Brian Feroldi is a financial educator, YouTuber, and author. He has been intensely interested in money, personal finance, and investing ever since he graduated from college.
If you walk away with one big idea from this conversation, let it be this quote from Brian’s book: “The stock market is the greatest wealth creation machine of all time.”
Brian started investing in 2004. In the beginning, he had no idea what he was doing and got his teeth kicked in. His returns improved dramatically as his experience and knowledge about the stock market grew.
Brian’s career mission statement is “to demystify the stock market.” He loves to help other people do better with their investments. He has written over 3,000 articles on stocks, investing, and personal finance for the Motley Fool.
In 2022, Brian’s best-selling book Why Does The Stock Market Go Up? was published. It was written to explain how the stock market works in plain English.
Brian lives in New England with his wife and three kids.
We talked about:
1. Childhood and Career Path:
2. Stock Market as a Wealth Creation Machine:
3. Money – A Taboo Topic:
4. Value and Price in the Stock Market:
5. Determining the Right Purchase Price:
6. Pumpkin Spice Latte and Salted Caramel Frappuccino and Daily Price Moves
7. Why the Stock Market Always Recovery
8. Investing During Economic Downturns
9. The Importance of Saving:
10. Investing Isn’t Just for the Affluent:
11. Stay tuned until the end when Brian reveals the biggest edge over Wall Street that investors have.
https://www.brianferoldi.com/about/
https://www.brianferoldi.com/newsletter/
---- Crisis Investing: 100 Essays - My new book.
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IMPORTANT: As a reminder, the remarks in this interview represent the views, opinions, and experiences of the participants and are based upon information they believe to be reliable; however, Sicart Associates nor I have independently verified all such remarks. The content of this podcast is for general, informational purposes, and so are the opinions of members of Sicart Associates, a registered investment adviser, and guests of the show. This podcast does not constitute a recommendation to buy or sell any specific security or financial instruments or provide investment advice or service. Past performance is not indicative of future results. More information on Sicart Associates is available via its Form ADV disclosure documents available adviserinfo.sec.gov
This is an AI-generated transcript; please forgive any mistakes you might find; thank you!
[00:00:00] Bogumil: hi. Hello, Brian. How are you? Nice to see you.
[00:00:02] Brian Feroldi: Thank
[00:00:02] Bogumil: you for having me. It's great to be here. As you know, I'm a big fan. I read your book. Why does the stock market go up? Everything you should have been taught about investing in school, but weren't. And, and I loved it. I highlighted every other sentence in the book.
So I have a lot of questions, but I like to start those conversations from the beginning. And I'm curious to ask you about your childhood and upbringing. And I'm very intrigued how that time you think influenced your. Particular curiosity in investing and the career path that you chose.
[00:00:38] Brian Feroldi: Uh, so I was, uh, born and raised in a, uh, uh, middle class family in, um, Rhode Island, which is where I still, uh, live to this day.
I had a very fortunate, uh, childhood. Uh, both my parents, uh, worked, uh, for, for a living. Uh, we had a very nice lifestyle in a, uh, nice suburban, uh, suburban house. Uh, money was never something that my parents fought over, and both of them were naturally frugal people. Um, they never sat us down and really taught us lessons about, uh, money through, through Through language, uh, but they did themselves live a frugal lifestyle and they would often, they would occasionally drop hints to the, um, to us kids, like, you know, if we wanted to, we could drive a fancy car, but we don't want to, it costs too much, uh, money.
So I had a very fortunate upbringing from that perspective. And for whatever reason, I was just born to be a natural saver. I think some people are born natural spenders. Others are born natural savers. I was definitely born a natural saver. As soon as I started. Earning money. Um, I essentially had always set aside at least a small portion of it, uh, to pay for indulgences.
And I, I've always gotten pleasure from the idea of spending money in the future, uh, equivalent to, and I've always felt it to be painful to have money leave my bank account, uh, in, in, in the current time. So, uh, because of that, I've always favored it. Saving for the long term, uh, when I graduated from college, though, in 2004, um, I had, I had the foundations of personal finance, uh, built into me, but I knew zero, zero about, um, the world of investing and having your money work, work for you.
And I say that as someone that graduated with a degree in business. I graduated with a degree in business and I was taught next to nothing, nothing about the stock market or growing your money or inflation or so many of the basics about investing. But when I graduated in 2004, my dad handed me a copy of a very popular book at the time called Rich Dad.
Poor Dad by Robert Kiyosaki, and I just devoured that book in a period of, of 72, two hours. Uh, it was the first time that I'd ever heard of the concepts about the rich. You can become rich in one generation. Uh, the rich use their money to grow their wealth. Uh, your house is not an asset. It's a liability.
And all these really. Basic concepts, but they were brand new to me. And that kickstarted a love affair that continues to this day with me trying to enhance my financial knowledge, uh, as best I can.
[00:03:34] Bogumil: Brian, I have so many follow up questions. So first of all, it's saving. I think it's a great blessing that you grew up with that.
And I can relate to that somehow for me saving. Always came easy, but I know it's not the case for everybody. I had a wonderful conversation with Brad Barrett that I'm, I thank you now about being a natural saver or a natural spender and how we can all fine tune it and overcome it. Now, I'm curious about the point when you got interested in the market, and I've had interesting conversations with a lot of guests on my podcast, how the time you get intrigued by the market, whether it's a bull market or a bear market, really influences how you feel about investing.
And I can tell reading your book that you've been shaped in a certain way, but I want to hear it from you. The time you joined the market, was it easy? Was it hard? Did you lose money on the first investments? What was it
[00:04:25] Brian Feroldi: like? Yeah, so, um, again, the book that really introduced me to the concept of investing was Rich Dad, Poor Dad.
And if you read that book, he is a big fan of using leverage. He recommends gold. He recommends penny stocks, right? He recommends all these things that now I just personally am directly opposed to. But I am very thankful for that book for introducing me to the concept of investing, but I would not recommend that book for actually investing, um, uh, ideas.
So one of the first asset classes that I learned about was, was real estate, you know, buying properties and, um, and renting them out and having the renters essentially pay, uh, your, your mortgage off a fortunate, fortunately or unfortunately, depending on how you look at it. Uh, I was getting interested in investing in 2004, 2005 and 2006, which was pretty much the peak.
Of the real estate bubble, uh, during that time period that led to the 2008, uh, financial crisis. So when I was looking around trying to shop for properties, first off, I didn't have a lot of money. So I would have to, I would have to like, you know, put 1 percent down on a property and borrow 99%, which you could do at the time, believe it or not.
That's how crazy, um, uh, credit was. At the time, but because asset prices were so high, the numbers just barely were, I mean, just barely worked and like everything had to go perfectly, uh, for the house to pay off. And thankfully, when I floated the ideas to my parents, they basically said, Brian, do you want to be a landlord?
Brian, do you want to talk with people about collecting their money? Brian, do you want to deal with tenant problems? And as I thought about it, I was just like, no. No, real estate makes sense on paper. Um, but it's just not the right asset class for my personality. So that led me to look at, uh, investing in, in the stock market.
And again, my education time was zero. I had very little education about what the stock market was. I couldn't tell you anything about how to research a company, how to read a financial statement when an sec filing was. So I thought. The way that you invested in the stock market was by buying penny stocks, like penny stocks were essentially the meme stocks of the day.
People would talk about them on Yahoo's discussion boards. Um, and you would see their prices fluctuate. And I thought the way that you invest in the stock market was you buy something for a dollar per share, and then you sell it for a dollar 20 per per per share. And why did it go up? I had no clue. I thought it was essentially a gambling.
So my first introduction to the stock market was buying garb, garbage companies, just absolute garbage companies. And thankfully, I lost money. Um, it was only a few hundred dollars. But man, was that a lot of money to me at the time. And wow, was that a painful lesson, uh, to learn. So what was happening in the overall stock market, I was basically unaware of when I first started, because I was focused on these garbage companies and essentially trading them.
Now I quickly... Lost money and I tried a couple of different strategies in there, but once I kind of wised up, started learning from David and Tom Gardner, Warren Buffett, Peter Lynch, I focused on higher quality companies and that was pretty much 2008. So, uh, the, the investments that I made in these higher quality, uh, companies, I mean, you could have, no matter what you bought in 2008, you lost money like immediately.
And it was extremely painful to, to invest that way. However, I was convinced at the time that the stock market was the asset class for me. I was investing for the long term. I was saving a high portion of my income and we had no kids at the time. So we continually meet my wife and I continually plowed money into the market.
And I was buying great companies at better and better prices. And I still hold some of those companies to this day, including Google. Uh, which has worked out pretty, pretty darn well. But my introduction to the stock, to the stock market, um, you, you couldn't have had a quote unquote worse start, uh, to my introduction.
But looking back, it was a wonderful introduction to the stock market because I lost money immediately and I learned a lot of lessons the hard way.
[00:08:51] Bogumil: I really like that. When I give talks about investing, I ask people, have you lost money on your first investment or not? And it really sets a different tone for the conversation and different expectations going forward.
If it's too easy the first few times around, I think you can have a wrong idea of what the stock market can do. Which leads me to a quote from your book that I really like. You say that the stock market is the greatest wealth creation machine of all time. And I couldn't agree more, but tell me more about that.
[00:09:19] Brian Feroldi: If you look back at any chart that shows the long term history of the Dow Jones Industrial Average, or better yet, the S& P 500, the undeniable long term trend could not be clearer. Up and to the right. It is not a straight line. It is a rocky road. A whole bunch of volatility happens along the way. Uh, but the historic returns for the S and P 500 over centuries has been about a 10 percent compounded rate, uh, per year.
And the stock market is the simplest way for ordinary people. with ordinary incomes to grow their wealth exponentially over time and retire as a multi millionaire. I mean, thanks to the invention of index funds, uh, automated investing and tax advantage vehicles, such as 401ks and IRAs in the United States.
Um, it's never, it's never been easier than it is today to harness the power, the long term wealth creation potential. Of of the stock market. Now, there are ways that you can grow your wealth faster, but if you're looking for easy, no research compounding, uh, growth, to me, there's no better vehicle than the stock market.
[00:10:40] Bogumil: I like the idea that the stock market can be what you want it to be. If you want it to be a casino, it can be a casino. But it can be what you call it, which is a wealth creation machine. We manage family fortunes, multi generational wealth. And the money has been with the families for a long period of time.
And I've been responsible for them with my partners for 20 years, my senior partner for almost 50 years. And I've seen a remarkable growth in wealth only because, or mostly because of the participation in the success of all the businesses, which happened to be listed on the stock exchange, which tend to be bigger, tend to be more established.
But when you think of the stock market as a place where you get to buy small or not so small pieces of businesses. And it's a place that's open to everybody, as you said, you can start with a small amount and you can put your family fortune in the stock market in a certain responsible way as well. So it's a wide range and the stock market doesn't care if you're young, if you're old, if you have a hundred dollars or a billion dollars, it's available to everybody if you use it the right way.
I want to ask you about money and money remains a taboo. It's a controversial topic. It's emotional, it's uncomfortable, but then in your book, you say that money affects us all. Money determines where you live, the food you eat, the education that your children receive, the healthcare you can access, the life experiences you can have, and much, much more.
Tell me more. How do we talk
[00:12:10] Brian Feroldi: about money? There's really two broad categories that it doesn't matter who you are, you have to know about them. The first would be health, and there's lots of ways to slice up health. That could be, um, physical health, emotional health, relationship health, uh, et cetera. And the second area that the category that just affects every aspect of your life.
It is money. Uh, money is, is the currency that we use, uh, to buy the necessities in our life, uh, to pay for life experiences, uh, that, that, that we have, uh, to pass, uh, wealth from one person, uh, to the next, it's an incredibly important topic to understand and it impacts every area of your life. When I was growing up, money was most certainly a relatively taboo subject in my household.
Um, we never sat down and talked about how much money my parents had or how much money, uh, they made. Uh, in fact, one time I got a, I got a look at my dad's, um, tax return and it had how much income they have. And the next thing he asked... He said out of his mouth was, don't talk about this with your, with your, with your friends.
So I got the impression very early on, uh, that money was a, a taboo topic, uh, subject, uh, that should not be, uh, discussed. And for whatever we, even, whatever reason, that idea is just woven into, uh, American, uh, society, not in every family, but it is a broad thing that many people don't talk about, uh, money and their finances.
Um, with, with, with, with others. I still have some aversion to talking about my personal finances, uh, with, you know, the general public on podcasts and appearances on this because that's because that's because that's my family finances. So that's my, me airing our financial, um, information that includes my wife.
Uh, and you know, she's not okay with that, which I have to, um, respect. But one thing that I have done. He's tried to make money a less taboo subject in my own household. Uh, my kids are aware of the, what we've paid for our house, what the houses in our neighborhood are worth. My kids are aware of the price that we've paid for our, our cars.
Um, and our, uh, the luxuries that we have in our life. My kids are aware of the cost of vacations. Uh, that, that we go on as well as the amount that we spend, uh, monthly, weekly on, on, on groceries and utilities and water bills. So I'm trying to be open and honest with them about what it costs to live the lifestyle that we have.
And I'm trying to make money a less taboo subject with my own children than it was for me growing up. But there's no doubt that broadly speaking, money is still largely seen as something that you don't
[00:14:55] Bogumil: talk about. What I'm hearing is that the behaviors that you observed at home and then the behaviors you want to show to your kids, to your family are the best way or one of the ways to communicate how you really feel about money, even about without mentioning actual amounts or net worth or your income, but just the behaviors around how you treat money that's coming in and the money that's coming, leaving your home.
I think it's a very interesting way of looking at it. I want to ask you about value and price, and it's a bigger discussion when it comes to stocks and it's not that intuitive. When people look at the stock market, they look at the prices moving up and down. You mentioned penny stocks, but all the stocks move up and down every day, but you have a whole chapter about the value.
So tell me more. What gives stocks value? How do we think of? Stock's the right
[00:15:45] Brian Feroldi: way. Before we talk about that, let's back up and just answer a very simple question, but one that's often overlooked. What is a stock? Like, I think that a lot of people have heard the term stock and stock market for, but they don't understand what a stock is.
A stock simply represents fractional ownership of a corporation. Let's say that again. Fractional. Ownership of a corporation, most people are familiar with the concept of a deed, a deed to a house. If you, if you would ask who owns that house on there, well, there's a record somewhere of a deed. And the deed says this property and this house is owned by by this person.
So the deed represents ownership. Of, of that, that, that house, a stock is the exact same thing, but for corporations with one important difference on a deed, you typically have one owner or maybe two, but corporations can be owned, can be split, uh, into, into like almost an infinite number, uh, of, uh, of owners.
So there could be one owner of a corporation. There could be two, there could be 10, there could be 10. a billion, uh, owners of an individual, a corporation. So all the stock is, is a stock represents a portion, a fractional ownership of a business. So why do they stock? Why does fractional ownership of a business have value?
Uh, the answer is that that underlying business itself, uh, has value. And why are businesses worth anything at all? Well, businesses own assets. And they also have liabilities. The difference between the value of the assets they own and the liabilities that they have represents the business's net worth.
And if that number is positive, then that business has some underlying, uh, value, uh, to it. And if you have a stock in that company that has an, that has a a net worth, uh, if, if you will, You have a legal claim on a portion of that company's net worth, and that gives that stock value. So that's one way that stocks are valued.
Another way that stocks are valued is based on the cash generation ability or the profitability of that company. Let's say there was a company out there that made one million dollars. in profits per year, 1 million in profits per year. And that company had a thousand individual shares. Well, each individual share would have a legal claim on 1, 000 of that company's Prop profitability.
So if there's a million dollars in profits divided by a thousand shares outstanding, that gives each individual share a claim on 1, 000 in profit. And if I was to ask you, if I had a legal claim that put 1, 000 into your bank account, each and every year, would that have value? Would that be something that you, you would want?
The answer I hope would be yes. I want things, I want to own things that put money into my bank account, uh, every year. So that is how you would value a business. Now we could argue about is that legal claim worth 10, 000? Is it worth 50, 000? Is it worth 100, 000? But we, I think we both agree that having a legal claim on a continuous stream of profits or cash flow has some value to it.
So that is why stocks, the underlying thing, have value to
[00:19:30] Bogumil: them. There's so many wonderful things that you just said, but first of all, I have to share with you something I showed on the podcast before that the first book I picked up about investing was one up on wall street by Peter Lynch. And as you, I was studying economics, finance, political science, and I wasn't really sure where I'm going to take it.
And my professors got burned in the internet bubble and they hated the stock market to be polite here. And then they told me it's a You don't have to know much more about it. And I picked up this book and Peter Lynch said that stocks are small pieces of businesses. And somehow that simple idea really spoke to me.
And I imagined myself as an owner of a collection of businesses I could have. 5, 10, 20, 15 businesses, or I could own the whole index, whichever way I want to go the same way anybody else with billions of dollars. And I got much more intrigued about the businesses behind the ticker. What is it that they do?
How do they do it? How come they have a profit? You mentioned profits, but what is so special about them? Is it the size, the network effect, the branding or whatever else that comes with it that would allow those companies to have a profit? But it opened my eyes to a whole new world that I never really thought existed.
So that's a beautiful way of looking at it. I want to highlight the profits part because when people look at the stock market, there are a lot of businesses that have no profits. And the last few years, I think one of the major investment banks was following an index that was called a profit less Index of companies without any profit.
And I think it's okay if an earlier company has no profits because they're still trying to figure out their business model and unit economics and so on. But if you have companies that have been around for five, 10 years, and sometimes they say that they don't have. A path to profit in the foreseeable future.
And I won't quote which company actually said it in their filing. You might guess which one it was. And it's very confusing when you look from the outside because a stock price of one company that's been around for a hundred years and a company that's been around for five years with no profits looks to the outside person the same.
Can you talk about that? Like the, at the end of the day, a business has to generate a profit. If it doesn't have a profit in my mind. It's not a business if it has no path to profit. Can you talk about that idea a little
[00:21:56] Brian Feroldi: bit more? Yeah, well, I actually have firsthand experience with this one, um, but I'm happy to talk about it in general terms.
Now, what we To answer your last question, we talked about a very simple concept, which was a company that produces a million dollars in profits every year. Those profits are owned by the shareholders, and that's why the shares have, have value to them. That's assuming, that's assuming that that profit number, that million dollars per year is a static.
Uh, is a static, uh, figure, uh, if instead of that same company produced a million dollars in profit in year one, 2 million in profit in year two, 4 million in profit in year three, 8 million in profit in year four, 16, 32, 64, 128, essentially the company's profits were doubling or expected to double every single year.
Would that affect the value that you place on that, on that economic claim? Well, it sure would, uh, because with just waiting a little bit more, you're promised, you're promised, uh, with this particular asset to double the amount of income or profits that gets placed into your bank account, uh, every year.
And if you take, take off into, um, Into perpetuity, you'd become the richest person in the world. If that just happened like 30 times or so, if it profits just doubled, uh, 30 times or so. So the perception in your mind is that this is going to be worth much more in the future because the profits of the company are expected to rise exponentially.
In fact, you might be so excited about the prospect of investing in that company today, that you're willing to pay a hundred times. A profits or 500 times profits or a thousand times the company's current profits because you believe the profits are expected to rise so, so much. Now, if you take that one step further and say, okay, well, instead of this business generating a million dollars in profits today, it's going to lose a million dollars in profits today, but we still promise that the future profitability of the company is going to grow.
So this year, the company's going to lose a million dollars next year. It's going to make zero after that. It's going to make a million dollars. And then. The profits are going to grow exponentially. Would that still be something that you were interested in paying for? Well, again, if the prospect of ever growing future, ever growing profits in the future, uh, is still to be a high likelihood in your mind, you'd still be very willing to pay a premium to own that business today, even if the company is not generating profits.
That's why so many profitless companies that are publicly traded in some cases garner very high valuations. It's not for what the company is doing today from a profitability perspective. It's what the company expects to produce in profits three, five, 10, 20 years from now. Now that's a concept that's very hard to understand.
When I first graduated from college, I was working for a venture backed. medical device startup company. This was pre FDA approval. So our revenue was zero. We didn't even have a product on the market, uh, yet, but we were hiring engineers and sales and marketing people and executives to build the value of, of the company and to grow a stream of revenue and profits, uh, over, over time.
Now, eventually we launched the product and we started to have some, uh, revenue coming in, but our costs were dramatically higher, uh, than the revenue that we were pulling in, uh, from, from the product. So we went public and we were reporting earnings to investors and every single earnings report that we produced had like a 10 or 15 million loss, uh, to it.
And yet our stock, the value of our company, Went up over time and I was incredibly confused. I was like, how can, how can we lose money, lose money? And investors are excited to own the business. I didn't understand it. What I missed was that investors weren't valuing us and what we were doing today. They were valuing us on the, on the future potential of the product that we were, uh, we were building.
And by the way, the company that I previously worked for was started in the year 2000 and it didn't make a profit for the first time until 2021, 21 years of losing money in the market before it made a profit for the first time. And the profit that it made was minuscule, a couple, a couple of million dollars and uh, hundreds of millions, if not a billion dollars had been invested into the company at that point.
However, if you look today, that same company is currently worth
11 billion, 11 billion in market cap today. So that is an example of a company that lost money, lost money for 20 years. And yet, because investors believe in the future profitability of the company so much, they did incredibly well by buying and holding that business.
[00:27:04] Bogumil: You're touching on something interesting, which is drives prices, and that's the belief in what the company can deliver or excitement that comes and goes and fear and greed.
There are many ways to call it. The trouble is that you have to be fairly correct about the future, and it's a wide range of situations all the way from a well established company. Let's say Coca Cola, that's growing at a steady rate. It's not that surprising what they will grow at in the next year or two.
And their profitability is fairly stable year after year, all the way to a company that you mentioned that's still proving itself doesn't have a profit. It's at a different point. But as an investor, you have to figure out where it could be over the next few years and the more accurate. expectations are, assumptions are, the more successful you will be.
I'm curious about the fact that, and you see it as I do, that investors go through. Uh, you know, fear and greed back and forth. There are moments when it takes only one or two quarters of missed earnings, even if it's a well established good company. And the stock price can be down 10, 20, sometimes 30%. And then you see the opposite.
The losses are deeper than they've ever been, but somehow the story sounds more convincing than ever. And the stocks triples. How do you navigate that as an investor?
[00:28:27] Brian Feroldi: Yeah. Morgan Hasel had a great quote about how businesses are valued. And the quote was evaluation is, is essentially, and I'm paraphrasing here, evaluation is essentially the numbers from today times the story about tomorrow, right?
And it's really the story about tomorrow that drives the value and the price of any, of any business, uh, case in point that I think most investors are familiar with. Think about the last, think about Facebook's stock Over the last three, over the last three years, 2020 hit. And like every stock that's out there, Facebook stock nosedived when COVID, when COVID was raging, there was so much uncertainty in the world that everything was selling off right when COVID started.
Immediately after that. So we saw the fastest bear market in history and Facebook stock plunged immediately after that, we saw the fastest stock market recovery in history because so many people were trapped at home. They were getting free money from the government and with plenty of time on their hands, a lot of people said, I'm going to give this investing thing a try for the first time.
And in 2020, we saw companies values. Absolutely, uh, skyrocket. In fact, the lesson that people learn in 2020, unfortunately, was every stock goes up and the riskier the stock, the faster it goes up. So we saw Facebook stock plunge from covid and then skyrocket given the frenzy of of investing. Enthusiasm for investing all the way through 2021.
Then in 2022, the story about Facebook changed dramatically. The story, uh, became they're spending money like crazy on the metaverse, right? People were very interested in the metaverse in 2021. Couldn't care less about it in 2022. Uh, we also heard the story of advertising is slowing down. And most importantly, we heard the story that tick tock.
Is going to come in and steal, uh, Facebook's, uh, profits. So the story that investors believed about Facebook took, uh, uh, uh, got punched in the face in 2022 and Facebook stock declined sharply. I think peak to trough, it was down like 70 percent for, for one of the most profitable businesses in the world.
That is because the story. About the future of the business is what drives the value of market prices. And then in 2023, what, what, what happened? We saw the story about Facebook take a complete reversal. We saw Zuckerberg pull back on spending about a metaverse. We saw growth return to the company and investors fears about Facebook being taken over by TikTok were completely, were neutralized.
And we saw Facebook's stock value Like more, I think more than double, uh, this, this year. So Facebook, the company, if you just looked at revenue, And profits, they have been fairly consistently going up into the right. There's been speed bumps, but the actual business business of Facebook has been fairly predictable over that three year time period.
But what the story. The market story that investors have about Facebook gyrated wildly. It became the story is this company is going down at early 2020. And then it became this company is great in 2020, 2021 shares jumped up. Then it became this business is going nowhere. They're wasting money and the share price declined.
And then the bit, and then that became all reversed in 2023. So the volatility. That investors have had to endure from holding Facebook stock has been far more exaggerated than the volatility of the revenue and profits that Facebook has generated. Now, that's a bit of a more extreme example, but it highlights the point that there can be a wide disconnection between what the value of a company does and what the underlying economics of a business do.
And the only way that I know of to, to, to neutralize that effect is to focus all of my attention on the underlying business of the company and just know that in the short term. Stock prices can visit very interesting places along the way. And if you're going to invest in individual stocks, you must, you must be okay with accepting that volatility that goes along with investing, because that is not a.
Uh, that is not a bug of the stock market. That is a feature of
[00:33:01] Bogumil: the stock market. I like what I'm hearing. So at Seacard Associates, we consider ourselves contrarians, and we try to take advantage of what you just described. I think anybody that invests the time, they can figure out the better quality businesses out there to invest in that they like, that resonate with them.
And you can end up with a list of 50 or 100. We have a running list of companies that we'd like to own. But at any given time, the price that we would have to pay is higher than we're comfortable with. And there are moments that you beautifully described when for some reason, the market is very short term focused on something negative and you can have some incredible businesses available half off or less.
And obviously March of 2020 was an extreme. When it was such an uncertain time on so many levels that we were stuck at home and we couldn't go to our offices and our work. And I think it affected the investor sentiment more than any other crisis that I can recall, because it was a very visceral experience at the time.
But there are moments when individual stocks go for ups and downs that you described with Facebook and it's. It happens more often than you would think. I sometimes talk about the idea of looking at the last 52 weeks and see the range of any company you like. And people are so surprised that even companies that they think they know, they trade in a pretty wide range in the last 52 weeks.
And I'm always intrigued. How, how could I benefit from the low of that range or a five year range, five year range, or a 10 year range? And there are moments when. Somehow the market falls out of love with the company. I want to ask you about the quality and, and overpaying for stocks, because I think it's a dangerous territory for a lot of people, people fall in love with the story that you described and they think that any price they pay is fine.
It doesn't matter how much you pay. So paying too much for a great business. Is not a recipe for success. Can you talk about that? I find it really intriguing and I think it's not that intuitive to a lot of people. Valuing
[00:35:04] Brian Feroldi: a business and learning how to value a business the right way, uh, is one of the most challenging aspects of, of, of an investment because it's almost like two things, two things can be true at the same time.
First off, no business is worth infinity dollars. The greatest businesses in the history of, of mankind, even if it's. Apple, which seems to be one of the greatest businesses ever at all times. Apple is not worth infinity billion dollars, right? It's worth a couple of trillion dollars, uh, currently, which is an insane amount of money, which is just a ridiculous amount of money.
But if you pay too high of a price for Apple, especially today, the odds of you earning a positive return moving forward are diminished, diminished greatly if you overpay for a business. That's one. It's one truth about valuing a business. Another truth. Another truth that I had to learn the hard way about a business is the higher the quality of the business and the longer the duration of that company's growth cycle and competitive advantage phase, the more.
You should be willing to pay a premium to own that business, uh, today. Um, so higher quality businesses, businesses that can generate higher returns on capital for long periods of time deserve. deserve to trade at a higher valuation today than an ordinary business does or a low quality business does.
However, just like with the, just like the fact that companies are not worth an infinite price, there is an upper limit to that number. Microsoft is undoubtedly one of the greatest businesses. Of all time. However, if you were buying Microsoft stock in 2000 at 50 or 60 times, uh, earnings, uh, even though Microsoft eventually delivered on the growth of that, you had to wait 16 years before you got back to even on your purchase of, of Microsoft, uh, because the valuation over the next 16 years went nowhere but down.
So even though the. Business continued to, to, to grow, uh, the speculative portion of the turn, just zapped all of your returns, uh, away from you. So in general, when it comes to valuation, investors should do their best to buy higher than average quality businesses at lower than average, uh, prices. And if you can consistently do that, the odds of you making money, uh, dramatically improve all time over time.
However, that's very easy to. Think about conceptually, it's really hard to actually execute on that strategy, especially in real time. No, that's, that's
[00:37:50] Bogumil: brilliant. I'm, I'm thinking about the idea of growing into your valuations, which you mentioned with, with Microsoft and many other companies that reach a certain peak in terms of valuations.
And then they actually have to grow into those bigger shoes that they're supposed to wear, and that may take a decade and you would have to be a really patient investor to stay with the story and with the company long enough to see the benefit in the long run. I want to ask you about the daily price movement.
You have a little story in your book that really resonated with me and made me smile. You talk about pumpkin spice latte and salted caramel frappuccino announcement that Starbucks did a few years back that they will release those flavors ahead of time, their fall flavors, and the price moved on that day.
It made me smile because I've seen it so many times when the stock price moves on very short lift, small news, but creates a momentary excitement. It's very confusing for a less seasoned investor. What is it that's actually happening? And part of me would want to know that, you know, that Starbucks will announce those flavors earlier ahead of time.
But when you really think about it, it's just a cute story that may not have a bigger bearing on the longterm success of the business.
[00:39:05] Brian Feroldi: Yeah, let's get back to that Morgan Housel quote for a second. The value of a business is the numbers from today times the story about tomorrow. The numbers from today are accessible to everybody, uh, all the time.
There's no edge in just looking at the numbers, uh, from, uh, from today. So that, and the numbers from today don't really change. All that much or all that drastically, uh, from, from quarter to quarter or from year to year, they can, but generally speaking, the numbers from today have a relatively predictable trajectory ahead of them.
The thing that is unpredictable about the stock market stock market is the story. About tomorrow, how investors are going to feel, literally feel about a business changes from minute to minute, moment to moment and day to day. So if investors feel, feel more excited, more bullish on Starbucks today than they did yesterday, then shares of Starbucks.
Are going to, to rise the enthusiasm for becoming a shareholder of Starbucks. If that increases, so too does the price of, of Starbucks stock. And the inverse is also true. So yeah, in my book, I highlight a very simple case where Starbucks announced that it was launching it's spice latte and spot and salted caramel frappuccinos.
It was bringing those to market earlier than it had been the year before. So in some investors minds, or I would actually say in some traders minds that created slightly more optimism that the near term profitability of Starbucks would rise at a faster rate than was previously inspected, expected thanks to that, thanks to that small change and in turn, that means that shares of Starbucks today are worth in traders minds slightly more than they were in the previous day's trading session.
So that's why shares rose on that particular day. And the next obvious question becomes, well, how can I take advantage of that? How can I predict when enthusiasm for that, those stocks or, or, um, or bearishness on those stocks, uh, will happen? And how can I take advantage of that? That is a game that I don't even think is worth Attempting to play because what you're trying to do when you're trading, you're trading stocks is what you're, you're trying to predict the collective mood of all market participants will be in the near term future.
Now, I don't know about you. I can't predict what mood. I will be in in four hours from now based on what's going to happen with the rest of my day. Are good things going to happen and I'm going to be in a happier mood than average four hours from now? Or am I going to get a call that when my kids is sick or something's going wrong in my household and that will cause me to be in a bad mood for it four hours from now?
I don't know. I can't predict what my, my near term emotions will be. So if I can't predict my emotions, what chance do I have of correctly predicting the emotions of investors? Uh, collectively, uh, I don't think that I, I can do that, uh, successfully. So if I can't anticipate the, the, uh, motions of, of investors, how could I possibly predict the, what stock prices are going to be, uh, one hour from now, one day from now, uh, one week from now.
So that's why I think that's an important concept to, to, to understand, uh, because once you truly understand that you realize how, how far, how foolish it is to try and trade stocks.
[00:42:51] Bogumil: No, I think it's, it's brilliant. I like the idea of focusing on long shelf life ideas. And it might've been Nick's sleep that, that brought up the idea initially.
When you get a piece of news and we have interns now, and then I asked them, is it good or bad as a buyer of stocks for you in this particular moment? And then do you think this piece of news will be relevant? Three, five years from now, and as cute as the story of the spice latte is, we will forget about it.
We'll use it as a case study to amuse ourselves, but it's not what's going to move the fundamentals of a business over the long run. And paying attention to that, as you highlighted earlier, pays more in the long run, especially if you want to be an investor and a business owner. For many years to come.
So as much as it's amusing to see those headlines that move the stock price in a day, that's not where the real money is made. I want to ask you about recessions and you make a point in your book, how every time the market recovers from recessions are a scary moment and market crashes in general. How do you think about that?
And why does the market always recover? What are your thoughts?
[00:44:01] Brian Feroldi: Yeah, the, when I was brand new to investing in, in the stock market, uh, I'd been shown that long term chart of the S and P 500, just like many people have seen. And again, the undeniable long term trend is up into the right. And it was told to me by the books that I was reading that yes, markets occasionally crash, but I was told that historically they've always recovered from crashes and they always go on to set new highs.
And that never made any sense to me at all. That was a set. I, I, I'm a fan of the phrase, or I've heard the phrase, what goes up must come down. And the stock market seemed to divide, um, defy that convention. And while it, uh, what, what goes up must always continue, uh, going up is essentially the, the, what's happening with the stock market.
Again, just never made sense to me at all. Now, if you look back at the major crashes or stock market declines that have happened over the last 100 years, all of them can be relatively understood by, by the general public, right? Uh, we saw the 1929 stock market crash, which was kicked off the great depression.
It's given the great depression. It's understandable why stock prices declined. Uh, we saw a big decline in the 1940s caused by World War II. Makes total sense. Uh, we saw the stock market decline in the 1970s, uh, caused by the oil crisis and Watergate. Again, makes sense. Uh, we saw the dot com crash. Makes sense.
We saw the 2008 crisis. Makes sense. We saw COVID, 2020. In each case, there was something bad going on at the macro level that made sense to me why stock prices would, would crash in those cases. What never made sense to me was why the markets had always recovered. Why did the markets recover, uh, from, from crashes?
So I think if you can understand the, the reasons why stock prices recover, it will tremendously help you to hold and maybe even buy more during scary, scary times. So broadly speaking, there's a couple of reasons why investors should expect stock market to recover. Number one. Tough times, bad economic times force businesses, uh, to become innovative and to change their, their, their, their ways when, when things, when times are going well, you don't have an economic forcing function to adopt new strategies.
Or try, uh, new things or, or make changes to your life on a consumer level, uh, to save, to S to save money when, when times are good, we live happily. It's only when crises are happening and things are going horrifically wrong, that businesses are forced to change their ways to try and save money and to, and to launch new innovative feature things to market.
In fact, during periods of, of economic crisis, innovation. Accelerates innovation, uh, goes up, uh, in addition, during bad times, uh, good companies survive and bad businesses, the weakest businesses die. They, they, they, they cease to exist. Well, when bad businesses die, that means that leaves more customers. For the strong companies in their industries to go out and capture.
So during bad periods, good companies expand their market share. Bad companies lose their market share or die or together. So bad times are actually good. For strong businesses and bad for weak, uh, businesses. Um, second, uh, when bad times happen, the government is certainly becomes aware of that. And they take actions through government assistance through direct payments, as we saw during, uh, COVID or through, uh, uh, interest rate, controlling interest rates.
Uh, to make the business environment easier, uh, for companies to, to operate in. So interest rates, uh, tend to decline that lowers borrowing costs, which makes companies against strong companies, uh, the ability to take on projects that may have not made sense. Uh, when interest rates, uh, were a little bit, a little bit higher.
And then lastly, when people are laid off, when employees are laid off during bad times, it forces some of them, it forces them to become entrepreneurs. When people are laid off and they're sick at home and they have trouble finding work, many of them will actually develop innovations. And start businesses, uh, from, from scratch that they would not have started, uh, during a good, good times.
And that again, accelerates innovation. And it's really new business formation that often introduces new business models and new technologies, uh, to, to market. So it opens up, it opens up new market opportunities, uh, for businesses to take advantage of. When you combine all those, all those together, eventually the bad businesses die.
Eventually, the good businesses capture a market share and with government assistance coming in, eventually the economy will, will reach a bottom. And that kind of lays the foundation for the next bull market to start. And that's when the green shoots, the innovations and the entrepreneurs that were.
We're started during the bad times. That's when they really start to grow and take off, which sets the legs for the next bull market to take over.
[00:49:36] Bogumil: No, it's, it's very true. I'm thinking that the stock market is not the economy. That's, that's one thing that I think it's very important to remember, and I see investing as a lifelong pursuit, but there are moments when you can buy incredible companies at incredible prices.
And these are moments where it's the least comfortable to go in. And these are the times you described where it's a very high uncertainty about the future. The immediate outlook is not so promising. But these are really the times when you can buy the best businesses, spread prices you haven't seen in a while.
And it's very counterintuitive. It's very uncomfortable and it comes more naturally to some people, less so to the others. But these are the times when you can make the biggest difference, especially if you choose to be a stock picker. But even if you're buying an index, these are the moments where you might choose to allocate a little bit more than usual.
To the stock market, then in times when the valuations are high and it's too good to be true in terms of the market story, I want to ask you about patience and patience is one of the words that I probably use the most, both in this podcast and in my writing. And you say that, and I love hearing this, that the patience is the biggest edge over wall street that we can have.
Talk to me about
[00:50:52] Brian Feroldi: patience. When, when, as an, as an individual investor, uh, the, the, the, the deck is truly stacked against you in so many ways when it comes to competing against, uh, professional, uh, investors, uh, the, you have worse and slower information than professional. Investors do you don't have access to management teams or research reports or, or analyst calls on the same level that they do.
You don't have access to faster computers than they do. So they can trade faster than you do that. Then you do. So what possible edge could you have over professional investors or professional traders? It almost seems illogical that you could have an edge over those people. However, You do have an edge or you could have an edge over them if you choose to.
And that edge is really that you have as an individual investor, the ability. To invest to truly invest, uh, for, for, for the longterm and with a longterm, uh, mindset. Uh, so many people on wall street are hyper focused on the story about, about the company. How is the story about the company changing? How are prices going to change and how can we position ourself to take advantage of the changing story about, about our business?
Again, I don't think that's a game that individual investors should even bother with playing. It's too hard and it's too hard to know if you're doing well. But if you can bet on the long term economic growth of a business or the long term profit growth of the economy in general, that Is the game where you can actually, uh, win.
And as an individual investor, you actually have, um, uh, in addition to time, you have something going for you that money managers, professional money managers would kill for. You have permanent capital, permanent capital. When you are managing somebody else's money. And you're making money from somebody else's money.
You, the, the, the, uh, you are taking on a number of risks, or there are so many additional factors that you have to consider, uh, when you're making an investment. It's not only, is this a good investment? You have to ask yourself, is this such a good investment that I can convince my clients? To stick with me when prices are going the wrong way and you have such career risk as a money manager that you're constantly having to consider how will my investors interpret this this holding as an individual investor.
You don't have to worry about any of that, right? You, you are your own client. You are not going to fire yourself because you have a bad month or a bad quarter, or even a bad, a bad year. Your capital is your capital, uh, to, to manage. And you don't have to think about career risk or selling your ideas to anybody else except for yourself.
That gives you the intellectual freedom to truly focus on the business and truly invest with a long term mindset, which is something that some clients on Wall Street simply won't allow their money managers, uh, money managers, uh, to do. So that is your source of your edge as an individual investor in the industry.
Only way to take advantage of that is to invest with a long term mindset and with a huge amount of patience, more patience than the market in general has. And if you can do that, that's how you can win as an individual investor. I
[00:54:24] Bogumil: love what I'm hearing. I'm thinking of a couple of conversations that I had.
I spoke with Guy Spear about managing your money, your family money and other people's money. It's a very different experience. And the second thing I wanted to mention. The money that we manage for our clients, we say that it's a capital they don't immediately need and a capital they can't afford to lose.
And it sets a certain framework to think about investing, but we're trying to get as close as possible to what you would call a permanent capital that you can actually invest and wait three, five, 10 years for the story to play out the way you thought it would. Brian, I have one last question for you. I want to ask you about success.
Your personal professional definition of success. How do you think about it? How do you know you're on the right track?
[00:55:07] Brian Feroldi: Great question. And my personal definition of success has changed, uh, over time. Uh, when I was growing up, I thought that success would be having a limo. Right. Having somebody to drive me around in a limousine.
I thought that that was like the ultimate definition of success. And then when I was in college, I thought the definition of success was having a big house, a fancy car and be able to take a fancy vacations. Uh, the longer I live though, and the more, um, uh, the more I become. The more I, uh, time goes on, the more I realized that the only true definition of, of success to me, financial success to me is complete control of your calendar.
That's it. Complete control over your calendar. You can spend your time working on the projects you want with the people that you want and under the circumstances that you want, and you can quit those projects at any time without On your family's lifestyle. That is true, uh, success and true wealth in my opinion.
So if you, the ultimate financial goal for me is just. Absolute 100 percent control over your calendar.
[00:56:22] Bogumil: Would you call it freedom?
[00:56:24] Brian Feroldi: Absolutely. Yeah. It's just, it's just another, a shorter way of saying that is complete financial freedom.
[00:56:30] Bogumil: I love it. Brian, this was brilliant. I learned a lot and, uh, You have a way of presenting very complicated ideas in a way that's very relatable and easier to follow.
And I think more people should consider participating in the success that the stock market can offer. And it is, as you said, a wealth creation machine that's open to everyone if you look at it the right way. So I will include everything in the notes so people can follow you and learn more about what you do.
But I think you're doing a remarkable job introducing people to a whole new world. So thank you for today.
[00:57:03]Brian Feroldi: Thank you.
