Brian Feroldi - Man or Machine
Brian Feroldi (@brianferoldi on Twitter) joined The Business Brew to discuss his investment philosophy. Brian is doing some very cool things to spread the message of personal finance and intelligent investing. Matt Cochrane (@matt_cochrane on Twitter) and Austin Lieberman (@libermanaustin on Twitter) vouch for him as a person. That means something to Bill.
As for the discussion, Bill enjoyed speaking to Brian very much. Brian is process driven, open minded, and implements a different style from Bill's. Thus, he's exactly the type of guest Bill looks to speak to.
Bill's takeaways from this conversation are as follows:
Brian is smart, writes everything down, has an intelligent mental model of how the world works, is trying his best to do something positive for the finance industry, and has a passion for learning. He looks for businesses with huge potential and market caps that are capable of growing for a long time. He articulates some of the concepts behind David Gardner's "Rule Breaker" philosophy very well in this episode.
Studying the philosophy that underlies Brian's strategy has been a great experience for Bill. The strategy is very different from Warren Buffett's, but it has created impressive outcomes for those that follow it. While Buffett takes large swings, Brian's strategy involves owning many companies and allowing the stocks to grow into concentrated bets. As he says, "make your biggest holdings earn their spot."
We hope you enjoy this conversation. If you do then please subscribe to Brian's Substack https://brianferoldi.substack.com/ and YouTube channel at https://www.youtube.com/channel/UCs60_Z83HU76uygzHRQl0kA.
ALSO, PLEASE GIVE US A 5 STAR RATING IN THE APP STORE IF YOU LIKE WHAT WE ARE DOING.
Thank you for listening!
Album art photo taken by Mike Ando.
Thank you to Mathew Passy for the podcast production. You can find Mathew at @MathewPassy on Twitter or at thepodcastconsultant.com
+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host bill, Brewster. Happy to be joined by Brian Feroldi, many people know him from The Motley Fool. You’ve got a YouTube channel, you're an educator in general, huge Twitter following. I don't know how he manages it, but we'll get into a little bit of that. As always, none of this is investment advice. Nothing in this podcast is an invitation or solicitation to buy or sell any securities. It's for informational and educational purposes only. And you are heavily encouraged to listen to nothing I say and do your own due diligence. Brian, on the other hand, has a lot to say that's worth listening to. So, maybe you can learn something from him. That out of the way, Brian, how you doing, man?
Brian: Bill, awesome to be here, and man, do you have a good radio voice.
Bill: Oh, I appreciate that. I wish that I could say that I worked on it. It's just something that I guess blessed with.
Brian: There you go.
Bill: But it’s been fun to experiment with.
Brian: There you go. Ride that talent out for the rest of your life. [laughs]
Bill: I would like to. I'd like to. It's funny, I never understood what media could do to accelerate my learning. I looked at it as a waste of time for a long time, and then I started to do some and shoutout to my man, Toby Carlisle. He gave me a shot on his podcast network-- I mean not network, but his podcast. It's just been great. I've really enjoyed it. So, you've benefited from it for a while, I guess. You've seen the Fool from the inside for how long?
Brian: I've been with the Fool for five years. I was a paying member myself for many years, and they have these wonderful discussion boards where you can go on and discuss the recommendations that they make, and connect with other investors. That is where the gold is for the Fool. It's the ability to learn from and connect with other investors. So, yeah, to your point, that is the most surprising thing about podcasting, video, Twitter that I've found, it's the ability to connect with and form relationships with other smart people that have the same interests you do. It's amazing.
Bill: Yeah. I guess it's funny, because it's a competitive world, and I think everybody's trying to outperform would be the goal. I'm not sure that's what I'm really trying to do. I'm really trying to get myself to the finish line is what I'm trying to do, and I guess, if it's somewhat suboptimal, but it led to the optimal outcome for me, then I don't really care if it's theoretically suboptimal. It's something I really enjoy, and it gives me a life-- I'm passionate about this. If I don't do it in a way that's good enough to work at a hedge fund, I don't actually really care.
Brian: Awesome. That's great.
Bill: Yeah.
Brian: That sounds like a no-lose proposition. If you're enjoying yourself along the way and you're going to achieve your goals, doesn't matter the timeframe?
Bill: Yeah, I don't really think so. I'd love to hear how you got started. I really enjoy-- you seem to what I've seen you put out is a very cool and refreshing combination of long-term thinking and personal finance advice but without being preachy. I like how you present it. Your graphics are simple, and also very thoughtful. So, it's easy to communicate. I have a lot of respect for how you communicate.
Brian: Thank you. I really appreciate that, and I got better at communicating by sucking at communicating for a long time and slowly learning how to suck less.
Bill: [laughs] That's how things happen, right?
Brian: That's right. [laughs]
Bill: Yeah. So, what's your story? How did you start investing? Why did you choose actives? Just if you don't mind going through it, I'd love to hear.
Brian: Sure. I've always been, like, some people are just born savers. Some people are, and I was just blessed with that ability. I wasn't necessarily always great at saving money, but I just always had that innate mindset and for delayed gratification, and obviously with investing and money, once you learn the principles, that's something that you learn to really double down on. For example, this might sound strange, but I remember in high school. For example, I would take my lunch money that my parents would give me and I'd buy candy bars, and I would just create a candy bar collection for myself and I was really big about getting my candy bar collection to be bigger. I almost never ate them. I enjoyed building out a collection more than I enjoy eating them. Weird. Totally weird, but just something that I did.
I got interested in money and personal finance and investing after I graduated from college. I was flat broke in college, literally $0 in my bank account at one point, and that's when I started working, and if you've been to college, it's damn hard to have money around, so, if somebody has 100 bucks, you're like, “Wow, where'd you get that?” So, I had $0 to my name in college and vowed from that point, “Boy, this sucks so bad that I never want to be in this position again.” Then, when I graduated in 2004, my dad handed me a copy of Rich Dad, Poor Dad, and that was the first book that I ever read that explained some of the basic concepts about money.
The basic concepts are everybody's in business for themselves. Whether you realize it or not, everybody is in business for themselves. The rich think about money differently than the middle class and the poor do, make your money, work for you, don't work for money. The idea of investing and compounding, and cash flow, and all those concepts just immediately resonated with me, immediately. That just kicked off a media consumption binge that I've just never stopped. I just read every book on money, real estate, personal finance, investing. I've read books on how to operate a laundry facility, like, anything that has to do with making money, saving money, investing money, and growing wealthy, I have just consumed endless content about that. That naturally led me to The Motley Fool in 2005. I started reading their website, I started investing on my own terribly. Just terribly, because I didn't know what I was doing.
Bill: What was your terrible experience? What were you focused on at the time?
Brian: I would be a Robinhood trader today if I was just starting today. It's just as easy as that. I would be looking for what is going to go up in the next hour, two hours, two days, try and buy that thing, and then try and sell that thing for a higher price later. That's what I thought investing was. So, I started out with penny stocks. My criteria was, is it below, is it below dollar? That was my checklist. Below dollar.
Bill: There you go.
Brian: I'm interested. [laughs]
Bill: Well, the good news is you got to improve your checklist by making some mistakes early.
Brian: That's how you get refined, right?
Bill: Yeah.
Brian: I made tons and tons of mistakes early on and they really hurt. The good news is, I made them without leverage, and I made them when I only had hundreds of dollars. So, it really hurt. The mental scars are still there, but that was the best tuition I ever could have paid, is making mistakes with a little bit of money. But that's how I got started, and then I learned about The Motley Fool, I eventually became a paying subscriber, I remember reading my first issue of The Motley Fool, and reading the write up that they did, and I was like, “Oh, my God, these guys research businesses 100 times better than I do,” and they presented the, “Here's the business. Here's the growth trajectory. Here's the risks. Here's devaluation.” And that just like-- I just started spending hours a day on The Fool discussion boards, and connecting with other investors and it's just through trial and error, seeing what works and what doesn't, studying the markets, you learn what your investing style is, and I'm a big believer in paying it forward, and teaching other people all the landmines that I stepped on, so, I can say, “Hey, don't step on this landmine.”
Bill: Yeah. How would you classify yourself as an investor today? It seems as though you're very focused on quality companies with growth potential. Is that a fair characterization?
Brian: Yep, I would say that would be pretty fair. If you had to classify me, I don't really believe in the growth versus value distinction. I think all investing is value investing, and it's just crazy to think that something could be of value when it's trading at 100 times sales, and 1000 times earnings. But that can be a value investing if that thing goes on to be worth much, much more in the future. I've just learned for myself what I am personally after is high quality, high growth, low risk businesses that I think are capable of compounding shareholder wealth for years and years and years. And if you can just find some of those, a few of those, and get those in your portfolio, and hold them voraciously over long periods of time, you'll do very well. That's essentially how the market works, anyway.
It's a very small number of very high-quality companies that drive almost all of the market's returns. I try and look for those companies, pick out the characteristics that I see that suggest that I could have found one of those in the future, make lots of small bets on those businesses, add to the ones that are winning, ignore the ones that are losing, and continuing with that process over and over again, and I think that'll work out.
Bill: So, when you say, “Add to the ones that are winning,” are you referring to your stock price is going up, or you saying that the fundamentals are improving over time?
Brian: It's usually both. Usually, if a business is really winning, its stock price is going to go up, but it’s an important distinction. When I say winning, I mean the business is winning. Take any, any successful company, literally any mega winner throughout history, and there are going to be times when that business is doing just fine, and that stock is going in the wrong direction. Just in the last, geez, seven months now, if you look at a stock chart of Zoom Video Communications, pick any number from that company's recent earnings reports, any number, and you'd be like, “Looks good. Looks great, it's going straight up.” That stock is down 40% over the last six months from its all-time high.
Now, prior to that it was up huge, but when I see that those two things, I see a business that's winning and stock prices is suffering temporarily. Temporarily, if you zoom out, Zoom has been a fantastic investment. But that's what I mean. I mean the business is winning. More customers, higher revenue, margins are stable or rising, profits are expanding, new products, new services, great corporate culture, expanding opportunity, etc.
Bill: Yeah, that makes sense to me. One of the things that I've studied a little bit more of what The Fool-- I can't speak really intelligently, but I've tried to consume everything that I can that David Gardner has put out in public, and one of the things that is, I don't want to say difficult to reconcile for me, but I really had to push myself to get over is, I come from the traditional value camp. So, my personality was one that I always thought that I had to be the smartest guy in the room to make some money in the market, and I realized the, one, I'm not the smartest guy in the room, so it’s probably not a great strategy. And two, maybe waiting to pick spots in quality companies with temporary problems is slightly better idea for me. I guess that, when I see something like Zoom, I have historically been so reluctant, because of the studies of valuation deciles, and how poorly the valuation decile is likely to lead to over the next year or whatever the study period is. What I have begun to appreciate about what David preaches, and I believe you agree with how he thinks is, the idea of this stock is so insanely priced probably actually leads some fundamentals that people are underappreciating, and stocks that really win tend to always be that overpriced.
I guess I'm rambling here, but that's been the hang-up that I've had. It's like, how can a value guy also like something like Zoom or something like Peloton, but I have started to understand over the past year why that strategy can make sense, or at least I think it does. So, you want to riff on that a little?
Brian: I'm cut from the same cloth you are. The exact same cloth you are. If you're into investing, you are, of course, going to come across Ben Graham, Warren Buffett, and the famous value investors that say, “The goal of investing is to buy something for less than it is interest to be worth today.” That concept, just makes sense.
Bill: It really does.
Brian: It really does that you-- Okay, you want to find good companies that can grow, but you don't want to overpay for them, and the way that, oh, don't overpay is you. You do a discounted cash flow analysis? You make really conservative assumptions, and then you wait until that that buy price comes along, and then you hop in. That's a perfectly fine way to invest. There are lots of people that follow that strategy successfully. I think that's actually a really hard way to beat the market. You can clearly do it. And it's a style that works and is attracted to a lot of people. I've learned by studying exactly the person just mentioned, David Gardner that, the best things you can do is ignore valuation, or at the very least, seriously, deemphasize valuation.
If you study investing, it's like, you're told valuation comes first. The very first thing, it's like, it is the lens that you view the world through is valuation first and everything else comes second. What David has taught me to do is say, put valuation 10th or 20th, and really focus on the characteristics 1-9. First up is, who's in charge? What's Jeff Bezos’s worth? How much is he worth as an owner operator? He's been undervalued the entire way, and he's been overpriced and undervalued the entire way. That's a hard concept to get around. How about the economics of the business? How about the opportunity ahead? How about the company's brand? How about the company's competitive advantage? How about the opportunity that's opening up in front of the company? How about the optionality of the business? I think that those factors are the true things that drive long-term returns, I mean, just riffing, but in 1997, roughly, when Amazon came public, what did it sell?
Bill: Books.
Brian: Correct. What’s it sell today?
Bill: Everything.
Brian: Correct.
Bill: [laughs]
Brian: Okay, so, in 1997, you had to have the foresight to say, “Yes, this is currently Earth's biggest bookstore,” but what if they sell groceries? What if they sell DVDs? What if they sell consumer goods? What if they get into any number of businesses? You had no ability to predict Amazon Prime. You had no ability to predict Echo and the Amazon line of products. You had no ability to predict Amazon Web Services. Yet, all of those other business lines that you couldn't have really predicted were going to happen in 1997, ended up driving all of the market gains that we have seen. And those are the things that will never appear on a discounted cash flow statement. But yet, they are the thing that have driven more than a trillion dollars in value for early investors that held on.
So, that's why when you see things like that, and you look back at some of the greatest investments that I've made, a lot of them have been completely surprising with products that they've come out with, success that they've had, new businesses that they've expanded into, and that's just the concept that David calls ‘Optionality,’ or the business to have multiple futures, and that's a really important part of investing in value creation, but it's just never going to be captured, if you focus solely on value. Can I quickly share my screen with you? I want to put out an article.
Bill: Yeah.
Brian: I'll just describe it.
Bill: For sure, man. This is what it's like to do a podcast with a pro. They know right away. “Hey, can I share my screen?”
Brian: Yeah. Have you ever read this article by Morgan Housel? It's called In Hindsight, How Much Should You Have Paid for That Company? Has this ever come across you?
Bill: Oh, no, but I'm sure I'm going to like this. I like what Morgan does.
Brian: Yeah, he's a smart guy.
Bill: Yeah.
Brian: So, what Morgan did is, let's see, in 2013, he went back to 1995, and said, “Okay, here are the components of the Dow, or at least the components of the Dow in 2012.” Companies like 3M, Chevron, Intel, Johnson & Johnson, etc. He said, okay, he has a table here. This table says, what was the P/E ratio that these stocks traded at in 1995? So, 3M was trading at 22 times earnings. And then, he did another calculation that says, how much should an investor have been willing to pay? What is the P/E ratio that investor would have been willing to pay to earn an 8% return over the next 17 years, aka a market-matching return? We'll take 3M. 3M was trading at 22 times earnings, but investors could have been willing to pay 37 times earnings for 3M in 1995 to earn an 8% return. So, 3M was trading at 22 times earnings, and it was undervalued by more than 50%. Okay? And if you look at Alcoa, the very next stock, Alcoa was trading at 10 times earnings in 1995.
Bill: Yeah, Alcoa had a rough run.
Bill: What did you have to pay? You had to pay three times earnings in 1995 for Alcoa to earn an 8% return. If you look at this table that he producing just go up and down, you'll find that United Technologies was trading at 11 times earnings, and investors should have been willing to pay 43 times earnings. UnitedHealth was trading at 28, investors should have been willing to pay 76 times earnings, and this table is just a great example to me of what do the businesses have in common that you should have been willing to pay far higher price for? They're all high quality. They're all awesome. And this just shows to me, reinforces to me, how much folly it can be with overly focusing on valuation, and how if you have found, if you truly have found a great company, don't let valuation get in your way, because even if it's priced highly, it still could be dramatically undervalued.
Bill: Yeah, I’ve got to make a side comment real quick. You're very enjoyable to talk to. I like your energy.
Brian: [laughs] Thank you. I appreciate that.
Bill: So, anyway, now that I've made it a little weird. [laughs] Okay, so the thing that is ringing out in my head. First of all, I agree with you, and I think that it makes sense. Secondly, how do you prevent yourself from seeing outliers everywhere? Because the skeptic is going to say, “Great, you’ve pulled up a bunch of companies. You’ve looked in hindsight, and you're not investing out the rearview mirror.” We're all trying to invest through the windshield. Yes, in retrospect, that's what happen. But if you just see roses everywhere, you're bound to be let down. So, how do you mitigate against that risk? My sense, not to give you a leading answer, but is position sizing out of the gate and monitoring, but I'm just curious to hear how you think about it.
Brian: There's no right or wrong way to do it. Everybody has a process that works for them. So, I'll describe to you the process that I have. No, I'm not claiming this is best, I just say it's the best version of what I found so far.
Bill: Yeah.
Brian: What I do is, I make lots of bets. I have a screening process that I go through. With any company that comes across my radar, I have a checklist that I put them through. This checklist is a-- It pumps out a score between 0 of 100. It's very consistent. I consistently take any company that I come across and I put it through here. At the backside, I get a result that tells me, it's designed to screen for the business qualities that I find attractive, and screen out the business qualities that I don't find attractive. It's not perfect, never will be. There's a lot of art to it. For example, I put a number on the company's moat, 0-20 on a company's moat. I mean, that's a wild guess. [laughs] There's no other way to say, it's a wild guess. I put a number on top of -- [crosstalk]
Bill: Well, at least it forces you to think about it, right?
Brian: Yes, that's the value. The value is not the end result, or the exact number that comes out. The value is the process of forcing myself to go through and think things through, and whenever I make a huge blunder, I update the process. So, that's the value of it. For me, if I find a company that checks the majority of the boxes that I look for in a company, and I think it has huge potential ahead, I'll buy it. I will add a tiny little bit of it to my portfolio. From there, I watch it, and I say, “Okay, here are the--“ and I write down in my investing journal, “Here are the reasons I'm buying this stock. Here are the things that I'm looking for. Here are the reasons why I think this could be an x-rate growth stock.” And I watch it for a quarter, two quarters, three quarters, and I see, is the business doing what I said it was going to do, what I hoped that it was going to do? Are there any new risks that are coming along? The companies that are outperforming my expectations, I add more capital to those companies over time, and the ones that don't, just fade away into obscurity, and they don't get any more capital.
Then ones I have devoted up to the maximum that I will put into a position over time is 3% of my portfolio. That's the most that I would ever put into a company overtime. After that, I don't add any more capital. It is up to the company to earn a higher spot in my portfolio. So, if you look at my portfolio today, I have positions that are 9%, 10% roughly, and that's not because I made them that high. That's because I put a little bit of capital into them, and then they were 10 plus baggers. They earned their highest spots in my portfolio, and that's how I let my portfolio concentrate itself into the best performing companies, is by just not selling the best ones I own.
Bill: Hmm. Why is 3% your maximum? I'm not trying to put you on the spot, but that's an interesting thing to say that's the most that I'm going to put in, because part of me is, well, if you really find a winner, don't you want to bet it harder? But I can understand why you would want to resist that urge also.
Brian: Because I'm wrong a lot.
Bill: Yeah.
Brian: [laughs] And it's a number-- [crosstalk]
Bill: I mean, that makes perfect sense to me.
Brian: It's because it's a number I picked out of my hat. It's not like I did statistical regression analysis and came up with 3%. It's just a number that I'm comfortable with. That's a rule that I learned the hard way. Once upon a time, not that many years ago, I had an outsized position in a pipeline company called Kinder Morgan, KMI.
Bill: Hmm.
Brian: That company checked every box. For me, every box at the time, founder-led businesses, great economics, take or pay contracts. They were immune from energy price swings, because they didn't care about the price of the commodity. They just cared-- They made money when they moved it. So, I put five plus percent of my portfolio into that company, and then I layered on options on top of that, a bullish option position, because I thought the company was such a low-risk bet. Lo and behold, 18 months later, energy prices fell through the floor, and Kinder Morgan stock sank like a stone, and I was like, “This makes no sense. This company is supposed to be insulated.” Well, turns out that it doesn't matter if you are insulated. What matters is are the people on the other side of those contracts insulated?
Bill: Yeah, you’ve got counterparty risk.
Brian: When your counterparties, when your customers, the people that generate your revenue are going bankrupt, and pleading for better terms, that's going to impact your financials. So, I lost, that was the biggest dollar amount loss I've ever taken on a stock, and from there, I was like, “All right, another mental scar.” But I learned a lesson. Go slow. Make your best, make your biggest holdings earn their spot. Don't force it.
Bill: Yeah, that's not how I invest at all, but I have gotten myself to a point where now I'm thinking that-- I don't want to say everything I do is wrong, because that doesn't make any sense to say.
Brian: [laughs]
Bill: Because I am reasonably decent as an investor. I think I have a long way to go. Well, I think the day that you stop thinking that you have a long way to go is the day you turn into a pretty bad investor.
Brian: [laughs]
Bill: But I had a lot of my portfolio in Qurate Retail last year, and the way I sized it was, I sat down with my wife, and I said to her like, “How much can I lose on this position before you'll resent me for the rest of our lives?”
Brian: Fair.
Bill: Because I thought it was a really good bet, and it was. But what I'm wondering going forward, is that really the smartest amount of risk to take in my life? It's balancing what I think is very smart about what I've learned from Mr. Gardner and talking to you, and Matt Cochran and versus what I have learned from Buffett, and what I just realize is, I would love to be able to invest like Buffett has. But he's Warren Buffett, and I'm Bill Brewster, and I am not that.
Brian: Importantly, Warren Buffett started investing in the 1950s and 60s and 70s when the market was unbelievably inefficient. When information was hard to come by, where you could get a serious edge by digging through SEC filings and just having access to them. Take nothing away from his genius and how well he's done, but it's a different time. It's a different time now in good ways and in bad ways. I think he had a lot of advantages just by starting in the 1950s.
Bill: Yeah, I think that's objectively true. I think that he morphed earlier, thanks to Charlie than a lot of people have. I guess one of the things that would make me nervous about adopting this strategy that you run is it seems like everybody's looking at those same stocks. On the other hand, you do own the best businesses if you run that strategy, and that seems a pretty good way to get wealthy as long as you don't overpay. And by overpay, I mean egregiously, right?
Brian: Well, market and I might be looking at the same stocks, but the market and I are not looking at the same holding period. That's my edge.
Bill: Yeah. Okay, so let's talk about that. Do you mind expanding on that? Because I know what you mean, but I'd love to hear you articulate what you're saying.
Brian: The market is generally focused on the next six months, maybe a year, maybe, maybe 18 months, that's how far out the market tends to look and price things. If you just take those same-- a lot of the same principles that make for a high-priced stock. The market is pretty good at saying this company is awesome, and then pricing it highly. But even if you found the next Amazon, and you added it to your portfolio, you wouldn't get the big returns from Amazon unless you had the ability and willingness to hold it for decades. The ability and willingness to hold it for decades. As an individual investor, I'm not beholden to anybody but myself. I don't have to prove my strategy. I don't have to hit performance targets. I don't have to come up with reporting on 90-day periods. I don't have a boss I have to explain what I'm doing to. That is such an underrated advantage. I have no career risk by buying a bad stock and holding a bad stock for a long time. Professionals sure do. But my only edge, I'm not smarter than the market, I don't have better analytical skills than the market, but I do have permanent capital. That's a massive advantage, and I have a willingness to hold things for a long period of time, and I have a willingness to endure very high volatility for a long period of time.
So, that's where my edge comes from. It's not because I'm smarter, or my system is better or anything like that. My edge is my ability and willingness to hold. So, I better use that ability. Otherwise, I'm going to do terrible.
Bill: How do you structure-- if somebody came to you, and they said, “Okay, I agree with that in theory,” what is the best advice that you would have somebody to make sure that they don't put themselves in a position where they have to liquidate at the wrong time?
Brian: This is--
Bill: Or conversely, the other thing too, is how would you coach people up to mentally prepare for the inevitable 40% drawdown in something like Zoom?
Brian: There's some things that you can't teach people. You can't teach people what a 30% decline feels like. You can't teach people what it's like to invest through a bear market. Because it's so easy. I wasn't an investor in the dotcom bust. I invested soon after that. So, I didn't experience the hype beforehand, or the fallout afterwards. If I look back at a chart of the Dow, I can easily say in hindsight, “Oh, obviously, obviously, these great businesses were way overpriced. Obviously, they didn't have durable businesses, and obviously--" But if you still picked the Amazons, and the Microsoft's, and the great businesses of the world, and held through that huge downturn, obviously, you'd be okay.
Looking at a past chart of that happening is one thing. Living through it, second by second, second guessing yourself, the psychological toll that takes on you over a long period of time, you can't teach somebody what that feels like. You just can't. More recently, the downturn in growth stocks that started what in like February, I think of this year, basically growth stocks did nothing but go up from March of 2020 until February of 2021. Then, they suddenly sold off 10%, 15%, 20%. And a whole bunch of new investors were freaking out about that small decline. Freaking out.
Bill: Yeah, if I'm not mistaken, Jim Cramer said that he thought that it may have ruined their faith in the markets or something, which I thought was pretty interesting.
Brian: I can understand that, because the only thing you knew, your day-to-day experience was stocks go up, stocks go up. If you find the great stocks, they'll just reward you immediately. That's just not how the market works. So, how do you explain to new investors when the market just goes-- when the only thing they know is immediate success. Sucks when it goes down. How do you explain that to them? You can't. You can say it. But that's something you just have to experience.
But to your question before, how do I deal with that? A couple of things. First off, this gets-- Oh, it's almost never talked about in the investment community, but I'm a firm believer that your personal finances are 100 times more important than your investing finances. They just are. I'm a huge believer in paying off all your debt. All of it. Mortgage and everything. Even though mathematically that's dumb, it's just dumb when interest rates are where they are today, but if you can pay off all your debt, you just have a mental clarity and an ability to withstand risk and volatility like nobody else because you know that money is not automatically leaving your account every month. Your fixed costs are just so much lower than they would be if you had a mortgage.
Number two, is keeping an emergency fund. If you have a big emergency fund, and you know that no matter what happens to my portfolio, I could lose my job, something bad could happen, and I got it covered, that just provides you with again mental clarity. Then, number three, is having multiple streams of income. If your household is one income from one job, and then February of 2020 happens, and 10 million people suddenly lose their job, and all of a sudden, your income is gone and you have very little ability to get a new job, and you have debt bills to pay, and your portfolio is cratering, holy cow, is that a lot to take in at once. It's really hard to look at your portfolio and say, “I know it's going to come back. I know it's going to come back,” but if you don't have the ability to withstand the downturn, of course, you're going to panic sell at the at the absolute worst time.
As Nassim Taleb points out, “Your investment returns aren't going to be from when you start till when you need them. It's going to be from when you start until you sell,” and if you are forced to liquidate at the worst possible time, doesn't matter how well you invested. Your returns are from when you started till the forced liquidation, which is going to be bad.
Bill: Yeah, I agree with that. I think that part of where I may take this podcast for the reasons that you're saying is a little bit more in the personal finance realm, not like I'm not going to lean too heavy into it, because I really do enjoy the investment stuff. But I completely agree with you that your investment returns don't actually matter if your personal finances suck. You're just not going to have-- One, you're not going to have enough to invest, and two, sometimes I feel as though I'm way too focused on the stock picking side of the world, and not nearly enough focused on maximizing the opportunities that are there to me in the personal finance realm, and some of it, I don't even know, because I'm so focused on the stock picking stuff that I don't even-- or now, like, media, I haven't really looked at stocks in a while. It's actually kind of freeing. I don't actually care very much. I thought that I would care, but I like to-- [crosstalk]
Brian: You're overly focused on the candy and not enough on the vegetables.
Bill: That's right. Yeah.
Brian: I like candy, too. [laughs] I just have it after dessert, I just have it after I eat my vegetables.
Bill: Yeah, that's right. I think too, if I-- I would like to distribute some knowledge, and I think that personal finance is really important to distribute. How do you deal with having such a public figure? Something that I was not prepared to encounter was like-- I started out this side of my career by leaving a bank, I didn't want to disappear, so, I got into Manual of Ideas and Twitter and stuff not so that I would stay sharp, and if I ever needed a job, I wouldn't just say to people, “Hey, I've been working, I promise,” and if I need a job, it's probably because my returns aren't great, but I promise I was working hard. Now, I feel as though I'm in this position where people might actually be listening to me, and it terrifies me. How do you deal with that? Do you feel pressure? Did you feel pressure is it like buyer beware? How do you deal with that? I’ll just ask it seven different times.
Brian: [laughs] I'll let you know. This is still new to me. Rewind the clock. 15 months, and I have 7,000 followers.
Bill: Did you seriously? Oh, my goodness, dude. What? How did you build your account so quickly? That's nuts.
Brian: I got better. I suck less at tweeting now. [laughs]
Bill: That's wild, man. You’ve got a huge account.
Brian: Yeah, it is weird. As you know, when you put something out into the world, you are viewing it through your lens, you are saying it through the way that you would interpret it, and when it comes to communication, you could say the simplest thing, “Pay off your debt,” and people will interpret that in different ways. Some people would just interpret that you're attacking them, or they're like, “That's a dumb idea,” because A, B, C, D, E, and it's like--
Bill: Yeah.
Brian: Twitter is such a wonderful communication tool, but it doesn't allow for or reward nuance. Of course, there's nuance to everything. Every investing concept has plenty of nuance, but nobody wants to read a thousand-word tweet about that covers all the nuance of something. But like you, it is weird that people actually freak what I'm doing, because it's not like, I'm new to tweeting, or I'm new to writing or I'm new to sharing ideas. What's new is that people actually care. So, I'm still dealing with that, too.
Bill: Yeah.
Brian: Let me know if you have any tips?
Bill: I don't, man. I'm actually going to a psychologist today to deal with this stuff a little bit, because I'm just-- it's a part of my life that I've never had to deal with, and I think that it's a part that I need to be better about understanding that, like, when I say this isn't financial advice, I'm very hopeful that people will listen, because people are really just listening to brain that I promised them as tortured at times. I'm just trying to figure all this out to.
Brian: I keep this. I have tons of sticky notes that I can't I realize-- It says backwards on my screen, but I have a sticky note right that I keep right in my line of sight and it says three things. One, don't take anything personally. Two, be positive. Three, people have bad days.
Bill: [laughs] Yeah, that's right.
Brian: Now, I still suck.
Bill: [crosstalk]
Brian: Don't take anything personally. [laughs] I really suck at it.
Bill: [laughs]
Brian: Doesn't mean it, a constant reminder right there isn't useful. I just always remind myself. People have bad days. People, especially on mediums like social media, you can tweet something, and then regret it, like, two minutes later or not even think about it, and the person that you tweeted it to might think about that for the rest of the day. A bad tweet might ruin somebody's day. But you just got to remember that, if you have an audience, if 99% of them are like you, and 1% that hate you, are disagree with something, that 1% is going to be what you hear from, and think about.
Bill: Yeah, that's right.
Brian: It's human nature to overly focus on the negative stuff. So, constant reminders, and just telling myself my brand is positive, period. That's what I want to exist in the world. There's plenty of negativity, and I refuse to add to it.
Bill: I like that. That's healthy. It's funny, I think you and I agree on a lot of things, looking through what you say, but I had the conversation with Preston Pysh, and I can't help if people get triggered by bitcoin.
Brian: [laughs]
Bill: That's not on me. The other thing is, I am not the arbiter of bitcoin truth. I don't even-- I think it's interesting. Don't get me wrong. If you came in, because you listened to Preston, I'm not, I'm sorry, if I'm letting you down when I say this. I think it's an interesting asset, but it's art to me. It has value, because it has value. But I can understand why people like that. I can understand what people see, and I wanted to talk to Preston. Well, I get these comments that I didn't have the debate that other people wanted me to have, and it's like, “That's your debate. That's not my debate. I don't even care.” Then, people are like, “You’ve got to get a skeptic on the podcast.” It's like, “Bro, I'm making my own art. I'm going to talk to people I want to talk to. You can get a podcast if you'd like a skeptic.” So, it's just kind of-- I don't know, I do think I need to work through some of that, and being better about not letting that stuff get in my head. It's just never something I've had to deal with before.
Brian: Tell yourself this. Them commenting, and them giving criticism means they care. If they're expressing it in an unpleasant way, but they wouldn't take the time to reach out and type back if they didn't care.
Bill: That’s true.
Brian: What would it be better to put something out there and then get no feedback, that means nobody cares. [laughs]
Bill: Yeah, that’s right. Well, and I'll tell you, the guy that I'm specifically thinking about is a thoughtful person and does care. There are a couple people that are kind of jerks, but whatever, they've got something else going on in their life they have to look at.
Brian: They could be having a bad--
Bill: How do you get so positive? That's right. How'd you get so positive?
Brian: I'm spoiled. I have a great life. I got my dream job at The Motley Fool, five years ago. I work from home. I've had such fortune in my life, and I learned this for Mr. Money Mustache more than anybody else. You know Mr. Money Mustache? You familiar with Pete?
Bill: Yeah, great blog and I mean whatever he’s doing now-- [crosstalk]
Brian: I've learned so much from him.
Bill: Yeah.
Brian: One of the most important things I've learned from him is the concept of money and happiness, and he has this just wonderful saying about vacations. “You can go on vacation, and spend any amount of money and have a bad time. You can go on vacation, and spend any amount of money and have a great time. You could go camping in your friend's backyard, and have a fantastic, memorable life-changing time. You could go to Disney, stay on property, have fast passes, spend thousands on food, and all that stuff, and get frustrated at all the little things that go wrong and your kids are cranky, and the weather's bad, and just-- have and they screw up your luggage, and maybe there's a hair in your food. You can spend any amount of money and have a bad time.” So, therefore, the spending of the money doesn't really lead to happiness. It's your interpretation of what's [laughs] happening that leads to happiness. Every day, I remind myself, I got another sticky note that just says gratitude. Right here gratitude. I'm talking to you, today. This is my job. How lucky am I?
Bill: Yeah.
Brian: I slept in a clean, comfortable bed last night. I woke up and had unlimited access to coffee and hot water, and food. My kids are at school. They're wearing masks, but they're physically at school. If you back up, it's like, “God, I'm so spoiled,” makes you happy.
Bill: Yeah. Dude, it's such a pleasure, and Matt told me, he's like, “You get to talking to Brian.” It's a pleasure to talk to people with that outlook, because there's so much of life-- and look, man, part of why I needed to take a step back from like-- I was doing a lot of media, and I was on Twitter a lot trying to get this podcast going, and it took a lot of effort, and I feel like, I was on a full-blown dopamine binge, and then I wasn't even present when I was home. I either had a podcast in my ear, or whatever, and then all of a sudden, I'm snapping up my kids, and I don't even understand why, and it's like, I should be really happy right now, and I found myself so rushed-- and I don't even know what the right word was, but it wasn't not happy. I wasn't depressed, but I was very anxious at all times. I was just like, “I’ve got to turn everything off for a bit.” I like doing things like this. I love having these conversations. So, I've continued to record. But I don't know, a lot of it really was just taking a step back and being grateful. So, it's very powerful.
Brian: Makes all the difference in the world. It really does. By the way, I suck at all those things you just said. I still suck at it. I love being on social media. I love producing content. I love interacting with people. I suck at-- I'm getting better, but I'm still quite bad at presence. Being there, like my mind, like you just said is in different places when I'm around the dinner table and stuff like that. So, I still suck at a lot of those things, and I'm working on them.
But I still think if you just zoom out and just think that the time that we live in, there's an endless amount of negativity if you search for it, and there's an endless amount of positivity if you search for it. So, search for positivity. The troubling thing is that takes effort. It takes no effort to find negativity.
Bill: That’s true.
Brian: So, you asked really find ways to filter out the negativity and focus on the positivity.
Bill: My sense is that The Fool, and this is going to sound really silly to people that have worked there since I've never been there but that's like very David Gardner, is there like an ethos around there? I mean, I know it's hard when you have such a big organization. I'll just let that hang out there. You don't have to answer unless you really want to. But it seems like a cool place. It seems like that's the-- [crosstalk]
Brian: I don't physically work at the headquarters. I'm a contractor that works remotely, but-
Bill: Yeah, well, you said you’re remote, yeah.
Brian: -I literally take vacations to The Motley Fool headquarters every year. That is an enjoyable vacation for me to physically go down there and see those people in person. If you've never been to The Motley Fool headquarters, they have a tour that they do when it was open. It's just a wonderful place. Conference rooms are named after boardgames. There's like Nerf guns, there's nap rooms, there's snack bars. They have boardgames upon boardgames that you can do. They have a library. It's just an awesome environment to be in. All the people that work there, I've never met somebody that was like, “I don't like that person.” They have such a good filter for letting people in, that it's just a great place.
Bill: This is going to sound like some new age millennial stuff but do you think that an attitude of gratitude is necessary for successful growth investing? Or not necessary, but do you think it helps you a lot like, get through some of the inevitable drawdowns and focus on the long term, and some of that stuff.
Brian: Can’t hurt. But I don't do it, because I think it's going to make me a better investor. I think it's going to make me a happier human. [laughs]
Bill: Yeah, no doubt. No doubt. I’m just thinking about how it all ties together. Sometimes, I feel and this is maybe unfair to my value brethren, and I'm sorry if I'm casting people in the wrong light, but sometimes I think value people are a little more curmudgeony.
Brian: [laughs] Little more contrarian? There is something too that.
Bill: Yeah. I think there's something about wanting a deal where a lot of the times it's like mass panic or something that you're exploiting or something's going on-- This is unfair. This is overly broad, but I just wonder if there's some overlap in thought and style-- [crosstalk]
Brian: I think, to be a value investor, you have to be more contrarian than the normal. More independent thinker than normal, because you have to like-- when a stock is falling hard, because something bad happened at the business, but you can go in and say-- and you have the mindset and the ability to say, “Well, it's not as bad as the stock price is indicating.” I think that does take certain contrarianism, a certain independentism to be able to do that. So, if that ability is also correlated with a different outlook on life, well, that's the way it is.
Bill: I think the really tough thing of that game, though, is some of the more dangerous words that I've ever uttered to myself and Post Market actually said this, shoutout to them, but it's priced in.
Brian: [laughs]
Bill: When you go through that chart that you showed on what companies would you have had to pay to return 8%, what could you have paid? Like Alcoa, you had to pay lower than the bid, Bank of America, you had to pay lower than the bid. It's one of those things that, I think a lot of the times, if you're too valuation focused, or at least when I am, I've been willing to overlook very serious business risk and justify it as valuation. The more that I've talked to more qualitative investors, the more I've realized what a big error that was.
Brian: This is a point that my friend, Brian Stoffel, hammers home all the time. He's a fantastic investor. His style, he doesn't even look at valuation. It's not even on his radar. His style of investing is called the anti-fragile portfolio. He looks for mission-driven companies, founder-led management teams, optionality, wide moat, no concentration risk, a strong balance sheet and free cash flow. You have those things, he wants to own it. You don't have those things, he doesn't want to own it. Valuation is not a part of the equation. “A big part of his reasoning is the future is unknowable. Unknowable. I'm not going to even try and guess the future, I'm going to buy companies that are most likely to thrive, no matter what happens.” He's done great. He's thrashed the market.
Bill: I am going to ask you for an introduction, because I'm going to need to follow up on this with him.
Brian: Sure. Oh, he'd be a great guest.
Bill: Yeah, I'd like to talk to him. I guess the thing that's ringing through my head is like, “Boy, is this a late market-- like a late cycle comment?”
Brian: [laughs]
Bill: But the thing that I would have to be honest about with what I just said is if you ask me in 2015, if things were rich, I probably would have said, yes. If you ask me in 2017, I would have said, yes. If he asked me in 2019, I would it’s like-- I've never looked at the market and been like, “Oh boy, it's screamingly cheap.” Except for I thought in March 2020, there were some very obvious bargains out there. 2009, I was too young to really understand that I should have been buying with both hands and whatever. That's too late or too soon. Too late smart too soon, or whatever. But yeah, what I mean, it's hard to think of an investment strategy that doesn't care about valuation, but then it's also hard to look at results and say, “Boy, there might be something to this.” You know what I mean?
Brian: I just think of rewind the clock five years. You could have probably come up with a DCF that says, “GE is cheap.”
Bill: Yeah. [laughs]
Brian: You could have. The underlying things that GE had, not going good. That stock just went down hard, and you five years ago, in fact, three years ago, oof, Shopify. Expensive. Very expensive.
Bill: Yeah.
Brian: You can't justify it. Look at the results.
Bill: That's one that really hurts, because I was smart enough in December of 2018 to know that the churn issue was not an issue. What I was not smart enough to understand was that stock was not expensive. Said so. [crosstalk]
Brian: Shopify was recommended to me at $25, $30, $40, $50, $80, $100, $120, pass, pass, pass, pass, pass. I finally said, I like it at $200. I was way late. Way late.
Bill: Yeah.
Brian: I paid a huge premium. Worked out okay so far.
Bill: Hmm. That's interesting. So, what are you looking for in deterioration in your thesis? Are you in the David Gardner camp of just like, never sell it no matter what, or are you somebody that will sell if you start to see fundamentals erode?
Brian: There are over 11 reasons that I'll sell. By the way, they--
Bill: I love how prepared you are for random questions.
Brian: [laughs]
Bill: [laughs] We didn't script any of this and you're like, “I got this right here.”
Brian: It's almost like I write things down, and then know how to access them.
Bill: It’s true. Yes.
Brian: By the way, it's a fantastic exercise to ask yourself, when do I sell? Ask yourself that. Write down your thoughts, categorize them. How simple is that? How many people do that? 11 reasons.
Bill: Not many. I have it on a couple assets. I don't have it on all of them.
Bill: I don't know if I’ll be able to go through all of them. I can quickly go through them.
Bill: Yeah, no, I'd love to hear it if you don't mind.
Brian: Number one, most popular reason I sell. I was wrong. The reason I bought the stock, wrong. My thesis, wrong. I screwed up something about the research. Under Armour. I was a fan of Under Armour long time. Kevin Plank, makeable. Great brand. Tons of room for growth. Wrong, wrong, wrong. [laughs] They really destroyed that brand. Kevin Plank really took his eye off the ball. It's been a cultural train wreck for that company. I was wrong. TripAdvisor, oh, number one search place they go to. They control the value of search. People go through TripAdvisor to make decisions on travel. I certainly did. Founder-led business. They've really screwed that up. That company had huge customer concentration risk. Expedia and Priceline were number two and number one. Number two, like 40% of the company's revenue each or something like that. It's been a disaster of a business.
Grubhub, oh, the number one, the biggest platform for meal delivery, is going to be the winner. The most restaurants, most buyers, how do you compete with that? Along comes Uber Eats, along comes Postmates screw, yup, wrong. I was wrong. So, that's number one. My something about the original reason that I bought the company was proven wrong. That's number one. So, if I'm wrong, I'll say, “Well, I'm wrong.” Sell take my losses. Number two, this is rare, but accounting irregularities.
Bill: Can we just do a quick follow-up on this, because Comcast is ringing out my head. I sold Comcast. It's probably a mistake. Everybody that's on Comcast, I understand, it's a mistake. I get it. What I don't like about that entity is the content strategy, and I fundamentally don't believe in it. I don't know that was enough to declare myself wrong. But I do know that I wasn't willing to lose to that risk. At what point do you cut the leash and say, “Hey, I'm wrong.” I know it's situation dependent. It's a stupid question. But I'm just trying to think through at what inning are you adjusting what you're saying to yourself?
Brian: It’s where journal comes in handy. It's very easy to convince yourself of other things. [laughs] If you don't write things down, your thesis can change. Because businesses, change situations change. It's like, “Oh, well, it's not that bad.” Yeah, sure. I bought this company, because it was owned by its founder, and now it's no longer owned by its founder. But that doesn't matter, because it's still business is still awesome. Everything’s situational.
Bill: Yeah, that’s right.
Brian: Plus, if you just don't believe in Comcast, find something else.
Bill: I don't want to say that, because people are going to be mad, and Brian Roberts is way smarter than me, and I'm not trying to be like that. I was a train I had to get off.
Brian: Not every winner is meant for you. Period.
Bill: Yeah, well, and I owned it for a while. So, it's not like it didn't do well, but, okay. Continue if you don’t mind.
Brian: Number one, thesis busted. Number two, accounting irregularities. If I can't trust the numbers, you're dead to me forever. Period. There are so many great businesses out there where you can trust the numbers. Why a bother, if there's accounting problems, forget it. Dead. Move on.
Bill: Yeah.
Brian: Number three, mega acquisition I don't like. Relative size here is important. Apple buys Beats. Even if I hate that acquisition-
Bill: No, it doesn’t matter.
Brian: -irrelevant. If it's a $3 billion write off irrelevant. Livongo Health, buying Teladoc emerging, that's a $16 billion company. That sizeable. Final like that, that's thesis changing. So, I don't mind saying, “I don't like where this business is heading. I don't like this merger,” so I move on.
Bill: You don't like the integration risk there.
Brian: Oh, big time.
Bill: Yeah, it makes sense to me.
Brian: Most acquisitions fail. Most. If you ever been part of a company that buys another company like its-- [crosstalk]
Bill: I lived through one. It’s a long arduous process.
Brian: Cultural clashes, management's, egos comes out, “Well, we bought you. You're going to be firing people”. People that are required to have any loyalty to the acquiree.
Bill: Yeah, that was tough. I did feel even when we didn't-- So, I was at BMO Harris. We bought M&I bank, great bank, great footprint, but it was difficult going through like, “Okay, well, this is how you did credit. This is how we do credit. We bought you. This is how you do credit now.” People were like, “Well, but we were okay at credit.” It's like, “Yeah, but now things are different.” Took a long time. I was gone before they had fully integrated and I was there for a little while. So, I get that
Brian: They’re hard. They ain't easy. Some companies are masters at acquiring, some companies suck at it. But either way, if it's a big acquisition that I don't like, again, if I like Livongo Health, but I don't like Teladoc, and Livongo and Teladoc are now the same thing, it's like, “Well, okay, do I want to invest in this other business that I didn't like?” That would be a reason for me to say I'm out.
Number four, thesis complete with no compelling second act, aka, I bought this company for this opportunity. The opportunity was realized. There's no second act. There's no-- I don't see any optionality that takes things to next phase. That would be like, of organic revenue growth starts declining below 5%, if profit growth falls below 10%, or if I just think the company is too big to succeed, I'll declare victory and move on. All right, scale out. Start to scale out over time.
Number five, cultural deterioration. So, Glassdoor ratings plunge, there's a mass management Exodus leadership transition, I don't like a sudden founder departure, leadership transitions are tough. So, if I see signs that the culture is deteriorating, I'll sell.
Number six, and this one's really hard. Extreme valuation, compared to the opportunity. I will pay any valuation for a $1 billion business, or $2 billion business, if I think that business could be worth $20 billion, $30 billion, $50 billion. I'll pay anybody. If I really am excited about the business and is trading at 100 times sales, and it's a $1 billion company, I'm like this opportunity-- this could be a $10 billion company. The valuation is irrelevant. Snowflake is a $90 billion business? So, to get a 10 bagger return or five bagger. You have to believe that company is going to be worth $500 billion or a trillion dollars, or whatever. So, paying a huge valuation, plus a huge market cap, I’ll --
Bill: Yeah, dude, we see this the same. I think that could be a little bit of an issue when companies are staying public or private longer. This could be a headwind that growth focus people suffer, or at least need to be mindful of. Let's put it this right way, rather than, say, suffer from that stupid, but got to be mindful.
Brian: Of course, the crazy thing is, you could have said, well, Zoom’s, $40 billion. It's a video chat. $40 billion? Plus, a high valuation. How big can it get? Well, now it's, I don't know, $100 billion, $200 billion, I don't even know Zooms, but it is an example. That's just really hard to do so. But if I just can't see that business being worth many multiples of where it is today, I'll start to churn out and sell.
Bill: It's part of why I laid the bet that I laid against Austin Lieberman when I did Qurate versus Zoom, because at the time, I think Zoom was a $90 billion business or something, and I was like, “Okay, well, if I think Qurate can double in two and a half years, Zoom would have to be a $200 million company.” Then at what point would that imply, and it was just a law of large numbers that more than anything.
Brian: That right. So, and again, that's really tricky. It's really tricky. But it is a reason I--
Bill: I also underappreciated with Zoom, to be fair.
Brian: Yep, same here.
Bill: He was right on that.
Brian: Me, too. Number seven, if a position gets too large in my portfolio, so, I will allow an amazing and low risk business, like MasterCard, Amazon to become a 15% position for me, if it's an amazing, but very high-risk business, I'll cut it off at 10%. So, if it was a very speculative position that I took that I just really nailed, and got lucky on. I'll be more willing to trim if it's not as high quality of businesses I thought at 10%.
Number eight. I'm no longer interested in following the company. I'm done with Comcast. I don't want to follow it anymore. All right.
Bill: Yea.
Brian: There's 100 other companies that are interesting to me.
Bill: Yeah, it’s not very scientific, but I like it.
Brian: No, but I will sell. Number nine, if the company gets acquired, if it gets acquired in stock, then you have a decision to make. Do the acquiree becomes your new investment. So, sometimes it probably gets bought out, I will almost always sell before the acquisition gets goes through and redeploy. Number 10, I need the money for my personal life, aka, the reason we invest in the first place. Why do we invest? So, we can have a nice life. If I want to do a kitchen remodel, I've sold stocks. If I buy a new car, go on vacation, I'll sell. That's the reason we invest. Then finally, number 11, tax loss harvesting. If I'm down at a company, and I don't think it has a bright future ahead, and I just want to realize a tax loss also.
Bill: Hmm. That's interesting. We have a lot of overlap. How I've morphed into-- I need to have a something that I can pull up. I like how you have 11 overarching things. I have specific assets that I'm looking for things that happen in them. For instance, I intrigued by this US marijuana MSO thesis just from a funds flow idea, because I just think there's a lot of funds that are precluded from investing that may invest but I don't actually know when I'd be wrong on that. Other than things need to open up if the flows don't happen, then I'm wrong. But that's just a market structure thing. That's not a business bet. And if I lose on that bet, I probably deserve it. That is a undisciplined thing to play, but I've also seen some crazy stuff happen, and I'm intrigued by playing with crazy that I digress.
Brian: I'm perfectly fine with speculation. Perfectly fine with that.
Bill: That's right.
Brian: As long as you position-
Bill: I think it’s intelligent.
Brian: -[crosstalk] and know that you can handle the downside.
Bill: Yeah, it's pretty tiny, and that's exactly how I demon. I demon intelligent speculation with the possibility of monitoring a space that's, I think, going to grow for a very long time, and I think has underappreciated benefits, but it's hard to argue that's a strict investment.
Brian: Speculating is perfectly fine, as long as you position it accordingly. I own a company that doesn’t have any revenue.
Bill: Oh, yeah.
Brian: It’s purely a speculation, but I liked it enough-- [crosstalk]
Bill: Is it a SPAC like a perspective.
Brian: No, it’s going through the FDA approval process now.
Bill: A lot of healthcare and biotech is in that, I just can't get myself there, but I guess you say to yourself, if this works, the opportunity is so large that it makes sense to put .3% on or something like that?
Brian: Yeah, I mean, first off biotech, I covered biotech for The Motley Fool for two years, and that really taught me biotech is hard. Really, really hard. So, I just know myself that, “Nope, just biotech is it for me.” Medical devices are a different breed altogether. I was a medical device salesperson for a company that came public for over 10 years, and I just saw firsthand how brand, how loyal providers can be to certain devices, to certain techniques, to certain trainings, and how hard it is to get them to switch even if you truly have something that is that is better. So, that's just an industry that I understand. But I typically don't take FDA risk. I typically wait till-- After the company has completely de-risked itself, after the company is generating revenue, which means they've nailed reimbursement, they've gotten providers on board, they've gotten the product out there, etc., and I want to see clear signs of market adoption, before I'll invest, because that then the thesis is, this thing that's working is just going to keep working for a long time. That's the thesis I can get behind, and I'm willing to put capital at risk for and occasionally, I'm willing to invest before that but it's very occasional and it's with a tiny bit of my portfolio.
Bill: I have one of the fans, Guillermo, if you're listening, shout out to you. He's been telling me about a medical device company, and one of the things he said is he's like, “You got to understand how the buying of medical devices works.” He's like, just look at Stryker, for instance. Once people are buying this equipment, it just doesn't make sense to go with different equipment. You got doctors that are trained on it, the failure rate is low, so why would you introduce a potential for failure and other equipment when the impact can be so devastating-- Once you're in, you're in. It has that been your experience?
Brian: Oh, yeah. Big time. Not only that, but you have to think of economics too. Let's say a doctor gets trained on Stryker’s products. Somebody comes along with something that's different, and it's cheaper. Is the doctor care about price? Is the doctor paying the bill?
Bill: No.
Brian: In other words, for the doctor to switch, they have to go through a process, they have to sever their relationships, they have to go through new training, they have to get their staff and their hospitals set up for this new system, and then there's no economic benefit for them to do so. Can you see how there'd be resistance there? God, I still have an iPhone. What's the difference between iPhone and a chrome? Nothing.
Bill: Oh, a lot. You don't want to go green. That's disgusting. That would be terrible. You would be cut out text chat.
Brian: I’m so used to using my iPhone. I'll pay a premium, because I don't want to learn a new operating system or a lot of people don't want to learn. That's my point is. Once you take the time to learn something, it's hard to get you to switch to something else, and doctors are people. [laughs] So, they're just a human. That's one reason why I like medical devices, and especially if a business is going in there and they are having huge sales growth, you know they are doing something special, because it is convincing doctors to switch. That's hard.
Bill: Hmm. That makes sense to me. I saw this firsthand with Henry Schein, the dental tool company. That was how it was explained to me. Their strategy was to get into dental schools, so then you have a lot of dentists that are trained on Henry Schein tools, and then once they become a dentist, they're just not going to switch. Similarly, [unintelligible [01:11:43] if you're listening, shout out to you, man. He reached out to me early in the pandemic and called Zoom perfectly and he was like, “Look, Zoom is in all of the classrooms here.” As a professor, and he was like, “It's everywhere.” Like they have won this market, and that was a very, very smart decision that Zoom made right to get integrated into student workflows, because now everybody, now you can say Zoom. It's almost like, a Kleenex.
Brian: Same with Adobe.
Bill: Yeah.
Brian: Digital school same with Autodesk and engineering schools.
Bill: Yeah. That’s right.
Brian: Make those investments early.
Bill: Yeah, and you know, what's so stupid to me, man, is for the longest time I was like, “Oh, well, software is going to have such attrition, there's no moat,” and then Shomik was asking me once. He's like, “When's the last time you learned a new operating system?”
Brian: [laughs]
Bill: I was like, “Yeah, that's a really good point.” [laughs] So, it's amazing how in the past, and this isn't a stock price broke comment. This is a legitimate business results comment. I have underestimated how powerful businesses are because I've allowed valuation to turn my brain off. When I've seen something that's very highly valued, I've been like, “Oh, this is stupid--" Peloton, I was a moron on Peloton. I own a Peloton. I love Peloton. I am a net promoter of Peloton, and I didn't even allow myself to see the opportunity, because of valuation. That's really dumb.
Brian: That's a hard one.
Bill: Yeah.
Brian: I think that Peloton, a hard one, because it's a hardware play. The software keeps you around with it's like an apple with the-- They sell premium products at a very premium price tag and that's really the software that keeps you around so, you have to be willing to understand and go for that. I got Peloton wrong too. So, don't feel bad.
Bill: I'll tell you where I've morphed on that particular name, and I'm not-- I haven't bought it or anything like that. But why I would be open to buying it is I actually think that a distributed-- So, their app is a good app. You don't have to have a Peloton to use it. 35 bucks a month for a reasonably good personal trainer is actually quite good value. I have still been hung up, because I don't know if I like the idea of having to take a phone to your gym and then you're watching a personal trainer on your phone at the gym that sells personal training services, that feels like some social friction that may be uncomfortable, but if there was like a wearable device if you could just throw on some glasses and just like AR, watch a workout while you were doing your workout like it was actually a virtual personal trainer, I think that market could be massive.
Brian: Could be. Again, that's a hard one to get. One thing I will say, one thing that is constantly underrated about companies like Peloton, this happens all the time, it's very easy to say-- Well once, NordicTrack takes this market seriously, bye-bye Peloton. Once GM gets really serious about electric cars, bye-bye Tesla. Once Walmart takes e-commerce seriously, Amazon is toast. It's very easy to make those arguments, but the truth is that when a company comes along and really carves out a market for itself, and it captures mindshare, that's actually a hard thing to knock off. It's not impossible. It's very easy to say, once Goliath gets into this market, David is done. It's an easy narrative to say, but if you look at it, there's a lot, a lot, a lot of counter examples of that company that is creating that market for itself, it's got the mindshare, and it can continue to grow even in the face of competition. History is just littered with examples of that happening.
Bill: Yes, especially when you have a cult brand.
Brian: Yes.
Bill: I mean, Peloton, I am part of a cult, I get it.
Brian: [laughs]
Bill: Fine. Whatever. I think Lululemon, the early adopters were part of a cult. I think this cult brand dynamic is very, very, very powerful. It's hard to handicap where it would go. So, if I were running something similar to your strategy, do you think that maybe my mind would operate a little bit like this? I might say it's an incredible bike. I like the bike. I think that the interactivity of the classrooms engenders like real loyalty. It's a founder-led organization and management team that really has big ambitions and has proven the ability to execute far in excess of what I would have modeled or thought was possible. So, taking a small position today makes sense, and then I monitor it and then as it goes well, I would add to it, and if it doesn't, I just let it fade to the sunset, is that--
Brian: That's how I would approach it, but Peloton is a $29 billion-- [crosstalk]
Bill: Yeah, I'm not asking for a recommendation on Peloton.
Brian: No, no, no.
Bill: I'm just thinking, yeah.
Brian: I’m just telling you how I would think about it. Peloton’s a $29 billion business. Is Peloton a $100 billion idea?
Bill: You know, man, if they can get to $100 million subs or whatever the heck they want to get to, then yeah, but I agree with you. It could be a tough road.
Brian: That would be my hang up. Clearly the business's very brand founder led, executed extremely well. There's a huge and growing unpaid salesforce that you are a part of.
Bill: Yeah.
Brian: There's value there.
Bill: That's right. I'm paying for this podcast to basically talk to about that how [unintelligible [01:17:52] Starbucks coffee. It's like, what's going on?
Brian: Yeah, but I would have to believe that Peloton was at least $150 billion idea.
Bill: Yeah.
Brian: To buy today, I would have to believe that it's a five bagger. I don't know if I believe-- [crosstalk]
Bill: Is that your filter? You're looking for five bagger?
Brian: Depends on the company.
Bill: -or a filter?
Brian: Yeah, I just want to understand, all right. I know the risk that I'm taking by buying this. I'm buying a hardware maker. I'm paying a premium valuation and I'm paying $29 billion. If this was a $3 billion idea, if this was a $3 billion business to me, it’d be like pfft. Is Peloton a $30 billion idea? Yes. 10x potential. I'll pay any valuation to check off the boxes. Is it a $300 billion idea? I don't know. [laughs] That's just the way the lens that I would look it through and it's not that Peloton isn't a bad company or bad investment, any of that stuff today. It's just that, okay, I could buy Peloton or I could buy any of the other 100 stocks that I track. Which one is the better combination of quality, potential, valuation right now? That's what I want to buy.
Bill: Yeah, I totally dig, and I think you're right. It's looking at the skew. The distribution outcomes, what's possible, what's not and for a long time, it's funny when you're going through your checklist of things you don't like, one of the very first things that I ever pitched was Budweiser, AB InBev. Went through massive acquisition, was having some problems, lots of leverage, growth slows-- I look at it and I say, well, the relative scale advantage of this business is huge. The margins are huge. I do think 3G is good operators. I understand they have some brands that are swimming upstream, but they've also built some good brands like, I'm not in these guys are idiots camp at all.
But what I really didn't ask myself and why I think that pitch was not a good pitch was like, what's the real upside here, and then how many different ways could this go wrong, and what's the downside if I'm wrong? I just think the skew of the bet I don't think there was enough potential upside to justify what would have happened. Now, the obvious thing then to say is, well, what's the probability the skew, but I think in retrospect, I almost certainly overweighted the probability of a good outcome, just based on business results. The business has underperformed what I thought that it would, they fired their CEO. So, I don't think they're thrilled with it, and then there was a pandemic. None of those things are great. But it's interesting, and my brain has started to actually seek expensive and small would be a combination that I am more intrigued by now, whereas when I started all this big and cheap was what I used to want, and now I see big and cheap is a great way to lose money.
Brian: Sounds like you've learned a lot of the same lessons that I have the hard way.
Bill: Yeah, I think that's right. I think that's why I've been so intrigued by The Fool’s way of looking at things, and how David markets his ideas, I think it's very, very interesting. I don't know where I'm going to come out on it, but my mind has already shifted a ton. What are some of your biggest mistakes?
Brian: How much time do you have? [laughs]
Bill: I got a lot, man. [laughs]
Brian: I've made a lot of mistakes. The biggest dollar mistakes that I've made, I've talked about, which are I overweighted in a sure thing. That was a big mistake for me. Buying penny stocks, not looking at all about the business just focusing on the share price, price of one share, that was a mistake. In dollar terms, it was a small mistake, but it was a big, big mistake that I made.
The number one mistake that I've made, and I will sadly continue to make this mistake for the rest of my life is not fine, great stocks that are recommended to me by people I trust.
Bill: Hmm.
Brian: That'll be by far the most expensive mistake I'll ever make and will continue to make. I just know myself. As I said before, Shopify was recommended to me at 25, I passed. It was recommended at 30, I passed. It was recommended at 40, I passed. At 50, passed. 60, passed. 80, passed. 100, passed. I finally caved at about 200, but what was the mistake of not buying at 25? Way more I lost out on way more money by not buying it 25 than I lost by overweighting Kinder Morgan.
Bill: Yeah. Now, you know as cynics going to say, “Well, this is a late cycle comment.”
Brian: Maybe.
Bill: But I don't think that that's true. I think that truth is closer to seeking positive skew in the distribution of outcomes leads to good investment results. I think that skew can occur in small inexpensive.
Brian: Yes, I agree. If you had ranked my mistakes, number one is not buying. Number two is the opposite of that which is selling too soon. I found something awesome, and I just didn't hold it long enough. Let's see, I sold Microsoft at 24. Ouch. I sold Dexcom at seven. That's not as well-known as Microsoft. Dexcom, DXCM, currently 421.
Bill: Oh, gosh, ouch. I'm sorry for you.
Brian: [laughs]
Bill: I didn't even mean to react that way. That would hurt.
Brian: I sold Insulet, the company I was working for at 17. That company is currently 300.
Bill: Oof.
Brian: So, not buying awesome companies that are recommended by people I trust, by far the most expensive mistake. Selling awesome companies way too early by far the number two mistake. All other mistakes that I've made are dwarfed by the massive gains that I forewent from mistake and that mistake number two.
Bill: It's been a life changing experience for me, and I don't know if that's a fair characterization, but it did. It was like, I got a what do you, what do you want to get? You want to get red pilled or blue pilled. Whatever the pill is that I'm supposed to take I got it. I had put out a Twitter thread about or not thread, but a tweet about my grandma. She was up 31x on her Coke investment. What I did not put out on Twitter, but I'll say here because if somebody is an hour and a half into this, they're probably a fan. Her cost basis and Microsoft is a buck. Her cost basis and Stryker is under $1. Her cost basis in Berkshire is nil. It is amazing to look at what-- I mean, she's 92. So, she's had a lifetime of compounding, but when I saw what her portfolio was, I was like, “Holy shit. Owning these good businesses now--" I wish that I had a detailed accounting of when all the flows went in, and would she have been doing better in the S&P would she not. I don't think it actually really matters. [crosstalk]
Brian: If she got Microsoft at $1, don't really matter. [laughs]
Bill: Yeah. I think it might be a buck 30 for real. It's insane. It's just like, “Oh, my goodness.” She's the OG of coffee canning.
Brian: Yeah, that right there is-- Microsoft current dividend is $2.24.
Bill: I know.
Brian: So, she gets 200% return on her initial investment in cash every year. [laughs]
Bill: Yeah.
Brian: Sounds favorable.
Bill: Yeah, it took a very, very long time to get there. But maybe there's a more optimal outcome. But who really cares?
Brian: What you just said, is exactly why I'm a long-term investor. You just need one of those in your life to have all your financial needs met.
Bill: Well, I know that's right. I don't need to say I think that's right. But what's been interesting to me is, I let-- borrow and steal this phase, and again, I'm not trying to crap on my value friends, because I like value investing, but I let the value disease get me into, can I play a rerating? Can I buy something for 60 cents, sell it for $1? I don't know. I will still definitely do that game. I played it on Qurate in a big way, and it really did change my life for the better. So, I'm not saying that it can't, but I I've shifted my focus more to less of special situation reratings. On the other hand, I've also said that they have my heart, so I'm talking out of both sides of my mouth. I acknowledge that, but it’s hard to look-- [crosstalk]
Brian: It's almost like there's a nuance to investing. [laughs]
Bill: Yeah, well, it's really tough, where are you going to pick your spots, and how are you going to decipher things. I think what I know, well, I shouldn't say I think what I know. What I know is I will only bet on people that I trust from here on out, and businesses that I think are either massively mispriced or have the potential to be much bigger. Those are my buckets.
Brian: Know thyself.
Bill: Yeah.
Brian: I personally break up my portfolio into three buckets. One is low risk compounding machines, the Adobes of the world, the Autodesks of the world, the Starbucks of the world. Number two is high, medium risk compounding machines, that would be the Shopifys of the world, and the Novacures of the world, and number three is speculation. That's only 20% of my portfolio, my aim for them, and that's like a high risk, but 10 plus, 50 plus, 100 plus x returns are available, if I'm right. By keeping the bulk of my wealth in things I'm very confident in and using a little bit on those things I'm not confident in but if I'm right, wow, can that pay off? I like that combo.
Bill: Yeah. Well, you know what it is? It sounds to me, like, even if that's not perfect or whatever, it's perfect for you, and that is the most important thing.
Brian: It's the best version that I found so far.
Bill: Because that can be [crosstalk] to the end. Yeah, that makes sense to me. I'm just looking at one of your slides, the invisible, visible thing. We're invisible’s budgeting, consistency, content creation, and then invisible’s that house and stuff. I love how you communicate with people, and I have to think that as your Twitter account has exploded to the upside. I didn't realize how high and how quickly, but the Scuttlebutt machines got to be much better, huh? Like your network, I would think has substantially gotten better over the last 16 months.
Brian: It’s the biggest benefit of Twitter.
Bill: Yeah.
Brian: Number one. Number one.
Bill: How much time do you spend talking to people about culture within companies and stuff like that?
Brian: What do you mean by people? How much--
Bill: I mean, somebody on Twitter reaches out and says, “Hey, I used to work at Shopify. I'm happy to talk to you about it or whatever.” I spent a lot of my time doing that now.
Brian: Oh, that's great.
Bill: I'm really grateful for the fans.
Brian: I wouldn't say that much. People reach out to me on twitter all the time about investment ideas and feedback and that kind of thing. I have learned the hard way to deemphasize anecdotes and deemphasize single points of views. Deemphasize, especially, industry experts that really know the old way of doing things cold, and I can say that because I would consider myself an industry expert on the diabetes market expert. I was in it for 10 plus years. I knew every product. I know the details of every product. Everything.
When Livongo Health came public, I thought this is interesting, and then I reached out to some people on my network, and they said, “Snake oil, this business model doesn't work.” So, it's a model that's been tried so many times that just doesn't work. And they talked me out of investing at Livongo. I missed out on a 10 bagger in one year. [laughs] That's not the first time that that happened. When you hear industry, again, go to the auto industry. Take any auto expert asked what do they think of Tesla? What would they have said for the last 20 years?
Bill: Tesla’s is the tough one, man. It’s hard to argue with--
Brian: Let’s look, it’s very, very hard. There's been a whole bunch of people that are extremely bearish on Tesla, and have been for the last 10,000%. There are a whole bunch of smart people that have been extremely bearish on bitcoin for the last 500,000%. [laughs] I'm one of them. People asked me years ago, what do you think of bitcoin? I said, “I studied a lot. I've learned a lot about it, and I still don't know enough, and I think it's all speculation.” If you bought and anytime I was asked, man, you up a lot.
Sometimes knowing you can know too much. There is such thing as knowing too much, and you just see all the risks and all the things that can go wrong, and you don't focus enough on the-- Well, what if this goes right?
Bill: Yeah.
Brian: So, that's why I have a speculation portion of my portfolio that I would say, well, even if I'm wrong here, I'm okay with being wrong, because if on the small chance I'm right. The potential rewards are could be life changing.
Bill: Yeah, man. Somebody said, what's the intrinsic value of bitcoin? I don't know, what's the intrinsic value of beachfront real estate? But I'll tell you what I'd buy like, beachfront real estate, if I had a discount, like, to where it is, or if I could afford it. There's a very real thing in life that scarcity accrues value, and I think that some of that has been seen in many different places, but one place recently has been growth stocks. There's no growth anywhere to speak of economically, except for some of these stocks. And I think people, they've accrued value. We'll see whether or not, it's a bubble. I think some people would say it is. I'm less convinced it is. I'm okay, not having opinions on things like that, and I've decided to get more interested in them then does form a strong opinion. I think that's how I'm just going to treat things from here on out.
Brian: I know every bitcoin bear argument very well. The one bull argument I can't get out of my head is should there be a global currency of the internet? I think there should. Is it bitcoin, maybe. It's definitely the leading contender. I can't argue with that. Should there be a global currency of the internet? Yes, I think so.
Bill: Yeah. Well, I guess the other part is even if there shouldn't be-- The question could be reframed. Will enough people believe that there should be in order for this to add value, and I'm open to the idea that it's yes. I know that that's upsetting to some people. But it what I think.
Brian: I view the world through my spoiled American suburban lifestyle. I've never had to deal with massive currency devaluation. Never had to deal with government seizures. Whole bunch of people around the world have, and for those people, the idea of putting their money in bitcoin is better. Billions of people think that putting their money in bitcoin or millions of people now, but could there be billions of people that say, forget my government, forget my home currency, I would rather take the volatility of bitcoin. Yes, but that's hard for me to get, because I only know the US dollar. So, I think that our view or my view on the global currency and all that stuff is skewed by that lens that I see the world through.
Bill: Where that happened to me was in the alternative lending space, and when I had that conversation with Tyrone V. Ross, I think that conversation made some people uncomfortable. That's part of why I had the conversation. He made me uncomfortable at times too. But it forced me to open my eyes, and he is such a passionate advocate for people that need an advocate. When he said to me that he doesn't begrudge payday lenders, because they actually give credit to people that need it at the time. To me, that was an earth-shattering thing to hear, and that's totally, because I live in a bubble, and I get it, and maybe I sound stupid right now saying it, but it's the truth. I just think that I have learned, thank God for Twitter and an open mind and whatnot that N=1 is not reality, and it may sound so stupid to say out loud, but I can echo what you're saying about the lens I see the world through is not at all the way the lens or the world actually works.
Brian: [crosstalk] another example of that is I vividly remember I think it was like six years ago, Netflix signed some like 100-million-dollar deal with Adam Sandler, and I was like, “What are they doing? His time is so over. What are they doing? His content is garbage.” It gets a lot of views on Netflix, [laughs] Adam Sandler content?
Bill: Yeah.
Brian: Which is like, well, I'm viewing their decision making through my lens of what I like, what content I like, and they are viewing it through there. What does the data say? People and it's just like, “Well, that was actually a really good deal.” Even though I thought it was dumb. I just remind myself of that. It's like my tastes and preferences as much sense as they make to me, they make complete opposite sense to a lot of other people.
Bill: Yeah. That's right. Netflix is going to be interesting to watch. I don't know, this quarter seat have doubted me. So, we'll see-- If they're still saying the same in three or four quarters. Same thing in three or four quarters, they got a problem, but time will tell on that. Do you want to cover anything else? I don't want to keep you for too long. I've enjoyed talking to you, and I'm definitely going to invite you back on.
Brian: Awesome.
Bill: I don't know, is there anything we didn't cover?
Brian: I had zero expectations coming in other than to have a good chat, and I had a good chat. So
Bill: All right, cool. Al least I didn’t let you down with falling short of zero expectations would have been sad.
Brian: There you go.
[laughter]
Brian: Low expectations and gratitude, key to happiness.
Bill: All right, cool. Well, I think that's a good place to end, man. I appreciate you joining the podcast, and I look forward to you know, hopefully a relationship that will build over time, because I really did enjoy this. So, thank you.
Brian: I did too. Sounds great to me.
