldn't be included as much. He didn't mention them. At least so those were my takeaways from this year's letter but in general I would have probably given it an average rating other ones. I've liked more but anytime you can hear what's on buffets mind is worth taking a few minutes to Rita for someone like you have been reading all his letters. It is interesting to see how especially the last safe ten letters. I think he's giving away less and less. I guess that's how I look at it. They're still good lessons to learn but it seems like he's a different mode. It seems like he's a bit more in legacy mode than he is in the. Let me educate you about business mode. But it's definitely worth a read and we'll make sure she'll linked to that later in the show notes but jake. Could you talk to us about Berkshire Hathaway and no? We're going to talk about the evaluation the end. So we'll get to that but talk to us about berkshire-hathaway how would you outline the for someone who is not too familiar with the company in my mind? It's a supercharged S. and P. Five hundred it's very. Us centric Bat. They insurance operations are way above average the industry and then you have somewhat doing cap allocation. That's the greatest of all time. And typically you're buying it for less than the markets typical price due to some kind of a conglomerate discount so in my mind. It's not a bad plug in or an S. and P. five hundred exposure. If you wanted that instead could you talk to us about the five major segments of the business? Sure Yeah I mean you have the insurance operations which are big you have a railroad inside of their Burlington northern you have Berkshire hathaway energy. Which is we used to be mid American and now is growing quite a bit. They put a lot of money to work in both energy and railroads and earned that interesting ten percent regulatory return. Likely we're talking about return on capital and then you have a marketable securities portfolio of a lot of blue chip companies. That are baked inside of there. Then you have what's called the MSN. Which is the manufacturing service and retail and those are a bunch of grab bag of different businesses. Some bigger some smaller all the way down from precision cast parts which is making high tech aircraft manufacturing all the way down to shakes and Burgers at dairy queen. And everything in between so you have the whole swath of the US economy. So let's specifically talk about the Insurance Division. So the property casualty insurance business has really been the engine. Propelling Brooks Halloway growth since nineteen sixty seven year that the both the national indemnity and the the sister company National Fire and marine now today berkshire-hathaway hold six point four percent macchia and they're only trailing state farm is the biggest underwriter in the country. The Florida's you mentioned before stands one hundred twenty nine billion dollars. How do you see Burke Chef perform when it comes to macchia and profitability in the next day Kate specifically for the Insurance Division? I do recognize that. They are very disciplined in their underwriting. And the data point that I use to back that up as that. They've underwritten profitably in sixteen of the last seventeen years. That's a pretty good track record. If you know the insurance industry I found it very interesting that it seems like Geico's been the little slow to adopt telematics which things like snapshot that progressive has which is basically trying to figure out like. How much risk do you actually take while you're driving? Are you speeding or are you accelerating or slamming on your brakes all the time which is surprising to me given? Geico's history Of targeting originally government employees. That's the GE part of GE ICO so they were looking for operations that had lower risk profiles and one way of ascertaining that would be to keep track of how people actually drive and then base their insurance rates on this telematics idea but in the plus side of the category for them is that they've always had such a bulletproof balance sheet that they've been able to underwrite that no one else would really be able to take on. They've always operated at like one less deal than they could've been doing all along or one less big insurance underwriting thing and other companies even insurance industry I've seen their operating much closer to the full deals that they could do or even sometimes taking on leverage to do one more deal than they could've done and then they're always kind of digesting that deal so what it allows Berkshire to do is to use a lot of that float and invested into equities which earned quite a bit more than what most people were earning in their floats all the other insurance companies because they've stayed so far away from the edge of being bold deal maximize irs and full underwriting capabilities so they're conservative. Nature in a paradoxical way has allowed them to actually take more risk with their float. Better security portfolio. I've noticed the thing too about underwriting with prophet sixteen seventeen years and buffet has been very upfront by saying that he does not expect that to continue happening and you can put a lot of different things into not comment. Obviously wanted us that. Buffet always likes to play. Whatever he's saying. I mean giving the low interest red level. You would expect for this to continue at least for quite some time. The reason why I'm saying that as given the low interest rate you supposed to underwrite with the Prophet because the risk return you can get elsewhere. A lot of that goes into equity due to different regulations on all that can be put into equities. There was this matching principle so depending on the length of the claim You have to buy even long bonds which might seem a bit weird. These states interest rate. But that's just the way it is. It's not something we can do too much about. I'm sure buffet would if he could. But unfortunately that's not the case but the other thing that I found really interesting about how buffet has been addressing. The insurance business is also that concern shareholder Hussein with global warming with everything. That's been going on. What can we expect in terms of claims to Berkshire and he says you know most of these things by definition of renewed so like he can set new premiums and what he's saying is as much as it might seem bad one year. A lot of things happening from an insurance perspective. He's actually a good thing. Because the premiums would just go up and the mole uncertainty though are the better ensure because so many companies have to have insurance now Jig. Let's talk about the growing cast pile. It has been heavily debated for years among the shareholders off burks Halloway and today cast and chiltern investments are one hundred twenty eight billion dollars whenever I say. Today don't mean today much nine after the stock market has been tumbling for weeks. Now I mean that's the latest filing that have cast pile similar to what it was in Q. Three Twenty nineteen so as far as we know it's not growing but it stagnated at very high level. Well you know. I woke up this morning. And the market was down five percent plus and we had circuit breakers going so on days like today. You kind of have to love that cash pile right. I mean it's the optionality on it is growing with every tick down. I love the anti fragility of that cash pile when you combine that with Warren Buffett's cap allocation skills. He's proven that he can put up. Great numbers especially when the opportunities come along. I should say the only thing that I don't like about it is that it makes me a little bit sad that it's possible that he could be waiting for this one last chance to do some big deals that. Sorta cement his legacy. I've seen this before where grandparents are holding on to see that oldest kid graduate from college or something and then once it happens then they kind of let go a little bit and it'd be sad to think that longer that we can delay a crash and him putting money to work. Maybe the more time we get with him. I would be a little bit sad if he was able to bag that last elephant and now he's like I've done everything I need to do in this lifetime and I'm ready to move on but people typically do is look at decisive his portfolio and the thing here the year end it was around two hundred and forty odd billion dollars and then the look at the cast position and say wow he is a lot in cash that's not how buffet looks at it. He said actually just two weeks ago. I'm approximately twin percent cash right now and I'm that because I'm including the three hundred plus billion dollars in upbringing businesses plus we have multiple secure. It is and then we have cash if you do. The numbers is a different way of looking at it. He's looking had eight. Percent Equity is twenty percent cash. Who knows perhaps with everything that's been happening? He's not so much in passing anymore and the real ties into my next Christian. Warren Buffett kicked his stock buyback procam into high gear. Here lately spending two point two billion dollars on share purchase in the last three months of two thousand nineteen. And that's the most ever. He's done in a single quarter now. This is not significant. Pets the my cup of more than five hundred billion dollars and a lot of investors. See this estimate tunes. It's loading up on shares. It should also be noted here that the trading volume berkshire-hathaway is exceptionally low. So in that sense of buybacks yeahs. Buffet is restricted differently than other. Ceo's if he wants to repurchase a high numbers yes because he's so easily moves surprise he's been talking about how he look within the at the Osa who could buy back three four five percent without moving price but because of the volume of Berkshire hathaway she asked that is just Solo. He's been talking about or at least he's been hinting. He doesn't talk too much about it but he's been hinting of. Just one percent can actually move the needle in terms of influencing the price. But as much as we'll talk about later. What do you read into the stock buyback here? Siphon the obvious fact that buffet at times have found the shares modestly undervalued as. He puts his in his letter a lot of people. I talked to like to think that this buyback program puts a floor under the Stock. And he's talked before about in the one point two to one point three times book value ranges aware. Berkshire will kind of quote unquote defend the Stock Price. But not sure if I think that that's true or not. I think Mr Market can do a lot of crazy. Things in that can still apply to Berkshire. They'd spent five billion dollars over the last year to buy back one percent of the company. Roughly so that's in like two hundred dollars. A share for the B shares on the other side is selling. That's something that I always like to ask myself. And when it comes to Berkshire shares most of them are locked up in families who own the company. It's not the typical company that's owned by institutions or even like index funds. It's very under represented in indexes. Because of that so. I don't think that you may be get as much panic. Selling either there so maybe it's unlikely to go on crazy sale as much as other companies. I think I personally think that he would be better off looking for that next deal than buying out partners within. Berkshire itself and I don't think that there's a lot of willing sellers that will part with their shares at the prices. That are really mouth watering from a buyback perspective. It's just not the dynamics that I see in the company ownership structure. I think you bring up a good point because if you look at the ownership manual what he wants to do the least is to repurchase yash he wants to buy wonderful businesses and even before that he wants to build a widen the mortar round the assistant businesses. You wants to buy gas and other companies before he wants to buy out his own partners as he puts it is interesting especially at these prices ride now at the time of courting bricks hell awaits trading at one hundred ninety five and it would be interesting to see how much he loads up on his own. Yes in Q. Four if you look at the numbers the average spying price just for that quarter was two hundred fifteen so it might be well he would be buying back then but keep in mind that s the price of Berkshire hathaway's now trading much more appealing prices. So as more or less all the stocks on the planet you bring up a good point good. Cap Allocation is thinking of your shareholders as your business partners. And if you're buying back from them at breezy low prices you're benefiting one group of your shareholders at the expense of another and you're neglecting your duty as a captain of industry and as an allocated capital and a steward of capitalism by taking advantage of one party over another. I think you almost have a moral duty to try to keep your stock price. Trading close to the intrinsic value so that If some partner of Yours Aka shareholder needs liquidity for something. Perhaps they have to pay for a surgery. Or there's a charitable thing that there's really important to them that they need the liquidity. You should do what you can to help them. Get the liquidity that they need to run their lives. I think that there's a lot of good that can be done. The no one really talks about in capitalism by a CEO who keeps one shareholder group from taking advantage of the other too much. So that's really interesting. So buffet has mentioned in his letter to shareholders that ninety eight percent of his shareholders going into the year are the same shareholders. Going out at the end of the year and I think it's kind of an interesting metric because it shows you how strong his share by can be if he decided to use his significant cash position to conduct the buybacks. So something else I want to ask you about. Jake is your opinions on Warren. And Charlie's age There are many people that will argue that they're the true competitive advantage or at least significant portion of of the Companies Competitive Advantage. But as we all know Warren is going to be ninety. Charlie's ninety five ninety six years old. So what are your thoughts about the company with them eventually? Going TO BE REPLACED. Yeah I mean you really kind of have to get comfortable with answering. The question is Berkshire a man or is Berkshire a culture or is Berkshire and ethos or even maybe like an operating system for a business super high integrity decentralized to the point of abdication as Munger said capital Allocation Stock Selection Insurance underwriting king abandoned opportunities all these things are in the ethos of the company. I personally believe that there will generally be okay. It's hard to imagine that there isn't some impact so if I kind of go through each of the businesses like the insurance operations I think those don't change a ton thick. They've got plenty of brainpower with G to still manage that part I know. Buffet helps jeep but deal flow. I think absolutely has to be impacted. How many business founders sell their business for less than they could probably get somewhere else to sell to buffet specifically that I think is a very real advantage that he's built as a way of cashing in on his reputational capital that he's built over the last fifty years of doing business the right way. He deserves to pay less than market because he has done such a good job with his reputation. I also think the performance of any CEOS in the subsidiaries of all these different companies. It could go down. I mean when you are having to send a letter to Warren Buffett about your operations for that year and report to local Warren. Like how you did and you WANNA make him proud. He's not around. It could slip a little bit. I mean I think that's just sort of natural human nature. I think the portfolio management side of things will be just fine with Ted and todd. I think both those guys are really sharp but target imagine it. There isn't less remote host worn and Charlie just mostly probably because of the deal flow aspects. They have to get in line and pay. Whatever else is paying for acquisitions? You're just not going to get the same kind of deals and therefore the same kind of returns on the businesses that you're buying because you're probably GONNA have to pay a little bit higher price for everything so on net. It won't be as good but the ethos still makes it one of the better companies in the world as far as how clean they are and how they do business. Suject rule simply. What's the biggest threat to Berkshire Hathaway or opinion? I would probably say complacency and that can come in different ways. I think that this management team. That's been around since nineteen sixty five deserves the benefit of the doubt on all things they've earned it however is a shareholder you can get complacent about when things start slipping a little bit for instance picking the book value out of the report. It's a little bit of changing the goalposts somewhat. I mean the timing of when he's done it and there've been a few other changes. I won't go into them because they're they're down in the weeds for most investors. But if you want to read a deep dive on that I would suggest checking out semper. Augusta's letter I don't know if you've ever read that one. But Chris Bloom Strand I think is one of the best analysts on the planet and he does a call it. A fifty page write up of Berkshire every year. He's a true true expert at this company. But anyway I think he's highlighted some of the places where they will change a little bit of things in reporting or move parts of the business and it'll be a little bit less clear how that business did or what the returns on equity were for that segment of the business mostly in the name of trying to make the numbers easier for the average person to understand but for the very very deep dive analyst. It clouds some of what we used to be able to know about the company so those little things can slip here and there that the disclosures part of things because the management has earned such a reputation. You can get complacent about just assuming that they're always doing the right thing all the time and that can get you into a dangerous place. Let's take a quick break and hear from today sponsor brought to you by capital one. You know how it feels when you've saved enough for that long awaited home edition now. Imagine saving enough for an addition on that addition. That's the feeling with capital one. Where new savings account earns five times? The national average capital one is helping you earn more towards your savings goals. This is banking reimagined. What's in your Wallet Capital One? 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Bowes all right back to the show interesting speaking of those analysts and those people who are really into it. I have a very nerdy. Gigi questions for you here now. Jake how do you value the earnings retained by burks? Non Controlling investments in public companies game that only dividends are reflected in operating income. And perhaps you can just explain the framework behind. Why is that even a topic worth discussing sure? So if you imagine these companies that are owned by Berkshire inside of Berkshire but they're publicly traded companies and they're doing their own business they're generating their own cash flows and sometimes they're paying dividends to Berkshire and so last year there. Ten largest holdings in their securities portfolio delivered three point eight billion dollars in dividends. They got sent to Omaha. Checks that showed up in the Berkshire checking account while those companies had another eight point. Three billion dollars in retained earnings last year. So that's money that's created inside of the companies that they own but that Berkshire doesn't really have control over it. It's still within the company and when I say that eight point three billion dollars that's figured out by taking the percentage that Berkshire owns of the company and then applying that percentage to what the total amount was so just to make the math easier. Like let's say that. Let's say ten percent of Apple. An apple earned one hundred billion. Will inside of that you could imagine that Berkshire Kinda earn ten billion through their ownership of Apple. I think you can't assign a dollar for dollar valuation to those earnings is that it could very likely be that company. That is making the decisions on that dollar. Where does it go to could be making bad cap allocation decisions and even making that dollar worth zero like we've seen that before with companies that make stupid choices with the money that's generated? It does not accrue as shareholder value. It ends up disappearing so the first kind of metric that we have to look at is. What do they do with the money? And I think buffets obviously trying to choose companies that have the ability to invest in projects that will generate further returns on capital. And keep this engine running and even growing and so you start to see why he's such a big fan of buybacks is because that instead of that dollar inside of that portfolio company going off into maybe a project that is destroying value. Maybe it gets bought back now. And His share of the company now increases. Obviously the price paid matters for that as well. So if they're overpaying for their buybacks than they are destroying value for the remaining shareholders including Berkshire and then the other part that. I think you should think about there. Is that money stays within apple or wells Fargo or wherever it is that Berkshire owns berkshires. Not Having to pay taxes on it at the moment so there's already call it a fifteen to twenty percent. Maybe even twenty one savings by not sending that money to Berkshire to them control. So there's no easy answer there because it's very fluid on like what do they end up doing with the money that determines the future value of what that retained earning was worth but those are some of the parameters that I think about I look at the retained earnings inside of the portfolio companies. You know it's fascinating. This is a topic that Buffett has been talking about a lot lately. I think this is a great accounting discussion. And it's something that many young investors don't understand. I Know Stig and I have talked about look through earnings for the non operational subsidiaries numerous times on the show and it's really neat to see him bringing up more more and. I think it's important because there's a lot of value there. That's not immediately evident if you're simply looking at the income statement the consolidated income statement for Berkshire Hathaway Okay so with all of that said talk to us about your intrinsic value for Berkshire hathaway today. Well I think their different ways of doing it. I tend to be more on the simplistic side of my investment stuff. Like if I can't write it on the back of an envelope or on a short piece of paper and a few sentences then it's probably too complicated for me to take a swing at so for Berkshire. The first passed a look at it. And this will sound a little bit Glib because the answer is going to be kind of silly but if you imagine Berkshire as a bond that yielded ten percent and I think that's a reasonable actual approximation because their return on equity has been ten percent for quite a while and it's likely to be around ten percent for a long time just based on the projects that they're putting money into thinking specifically regulatory yield of NSF and be h energy. So if you imagine a bond that yielded ten percent and you could reinvest the coupons in the business at a continuing ten percent. What would you pay for that bond? Today how much would the market pay for bond? That yielded ten percent in my mind. Safer than Treasury's Today's rates right now. I mean it's like approaching it goes towards infinity right. I mean that's why I said this is sort of like the Glib answer. It's a ridiculously high number. Which I think is more a reflection of today's rates being in my mind kind of ridiculous and not so much a reflection of Berkshire so let's go to a more real answer than some of the parts is away a very popular way of analyzing Berkshire which is basically. Just take all the different little business lines. Add them up and come up with some kind of a number so my back of the envelope. Math for some of the parts is yeah. Let's call energy worth about fifty billion the railroad worth about one hundred billion the. Ms Are the manufacturing service retail is calling one hundred fifty billion insurance call at a thirty billion and then an investment or folio. Three hundred seventy billion ish. You add all those up and you totals up to about seven hundred billion which implies about two hundred eighty dollars per share for the B shares. Quite a bit north of where we are right now so another way of looking at it the business would be. Let's just do a simple? What has Berkshire typically traded around as far as price to book goes into the answer. There is roughly. Let's call it one point. Seven five times price-to-book-value. Today's book value. Let's call it. Four hundred twenty five billion that gets us to a seven hundred and forty billion dollar range of potential valuation. Okay that's in the Ballpark of r sum of the parts. That makes sense. All of these things are all just triangulation. Data points like anyone is not better than the other but if there are all kinds of telling you the same story then maybe you're onto something that's how I think about this. And then maybe the last one would be called like a two pronged approach. And that's basically like add up all of the investments and then try to put some multiple on the actual earning businesses and then add those together. And what does that number tell you in my rough calculations? Let's call it. Two hundred sixty billion for Equity Securities and other one hundred thirty billion for cash. That gives us a three hundred. Ninety billion dollar for Prong One and impromptu will take twenty four billion dollars of operating earnings and multiply that by ten that gives us two hundred forty billion. Add those two numbers together and you end up with six hundred thirty billion as another mark so all of them. In the seven hundred ish billion dollar valuation range so just to recap that. You're saying that the price of the BCS that's right now trading around one hundred ninety five we'll looking at around two hundred and eighty plus minus very interesting. Thank you for breaking that down for us. It is interesting what you would mention there about the potential discount because it is a conglomerate. I guess you would even have. People say that is actually the competitive advantage offer that is a conglomerate to the money would go where it's best used. I guess there's also a discount to Berkshire hathaway because it has not been performing as well. He'll the pastor. Yes it's actually been trading this p five hundred. I think that's probably also one of the reasons why whenever I talk about being good price and all that and I think most listeners were already know I am long. Berkshire Hathaway Cynthia take it for what it is whenever I'm complimenting Jag about why that's a great investment I am obviously biased and it kind of leads me into the next question which is something that which is about position sizing but it's just always such a interesting topic to discuss especially for company like Berkshire Hathaway many investors have different rules from cells when it comes to assisting sizing for example invest might have ruled that he or she won't bill position in a single stock would more than ten percent of their portfolio now. Warren Buffett is previously in his letters to shareholders commented on how many investors holding to how the way as their biggest position in the portfolio most notable himself with more than ninety nine percent of his net worth estimated that more than ninety percent of the shareholders has books. Halloway ask by far the biggest position. Please elaborate on how you see position sizing and if Berkshire Hathaway is an exception to the rules that we may have imposed ourselves giving that is such a diversified company already and may have the downside protection that you mentioned before it very much comes down to your own personal preferences at risk tolerance of how much exposure you're willing to take on any one facet of business or economy or anyone person so the first thing you have to ask yourself is about the opportunity cost. Do you have anything else that might do better than a relatively safe. Call at ten percent or Anam type of return profile if you do then Burke Shire may be sort of an anchor in your portfolio and maybe you don't want too much of it. I don't think that Berkshire is terrible. As a bond proxy maybe especially for someone who's a little bit younger relative to the prices of bonds today? So how much are you willing to do you want as a bond allocation for? Shire may fit the bill of that a little bit like we just talked about you know if it was a ten percent on a lot of portfolio managers who I've talked to and respect. They often will use Berkshire as a cache proxy so if they don't have anything else to invest in rather than whole cash they'll just stick it in Berkshire. I don't think that's a terrible strategy. However the whole point of cash that it doesn't move around at all and Berkshire definitely moves around. I mean in one thousand nine hundred eighty eight or was trading at three times price to book value. Right and typically. It's been one point seven but we've seen a below book value also so to think that it's just this like solid anchor that never moves around provides the liquidity that you want when you need it and I'm not so sure about that. The last thing I would say is that because it is so. Us centric it could form a bit of a home country bias. That is common for a lot of shareholders. People tend to own more whatever country that they live in because they feel like they know it better and if so if you are a US investor and you already own a lot of other US based securities and things that are tied to the US economy then being long Berkshire is just more of that same thing and so you may not have as much diversification geographically speaking when you may end up suffering even stronger to a home country bias but all in all I mean. It's pretty hard to imagine that. Berkshire in Penn. Twenty years is not worth more than five hundred billion dollars so if you have the stomach for long term. You could sleep comfortably at night. Earning probably a ten percent. Roughly return on equity over a long period of time and there are definitely scarier and harder ways of making money. I think you bring up a really interesting point and a good point so jake thank you for your thoughts about burkes. Halloway is always a pleasure to hear how people think about that business that we've been following since the very first episodes here and the masters podcast now. Speaking of that I wanted to end the interview on the slightly more abstract note. Because not only are you a great investor self you also one of the thought leaders in the value investing community or like to relate this to whenever I first started become interested in value investing. I think my motivation was like any other. I wanted to replicate if possible. Howard Buffett pick stocks and that was why but interest in the first place then after starting value investing for years and reading and rereading buffets wisdom. I slowly realize that it really wasn't just about the money. It's really the community around Brooks to how the way and Warren Buffett. It's not so much about business but Justice Matz about investing in a life. Well lived so in your amazing learn that you send out to your clients you talk about. How much of the human actions we've seen the world can be explained by deeply embedded scripts designed to source into hurricanes and. I know that we are going to bit APP. Start here just from talking specific numbers about Brexit Halloway. But I think it's a really good way of rounding off the into you to talk about value investing very specific and then to look at more the grand scheme of things. Could you please elaborate on that specific quote? And how you see this. Yeah no I think you're right to highlight that these guys are heroes for a lot of us but I think the amazing thing is that they're such good teachers and we benefited from them. Being willing to share all that they've learned it would have been very easy for them to just hide out. Never talk about any of this kind of stuff and share with us and just make all the money that they ever wanted to make in the world And but we'd all be much poor spiritually than than otherwise. I tried to reflect back that same thoughtfulness when I can and that same spirit of sharing and being kind others and back that these heroes have been so intellectually generous whether I'm successful or not could be debated but you mentioned one of the client letters that I wrote and in that letter I looked at what lobsters and Warren. Buffet have in common and then actually Buddhism as well so those three very weird things. And here's the punchline of that letter lobsters will fight each other for space and mates and territory and when they're able to win in a fight and get that space they have a bump in serotonin inside of the lobster so this chemical that makes them feel good. When they win and the lobster who loses has a decrease in Serotonin and ends up often retreating and then dying not that long after and so- nature has created this system where we have these chemicals that make us feel good. When we're at the top of the hierarchy. And we have that exact same serotonin molecule floating around in our brains when we sort ourselves into hierarchies that the lobsters do and lobsters are really old. They're older than dinosaurs. So like this serotonin mechanism has been with us and Ben with biology for a very long time and we're just as subject to it as other creatures are so. What does that have to do with Warren Buffett? Well I think one of the key insights about Warren Buffett is that he's always been willing to follow his own inner scorecard and not be holding to certain hierarchy sorting and trying to show off and be more than he is like he is very true to himself and including thinking for himself when it comes to investing and his personal life to at that are very colorful. I think what the takeaway for all of us is to try to recognize when we are in a hierarchical situation and can feel ourselves being drawn towards sorting and instead trying to opt out of that. I think Buddhism has some interesting principles. In it that are really about opting out of that. Serotonin Matrix that a lot of us live so. I all those things together for your investment portfolio that thinking for yourself knowing Mr Market are taking advantage of Mr Market. When you can all these things all tie back together and hopefully they also lead to a life. Well lived on your own terms that at the end of the day. You've minimized your regret. And you feel like you did things your way. Let's take a quick break and hear from today. Sponsor transfer wise is the smartest way to send and receive money internationally the MS podcast network has used transfer wise since two thousand sixteen. We can station of fifteen people and counting where most of US international transfers spin the service that we solely relied upon. If you ever had to move money across borders you know how expensive it can be. And how difficult is we changed? How we do payments internationally for exactly those reasons transfers is cheap and Matz issue that anything we found transfer is over six million customers who save nearly four million dollars every day back rates and hidden bank fees or even better is that you can even get your own bank details for the US UK euro-zone an Australia. Meaning you receive money from those countries for free. It's great for freelancers and anyone who works internationally. Try them out today. Get your first transfer free by visiting transfer vice dot com slash T I P that's transfer wise dot com slash CI. Ip fundraise is revolutionizing the investment world fundraise enables you to have a portfolio of high quality high potential private market real estate projects that are carefully vetted actively managed by team of real estate pros. All these without having to break the bank fundraisers rises cutting edge. Low cost model eliminates. The bloated costs and middle men have traditionally weighed down real estate investing saving investors. Time and money when you add fundraise real estate into your investing strategy you get to have a deeper sort of diversification beyond public stocks bonds and even other kinds of real estate like publicly traded. Reit's and one of the secrets that many of the country's wealthiest investors understand. Is that when you diversify your portfolio's not just resilient it's actually position to earn more overall no matter what kind of investor you are? Fundraise makes it simple to build a more perfect portfolio visit fund rise DOT COM SLASH BILLIONAIRE? That's F. U. N. D. R. I S. E. DOT COM slash billionaire to have your first three months of fees. Waived all right back to the show so jake. This is a great segue into your book. The rubble alligator In fact we have another show on our network that's hosted by Sean Murray. And it's called the good life and he interviews you about all the different aspects of your of your book and we'll have a link to that in the show notes if people want to check that out and I would encourage you to check that out. talk to us a little bit about the book and also talked to us about this idea of sorting and how it's demonstrated in the book. A lot of the impetus of the book came from having studied a lot of different managers in the decisions that they make around cap allocation and seeing a lot of what to me seemed like unforced errors by people who were plenty smart to make the right decision under the math is hard but the emotional quotient part of the equation and really following your own inner scorecard and doing what you think is right was ignored. And that's how the errors ended up coming together. People wanting to show off about some big merger and acquisition that was destructive for most of the shareholders. But they got to feel like they were the big man on campus because of it that is a hierarchical sorting kind of thing bragging. About how much revenue have but not being profitable. We see that a lot so I wanted to write a book that hopefully would give those managers and then also through other proxies investors who recognize managers. Who are doing that a little bit of a playbook on how to think for themselves to have the confidence to do it and so crazy enough. I ended up deciding to it in a fictional story. Format that only baked the lessons in and we're able to resonate with the reader a little bit more than just a dry nonfiction explanation of all of these cap allocation principles. So if you look at what the book really is. It's the karate kid if Mr Miyagi was like a Warren Buffett character. So that's the kind of spoiler for the story press definitely huge fans of your book and another person who is a big. Fan of your book. That is Charlie monger. So if you listen to the episode that Sean Murray did with you jake to actually have a chance to hear what you and China among talked about for twenty minutes after he called you more or less out of the blue to talk about the book. We'll definite short linked to that in the show notes. This has been absolutely amazing. Jake can the Audience l'amour about you you book and Following Street investments yet I write quarterly letters for my clients and but they're publicly available and those are at Farnam street dot com. It's pretty easy to sign up there. I go on twitter probably more than I should. It is a very fun place to be a lot of times in the financial space. So my handle there is at Farnam. Jake one pretty easy to find. I do a podcast with a couple of friends who you are. Well familiar with Tobias Carlisle and Bill Brewster this value after hours. It's like if three buddies got together after work. Long Day at the office buying companies and then kind of. We're talking about the inside part of baseball for investing. That's what the the show is approximating. It's a lot of fun to do. We do it once a week but yeah otherwise if you know anyone wants to reach out to me. My email is five good questions at g mail all spelled out. Fiv. So I'm not too hard to find. And as far as the rebel allocated goes it's available on Amazon in print digital and audio. So you can check it out there. That sounds amazing and again we'll Michio to link to all of that in the show notes. Jake thank you so much for taking the time to speak with Preston me here today. Thanks for having me guys all right guys so this show. We play Chris from the audience. And this question's very timely. It's from Nathan and Christian is about berkshire-hathaway high presidents take. My question is about Berkshire Hathaway in stock. It owns in his portfolio. Berkshire already owns a specific stock in its portfolio. How do you think about considering a by more than individually taking into account the fact that you already have some exposure to the stock through charts for Photo Nathan thing? That's a great question. I don't think that there are any issues. But you getting a bit more exposure to any of the stocks in buffets portfolio. Because when you do the math you have very little exposure to almost all stocks in his portfolio. Keep in mind. The Buffett's stock portfolio is less than half of the value of books. How the win the first place? They have a lot of operating companies to none even apple. You have two months exposure to now is the biggest position in Berkshire hathaway portfolio which is more than ten percent of the market cap off Berkshire hathaway in the first place and is almost a third of the entire public trade portfolio. But even so consider if you have ten percent Berkshire and then ten percent of that are made up of apple she s you still only have one percent exposure in your portfolio to apple. Now Bill is a little more. It might be closer to one point. Five one point seven in this example if you have ten percent in Berkshire hathaway but any case. It is very little. So even for buffets portfolio that is very top heavy and just an example if you look away from the top ten holdings the eleventh biggest holding is just a bit more than one percent above its entire public trade portfolio. So it's really not significant. It's really my way of saying that you shouldn't think of Buffett's stock picks at all whenever you consider your own portfolio unless you only hold berkshire-hathaway in your portfolio or very close to only hold on that one stock but where do think that. You should pay attention. Is THAT BUFFET. Like all the money. Managers with more than one hundred million dollars on the mennesman has to disclose with surprise the buy stocks. And that may give you good indication of with stocks that are currently undervalued. You can find those prices and those picks at guerrillas for free and we even have a resource Academy where can check out of its picks together with all the super invest us like spear Mona's pop rai and take a closer look at their portfolio. We'll make sure to linked both of those resources in the show notes and then four times a year. The stock picks become available. It's February fifteen may fifteen August fifteen and November fifteen. That doesn't mean that I'll do the same thing as they do but I do. Use Office picks and other supermassive specs ask inspiration and perhaps put a few on them on mental. What's List for further investigation? So Nathan great question. But I really can't add much value beyond Stig's response because I pretty much agree with exactly what he said. So with that Nathan for asking such a great question we're going to give you free access to our intrinsic value course for anyone wanting the checkout the course go to t I P intrinsic value dot com that's T- IP INTRINSIC VALUE DOT com. The course also comes with access to our T. I. P. Finance tool which helps you find and filter. Undervalued stock picks if anyone else wants to get a question played on the show go to ask the investors DOT com. And you can record your question there. If it gets played on the show you get a bunch of free invaluable stuff. All right guys knows all the press down. I had for this week's episode of the PODCAST. We see till again next week. Thank you for listening to ti to access our show notes causes or forums go to the investors. Podcast don't come. This show is for entertainment purposes only before making any decisions. Consult a professional. This show is copyrighted by the investors. Podcast NETWORK. 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116: Long-Term Investing: COVID-19 Changes Nothing with Jim Collins from JLCollinsNH.com

BiggerPockets Money Podcast

1:13:54 hr | 1 year ago

116: Long-Term Investing: COVID-19 Changes Nothing with Jim Collins from JLCollinsNH.com

"So the market clearly clearly as searching for a direction that doesn't quite know what to do and nobody in certain released to all may knows what is going to do on Monday. Mean this could be you know today could have marked the beginning of the turnaround where it begins to just go up again or it could be is chairman. They called dead cat bounce. Swear Monday will open up. And we'll be down even further. I mean nobody nobody really knows. And and that's kind of the. The most salient point is because we don't know there is nothing to be done. There is nothing to be gained by trying to dance in and out of the market is as Warren Buffett. One said you you buy the mark old and you're investing for the long term and this volatility is to be expected every night again the market plunges every now and again there are Bir markets. Hello Hello Hello and welcome to the bigger pockets money podcast. My name is Mindy Johnson and with me as always is my steady stay the course co host. Scott Trench Scott and I are here to make financial independence less scary less just for somebody else and show you that. By following the proven steps you can put yourself on the road to early financial freedom and get money out of the way so you can leave your best life right whether you want to retire early and travel the world. Avoid panic selling in a recession. Go on to make big time investments in assets like real estate or start your own business will help you financial position capable of launching yourself towards injuries. This is episode number one hundred sixteen featuring Jim Collins from jail collins and H DOT com. You may know him. Better as a previous guest on our show number twenty. He's also the author of the famed Stock Series and even more well known book called the simple path to wealth. Jim is here today to talk to us. About the stock market The state of the stock market specifically. Today Jim is going to talk about how to navigate the financial crash in his philosophy about long-term investing with the by staying the Course Index Fund. Investing so spoiler there. He's got great rationale for that and I think it's really important point. That's why we have really changed our podcast scheduled to accommodate him and have him come on and give that advice to everybody and then after gym is done. If you want to stick around you own real estate mindy and I will talk about how to think about your long term real estate holdings in the context of this market this correction. Whatever you WANNA call it. The Corona virus caused market panic right. So we're GonNa talk about that stuff and then we'll invite if you have any questions to join us on facebook email. Us reach out. We know that we're giving advice. Stay the course. Invest for the long term. We know that's difficult. We know that that's going to be a challenge for a lot of you but we want to be there and help you and make sure that we're open you move toward your long term goals. Yep We really want to help you out okay. Before we bring in Jim. Let's hear note from today's show sponsor whether you already have an established rental business or analyzing your first rental deal than you know the getting the rent right is absolutely crucial to lowering investment risk and optimizing your rental income. That's why the go to source for rental. Data is renovator. Property owners and investors rely on rent because it is the fastest and easiest way to access quality rental data anywhere in the United States. But don't take our word for it rent processes over three hundred thousand rent reports per month and gets rave reviews from their customers. Many of them fellow bigger pockets members. And if you aren't already rental customer they make it really easy for you to test them out with a free trial. A real free trial with no credit card required an access to the full system. And if you decide to sign up for rent. Commodore Use Promo Code. Bp One hundred at checkout to get over fifty percent off a whole year of rent or pro remember b. p. one hundred is a special offer only available through bigger pockets to get domino at the lowest available rate. Go to rent Tom. Dot Com today to check it out. Hey there as a working mom. I know how much work it is to juggle. Career family and money management and power is an awesome APP. That gives you back your valuable time by making money management. The easiest thing you do all day how would you feel if you could save more than you ever have before without lifting a finger empower helps you do just that. For starters. Empower has an automated savings feature simply tell the at my weekly savings target and everyday empower studies. Your income and spending an automatically knows when to move the right amount of money into your savings account where grows at one point one percent. Ap Wi with unlimited withdrawals and no minimums. It's called auto safety. Just set it and forget it with empower. You also earn that same one point one percent. Apr On your checking. Yep you heard that right checking. That's thirty five times higher than the five biggest banks with none of the garbage like account minimums overdraft fees the APP even hold you accountable for all your spending with easy budgeting tools and real time alerts to tell you when you need to reign it in. It's nice to have an APP that reminds you. You've already spent over fifty dollars coffee for the week. And it's not even Wednesday if you want to save more than ever before you've got to check out the empower APP download empower that's emp w. e. r. in the APP store or playstore and over six hundred fifty thousand other people have to and for listeners of this show get five dollars when you use offer code money and reach your savings goal visit empower dot me slash money for more details okay. Huge thanks to the sponsor of today's show Jim Collins. Welcome to the bigger pockets money. Podcast I am very excited to have you back. You were here on episode twenty way back a couple of weeks ago. This is now episode one hundred sixteen and I know you are a retired person and you've been retired for quite a while. I'm not sure if you've noticed because you've been traveling around the world and you know you are retired. The stock market has had a bit of action. The last couple of days. Have you heard about this? And what are your thoughts on? This actually actually even even uses reached even me. Yeah I've heard about it is it is Been a volatile couple of weeks. Volatile is a really great way to describe this market. This was the worst stock crash since October of nineteen eighty seven. Do you remember October of nineteen eighty seven? I do Scott was negative three but you and I were around then. I was a sophomore in high school and I still remember that day because the next day in the economics class they talked about what a huge thing it was and it was five hundred eight points and it was a twenty two percent drop and that's enormous and all my God. This guy is falling so this stock market has actually not crashed five hundred points. It's crashed more like two thousand points but because we have grown so much since nineteen eighty seven this was only a seven percent crash as opposed to the twenty two percent crash in one thousand nine hundred seven. So why are people freaking out about this? Well people freak out whenever the market does something unexpected whenever drops. But your your points for tank at actually. Nineteen eighty-seven was a much bigger. Drop than than anything we've seen in this one. So for instance today the market was up about nine percent. Yesterday was down about nine percent but as you correctly point out when the market dropped those five hundred points which seems kind of quaint. Today ever presented a drop of twenty three percent. I think the total market decline has of Thursday's drop came to twenty six or twenty seven percent over a couple weeks by the way in eighty seven. That one day drop was not. The only dropped continued to to edge down for the next. I don't know three or four months before before it turned around and began its relentless climb once again upwards as the market always does again this time yes so Scott an I have a document that we chat back and forth with and he said wait. There's like a ten thousand point crash over the past two ish weeks and he's right. I was talking about on Monday. To about five hundred. I'm talking about on Monday. They had actually halt trading. And which is not something that they did back in nineteen eighty-seven and they had to hold it again. What Thursday and we're recording this after the market has closed on Friday. But the last couple of weeks have been quite crazy. However as you just said the market dropped in eighty seven and then began its relentless. Climb as it always does which. I am quoting Jim Collins. I am not stating that officially. But he's right and so. I am one hundred percent agreeing with with Jim. If you sold on Monday your holdings would have dropped so. The market opened very poorly on Monday. You sold on Monday. You would have realized losses at some point from your high at the very most or at the very least And by holding onto them on Friday you would have recouped a lot of those losses. Most market recoveries are not that fast but today we were up quite a bit. We were up almost two thousand points. Mark Monday. They were down two thousand points. I think in the middle there was some more down. Will Thurs Thursday was was down so today say I think as I say today was a baiter nine percent but it was roughly up today? The same amount was down yesterday so the market clearly clearly as searching for a direction doesn't quite know what to do and nobody can certainly least of all me knows what is going to do on Monday. Mean this could be you know today could have marked the beginning of the turnaround where it begins to just go up again or it could be. What is charming? They called a dead cat bounce. Swear Monday will open up. And we'll be down even further. I mean nobody nobody really knows. And and that's kind of the. The most salient point is because we don't know there is nothing to be done. There is nothing to be gained by trying to dance in and out of the market is as Warren Buffett. One said you know you you buy the market new world. You're investing for the long term and this volatility is to be expected every now and again the market plunges every now and again there are bear markets. They are healthy things actually and their midst. It's like getting getting all of sudden panicked about is Mike living in in Minnesota and being surprised that you get blizzards. I mean it's part a winner in no. It's just. It's a natural part of the process now every time what triggers. The drop is different. And what's triggering? This drop is is a disease and of course that scary on a whole different level but if it wasn't that eventually would have been something else surprises me is that this is really the first brock we've had since the big crash in seven eight in December of eighteen right around Christmas. The market dropped twenty percent but it turned around so quickly then the most of us don't even remember it was it was such a quick blip on the radar but this one looks like it was extended a few weeks and my guess is it'll extended humour but that's only guess so let let me ask you this. I think I think one of the you know for for maybe the three of us right. We likely have a financial position that has some cash on hand is very conservative. Were we've self educated quite a bit on this topic? We're very comfortable. I think with the realities of the market amnesty. The Courses Continue Index Fund. Investing as I've always done and keep it in there and keep it in there for the very very very long term but suppose that we're putting ourselves in the shoes of somebody who does not have a big emergency reserve right or as very little cash and is afraid of losing their job right. What does that person need to be thinking about here in terms of their long term investing approach or maybe needing to access that money. How do we frame that as a problem for them? Well the first thing is that the those are considerations of that person should have been thinking about before now now in the Middle Vora. Crashes is not the time to try to to try to sort through though whether you should have an emergency fund for instance or how much you should have allocated to stocks. That's something best done when the waters are calm and the markets are peaceful not in the middle turbulence storm. So that's a whole different question. I would say to anybody regardless of that situation that that you need to buckle down and stay the course for now and then if you found yourself in the position you described when things calmed down. You probably want to reconsider in reality. If you're in a situation where you have to have money to live on because you lost your job. Well then obviously you're going to end your fully invested in the stock mark. First of all. You shouldn't be but secondly you're just going to have to draw down on those stocks when they are down and obviously you WanNa draw as little as possible made the most basic needs and your portfolio chance to recover. Got It okay. So what does Jim Collins considerate? Good Emergency Fund. That's so variable Mindy That it's almost hard to our dancer. Tha depends on your situation. So for instance. I don't own a house. I don't even rent an apartment at this point. We are completely nomadic. So you know. There's very little variation in our life had suddenly GonNa come up but we just bought a new car so I don't have to worry about all repairs so my emergency fair you know fund is almost nothing. I can tell you especially you know a new car but I can't believe you bought a new car the worst thing you could possibly do. You'RE GONNA ruin your financial future Britain three posts on it. So you can. You can check out why why I'm not worried about running financial future but in any event is so for us. I mean a Emergency Fund is twenty bucks in my wallet. If you own a house and the furnace might go out. Will you have a very different need or you might need a new roof for if you're driving. An older are an maintenance new transmission. So those are all the kind of variables. Ironically the less money you have less wealth you have the poor. You are the more you need that Emergency Fund. I I love that so if I'm listening and I am on my way but not quite there. Maybe not even halfway to financial independence. I like to think that you that listener are actually have been preparing for a recession pretty aggressively over the past several years. Right you've got an emergency fund you've been ingress investing for the long term most likely and preparing for early retirement. I think in a lot of ways is just like preparing for recession and to your point about it emerges you reserve your right the war wealth. You have more stocks that you owed the less you have to have in cash because you can liquidate or us or you're going to have higher dividend payments or whatever and so there's less need for that more cash flow you know the higher your cash flow the less you need and in emergencies and you know the simpler your life. The less things are potentially to go wrong so yeah so anyway. The point. Is that the more you're living. Ironically enough. The more you're living paycheck to paycheck the less resources. You have the more things you own be houses our cars or whatever the bigger your emergency fund needs to be. Let's say you know I I I love how simple and easy messages here right. Everyone is panicking. The Sky is falling around. But it's like it's like if you're getting sick right or join about your health right. You need to have a good diet exercise sleep. You need to do all those all all these things and your risk of getting sick as low and risk of having serious health complications even lower. If you track your spending spend very little control your big fixed expenses in particular by not buying the doodads that you just mentioned ready like a new car and just kidding so I do. This is the woman who used to drive it. Then then your risk of having financial consequences because of a recession are very low and your risk of bankruptcy or anything to draw down meaningfully on your long term. Portfolio is even lower the same and gets the same analogy. There I'm David Green for the day and the people when when the market drops is as it done recently in and dependent on it they Fair takes over and you lose sight of a couple of key things. Appoint MR MONEY. Moustache made to me years ago which I never occurred to me. The Total Stock Market Index Fund. Which is what I favor. A dividend of about two percent. If you're living on your portfolio and you're using the four percent guideline near pulling four percent of your portfolio. You don't even nationally when the market goes down. Do not have to sell all your stocks that have big loss. You don't even have to sell four percent of the year because two percent of that Funded by the dividends who just have to sell two percent of your old links each year and it's a very rare market decline that doesn't resolve itself within say five years. Most of them resolve themselves. Within a year sometimes considerably less. So it's not the fluctuation in the paper value of your holdings only matters if you have the need to sell it all at once or if you're silly enough to be driven by Anna Gonzaga once and then you lock in that loss. But if you're just a little bit you need to live on it's probably not. GonNa Affect you very much and you just let the rest ride for when the market Turns wait I'm hearing you say that you don't sell when the market drops significantly. No you need the course you course you hold on river forever. My holding period mindy for SAS is literally forever forever. And when I'm dead it Myers will old it forever. And when they're dead there's will old it forever over buffet. Selling that's ever done is if you need to live on the portfolio you'll take the two percent dividend soaring off and then you'll go another two percent sale of shares and and all day and that adds allows you to ride out all of this volatility in the market theory adequately throws that just to keep us on our does okay so. I'm seeing a lot of advice on the Internet. Which is you know. I love the Atlanta. Got Either Dance Troupe. Mindy the quote from Abraham Lincoln. Follow at all. I'm here I'm seeing things like I'm selling covered calls and I'm like why. Why would you do that? Unless you're a stockbroker and then even then maybe that's not the best time to be doing that or maybe it is the best time I don't know I. I like to consider myself fairly well versed in money and I don't. I'm trying to think what does covered call. I don't know enough to do that so I'm not GonNa do that. I'm buying inverse. Etf's what are you doing? Jim I'm just holding my total stock market fund. That I own the one the one thing I did and I this is i. I described us in my most recent boast tripled put up a few days ago. His I noticed that has the market was dropping. It was dropping the value of the shares that I was holding in my taxable account to the break to break even point and that was interesting to me because sometime in the next five years. There's a possibility we might give up our nomadic life. Buy a house settled down and I looked at that chunk of money as the Source of cash for that transaction. If in one at and I was also looking at the fact that the I had a capital gain in it that I was going to have to give twenty percent of the government in the capital gains tax but when it came down to to where that capital game went away which is a bad thing of course. Because it's money but graded the opportunity to sell at a break even point so there was no capital gain and then I just took the equivalent amount of bonds in an IRA and switch them over. Davita Zach so my allocation did change at all and that now freed up the capital in the taxable accounts to you know where I won't have to pay capital game when it comes time to to spend time comes if that time comes and that is detailed in your article taking advantage of Mr Bear which we will include linked to and our show notes which are at bigger pockets dot com slash money. Show one one six. We have a lot of things in there. That we're linking to today a guided meditation for when the Stock Market is dropping. Yeah so that's a say a guided meditation. I record it at the suggestion of one of our Chautauqua. Ten days last year and I recorded last summer and You know it got a modest number of us when I first put it up a few more weeks. Yeah and we will also link to that in our show notes to other things you might link to a in the show notes is. I Have Post A. Y. You should not be in the stock market and I wrote that those two years ago in two thousand eighteen when things were calm because not everybody should be in the stock market and right now. This volatility is a test of whether you should be in the stock market. If if it's keeping you up if you're worried if you're thinking man I need to sell before I get out. You should never been in the market. To Begin. With so that's opposed. That might help people that get through the other. One is a time machine in the future of of stocks and that basically is interesting in this context because it looks back at the period between nineteen seventy five when I first began investing until Donald. Seventeen eighteen when I wrote that post and looks at all the traumatic things that happened in the world into the market in that forty plus area of time. Lot of them very much more dramatic than what's going on now and yet over that forty years the market `hostages shy of a twelve percent. Return the point of that owes his. The market does not require perfect conditions to give great returns. But you do have to be willing to put up with the volatility. All that means. Is You ignore when it happens. Stay the course. Keep investing if if you're in the wealth accumulation stage and if you're the wealth preservation stage you have bonds you might gesture allocation take advantage of the the lower of the sale on stars. I think it's fantastic. I have a couple of things to go back a couple of minutes ago right. You mentioned something called V. T. S. A. X. Right V. Tsa X. For those of you listening not familiar with with our our terminology. Here is an index fund from vanguard it's passively managed index funds the Total Stock Market Index Fund. And it's Mr Collins Favourite Fund. If I'm if I'm if I'm remembering correctly right and then this you know the only difference between me and and Jim here is that I use V. O which is a vanguard. Sap Five hundred US based index fund. So little terminology thing. There second thing you mentioned is you're only going to lose in this market downturn if you have to sell your holdings and only only people who should be selling their holdings are people who are already retired who are selling two percent of their portfolio under the four percent. Which we've talked about in previous PODCASTS. As well and that's the only people who are going to experience a loss of economic power over the very long term from this market crash all the rest of us who are still working still contributing still investing over the long term are GonNa see no long-term dramatic impact from this drop off. All we have to do is keep staying the course for me. That's v O over USB. Tsa X. for Listener Whichever Long-term Index Fund a strategy. You choose is that. Is that a good synopsis there. Genetic is very good synopsis. I'd had a couple of things got one is that your show is a is an ETF and the version of TSA XS V. Ti. Same question. Gang is you know. Wow I V. TI should I switch to GSA actual no you on the same thing? It's in fact. Vdi The ATF is a slightly better choice. These days simply because the expense ratio is slightly lower now in terms of the difference between a V. TSA ex and the S. and P. Five Hundred Fund you own. That's another question. I get a lot you know as I all my 401k. O.`Neil only offers five hundred son. I don't get I can't buy the total stock market. You know what do I do well? They're so close that it doesn't matter both of those funds whether it's an S. and P. Five hundred hundred the total stock market son overtime. We'll track very closely. The both serve you very well. At the end of the day one will be higher than the others simply. Because that's the way of the world but there's no predicting which that will be. So you're avenger. In an anybody who's owning similar find? That's just fine. People obsess over things they don't need to obsess over it or need to obsess over whether you're in the SBA by one hundred fun. As opposed to the stock market fun you don't have to obsess over. Whether you're in the fun version of the Egypt version of those you do have to obsess over whether you're an actively managed funds bang exorbitant fees for lower performance or index funds and low fees and better performance. As for you WANNA spend your day. My husband that you both know comes to me the other day. And he's like. Did you see the market? Unlike know what happened. I don't WanNa be sitting here saying what I'm doing is right but what I'm doing is right. I don't pay attention to the market. I you know I. I don't WanNa be Bussey but I'm bossy so be like mindy and don't pay attention to the market. He will ask me all the time whenever. There's a big swing. Oh my God. Did you see the market today? I'm like no what did it do. It was up so much it was down so much. He is obsessed kind of a little too much with where the market isn't what it's doing. I don't care it is what it is and me looking at. It is not going to change the direction of the market. Jim here's a little bit of Trivia for you. You probably already know who owns the best. Portfolios the best performing portfolios over the very very very long term. I think you're referring to dead people rate. Don't touch their portfolios. Have the best returns because they set it and forget it Jim. When was the last time outside of this? I read your article so outside of this selling because you might buy a house and taking your bonds at doing that. When was last time you sold a like a significant portion? Not The whole. I'm living on it stuff. Never Jim Collins. The master of the Stock Market says he never sells anything ever. Do you have a positive or negative? Networth Jim so so far so far as positive. Let's let's remember the krona mirus takes a burden though many I I wanna I wanna say that I agree with your approach in fact of ignoring the market and I will I will I characterize and I have in the past. That's a superpower so I put it usually in context. I didn't realize that that that was your approach but my daughter who is the sole reason. I wrote the Blogger. The booker any of that stuff is zero interest in in this stuff other than she recognizes. It's important and she needs to get a couple of things right and that lack of interest means that she's not going to bang to attention the market. That means she's not going to be freaked out when it goes down. That means he's not gonna be tempted into doing something stupid. Like annex selling or tinkering with a and she that's a super she will do better than the vast majority of my readers. I have readers who are like you and we're like my daughter Jessica and I have readers who are read my stuff because they're just really into the market and there forever saying well. What if you did this? What have we did this? What are we adjusted here? And those are the people who can't resist tinkering and the Aiken almost guaranteed the UN Jessica will outperform them over time through your benign neglect. I love it all right. Hope you're enjoying the show. We'll be right back. 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All the books want an offer one low price right now for a limited time. Blinking has a special offer just for our audience go to blink dot com slash bigger pockets and try it free for seven days and get twenty five percents off your new subscription. That's bleakest spelled B. L. I. N. K. I S. T. BLINKING DOT com slash. Bigger pockets to start your free seven-day trial and you'll also save twenty five percent off but only when you sign up at blinking dot com slash. Bigger pockets so I'm getting on a questions right now from people who are are looking at the market and they are well they do have a reserve. They've been saving up. They've been worried about a recession and now the market drop his comments dropped twenty five percent in two or three weeks and they're wondering shy by airline stocks which have been particularly hit heart shaped by cruise lines. Which you know one of the cruise lines is down. Eighty percent show by events businesses that events being canceled those people are wondering can I take some of my excess cash invested appropriately? What's the advice for someone in that situation as well? I'm not a I'm not a stock picker and I believe that stock picking is a sub standard way to approach in restaurants over overall. Now I say that by the way has somebody who achieved financial independence picking individual stocks and picking actively managed funds that were run by people picking stocks so to be clear. It doesn't mean that you can't make money doing it. It just means that you're going to spend a whole lot. More time and effort can probably not do as well. As the index researches categorically shows the next performed toxic. Now having said that I I would say if you have extra money. Now by would be putting it into the market. But I'd be in those broad based index. We talked about and they will include the cruise ships in the airlines although solve those others but if somebody can resist picking stocks than picking deeply out of favour Atta Gorey's when As the saying goes blood is in the street. Is there were things to do it? I recently got this question from somebody and in my answer was let's say ten thousand dollars right. Excess cash sitting around your. You've been waiting for this moment. You're ready to play it. But eighty five hundred of it into an index fund. You can put it in all at once today. You dollar cost average it but in a couple of hundred bucks every day for the next month. You're worried and then take the last fifteen hundred bucks and go have fun. It's gambling you're at the casino. That's we'll keep you interested. Enjoy what do you think about that am I? Am I wrong with that or disagree entirely all right perfect? You know. I've always got A. I always had a cringed. It this idea you just described which is basically put the bulk of your money in good investments index funds. Then take something to play with. Investing is not play money. At least not my world I mean investing is is serious money so I don't play with any of my investment money if if I wanna play then I have. I have money for recreation. And what have you? I'm not a gambler but if I was so inclined and won six months ago Las Vegas and and and blow it which I have done that you know so I mean that's that's fine but in terms of your investment should be here investments. And you shouldn't look for entertainment and fund from your investments. You should look for wealth-building investment you look for your entertainment elsewhere. I like your advice better than mine. Okay so I want to ask Scott. I went to answer your question. Scott and say yes. You should invest in the cruise ships and the the airplanes. And all of that. And you do that. By buying an index fund. You take all that money and put it in the index fund. But Jim said it before I could say it. Advantage of all those okay so on that same line because I have also been getting lots of e mails. I'm seeing people that are freaking out like Scotches said. My accounts are down. I was planning on retiring next year or in two years. What do I do I would say? Stay the course but what is Jim say? Why would say the same thing I'd say? Stay the course you know. It's it's interesting the the post that I put up most recently About taking advantage of the bear which was actually a simple little post just about this particular tax love the the declining market afforded me but in the comments there there's a variety there's people who sorta get it and who obviously obeyed attention to my writings in the past and then there are other people who are are well. The market's declining and I think it's going to go down further so should I cash out now and save my principal and first of all you have no clue as to whether the market's GonNa go down further but he knows what is going to do. It might might not but that's market timing and if you re and these are usually coming to the preface by the way Jim I've read all your stuff and I'm actually absolutely on board. Okay right one. But the market's going down. I think it's going to go down for the early either. Haven't read my stuff. You haven't understood it or whatever the market timing if you really think the market is going down further and then yes. Obviously you saw your stuff. If I was convinced that America was going down further from now. They're obviously I would sell all my stuff and then if I was convinced I knew when it was finally hitting the bottom. I would put all my money back in. Oh tell me when it's hitting the bottom and the other problem is nobody can do that now. The question becomes. How do I know that nobody on the planet can do that? I mean how does Jim Collins know that all of the people all the seven plus billion people and all those people that nobody can time the market the wages described. Here's how is anybody who had that ability would be ten times or MORE RICHARD THAN Warren Buffett. And far more lionized name that person for me there would be no power investing power more powerful than actually being able time. Merck not the phony claims that you see on the TV shows people who tell you they can do if somebody could actually do that. They they rapidly own. All the money in the world is a real piece of work on my facebook feed. Who CLAIMS THAT? He saw this coming in the early part of the corona virus thing. And if you just listen to me and Solo Ukulele position that person that that trumpeter of that there's always one of them at every crash and they're always parenting a crash. That's a few months a few quarters or twelve to eighteen months favorite timeline. The crash has always twelve to eighteen months away. According to the pundits no matter what of the market that you're in and you're right nobody can time the market there. Will you know Scott if I can jump in on that there? There's a there's in the going back to one thousand nine hundred seven which we talked about earlier in the interview. There was a woman at the crash in eighty seven happened in October. As I recall there was a woman by the name of Elaine Garzarelli who was a stock analyst on Wall Street Young Woman and she predicted the crash almost to the day. Like in August and she was lionized for that I mean and it was documented in. She was on record as having having said this so it was verifiable that she wasn't doing it after the fact by some people try to do and she was lionized and she rapidly had her own firm and she could never repeat the performance because she got lucky when people need to understand. Is that any given time. There are so many people in the in the stock market in Wall Street and they're predicting anything the market can possibly do. Somebody is predicting it. And therefore somebody maybe a collection of somebody's is going to be right. Does that mean they have predictive powers? No that just means if there's somebody predicting everything somebody has to be raid it's like the lottery when you see somebody when powerball you don't sit back and say wow Scott one powerball. He must know how to pick winning. Numbers no recognize. The Reality Scott won the ball. He just got really lucky. That's all it is. It's not seeing the future. Show me the person who can do it repeatedly and now attention and unfortunately for Elaine got lucky one time and couldn't do it repeatedly okay. I predict on Monday. The market is going to go up and I predict on Monday. The market is GONNA go down. One of those is going to be. It's possible both could be wrong. It could play into it. Could just okay. I predict the market is going to be flat on Monday covered on the basis. Jim I got. I got a question for you free of us. We could each take one of those predictions moments. We'll be right and then we could say see. See this jail house guide to know what he's talking about. It's not that hard to predict the market. I digital right. I got a question for you too so you know our audience people. Listen to the show. I think are typically in their twenties thirties and forties and they're either working towards early retirement. Maybe a couple of them have cross the hurdle and our earlier tired but I think most people are still working towards that end in for the long run. But suppose that you're in your late fifties or early sixties you've got a billion dollars in the portfolio and you're planning to retire in a couple of years but now the market and you're worried you'RE GONNA lose your job and the market's down twenty five percent. How should that person be thinking about their overall financial position and navigating the challenges that may come with with the recession with the market going forward? We'll so first of all the first group person talk about them. Noah tarbuck second group so for those younger people out there who are still working still building their wealth. This drop in any drop is a gift. Because if you're following my plan might have basically have a high savings rate and you are putting as much as you can whenever you can into a broad based stock index fund like Bedia Say X. Market drops are your friend. Is that amount of you put in every week or month? Or whatever is now buying more shares. The best thing that can happen to you as you're accumulating. Your wealth is for the markets. Take a nice big plunged. Stay down for a long time. So you can buy those shares at a discount because that cash flow from your income is what smooths out. The ride allows you to take advantage of Mr Market. When he goes down now for that older person you were talking about and that by the way includes me when you don't have earned income anymore then you need something else to smooth the ride and that's something else bonds so you don't protect yourself from market volatility by trying to figure out how to time at which so many people seem to think they need to. Do you protect it either. Having that cash flow from your earned income or by your allegation which includes bonds and then when the market drops in your stock value of your status. Go down the percentage they represent will also go down and you'll be shifting money from the bonds to bring it back up your set allegation and that's how you take advantage of of then in terms of me worried about losing their job. That's kind of a whole different question. So if you're worried about losing your job in your near retirement you should be more conservative with your investing. You probably should be adding those ONS now. If you feel secure in your job until the moment you retired than I was I was one hundred percent personally one hundred percent stocks right into the moment I pulled the trigger and what my job and that and only then did I at bonds but again that's a matter of personal preference to I have a pretty high risk tolerance a lot of people even if they're secure in their jobs say I want to begin transitioning to bonds five years out or whatever and that's that's fine fantastic response thank you. Yeah I was GONNA ask you to explain bonds but then you just did so never mind but I am not super excited about bonds. Because they don't have an aggressive growth rate. Typically they have a non aggressive lose money rate which is really nice on a day like Thursday but again I can't time the market I would love to know when the market's going to crash so if anybody wants to pull that one thousand nine hundred seven lady and tell me when the market's going to crash and guarantee it you gotta guarantee it. I would like to put my money out the day before and then buy it back again the next day. So if anybody steps forward tells you think they could do that for you. Mendy would I would. I would shut down the microphone in. Close my ears. Yeah Yeah I don't know what I'm just not selling and I'm also not paying attention to it. And maybe if you're freaking out about the stock market maybe you just close up the browsers and look at things that aren't talking about the stock market. Look at Pinterest. Pinterest will give you lots of great recipes and funny things that you don't have to worry about stock market not a lot of stock market conversation on Pinterest which is Kinda Nice before we get too far away from talking about the market and quoting Jim. The market always goes up. Eventually I would like to point out. There is A. There's a website it's macro trends dot net. I will include a link to this particular chart in our show notes. It's a really helpful chart to see the historical annual data on the stock market. There are one hundred and five years and I was thinking about this. Do you know when the stock market started because this this chart starts in Nineteen fifteen while the very the very first stock market was in In the Netherlands in Holland in like the fifteen hundreds of small. But you're talking about the Dow if you're talking about the Dow Jones Industrial Average. I I WANNA say it was eighteen ninety something eighteen stocks that began. I actually I actually talk about that in the style. One of the early Boatswain's DOC series. I actually have the actual numbers but yeah we've got a pretty long history of it. We have a long recorded history of it. Starting in Nineteen fifteen on this link that I will share in the show notes in one thousand nine hundred fifteen. The stock market closed up eighty one percent. It started off at seventy four percent and went to ninety. Nine percent percentage wise. That was great. That's like twenty five dollars so that in one thousand nine hundred dollars. That's a lot but if you scroll through this I was writing an article for the bigger pockets blog and I was scrolling through this and like a positive year is a green number. A negative year is a red number and I'm scrolling through like there's a lot of green. Oh there's a red lights green red lots of green red. There's a lot of up years and only a few down years and I looked. There's in one hundred and five years. There's thirty five. Years and a lot of those years are single digit downs. Like two thousand fifteen was down two point two percent. There's some down years I don't really want to on average the you know. The market goes down one out of every four years. So twenty five percent of the time roughly and that of course means seventy five percent of the time. It's is going up so the winning bad is that is going to go. And there's lots of reasons for that not the least of which is that. The market is not little bits of paper. Bits of data that are traded although it is that when you own the total stock market index fund you own a piece of every publicly traded company United States you own the economic power of the United States and everybody in those companies from the factory Florida the CEO is working to make you richer and to beat the competition. And you don't have to worry about which ones are gonNA fail. Some of them will because you own them all in the ones that fail just fall off the index and the most they can possibly lose. Zainab sent one succeed. There's no limit to how high they can go. So it is a winning formula. The market the index funds. That we describe our what I'VE A- term that I'm very proud of that. I coined ourself cleansing because losers fall off the new companies that that get started and build up her get at it and the companies that that succeed are are left to run as far as they can possibly run. I really can't top that I can't top that at all. You know I'm thinking about a couple of different different last things that I wanNA make If you'll indulge me of course we've talked a couple of times about my now somewhat famous line that the market always goes up and that of everything I've written I think that's got the most pushback and you know I've had people say things like well you know at some point. The Sun's going to expand into a red giant Gulf theater and burn to a cinder. How will the market do that well? Then the market's not going to recover their there. You have to understand their what I said. The market's always going to go up contingent on the United States continuing as a viable economic country. And if something were to happen the derail that yes. The market's not going to recover so let's take a look at corona virus as an example the only thing the only way the market's not gonna go up at some point after this is run. Its course is if in fact the krona virus turns out to be the next plague the next black death until sixty percent of humanity. Now if you think that's going to happen then invest. The market's not going to recover is not going to go back up again and bution be invested in the market. Now I can't think of any investment. Your House isn't going to be worth anything. Then your investment properties are GonNa be worth anything. Nobody's GONNA care about gold in deeper yet. They take guns and ammunition and I know people. I have friends by the way who believe that. Civilization is going to end and and they are building off the grid houses in in in remote areas. And so if that's your belief system you certainly don't want to follow the path that I outlined but if you don't believe that if you believe that the. Us is going to continue as a viable country viable economy than the market will always go up if you believe that this disease will. This corona virus will be solved and controlled at some point in the market will go back up man. I think before we scare everybody with my black deaf analogy. It's important to realize that back in thirteen fourteen. Hundreds they had no concept of the germ theory of disease. They had very little concept of medical attention. where even basic sanitation? So the idea that something of that nature happening or a whole lot more remote than they are. They were back then. When did they discover you had to wash their hands between patients like that right? There saved a lot of Transmission and that was like what the twenties or the thirties and that was a mendy but but disturbingly recent they used a certain is to cut people open without bothering to clean their hands between surgeries in. Oh yeah that's gross. Just they didn't know yet. You had a tweet. The other day that I thought was just so brilliant and then I read your Mr thing and I realized that it was straight from the article. You said this time is different right. This market crashes different and you know every market crash feels like this time is different and someday if it truly is the nothing will matter and that is so true. This market crash is not any different. Just like you said it. Well I mean it might be like maybe in all the rest of the country the co- vid nineteen mortality rate is between two to four percent. Ish which is what they are currently quoting but maybe in America it's going to be eighty percents. Probably NOT. What are the odds? That every other country in the world is going to be more immune than America is one and if it is eighty percent than in won't matter whether you're invested in stocks are not invested in Stocks. Gets it just is so the other performing portfolio? Because you'll be dead yeah the other illustration they use is in new guys and most of your listeners are way too young to remember this other than district books. But I'm old enough that I was. I was very young but I was alive in nineteen sixty three during the Cuban missile crisis. And that's when we came right to the brink Gupta all out nuclear war the US and the and the Soviet Union hurling nuclear missiles in each other that certainly would have been the end of both those countries. There is an argument with the fallout. It would have been the end of civilizations across the planet. What a wonderful time to buy stocks because if the nuclear war happened it doesn't matter if the nuclear war doesn't happen and of course we know from history it didn't then you have this growth of of stocks from nineteen sixty three until now may just incredible wealth created over that period of time. So it's the same thing now. If if the krona virus kills eighty percent of us doesn't matter what you're invested but doesn't than stocks are going to continue to do very well and every time to buy a what a great time to buy and twenty years from now it'll it'll be worth far more than it is today. I love the way your mind works on this stuff. Not everybody not everybody agrees with these guys talking about Scott. I love the way your mind works. Don't ever sell now. I know Jim to be a very very intelligent man. But that is not one of those. Oh it took me a lot of time to come up with this idea. Don't sell the end but the the arguments the amount of the arguments pushbacks and the models that you've developed. Jim took combat all of those arguments against it. I think is what really makes us such a special contributor to the financial independence community with your with your book the simple past a wells those. That's that's what I think is really the unique about you and your perspective y. Or so grateful to have you on the show today here in the state when everyone's freaking out about the market or the other advantage that has got is that if I'm wrong we'll all be dead and nobody can hold me. I and if we're not all dead I will have been right. I think all these people that are arguing with you just want to argue with you on the off chance that they can prove you wrong. I prove Jim. Rong chip doesn't care no I you know I mean again untold. Go ahead and prove him wrong. You're not going to because he's not wrong. I mean I've got you know many along along those same lines. I do I used to and I got so many of these. I finally put it in this famers of how I feel about it. But here's a link to this article written by someone so and this person disagrees with you. Tell me why you're right. And they're wrong will no. I'm not GONNA do that. It could spend my time doing that. I Have I've written a book and I've written a blog in those two things. I've expressed my ideas as clearly as I know how. And I presume that this person whose you linked to as done the same presumably they have expressed there. It is as clearly as they know how you can read both and you decide. I don't care it doesn't make any difference to me if you think that person's ideas are better than mine than go for it. I am just binge. I've only ever tried to convince one person and that's my daughter and finally I succeeded. And so my mission stun Wales things would have to say as worthwhile and they WANNA come along for the ride and it and it enriches them. I think that's wonderful and I'm delighted by it but for those who don't I mean God speed. I don't care do it everyone. Do I mean if you WANNA keep buying individuals to access them by individual stocks? It did just makes a better market that in fact the fewer people who follow Mike. Pass the better off. Finding a personal of you. Want to go individual's tax. You WanNA sell your stacks panicked and dragged the breakdown so I can buy it cheaper. You go for it and it's all right with me. Okay so jim says probably you should say the course. But if you don't want to do what you want okay you do do you there you go you do you with Jim Collins from Jail College Age Okay Jim. We have a segment at the end of every show called the famous four. But it really doesn't apply because we've already heard your personal story where we ask your your favorite book and all of those things. So we're GONNA switch it up just a bit and say. What is your best piece of Advice? People who are just starting out investing. Oh I mean it's the same all the time you WanNa you WANNA spend less than you make and use that surplus to pay off debt if you have dead and get rid of the debt and if you don't have debt or once the debt's gone then use that surplus to invest and a favourite investment vehicle is Beedi SAS or be ti Through Vanguard and put as much as you can and whenever you can don't pay any don't try to time it don't try to say I'M GONNA wait till it's up lower just put as much in his as you can whenever you can and keep doing it over time and you'll take advantage of the drops from the APP. And then you'll be there for the for the rises that happens in Christie Shannon of of Millennia Revolution has a great line. That I'm probably not gonNA quote exactly but as some of the effective. It has never a good time to buy stocks either. They're too expensive. Because market's going down or the markets dropping and and they're losing value so it's never there's never ideal time buy stocks. You know. It's always before this crash. People were no I. I can't buy now because it's going up and now again by because is going down and nobody knows. Nobody knew how I was going to go before. Nobody knows. How low is they? Just keep by. Don't pay attention. Just keep buying be like mindy though like Wendy ignore it ignore it ordering the money in and then they invested forever and just dry out a little bit. You need when the time comes to Lamar job done. Well I can find this as well on on the On the show notes episode twenty at bigger pockets dot com slash. Money Show Twenty. But where can people find out more about you? Let's let's say that one more time for people who are listening to this episode worthy. I'm on twitter and on facebook but the big one is the blog of course which is jail Collins. An Age stands for New Hampshire where I was living when I started the so jail Collins h dot com and you can also find his book. The simple past the wealth on Amazon and that's constantly quoted as one of the favorite books by guests are on the bigger pockets money shows. I'm sure you've heard that mentioned if you listen to a variety of episodes but one of the premier one of the the key books to read in the financial independence fears definitely. Check that out if you haven't yet free plug for you either and I am delighted to hear that it. It gets such positive comment from your listeners. And as a forward from The the one and only Mr Money Moustache as well. I believe right. Yeah absolutely absolutely and he did a great job one I love. I love the forward erode. Okay Jim Thank you so much for taking the time today to share your groundbreaking advice of don't sell advice. I think sometimes it's really reassuring to have people hear it from somebody. Not Everybody can just send you an email or call you up and be like. Hey Jim you wanna chat for an hour about the stock market. So He's told call one number two debates just call him and debate him he thrives on that kind of stuff he really likes to. Am phone calls at one? Eight hundred call me anytime dot com. Okay I'm worried about the stock market. Where can I get more money to throw? Edited strapping okay. But no I really do appreciate this. I really think that a lot of people are going to send us emails and Youtube saying you know what it was so helpful to hear this or that you would ask to ask. It's always always fun hanging out with you guys and kicking these things around. It's I always have a good time. So thank you but great. Okay well thank you so much. Have a lovely day and we'll talk to you soon. Hopefully we'll talk to you in like six months when the stock market has just crashing through the roof. Or I'm sorry going through the roof so it's so high not not crashing. I guess that's the wrong word. I think okay okay. We'll talk to you later. Bye-bye Okay Scott. That was Jim Collins from Jail Collins. H The author of the simple paths to wealth. What did you think of today's show? You Know I. I'm glad we brought him on there instead of US talking about it because he better advice than what you're I have even though it's it's very similar right. We're all doing the same thing. All three of us were staying. The course or not selling any investments and we're continuing to put our excess cash into the stock market right magic formula there and again we're protected because we've made long-term good guy a smart financial decisions of spending less than we earn building up a reserve. That's appropriate relative positions at loved his thought process. On how you need less of that as your financial position accelerates and just continuing to do what we've always done because it's recession proof and thinking over the very long term anyways well and it'll over the very long term I think is a really great point. I am not in the stock market so that I can cash out tomorrow. I am older than you but I'm not sixty five so I don't WanNa take my stocks out until I need them. I have a job that pays my living expenses right now. I don't need to access my stock market funds so when the market goes down. I just regret that I don't have more cash on hand to throw into the market. At that time I agree completely. You know and we talked about what happens if you are closer to sixty five. And that's why you move your allocation more towards bonds as you get closer to traditional retirement age Let's talk quickly about real estate however because I know a lot of the folks that listen to the bigger pockets money podcast also own rental properties right and when I think about rental properties I try to apply exactly the same philosophy just discussed today to my rental property invest. I'm investing for the long term. I believe that over. Very long period of time my rental properties are going to appreciate in value and my cash flow is going to grow as rents rise with inflation right. Expenses obviously also increase the flation but mathematically that translates to greater and greater cash flow growth over the very long term as well the difference with rental properties and stocks. In this context. Maybe there's even a difference but one of one of the potential problems that investor will have will run into is you've got capital expenditures and you've got vacancies to deal with and potentially reductions in rents so the problem. The fear that I know a lot of real estate investors will have if we are in fact entering recession. We may look silly if there's isn't even recession bounces back or look like geniuses one of those too but you know you know the fear that an investor has in that environment is Hayes. My cash flow going to evaporate in what am. I going to do to sustain this property right and that is why when we invest in real estate we invest with a reserve. Right when I buy when you buy your first property I always say the same thing. Bring your down payment. Bring your closing costs bring expected repairs and bring ten to fifteen thousand dollars in cash reserve. That you're going to set aside or more if you're buying much larger property that's larger than the average but by bringing appropriate reserve and consider that part of your investments. And for me. I only take cash out of my rental portfolio if I if I'M DUMPING MONEY INTO BANK. That's an excess that reserve so semi reserve used to be thirty five thousand dollars across my portfolio right when? I have thirty six thousand dollars in my account because my cash flow that's when I'll begin taking a distribution make sense and that allows me to stay in the market forever. I never have to sell can't sell I can refinance. I can buy more but I I. I am trying to play the exact same long long term philosophy and just like Jim said if this virus kills off so much of the population that there's a a panic you know a over supply and demand of the population. We've all got bigger fish to FRY and you shouldn't be in real estate. You're afraid of that reality but in in most I think what I'll use the word reasonable scenarios that we can come up with you know I. I believe that my approach long-term to investing in real estate in parallel with my index fund investments will will will be a strong bet and I'm going to capitalize appropriately for that. You Know Scott. I've said this before and I'm GonNa say it again. The whole reason we started this podcast is because the number one question that we would get in the forums is. How do we start? Investing in real estate with no money bad credit and the answers. You don't let's fix your no money in bad credit situations so if you have no money you should also not be in the real estate market. At this time you can be learning. You can be saving if you've got debt you shouldn't be paying that off or as we heard on. Craig CURL UP EPISODE THIRTY Five. You can use that to your advantage by saving and then investing and using that to pay it off. Craig's says it way better listen to his episode if you haven't yet but if you don't have a healthy reserve account you should not be purchasing properties where you are providing housing for other people that said there are times that you'll have to dip into your reserve and that's fine. That's what it is there for. But you need to have a healthy reserve and I love Brandon Turner but I don't agree with him with his whole how to buy real estate with no money. Well it maybe it's none of your money but you need to have something that you can pull from right now. Cove is an issue. They're closing schools. They're closing locally. They've closed the REC center and the library and all these things they closed the NBA. They Mount Everest. All these things are going to have ripple effects what happens if your otherwise great tenant loses their job they work at the NBA Arena near you and now. They can't pay their bills because they're not getting paid. Are you GONNA kick them out? Who is WHO's GonNa come and live there? I think I think what you know with this. We we Mindy Mindy and I are extremely passionate about helping you guys succeed financially over the long term and we know we we hope that through this show that you've learned some great habits and great ways to deal with money and if you're new to this show maybe you're starting off in a little bit tougher of a position. If you have worries find us on the facebook group at bigger pockets money reach out to us on bicker pockets. Email us right. We're here to help in in for. I want to make sure that if this is recession if this is a painful problem for people that we are personally privately as individuals there to help you if you have questions or the group. Is there for you? The facebook group pockets forums right. This is where we wanna be helpful and where we WANNA be useful. It's all free. We want you to succeed and have a successful financial outcome. Stay the course. Continue that journey to financial freedom so please use every all the resources we have and know that if you're starting out now in a rough position and we do go into recession you're going to be in for a slog but we're still there to help even if that's the case yet and like you said Scott you said on the facebook group that's filled with almost three thousand people who are doing it just like you. They have questions they have answers to your questions. They've been there before I can tell you what worked for them or they can even just say. Hey I hear you and I'm sorry you're going through this. It's filled with people who are on the same journey in various different spaces. And it's it's really been a great group so far in the show notes today which is bigger pockets dot com slash money. Show one six. There's links to my email mindy. A BIGGER POCKETS DOT COM and Scott's email Scott bigger pockets dot com the facebook group. All the things we talked about on the show today with Jim and I we did kind of make light of the situation. Oh just don't tell but you know I can say that because I've been through several crashes. It's Scott's first crash and he's still saying stay the course and if it was worth it to you to buy the thing at X. dollars three weeks ago it should be even more worth it to you to buy it now at its current lower price so individual stocks index funds are the preferred method for almost. Everybody we've ever talked to but even rental properties I've had lots of people sending me notes. Hey is now a good time to buy well? What is your local market? Look like we're in Denver Denver's pretty hot market. Denver has been on a tear. For what ten years? Scott Yep if I had an opportunity to buy a property. That was a good deal three weeks ago I would continue to go through the property through the process and close on the property. Because it's going to be a good deal to me is the value. GonNa go down. I don't know I don't have a crystal ball and I can't tell but in our market it's so hot. I can't imagine that it would stay down for a long time. It is now a good time to buy is now a good time to sell now is a great time to consistently but not too aggressively work towards your long term investing and financial goals. Now is a great time to not spend more than you learn to continue to take to keep control of your budget and to continue to work very hard at your job and continue to pile up that cash and invested appropriate index funds real estate. Or whatever it is that you decided to invest in it now is a great time to end because I cannot top that at all. I wish we get out of here. We should from episode one hundred sixteen of the bigger pockets. Money is Scott Tonight Johnson and we are encouraging you to stay the course.

Jim Jim Collins Scott Trench Scott Warren Buffett Mindy Johnson Emergency Fund facebook United States Mr Market America chairman Tom MR MONEY Wi Good Emergency Fund Anna Gonzaga
EP44 Margin of Safety

Value Investing Podcast

22:41 min | 2 years ago

EP44 Margin of Safety

"This is volume vesting. I'm your host June Kim in this podcast. You'll learn everything related to volume best. It's far better to buy a wonderful company at a fair price, then affair company at a wonderful price. Helo following esters welcomed another episode of volume vesting, I just started this podcast with a coat from Warren Buffett, and this is very important concept. And also it's going to be related to the topic that veer about to talk about in this episode in the last episode. We talked about economic mood, and that is very important concept. If you are trying to understand Warren Buffett's investment philosophy. So if warm buff wants to make an investment he looks at the following criteria. Number one. He wants to buy a business that is simple enough for him to understand the business model. So this is also known as circle of confidence second he looks at the business with Europe will. Competitive advantage, which is also known as economic more every discuss last time. Third. He wants the business with able and honest management team. Lastly he wants to buy business that is selling at a fair price. So this is also known as margin of safety since we talked about economic mode, which is one of the important components of his investment last fee. I decided to talk about margin of safety in this episode. This is a very important concept for you to understand if you're trying to get a grasp of how Warren Buffett invest his money for the long term. So I'm so excited to talk about this topic. I think there are just couple of things that I wanna talk related to margin of safety, and let's just go over them. But before we do that. I just wanna give your creek. Disclaimer as always that this podcast is for entertainment purposes, only, and it is your responsibility to conceal. Salt with your investment professional for any investment decisions. So we have for their do. What are we get started? As I mentioned in the intro. Our topic today on the show as margin of safety. So why don't we define what it means? So that everyone is on the same page in terms of margin of safety concept, so margin of safety arises when there's a difference between intrinsic value of the company and the market price the larger difference the larger margin of safety. So let me just give you a quick example just to facilitate you're in the standing if you're trying to buy a back, maybe from department store, and you know, that this bag is worth one hundred dollars all the time. And you know, that if you buy this back by paying one hundred dollars, you know, that you can resell his back to the people for exactly the same amount. Let's just assume that for the sake of simplicity. And one day, whatever the reason that department store goes on sale for a lot of their items, including this bag and this bag is on sale, and you can get this count. And you came by now at sixty dollars. So you knew that there's a difference between intrinsic value, which is one hundred dollars and the current market price, which is sixty dollars. So there's forty dollars gap, and you buy this back because you know, for sure after the sale ends, you can even resell this back to other people for one hundred dollars. So that's kind of the concept of margin of safety. You can apply exactly the same logic. When it comes to buying stock because for every stock there's a company behind so if you know how to assess the company's interesting value, and if you follow stock market and the market price of the company if that stock prices significantly below entrance value, then that means you have high margin of safety. So that's the definition of margin of safety. And is sounds very simple. Belinda tell you right up front that this is not easy concept to implement when you're making your investment. So what I like to do for deceptive code is to talk about why it is so hard for an average investor to implement this strategy when it comes to buying stocks in the stock market actually before we do that. Why don't we go through several approaches to calculate and to assess intrinsic value of the company because in order to calculate margin of safety. You have to know two things number one, you have to know the stock price which can be easily obtained by just going online and check the stock price, and you have to know the intrinsic value of the company. So you need to know how calculate intrinsic value. I've already covered this topics in the pass this. It's some not going to go to the details of each approach. But what I like to do is like to just go over each of the protest critically. So that we can refresh our memory. I approach is coal. Discounted cash. Flow analysis and this approach requires a lot of a sumptuous for your calculation, for example, you have to know how much cash flow this company's going to generate. Let's say in the next five years or ten years, and once you forecast this cash flows, you have to discount these cash flow back to present value for that calculation. You need to come up with discount rate appropriate for discounting future. Cash flow back to present value. So there are a lot of assumptions you have to make. But theoretically, this is probably the best method. You can use for intrinsic value calculation. The second approach is called ratio. Which is quite simple. You don't maybe have to any calculation if you want to use just trailing value of their company. So for example, if you want to calculate price to earnings ratio, you can simply use the Kerr market value of the company, and for the denominator, you're using trailing twelve month earnings than you don't actually have to do anything, but you can just go to any stock website and you easily find this metric by the same token, you can get easily priced to boot ratio price to cash flow ratio. And in some cases for the denominator instead of using trailing twelve month metric, you can use one year four looking of forecast, for example, if you want to calculate price to earnings ratio by using one year for looking earnings, you can just do that. And a lot of these numbers available Easley on any stock related websites. So there are pros and cons between discounted cash. Flow analysis and racial based approach that third approach you can use. Is simply comparing the market capitalisation against the boot value on the ballot shit. So this approach is also very simple because you can get this book value number directly from the balance sheet easily you might have to make some judgments in order to come to better value number, but it's very simple the loss. One is little bit tricky because this is equity approach where you're trying to says intrinsic value of the company by predicting how much are their competitors are willing to pay for the business that you're interested in buying because if other competitors are interesting buying or large companies are interested in buying this company. They usually have to pay high premium on top of the stock price. And usually this valuation is therefore higher than using other approach. So these are the four main approaches when it comes to assessing intrinsic value of a company. So these are the technical details. You might have to study by yourself and understand fully water. The pros and cons of each approach. But what I like to do for this episode on today's show. I like to talk about why it is so hard to implement margin of safety concept. Even if you give arrived the right intrinsic value. So let's just go over them and see how you can cope with this kind of difficulties. So first difficulty or hurdle that you're gonna face when it comes to applying margin of safety is the fact that all this intrinsic volley calculations are very prone to what assumptions you're making. So for example, I mentioned that if you calculate intrinsic value based on discounted cash. Flow analysis, the final intrinsic volume number is going to vary quite significantly depending on which assumptions using for example. If you're using let's say ten percent his rate versus twelve percent discount rate. Even though is sounds very similar only two percent efforts. But it's going to make a huge difference in the final number also depending on how you wanna forecast future cash flows of that company, your final number is going to be different. And if you use a terminal volume approach, which is very common for discounted cash flow now. Alice's? You always have to come up with some terminal value and diwan is also very subjective. Second hurdle that I want to mention is that margin of safety concept is very subjective concept. What I mean by that is let's say, you know, interest value of their company, then how much margin. Do you on apply when it comes to buying their company? Do you want to have ten percent margin or twenty percent margin thirty percent margin or even more because less the stock's intrinsic values one hundred dollars as stock price fell below? Let's say eighty dollars. So you have approximately twenty percent margin. Then is it the right time to buy stock or do you want big oh margin. Maybe forty percent of fifty percent, and you just wait until you secure their margin. So this is kind of the question that you have to ask yourself when you're buying accompany from the stock market because the company stock price may not go below the threshold. They use said, and you may not be able to buy the company at all in the future. So there's a risk of missing out on buying their company versus there's a risk of stock. Price falling below whatever price you're paying. So you have to determine what is right margin for your investment. Third reason why it is hard to implement margin of safety concept is because in require scenic Amada patient from you because you have to wait until the stock price falls below whatever margin you said, and sometimes it doesn't happen for five years. Maybe six years or may never happen at all. So it requires cigarette. Compati- so that's why I'm saying it is not easy to implement. So we just talked about three reasons why it is not easy to implement this margin of safety concept in a daily vestments situation. So let's quickly go over them. I interest volley calculation is going to vary depending on which assumptions, you're using. For your volley calculation second this margin of safety concept is very subjective. And people may have different threshold for whatever margin date. They won ten percent twenty percent. And so on. Third a requires significant amount of patient because you have to wait until the stock price falls below your threshold. Now what I want to do is. What can we do given all these difficulties when it comes to implementing margin of safety? The first thing that we can do is when you can't quite interesting value instead of just driving dangerous value number to a single number. What warm buffer recommends for the most part is just come up with a range. So let's say you are interesting value ranges, ten dollars to twenty dollars for certain stop. And if the car market volume falls between this range, then maybe you don't want to buy the stuff because you are not securing big enough margin for your safety. But if the stock price falls below ten dollars, which is your minimum intrinsic val- calculation. Maybe you can secure enough margin for your safety, and you can buy stock at that point the second thing, you can do is just pass on whatever stock that you have that skated if. You're not sure about that investment. So if you're not sure about what this business is doing, and what the business model is then you can just pass on their investment. If you're not sure how to calculate intrinsic value of the company you can pass on their investment. If you're not sure that this companies selling below entrance value, then you can pass on that investment. If you're not sure that you don't have enough margin of safety. You can pass on that investment. You can just wait and wait and wait until you finally get to the point where all these criteria. Had check box checked. The third thing that we can do is create a watchlist because that's what I do for my investment per folio. What I do is. I put all these stocks that I'm interested in in my performance watchlist. And what I do is just I just don't do anything until something really bad happened to these companies. And usually there's a scandal that's going to track down to stop price of certain company. And I looked at the situation and try to SAS if a really warrants that stock price Trump that happens all the time even for really great companies. So if that type of scandal happens what I do is I make the SAS men, and if the current assessment shows that stock price drop is now warranted on the that circumstance than I by the company when I believe that the cursed out price is below intrinsic value significantly. Four thing that you can do a don't check stock price all the time. Because if you are checking stock price all the time in every day, then you're going to be influenced by Mr. market, which is done at the concert discussed in the previous episode. So don't check the stock price all the time every day because you're going to be fluent idea in a negative manner. So you can do in order to improve your patience, and temperament is just you make yourself occupy with something else. Maybe do more research on other stocks or do other activities because that's going to be a lot healthier for your mental health. And also it's going to be good for your portfolio management because then you going to allow yourself to develop the patients that is required to be successful investor. Because as I mentioned if you want to implement the margin of safety concept, successfully you need a lot of patients, and you cannot be really patient if you're watching stock market every single day, and you get his tractive by all this media news articles. So I think those are the things that we can do in order to implement margin of safety. But it's always easier said than down and a lot of people know in their head that what they have to do. But when they lose money significant amount of money or even gaining some profits. They just act irrationally, and that's not really healthy for their performance returns. So let's just keep that in mind. I personally think that knowledge is very important. But what's equally important is the temperament and discipline? Even if you don't have the right temperament for the stock market there so way, you can develop your mental muscle. And that's what I liked to do through this kinda podcasting because as you listen to the same thing over and over again, you probably will be able to develop the muscles that. Are required. And that are necessary for it to become a successful in the stock market. And I'm telling you all the time that you need to do the longer investing. You have to develop patients, and that's what Warren buffet in. All the other legendary volume Besters have been telling all the people, but what's quite interesting and funny is that people don't listen to these legendary volume Besters, I don't know why. But that's what happened to a lot of people, and that's just a nature of human being. So if you develop this kind of temperament and muscles mental muscles in order to prevent yourself from doing stupid things when market crashes or market goes up significantly, then you going to be way ahead of other people because other people get super fearful and either sell their stocks when you know stock post. Down. I mean, I'm not saying that you should ask sell the stocks at all. But you have to make the Cessna n- in an objective manner. Not based on your emotions. So that's going to be a huge advantage for you and give you upper hand in many situations. So let's just take a look at watt warm of at has done so far because if you look at fifties or sixties warm buff Ed purchased companies when they're selling at very very low price at one point Warren buffet was able to Cuba a twenty percent of his per folio by purchasing stocks of Dempster meal. So this is the company that has been in decline for quite some time, but warmth of purchase this company. Probably twenty five percent of the value of the company. So this is quite excellent. The price warm of paid. However, this company was obvious to the peer rate over time. But warm, but was able to recoup whatever investment that he made. And also he got an decent return from this company. But this is kind of the Sikh up approach that here da- pted at the beginning of his investment courier but later on Warren Buffett switch his approach. And now as I mentioned at the beginning of this podcast episode. He saying that it's far better to buy a wonderful company at a fair price than affair company at a wonderful price. So he's arguing now that you have to pay maybe a little bit more for wonderful company and over time I'm saying like maybe more than ten years. It's going to bring you a lot more returns. And Charlie Munger once said that you just have to be smart one. If you implemented approach, but if you trying to implement seek our bud approach, then you have to be smart all the time. Because once you buy the company, very, very cheap price. Then you sell the company, and you get the return, but you have to find another company like that over and over again in order to increase your perform value. However, if you buy wonderful compainies, then you don't have to do anything, you just let it run by self, and it's going to generate tons of money for your portfolio. So that's what I wanted to mention related to Warren Buffett. Okay. So I think we talked about a lot of things with respect to margin of safety. I hope that this episode was helpful for you. As I mentioned at the beginning of this episode. I was able to complete the development of the website for this podcast. So we have platform you listen to this podcast. You can just pay a visit to their website. And let me know if you have any comments related to to website that we have for this podcast. Thank you for listening and cenex time.

Warren Buffett right margin Europe investment professional June Kim Helo Charlie Munger Belinda Easley Alice Compati Mr. market Amada Cuba Ed Dempster one hundred dollars
The Tom Dupree Show   8-9am   3-14-20

The Tom Dupree Show

52:07 min | 1 year ago

The Tom Dupree Show 8-9am 3-14-20

"Winging paid program on six thirty wwl a this is the time to free show on newsradio six thirty WWL AV and WWL. Ap Dot Com. Well I guess you alive not a on your shades. You know what the call if you want it. You welcome to the Tom to pre show. What do you got a little bad finger there? Yeah that's a good intro Yeah just a little bit. We got some things we're GONNA talk about. Obviously we've been in a very bearish scenario with stocks. Horrible things going on in terms of the corona virus and preparations for that. But we're going to talk first about Some things that you should know about bear markets. And so this week. Let's let's recap this this week. Real quick we need to redefine the WORD RECAP REDEFINE RECAP REDEFINED. Recap right after this war. Yeah Yeah Recap I don't know what is a good word is right so it started on Monday. You had the surprise announcement from the Saudis in Russia. You had everything going on there with all price. Oil prices so pre-market trading they have circuit breakers circuit. Breakers that go on during the day with trading too which is it stops the market from trading when it hits the circuit breaker. Right exactly it halts for a little while so you had a limit down which is five percent pre-market Sunday night. Then you had a limit down Wednesday night right then. You had a limit up Thursday night right so I mean they're just incredible volatility You know Thursday was though the biggest. You know that there's been headlines. You know biggest point drop you know since such and such Thursday was a new one. I mean that was a ten percent drop. That's the biggest percentage drop since nineteen eighty-seven so it was a big drop Thursday Yesterday we had almost. It was over nine percent up up yesterday. That's after trump's announcement that they were gonNA commit fifty billion dollars to the Corona virus effort. Yeah and he had all the CEO's of the different pharmaceutical companies in Walgreens. Getting like that and government officials right and getting the testing out there which wasn't even after it guy and I were sitting watching tracked end of trading as each CEO is being introduced the more it was just ratcheting up like a straight arrow. This isn't against trump. But we all know you know when he came on the air on Wednesday night was it Wednesday night. He gave the talk. It was in of course. Thirsty was just horrific. Yup and they said a lot of people are saying like what trump had to say Wednesday night he was just wasn't real confident firm and his plans were Kinda vague etc etc. But when he started speaking yesterday. Elizabeth. I headed up on the big screen. And we had the market index right next to it the the market dropped about three hundred points but then when all the CEO's were being introduced engine stepping up and what they're going to be doing in the unity and the collaboration you know it was just out in the market went up. What seven hundred fifty points or something during his talk right? Yeah and it closed up. You know nine thousand nine hundred points for the day. Yeah something like that yesterday So I mean it was just it. Was You know a big day up yesterday? Now what we've been seeing volatility. There's a measurement called the vix volatility index and the volatility index is just been you know at levels not seen since. Oh eight zero nine. And and that's why we're seeing these big moves. Exporting Real Quick Mike the Volatility Index for the listeners. That don't know what that is Vicks. It's it's like the market land. Basically you WanNa get on what the market's going to do. It's kind of like betting on a football gang. Exactly call in Vegas doing the same thing. Is that correct right? And and IT MEASURES OPTIONS. And it's just it's the expectation of volatility and you know expectation of volatility translates to real volatility right So you're seeing the volatility spike part of that. Ver- her on interesting statistic over it's between sixty and eighty percent of daily trading volume is algorithm computer trading. Big Point not being done by human being done by human beings by think about that do you. Ge- amounts of volume money. That's just sloshing around in the system when you have volatility like this that that amount of trading adds to the volatility. Well it triggers it. Doesn't it it triggers and then it feeds on it it feeds on itself which bigger now nowadays because that model was not as active in my understanding correctly like an eight or nine that model of the algorithm triggered trading was not like it is today so even fueling it more than what was going on a no eight absolutely hence the reason for the circuit breakers that you were just talking about right right. Those weren't in place in La Donna at that. I'm not sure I'm not sure if those were in place at that probably were. I can't I can't promise you on that. But the the computer trading that can be these these programs will trade on anything from the smallest inconsistency on pricing on treasuries or on certain sectors very very miniscule pieces of the market and kind of dark corners of the market. They'll trade on but it just it just fuels that volatility right So it's it's interesting you look at what's been going on and the The people are not trading on fundamentals and this volatility based on fear and Simply just sell everything at this point. Sell every out. If if if a certain level is hit the computer says self certain levels hit the computer says by in that creates volatility now where that steamrolls into the the average investors you see this volatility well naturally emotion kicks in and then you have selling on top of that so I if if the market's going up you'll have buyers. Well I'm I need to get in because I'm GONNA miss out if it's going down so the market is dictating the direction that a lot of people are trading right now but when you look at the fundamentals most things are not trading based on fundamentals. They can be extremely cheap based on the underlying business and what's actually their revenues. Were the question is now at this point with shutdown. There's obviously going to be a lowering of expectations in terms of earnings right. Now right right. And that's what the market trying to gauge Is what will the actual earnings look like when they start coming out? Yeah and so. You've had this knee jerk reaction that you know sell now ask questions later and once earning start coming out. You'RE GONNA find that equilibrium You know earnings leader be worse than what the markets expect. That are better Or you know so your that's one. It'll find footing and you'll see more Pricing based on fundamentals. Well you know it's interesting when you talk about the earnings piece that we're approaching everybody's expecting that but yet people are spending buddy like the world is. How many pictures did we see this week of empty shells? Every store across America is just these runs like Oh my God. We've got a snowstorm of three weeks. The coming now there could be something underneath that. What's the impact going to be as it relates to the media industry the Sports Industry Entertainment? They seem to be the areas that are really being paralyzed absolutely. Yeah it's interesting You look at. Let's go and take a break here. Okay okay it's time to pre show newsradio six thirty wwl. Ap This is what's happened to run a virus. Pandemic to prevent the spread of this disease has several measures proved attest warranty check in throughout the day. Losing schools no sporting events hair and take precaution with newsradio. Six thirty. Wla Hi this is Tom. Debris junior if you have your retirement savings in a 401k or four three B plan your money is in a mutual fund more than like in a Mutual Fund. You invest with a group of people and you are affected by the group with which you invest if they are withdrawing money while you're holding tie your investment performance could be affected negatively at the pre financial group invest every account individuals. That means each client owns his or her own group of securities which is unaffected by the behavior of other invest. It is not a pool to camp for Free Review of your retirement investment holdings called the Pre Financial Group at eight five nine two three three zero four hundred and make a no obligation point. Also be sure to listen to the Tom. Depre- show on Saturdays from seven to nine. Am That's depre- financial group at eight. Five nine two three three zero four hundred and DuPrey financial dot com. This is the home of the wildcats. Six thirty wwl a pass back on the Tom. That ratio ten things you should know about bear markets so we've not been in a bear market since the financial crisis eleven years eleven years battling anniversary of the bull market. Was it thirsty or went Tuesday? The all was at Tuesday. I think it was Tuesday. Was the eleven year anniversary. Yeah thank you. Dottie Arabia and Russia just made the Black Cowboy Boulder out one thing. Real quick Guy. You're just talking about the consumer being strong people spending money you interesting to Statistic Household Debt Service Ratio. Which is how much of your income's going to service debt on average the the consumer right now As of the fourth quarter of nineteen stood at nine point seven percent back in fourth quarter of seven right before the financial crisis that was closer was over thirteen percent going all the way. Back to nineteen eighty. It's not been below ten percent points because those people have the cash flow you know they've the consumer is not leveraging up you know you have You have student debt car. You know auto loans but you know with interest rates being low like they are they can service that debt better so that was just entering much more than they words other day. Yeah and one other thing because we talked about it at the beginning of the hour. Kudos to the House of Representatives twelve thirty eight last night. Yes past the the the bill for eight which I think is going to be outstanding and I don't know about you guys but I have received it four or five different emails from utility companies gas electric. You know all these services that we all use in require need daily saying we are here for you in the event that you lose your job. You can't we're not going to turn off your electric or cut off your gas or any of those things. I love seeing how this country is coming together to help each other absolutely in a time of uncertainty absolutely so. Let's let's talk about things that happen. Historically you know in a bear market. Let's put some of this in perspective here because a bear market is a drop of twenty percent or Fr- that's when you trigger a bear market from the most recent high so technically we are in a bear market now with zero debt. Feel either though does it. So you mean well bear bear market kind of Lazy Sleep. They sleep for a long period of time. And they're Klatten. Unassuming is not being the some key things though. Bear markets are normal Since Nineteen Twenty eight there have been twenty five bear markets in the S. and P. Five hundred During that same time there's been twenty six bull markets You break that down over the last ninety one years Bear markets of comprised. Only about twenty of those years put another way. Stocks have been on the rise seventy seven percent of the time. In general long-term stocks have gone up over time So bear markets are normal. Bear markets are corrections bear markets. They're actually healthy for yeah markets because it it weeds out fluff if you will. It gets things to real value. And that's when you know. Long term investors have opportunities Bear markets tend to be short lived The average length of a bear market is about ten months And that's significantly shorter than the average length of a bull market which is on average about little less than three years. That's a that's an interesting point right there. Average bull a little less than three years in. We're coming out of an eleven year bull market right. This one's interesting since World War Two Bear markets have been less frequent Before World War Two There were twelve bear markets About every one point four years since in seventy four years since the war ended there have been thirteen or one about every about every six years. Five point seven years so part of that has to do with information flow. I believe you know the the speed of information. Now that can add as we're seeing this week. Things will react more quickly. When news comes out. I think But it's just interesting. You know the It's been extending out That in the duration between bear markets since World War Two A bear market does not necessarily indicate a recession There have been twenty five bear markets since nineteen twenty nine but only fourteen recessions during that time. So what about fifty percent of the time? There'd been we'll have a recession this time well and and there are in it we could. We could because a global recession is a slowdown in economic growth. So if you have things shutting down you can have a technical recession but that doesn't you know the market's already pricing those kinds of things in to to a large degree And you could have a when well. The market is a leading indicator. So you typically and this this is. This is interesting here. Half of the S. and P. Five hundred strongest days in the last twenty years occurred during a bear market during a potential recession because the market will move twenty percent before. There's actually before that says. Hey you know. We're we're in a recession before. It says the recession ends. Yeah so it moves quicker. It moves quickly and I think you know the economy is so strong right now. The economic indicators are still solid I mean we've got a corona virus. Yeah Yeah which is GonNa you know if the reset we do have a recession. I think it's going to be one of these. Real short lived recessions just because of the corona virus effect on earnings. It'll just slow companies. Just enough my God. We got zero unemployment gas. It's right people are working. They've got cash to spend and they WANNA spend it and you know there might be a whole nother piece to this. Now get to my fantasy mind gets to roll. Thank about the IMF the psychological impact of this self quarantining. And when we come out of IT WOULD WE GONNA. WanNa do stuff stuff. That's right we're GONNA WANNA suspend and don't do stuff and travel at goal. Is this looking at me? Like he's debts on thinking let's Go let's go rock and roll which well when you don't know the markets despise uncertainty exactly. Yes don't know the impact that this virus is going to have. You don't even know this virus Yesterday we're getting going down the rabbit trail one of our fellow employees. I'm sure as listening. It said what makes you all in authority to talk about Coroda. Lot of impact on the market right now but It it's just the cause and result and the unknown of this virus. I was listening to another doctor last night. Talk about how to prevent getting it. And he's saying it's airborne somebody else's saying it surface. They don't know where it's coming. What it's you know so many uncertainties so we just need the battened down and use good judgment and that hope that it goes quickly doesn't have the economic impact so by can bounce back quickly right in. Bear markets are part of investing. You know how this is not something that's new. We're going to have a bear market again at some point in the future but the important thing how we invest. We're not because we don't know what the the economic impact in the short run is going to be from this. You know you can prognosticate on what things are going to be. You're going to have far lefts. You know projections far-right projections. You know optimistic pessimistic. It'll probably be somewhere in the middle And the market is has been it. Looks like reacting very pessimistically very conservatively? You know meaning sell off but when you look at the long term this is when you know you do your research because we don't know what's going to happen with the market so you have to fall back on something which is research yeah You know it's it's interesting you know you look at Jason's week did an article This was actually last week. But what what Benjamin Graham would tell you to do now look in the mirror This is something that you can control. You can't control. We can't control what the stock market does. But there are some things that you can control which is more the psychological side of things Andrew Investment Approach And I love the way you know he puts what Graham you know he summarizes it says forget about the start what the stock market is going to do instead. Focus on what you as an investor ought to do There are the the the the quote from Graham. The investors investor. That's that's key. Here not speculator. Investors primary interest lies in acquiring and holding suitable securities at suitable prices the speculator on the other hand mainly cares about anticipating and profiting from market fluctuations. So the long term investor. You know you he you know Graham. He came up with you. Know he's us. Mr Market The personification of the stock market and Mr Market every day offers to either buy or sell your stock or or sell more stock to you and Mr Market always wants to trade much of the time. The prices are sensible but a lot of time. They're ridiculously high or low and it's interesting. It's a paradox. But when when Mr Market says you know I'M GONNA I'll sell it to you at a lower price. More PEOPLE WANNA TRAE when prices go lower. More people trae those. Y'All that don't know who Benjamin Graham is. He's the father of value investing he is Warren Buffett's mentor. Wrote a book called the intelligent investor worth reading. Stay with us. It's the Tom to pre show. Newsradio six thirty pay. Morgan and Morgan consumer message every home built before nineteen seventy five has cast iron pipes that are failing. Have you experienced water damage? Slow drains or water stain walls. Did your insurance companies say that. Your claim was excluded because the damage was long term or over. Fourteen days are attorneys. Have been successful in overcoming this exclusion. Let our turns review your claim or free if your insurance company denied your water loss. Play all US immediately. Morgan and Morgan Offices Lexington help wanted LEXINGTON DOT com salutes. The employee of the month. The one employee you complete without the others. Let's just call them? Dave what are you doing? Dave we need help with payroll doing squats. Mr Employee of the month. I'm taking your advice. I'm working my butt off. 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The president declaring a national state of emergency Friday earmarking federal aid to states for expanded testing and the economic fallout. Abc's Trevor All is in Washington. Much of that progress will be made working with private companies. The president championing that partnership Friday in the Rose Garden still the effort to make testing more widely. Available is something critics argued. The White House has fumbled the president without evidence if blaming the previous administration for the lag in test kits late last night deal on Capitol Hill. A bipartisan relief package passed by House. Democrats and Republicans to help millions of Americans affected by Corona Virus House Speaker. Nancy Pelosi after the vote did what we said we were going to do. Put families I with page Sick leave sick days family medical leave unemployment insurance. The Senate will take up the bill next week. Michelle Franzen ABC News. Keep that rain gear handy for this Saturday. We are looking at a wet 'n chilly here in the Commonwealth temperature wise. We start out on a chilly note and doesn't really gave much better for the afternoon. Highs expected to top out only in to the mid to lower forties gusty showers also going to be with us all day long so keep that umbrella rain jacket handy from the W K Y T first alert weather center. I'm meteorologist that amortised broadcasting live twenty four seven from the heart so big Blue Nation. This is newsradio six thirty wwl. Ap An iheartradio station. The unemployment rate is lower than it's been in decades that means you're trying to hire new employees. They probably already have a job. Which means you need to try reaching them in a different way. That's where iheartmedia comes in every week. Our radio stations reach ninety three percent of the US most likely when they're on their commute or already at work so start connecting with the qualified candidates. You've been looking for on. Am FM radio. Visit IHEART WORKS DOT com. That's IHEART WORKS DOT com when it comes to your kids. Dental hygiene is very important. Not only for their teeth but their overall health and wellbeing the Bluegrass community and Technical College Dental Hygiene Program on Cooper dry cleaning teeth for kids aged from four to twelve for free. You heard that right for free from April sixth to April twenty nine BC TC dental hygiene program is doing free xrays kindergarten screenings and cleanings and best of all. It's for free. Call eight five nine two four six sixty eight fifty seven to reserve a spot and let us give your kids a smile. That number again is eight. Five nine. Two four six sixty eight fifty-seven finding great candidates to hire can be like well trying to find a needle in a haystack but not with ziprecruiter. It's powerful technology actively fines and invites qualified candidates to apply to your job so while other companies might deliver a lot of Hay. Ziprecruiter finds you the needle in the Haystack. See why four out of five employers who post jobs on Ziprecruiter get a quality candidate within the first day try Ziprecruiter for free at ZIPRECRUITER DOT com slash trial that's ziprecruiter dot com slash trial. This is the home of the wildcats. Six thirty double new way back on the Tom Price. Show WanNa talk more about Benjamin Graham. I think it's so timely with with things that are going on right now I Wanna I wanna just read this guy. I can't say it any better than it's written intelligent. Investors Graham insists don't need superior intellect training or expertise instead intelligence consists of patients independence. And Self Control. You don't have to let the market do the thinking for you. The true investor scarcely is ever forced to sell his shares. And at all other times. He's free to disregard the current price quotation. That right now is key right now. This is why we do so much education for our clients. You'RE GONNA have markets that go down and we've we've been saying that you know for the last several years you know you're gonNA have markets that go down. You have to know what you own why you own it and what the company does and how. They are financially right. When you know those details you can keep your emotions more in check when you see something like what happened yesterday. Happening where you're seeing stocks down ten twenty thirty percent. That's when you can say okay. You know Mr Market. Right now is willing to pay me the say. Let's say for my house. You have one hundred thousand dollar house today. That'd be great deal but let's say you had one hundred thousand dollar house. Market's willing to pay you seventy thousand dollars today for it. Am I going to sell it to them? For seventy thousand. No way no what it costs to build the house. I know what it's worth. So it's no different with a company with the stock when you see the market doing something like that you say okay. I I know what I have. No what the company is. And in our case the companies we own the companies that pay dividends. The dividend hasn't changed from what it was a month ago. Now whenever you get big dislocations in the market sometimes there are tangible things that have changed like with what happened with oil prices. That was a fundamental shift. Know because you know oil prices being at thirty instead of fifty. That's something that has changed as so what we do. We went back. And we're reviewing our exposure to energy and identifying areas that potentially. Let's say they say they do have a dividend cut. What would the potential impact be? Had this conversation with Someone yesterday when we're when we're putting together a an income producing portfolio say you have thirty different positions? Every one of them are paying. Dividends every single company in in our in our portfolio pays dividends. We know at any given time. There's a potential for some a couple of those companies to not pay a dividend unlikely but possible because dividends aren't guaranteed but in a market. Like this where you're seeing big sell-offs with cash and bonds were able to buy more or new companies that are also paying dividends so the net effect on the portfolio is to keep that income stream. Moving up yeah. So diversification different industries and keep the income that's coming from the portfolio to our clients increasing. We talk a lot about this. At Pre Financial Group in our cl- our phones aren't ringing that much because our clients have been very much so educated. And we like to talk about how we are. We EDUCATE AND WE'RE GUIDE. We empower you to enjoy your life during retirement. But when you think about Benjamin Graham and what his principles are he wrote this book fifty sixty years ago. Seventy two seventy two okay. This is a long time ago. We didn't even have a cell phone in one thousand nine hundred seven okay. The Internet didn't exist. You know or had not invented it all all right. Sorry that he want to silence made that even funny at your expense but says he says you should reconcile yourself that the probability rather than the mere possibility that stocks will fall by thirty three percent or more at least every five years. Now I want to share something with you guys. We're in market economy now. That information is instant right. Yes my son who is works in the government works in Frankfurt. He asked me to sign a sit dead. You won't keep up with the What's going on with Corona virus? And everything he said. You need to sign up for this twitter called bluegrass politics. I said okay. That sounds fun. You know so when the governor comes on and gives an announcement about something you can tweet. Now I've never done this guys. I'm I'm from the old generation. This was a new experience for me and I want you to now this past week. I probably got four thousand two hundred twenty three weeks ago and I wanNA tell you some- every one of those tweets terrified me. They created fear and anxiety in this was just about the corona virus. Okay now imagine if I'm invested in the market Elizabeth's over here and I'm in the markets and I'm paying attention to all this news. What's going on in Wall Street in this is hitting me. You would expect taft your investment population to be institutionalized right. It's like a flock of squirrels coming from about fifty direct. A keep calm. Be Calm tune out like I said. I'm not going to sell my home that I spent a hundred and fifty thousand dollars to build for seventy thousand. I'm not GonNa do that but back. God sure left getting my rent. Check every month right. And that's exactly what our principles are. That's what Benjamin Graham's principles our value investing absolutely and one of the things we've been able to help people with so much is a lot of our clients you know they they were coming from a 401k or some company retirement plan and those plans are great for accumulation. Because it those that's what they're set up for dollar cost. Averaging you know the problem is they're not set up to for the distribution phase in life and there's no person to talk to you're GonNa talk to an eight hundred number and they're gonNA give you know they a lot of times they can't give recommendations They'll just take an order But they won't give recommendations and it's times like this where you need somebody that you can trust that that you have built that relationship with you've put them to the test and you've been through ups and downs with and that you will go with them through ups and downs. That's when it's important to have that kind of a relationship as is to help. Keep your emotions in check you know. Philip talks about this lot on the show that you know. It's like a marriage and an our clients and the relationships. We have our like marriage and when I get fearful or concerned or anxious about something it's it's very comforting for me to be able to talk to my wife about how. I'm feeling and you now and just Kinda get it out of my head because sometimes when you live up inside your brain can become a very dangerous dark neighborhood and forty two hundred tart at all. It was vacantly crazy but you know when we do the same thing. Depre- you know in some clients did call you know. And they wanted to know what was going on. But absolutely you know we have this partnership this this forthright ongoing relationship that you know positive yesterday. This one of our sweet dear customers brought us to packages the most delicious muffins. And instead of US saying are you. Okay he was. He was thinking about us that we had had. But that's a relationship that we've developed and he's one of our our customers that takes the market pretty seriously And that that was spoke volumes. I'll I'll love our clients. I mean you're talking about that example. I had several of them to just talking to them on the phone. First thing they say are you all doing. Yeah and then you know we get to talk about the portfolio. What's going on in the market but and it's not just a formality. Hey how are you? It's like really you know interested. How are you doing you have a relationship? It's not just talking about business. Yeah Yeah and so that. That's that's what we want to build with our clients And it's it is a business relationship obviously but there's that personal side of it too that's right half of the S. and P. Five hundred strongest days in the last twenty years occurred during a bear market. It's right was in. That's that's why it's so hard to try to time. The market because inevitably the market will do the opposite or at the different time than you think it will if you miss out on and going memory here but if you miss out on the ten best trading days over a long period of time it reduced your total return about almost fifty percent right. I missing ten days. And that's why we we fall back on our research. Hold the companies that even if they're down in price hold onto him unless something has changed with the business and if something changes with with the underlying business will sell it in a heartbeat. Because that's when you don't want to hold onto something just be holding onto something And it's it's it to. It's incremental moves We're not market timers. And but we were looking you know back in January. Some companies that had gotten expensive. They weren't paying much in the way it did is because they'd gone up in price. Well we were selling them Trimming some selling all the positions of another We did that again. Few weeks ago. and it because we didn't know what the market we didn't know it was. GonNa do this. But valuations looked expensive And so the net effect was you know we we have cash had and still do have cash but it's small incremental moves over a long period. It keeps you from doing something drastic. Either JUMPING ALL IN. You know if you know. Go One hundred percent you know. Hey I'm GONNA put one hundred percent of my cash that I have right now in the market. We don't do that you know I was sell everything. Go to cash. We don't do that. It's incremental moves along the way and that is in our opinion the most prudent way to manage a portfolio. If somebody does call you. Oh Yeah it's always always their money and you can give them your opinion but ultimately if they want to go to all cash than than they do. It happened this week. Sure and yeah and that was okay. Go ahead and take a break here right. Yep You listen to the Tom to pre newsradio six thirty WWL EP. This is what's happened to run a virus. Pandemic to prevent the spread of this disease has several measures proved a tessler shaky and throughout the day losing schools no sporting events here and take newsradio six thirty. Wla Hi this. Is Tom Depre- junior if you have your retirement savings in a 401k or four three B plan your money is in a mutual fund? More than likely in a mutual fund you invest with a group of people and you are affected by the group with which you invest if they are withdrawing money while you're holding tie your investment performance could be affected negatively at the pre financial group invest every account individuals. That means each client owns his or her own group of securities which is unaffected by the behavior of other invest. It is not a pool to camp or free review of your retirement. Investment Holdings called the Pre Financial Group at eight five nine two three three zero four hundred. Make a no obligation point. Also be sure to listen to the Tom. Depre- show on Saturdays from seven to nine. Am That's depre- financial group at eight. Five nine two three three zero four hundred and depre- financial dot com. This is the home of the wildcats. Six thirty wwl. Ap Okay back on the Tom to pray show strategies going forward so this week well really the last couple of weeks Like as talking in the last segment we had sold some things that had gotten expensive. weren't paying as much in the way of dividends. Raise some cash So we are holding you know the the positions that we have currently and then slowly deliberately Diligently you know adding small amounts to certain areas that look attractive Things that have been priced like in an Oh eight oh nine scenario and are still paying good dividends. You know what you could get with a four percent dividend two weeks ago now as a six percent dividend or something like that so we've been slowly adding some positions for the long term hopefully appreciation in price but mo- most importantly for the long-term income for clients and it's cost averaging right mike the when the interest goes up it's not because the company's paying more dividend it's because the value of the stock is down stock prices gone down because of what's been going on in the market now in in a quarter six months time somewhere around there some of these probably they're going to be paying a higher dividend as well so if they're paying a dollar a share in dividends they might be paying a dollar ten in dividends because a lot of these companies have long histories of doing that and will probably continue to do that so it's a combination of the lower price and probably Johar dividend payments coming out right Assuming a fifty year investment horizon you could expect through to live through about fourteen bear markets. That's as much that's right that's right. Yeah Yeah I mean it is. It's a bunch. And that's there's there are a lot of Investors managers. Now out there right now that have never been through a bear market. Haven't been through one That's a good point. There's a lot because it's been seven years seven years and what a blessing that's been ooh You you have to be prepared emotionally and you have to have done your research going into a market like what we're in If not you're scrambling you know. You're you're saying you know you're you're saying oh my gosh what what has what is going on you know emotionally you weren't prepared and you're scrambling trying to get data on what what's your clients own. You have to do it. You have to do your due diligence constantly for environments like this can possibly have conviction in what you own and the competence to if you I don't know I really wonder would have been interesting to be in some of the other offices where the research comes out of New York or London or wherever and and how they I mean you think that we were uneasy knowing what we know and being invested with income based products that the customers are still going to be able to pay their light bill and whatever and they're not watching their life savings plummet without having income coming back in but I the having that conviction is absolutely key Absolutely yeah and Because Tom you've talked before you know when you were you know at another firm you know long. Long time ago they had the the the guru that was recommending. These things in win the market went the other way silence. Yeah there was. There was nothing you couldn't get the information from the source right. That's why we do our own research. Yeah that's the source. Our clients can access the source of the information. There's an ability speak in a research. I didn't have this last week and I wish out did that. I hadn't had time to do. The research did some research this week and I'd like to share it with our listeners and I think it's appropriate and it's something positive versus negative So I finally got an analysis of how the market his done after every epidemic. Pandemic that we've experienced going back forty years in corona virus like the corona virus. You are all in very surprising this is the SNP okay numbers HIV age. Now this is after the first case was announced okay. June of eighty one six months later the market was down point. Three percent twelve months later was down sixteen and a half percent in. Y'All know that was probably the most has been the most deadly pandemic we've had. It's still going on today. We still don't have a cure so I'm not surprised by that number. Let's go to SARS skip. Some of these SARS was a big deal. April two thousand three six months later the market was up fourteen and a half percent twelve months later. Twenty percent the swine flu April of two thousand nine six months later the market was up. Eighteen point seven percent twelve months later. Thirty five point nine six percent and then let's go to murders in which was may of two thousand thirteen. I case six months later market was up ten percent twelve months later almost a seventeen point nine six percent so I don't know most recent was Zeke. A virus which was January of two thousand sixteen and the market was at twelve percent six months later and then seventeen and a half percent twelve months later. Think this Cana- tailing and the reason it's telling to me is simply this. These are scary things for anybody. Sure correct in so the emotion that we were talking about with Benjamin Graham really feeds into these this analysis. You know once we get an idea what we're dealing with you know and let's let's look at the facts right now. We understand what this disease is. We know how to treat it. We know how to prevent it. Okay washing our hands and social distancing and all these different things. I don't know that we do completely understand because I keep like saint earlier. I've heard it's airborne of heard it surface based and I. I don't know that we understand what I do. Think is that it is going to the measures that the government and the public have come together. I think that it's GonNa come to a an an NCAA as painful as that was for. All of us sports fans hobbling the tournament. Those kind of measures I think are going to really cut down in the education once again. The public has been educated about isolates public. Or what is it social discourse social distances thing? I think that the other countries where it's going rampant. I don't think that they have st- because it seems silly. Why did they cancel the final four? When that's what three weeks of why? Why are they that far out keeneland? They've suspended for a couple of weeks. That starts April. Why are we? Why are we doing this as far out? Well IT IS PREVENTATIVE BEFORE. It is an epidemic in this area correct and nationally. So I'm not as concerned from that. Were getting ahead of it we are. We really don't know what we're dealing with if we don't take precautions. Yeah I mean as far as a vaccine. We're not there yet. They're looking probably a year so right on a vaccine. But we're like you said we're we're taking the measures the social dissing the self quarantine all those things to help. Contain it and thank God. They're getting the testing out there on a mass scale now. I do think that that's something that should have been done three weeks ago. Which is I do think God. They're getting it out now yes. So there's there's good news yes things. You're going to get better not worse run. That's my message. Well in in from the market perspective I mean. Obviously we have to caveat. No past performance is not indicative of future performance. That's correct but the companies themselves. What has changed with them right? That's you know that's what we're always. We're going back and challenging feces and You know communicating that to our clients. Hey everybody I'm going to close it out today. You've been listening to the Tom debris powered by depre- financial. Hey give us a call. You can find us on facebook. You can also look at our website at DuPrey financial dot com. Come see us. Thanks for listening right now.

Benjamin Graham Mr Market US wildcats Tom Depre Mutual Fund Russia trump Pandemic CEO Pre Financial Group Vicks Free Review Dave market Elizabeth football
Tony Kynaston - Situation Normal

Shares for Beginners

25:42 min | 1 year ago

Tony Kynaston - Situation Normal

"Welcome back to shares for beginners UNFIL- mascatello listening to this. Podcast will be aware that I normally discuss topics of a general nature only with guests. We don't talk about market conditions happening. However I know there's a lot of fear emotional turmoil game on at the moment so let's pour some oil on troubled waters of US Coniston from the Qa podcast to come back on so that we could ally some of those fees tiny feel faithful at the moment. So I emailed Tony yesterday and mentioned difficult times and Hema email back saying situation normal hence the name of this episode. There's also a few moments at the end of this podcast from Rub Gilmore about the oil prostitution because it's not all about the corona virus. You may remember rob as the first guest ever on this. Podcast dropped around this morning to give us insight into the oil price. What's volatile and why it has an effect on markets so we're recording this on Wednesday march eleven at ten. Am The markets are just opened? We're having not having a look at this before that at this stone. I look at it that often. I guess at this time I look at it. Maybe two or three times a week so on Monday the ASX two hundred. The top two hundred shares on the Australian Stock Exchange dropped seven point three three percent that was after dropped around thirteen percent in the previous wakes the moves on the New York Stock Exchange of being similar yesterday the ASX. Two hundred closed up about three percent after opening three point. Eight percent lower overnight the US is up nearly five percent. These gyrations quite funky and wild yet tony. You're remained sanguine. Why well I think what's happening with. The market's going up and down at the moment in particular is people reacting to stimulus to what Elliott is assigned. What's happening with light as reports of spread of Corona Vars? So they're acting to news and we can't lose sight of the fact that the share market is a market it's people trading with people and therefore subject to human psychology. Which is the study of behavior? And we we need to have a framework to deal with that and the framework which says this is how I approach investing on buying shares in companies and. Yes they tried it on and isn't subject to psychology so I have to have that framework operating in that kind of real environment but I can't be blowing sided. Bought it by human psychology. And I think that's what's happening in the market at the moment is is people are I guess because the news tends to focus on share markets at this time it is becoming top of mind and people's awareness. It's a bit like we've all worked in offices where there's one person who always begins a conversation with have you heard the lightest and that kind of person is kind of dominating the market at the moment and we need to be polite to that person we need. Basically in there will be times when there's big falls and we have to decide whether we're borrow seller and there'll be times when those big Roy's is and we have to decide whether we were borrower seller but that's part of being an invest up and before the podcast go talking about Warren Buffett. And he's quite we need to be fearful when people are greedy and greedy people fearful now. We had the faithful when people are greedy activity last year and they were having the greedy when people are fearful top event this year. I'm not saying that people should be buying into the market at the moment but should have an idea of what will be a situation when they'll bind to the market and I have a framework. I guess I need to put a caveat ramble. I'm talking about here. I'm trying to give people a boss. I'm trying to tell people do and that's different. I think whether you fall is up to you and what we're all about on air podcast. The podcast is to teach people how to think for themselves and to deal with markets. And I have a framework and the framework used to look look for the quality companies and look for them when they're at value and at the moment there are lots and lots of companies in that situation. But what we're doing is well on on waiting for the sentiment around those companies to start to turn. That might not be. It might be tomorrow. It might be in six months time in twelve months time but That's that's what I'm looking for and we talk about what we call a three point. Trend Line graph. Some people talk about moving averages so basically it's when the short-term sentiment in the market overtakes the long-term sentiment in the market and when we see that starting to happen then we'll we'll be a bar in this market but there are plenty of opportunities to to boy. So what would you say to someone? At the moment. I mean it's a psychological thing and because of all the headlines and because of all the media making a big deal about it and Italy's in lockdown if your new to the market and you're not sure what's going on. This is probably a learning experience for you because this kind of corrections happens. Every six or seven years. It's basically wants the sokoll event in the shamrock. So I get used to it as we said before situation normal. These things happen. I think the last one happened like there was a ten to twenty percent correction about December. Two Thousand Nineteen so so. I don't panic. I guess as the message by the same token if you're scratching your head saying okay become during this process but I don't know what to do then I would be hesitant to start trying to guess and trying to put money into the market if you really don't know what you're doing this Nairobi. The learning point in price for a new sharing vista. Maybe I don't know what I'm doing. I don't have the stomach for this gone. By Elicit Investment Company Anita or put my money in industry super fund or or a life fund off think. That's a very legitimate tyke out to have from this the last two weeks in the market and I think that's a very smart thing to do if you're feeling at all squeamish or at sea or not confident with what you're doing you can. You can certainly keep learning and maybe even running a paper portfolio during this process and see how you went and that's part of the learning process but if you are answer and don't don't take a risk put the money into a into a fund because this has been a very recent event. I mean people might have been buying an ATF three weeks ago. Yeah and this is. This is the first time they've been hit with it. So it's just a learning experience really. Isn't it something to think about and really stick with it? Yes Oh exactly want shouldn't think this would deter people from being ashamed. This is what I'm saying. Is this happens? This is normal for a shame market but if you are feeling squeamish or unsure what to do maybe maybe direct investing isn't for you but maybe in the future and so keep keep at it and learn through this process but I remember I call the GMC my my University of course in in share investing. And before that when I first started investing and did everything wrong. That was my my school of investing. So you always learn through these prices and experience does does help us give you the framework to keep calm and in buffet as we said before said you don't need anarchy over one hundred fifty to share investing need to become impatient and and that's exactly what we're seeing at the moment and other buffet saying years. Mr Market is a manic depressive. Knots your door every day and says on the by Your House. And here's the price it's up to. It's up to you whether you sell or or by his house next door. He'll keep coming to you or show. Keep coming to you with a price. It's up to you with the process. Did you enjoy his latest news and a couple of weeks right? What's your really recommend people go to the Berkshire Hathaway site very simple side. It's really just the list of the past twenty years of newsletters and start to read them fantastic and there's also actually all posted in the blog. Post this episode. But they he did an interview to our interview with CBS. Okay interview if you've seen that excellent interview. I mean the guy's rock solid is rock solid in the way he looks at looks at things and and I have a framework. I have a way of doing things and white for the market to to be in the right condition before I act so W- no one can predict the future but there's a lot of talk about that. Australia is going to go into a recession this year. How would that does that? Have any effect. I guess it doesn't have any effect on the way that you think about things or just changes the the timeframe of your investing now. It doesn't have any any direct effect and I guess I don't WanNa say I'm flippant I mean people will be hurt. If there's a recession people will be hurt. In particularly with the corona virus going through people will die so. I don't want to sample these various series topics we're talking with but in terms of how they impact don't have I invest. They just part of the general hilly billion the market I said before I have a framework of looking at companies individually. I look at the quality metrics and I look at the price and and decide whether it's their value or not and as Alaska the screen and look to see what the market's doing and with that company using an upswing or a downswing before I decide to pull the trigger and by that will be affected if again to a recession I expect that the list of companies looking at will grow but a and it might mean that anything for six months or twelve months Siberia and they all hang onto the ones. I've got and I would add a word of caution here to anyone out. There has a portfolio that they might want to consider reducing some of that gearing especially if it's a margin line when some of the shares can be at call. I don't think people have any idea of what a recession is like. I mean you and I were through several. I'm sure and that's kind of a market man. That's true I have at the back of my mind when when these kinds of events occur is that you know. I've lived through the ninety one recession through the Gulf wars of invested through the Dot Com crash the ninety eight long term capital management meltdown the Asian financial crisis the GMC. All these things you survive. And if you if you take the longer term view and look at the sham one hundred years the graphs dots in the bottom left hand side of the shape of the piece of paper and that goes to the top right hand side of the piece of paper. We'll always do that. I ever longer turn. We just have to keep that uppermost. Yup I'm talking to my daughter at the moment because she hasn't started investing it and she's got no idea doesn't want to do it she just wants to spend money and have a great time. She's at that age and But I tell her that his absent are available. These days which can help you get started investing like rays. Have you heard of rose? I haven't anyway what it does to basically it just rounds up every purchase on your own and that gets invested and I'm saying to a look. This is a great time to get started when markets down. Your dollar cost averaging in by getting in the best possible time. Is this the way that you would see someone? I starting in the market right now absolutely only gets Tom to start in the market anyway. Anyway possible yeah provider. You can stomach at going further down to help that price as you say is Duller cost average so if you've been dollar cost averaging into the market allows twelve months for example you've been buying lists is in the last twelve months now you buying more shares and so overall you're going to get a decent performance and you're not really worrying about where the market is you or you're trying to work out with them on by more or less the same number of dollars every month and I'm GonNa signed by twenty year old daughter who's asking us of the good time to start so we are starting with her the night. Perhaps we should explain what dollar cost. Averaging is here at this point sure so if someone for example to me and say I've just inherited one hundred thousand dollars. What do I do with it? The lasting ties him has gone. Put put it onto the market. Tomorrow I would say for example. Maybe take ten thousand dollars a month for the next ten months and every month spend ten thousand dollars buying into the market. And it's easier if you're buying an ETF listed investment company or putting it into US manage fund. You just keep putting ten ten thousand dollars in each up but what that means is that at the moment. Your ten thousand dollars goes twenty percent further. Then if you're doing it last year where you're buying list with that ten thousand dollars but I have a time. It evens out. You're buying market average. We haven't really discussed listed investment companies. But I just said this. We've got an episode that we've already recorded where you're explaining companies which will be coming up in the future. Sorry go into that. We've got that one to look forward to it anyway. Maybe we have discussed that. So if you've been holding off buying and you've got some cash is now something time. The people should stop thinking about it absolutely. Yeah I mean. The market's down twenty percent from its highs in my good answer this. I saw the overpaid told US dollar cost averaging to stop buying but yeah. This is sort of Tom. We're not going around looking at. How much undrawn facilities have in terms of debt? And whether I have any cash that Can pull together and start to put into the market the Koran Avars Heffler you of Karan Avars unfaithful of catching myself personally. And as I said before that one of the be flippant people will die from the virus on a macro style and economic scale it will disrupt supply chains if I sort of go through the risks of what could happen. I'M GONNA I'm GonNa say them as risks but they may not happen and I think yeah the management saying your hope for the best plan for the worst is a good one to keep in mind at this time but as you said before. We haven't seen the recession since nineteen ninety-one and it's we haven't seen what's caller supply recession for much longer than that so supply. Cyber session means that people can't get access to goods so for example. A bill to get access to howdy plank or something like that that they use to build a house with and that has two problems one. It means the house doesn't get built so there's this money going into the economy and the building has to put their their labs off but to also means that they'll be someone out there who can produce howdy plank in limited so the amount but the process go up and so we started to see inflation comeback into the market and so that the risk with with corona virus around the world is that people start having to pay more for like a buy cheaply either from China from from somewhere else that starts around of inflation and that's always bad for share markets because it's all the process of going up that means why we'll have to follow to pay for things Which means the economy go up. And that's a drag on business and the drag on the ship. All the shame marker and suicide tougher for people because they suddenly having to battle having to ask for more money and battle with the budget to try for everyday items groceries and clothing and things like that. You must be the person that sees inflation as a risk of this stuff. But I'm talking about real inflation. I mean we've lived through periods when inflation's be running at a high single digits and that's that's a pretty tough time to be to the an investor to to really get about an economy early Okay because Everyone else every pundit that I hear saying that we're going to be having low interest rates for a long long time. I'm a bit of a contrarian film and everyone says one thing I expect the opposite because no one can see the future and we're not a consensus in the market. It usually means it's already happened. Regret the turned the corner so the other side of the problems at the moment is to do with the oil prices. Well it's not just and we'RE GOING TO HAVE ROPE. Gilmore's I mentioned a bit lighter on just giving a brief review of that hetty say the oil price situation as it is developed. At the moment. I'll give you my opinion. And that's all it's it's you know. It's worth two cents really. I have my two cents. I did use to work for the Shell Oil Company so I have a little bit of experience in the world but not much to be able to shit any sort of certainty on. What's going to happen? I guess the fact is you need to consider out savvy. Arabia has just launched Aramco which is probably the biggest company in the world. Now it's seeing Russia's a as a major competitor so it's it's taking on Russia and doing some strange things to try and grow market share because Russia's economy the that's the main money earner Russia. It's one of the big ones it'd be only years. The energy oil. Guess yes. That's right so I can see tussles going on between Russia and the Ramco which is driving the prostate at the moment. I don't know when that will shake out. It'll be a game of bluffing. And who blinks first? I think I think the more important thing for the global economy is that if you Ara an oil company you have lots of debt your GonNa face a very tough time going forward. And I think it's the fallout of what happens to all companies in the financial community which is probably just as important or more important to awesome busters because there are some where we still applies out there especially in the. Us liberal leverage means that they've got some did got lots of debt. Yeah and so if I if I can't if they're showing all of the loss and thirty dollars a barrel they'll be some out there. Who are they will have to either refinance in which case that puts even more stress on the company and draws the shape process or or if they can't refinance and then if money to banks and those banks feis payment losses may become less profitable and this day and age all the banks are very interconnected site so banks realize that they shouldn't have all the eggs in one basket so they want just just be solely learning to the oldest straight dog often. And we'll take you take thought though. If they lie money to the oldest rate up probably gone borrowed from another bank to try and offset that line and balance out their portfolio which is the indicate by the financial markets. Were and we're back where we were with. Ge where you don't know if all company I goes down which bank follows it and which bank money which other bank and how that impacts back onto the banks in Austria and so you got this same slow situation of unknown risk in the finance system and that will also see the cogs of the economy starts to grow into a hole. Was there anything in the united that you wanted to say because all my questions exhausted fit my fears. I think probably the the last thing I'd say is that it's it's times like these when I like to watch and listen the people with long respect because again. I don't give advice but they have conversations like this and people like Roger Montgomery on your show recently. Montgomery's when I listen to you I've been watching rating lot of his stuff. Very calm very. He's an excellent devote. Jeff Wilson Formosan Asset Management Ellen Cola and weekly briefings and. He's PODCAST is good and obviously Warren Buffet. And Charlie Munger when they come out and speak as well. It's always with into and you can't feel quite isolated if you're an investor city by yourself so having these people talk to US cider speak even I might read. It came to be a good way of keeping you on track Ellen Collar and the money cafe it is skype podcast every week as well enjoying Thursday afternoons competitors. We shouldn't talk too much about competitors but They've got a nice lighthearted touch to the way that they trade in that does help make you feel better as well. It does not see you as a competitor for see them as a competitor Rogers role on the same wavelength of trying to help people to to learn about investing and to eventually break the shackles of pain. So many fees for forgiving people their money. That's probably the most important thing of of of that's why I do. And that's probably the most important thing I can contribute to this. Podcast US INTO OUR PODCAST. But please form your own opinion and working at what styles. It's you the best and work out. Where the you had to have the temperament and stomach for personal investing. And if you do great and if you would look for look for something with life as to invest you my and and also to the world goes on this is we're all about investing to improve our quality of life if it makes us if it keeps US awake at night and means that we can't enjoy it's not worth we need to allow through this whole process as well and continue to enjoy our laws trying to trying to be good investors fantastic. Thank you very much for dropping in China or I could feel and we'll just cut now to rob Gilmore. Who's GonNa give us his thoughts on oil prices and what's happening with oil at the moment as well Well it's not just the virus. It's the oil price and while the market's being trying to come to terms with the impact of the Koran of our outbreak for the last week and a half unsuccessfully mind you it was almost like the market took a king hit last weekend when OPEC filed to come to an agreement with regards to production cuts. Now we're going through a phase in the oil market where demand is dropping off because of a coronavirus and pick were trying to agree production cuts in order to could supply while demand had fallen now. Opec these days includes Russia and let me Putin decided not to cut production trying to go against basically what Saudi Arabia were pushing and the reason for that is because wants Roy. Us Shell oil to go out of business and he feels the best way to do that is to crush the oil price which is below the cost of production of US Shell oil and basically make them to fold on their debt and curb supply that way. During which time Russia Ken gain market share and ultimately prices rise and they profit from it so Saudi Arabia wasn't too happy with this and so they came to the Party and said right. Well if you're not going to cut supply we're going to increase it and we're going to drop the price so essentially what you've got now. He's a price war between the Russians and the Saudis by both have very low costs of production but how long can sustain this sort of price? War is is the big question. It's bad for share markets because any any shock causes uncertainty and volatility when you see the price of a commodity like oil full thirty percent. It has a dramatic impact on currencies. It has a dramatic impact on a lot of industries and a lot of industries that do depend on on oil and if you look at the ramifications of a lower price just on the US shall industry alone that has knock on effects into credit markets if they default on their debt then that causes further in credit which can potentially create some sort of contagion if you take the US shale oil industry the pots of that industry where companies are heavily indebted issued bonds. And if they default on those bonds that then has issues cause issues in in credit markets. And if you think about other industries that feed off the oil industry in the US like employment life. The contractors there are further ramifications in not only in the US but other parts of the world when you see dramatic fall in the oil price. It has a flaw in effect to Australia. Throughout gas produces where the price of gas is fixed oil so immediately your your product. Profitability of these companies has been effectively decimated because the cost of what they're producing has just fallen by thirty percent ships for the Guinness for information and educational purposes on. That isn't financial advice. And you shouldn't via Cellini investments based on what you put any opinion or commentary is the view of the speaker on the beginning. This podcast doesn't replace professional advice regarding personal financial needs circumstances. Oh Karen situation thanks to Christopher SUE MOSS FOR MUSIC PRODUCTION WITH THAT SPECIAL CURRICULA SHIPS FLAVOR REMEMBER. Musical wise flows even when the money went.

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Momentum

The Curious Investor

24:32 min | 2 years ago

Momentum

"The. This is a QR's curious investor a show, the breaks, down some of the most important ideas and finance to help us make better investment decisions. I'm Dan Bill, and I'm gave the galley. Welcome to season to everyone. We're kicking things off by talking about momentum. What it is why it works. And why it's so hard to stick to momentum is a big area of research for academics and practitioners and today's guests are kind of both they got their PHD's from the university of Chicago. And both use momentum themes to manage real world portfolios. My name's west gray, I'm CEO of alpha architect, high cliff, Agnes, managing principal, and a co founder at a QR momentum at its core is pretty straightforward. If security has done well over say the last, twelve months, you buy it. If it's done poorly, you sell it piece of cake, but things get a little trickier once. You get into the details, here's Wess if you talk to people about momentum in our business. It means so many things to so many different people. If you talked in academic momentum means relative strength. Whereas if you talk insane momentum to practitioner, a lot of times think you talk about trend falling or time series momentum, which is where you got a single security measured over two different time periods. Here's an example of the difference trend following or time series momentum is about looking at a security by itself, so suppose the S and P five hundred is up ten percent over the past twelve months trend followers would be bullish. And let's say the u k footsie is also up, but only five percent trend followers would also be bullish what it's different in relative. Strength momentum there you've still be bullish on the SNP. But this time bearish on the footsie because the footsie, underperformed, the SAP, even though they're both up. We'd care about their relative performance and this is the type of momentum. We'll be talking. About today? Some factors like value and quality have been around for a long time Benjamin. Graham wrote about investing in cheap high-quality, stocks almost a century ago, the momentum factor is a lot newer to the game. Okay. So you were one of the first folks do in academic treatment of momentum. And it's wondering if you could kind of bring yourself back to the late eighties early nineties. What got you thinking about it in the first place. First of all, it's a little depressing because I had a beautiful head of hair at that point. So we're going to go back that time, I, I gotta get past that, you know, we always talk about data mining just looking for patterns to be dangerous because you can discover random patterns and then you don't know if they're real I do think the in all honesty. The initial momentum results were largely observational in that led cliff to do a little more digging. It's one thing to stumble upon some pattern that seems to generate returns. It's another to understand why and publish about it in nineteen Ninety-three, Narasimhan Jagdeesh, and Sheridan Timon wrote a groundbreaking paper on momentum in the journal of finance, I give Jagdeesh tip and full credit for being first. But I was very contemporaneous with them just sitting alone in my dorm room as a grad student, the momentum that cliff was looking at is often called one. Year. Momentum basically looking at returns over the past year. Excluding the most recent month. His data started in nineteen sixty three and went through the eighties and Dover that sample the returns to this momentum strategy looked pretty good. Rick, then cliff got his hands on a new data set one he hadn't looked at yet that date. It was like a prequel it started in nineteen twenty six and ended in nineteen sixty two I actually got a little bit of a chill. This is the closest financial research comes to high-drama the one year momentum result was approximately as strong was very excited. Part of what makes a factor viable is that it needs to work over long. Periods of time. It also needs to be pervasive. And momentum seems to work in a bunch of different asset classes like commodities fixed income equity indices, and currencies just to name, a few and no fence to cliff. But the thing that I always found odd with momentum is that it's such an easy. Strategy. You basically look at returns over the past twelve months, things that did better than average you like and things that did worse than average. You don't like doesn't really seem like something that requires a fancy academic background to get right? But west gray CEO of alpha architect says it's deserving of hardcore study. And he uses the concept of gravity to make his point. We all know how gravity works if I take an apple and I drop it. It'll go and hit the earth. Great, anyone can do that. Anyone can implement that, but the issues it takes someone like Newton or Einstein actually understand, will why does gravity actually work. So I think momentum might be the same thing where if you just want to implement momentum. It's not that hard, you don't need a PHD too short securities on their past performance, but work, it's difficult is trying to understand. Why does momentum work in in? That's where, you know, you need research skills and ability to. Think deeply about what seem simple because we all know it works. But we may not know why it works. This brings us to one of the most important things you can ask of an investment strategy. Why does it work? And while there can be lots of possible explanations. They can generally be grouped into two categories risk-based and behavioral. The risk base camp says you get paid for investing in a factor because it's risky. Take value as an example, cheap companies are cheap for a reason those companies might be the first to go out of business when the economy suffers so you'd expect, hey, you're taking a big risk. You should get a bigger reward. But the behavioral camp says no, cheap companies aren't riskier. It's just that were humans and his humans were not that good at knowing the right price of a cheap company, and there can be a bunch of reasons. Why like a company whose price has been beat up for a few years might just get neglected? People are talking about it less. They're less interested in it, sending its price lower than it should be when it comes to value. Both the risk and behavioral camps, have pretty good explanations. But momentum is different. There aren't that many intuitive risk based explanations for it. That means most people tend to favor the behavioral ones. Let's start with under reaction. Here's cliff. When news comes out, you do incorporate that new news. But you move off your prior beliefs. Maybe slowly, the price will move. But if the market as a whole exhibits this tendency, it will move less than the new information really warranted. It'll be all right. We see it, but we're gonna move part of the way if that's the case you get a simple momentum effect. Good news on average leads to price going up on average price doesn't go up enough. So an average when you see price going up, it probably wasn't quite enough. This underreaction story is related to news, but investors can also under react to changes in fundamentals. Some classic examples are earning surprises. Analysts provision to earnings that is a beautiful under reaction story. Now, I will tell you under reaction is my favorite story. Not my favorite like I find it most aesthetically pleasing. The one is the one, I think most likely. To be true or or contribute the most, but one of the other major explanations for momentum embarrassingly has the opposite terminology lease. But as overreaction many think of momentum as far as people chasing price there you can build that into models to show that if people overreact that can lead to momentum, another behavioral reason is related to the disposition effect, which is that people tend to dislike losses more than they enjoy gains. This is the, the pretty well documented tendency individual investors do this. They are very willing to sell winners in hold onto losers. And that is a call it a psychological bias, but it's kinda neat. When you think about that. What would that would lead to if you are absolutely quick to sell winners? When good news comes out, they'll be selling pressure against it again. It was real news. So eventually, it's gonna. Get into the price. It's a way of, of, of slowing down that move the people who react that way might actually create momentum profits, because they're keeping the price from jumping all the way west has another explanation for momentum. And that is reflexively. So fundamental guy says, okay? Fundamentals drive the price, right? If the fundamentals are doing better, eventually, Mr. market agrees, with me in the price will move to what I say. But what did you invert that question, and said, what if prices actually influence fundamentals, how might this work? Think about a company whose stock price has recently gone up a lot compared to its peers. It's cost of capital is probably now a lot lower. Now say wants to acquire another company. Well, that's a bit easier with their newly inflated stock price. How 'bout tracked and talent what kind of engineer who's probably? I'm not a finance expert. They just look at the stock price assess how great amazing this company is like, yeah, I wanna work there. Those options are probably gonna be worth a lot. So maybe there's, there's a billion detract human capitals, because your fancy, you're hot. You're out there. If you think about it reason out performances, great PR that can further as a, stock's price over time allowing momentum investors to profit. We've talked about a few of the behavioral explanations from a mental, but there are a few risk-based wants to if you're an investor which explanations should you prefer? There's no clear answer. But I'll tell you the good and bad parts of both if something works because it's risk your first best. Guess is it's going to work forever is compensation for bearing risk. There's no real reason. It should go away. That's the good news. The bad news on this is I apologize in advance for the obviousness of this. But if it's risk than it's risky risk is something that hurts, you that you don't want to bear if it's behavioral you get precisely the opposite. It's not adding over time to the risk of your overall portfolio, and you expect to make money long term. That's wonderful that's better than a risk premia because who the heck doesn't want money without fear. The problem, of course, is it is more. Susceptible to going away if something works because investors make errors. It can go away for two reasons. They can stop making those errors or too many people can try to exploit those errors. I guess I'm rooting for a behavioral premium that takes a long time to go away. Luckily that, that does appear so far to be the leading contender, and to be entirely clear, the world doesn't really give a darn what I root for going to be. It's going to be what it's going to be. Cliff raises a point about investors wising up to a factor and piling in which leads to a big question if everyone knows about momentum and if it's due to behavioral by sees you'd think it'd go away. Here's west is take. Why would we write books in might be super transparent about the exact nuts and bolts of the strategies, we run that seems insane, right? Because we know a little secret. We're doing is difficult to actually employ impractical. I say no pain, no gain in marines. This extreme pain, extreme gain it's probably worth mentioning that west was US marine for four years before getting his PHD. He was also training for a one hundred mile ultra marathon when we met him he knows about pain, and momentum even if it's just a behavioral mispricing can still be painful. This might be a big reason why it's not getting arbitrage away. So there's a twenty dollar Bill on the ground. But there's a grizzly bear that standing next to it so clear. This is miss price. Right. Why would you have a twenty dollar Bill sitting on a frequent ground, but there's a grizzly bear. Staying over it. So, so sometimes in the marketplace, there's an open secret. There's a twenty dollar Bill on the ground. Go for it. There's a grizzly bear on top of it. And that grizzly bear might be career risk. It might be arbitrage risk. You may be frictional cost. Whatever. West stakes is metaphor. So seriously, that he actually has a taxidermy grizzly bear in his office. It's called the Grizz and it was terrifying. Another thing keeping investors from facing off against the Grizz is that momentum is harder for most fundamental investors to get their heads around. I don't think it's as intuitive or feel good as value like value makes sense. You get a buy cheap stuff. It's down. You're not the sucker. Right. But who wants to look? At a stock chart at its fifty two week high and be like, oh, I want to buy that, right. That's not intuitive. Like I don't wanna be the bag holder, even cliff a guy who's been managing momentum oriented strategies for nearly three decades agrees a joke, I made for probably about two years to one of my co founders of accu- are John Lew. He probably wanted to kill me for making the same joke over and over again. I'd say, John, are you telling me, we are buying more of the Japanese yen, because its price is higher than last month? And John would just look at me, deadpan and go. Yes, that is what I'm telling you. And I think part of it is, is while I think there are good behavioral stories for it, it, it does not have the same to it of buying that, that value has. And like all factors momentum can have some painful drawdowns momentum has in an industry parlance. Two very anodyne way to put it as has left. Tail is negatively skewed which kinda rhymes with how you actually feel at those periods and just to define that the world. Rarely follows a perfect normal distribution something very close to the famous bell curve, where two standard deviation events or rare three are very rare. And for only happen in nightmares. No, the real world tends to be somewhat fat tailed, meaning big events happen. More often a portfolio of momentum stocks. Particularly long short long winner. Short losers has undeniably had a big left tail it has crashed most notably in the spring of two thousand nine as the global financial crisis abruptly stopped and reversed no matter how much you try to construct your portfolio. Well, a short sharp reversals of strong trends, I, I don't think I need to belabor that, that seems like the obvious time momentum going to get hurt. The what should matter to investors isn't just that one factor can underperform. It's whether others can be there to pick up the slack. So let's go back to two thousand nine value, by the way, did well enough that a whole portfolio of both factors was not particularly distressed. One of the things that makes momentum so special is that it tends to work really well, with value. When one's doing worse than normal, the others doing better than normal, statistically value and momentum tend to be negatively correlated, which kind of makes sense if you'll imagine buying stuff, or good stuff is going on lately, and another strategy is buying stuff in some distress, that's reflected in the price. I don't think most people require giant intuitive leap to say these appear to feel like different strategies the momentum value correlation a call. It minus point six and fairly reliable. That is a huge number meaning if you're gonna do both they're both better than viewed alone. In fact, more and more over time I prefer to think of value in momentum as a system, you might think given the diversification benefit and combining value momentum. Everybody would be doing it, but they're not and west has theory for why like people that do value or stuck on fundamentals stuck evaluation, people that do momentum. Just look at prices and charts but I liked that. Because just structurally different worlds in the market, which means they also should have pooling benefits but for anyone who's a value investor. They don't believe in the religion of price trend momentum because, you know, Ben Graham told now's a bad idea that the great irony is, they're the ones that could maximally benefit from the dishes momentum. But the problem is they've got to get over the behavioral issue of being so faith based in, in one school thought. In that maybe you can't break that. It's tempting to say okay in this environment, I'm gonna put all my eggs in the momentum basket. And in this other environment, I'm going all value west says to think twice before giving up that diversification the issues, I I'm going for two birds in the Bush as opposed to the one bird. I know in my hand because the bird, I have in my hand when I roughly take equal risks from value momentum is known structural diversification. Right. So I know I'm going to get that. If I stick to these things, the minute, I start, tilting them like, oh, let's just do more value. Not that much momentum. I give up the known structural correlation benefit that I believe in strongly in I get the potential benefit of maybe better expected return by tilting. More to one versus the other and yeah, you can back test. You're blue in the face to show me that factor timing works. But you're kind of risking the one thing we. No earliest, I believe more strongly end than factor. Timing is the diversification benefits. A common knock on momentum. Is that it's expensive to trade the way you get that strategy working? Unfortunately, is it's gotta have turnover in. It's gotta be rebound. Right. You always gotta be recycling of these high momentum names. And the problem with that is ninety got tons of frictional cost. A lot of investors questioned whether momentum even works after all these costs. Well, the answer's yes, it doesn't work as well. Nothing works as well after after cost fees and taxes. They're, they're those three rarely positives. There are critics of it, who point to its turnover and say, look, the prophets may be wiped out. We think they go way too far to prove his point ache, you are published a paper called trading costs, which reports live trading costs for running momentum strategies, but even more important for investors is it can get cheaper to trade momentum. When you combine it with other factors again particularly value in momentum often. One is buying what the other is selling. And you know what the cheapest trade on earth is, is the one you don't do. So the point I think, is even stronger in a in a multi factor world. So let's recap momentum is a source of returns founded many asset classes, and over a long period of time, we can call it a factor because there are many economically intuitive explanations for it. These include under reaction in news, the disposition effect and reflexively. But it's benefits. Don't come easy like any factor momentum can have its periods of pain. But that might actually be a reason. The momentum premiums sticks around. We all know what works by pain. Be disciplined by cheap by strong, you know, put it in a Bank account minimize fees minimize taxes and wake up thirty years from now. Great. The problem, though is being able to stick with them. Right. So why education, we think is so important is if I'm gonna get you in something that I know, has a high probability of working I need to make sure that you yourself or defense up. So inevitably one, there is the real pain. You don't look to me is like, hey, you're the guy. Why is this not working in, so that's why the focus is on education to the end client, because we want to have education in order to make you more sustainable. We've got your back on that one with for listeners who want. To learn more about momentum head over to a QR dot com slash curious where we posted a few papers on today's episode. And if you want to keep this episode. It's momentum going. You can Email us at curious at a QR dot com. Next time, we'll talk about commodities trends, and turtles, I think pork bellies stopped trading in twenty eleven which is kind of funny because I think it's the go-to of everybody like when you say commodities, they're like, yeah, you trade pork. Bill. Not since twenty one. You stayed curious listeners and watch out for the Grizz. You have to fight a damn grizzly bear is scratches on your back. Right. You get like even by the same maybe time for one more. Well, one thing we didn't do I never actually gave you any of the behavioral explanations for. Oh, yeah. Meant them. Fill it, somehow we veered. So it would be great. It's yeah. I don't need too much on this. But go yeah. Asked me to can you give us one or a few behavioral stories behind why momentum might exist. No, really. Was hoping. The views expressed in this recording are the personal views of the participants as of the date, indicated and do not necessarily reflect the views of a QR itself. Nothing contained in this recording constitutes investment legal tax or other advice, and it should not be viewed as a current or pass recommendation, or solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The information in this recording is based on current market conditions, which will fluctuate and maybe superseded by subsequent market events, or for other reasons, AAC does not assume any duty update forward looking statements the information this recording has been developed internally and or obtained from sources believed to be reliable. However, no representation or warranty express or implied is made or given by or on behalf of ache. You are as to the accuracy, and completeness or fairness of information contained in this recording any liability as a result of this recording including. Any direct indirect special or consequential loss or damage is expressly disclaimed, copyright twenty nineteen ache. You are capital LLC all rights reserved.

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Bitcoin  Correction = Manipulation?

The Cryptoverse

09:42 min | 2 years ago

Bitcoin Correction = Manipulation?

"Hi there, guys. Welcome back through the cryptovest with me, your host, Chris Coney another reminder, now, the bindis is back running can offer you this full free over one hundred ninety nine dollars is up to you is my line goals on how to trade cryptocurrencies entitled crypto exchange mastery in getting for free by completing a simple twenty four hour challenge. If you succeed in the twenty four hour challenge you get to keep the goals for free forever. He fail you lose access to the goals after twenty four hours until he pay the hundred ninety nine dollars to buy it. Some people have already failed the challenged started yesterday and the vest, if they can still access the course well he go to the website. Crypto asset. Don't school submit a support ticket by the help desk and just tell me that you really, really want to take the goals, I might give you a discount coupon or something like that. But now on with the show annoyingly the short trade setup that I described in detail yesterday would have gone perfectly well, right after this break down below seventy six hundred we ran all the way down and passed. Six thousand eight hundred fifty I think we had a low of six thousand six hundred. So this is why I said that the plan was the titan of the stop loss as we approached each prophet target level. The fest profit target was sixty eight thirty. Now, this trade would have got stopped out as then bitcoin went back up, again, in the same one hour, KENDALL boots the stop loss, that would have Buddha, titled the stop moss as approach to that sixty eight thirty level, and we would go stopped out as difficult prophet about ten percent in fact, and that was without leverage. So if you had ten times, leverage on that would be doubling my money, right? So he'll be question is did I double my money? No. Because this happened on the three AM KENDALL UK? I'm when I was asleep. And before you say, yes, I could have automated this trade with orders. There's no way I'm doing that though. Not when the market is volatile right? I want to be listening to what Mr. market is saying in real time. So I can manage the trade very, very carefully, especially if the price is going open an account, a trend trading, which is shorting when the prices go. That's that's where you're gonna be really on the bowl. So while that trade planet, described yesterday would've gone. Well based on technical analysis the may very well be an external factor at play here. Now, I've gone through the news articles that came out over the last twenty four hours and I've only been able to find one story or one news outlet reporting on this, which is bitcoin, est dot com. So they've published this article cold bitcoin price flash crashes to six point one k his the likely reason why. So what did they report reporting here is the five thousand BTC was sold on bit Stemp in the hours of this morning Friday, the seventeenth of may. So what do we think about this? I know that to sell five thousand BTC at six thousand two hundred would have ripped through the orderbook, right and took the price all the way down. Now that order would have been filled at various prices. So is the market price was seven thousand eight hundred at the time when you would was placed, well, it would have been filled in as the price went down. Now, the whole dynamic of how that works that's explained in the crypto exchange mastery. So check that out just assume for a second that all was filled at the low price. Let's say the entire five thousand BTC was filled at six thousand two hundred dollars. That's still that you will million dollars worth of bitcoin. And when you have them, which bitcoin to sell, it's very rare that you would sell it on a public exchange like bit Stemp specially dooney in one go, because there's so much slippage right in the price that you get for the cell. It also says that this wasn't a single like mock order, it says, on the flip side, looking at the job forbid stamp, the dump academy of retention twelve minute period, while orders were being. Continually executed consecutively at lower levels, so that's, that's interesting. Those kinds of quantities five thousand bitcoin one billion dollars with bitcoin. That's usually, the realm of the over the counter market with a broker that happens in private. So having established that, that this should have been a not see trade. We're left with the question of, whether it was one a intentionally trying to manipulate the market to a fat finger era, where basics when click the wrong button. All three an automated trading bought the glitched now. I don't buy the fat finger everything especially since it wasn't just one big market order. He says Ayla actually new new settlers came in consecutively over a ten minute period that looks intentional to me. So that's the fat finger era. Discounted in my opinion, the, the glitch of a training ball. Maybe because that would be why you do on an exchange. You need an exchange to have an API via bought. Talk to how I've still doesn't gel, quite well, one held. You have five thousand bitcoin on bit stamp. Right. So you might do, but it just seems it seems unlikely to me in a why not try to TC. So if you've got answer to like other explanations for this that I'm not seen posted in the comments or tweet at me at Chris Coney, t the of this, that's just an intentional manipulation is related to short-selling of bitcoin. So if a manipulator opened a lodge short position with leverage on bit mix will then it makes sense to then don't allow a bitcoin on a public exchange to spike, the price down and then create a round of panic selling because you, you have to start the snowball and as it begins to roll the masses takeover in the panic, selling and momentum gets going so when that happens as the price tumbles that leveraged short trade that you had prepared and ready and open a bit mix should mold to make up the bitcoin that was dumped on the public exchange. Now, if you knew the bitcoin was going to go down. Will you would open a short trade, wouldn't you? Right. And if you knew the big home is gonna go down. Because you had the ability to cause it to go down. You would open a short position with big leverage. Right. So this is one of the features, fortunately, or unfortunately, of a truly free market. That's unregulated anything goes and anything is allowed to happen. The other potential intention behind this may well have been to cool off the rally that we've seen recently as long as the price kept rising, everyone was happy to keep jumping in no one really wanted to think about the price going down pulling back. So by creating a shop drop all of a sudden, it may will bring cautioned back to the Mark is everyone's old wakes up from the drunken haze. And goes. Yeah, the, the price can go down for go by that. So in terms of where we go from here than what I can observe on the one. Our job is this. We're still under the two hundred today. So the two hundred EMA one hour shot. So is the two hundred our exponential moving average the, the actual breakdown below the support seventy six hundred that happened on the three AM candle and it closed onto that level fest on that happened in full since we boast, up above it, like I was saying yesterday about the resistance eighty two hundred we had several false breakouts to the upside boot's when he came to the downside, support seventy six hundred it was tested twice and held didn't go outside of it. So when this three candle yesterday closed below seventy six hundred that was the first time that happened since we go inside that consolidation area. But then following that was the big old massive volume dump. That took it all the way down to six thousand six hundred now that one hour KENDALL closed. Below the two hundred our exponential moving average, and since then, no KENDALL since then on the one hour shot has managed to close above. It's the, the some this some real push against it. But no closes on the one hour above the two hundred may so that could be a sign that we're going to continue in downtrend, but for now ally can say is I'm going to keep listening to misdemeanor and pay careful attention to his mood because this is this is a real bullet out-priced moving right here. So that's all good for you today, and tens of analysis one final reminder, get over to the Lincoln, the description, because you can get this course, for free offer one hundred ninety nine dollars. If you wish is my online calls, cold is not called how trae cryptocurrencies that's what it will teach you to do is cold. Crypto exchanged mastery thing you can get it for free just by completing a very simple twenty four hour challenge. You NTN an Email you get access to the coast for twenty four hours. And then you've got twenty four hours to complete the challenge. If you succeed you get to keep the. The coast for free forever. If you fail us access to the course until you pay the hundred nine dollars to buy it. So click the link in the description to participate in this, like I said, some people have already failed this challenge. I lost yesterday is now been about twenty four hours and some people forty failed. But they've emailed me saying this that one I have access to it. So if you if you go to the website, crypto assets dot school. Click on the help desk and support ticket and just say Krispies, I really wanna exist goes, I like give out some discount, coupons to a select few. So let me know what you think today's episode in the comments or on Twitter. It's at Chris Coney international, but is all go for you today. I'll be back with the next episode of the cryptovest. So until then it's me, Chris Coney saying bye for now.

Chris Coney Chris Coney international UK Mr. market Twitter dot school Buddha Stemp KENDALL Ayla twenty four hours one hour twenty four hour one hundred ninety nine dollar six thousand two hundred dolla hundred ninety nine dollars hundred nine dollars
EP52 (Part 1) Cognitive Errors  Behavioral Biases

Value Investing Podcast

24:29 min | 2 years ago

EP52 (Part 1) Cognitive Errors Behavioral Biases

"This is volume vesting. I'm your host June Kim in this podcast. You'll learn everything related to volume best. Hello following busters. Welcome to another episode of the value investing podcast on today's show. I wanna talk about behavioral biases, I think this is very important topic for any investors out there. So I hope that this is going to add some value. And what I like to do is. I wanna talk about behavioral biases through three episodes. So on today's show. I wanna talk about cognitive biases from belief perseverance airs on the next episode on talk about cognitive biases from information processing airs. And finally the next on the next episode. We're gonna talk about emotional biases. So I put behavioral buys into these three categories because I thought that it would make sense. And it's. It's gonna be very interesting topic. So before we get into the details. Let me just give you quick. Disclaimer. As always that this podcast is for entertainment purposes, only, and it is your responsibility to consult with your investment professional for any investment decisions. So without further ado what we started. So I wanna talk about the differences between cognitive biases and emotional biases. Because I told you that we're gonna talk about cognitive biases on today's show. And also the next show and emotional biases will be talked about the following episode. What are the differences between these two so cognitive errors can be thought of as blind spots or distortions in the human mind. So it comes from faulty reasoning. You have sub-conscious Manta procedures for processing formation and cognitive errors could arise from that process. And call into airs could be more easily corrected than emotional biases and errors are logically identifiable. So that's the difference between cognitive airs and emotional airs. And emotional airs as the name suggests it's based on your emotions, and even if you know, these things exist, it's probably really difficult for you to stop that from happening. So that's why it's so interesting to talk about because when he comes to investing. What matters is not always the knowledge or logic. What matters is how you can control these behavioral biases, so that you minimize them. But you cannot escape from these biases one percent of time. Even if you are aware of them. That's what makes this things quite fascinating. And I thought that this is very interesting topic to talk about and one thing to note is that among these biases. There are many overlaps. So you can say that in certain situations are one bias is applicable on. And also the other biases might be. Applicable at the same time. So once you learn all these biases, you should be able to understand how you can apply these biases in to real life situations. So let's just talk about them on one by one. And as I mentioned on today's show. I wanna talk about cognitive biases from belief perseverance airs, what that means is that once you have certain beliefs in your mind debt, specific belief is going to persist over time. So it's not easy to change that belief. So let me just list items that we you wanna talk about here. I we wanna talk about conservatism bias second confirmation bias, third representativeness bias and illusion of control bias and lastly, hindsight bias, so these are five items that I wanted this cuss onto this show. I item is conservatism bias, so what is it? Conservatism bias is a belief perseverance bias in which people maintain their prior views or forecasts by inadequately, incorporating your information, so people tend to overweight, initial belief about probabilities and outcomes and on the way new information. So I'm gonna talk about recent seed bias in the future episodes. So it's kind of opposite of that. But here you're basically saying that you tend to put more weight on whatever initially information, they you wire in later, ignore new information. So let me give you a couple of examples here, so many stock analysts invest significant amount of their time to research, their stocks and publish ratings for those stocks. So once they polish. Those ratings they tend to stick with their origin view and only change their ratings when presented with in this beautiful evidence. So they tend to stick with their own views. And this was also has to do some equal because once you say something publicly, it's not easy to change. And once you invest significant amount time doing the now since then, it's not easy to change your view. Even after you received new information that contradicts with your own view. So think about your situation save it. This is applicable for you as well and think about your stock purchasing experience and see if you fall into this trap. But what I like to say is that sometimes it's not always bad to have this bias because if you wanna be a long-term Bester, you wanna have firm ground. Into your analysis. So but also at the same time what this bias is telling you is that you might have to be objective in terms of incorporating. You've us and your information into your analysis. So every now, and then laissez every quarter, the companies publish their quarterly results and every year, they have annual reports, and whenever you have this results and see if you're Alice's has to be modified based on this new formation. That's first thing that I recommend a second. You also need to write down your rationale for any buying decisions. So let's say you want to buy stock. A why? That what you have to do is you have to write down your rationale in protective manner on a piece of paper. So that later if new information comes in then you have to says whether it's important for you to revise your own personal initial assessment of their stock. And you might have to update your rationale on a regular basis. But not too often, as I mentioned, if you think that the information that just came in is probably not worth that much, and it's not material than you probably want to stick with your journal assessment, you strike a balance between sticking with Eurojournal Cessna versus incorporating you information because we are always swamped with tons of information from different sources, and you wanna make sure that return is material and return, his material from owning stock perspective. And if you tend to be vulnerable to all these new pieces of information too often, then also you probably not gonna hold onto your stock. And you're not gonna be alone to invest there. So you'll always have to strike that balance. That's what I wanted to say. Let's move onto the second bias to for today. The second bias coal confirmation bias, this is so prevalent in everyday life. So let me just say what it is. And then give us some examples people tend to look for and notice what confirms their beliefs, and he can or or on the value what contradicts their beliefs. This is a very strong cognitive bias. For example, Republicans watch Fox News, whereas Democrats tend to watch CNN because they want to reinforce their uses team believes they don't want to hear other people's sides. And this is very strong when it comes to politics or religion. And you tend to listen to whatever information that confirms your origin beliefs. Also, let's. Look at investing situation because investors may fall in love with specific stock, and he can no obvious warning signs. So this is quite important because people have this tendency to certain extent, and no matter what can a person you. Are you probably have some tendency of within this confirmation bias space? So let's talk about how we can avoid this confirmation bias, the first thing you can do is actively seek out opposite views. If are long on a certain stock seek out the arguments from short side because they may have a volley points about why you shouldn't hold his stocks. The question that you have to ask is is there something that I'm missing or how do I know that I'm right and others are wrong. Because on every trade there's always opposing side if I'm trying to buy something, then there's always someone on the other side selling the stock. So how do I know that I'm right and the other person is wrong. So that's a question that you have to ask. And also whenever you have this opposite views try to see if they have valid reason and check if also the fundamentals are intact. So whenever this new article or new piece of information comes out and see if it's based on fundamentals of the company or based on something else or emotional selling pressure. And the question that you have to ask is Easter market over reacting to the news. And if the stock goes down, let's say thirty percent on specify news. And you believe that that's not valley. It's probably negative news. But it shoot an actually drive to stock that much than than you. Probably don't have to react to Mr. market's reaction. So confirmation bias as I mentioned is very strong cognitive bias. So you have to play some controls and checks. So that you don't get influenced by a confirmation bias. But I can tell you right off the bat, I have some confirmation bias, and everyone has confirmation bias to certain extent. So our job is not to get rid of all this confirmation bias altogether. I mean, not just confirmation buys all bias. They we're gonna talk about. But our job is cognizant of the fact that these biases exist, but try to cart against falling into trap of making some stupid actions because of this confirmation biases. So let's move onto the next one next one is representativeness bias. So what is it? People tend to classify new information based on past experiences and Klaus fixation people have a shortcut to derive conclusions based on their past experience and intuitions without going through t tail analysis. So this is what we call rule of. Thumb so whenever we apply rule of thumb sometimes it is good because we can make decisions, but sometimes it's not good because his too shallow in terms of doing analysis. So you can take a look at or read a book cold thinking fast and slow by Daniel Canan. And there he describes two systems in our mental system. I system is fast automatic frequent emotional on conscious the second since they may slow infrequent logical and calculating conscious. So these are the two systems that we have and sometimes we can apply system one, which is you know, rule of thumb and shortcut to derive conclusion. Sometimes you you might have to apply system to which which is slower than system on. But requires a lot more time to detail analysis. So it's case by case on I'm not saying that, you know, rule of thumb is bad. But sometimes you have applied both systems in order to derive the right conclusion. So let me give you kick example, many comes to stock market. So a lot of investors up just simply tried to categorize stocks into volume category. When they see low p ratio and low price to book ratio and most cases that rule of thumb works. But not always. So and also when you try to the new management team, all you look at you know, how they talk and how they look and just compare appearance to whatever experience that you have had in the past and tried to SAS their quality based on that based on the first impression. And I think that that's a mistake. So you have to actually look at their track record and look at how they have performed previously on in different companies and so on. So maybe you need some objective data to support your assessment in the new management team. So let me give you some very interesting study by a vanguard investment grew where then allies the five best performing funds from nine hundred ninety four to two thousand three. So it's quite long time period in what they found was fascinating. So Limoges give you quick facts. From this study only sixteen percent of tough five funds made it to the following year's list. So they look at e over year and only sixteen percent of tough five months made it to the following years list. Second tough five funds averaged fifteen percent lower returns in the following year. Third top-five funds barely beat the market in the following year. Lastly twenty one percent of all top five funds ceased to exist within the following ten years. So the reason why I mentioned this study is because people are prone to representativeness bias. So they look at just past experience. And and they look at these top five fund managers than they assume that these top five fund managers is gonna do will again in the future. There so extrapolate the short-term performance of these mutual fund managers into the future. And that's a significant mistake because based on the study these top performing funds cannot really maintain their winning streak in a significant amount of time. There are some exception to this study, for example, Warren Buffett was able to perform very well relative to the market or thirty year period. But usually if you look at this kind of study, it tells you that these top performing funds would not really perform well in the. Future. So they revert to mean. So how do we avoid the representativeness bias? So I think we just have to be objective for any new information coming to us and potentially we can create a checklist. So that we don't actually become vulnerable to our past experiences and biases in classifications we could through this checklist. So that we have a thoughtful way to check. Whether the stock is good or management is good. Okay. So let's move onto the next one. The next one is called illusion of control bias. So what is it people tend to believe that they can control or influence outcomes? When in fact, they can't so let me just give you some examples. When you buy a lottery ticket you choose your numbers. And this is a typical example of allusion of control because people are willing to pay more if they can pick their own numbers. So they they think that they control the situation and they can win the lottery if they pick their own numbers, but in reality, that's not the case, you gonna have exactly the same probability all when you actually let the machine choose the number in the random manner. There's no probability difference between your own numbers and randomly created numbers. So that's typically -xample of losing of control bias. And I there's obvious reason why the lottery company let you do that. Because it actually gives you in of control, and they can make more money off of that. The next example is traders think that they can time the market when they buy or sell securities. And as you know, and I talked this talked about this on multiple times in the past the market is truly random. It's it's a random walk. It's not easy to time the market, but let's say you have some experience in the past to catch the bottom, and you found really right timing and the stock actually has gone up then der experience is going to give you confidence that you can time the market, but that was purely by chance so you don't actually have the control when it comes to price movement in the short term. So don't fall into this trap thinking that you can time the market you can catch the bottom and sell at the top. So I don't think that anyone can do that. So you probably have to forget about the if there's anyone who can do that. Then that person. Should've made tons of money consistently over time. But I have not found any person like that. On the examples dad employees by their own companies stocks on and they think that they can control the outcome of this company. So if you are CEO, maybe this will make sense because but if you're just one of many employees who think that you can control the outcome of companies performance than I think you're fully into trap of illusion of control bias. So how do we avoid this illusion of control bias? Investors need to recognize successful. Investing is based on probability. And they shouldn't really think that they have control, but everything should be based on different scenarios and your sign the probably too stiff these different scenarios and on have the right process to make investment decisions. Always keep track of your investment trading records and assess if you traded up before just because you thought that you could time the market then that was the mistake that you made. Let's move onto the next bias next bias is called hindsight. Bias people may see pass events as predictable and reasonable to expect. And they may say I knew it. I knew that's going to happen. And that's typical case of hindsight. Bias in hindsight poorly reason decisions with positive returns, maybe described as brilliant tactical moves and poor results of will reasoned decisions maybe described as avoidable mistakes. This is where it's important for you to separate process from outcome. Just because you earn a lot of money from a single stock doesn't mean that your investment processes robust. Because you cannot repeat the same thing over and over again, if you Yuli made money based on lock than it's going to be hard to repeat the same outcome over and over again in the future. So if you fall into this bias, then you over is to mate the degree to which you can predict an investment outcome. So how do we avoid this hindsight bias again here, you have to document your investment decisions in terms of catalysts potential, risks and goods and bads? And later when you actually make assessment to your investment decisions when you actually try to SAS how the quality of investment decisions that you have made in the past y'all always look at your initial document and see if your investment outcome directly linked to your origin assessment. Okay. We talked about five different vices today. I hope that it was helpful. So let me just go through them again. Conservatism bias confirmation bias representativeness bias illusion of control bias in hindsight bias. So these are the five cognitive biases from police perseverance airs. So as I mentioned in the intro these other biases that we should card against. But it's something that we cannot completely avoid one of the percent of time because it's just not easy. You're not just why that way. Many consists we probably have to be aware of all these by snus tried to use them to extent possible. But we're not going to be completely free of these biases. I hope that you enjoy this show. It's worth this show. And as I mentioned, I'm going to create more episodes about behavioral biases in the next two words. So thank you very much and soon ext time.

investment professional June Kim Fox News Mr. market Daniel Canan Warren Buffett CNN Eurojournal Alice Yuli Klaus CEO sixteen percent twenty one percent fifteen percent thirty percent five months one percent
744: The Values of Value Investing by Vitaliy Katsenelson of Contrarian Edge on Smart Investments

Optimal Finance Daily

08:41 min | 2 years ago

744: The Values of Value Investing by Vitaliy Katsenelson of Contrarian Edge on Smart Investments

"This is optimal. Finance daily episode seven forty four the values of value investing by Batalli, cats and Elson of contrarian edge dot com. And I am, Dan. I'm your host here on the show. And this is where I read to you from some of the very best, personal finance blogs, anywhere. And today, I've got a post from metallic Katzen Nelson of contrarian edge. And if you have any topic requests for us any ideas, you'd like to hear me cover here on the show, or perhaps an author that you'd like us to reach out to to see if we can get their content, please share those with us. You can come visit old podcast dot com. And give us those ideas. And this episode is brought to you by send pro online from Pitney Bowes, send a pro online software makes it easy to save time and money, no matter what you ship or mail print shipping, labels and stamps, right? From your desk and access discounted rates. Try it free for thirty days and get a free ten pound scale when you visit p b dot com slash finance. That's PB dot com. Com slash finance. And now, let's get right to today's post as we optimize your life. The values of value. Investing by Batalli Ketson Elson of contrarian edge dot com. I organize a conference every summer called value. X Vail veal is a quaint beautiful ritzy ski resort town tucked away in the gorgeous rocky mountains about one hundred miles from Denver one day. I received an Email from a reader asking why of value investor would have a conference in an expensive place like veil, he suggested that as a true value investor? I should hold the conference in a hotel somewhere by the airport, where prices are much cheaper his precise. Comment was I thought value investors were supposed to like cheap stuff. This Email changed my value investment hood. It made me question my value. Investing values was that reader, right? Was is straying from value investor traditions. Maybe I should rename the conference value x motel six and hold it at thirty six dollars a night remote airport hotel. I recognized that the notion was slightly silly. But it started me, pondering, what are the values of value investing? Let's think about the bible of value investing. Then. Grams nineteen forty nine book the intelligent investor Graham spent a lot of time talking about cheap stocks. He defined them as the ones that trade at single digit price earnings multiples trade at a discount to book value or trade below their cash value net. Nets Graham, placed great emphasis on statistical cheapness his flavor of value. Investing is tangible staring you in the face it requires very little imagination. You just need to close your eyes. Plug your nose, take a deep breath and buy whatever you scrape off the bottom of the stock market abyss what? Warren Buffett calls the cigar but approach to investing. But if the only thing you get out of grams teachings is to buy statistically, cheap stocks than you are shortchanging yourself. This analysis is one dimensional ending nor as much that is important in one of my articles. I called Charlie Munger, Warren, Buffett's sidekick, Geoff Matthews friend, and the author of pilgrimage to Warren Buffett's, Omaha sent me an impassioned note saying Charlie is not a sidekick, Charlie change. Buffett's investment philosophy? Sidekicks don't do that. He went on to say, quote at mongers ninetieth birthday party buffet pulled out an old yellowed letter that Munger had written back in the day where among actually told buffet explicitly that he had to change that the cigar butts stuff wouldn't scale that it was better to buy good businesses. Even if the price wasn't dirt cheap. I thought that was astonishing maybe the most inciteful thing I'd ever heard about Munger. He didn't just talk about it. He actively pushed buffet to change literally without Munger. There's no Berkshire as we know it and quote Munger turned buffet from being a one dimensional to three dimensional investor the two dimensions. He introduced are quality and growth a statistical value investor does not even have to be good at math, the counting skills you acquired in kindergarten or enough as long as the P E of the stock. You want to buy doesn't exceed the number of digits. You have on two hands. You are a Ben Graham value investor, but as Munger pointed out this one dimension. Strategy is not scalable, quote, you have only a very few opportunities in your lifetime to assemble a portfolio of in-your-face statistically, cheap stocks. That are decent businesses. All other times, you'll end up owning a lot of melting ice cubes, and quote, the quality and growth dimensions may lack in your face tangibility. They are often more difficult to quantify, but are very important sources of value. Let's look at quality a high quality mature company that is barely growing earnings. Think Coca Cola is like an inflation protected bond. This company dominates its industry and its existing keyword business generates a high return on capital, but it cannot put this capital to work at these high rates because it already has a large market share in an industry with GDP growth as an investor. You'll collect dividends that will grow with inflation. You'll make or lose money on the stock price depending on the pendulum swing of price to earnings around the fair or par value, which will also appreciate. In line with inflation from today's perch in a world where investors are starved for yield mature, high quality businesses trade like very very expensive bond substitutes their p pendulum puts their valuation much above par growth is a tricky dimension on a standalone basis, it means very little and can often be dangerous a company that grew earnings at a fast pace in the past. But lacked a sustainable competitive advantage, a bedrock of quality will invite competition that will destroy current and future profitability when you combine growth with quality. However, the mixture is magical and will result in a lot of value. Think apple this value? Lies in future earnings another way to say the same thing is a high quality company with a high return on capital married to a significant growth runway the ability to reinvest at a high rate in the future will create significant value, which will not be observable in last year's or even next year's earning power. But years. Now think about some of buffets. Best investments American Express and Geico both had significant competitive advantages in the case of Geico it's sold directly to consumers, and thus was a low cost producer in a commodity industry. American Express simply had an unassailable brand both had a huge growth. Runway ahead. When buffet purchase them. If grams intelligent investor is the bible of value investing. Then what should we learn from it don't trade stocks like you would trade sardines view them as partial ownership of businesses? Mr. market is there to serve you not the other way round. And of course, there is margin of safety buying stocks at a discount to what they are worth. But a discount to worth doesn't equate to statistically cheap. A thirty six dollars a night room motel six by the airport. Overrun by cockroaches and bedbugs and with questionable plumbing may be statistically cheap. But it's not a bargain, if I held my investment conference in a hotel like that, it wouldn't be attended. By anyone other? Than the vermin that are already there. You just listen to the post titled the values of value investing by Batalli cats, Nelson of contrarian edge dot com. And once again, send a pro online is an amazing online software that helps you save time and money, no matter what you send like letters packages overnights or flats and you'll always pay the right amount. It comes with a free ten pound scale that weighs and calculates rates for you. Plus you can compare options between USPS UPS and FedEx right at your fingertips on January twenty seventh twenty nineteen USPS postal rates are going up, but just by using send pro online you get discounts of up to forty percent off USPS priority, mail shipping and get five cents off. Every letter you send no additional equipment is needed. Just log onto your computer and use your own printer to print shipping. Labels and stamps, send pro online is only fourteen ninety nine a month. And listeners can get a free thirty day trial by visiting PB dot com slash finance experienced the convenience of send pro online and try it out for free at PB dot com slash finance. And that'll do it for today. Thanks again for listening, and I will be back with you tomorrow where I'll have a post from tiny Buddha while see there in the Friday show where your optimal life awaits.

Charlie Munger Batalli Ketson Elson buffet Ben Graham Batalli Katzen Nelson Pitney Bowes Warren Buffett Dan Denver Buffett FedEx Geico American Express American Express Omaha Berkshire apple
8-14-19 What's News

The Nicole Sandler Show

06:00 min | 1 year ago

8-14-19 What's News

"And it's time for nicole sandler's what's news from nicole sandler dot com and the progressive voices. This isn't it worked. It was another night of chaos in hong kong. Thousands of anti government protesters blockaded the main terminal at hong kong's airport for a second straight night temporarily stopping flights. Here's more from c._n._n. The new violence coming after hong kong's airport was shut down by protests for a second straight day. Jake the crowd turning on suspected chinese spies and ramping up anger against what protesters call police brutality chinese authorities have blasted the protests tests as signs of terrorism over the past week. State media has shown videos of chinese military drills on the mainland less than twenty miles away protesters. I tell us they're undeterred. Does that scare you know if parents president trump responding tonight oops he did it again. Trump made a ridiculous threat this time about new tariffs on chinese goods that would hurt the american consumer particularly hard and then he backed down off off of it this time he announced that he delayed the plan until december fifteenth so prices on toys cell phones video game consoles won't be affected during the christmas shopping opping season but i thought china was paying for the tariffs n._b._c. Stephanie rule has more. The president outed himself today he very clearly he says china paying us billions and billions. Will that certainly doesn't make sense if today he's now postponing tariffs and citing the christmas shopping season that that being the case he's tacitly meeting. It's the american consumer who pays for this so the president is pushing these tariffs why because being mr market is is more important to him than being the tariff man and we've already seen equity markets pretty volatile. You mentioned those banks earlier the c._e._o. Of goldman sachs two days ago said it's the trade wars that could push us into recession. The new york times is reporting that aids several key senators in both parties have been meeting with senior white house officials about gun control legislation the senators involved pat toomey republican of pennsylvania joe mansion sorta democrat of west virginia and chris murphy democrat of connecticut. Their staffers have been meeting with joe rogan's domestic policy council and white house legislative affairs director eric uland roland stay tuned. We're learning more about what happened. The night jeffrey epstein died the two staffers and manhattan's metropolitan correctional center tasked past with watching the accused sex trafficker on the day of his death falsely recorded they had checked on him every thirty minutes this according to a report in the new york times times a source cited by the associated press said surveillance footage showed the guards had failed to make some of the checks recorded in the logs. This comes after the two guards guards were placed on administrative leave pending investigations by the f._b._i. And the justice department's inspector general the m._c._c.'s warden was also temporarily early reassigned. We're also learning more about one of the workers who was supposed to be guarding epstein at the time. Yesterday we reported. The employee was not a fulltime corrections officer. You're now a person familiar with the investigation tells n._b._c. News that employees had been a corrections guard for seven years. He then accepted different job with better hours but routinely took an overnight shift as a corrections officer to get overtime pay. The source would not say whether the employee was one of the two place not administratively meanwhile the new york times is reporting the two staff members guarding epsteins jail unit fell asleep and failed to check on him for about three hours then falsified records. It's to cover up that mistake. According to several law enforcement in prison officials with knowledge of the matter to law enforcement officials telling mec- news investigators are looking at whether either i either or both of the employees on duty who were responsible for checking on epstein were sleeping. They say no conclusion has yet been reached epstein who was arrested for the alleged. Sex trafficking of dozens of miners is thought to have died by apparent suicide in his cell and in campaign news former colorado governor john hickenlooper luper is said to be in discussions about ending his presidential bid. Yes and entering the race for his states. Republican held senate seat. Potentially giving democrats are strong candidate in a race. They really must win in order to have hopes of retaking the senate in two thousand twenty one. Oh and tom steinmeyer the billionaire bilionaire entrepreneur and climate change activists. He revealed on tuesday that he has inexplicably reached the requisite one hundred thirty thousand individual individual donors needed to be included in the next round of debates democrats have until august twenty eighth to qualify for the debates happening september twelfth and thirteenth in houston austin star who has been a vocal proponent of impeaching the president is also on the cusp of qualifying with polling he has said two percent in three separate polls needing just one more to qualify nine candidates have already reached the donor and pulling thresholds and will partake in the debate with <hes> tom steyer and two others. There's former hud secretary julio castro and representative tulsi gabbard reaching the donor prerequisite. Stay tuned. That's just a bit of what's news for now. I'm coal sandler. Appreciate these reports nicole sandler show. I hope you'll consider making contribution. My work is one hundred percent listener supported and i can't do it without your help. For more information visit nicole sandler dot com click on donate.

jeffrey epstein nicole sandler president hong kong The new york times senate china officer goldman sachs joe rogan Trump Stephanie rule Jake pat toomey chris murphy tom steinmeyer
Decoding Warren Buffett: Book Value vs. Market Value

WSJ Your Money Briefing

09:40 min | 2 years ago

Decoding Warren Buffett: Book Value vs. Market Value

"Are you hiring with indeed you can post a job in minutes set up screener questions than zero in on your shortlist of qualified candidates using an online dashboard get started today at indeed dot com slash podcast. That's indeed dot com slash podcast. With your money briefing. Im JR Waylon at the Wall Street Journal in New York when Warren Buffett speaks people listen, but when the oracle of Omaha spoke of book value versus market value last week, it caused quite a stir will sort out the method behind the message in a moment. I these money and markets stories, you should know CEO's in the nation's top three credit reporting agencies went before a democratic house panel on Tuesday as congress considers new legislation with regard to fixing inaccuracies and consumers credit reports. A new proposed Bill calls for a new rights for consumers to challenge errors in their credit reports also bars employers from using credit reports to screen job applicants and allows greater power for the consumer financial protection bureau to regulate the industry the CEO's push back against the need for new legislation saying they have made significant improvements to their systems and practices in recent years. The CEO of equifax told lawmakers that since the massive two thousand seventeen data breach. The company it has increased the technology spending by a billion dollars. The company is also investing more to help consumers access their data and fix errors more easily. Meanwhile, the reopening of the government in January sparked a strong uptick in consumer confidence in February the Conference Board, which surveys consumers says it households outlook for jobs and pay was also generally more favourable, the so called labor differential, which shows the gap between survey participants who say that jobs are plentiful and those who indicate jobs are hard to get it an eighteen year high in February report also showed that future inflation expectations. Continued to fall hitting the lowest level in about fifteen years and the unemployment rate among Americans disabilities has fallen dramatically but the disabled remain disproportionately employed by governments and in low wage occupations Labor Department says jobless rate for disabled Americans fell to eight percent last year. And that was the lowest rate in a deck. Decade of comparable records and well below peak of fifteen percent and two thousand eleven but despite the gains people with disabilities were more likely to work in public sector jobs in low wage, occupations, and to be self employed last year, fourteen point one percent of employed persons would disabilities work for a government entity compared with thirteen point four percents of those without disabilities. Are you hiring with indeed you can post a job in minutes set up screener questions than zero in on your shortlist of qualified candidates using an online dashboard get started today at indeed dot com slash podcast. That's indeed dot com slash podcast. Berkshire Hathaway CEO Warren buffet sent a chill through financial circles when he announced his annual letter to investors last week that he would no longer report berkshires wealth creation in terms of book value. But was there some method behind the move that surprise some Wall Street Journal hurt on the street deputy editor Spencer Jacob joins us to discuss. So Spencer just a lay things out. What does book value of a company indicate so book value is a by the book, accounting measure, it shows the assets and the liabilities of a company and the value that accrues to shareholders, it's very hard to fudge market value moves up and down the web's. The market depends how how optimist people are about something. And so people were a little bit surprised because Warren Buffett has not really paid a lot of respect to the market. In other words, he's gotten rich off of the markets irrationality. And so people read a lot into this move to say. Well, maybe now he he thinks the market is is more rational than accounting measures. And is he losing it? Or is he sort of, you know, straying from his views, and that that is not the case. But it's easy to think. So and buffet feels that using book value as a barometer doesn't provide always a fair or accurate reading of a company's overall value. That's right. So if you look at at what Berkshire was an has become you get to understand it. You know, he took it over. It was just a kind of a failing textile company that he turned into an investment vehicle, and he said when he took it over the book value of that textile company way, overstated the value of the company, it wasn't realistic because textiles were not a good business. Even then when he took it over, but over time as the, you know, he's he bought stocks and bought individual companies bought gyco and See's candies. Bought Burlington Northern railroad and other insurers those companies have become part of Berkshire. There's no market price anymore for those. So you know, he he does invest in them. But the book value of those assets has not grown as quickly as the market value. Berkshire. So to put it in round terms, the book values grown something like a million percent during his tenure, which is pretty good. But the market value has grown something like two million percent since his tenure. And so the gap has gone in the other direction. And and that's why he says that it no longer reflects, and there's some more complicated reasons as well. Now, you know, he he has a pile of over one hundred billion dollars in cash that he could use to to buy companies. He also uses it to buy stocks. But he also uses it to buy shares of Berkshire Hathaway is the investment that he knows he made that point in your column that have created a large gap between the book and the market value when he began to buy back the shares. That's right. It exacerbates the gap. And so if you uses some of that money, and he said that he has certain criteria, and he has his own measure of the intrinsic value of the company so right now. Berkshire Hathaway's trading it something like a forty. Or fifty percent premium to its its book value. He said that he has his own idea of what the the real value is a Berkshire Hathaway, and when it goes below that he might use some of that cash to buy it. But when he uses a dollar of the cash on the balance sheet to buy back, those shares then it widens that gap further. So what he's saying is that that gap is just so big now that he's not going to measure, your wealth creation in terms of book value anymore. You can use market value in in terms of what you know, whenever you happen to have bought berkshire-hathaway, if you're a shareholder, you've you've done well over most periods, especially over very long period, you've become very wealthy. Owning it the real wealth that it has created for you is the market value, but people did misinterpret because they think that like, you know, he he's kind of derided the sort of the market's ups and downs, and wims and moods. And maybe now he's sort of embracing it more, and that that is not really not the case. It's just that, you know, in the specific case of his company because it has all these operating subsidiaries that he's not going to sell. He's not going to sell his railroad. He's not going to. L gyco. He's not going to sell these things and realize the full market value. Whatever they may be that gap is going to keep on growing and growing. And that's why he's steering you away from looking at that, you know, decoding Warren Buffett is common activity. It's like a cottage industry, but one thing is for sure he really has never been a big fan of chasing after the ebbs and flows in the dramatic ups and downs of the market. That's right. You know, he uses this allegory that he got from his mentor Benjamin Graham, which is Mr. market. He said pretend that you have a business partners name is Mr. market and some days, you know, and he he's mentally unbalanced. You know, some days he's super optimistic and he wants to buy your share of the business for way, more than you think it's worth. And then the next day he comes in and he's super pessimistic. He wants to sell you his share for you, no way less than than it really is worth. And he said, you know, you that you're basically doing business with with someone like that in the long run where the ebbs and flows allow you to pick things up more cheaply or sell things more dearly than than the the. Intrinsic values and that that is still the case. And that is still the case even with his own company where the market sometimes a little bit too optimistic about it. And sometimes it's more pessimistic. And that's that's how you, you know, over his tenure he's made something like sixteen times, what you would have made just owning the, you know, the the S and P five hundred by itself and Buffa carries a lot of credibility, and if market value readings allow him to better gauge, the health of Berkshire and the subsidiaries investors elected to keep listening. I think they are. I mean, I think that's what ultimately that's what people care about. And they thought that he was a bit of a stodgy for pointing to the book value for so many years ago, they're not many companies that that measure their shareholder wealth creation in terms of book value, they measured and just in terms of market value. And they viewed this somewhat throwing in the towel. But you know, what he said is that it's at least closer, it's at least a better measure of of wealth creation than book value because book value is sort of, you know, it's just moving farther and farther ways, and I'm not going to change. This is still you know, or LA. Largely a conglomerate that has operating businesses. It's not going to sell these businesses. It's going to keep them for a long long time. And so that gap is going to keep on growing. And so it's just is not useful anymore and the only other measure out there. He's not going to give you a measure of intrinsic value because that's totally subjective. So the market is the the only other thing out there. It's the next best thing. But it's not very good. All right. That's Wall Street Journal heard in the street deputy editor Spencer Jacob here in our studio Spencer. Thanks for stopping by. Sure. And that's your money briefing. I'm Jay are Whalen in New York for the Wall Street Journal.

Berkshire Hathaway Warren Buffett Wall Street Journal CEO Spencer Jacob Berkshire Berkshire New York deputy editor Conference Board equifax Burlington Northern railroad Omaha Bill self employed congress Benjamin Graham gyco Labor Department
Ep #8:How to 4C's of Marketing? Ft. Jeff Beale

Business Podcast by Roohi | Entrepreneur,Marketing

27:59 min | 3 months ago

Ep #8:How to 4C's of Marketing? Ft. Jeff Beale

"Hi everyone. Thanks for joining in the weekly business broadcast by ru. He hosted by higazy. So this podcast is for enterpreneurs marketers. Broadcasters and much more in this podcast series. I'll be bringing on expert industry and thought leaders to hsieh they're inside growth strategies draw on many topics ranging from marketing to the music industry and beyond to the business podcast by rookie. Today i'm joined by special guests. Mister mock balaji. Himself mr geoff. Diehl so Jeff would you like to give a kind of a brief overview to the audience about who you are and what you do sure. I'm bill jones. The business community is mr mark. -nology i have been marketing for several years and i am a marketing strategy so i hope companies actually provide practical strategies for they marketing Basically did get in front of their target audience. Offer with your target audience needs and convert so Is more than just a providing you the latest greatest marketing thing out there like the new shiny going. I really like to dive into your company. Your companies goals set some expectations understand your audience Help you understand the audience and the audience needs and how you can benefit their needs. So that's would I do. I have the privilege of being able to sit at every seat of the table. So i've been a entry level worker. Been consultant. i've been a freelancer avenue. An executive been agency life In house life. So i've seen almost every angle when it comes to Sitting at the marketing table so that helps me bring Different perspectives from different people's point of views events. What's your take on. How marketing is today. And what are the kind of new strategies. And you tings in marketing. Today is more of a relationship building than it is pushed marking a market marketing in the nineties. And before i was more push marketing you had television radio. Great mail Impressed that you basically get commercials. And you told people think. I'm in today's time with social media internet Bones and so forth. People are doing a lot more research due diligence. So you can't really tell them you're the best thing you can't really tell them you should buy from me. They make their own decisions based on the release relationships in research today do so marketing. Today is more of you building that relationship even if you don't physically communicate with them to Have them like in sales cliche. No like entrust. You was fantastic. Point that you brought about about how marketing is just about relationship building. It's no longer a traditional marking methods. No long will in play like all the most shows and all that is long gone. So what are some of the four cs of marketing. So foresees the marketing Help you build these relationships. So i'll go to the first. I versus content and you have to have quality content not just a lot of content so when i mean content i mean things such as written content like You have to have a visual contents. That may be graphic design. Maybe video Sometimes you can have a content like we're doing right now audio content says podcast You can have a tangible contents as brochures bailers so you have to have content so that's very important at is very important half content that speaks to your audience Not just advertisement on a lot of times now like i say when you build relationships in order to build relationship you have to communicate so your content has speak to them in a way that they digest which is saying or the contigent providing. So i'll say the language they speak. So that's the first thing will be context. I know all of us have heard Cliches who you know. It's not what you know who you know so the who you know really opens up doors when it comes to building your business on those relationships building york you're planning estimates base as a lot of times people are I remember early on. You would ask companies. They say why just had word of mouth and really. That's what contacts all about so building the right contacts at also speak to your audience also provide them with endorsements of your product or service Influences them to make decisions. So you have to have contacts. The third sing would be communication. So you have to communicate and when i mean communicate i mean where do you communicate with. That's things such as. Do you communicate with them on your website. You communicate with them through social media Do you communicate with them through podcasts. Know how do you communicate with them and setting up your points. A communication focusing on optimizing. Those wants to communication is cheap. Some people say you should communicate everywhere kind of throw it up on. The wall was sticks method and infrasonic companies. That may work. You have the logistical power to do so It takes a lot in. If everything can kinda worse cohesively that might make sense. Other people say pick one lane and ask that lane so only communicate on one maybe two channels owned and that works to So you just need to figure out which platforms were best to you and focus on the strategy more than just the platform because one thing about platforms. They control your destiny if you are saying only using facebook and you put all your eggs. Facebook basket of facebook decides to go the way of space which their their business model isn't the same as it was when it first came out or be they decide to ban you for any reason at eighteen worthy then your whole marketing campaign goes down at train because you only use that one platform so that pick one one channel approach. That's the con with that approach Now i'm not advocating. Do the communicate everywhere. But that's one of the drawbacks. Only picking one lane so communication is key but is not driven on which you want to do more than where is your audience go. Where do they go to consume information base in your industry to make those decisions. If they're going to talk you should be on top. Figure it out that just because you like to be on top. If they only dan. If your business to business only end you should focus on how to maneuver through late. Did not just because everybody says the new thing is talk or facebook is the greatest So picking a proper lanes to communicating is very important and in the lassie. Is the most important. See that a lot of companies feel at odds. Even failed added from time to time s consistency. In order to build the relationship you have to be consistent and You know that consistency builds everything around it and as you communicate as you put out content. It gets better. You get better. You feel more contacts. Also as you're more consistent Put it in in the mind frame of this. If you have a friend that you never call you never message them or anything. You never communicate with them then all of a sudden you need something is hard to call a friend because they say i haven't heard from you in years. Now is the only time. I hear from us when you want something and a lot of times business as do the only time they hear from us as as they see an ad on social they. Cnn search engines is as their email just adds only time. I hear from us when you want something. So you haven't built that relationship but if you're putting out content constantly on these platforms and you're consistent and they see that you're adding value to the marketplace over and over and over again when you do finally asked for something. They're more likely to engage. So you have shed a fantastic framework of gone. Gone dot communicate and consistency. So now how can someone build a business on shared the message through social rich media to attract massive exposure. One of the best cliches that out her. When it regards social media marketing is social media is meant to be social and That is brilliant because honestly the best technique is start the conversation any gaijin in conversation with your audience on social We see a lot of air. Ed courses and youtube ed courses in so zone an advertisement works. A best results is when you build a relationship with your audience Through engaged conversation That helps you build your own They know you know what you're doing what you're talking about. That helps bill de loyalty because they look at you as somebody. That's a friend innocence. Because you're actually communicating back and forth with them versus a salesman. And i don't know how many people love getting sales goals. I mean i know personally. I don't even know understand what they're doing. I respect with going. When i know it's a sales all our sales email. I don't jump up and down getting your sales go so you know your audience is the same way in over social. If you're building social you need to be social build your content in a way that engages them that gives a dialogue back and forth conversation that they can actually provide feedback. Provide communication back to you Far as rich medias concern. I think videos are are wonderful Because it gives more than just the audio gives the video of the visual as well You can repurpose it in a way that you have audio visual. And you can transcribing texts. So it gives you a lot of different angles in doing audio grams. You can have graphics as well so You know i. I think that leveraging video especially nowadays with all this going on out people also use now to going on as seen videos online on. They want like a say. Put a face with the name so Having that rich media aspect to your social really helps and if you check any statistics You'll see video usually outperforms any other of content across the board so If you're not comfortable using video that's fine. Everybody is not one Camera friendly but you can find somebody that loves to be in front of the camera and they can be your spokesperson. They can beat the face of your company So you know just figuring it out Is is is a key. But i've noticed video does very well especially when it comes to social kind of inside is that to You should kind of have a strategy which is focused on repo passing multiple content. But if you want to be on social media you want to build some more rich content you should be focusing on video exactly You know it's one of those things where each company has different. You find out from testing any find out from doing research which audience retains and you can see that by likes to shares the saves. You know you can see what type of content they retain. There may be a base. It loves to read so video. Might not make sense for them but one of the things that you look at is just kind of look at like fans yong content or your competitors content. Were gets the most engagement and when you see that you know most likely it'll be video at you know most likely when even in your personal data day wednesday might share something with you from social. Usually as the video is not usually a long article in. It's not usually every now and again. Maybe a graphic but when it comes to them sharing information usually is a video you know so just kind of take a practical logical approach suit and nc which former content works best in your industry. That's a great point about gun of creating content. That's going to work the best in your industry that yeah. That's a very good point that you should implement these strategies your social media as as well. What is your kind of take on. How can this exposure be leverage to get more traffic leads and sales for business. Yeah so when you're building out those foresees you should have in mind. Note that user or customer have in mind which you want to do. Have some intention Is not is not bad to have haven't tensions so as you communicating. Let's say you're on social when you communicating with them. You should have a logical next step a call to action a lot of times we communicate and we have nothing after information and then we look at the end of the month and we say well we haven't converted Are why isn't what it needs to be and Why what we put out a lot of good videos. Let's say let's say we use videos and it will funny videos but they would just funny videos so they never had a call to action. People wise today shared a laugh. But you never told them which offer and you never invited them to do anything so you know having that strategy mapped out a front is very important. That's why i usually come. In with companies and help them provide a beginning to end strategy with all things in between all variables if they do this in. Have them do that if they don't do this. Then here's the next thing that we need to look at nowadays. The days of impulse buys aren't as much as it used to be because it will now can do their own research so you know you may have to get in front of them. Multiple times as they consistency comes into play before they start to trust you to do business with you. So mapping all that out in a strategy of front is very very important in as you map everything out up front you can then start seeing where there's holes in your campaign that you need to You might see waterfall where they really drop off right here. And you may need to change your strategy at that point. Which percentage increase their. You're our ally increase so you know that's that's something that you can only do if you already have something mapped out. It's sorta like think about if you're taking a trip if you taking the trip and i'm in atlanta so everybody knows atlanta knows about atlanta traffic. We have some terrible draft If you're going from one side out of town and you get traffic. You may know that. If i'm trying to get across town i can take to eighty five or i can take seventy five or eighty five now. Seventy five eighty five or block. I can take to a five. But i only know that if i already know the different directions i can take your marketing and you just winging it you to drive and if you hit traffic you don't know which rose can take you there so it's the same thing in marketing. If you're not mapping things out and saying this is the path that Take and here's some alternate routes if they if they decide to get off the path then you don't know what to do if you're conversions law and that's the importance of go ahead building it out of so. This whole idea of building adaptable call to action gun strategies correct. Yes yes it definitely needs to be adaptable until you start hitting your number and any ceding your numbers highly Bin you can stick with the same thing what than change. Time change you know You know back when. Let's say snapchat up years ago. Used to be the big thing everybody was talking about. If everything was going through snapchat right now is really talking about snapchat so you would have to adapt so kind of how to get over irrelevancy or like just the brand new kind of fading away slowly so you have to make a lot more adaptable and engaging so that people who keep coming back correct yes that's correct you have to consistently add value if you not always adding value on him. Adding value brings you know. Brings you as a thought leader on an orgy in the space So in in that bills. The brand awareness. But if you have consistently doing that then all of a sudden you'll be forgotten and unfortunately in today's time people's attention spans very short a. What's your best advice for people who are wanting to kind of break into the marketing space. Best advice would be to basically build relationships with people that away. You wanna be If you're trying to break into marketing marketing changes so rapidly. Then i would not recommend I was going to formal school because by the time you graduate. Probably what you've learned at the time won't be relevant on the best thing is a jump in. It detests to talk to people that are doing it to ask them. The mentor you to Ask them some of their experiences to listen to podcasts To read books at the moment that are written at the moment in today's time You know consuming information and then look to those that are where you wanna be asked for their opinion their advice their mentorship because you may consume. A lot of information comes overwhelming. These people are actually practitioners. The end the trenches doing it they can say. Don't waste your time with vance right now. If somebody was to come to me and say well. I'm studying in how to. I don't know do my space marketing. Don't waste your time. Space isn't even a competitor anymore. I want to figure high in rankling. You on yahoo who hasn't been a competitor s ios based in a long time. Don't even waste your time. So you know having those contacts and you don't have a formal mentor Just build relationships to where you're in conversations with people get into groups whether it's facebook lincoln was app get into groups getting those conversations. Because that's what you're gonna learn the most information on housing's going and then testified out what works for you. You may have certain strengths. That others may not have yeah. That's a great point that you made about how rather than just relying on the formal education on the formal system kind of go out there and seek all these vendors. People who already in the industry already practicing anto just build relationships with them. And kind of get some validation about whether you're doing the marketing space is the right way to move forwards. Okay well thank you so much for your time and immediate owner that you considered to be a out of this podcast series and yes so. Do you have any last minute kind of advice that you would like to show any last minute things that you would love to share definitely You know thank you so much for having me on the show. I mean it's been definitely an honor and you you gracious host As far as advice last minute marketing. Like i said is ever changing. You have to get in the game you have to actually like when learning how to swim you have to get into war so you have to give the game you'll learn and you'll you'll win some you'll lose a failure is not a loss more of learning on and just continue to lose. But here's the the main thing if you take anything away from this Listen to your audience and then your action should be based on what you find out from your audience The whole way of marketing used to be just tell you what you wanna thank understanding in. Today's time with so much out there. So many options in so many ways to do diligence and research Is more about relationship building so find out what your audience wants and provide them that Versus kind of forcing it down at throat telling them what they want kind of create content with the audience in mind exactly exactly and given communities. I mean there's tons of communities out there like say facebook's glinka was at tons of communities. I'm actually building a community myself Market allergy group dot com. Where it's just we all talk marking. And i actually not only myself but others coach you through different aspects of marketing and we dive into the strategies of marketing pieces. And not only. Do you learn. Like i said it's not like formal training to where you read books in in so what we basically say this strategy working and here's moslem Event let's bring in some other experts that have other points of views Other ways they do marketing get their their point of view. And then you can develop your own point of view in your own strategy from there And then it builds a community so you have peers that you can talk to you have those that are more advanced than you are in those that are not as advanced as you are and you can interact with everyone in find out exactly you know was working for different people and make your own assessment with strategy. Works best for you. Yeah that's a great point about how You're doing an amazing job of kind of creating your own band of todd's and strategies of what's working in marketing leveraging the strategies of other fan of experts in the space and then providing that to people who may not have the same amount of knowledge and then kind of building a notary in the community around that. That's an amazing thing that you're doing with your mahkachkala. Joe dot com. Yes he Going through mr market allergy dot com as far as my social o'brien awareness. I have missed the market allergy across all social platform. So that's the best way of cards acting me Lincoln's only one is different as under jeff beal So you know of course they have to have your your real name so That's how you can contact meal. Social mr market on website is mr market allergy dot com. That's m. r. m. a. r. k. e. t. o. l. o. g. wide dot com. And then if you are interested in being part of that community market alleged group dotcom so That's actually community in there every day. So you can you know. Reach out and ask questions and things of that nature now just a small request. If you enjoyed today's episode lease rate and review the podcast and apple podcast or listening on spotify. Make sure you follow their subscribe and chanted podcast with other people. Hope you learned something new today and looking forward to connecting next week.

higazy facebook mr geoff mr mark bill jones bill de Diehl atlanta Jeff Cnn dan Ed youtube Bin vance lincoln yahoo jeff beal todd Joe
#1271 You Can't All Just DO This

The Adam and Dr. Drew Show

38:47 min | 11 months ago

#1271 You Can't All Just DO This

"Thanks for listening to the atom. Dr Drew Show on podcast one. Podcast one presents a collect call from sing-sing name is John Lennon. I'm locked up for selling drugs and committing murder. Also Brash Choir magazines project so I'm a writer and I'm prisoner. Imagine trying to stay focused and talk about issues of substance pizza slamming prisoners screaming and blaring in the background. Get new episodes every Wednesday on spotify. Podcast one and apple podcasts. Well we roll out a theory. Coalmine my magic spackle theory which you guys should take and run with. I think it's more than a theory. I think it's a it's a metaphor for reality. Yes so you're welcome America. I I'll tell you about lifelock corona virus it is upon us and CYBERCRIME is kicking into overdrive lot of complaints to the FBI like Scams promising a government checks and Faye. Cova charities. Boy. You guys know what we're doing with boy it's like here's what it is. It's two thousand twenty. 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Promo Code Atom Call One eight hundred lifelock or lifelock dot com use Promo Code Adam for twenty five percent off recorded live at Corolla one studios with Adam Corolla and board certified physician and addiction medicine specialist. Dr Drew Pinski. You're listening to the atom and Dr Drew Show. Yeah I get it on. Got To get it on. Church vindicated on. Thanks tune in front of that about with also an match Mexican. Oh I am also that it's interesting. Did Not know. Impressive material drew a theory based on a conversation. I had Nine minutes ago with the Jose other shop which is communication difficulty. I know you're texting now. No I'm not I'm trying something that's driving me and say let me try one more time. Go ahead what are you doing stuff? My phone's about don't ask I get it done really quick. Well I'll let you all talk about something. No done good all right now hold on. Where's my phone? That's right not in the studio number in the studio all right now. Listen you're your doctor? But I'm a sought after carpenter's I don't think there's emergency there are. I'm sure somebody's wife has called you on an emergency several times. Yes yeah all right so communication. Yeah I believe that. Our phones and other distract distractions are hurting us from communicating correctly. An immediate demonstration. Exactly that hurting our ability to communicate interpret. You're not talking about this. Just distracting us from personal communication. You mean it's impairing communication by virtue of how we're always using the phone know what I'm saying is is Constan pure weakens your immune system right having every number on your phone and never having to memorize anyone's number probably probably weakens that part of your brain memorize people's phone numbers like we used to do back in the day and it is generally compromised are sort of ability to communicate and to also sort of infer things used deductive reasoning and logic and stuff like that. Yeah I just had this situation where I was working on my Warehouse and told Jose he's going to be at home depot. Grab a bucket. Grab a gallon of Swiss coffee which is like off white and get it in interior semigloss. Give it to the boys and have them Put it up on in the bathroom. Paint the bathroom so okay and then the next day I walked in the bathroom was Brown through and it was I looked at the can in the can was brown and it said It said Exterior. Which is weird. Like right on the top of the CAN and and it said Satin just the sheen where I I wanted interior and semigloss and was not Swiss coffee. So it'd been vexing me for a while and I finally ran down Jose at the other shop and I was like. What is this story behind this? How does it work because forcing you get as he sort of Vega toots all the times I thought I told the guy you know? He said I said okay. I told US coffee. Yeah Yeah I should to Swiss coffee. He said okay. Okay so my next on your mind. I'm talking. I'm talking to Jose and I'm like they have aisles of Swiss coffee in its INA. Can that the reason I ordered Swiss coffee is you don't have to have it mixed up. It's just there. Yeah so I don't know why Jose didn't just walk down the aisle and get a cannabis with coffee. But he didn't. He said to the Guy. Behind the counter. I want Swiss coffee and there is A. There's an entire wall of swatches of color swatches with paint code so you go pick the color then you give the guy the card. Yeah and he looks at they color code and he goes. Okay mixes into shots at this? Who Shot to that. I don't know that there's anything where you talked to a guy. `bout a color if the hand him there's kind of two choices you want Swiss coffee. Yeah you want me to Mitch Color. Where's the swatch or bringing your daughter's Cardigan and hold it up and we can try to do a match or whatever but yes yes. Okay so I just said Jose what what happened. How how did this go down? Said to the Guy Swiss coffee and he said okay. Let me mix up a random brown. That's what he gave me. I said okay. You said Swiss coffee and the Guy Works there with the aisles of Swiss coffee. He just said Okay and he just said I'll make I'll make brown color. I Yeah I said okay. Go Talk to the guy at the store. Now you'll never find that guy committed suicide. I said I said to him but but semigloss I told him semigloss in Interior. You Got Teary. I told him so coffee. Semigloss INTERIOR PUT THE KANSAS EXTERIOR. Sat in on it. I don't know I said okay. Well then why I took it to the shop and I told Roberto Alvarez like I'm not sure about this this looks seems weird to me talk to Adam first before you put it up and I'm like okay. What HAPPENED THEY PAINTED? Like is any of this happening. Is this really happening or is this what we're talking about? Is it all made up? I don't know I don't. I don't know what Roberto I don't know what said to Roberto under the Guy Behind counter. I don't know what it Jose's saying he's like I checked it on my phone and it looked like this. I don't know what's actually happening anymore. Do you know how did this happen and did he seem confused by your perplexed this no he was just like. I went and told the Guy Swiss coughing this game me but how would a guy who works in that department with really Swiss coffee only stock color? This may be another point. This may be another. Seminal moment like when your daughter said your wife said your daughter's feelings are hurt feelings therefore that's fact. This may be another moment like that where we're crossing over. We're whatever you say well what comes back. Here's here's what we're able to achieve now. What we're able to achieve is a kind of time machine logic that somehow transcends everything so you say hey man what happened. And he goes. I told him exactly. What and then if I went to Roberto Alvarez said. Why'd you paint it when Jose said don't do they go? He never said that. And if I talked to the guy behind the counter he'd go that guy came up and he said he wanted Oyster Brown. And I'd be like one at someone's lying. You can't just do this. We can all just live in this world. We're going to COM CA concoct leading. We want your zeroing in on something else which memories are terribly inaccurate extremely inaccurate and I feel like that's been getting worse to all my God so so people feel in their memories however they please yet but let me get limited. Here's the yeah. Of course how the memory feeling. Here's how that magical spackle works. It goes over all the Shit you did wrong. You just smack like Jose he's like. Hey Man I just went in and did that. And then he'd probably sit around thinking what would make this even better. I told Roberto not to paint until they talk to you you did. Why DIDN'T REPORT WIDER ROBERTA? Put it up that afternoon so you told the guy behind the counter. I want Swiss coffee. That guy has an aisle of cans and say Swiss coffee on eight feet behind him. He didn't point at those cans he went. I'll make you a magical brown color and then you told Roberto who's dutiful guy. I don't know about this paint. Don't paint it until you talk to the FA and he went fuck that I'm going rogue or he's got a thousand things to do. It could just put the talk that him. That's what you did or is that magical. Spackle the magical spackle that cleans wonder where our justice system is such a mess. It's relying on reporting and people remembering and being honest so everyone gets their own can of magical spackle and we get to just go over all the fissures and cracks and imperfections in our stories. And it's it looks like a skating rink with a fresh Zamboni run. When you're done with the magical spackle so now I'm talking to Jose this whole fiascos five hundred bucks out the window for me. But how can I blame him? He told the guy this is what the guy game. Now he had pick hiccup a little. When I said it says in big print on the can exterior satin we said interior semigloss. Why didn't you look at that? That was that was. That was the other guys. I didn't have my jewelers. Yes Gary Sorry Magical spackle listen magical spackle. This glorious term. I like that a lot. The one thing I did when I was listening to the telling of this story the first time the one thing that made me perk up a little and it does not fix the nine subsequent failures but somebody posited that maybe the gentleman at the home goods store hiccuped over the word Swiss and just coffee or something like that but that was intriguing but but why go to the guy at the counter because the take longer and they don't want to actually work now now. Don't go to the guy to count. Wow unless you WANNA mic something. Did he not know that? Swiss coffees available. Evidently he wasn't aware that. But here's the thing. Is he a painter. How far off? Here's market was. He's a poet. Here's here's depart. Well in certain surely card only yes. Actually he know. Here's the part. That's mind numbing if you go guy the counter at the home depot and you go. I went coffee Swiss Coffee Navajo White. Whatever you say to him he's GonNa Point at the Swatch Wall and go. I don't take requests. Go get the thing. I'll have the number on the number will be on the hand or beyond the swatch will mix it up. You can't just shout out names. That doesn't mean anything. They don't have a mem- memory. You could say coffee there. Probably five different manufacturers that have a version of coffee. You know what I'm saying. So that's that also I've screamed about my entire working life. Which is Swiss. Coffee IS LIGHTER THAN NOVEL WHITE. Perfect of the word that one that has a word coffee in it is lighter than the has white in the winter has award coughing. You get it kind of looks like coffee. You go there you go right. And that's part of the problem with labeling yes if it was called Arctic wife and you turned and looked at it it was fucking Brown. You'd go whoa wait a minute. But it says coffee. Yeah that's the problem. Get people to fucking label things correctly. Get Magical spackle. Thinking what's going on drew is. Is this the computers that are doing? This is is it. I let me let me tell you something about me. I work with a guy. You guys should try this you have. I work with a guy and he'll tell me story who go. I got an idea. I'm a D. about a script that when a ride about this guy's from my hometown he's a biker. But he ran drugs too but he was a black bell taught kids but he also hooked up with the Mafia and then when I see that guy week later or more I go let me see if I can tell you. That story told me I do it to him all the time and I just close my eyes and I go see the guy who was from your own hometown right. Sometimes it'd be little things I keep come to he come out to la or San Diego La Okay so you come out here from Sterling Illinois to come out right and then he he he he does score over these drug dealers right and I. I'm checking how much of his story that I can regurgitate. We're doing it to test your memory. Yeah WanNa know. If I'm listening I WANNA know how I'm listening and what I'm screwing up and what the way to hear stories when somebody's talking and telling the story after picture him. I've told you this. Dunning Kruger problem is massive and it applies to memory to people grossly overestimate their memory. Well let Rotel Ball Ball all right. We'll get into that second. I WanNa tell you about liquid ivy easy health healthy solution for dehydration. One stick of Liquid Ivy. One stick is good. Put that sixteen ounces of water shake it up real good much. Hydration as two to three bottles water proper. 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Get better hydration today at liquid. Iv Dot Com Promo Code Atom. So done in Kruger. Yeah the people have. It's a cognitive distortion. That people believe they know more than they do. They they overestimate their sort of understanding of something because they a little bit. They assume they know a lot. Say and they have a grotesque distortion of how memory works people tend to think memory is like a video like a screen that you're watching something recur. It is a highly redacted reconstructed phenomenon that gets re reconstructed over time no member. That's that's why witnesses are one of the gear goes will tell you one of the least reliable forms of evidence witness. I have had conversations with my wife that were three days old where Shogo wife standing in the kitchen. I was telling you the story and Natalia with standing next to me and Blah Blah Blah time wasn't in the kitchen. Listen I go. I'll take exactly what you were standing by the fridge. Start TELLING THE STORE. Then you walk over to the coffee new continuous. During the Italian it was not in the room. Sonny was sitting next to me at the table. Tally was in her room. The wow they can actually make Dr Bombay a physically making people present in the room. That weren't even there again. I don't here's the deal. It's it's like I don't blame them. But you must be cognizant of this You must be aware that this is something you're able to do. You have to look at yourself like the Wolfman on a full moon like lock me in this closet. I don't blame nobody. I don't care that your memory's not that great but you have to understand that you have a propensity to do this and that Europe to my wife fills in elaborately war. No it's it's a whole and I've got a son I've got screwball. Memory that when I was young particularly I and it's not like it was and I'm aware of it but I kind of had a screen memory when I was a kid. I've got a son that's got that you have a what memory screen like like. I can play it back like in my son's got that memory. I see him doing all the time. We just played back the tape and so when something had happened where he was around of tell them the storm. I will just go to the tape him. Yeah yeah I know that so because I kind of had the same thing and now I don't anymore. Well here. Here's the here's the insidious nature of what we're talking about. If the person you're dealing with could be micro macro could wife in the kitchen could be political story whatever. It is something big something small if that person just has a bad memory. Then there's no problem right. It's going to be sure but if that person has a narrative and a bad memory and an agenda now work going down a fucking rabbit hole. Because now they're explaining what happened with an agenda with momentum with certitude and none of it happened. That's an issue so if there's somebody saying I don't you know I can't remember if I was touched by this judge or Joe Biden who caviar. Whoever it if they just go I really don't remember whatever but if they know what happened and they're telling you what happened and it may or may not have happened now we're getting some pretty scary territory as a society who very scared. Who Will I do think now? Listen I'm not taking this position. Nobody attacked me for this one. But do you think the metoo movement in their attempt to support women saying like all women have to be believed no matter what no matter what victims have after be believed have put a little juice behind this idea that all memories are valid. Oh Yeah I was thinking about it. The other day I looked it up when I was born in. Nineteen sixty four six point seven or something percent of women had college degrees. I'm in well under ten percent now and men were like eleven point seven eleven eight or something like that now. Women have surpassed men and they're hovering just little under forty percent. The guys are thirty six percent or something they they're a little bit higher but the point is is. I've started really I e. Everyone thinks I'm a Douche I get it. I wrote a book called in fifty years. All be chicks because I'm studying the male mind in the female mind and they're very different. Anybody who's had that conversation with their fucking wife in the kitchen where they explain exactly what happened. That never happened. There's there's there's going to be an issue a different if that person's in charge of the neighborhood there's some issues there's GonNa be some issues and the more we can get the more women who go through college who essentially indoctrinated and then hold positions of power in the more men who hold positions of power. Who went through that feminization process? We're going to get things that aren't necessarily based on a hard science or hard facts. We're GONNA get feelings. We will be more feelings based which isn't all that but it's not great like during a pandemic. Well it's it's good if you know that's what's happening so you can move back and forth. I know it's happening right and other people don't know and speaking of hard scientists. I've been thinking a lot lately about epidemiology and all that and Models those not hard sciences. And we've been treating them for the last two months like they are. We say well. There's highly speculative mathematical modeling based on kind of spur. Some of its on spurrier. What is so? I'm starting over in certain about it. Drew Yeah I'm GONNA tease this. But what is the difference between the epidemiologist models for disease per se and Environmentalists environmental scientists models. The let me let me even use a less charged notion models of where. The market's going right. Those are accurate. Those are expert expert Models Bhai Brilliant Computer Sciences. Many Times. They right I was I was. There is a tape tape a guy like very much and I think a guy who I who most people respect a lot I do. Mark Cuban ECK guys being interviewed. I mean arguably the guys on Shark tank. You're seventeen. He's a wildly successful financially wildly successful guy. He's wildly successful by all measures and the guy was sitting around talking and he goes. If trump gets elected Economy stock market could drop by half by half. But it's going to be real bad times. That was his prediction. Now we we had some of the best times financially before the crow virus. Obviously but I mean he was very wrong wrong and that's a guy who if he was a family member of yours. You would be seeking financial advice from him and rightfully so. But I'm saying that's how wrong people can be the one thing that Foul she always says though that is correct and much the way economic models are financial model with will say the same thing which is. Hey Hey man the viruses in charge. We don't know the virus in charge and the financial guys will say it's Mr Market. Mr Market goes up mark down. We we know weak predictor right. But what I'm saying is these models have been from age seven to my age now I have heard one hundred and fifty thousand proclamations about where we were heading environmental a. We've had gary read the stuff about the ice ages coming in the seventies and eighties and none of them. They factor in cars more cars more people driving. They didn't factor in catalytic converters in nineteen seventy-three. No one knew what a catalytic converter was invented. Right see they're not factoring that not only that but the phenomenon that really catch humans is when something happens. They don't anticipate right so they know this change. We got to come up with something like Catholic converted. They come up at the catalytic converter. Things are bad same thing with I knew with this outbreak. I knew we'd start to have treatments and we'd start to have this. We start to have that and it would that the original models out of the imperial college were assuming that humans did nothing except continued their behavior like kissing each other. I'm going to give a break to be fair. That guy was balls deep in Cooma when he was coming up with some of those calculations safely distancing with Dick cry. You guys know this story about Ferguson. It's great bright. You Brooke you save at minute second. Let me tell you about Tommy. John Working from home all that sitting around answering emails standing up picking up the toy days filling the dog ball up man takes its toll on your layers man. Tommy John. Those life has its ups and downs. They've at noon improved underwear. I. You can't improve it. How do they improve it either? Old Stuff is the stuff I'm wearing right. Now is the best even better making more resilient and two times more durable. Well that's true I have worn through a para too but that's where every single day right and then I go in the pool with them to clean them off and then I hang out to dry and put him on the next day Memorial Day by the way right now They got a sale up to thirty percent site wide. Everyone Tommy John. It is the best pair. You'll ever wear Tommy John. Raymond shop the Memorial Day Sale. Tommy John Dot Com and get up to thirty percent off site-wide with code. Ads ADS for up to thirty percent. Off sitewide Tommy. John Dot com see site for details. All right what were you saying? I I was saying that. This Guy Ferguson broke quarantine that he insisted upon to go visit his married girlfriend and then was asked to please step down from and by the way. I read some to Redo all the previous predictions he had made that had been a thousand miles off. It it's bad cow disease without. Where was that on the Gary Go? Yeah maybe might have reason. It's just you guys haven't been around long enough but if you hang around long enough you just see that. Most these proclamations are all. These are not hard science. The they are attempts to predict the future which nobody can do. Well let me let me say this drew ready. Yeah I had this chapter. You rely rely on you so you kind of know what you know like He. You know there's more sense. You need sense horse sense pragmatism. A sort of a thing that people are starting to lose. They're losing that certain to lose basic sense. It's gone The what. I was thinking about earlier today. Was this and I. I want to see this resonates with you. I've always said that if you go to a doctor as it pertains to the pandemic if but I. I've said this in the past if you go to a doctor and you say I hurt my ankle and he goes. Oh your your ankles broken. And then he'd he goes. Did you do it? You go skiing and he goes okay. No more skiing for you. But what if your professional skier and so what we're saying is what happened corona virus. Lock it down man. Go stay in your apartment. That's good if the guy is in a professional skier you know what I mean like visit a weekend warrior having some fun and you go man. Stay off the slopes fine. But if you do it for a living. The answer needs to be different. The answer needs to be. I'M GONNA put a couple titanium screws and a plate in here and I think we can get it out about five weeks and whence when's the next race not no more of that that that is not we don't need? I don't need a doctor to tell me no more of that. And if and what we're doing is we're treating it like lockdown weekend warrior. No more skiing now. We're professional skiers. We have to go out and compete with now. Nobody said we. We have to stay off our ankle. Fine but for how long? It's not just go home and forget convalesced the rest of Your Life. We gotta get you back on the circuit. We gotTa Rehab and get you back out there. And then there's this notion now. And this is the insidious part is all the fucking postseason standing by the doctor. He said go home forever. It's like hey my livelihood is skiing I have to do now. I'm not saying I can ski this weekend but I am saying. We've got to come up with the plan. No shot it down that you're putting his leg his financial gain ahead of his leg. Oh my God if I hear another fucking newscaster going we're GONNA put a people of Color in danger so you can get a haircut. You can go out and have a Martini now. Not For me for the restaurant. You fucking assholes you sanctimonious pricks Jesus Christ is that. We lost the ability to think. What would we are you in front of a camera if those are your opinions so sad? It is a weird sad state. I had a weird moment or not weird but like a sad moment I was like I know it's just going through my tweets and it was Susan Collins who with Parkinson's disease and I don't. I don't know her Maine Senator. I do not know her but it was a thing of her going. Hey you know. A lot of people that needed to get filling. It's now turning into root canal. So we need to figure this out and I went. I don't know who she is but she's a Republican. That's what I that's what I I didn't know it said Republican. Okay Republican I such Democrat but look now now we got a well sometimes sometimes our EP. Well whatever she is. I'm a fan of her. I liked her. She always reminds me of Republican. Okay now here. Thank you drew. Here's what I always thought you were wrong. I said I always saw a democrat. Well if I said she was a Republican and he said I always thought she was a democrat. That's a form of saying. I'm around as represented has represented Maine in the Senate since one thousand nine hundred seven all right so it's only been twenty seven years you know here's I just think about may part of his. I don't think Maine is now that that's that's my point here. Here's here's here's the scary part. I'm saying I looked at this person. She's a woman and she from Maine and it's a very liberal state and I thought that's a Democrat and then I thought now Shang something sort of normal you know what I mean like. You have to call sharing a practical thing you say. We got the dental care which lock it down. No not don't pay rent then forget about going back to work like she was sick. She said something sensible. Yeah and I was like I thought she was a democrat. But I was like now. I'm gonNA check because she seems she saying something sensible and that's kind of what we that's where we're at now by. Here's something sensible. I know they're not Democrats which is weird to me. Like whatever can be sensible with dental care right to normal fall. We don't get sensible with this whole thing. God knows what catastrophes people are going to bring down you know. It just requires critical thinking and decision. Making I've said unintended consequences. There's might new bumper stickers unintended consequences and all roads lead to narcissism are my two things. Yeah those are my two things and and watch out what you pray for there is there is something is created by you creating something if you say everyone locked down in perpetuity. Fine that is safe. There will be a whole bunch of negative residue that comes off not safe by the way the the actual residue from that will be social unrest people force into poverty. Massive medical problems and people have no access to care or finance or a way to make a living. I mean it's just what and what the governor just goes on pretty money here that the state of California wants to trillion dollars. Just neutrally book all right. Let me hit It goes at your think about money not having any more meetings invisible. The Governor Governor ideas dollars. I can't put money. You can print it a trillion. Wait a minute. We're this stop. I am so confused by that when he asked for that. I was like really has at work. Why waste beaches don't like it's like you can go on the beach but you gotta you gotta run the whole time in screen. F- with the Basque. You have to light on fire and run. I don't go in the ocean but you can't put a towel down and lay down even if someone is six feet away. There's no sunning yourself because that's hard. That's a hard science and then every time you walk past a lifeguard station you have to circle it twice and yell. Ollie Ollie Oxen free. Okay done done. Jesus Christ all right. Lifelock corona virus sparked an increase in cybercrime complaints the F. b. i. like domain names and spoofing vendors and scams promising government checks and fake covering charities. Please people these. Hackers are out there. They're working from home and they want to capitalize on you working from home. Hack into all your stuff and take all your money. Cybercriminals keep finding new ways to steal identities. It could miss certain threats. If you're just monitoring your credit after protect yourself you have to go with the lifelock. They're the leader and identity theft protection. We become a victim of identity. Theft lifelock can help you restore your good name right. Matt lifelock detects a wide range of identity. Threats like your social security number for sale on the dark web if they detect your INFO has been partially compromised. They'll send you an alert and you'll have a dedicated restoration specialist for your case. No one can prevent all identity. Theft OR MONITOR TRANSACTIONS AT ALL BUSINESSES. Lifelock and see threats. That you might miss on your own. Join now and save up to twenty five percent off your first year by using Promo Code. Adam call one eight hundred lifelock or lifelock dot com use Promo Code Adam for twenty five percent off right You can see me this Thursday. That is Oh sorry this Thursday through Saturday may twenty first through the twenty third Houston Improv. Going out there and doing standup Drew Dan. Crenshaw to right. Yeah we're going to do a live pod out there and I'm also GONNA do a couple IPODS and stand up show or two and then we're going to donate all the money to the Houston Food Bank so so in Texas. You're allowed to go out as long as you distance. Is that how it works? It's like the club can be half capacity. Yeah right yeah. They're wild people over there. They're saying everything everyone's going to get infected. It's awesome all right so we got that coming up and also you can go to my youtube channel. Youtube dot com slash Adam Karol and watch our stand up there and I'm your emotional support. Animal is available for preorder right now on Amazon and click through our link. It just helps drew go to Dr Dot Com gold. Find all the pods air. We're still doing regular stream so livestream look for those them today. So they'll next time for your Sane Mahala.

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