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6 Investing Rules (Don't Get Screwed)
344 Plays8 months ago
I’m breaking down the 6 must-know laws of value investing that can stop you from losing your hard-earned cash. 💥 Whether you’re new to investing or a seasoned pro, understanding these principles could save you millions and set you up for financial freedom. 🙌
In this episode, I dive into Warren Buffett’s timeless strategies and how you can avoid getting taken advantage of by so-called “helpers” who only want to make money off you. From buying businesses at a discount to letting compound interest work its magic, these are the exact rules that have transformed countless investors' portfolios.
What You’ll Learn:
- How to ALWAYS buy stocks for less than they’re worth 🤑
- The key to estimating a business’s real value 💼
- Why market crashes are actually your best friend 📉
- Why sticking to what you know is the ultimate advantage 💡
- The dangerous financial traps to avoid at all costs ⚠️
- How to harness the power of compounding for massive long-term gains 💰
If you’re serious about growing your wealth and avoiding costly mistakes, this is the episode you don’t want to miss!
🎙️ Listen now and learn how to make your money work for YOU.
Recommended
Transcript
Why is Wise Investing Crucial After Business Success?
00:00:01
Speaker
so So this last one, I wanted to talk about investing, which is interesting, because I know there's going to be a time when a lot of some of you already have been in this position where you've already sold a business, or at some point you may just generate enough cash in your business that you've got this amount of money sitting there that you're trying to figure out what do I do with this thing. And so I've tried to figure this out on my own, and so I want to share what I've learned and there's also another reason for this because the alternative title for this other than six laws of value investing is how not to get screwed out of your money because as soon as you have any sort of money to invest there's going to be doofuses who come out of everywhere that are trying to pitch you on stuff you should invest with and pretty much all of it is not in your best interest or they're not just being nice people it's because they're going to earn some sort of money off of your money or at least that's what they're hoping to do
00:00:53
Speaker
And what I've seen, I know lots of people, lots of friends, you know, been doing this for a while that have sold businesses for a few million bucks, tens of millions of dollars, all kinds of different numbers, and they all end up
What Can We Learn from Investment Mistakes?
00:01:02
Speaker
in the same situation. They all have done a good job building their business, they know e-commerce, or they know something else, and then all of a sudden they get into the investing world and they think that it's like an immediate translation.
00:01:11
Speaker
It is some of the same skills, but it's not the same thing. Like if you want to do well at investing, it's almost like how you did well in business. Like you're going to have to devote time and energy trying to figure this out. It's not just because you've built a successful business or even multiple successful businesses.
00:01:28
Speaker
but all of a sudden you know how to make good investment decisions. So I want to share what I've learned. And a lot of this is just from other people because I was somewhat hesitant about giving this talk just because I've been so deep into this material that there's a lot of other people that are better, more qualified to learn this stuff from. But my fear was is that if I did not cover it here, you all would end up getting screwed over by one of these doofuses or end up just burning your cash, doing something else. And so I figured that if you didn't hear from me, maybe you would never hear this.
00:01:57
Speaker
and somebody would just pop up with some new book or some new social media ad or something and you'd be down a rabbit hole that's not going to be good for you.
What Did Warren Buffett Say About Non-Controlling Business Portions?
00:02:05
Speaker
What's that? NFTZ. NFTZ, I don't know that. um So this is kind of what got me into this. So there's this quote by Warren Buffett. He says, owning a non-controlling portion of a wonderful business is, I don't know why the screen is a little bit off, but either way, is more profitable, more enjoyable, and far less work than struggling with 100% of a marginal enterprise. And so what is he saying here? He's saying that It matters the quality of the business. And so, what i what got me into investing is that, you know, back in the day and sort of the heyday of ASM, at one point we had, I think, $12 million dollars in the bank account from sales. It was crazy. And maybe it was like, you know, a few million bucks that was owed to affiliates and that kind of thing.
00:02:46
Speaker
But at some point, I kind of thought about this, and I was like, man, this was like seven years later. I was like, had we just taken that, like, call it $8 million, $10 million dollars or so, and just invested in the company that we were telling people how to sell on Amazon, and just sat back and did nothing for the next seven years, we would have had him a lot more money. And we would wouldn't have been beating our head against the wall, trying to, um you know, manage employees, deal with a lot of customers, all that kind of stuff. And I just looked, and that same, if it was like, call it $8 to $10 million, dollars would be worth like $70 to $80 million today. Doing nothing.
00:03:16
Speaker
Zero work. Jeff Bezos is doing all the work. Andy Jassy is doing all the work. All the people are packing boxes and warehouses.
What Determines Investment Profitability?
00:03:22
Speaker
We're just sitting on a beach or something doing zero work. And I was like, that seems a lot better than running a business. And and so.
00:03:28
Speaker
When building a business, sure, you can possibly turn, which most of us have, a little bit of money into a lot of money. But if you can find a way to get somebody else to do all the work, that's pretty good too, and it's something to consider. What determines how much money you make from investing? How much money you have to invest. This is why we're all building businesses, so at some point we have more money because it's like you can learn everything you can about investing, but if you've never built a business before and you have like 10 grand, it's gonna be hard to turn that into a lot of money. So how much money you have to invest, which is the reason why we build businesses,
00:03:55
Speaker
Your rate of return after taxes and fees, which is where a lot of these doofuses kind of screw people over. Maybe their rate of return is not so good, but then also they're taking all kinds of fees or people are so focused on cash flow, they don't realize that that's potentially being killed through taxes. And maybe you'd be better off just letting something appreciate and then taking the amount out that you need, which we can get into later. And then the length of runway, how much time you have.
00:04:20
Speaker
The longer you invest, the longer your money compound, the better. But these are kind of the three things that we're trying to manipulate so that we can make as much money as possible and not have to do any work that we don't want to do.
00:04:32
Speaker
So this is part of, um basically took a million dollars over 20 years and say it's the difference of like seven or 10% because you've got these helpers as Warren Buffett would call them, these people who just wanna make money off of your money. If you can make that same rate of return without them, you end up with basically double the amount of money after 20 years.
What Are the Six Laws of Value Investing?
00:04:52
Speaker
That's the difference of literally just a 3% that you may be paying one of these people that are probably and statistically not adding that much to you on your investments.
00:05:01
Speaker
which is why it's also helpful to learn how to do some of this stuff yourself or at least to learn how to evaluate what to do. So these are the kind of six laws of value investing that we're going to cover require a large margin of safety. And so I was talking with one of our people here and he said that I'm terrified of buying stocks or terrified of investing.
00:05:19
Speaker
This is the big reason why, because there's no margin of safety. Super important part. If you talk to Wilson and Warren Buffett or his sort of guy he learned a lot of stuff from early back in the day, Benjamin Graham, he says, like, if you had to boil down the entire notion of investing, it's margin of safety. That's what it's all about.
00:05:37
Speaker
Estimate intrinsic value. This is where a lot of people go wrong, including friends that I have. They'll go out there investing in businesses, public equities. They have no idea. And they probably could if they really tried. They're generally pretty smart people. But they're not actually trying to value those businesses. They're not like, OK, I'm going to dig through the financial reports and figure out, just like if I was buying if i wanted to buy Miguel's business, or if Miguel wanted to buy my business, he's not just going to be like, oh, like how well is the price trending online?
00:06:01
Speaker
He's going to be like, no, he's like similar financials. and I'm going to try to come up with some sort of value for this thing and then decide if the price you want to give me is better or worse than that. Same thing you're doing with public companies or really any other kind of investment. That's the only way to do it. Just imagine like you were trying to buy a small private business anytime you're trying to buy any sort of other investment.
00:06:20
Speaker
Then use Mr. Market to your advantage, which we'll talk about. Know thy circle of competence, important, and we're gonna go through each one of these. Avoid debt, shorting, and other financial shenanigans, and never interrupt the magic of compounding unnecessarily. So these are the kind of things we're gonna cover real quick. So law number one, require a large margin of safety.
00:06:40
Speaker
So this is where people run into trouble. This is Microsoft. It's a little cut off. This is Microsoft. And if you're looking at the years down here, this is around year 2000. Most of us fairly young around that time. But this is where these sort of dot com boom mania was going crazy. More crazy than what we experienced recently.
00:06:58
Speaker
And so it was pretty insane back then and this is Microsoft great company like it's worth three trillion dollars a day prints cash great modes all the things we wanted a business super smart people investing in the future while also sort of protecting everything they have going on but if you had you bought Microsoft back then.
00:07:16
Speaker
You would have basically had to wait 15 years to make any money. It would have just been dead money for 15 years. And so the big lesson here is a great business does not always make a great investment. Any business, no matter how good, can become a bad investment if the price gets bid up too high. And so that's a big thing to understand. And so, you know, Nvidia is the big option right now. I don't have a crystal ball. I can't tell you if Nvidia is going to be higher years from now or not, but It's not the way to bet in my opinion it's so inflated in terms of value if you look at any sort of multiple possible that sure all the stars could keep aligning things could keep being great or it could be microsoft great business keeps growing sales keeps growing profits but the valuation is just too inflated and takes you forever to make any money if ever.
00:08:01
Speaker
That's the risk we run and that's why we always look for a margin of safety. At the end of the day, what we're really trying to do is buy dollars for 50 cents. We try to figure out what is this thing worth and can I buy it for half off. It's basically the whole notion of this sort of investing.
Why is Margin of Safety Important in Investing?
00:08:16
Speaker
And this is Joel Greenblatt, who I'll give you a couple of book recommendations at the end. I think he's one of the best writers. um He actually, you don't hear as much about him. Like, does anybody actually familiar with who Joel Greenblatt is? Yeah, most people are probably not, unless you dug into this world. yeah um He's done the work. He built a hedge fund, had like 40% annual returns, made a ton of money, and just started teaching and stuff, and I don't think really cared after that.
00:08:38
Speaker
Super smart guy very good at writing and communicating some of these ideas simply But he has a quote that says find out what something's worth and buy it for a lot less That's it. Same thing if you were trying to buy a small private business Monash for Bri is another person. I'll give you these recommendations at the end. He I think um He and the I guess a friend years ago, and I think it was back in like 2009 or so, they bought the lunch with Warren Buffett, which back then I think they paid like $600,000. You could basically bribe Warren Buffett to go have lunch with you. And so that's how he met him. He ended up, because of that relationship, becoming friends with Charlie Munger, got to hang out hang out with him, play bridge with him, like like legitimate friends. And so he's a great guy that I followed a lot too. He's broken down a lot of Warren Buffett and Charlie Munger's kind of principles.
00:09:22
Speaker
And the stuff that I think is a little more relatable because he's just sort of younger in the journey and that sort of thing. ah But he basically says, I look for opportunities where like heads I win, tails I don't lose much. Downsides not super crazy. And so not a lot of downside, tons of upside. That's what we're looking for in terms of margin of safety. It's like if things go really bad, like what's the downside?
00:09:42
Speaker
um But if things go really good, what's the upside? Like with Nvidia right now, it's like if all the stars ever align and everything goes great, maybe this $3 trillion dollar company turns into a $6 trillion dollar company. It's basically a double. But if things go bad, if all of a sudden other companies start competing with them, if all of a sudden their multiples get compressed, then you could literally see your value like Microsoft at one point, like the down part of the chart, it was down like 90%. Like that's a potential. So it's like lose 90% on the downside, possibly a double on the upside.
00:10:10
Speaker
Well, right now there's companies out there, which we'll talk about later whether you should actually dig through these businesses or not. But there's companies out there right now that, you know, like a company that I invested in, it was doing $500 million dollars a year in sales, um more or less breaking even, but actually generating some cash flow. And it had about $200 million dollars in the bank, like $100 million dollars in debt, so call it net $100 million. dollars And the total market cap was like $200 million. dollars So if you take the $200 million dollars market cap minus the $100 million dollars kind of net cash, call it $100 million dollars you're paying for this business, but it's doing $500 million dollars a year in sales. Like there's that kind of stuff all over the place. So that's like, they really have to screw things up for that to get even worse. But the upside is they fix a few things and multiple goes up. It could be double, triple, quadruple in a few years. That's kind of what we're looking for here. So margin of safety, the most important concept. Like what's the downside if I'm wrong and what's the upside if I'm right?
How Can Market Fluctuations Be Used Advantageously?
00:11:03
Speaker
Law number two, estimate intrinsic value. And so this is a pickled shark that was sold for like tens of millions of dollars to some, I think, hedge fund manager or something. And so when it comes to these kind of investments, I think it was maybe Charlie Munger that has a quote that like, you know, some investment investments are typically valued in part because of the financials in part with sort of some like like an artwork value.
00:11:27
Speaker
People like NVIDIA as an example. And so what what we're really doing here, this is a stock certificate for a Coca-Cola company, is that any time you're buying even a share of a business, think of it as you're buying a piece of a real business. You're not just buying something in your brokerage account that either goes up or down. You're literally buying a piece in a sort of legal part of an actual business. I think the more you think like that, the more you think like you're buying a business from a friend or a family member, the more you'll think correctly about investing.
00:11:57
Speaker
An intrinsic value, what would the entire company be worth to a private buyer? It's usually the way to start. And so if you can't figure it out, I'll show you in a second. I don't have it here. But yeah, so if you can't figure that out, then skip it. Go on to something else. This is why the circle of competence thing we'll talk about in a second is so important. Because if you can't figure out how to value something, then you probably shouldn't be investing in it. Because how else do you know what to pay? Other than what other people are doing or whether the price has gone up or down like really recently, which is not a good reason to invest in something.
00:12:24
Speaker
This is why it's important to stick with businesses you kind of understand.
What is the Circle of Competence in Investing?
00:12:27
Speaker
So what would the entire company be worth to a private buyer? Warren Buffett said, um basically using ASOP's sort of 600 BC axiom, a bird in the hand is worth two in the bush, which most of us have heard of. Buffett kind of expanded on it and said, how certain are you there are indeed birds in the bush? This is to figure out what an asset is actually worth. Are there actually these birds out there? Then when will they emerge and how many will there be?
00:12:54
Speaker
And then what is the risk-free interest rate? So basically, all they're doing is what's called a discounted cash flow analysis, because they say that the value of any asset is a total amount of cash it's ever going to produce forever. Discounted back today is some sort of interest rate. Because you could take that same money today, put it in, say, a treasury bill or something, and earn 5% a year. um Or you could do this instead. So you're trying to figure out how much cash is this business ever going to generate in the future, and what is that cash worth today?
00:13:21
Speaker
The big problem is is when you either don't do that analysis yourself or you can't do it because it's too complicated. And in that case, you skip it. And so this is all we're trying to do, whether it's a public company, a private business, any sort of asset we're valuing, what it's worth is the total amount of cash ever produced discounted back to today. And this is essentially its intrinsic value.
Why Avoid Complex Financial Strategies?
00:13:39
Speaker
Law number three, use Mr. Market to your advantage.
00:13:45
Speaker
And so Benjamin Graham, I think Martin, you said that you read Intelligent Investor. And so this is straight out of Intelligent Investor. So he talks about the two big things, margin of safety and Mr. Market. And what he talks about with Mr. Market, he's like, imagine you're in business with a business partner. And some days his business partner wakes up and they're very depressed.
00:14:04
Speaker
And they're like, I'll sell you my interest in nothing. And another day they wake up, they're very excited. And then I'll buy your interest at a really high price. And they think that's basically what's happening in the stock market all day long. The prices go up and down and go crazy. Because I'm going to show you something real quick. I pulled Tesla. And so.
00:14:21
Speaker
I don't think I need to zoom in. So this is Tesla's sales on a quarterly basis from right to older to left to most recent. So you can see 18 billion, 16 billion, 21 billion, 24 billion, 23, 24, 23, 25, 21, 25. So it's generally going up and more or less, some down, some up, but look at their actual stock over the past year.
00:14:42
Speaker
jumping around all over the place. It's like, if you were to just look at this, do you think that business is changing this amount? I mean, it's basically swung from $138 a share to $278 a share at some point or another. The businesses, depending on how you look at it, either doubled or been cut in half at some point in the last year. That's this sort of Mr. Market.
00:15:01
Speaker
That's happening. It's basically and driven driven by investor psychology. One day they're very optimistic, one day they're very scared of everything. And that affects what's happening here. And so this is the Mr. Market that Benjamin Graham talks about. Because another example I've heard, you know, we've talked about in video, like this is kind of happening with their stock, with all these businesses. ah People are basing whether to buy it or not on expectations of the future.
00:15:22
Speaker
But the other idea is to think about this is imagine you own a house and you called up your real estate broker and we're like, what's my house worth? They could be like a million bucks and you call them up the next week. What's my house worth? They'd be like, it's still a million dollars. You call the next week. What's my house worth? They'd be like, quit calling me. And it's it's not changing that much. Maybe it'll go up five or 10% in any given year, unless something really is dramatic is happening. But with stocks, because it's an auction-driven market, you've got a whole bunch of people that are voting all day long, and sometimes something happens in the news, it tanks, something happens in the news, they get very excited and it goes up. And so this is the interesting part.
00:15:54
Speaker
about investing in public equities because you have that as an advantage. And so that's what Benjamin Graham and Warren Buffett would talk about is using that to your advantage. Whereas if we were all doing negotiations trying to buy each other's businesses, it's not going to be swinging around like that because it's an intelligent buyer, an intelligent seller versus the market is there's all kinds of craziness is happening, which is why there is an advantage in buying and investing in public equities because you get these crazy swings that don't make sense anywhere else.
00:16:21
Speaker
And Howard Marks, another book recommendation I'll give you, is the greatest profits can come from buying when others panic and sell.
How Does Compounding Build Wealth?
00:16:27
Speaker
Pretty straightforward, easier to say than it is to do, but this is what we're trying to accomplish. We're trying to take advantage of Mr. Market's swings. And so this is the S and&P 500. I think I pulled the last 20 years or so.
00:16:40
Speaker
And this, I believe, is the dot-com crash. This is the financial crash, 2008. This is pandemic, COVID. This is what happened after 2021. So there's all these kind of things. In general, it's kind of up and to the right. Life is good investing in these kind of businesses, but there are these crazy swings. And these are when opportunities can't happen because people panic and sell, and they start selling everything in their portfolio because they're scared. And then all of a sudden,
00:17:07
Speaker
a lot of stuff can go on sale all at once. And so that's why you'll see companies like Berkshire Hathaway currently sitting on 270 plus billion dollars in cash because they just sold half of their Apple position. Their major is not know what to do with their money because for them it's like they almost have to invest in something with like 50 billion dollars otherwise it's just not going to move the needle for him, ah for them, but they're more or less just sitting and waiting for stuff like this to happen because it's like you know call it more or less once every 10 years or something, something dramatic like this happens and you can get a really good deal on something.
00:17:36
Speaker
So this, on a much smaller scale, is kind of what what we're waiting to do in our own investing. So law number four, know thy circle of competence. So this is what I was talking about. Warren Buffett literally on his desk, you can't see it because it's a little blown out, but he's literally got a little ah paper holder that they call it too hard. It's somewhat symbolic.
00:17:54
Speaker
But it's also true. I mean, that's why you never really invested in any tech businesses until Apple way down the road when you realize like, hey, you know, I may not understand technology so well, but this is a consumer brand. I know consumer brands. I know Sees Candy. I know Dairy Queen. I know all these other brands that he's been involved with over the years. And that's when he decided to put a lot of money to work in Apple.
00:18:12
Speaker
made, I think, $100 billion dollars or something, I don't know. But he also has this thing that he calls too hard. So this is where, like, if you're looking at companies to invest in, and this is where, um you know, if you're, like, I'm scared to invest in public companies, and you're looking at companies like Nvidia, because you, like, barely understand half the technology, then maybe that's a pass.
00:18:30
Speaker
um But there are businesses like ours that are publicly traded, e-commerce, that do basically the same exact thing that we do. I mean, there's Allbirds, you don't have them on the today. Mike's got them on. Allbirds publicly traded. They went public, I believe, through a SPAC, super crazy e valuation. Now, not so crazy. Not saying it's a good or bad investment, but it's an all business we could all understand. There's businesses like that all over the place and stuff that we actually do know and understand. We don't have to get involved with all these crazy things that we know nothing about other than what our friends and family are telling us why we should buy this company.
00:19:01
Speaker
Because as as Warren Buffett calls it, there's no called strikes in investing, which means that just because an investment passes you by doesn't mean you have to take a swing. Even if you miss it, you don't lose any money. All you can lose money on is the things that you actually put money in and those go down. But if something goes up and you missed it, doesn't really matter.
When Should One Sell Investments?
00:19:21
Speaker
You know, Charlie Munger, and it's taken me a while to sort of let this sort of stick in, is that Charlie Munger's like, look, there's always going to be somebody getting richer faster than you. He's like, it's OK. He's like, life's going to be OK. Because I think a lot of us can end up making bad decisions when we see people making a bunch of money over here. We're like, I got to jump on that.
00:19:36
Speaker
which is part of why you see this sort of euphoric periods in investing because, you know, somebody's friend has sort of just made $10,000 investing in crypto. Then all of a sudden, you know, this other person just made $10,000 and the Bitcoin key goes up, up, up, and up until it does it. And this happens in every market all the time. And it always will happen because it's just basic human psychology. We don't lose anything by skipping out on an investment.
00:19:57
Speaker
If we don't understand it, or we don't think it's a good deal, or we're not comfortable with it. um So we looked for those ones that Warren Buffett would call fat pitches, where it's like, this is so obvious. you know The company's got a ton of cash, tons of profit. I understand the business. It's been beaten down for a dumb reason. We can wait until those things pop up. We don't have to do anything. We don't lose anything by waiting or by doing nothing. So ways to kind of figure this out is, what do you know? Products and services you already buy. How many bullets I have here?
00:20:24
Speaker
That's it. Yeah. So products and services you already buy. This is stuff you're somewhat familiar with. Things you spend your time on. Also stuff you're familiar with. Areas of your work. Ecommerce for us. um Companies and industries you've researched thoroughly. I mean there was a time recently where Facebook, I think dropped down to like 70, 80 bucks a share. It's like 500 now. Like that's a business that Maybe there's a few areas that were kind of inconsequential, some of their AI stuff that we may not fully understand. We may give a crap less about virtual reality and whatever, but their core ad engine, if you had an opinion about, is this going to keep going on? Are people going to keep using Facebook? That's a business we all understand. Like that's one that's more straightforward and it was heavily on sale at some point. So this kind of stuff happens. So this is where you spend your time, not crazy stuff that you know very little about.
00:21:13
Speaker
Law number five, avoid debt, shorting, and other financial shenanigans. So this is Myron Scholz. He received a Nobel Prize in economics. I believe it was the late 90s or so. There was a hedge fund called Long-Term Capital Management. Had people like him, their IQ on average was probably like 160 plus with the entire company. All the money in the world, they had figured out some trading strategy where they used a massive amount of leverage based on these debt spreads. Long story short,
00:21:40
Speaker
blows up, the whole company blows up, all kinds of people get fired, they end up having to have some government-based bailout, the whole thing imploded. All the brain power in the world, but using an excessive amount of debt and hoping nothing goes wrong is what blew the whole thing up. So not good. So that's one lesson to avoid debt.
00:21:57
Speaker
this guy here owns a company called Melvin Capital and so he was shorting GameStop before the sort of GameStop frenzy that happened in 2020 or 2021 and he was right to probably be doing so because that company was just getting inflated but it was a terrible business selling video games when nobody wants to even buy physical video games anymore in retail stores where retail stores have been in this like secular decline forever and so he was shorting that probably right that it would eventually go down, but the problem with shorting is you can't be just right that it will eventually go down. You have to be right of when it will go down. And so then it starts getting bit up a ton. They lose something like five, six billion dollars on that. They just get blown out. And so and that's real money they lost because of shorting. And that's one of these things where the asymmetric risk and reward is not in your favor.
00:22:47
Speaker
Because if a short goes to zero, you can basically double your money. But if a short just keeps bidding up like theirs, you can lose an infinite amount of money. That's the problem with that. And so that's why a lot of investors... Now, there's going to be some fancy hedge fund managers and probably people you may have heard of that have done well with shorting, and maybe it's okay. But in general, if you're following most value investors and trying to reduce a risk, not a good idea to do.
00:23:10
Speaker
And this is ah from John Maynard Keynes says, markets can remain irrational longer than you can remain solvent, which is the nature of sorting. It's like if that thing just keeps going up and you're trying to sort it, then all of a sudden you can get screwed. And Charlie Munger would say, also related to any other investments, anytime anybody offers you anything with a big commission and a 200 page prospectus, don't buy it.
00:23:31
Speaker
And so if somebody comes to you with this amazing real estate deal and there's this 800 paid contract and all this stuff, you should probably be a pass. I mean, I've personally been screwed over by some tax strategies that back in the day, I'm like, I'm tired of paying all these taxes. And so there's all kinds of people out there who have these great tax strategies for you. So we did that. It was some sort of conservation easement thing.
00:23:51
Speaker
where they were like, buy these properties, put a conservation easement, they raised a whole bunch of money, then all of a sudden there's this big tax deduction. So the general idea is like you put in a hundred grand and you can save like 200, 250 on taxes. I was like, this sounds great. I still today, this is like seven years later, still today and getting emails about these things being challenged by the IRS. And I like barely even know what to do with these. And so I send them over to our CPA and they're like, yeah, we've got to keep monitoring this. It's so stupid, it's not worth it. And that's the case with most of these things that add so much complexity to your life, that's just unnecessary.
00:24:20
Speaker
So what is necessary, in my opinion, owning good companies, which could be your own private businesses, but also public companies, own good companies and cash. These are good things. What's unnecessary, debt, shorting options, futures, derivatives, real estate, Bitcoin,
00:24:36
Speaker
even though Roman doesn't like that. Tax shelters, venture capital, private equity, oil wells, stock trading, mutual funds, and Cathie Wood. None of these things are necessary. Sure, maybe you might find a reason and it's like investing sometimes is almost like half arguing math and like half religion. Because some of it has so many biases sort of baked in and there's different political beliefs and whatnot about why Bitcoin could be so great and you know all kinds of things and maybe I'm wrong about some of this stuff. But from what I've learned, from what I've understood in my general philosophy at this point,
00:25:06
Speaker
These two things are mostly all you need. You don't need any of this other sort of stuff. I mean, the first thing... Yes, Scott? just goingnna ask if you
00:25:14
Speaker
heart trade do ver That's the only way I invest, no? Well, I decided, you know, after learning all this stuff, because it's been about three years, kind of...
00:25:27
Speaker
figuring out all this value investing stuff because of that whole epiphany about like, Hey, if we just took that money and invested in Amazon and did nothing for the next seven years, life would have been better. Um, so I started doing this stuff myself and then I started tracking my annual portfolio performance return versus the S and P. And I said that if I
What is the Passive Investment Strategy with Index Funds?
00:25:44
Speaker
couldn't beat the S and P by a decent margin over like a five year period, cause there can be weird anomalies, then I'm just going to invest in index fund. And so far it's been beating it by a good margin. And so I keep investing in my own companies, the ones that I pick.
00:25:57
Speaker
yeah And then six, never interrupt the magic of compounding unnecessarily. So anytime anybody's ever tried to explain compounding like guys, just start when you're 20 years old, put your $3 a day in your bank account. And then by the time you're like 97, like life is going to be so good. You're going to have millions of dollars. Like that's never seemed exciting to me. And I'm like, I'm so impatient by design. So it's even worse. And I'm like, this is not exciting. But then I think one other way to think about it that is kind of exciting is like Buffett's Coca-Cola investment was a billion dollars between 1980 and 94. He never bought another share because I didn't think he thought it maybe got overvalued or something, I don't know. But never bought or never sold another share. Invested a billion dollars back and call it like 1990. Last year, he got $736 million dollars in dividends from that investment. This is just cash being paid to his company. He never had to put another dollar in there, as you can see by the numbers, that's basically almost making back his entire initial investment that he's just getting paid every year.
00:26:57
Speaker
I would like to have $736 million dollars paid to me and by this massive company that's probably never going to go anywhere. um That, to me, is more exciting. But that's the same idea of this idea of compounding. So you put money into something today, at some point, it could be... end up Because i mean ultimately, a company has to figure out what to do with the cash that it generates.
00:27:15
Speaker
And it really only has a handful of uses, us included. It can either pay dividends out to shareholders, which if it's our own business, we are the shareholder. But in a public company, same thing. It can repurchase shares, or it can invest in the business. Those are basically the main things that it can do. Maybe pay down some debt, but it's kind of investing in business.
00:27:31
Speaker
That's it. So at some point, as long as the business does well, you're probably going to receive this either in share buybacks, which reduces the total number of shares outstanding, which means you now own a bigger portion of the business, or it's going to start paying you bidit dividends if you hold it long enough. So this is what's possible with compounding. As Charlie Munger would say, sit on your assets.
00:27:49
Speaker
This is the hardest thing out of all this. I read this book called 100 Baggers that was talking about all these companies that basically produced like 100 extra turn. And the biggest is lesson from that book, and there's another similar one, um is holding stuff and not selling. I mean, it kind of applies to our own businesses also. Like, I was talking with Roman. He doesn't have any interest in selling his business. Maybe he could have sold it a few years ago or something, but now it's bigger than it was a few years ago, or at least will be.
00:28:11
Speaker
um And the longer he delays that gratification of getting that cash, the bigger that business will probably be, as long as he willing to keep hustling and that sort of thing. We're all in that same sort of position. In my opinion, at some point, if you have never been able to set aside like a few million bucks, then there could be a strong argument of doing that. Because if your whole livelihood, if your whole net worth is riding on your business, it can be a little dicey, which is why I had Martin Philip kind of come up and give their sort of take on selling their business. That does put you in a slightly different position because you're like, hell, even if this thing goes to zero, like I'm still fine, I got a few million bucks.
00:28:42
Speaker
So um if you're not in that position, that could be an argument, but otherwise delaying gratification and holding the thing longer, whether it's a public equity or your own business, could be a good move or in all likelihood, it'll ah end up resulting in more wealth. Unless you end up in one of these periods, which I had friends and I'm sure Roman does also that in like 2021, stars aligned. They were in the right place with the right kind of business and people just paid insane multiples. Like I got a buddy that he was doing, I think $60 million dollars annualized. They gave him three and a half X, got about $200 million. dollars um He wouldn't get anywhere close to that today. But he was in the right market at the right time with the right business and he'd hustle. He'd done a lot of things right also. But those kind of opportunities that those come up, then you're doing the same kind of calculation. Mr. Market is telling me my business is worth this. I've done my own intrinsic value sort of estimate and I think it's worth this. Maybe I should sell. But if it's kind of marginal, then maybe you're better off holding on.
00:29:32
Speaker
So when do you actually sell something? The best example that I've heard, um this is more public equity stuff. I haven't tried to translate this into a private business. um But that same investor, Monash Fabry, says a two to three year role must not sell at a loss unless you've held it for two to three years. This has been helpful for me. This is a thing that's not from Warren Buffett or Charlie Munger. um This is from him, but this has been helpful. Because sometimes you'll see ups and downs and stuff. You're like, I don't know, should I sell this thing? It's like, if it hasn't been two to three years, and as um you can't sell it at a loss. so unless you're really confident the intrinsic quality of the business has degraded. If you're just saying because the price went down, I mean, I at one point, I didn't buy Facebook when it was at, you know, 70 or 80 bucks, but at one point I bought it at 200 and it dropped down to 70 or 80 bucks. So it was down 50%. And I don't do like little small positions. um But I was confident in the quality of the business and waited and then basically ended up making money. Just had to write it out for a year or so. And so that is going to happen. And I think this kind of rule helped.
00:30:30
Speaker
So big question is, what is risk? So a lot of times, like even in finance textbooks and stuff, and I still think they teach this at college, which is kind of insane, is they teach risk. They'll use like beta. um But what they're really talking about is volatility. Like risk is not volatility. If Facebook goes from say 200 bucks to 100 bucks,
00:30:47
Speaker
um you haven't really risked anything as long as you don't sell it at that point. Just because it goes up and down, you could go to sleep for a few years and it doesn't really matter what happened in that time period. So a lot of people are kind of equating in the market and finance textbooks risk with um volatility and price. Risk is really permanent loss of capital, which like you're kind of alluding to is that risk would be, oh man, I need this money that I've invested. And so the market's way down, I have to sell it at this 50% discount.
00:31:14
Speaker
That's the real risk. So what we're literally looking for when we're investing is not having a permanent loss of capital, which is why the margin of safety matters. Because if you're buying something at a super inflated 50 PE or 50 multiple of sales or something, all the stars have to align. And the business may keep growing, but the market may never value it at 50x sales again. It may value it at 10x sales, which is still relatively high, but you've still lost 80% of your money potentially. And so that's that's the risk there. and So conclusion, how to invest like a value investor. So this is kind of the seven steps that I have used and have gotten from all these other sort of people if you actually want to do this on your own. Who after going through this, and this is not like me sort of helping you do this, who after going through all this thinks they would actually want to go out there and research these companies on their own?
00:31:59
Speaker
Miguel, so a handful of people. Yeah, so that's probably about right. um So this is how I think you would do it. Create a list of companies you're interested in. A kind of hack here is this site DataRoma dot.com. They pull in a bunch of value investors that if you dig around online, you can read papers, watch videos, listen to podcasts, episodes of some of these people. DataRoma.com pulls what's called their 13 Fs.
00:32:21
Speaker
that if you own some sort of fund that has at least $100 million dollars in assets in the US, you're required to report with the SDC, which then becomes public knowledge, what you own, what you bought and sold. and so A cheat is rather than, you can look at all the kind of criteria I gave you earlier, like what is the stuff that I'm familiar with, or you can go to this dataroma dot.com, and what are these really experienced investors, who in most cases have been doing it for 30 plus years, what are they buying? What's the biggest position in their portfolio? Because that's probably their highest condition conviction holding. So that could be a way, like okay, I'm gonna look through all those, and if I find one of those that I'm pretty familiar with, maybe that's a good starting point. So rather than going from 3,000 publicly held companies in the US or so, you go down to maybe like 10.
00:33:00
Speaker
And that saves you a lot of time. And so however you create your list, throw out the ones you don't understand. For the other ones, you can read their 10Ks, 10Qs, and earnings calls. I like seekingalpha dot.com, which is the one I showed you those quarterly sales. It's not very expensive. like You can do the free version, but at some point it gets kind of annoying. And so the paid one is a couple hundred bucks a year or something. It just makes a lot of this data way easier. um But this is how you would actually dig in.
00:33:25
Speaker
This is like being able to buy a private business that you own, and they're required to share all this stuff publicly, and they get a lot of legal trouble if any of this stuff is inaccurate. That would be available to you if you're investing in public equities. um Not typically available. When you're investing in a private business, you kind of have to trust them, do some level of due diligence, but all that stuff is public. So read through that stuff.
00:33:47
Speaker
Try to value the ones you do understand. Say, how much sales are they doing? What's their profit? Do I think it's going up or down? How long do I think it's going to last? How much cash do they have? How much debt? If it gets any more complicated than that, then you probably want to skip it. So try to value the ones you do understand, and then throw out the ones you can't value confidently, and then only buy them when they're half off.
00:34:07
Speaker
This is sort of, I think there's anything else? Yeah, and the plan to never sell, which sounds nice, and but it's hard to stick with. But either way, I think if you do this, the first six steps, you've got a huge margin of safety, you've got businesses you understand, you've stacked the odds in your favor that these things are actually going to appreciate and value versus depreciate regardless of whether the business goes up or down.
00:34:29
Speaker
So an alternative to all this, for the 80% or so, that are like there's no way in hell I'm ever doing this. um In my opinion, buy a low-cost index fund such as such as Vanguard. Year-to-day returns on this. When I pulled this on August 14th, we're 15%, which is good. It's also not normal. Historically, it's been, depending if you're looking at after taxes and whatever, somewhere are between 7% and 10%. Monash Pabrai would say the index fund, the reason it's good is because the index fund's too stupid to sell great companies.
00:34:56
Speaker
They don't worry if things get overvalued. They just keep sort of repositioning the thing. So the index fund is appropriately allocated and so this is the reason that it tends to work.
Where to Find Additional Resources on Value Investing?
00:35:05
Speaker
OK, so this to me is kind of the best option if you're not going to go out there and do this yourself from everything that I've learned.
00:35:12
Speaker
There's going to be ups and downs, kind of like Miguel said, it's not good. If you put your money in this thing, then all of a sudden you panic and sell it or you need the money. So ideally this should be money you don't need and kind of leave there for a minimum of five years. And then with all that, this is probably the best option you have if you're not going to do this yourself. Out of everything that I've seen, I just want to make money.
00:35:30
Speaker
I don't care about like worshipping the Warren Buffett or whatever. There's nothing that particular special about investing in public equities. I'd be fine if I felt like I could get the same returns from real estate, which I've done real estate. I've read a lot about it. And like, I just want to make money with doing no work on the investment side. And this is about as close as I found to get to it.
00:35:48
Speaker
A few other further resources. i These are the books that, there's a million books on Warren Buffett and whatnot, but some of it's a little bit, I couldn't pick one that I thought was really that great. um If you ever want to go deep into it, I just recommend reading all of them. But these are the ones that I do recommend. Joel Greenblatt, the little book that beats the market.
00:36:05
Speaker
The little caveat there is I feel like if you read the first 80%, you're gonna understand a lot of good stuff. He does have, and this is like, he came out with an updated one called Still Beats the Market, but the original one I think is just as good. He's got this, um because he calls it the Magic Formula Investing, where they run all this analysis. He's a smart guy, I'm sure he's probably right, but he's created this site called magicformulainvesting.com, which is another site that you can use to kind of shortlist companies.
00:36:32
Speaker
These are companies that have grown earnings, I believe, and have a high return on capital. And so he's kind of shortlisted these things. And based on all this analysis, these are potentially companies that should grow. And so in the book, he kind of details a process for like, I think it's like you end up planning on buying 30 of them, but only buying like five a month or so. And then eventually he has a process for rebalancing the portfolio. I tried all that. I know the patience for it. And I was like, I don't even know what the hell these little companies are. I prefer to like actually know what I own. But that's the only caveat I have there, is that like he could be right. I don't know if anybody's ever had the patience to stick to that process. So you'll see that in there if you read it. But otherwise, I think it's a fantastic book. Richard Weiser, Happier. I've told a lot of people about this. This is probably the only book, maybe at all, but only investing book that I read twice back to back and then read it again six months later.
00:37:16
Speaker
I think it's really good. And he kind of, this guy interviewed a whole bunch of these value investors and owners for buys in the fast first chapter. That's how I found out who he even was. um Interviewed a whole bunch of other people. And then mastering the market cycle. I think if you read these three books, you'd be set up for success. Mastering the market cycle is an interesting one because this guy Howard Marks is probably one of the most conservative investors. And he says he's very risk averse. He's been doing this stuff since like the 70s. He's worth a few billion dollars. And so for him to write a book on market cycles and essentially timing the market,
00:37:46
Speaker
Is very interesting, but his whole approach is that like you have no idea where the future is ever going, but you should know kind of where we stand. Like if you're standing there in 2021 and you companies are just getting money thrown at them. Everything is kind of flying up and that sort of thing is like you're in that period. You don't know how long it's going to last.
00:38:02
Speaker
but probabilistically, based on all this financial history, things are probably not gonna be so good at some point in the future, because you kind of feel like you're at this peak, and that's all he's doing. If people are just like, I'm never buying these investments, everything is terrible, life is terrible, I'm holding cash, every company sucks, then that, probabilistically, is probably gonna end up being better in the future, just because it's the market's so depressed. And so that's what the whole book is about, and I think it's a really good option. As far as other than that, other resources, Warren Buffett, if you want to dig through any of his letters, fantastic. Charlie Munger, Poor Charlie's Almanac, great one. Monash Pabrai, he's one of the guys who you can actually listen to on YouTube or his podcast also. Joel bri Greenblatt, Howard Marks.
00:38:41
Speaker
And Benjamin Graham, as Warren Buffett would say, you really need chapters 8 and 20. A lot of the other stuff is kind of dense. But I feel like if you went through a handful of this stuff, you'd probably make better investing decisions than 95% of other fellow intelligent business owners that sell their business and now have cash to invest. Thank you.