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welcome to the best interest podcast
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where we believe Benjamin Franklin's
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advice that an investment in knowledge
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pays the best interest both in finances
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and in your life every episode teaches
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you personal finance and investing in
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simple terms now here's your host Jesse
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Kramer hello and welcome to the best
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interest podcast Jesse Kramer here this
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is episode 74 of the best interest
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podcast wow 74 episodes and I'm really
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excited to bring on Brian faldi today
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Brian is an absolute expert when it
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comes to Stock Investing evaluating
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stocks evaluating the companies
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underlying stocks and Brian's also he's
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just a great speaker uh really exciting
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speaker I loved the conversation I had
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with him originally that I'm going to be
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bringing you today I loved listening to
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it a second time as part of the podcast
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production and then I'm going to enjoy
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listening to this final episode I know
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to listen to Brian a third time so I'm
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excited to bring Brian to you guys but
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first we're going to talk a little bit
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about something called the index fund
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bubble because as much as Brian enjoys
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investing in individual stocks he
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understands as I understand that for
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most of us including me index funds or a
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diversified portfolio is just easier it
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makes more sense and over the long run
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based on how much effort we really want
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to put into our investing lives
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something like an index fund probably
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makes more sense that's one of the
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principles that that we espouse here on
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the best is is a diversified portfolio
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that tends to steer clear of individual
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stock picking even though stock picking
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is certainly exciting and and it's
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important to understand the underlying
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mechanics of how stocks have their value
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in the first place and that's what Brian
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talks a lot about but yes I'm going to
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talk about something called the index
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fund bubble in a minute but first we
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have our review of the week as you guys
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know these reviews come from Apple
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podcast so if you're so inclined I'd
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love to read your review leave me a
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review on Apple podcast or you can just
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give the the show a rating on Apple
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podcast or Spotify or whatever your
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podcast app of choice is this review is
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from Jane who said great podcast Jesse's
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podcast is fantastic I love the
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interviews and Jesse does a great job
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explaining complex Financial topics
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we'll strap in Jane because today's
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topic is a little bit complex Jane also
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says she really enjoys listening and
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definitely recommends it to anyone who's
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looking to improve their finances and
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stay inspired along their Journey Jane
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thank you so much for the kind words
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feel free to reach out to me Jesse
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bestter interest. blog and I'll get you
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set up with some cool bestest gear okay
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let's dive into the indexed fund bubble
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this is a topic that bubbles doubles to
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the surface every once in a while maybe
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every couple years and it's an argument
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in some ways against passive index
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investing first I think to ground
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ourselves we should just remind
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ourselves just in case someone doesn't
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know exactly what an index fund is an
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index fund owns a wide assortment of
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assets like stocks and owns those assets
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in proportion to their market share so
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what that really means is S&P 500 Index
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Fund would own all the stocks in the S&P
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500 uh since apple and Microsoft each
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make up maybe a 5% share of the S&P 500
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that Index Fund would be comprised of 5%
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apple and 5% Microsoft but since
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Chipotle is only about 0.008% of the S&P
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500 the index fund would own 0.008% of
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Chipotle that way the index fund itself
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is benchmarked to the S&P kind of like a
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shadow that follows around all of the
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B's movements there are many different
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types of index funds there are Bond
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index funds there are total stock market
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index funds which own not only the S&P
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500 but every single stock out there in
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the market there are lots of options in
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the index fund world let's talk about
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this idea of the index fund bubble what
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exactly is that so I was listening to a
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podcast called odd lots and specifically
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I was listening to an investor named
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Mike Green and we'll link this episode
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into the show notes the original idea
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behind indexing in the first place is
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that active Traders people who are
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looking to outsmart the market people
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who are really looking for an edge and
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looking for profit that those active
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Traders and any sort of actively managed
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funds that they're in charge of would
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dictate the market behaves and that a
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smaller number of passive investors like
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index funds would simply go along for
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the ride there would be a majority of
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active traders that are kind of like the
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dog if you will and then a minority of
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passive investors that are the tail the
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dog does what it wants the active
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investors Drive the market and the tail
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only follows along well if dogs don't do
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it for you I also like the boat analogy
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think of actively managed funds and
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active Traders as this large Cruise
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liner and then passive investors are a
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small canoe the cruise liner picks its
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course the canoe ropes onto the cruise
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liner and gets a free ride the cruise
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liner for the most part doesn't even
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notice the small canoes drag whatsoever
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so its course is largely uneffective
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this big small relationship is the
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original assumption behind passive
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investing that market Behavior would be
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dictated by the active majority and that
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the passive minority would get a free
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ride however Mike Green this investor on
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the odd Lots podcast says that we now
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live in a paradigm where active and
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passive investing are far too close in
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size and therefore the fundamental
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underlying assumption no longer Rings
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true the big boat small boat or dog tale
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story is no longer true so green is
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saying that right now millions of
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average Janes and Average Joe's like us
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individual investors are using index
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funds to invest huge portions of our
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income and savings that's how how a lot
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of 401ks work and many of their
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non-american equivalents green points
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out how recent us legislation changes
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are actually pushing 401ks and passive
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investing even further into the
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mainstream and largely at least in my
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opinion that's good but what it means is
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that passive investing is no longer the
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small tail it's no longer the canoe it's
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now a fairly large boat and the active
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management Cruise liner is impacted by
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Towing such a large passive boat the
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past 30 years have seen index funds grow
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and grow index funds inflows are
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actually the single largest transactions
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in the market by far therefore by
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definition they're not passive index
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funds have to be influencing the market
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in some way and what might this
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influence look like exactly let's go
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back to our S&P 500 Index Fund from
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before the S&P 500 went up about 25% in
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2023 now where does this Gain come from
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some of it comes from the fundamental
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growth in the S&P companies they're
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doing better uh active investors respond
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to that by saying well if a compan is
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doing better if it's more profitable if
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its future outcomes look more optimistic
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then those stocks are worth more right
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now and we should buy them but
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alternatively we should also ask what
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happens when millions of individual
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investors put their retirement savings
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into S&P 500 index funds it's simple
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supply and demand in that case Joe and
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Jane investor are increasing the demand
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for S&P 500 stocks and therefore the
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price is going up when Joe and Jane were
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the small canoe their demand didn't
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really affect the market prices that
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much but these passive investors are no
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longer just along for the ride they're
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now actively impacting the ride last
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year's 25% price increase is not based
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only on fundamental growth says green
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instead the average James and Joe's are
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artificially increasing the price of the
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S&P 500 via their demand for index funds
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and we should also ask what about
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company number 501 that is the first
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company not in the S&P 500 it does not
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receive the benefits of being part of
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the S&P 500 index funds it does not
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receive that demand that occurs from
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inclusion in that index fund and that
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exclusion affects company 501's price
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Mike Green says that historical data
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clearly shows this growing impact on
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asset values he calls it index inclusion
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it's true for all sorts of index funds
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in fact they include some stocks and
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exclude others and there's a
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recognizable delineation between those
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stocks that are included and excluded
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green says there's a distinct and
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permanent shift in the valuation and
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price levels associated with these
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Securities when they are included or
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ejected from an index companies inside
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of indices are receiving more attention
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than they fundamentally deserve and
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companies outside of indices therefore
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are getting the cold shoulder this lack
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of true valuation is one of the
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formative factors of the index fund
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bubble in the past 40 years passive
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investing has done nothing but grow but
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eventually that growth will end
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individual investors will start retiring
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more and more withdrawals will take
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place more and more and what happens
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when you take the money out at that
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point according to Green the artificial
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inflation of index funds will cease and
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will quickly turn South as more retail
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investors sell prices will drop when
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investors see prices dropping they'll
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get scared and sell more the Vicious
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Cycle will continue sell then drop then
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sell more then drop more into an index
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fund crash it's like an old-fashioned
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Bank Run or as Nasim TB has written the
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market is like a large movie theater
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with a small door if everyone is looking
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to get out the only way to do so is to
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offer the doorman a better price than
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the other people and what that means
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effectively is that prices will plummet
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top goes the index fund bubble okay guys
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I'm G to read a few more I'm playing
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devil's advocate here so that was what
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Mike Green thought now I'm also going to
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quote here from a gentleman named R pal
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R pal looks the part he sounds the part
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and he produces lots of videos where
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he's sitting in front of monitors that
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are full of financial data personally
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when I listen to him my BS detector wors
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to life a little bit but something about
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maybe his accent is the British smooth
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accent is just so factual but rul pal
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also argues for an index fund bubble his
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argument is that the Baby Boomers
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through no fault of their own have been
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dumping too much money into passive
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funds like pensions and 401ks and when
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they start selling on mass which should
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start happening soon ostensibly if it
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hasn't started happening already then
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pop will go the index fund bubble in the
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USA there are 76 million Baby Boomers
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and their average age is now about 68
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years old the wave of retirees is about
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to Crest and when they start pulling
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money out for retirement we will see a
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large theater with a small door prices
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will plummet but according to R pal
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index funds aren't the only issue
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Boomers will also face issues trying to
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sell their houses that doesn't sound
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quite right to me because the housing
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market is way high in demand and low in
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Supply but any anyway we we'll finish
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Pal's argument before we criticize him
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too much he also thinks Boomers will
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have issues trying to sell their
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material Goods Baby Boomers were such
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prolific consumers that the economy will
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be overwrought with all their stuff and
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prices will fall everywhere growth will
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cease as markets are flooded with goods
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and a vicious cycle will ensue and then
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according to Pal the Doom Loop of
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corporate debt will get ignited Doom
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Loops sound pretty bad to me but in
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short pal says that corporations have
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recently gotten the habit of borrowing
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money that's corporate debt then buying
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shares of their own stock AKA stock
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BuyBacks which drives the price of their
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stock higher which is in a way an
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artificial price increase which makes
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the company appear more valuable and
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usually lets the biggest stockholders
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like the executives get rich now on that
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front pal is Right U many corporations
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have been gluttonous when their own
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stocks in recent years Apple for one is
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one is is a stock that's famous for its
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own buyback tactics eventually those
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companies will have to pay back their
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debts and the artificial valuations will
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come back to earth stock prices will
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plummet indexes and Pension funds will
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also plummet and as Baby Boomers sell
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more and more that will cause further
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downward pressure on stock prices and
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thus claims pal the third baby boomer
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crash will occur every good story has
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the symmetry of Threes my core issue
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with r pal is that he's just as much of
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a Storyteller as he is a fact teller and
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therefore it's hard to tell if he's
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selling olive oil or snake oil for
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example this sounds impressive where he
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said the Baby Boomers accumulated the
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greatest concentration of wealth the
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world has ever seen and they'll destroy
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it too wow you know rise and fall the
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double-edged sword the Boomer giveth and
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the Boomer taketh away he provides some
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facts to back up his claims but his
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facts are arguable at best for example
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he says that the 2000.com bubble
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occurred because Boomers flooded the
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stock market with their Investments and
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then everything got dashed on the Rocks
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as those markets collapsed well the baby
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Boomers who were then age 45 on average
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turned to real estate says pal and
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according to him they caused the 2008
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subprime mortgage crisis and the Baby
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Boomers are so many in number that their
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some total Behavior can't help but
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create bubbles after 2000 and after 2008
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the Boomers were worried about their
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retirement savings so goes Pal's
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argument so now they've got to take risk
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and they're forced to do so in the stock
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market and what's the easiest way to
00:13:24
invest in stocks through passive
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investing and as we've now learned twice
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according to Pal where the Boomer money
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goes a bubble will soon follow it's a
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nice story it has symmetry it has
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foreshadowing he narrates it well but it
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doesn't mean that it has any truth to it
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euphoric day trading of companies led to
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the 2000.com bubble passive investing is
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the exact opposite of that kind of
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behavior so perhaps the money is coming
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from some of the same people but that's
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not evidence of the existence of an
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index fund bubble so in my opinion I
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liked Mike Green's argument at least
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they make sense to me
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R Pal's arguments I think he's grasping
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at straws a little bit but enter Michael
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bur Michael bur is an investor and a
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hedge fund manager who correctly foresaw
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the 2008 financial crisis he managed to
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make a boatload of money for himself and
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for his customers through his correct
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prediction and if you've seen the movie
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The Big Short Michael bur is the guy
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played by Christian Bale now Michael bur
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is also arguing for an index fund bubble
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his argument is a bit less scary than
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Mike greens and certainly less
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apocalyptic than r Pals now bur's claim
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is that indexing has caused an
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artificial bubble that's inflating
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stocks inside the index and thus leaving
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stocks outside the index right before
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the picking it's exactly the same as the
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index inclusion argument that we talked
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about before but where're green sees a
00:14:45
dangerous bubble Michael bur sees more
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of an opportunity so let's talk about
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another metaphor here imagine an
00:14:52
identical pair of basketball playing
00:14:54
Allstars everything about them is the
00:14:56
same including their skills except that
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one of the twins plays basketball for
00:15:01
Duke he's always on TV it's a very
00:15:03
famous college basketball program while
00:15:05
the other one plays for Harvard sure
00:15:06
it's a good school but nobody knows
00:15:08
Harvard for its basketball team the
00:15:10
average basketball fan just sitting on
00:15:12
the outside looking in would be biased
00:15:14
towards the Duke twin he's on the better
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team he gets more media coverage he has
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more postseason success that average fan
00:15:22
would certainly believe that the Duke
00:15:23
twin has better long-term prospects and
00:15:25
therefore would deserve a bigger
00:15:27
professional contract you know since I
00:15:29
built this straw man hypothetical you
00:15:31
and I know the truth the two twins are
00:15:33
exactly the same they have the same
00:15:34
exact skill set and therefore signing
00:15:37
the Harvard twin at his lower perceived
00:15:39
value would actually be the financially
00:15:42
efficient move it would be the better
00:15:44
investment and Michael bu is claiming
00:15:46
that that's exactly what's happening
00:15:47
with passive investing nearly identical
00:15:49
companies are being over or undervalued
00:15:52
due to their index inclusion or
00:15:54
exclusion stocks on the inside of index
00:15:57
funds are like the Duke twin being
00:15:58
overvalued stocks not in the index are
00:16:01
like the Harvard twin being undervalued
00:16:04
now in my opinion that makes it less of
00:16:06
an index fund bubble and more of an
00:16:08
anti- index opportunity bur is simply
00:16:11
saying there's an inefficiency here I've
00:16:13
discovered it and I plan on making money
00:16:15
off of it by the way come invest with me
00:16:17
Michael bur so we can make money
00:16:19
together right that's what he's saying
00:16:20
to people out there so fine if that
00:16:23
argument is right go for it Mike Go
00:16:25
exploit that in efficiency Michael bur
00:16:27
has a second claim and that claim is
00:16:29
that price Discovery is becoming fragile
00:16:32
price Discovery is a fancy term for
00:16:35
buyers and sellers determining a price
00:16:38
where they're willing to make a deal so
00:16:39
let's think about Craigslist someone
00:16:41
wants $200 for a used snowblower yes
00:16:44
here in Rochester it helps to have a
00:16:45
snowblower so you take a look at the
00:16:47
snowblower and you counter offer 150 the
00:16:49
owner haggles back to 175 and you have a
00:16:51
deal that process right there was price
00:16:54
Discovery now typically stock market
00:16:56
price Discovery involves many many many
00:16:58
buyers and many many sellers conducting
00:17:01
detailed analyses of a company's
00:17:03
Holdings and profits and cash flows all
00:17:05
of those underlying fundamental business
00:17:07
metrics we're going to get into those
00:17:08
later with Brian faldi that's how prices
00:17:10
are discovered but passive investing
00:17:12
doesn't care about those fundamental
00:17:14
metrics instead passive investing is
00:17:16
simply Following the Leader passive
00:17:18
investing assumes that others in the
00:17:20
market have already done that
00:17:22
fundamental research and that the
00:17:24
current price of a stock is therefore
00:17:26
correct it's a little bit like saying
00:17:28
well the last Ed snowblower on
00:17:30
Craigslist went for 200 so I'll buy the
00:17:32
next one for 200 sight unseen now are
00:17:35
you sure you want to trust the last
00:17:37
buyer and the last seller now what if
00:17:39
they were wrong don't you want to look
00:17:40
at the snowblower yourself and and make
00:17:42
your own unique decision now passive
00:17:44
investing it doesn't rely on price
00:17:46
Discovery bur argues and so he's saying
00:17:48
that prices are now dangerously skewed
00:17:51
from whatever traditional price
00:17:53
Discovery would suggest this cannot go
00:17:55
on forever and eventually the prices
00:17:57
will snap back to reality to where they
00:17:59
fundamentally belong or I guess put
00:18:01
another way you could say that the index
00:18:03
fund bubble will pop this according to
00:18:05
Michael bur is very similar to how
00:18:07
housing and CDO pricing malfunctioned
00:18:10
before the 2008 crisis it will be a
00:18:13
painful painful snap okay deep pause I
00:18:17
appreciate the logic of green and bur
00:18:20
and pal there's plenty of good money
00:18:22
though still betting on the positive
00:18:25
future of index funds so I'm done
00:18:27
playing Devil's advocate for now and now
00:18:29
I want to talk about the pro Index Fund
00:18:32
side of the argument which is ultimately
00:18:34
the side of the argument that I land on
00:18:36
so let's start with Ben Carlson Ben
00:18:38
financial analyst author blogger at a
00:18:40
wealth of Common Sense and the animal
00:18:42
spirits podcast Ben is awesome I highly
00:18:44
recommend the work that he does one of
00:18:46
Carlson's main arguments is that active
00:18:49
investing by nature is biased against
00:18:51
passive investing passive is stealing
00:18:54
actives business share and now active is
00:18:56
biting back passive investing is as
00:18:58
we've talked about it Shadows whatever
00:18:59
active investors are doing but rather
00:19:01
than spending money on research and
00:19:03
trades passive investing keeps its
00:19:05
expenses pretty low passive has all the
00:19:07
profits or at least many of the profits
00:19:09
of active investing but much fewer of
00:19:11
the costs therefore on the whole passive
00:19:14
investing is better but active investors
00:19:17
and active fund managers and active
00:19:19
salespeople don't necessarily like that
00:19:22
and therefore the index fund bubble is
00:19:24
potentially a propaganda technique now
00:19:27
besides we have to consider the claims
00:19:29
that passive investing is doing
00:19:30
something wrong now logically speaking
00:19:33
anything that passive investing is doing
00:19:34
wrong first has to be done by active
00:19:37
investors right you can't blame your
00:19:39
Shadow for flipping you the middle
00:19:41
finger the shadow only copies The Source
00:19:43
similarly passive investing only copies
00:19:46
what active investors are doing that's a
00:19:48
simple argument in logic now Carlson
00:19:51
also addresss the price Discovery
00:19:53
argument he says that price Discovery is
00:19:55
a copout there's way more Trading
00:19:58
occurring today than most times in stock
00:20:00
market history in the book index
00:20:02
Revolution author Charlie Ellis writes
00:20:04
that about 95% of all the trades today
00:20:07
are done by active managers and
00:20:10
therefore there's plenty of opportunity
00:20:11
for Price Discovery it's all about
00:20:13
trading volume and that means that
00:20:15
prices aren't skewed the prices aren't
00:20:18
stretched like a rubber band ready to
00:20:20
snap back there's no Index Fund bubble
00:20:22
waiting to pop instead the active
00:20:24
investors are setting the prices through
00:20:26
their majority of trading and Discovery
00:20:28
is healthy so what exactly is Michael
00:20:30
bur worried about then besides according
00:20:32
to Carlson when else in life do we
00:20:34
expect individuals to actively partake
00:20:36
in price Discovery now do you haggle
00:20:38
with the grocery store cashier about the
00:20:40
cost of oranges all over our economy
00:20:43
prices are set and individual consumers
00:20:45
simply choose to buy or not they don't
00:20:48
actively barter or bargain or
00:20:50
participate in price Discovery now does
00:20:52
this particular metaphor transfer over
00:20:54
to the stock market I'm not sure I think
00:20:57
a lot of people are just BL blindly
00:20:58
putting their bi-weekly 401K
00:21:00
contributions into index funds
00:21:02
regardless of price there's not a lot of
00:21:04
take it or leave it going on most of us
00:21:07
are just buying right we're just taking
00:21:08
it so index investors might be blindly
00:21:12
buying in but they're still buying at a
00:21:14
price that was intelligently discovered
00:21:16
through the fundamental analyses of
00:21:18
active investors so Ben Carlson kudos
00:21:21
for that now we're gonna go on to
00:21:23
another Ben Ben Felix Ben Felix is a
00:21:26
portfolio manager at a Canadian
00:21:28
investment advisory firm and a very
00:21:30
popular and excellent Creator on YouTube
00:21:32
I really like one of Ben Felix's
00:21:35
foundational arguments against the idea
00:21:37
of the bubble and that idea is that
00:21:39
assets under management do not set
00:21:41
prices instead trading sets prices so
00:21:45
green and bur they should not be asking
00:21:48
how much money is in indexes instead the
00:21:50
question should be how much trading is
00:21:53
done by indexes which means that the
00:21:55
size of the boat doesn't matter in fact
00:21:57
it means that the boat metaphor doesn't
00:21:58
even really make sense instead we have
00:22:01
to relate it back to that quote earlier
00:22:02
from Charlie Ellis 95% of all trades
00:22:05
today are done by active managers that
00:22:08
means that price Discovery is dominated
00:22:10
by active trading and it means that
00:22:11
there shouldn't be any bubble driven by
00:22:13
Price Discovery Black Rock which is a
00:22:16
gigantic investment management firm
00:22:18
estimates that for every $1 of passive
00:22:20
trades there are $22 of active trades
00:22:23
again this points to the same conclusion
00:22:25
there's no issue with price Discovery
00:22:27
there are to more really cool arguments
00:22:29
from academic research that are against
00:22:31
the index fund bubble the first one
00:22:33
comes from the very famous investing
00:22:36
academics F and French they came to the
00:22:38
conclusion that it doesn't take much
00:22:40
active investing to create an efficient
00:22:42
market passive investing they say is
00:22:44
pushing bad active managers out of the
00:22:47
market completely and those who remained
00:22:49
are only the skilled active managers
00:22:51
it's darwinian ISM right it's survival
00:22:53
of the fittest and calling the weak
00:22:56
active managers should only make the
00:22:58
Market more efficient more efficient
00:23:00
means Better Price discovery which means
00:23:03
no bubble pretty cool two other academic
00:23:05
researchers pelia and soinski have a
00:23:08
very interesting Theory too now in brief
00:23:10
they claim that index funds are driving
00:23:13
down the cost of Short Selling and short
00:23:16
selling therefore is more efficient if
00:23:18
it costs less and that leads to Better
00:23:20
Price Discovery they start with the
00:23:22
simple truth that index funds hold on to
00:23:24
lots of stocks well that's true and
00:23:26
since the supply of stocks is high index
00:23:28
funds can easily lend out those stocks
00:23:30
to short sellers right short sellers are
00:23:32
people betting that a stock will go down
00:23:34
in price the short seller pays the index
00:23:36
fund a small fee which gets passed on to
00:23:39
the passive investor Us in the form of
00:23:41
low costs however since there are so
00:23:43
many index funds out there the short
00:23:45
sellers have many different options of
00:23:47
where they want to borrow stocks from
00:23:49
with high Supply come low prices they
00:23:52
can find their short sources very
00:23:54
cheaply and that makes the cost of
00:23:56
shorting go down thus Pia and soinski
00:24:00
conclude that passive investing is
00:24:02
creating a more efficient market for
00:24:03
short Sellers and a more efficient
00:24:06
market leads again to Better Price
00:24:08
Discovery no bubble that's what they're
00:24:10
saying now you've heard from all the
00:24:12
smart people so I've got a few homegrown
00:24:14
arguments here the first one well index
00:24:16
investing is self-corrective if we take
00:24:18
another look at Michael bur's argument
00:24:20
he said you know passive investing has
00:24:21
an inefficiency in undervaluing
00:24:24
non-index companies and I plan on taking
00:24:26
advantage of that right bur plans on
00:24:29
taking advantage of that well if he's
00:24:30
correct then more active managers are
00:24:32
going to follow his lead and make their
00:24:34
money and right behind them will be
00:24:37
their Shadow AKA passive investing the
00:24:39
market is a self-correcting system in
00:24:41
that way and money flows towards the
00:24:43
best value passive investing will simply
00:24:45
follow that flow of money if passive
00:24:48
gets too influential then smart active
00:24:50
managers will exploit the problem the
00:24:52
inefficiencies will eventually balance
00:24:54
themselves out in the long term and
00:24:56
passive investing is a long-term
00:24:57
technique no problem there and then the
00:25:00
second argument I have is that it's easy
00:25:02
to avoid the pitfalls of index inclusion
00:25:05
now index funds don't have to exclude
00:25:08
stocks many investment managers Fidelity
00:25:11
Vanguard offer total market index funds
00:25:13
they include high and mighty S&P
00:25:15
companies and all the other company 501s
00:25:18
out there that might be excluded from
00:25:20
other index funds therefore if there is
00:25:23
an index inclusion driven bubble the
00:25:25
total market index funds owns both sides
00:25:27
of that bubble and by diversifying
00:25:29
between different asset classes you also
00:25:31
exclude the risk that you are
00:25:33
concentrated in one bubbly asset and
00:25:36
potentially underexposed in an unbubble
00:25:38
asset in general one of my thoughts on
00:25:41
the best interest is that it's
00:25:42
compelling and it's interesting to
00:25:44
understand both sides of an argument
00:25:45
personally I'm staying my course at
00:25:47
least for now I've certainly not been
00:25:49
convinced to move away from indexing or
00:25:51
that there's an index fund bubble
00:25:53
largely indexes still float my boat and
00:25:55
I think the bubble argument has probably
00:25:57
more bark than bite I'm in it for the
00:25:59
long run I still think that handpicking
00:26:02
individual stocks is interesting it's a
00:26:04
very interesting concept but it's not
00:26:06
something that I spend much time on
00:26:09
myself here's a quick ad and then we'll
00:26:11
get back to the show did you know my
00:26:13
written Blog the best interest was
00:26:16
nominated for 2022 personal finance blog
00:26:19
of the year and it's been highlighted in
00:26:20
the Wall Street Journal yahooo finance
00:26:22
and on CNBC I love writing especially
00:26:25
when that writing is to share financial
00:26:27
educ
00:26:28
and I usually write one or two articles
00:26:30
per week you can read them all at
00:26:32
bestter interest. blog again the web
00:26:35
address is bestter interest. blog check
00:26:39
it out but someone who is an expert in
00:26:42
individual Stock Investing is Brian
00:26:44
faldi Brian started investing in 2004 in
00:26:47
the beginning he had no idea what he was
00:26:49
doing and in his own words he got his
00:26:51
teeth kicked in but his returns improved
00:26:54
dramatically over time as his knowledge
00:26:56
about the stock market grew and in 2015
00:26:58
Brian became a writer for the mle fool
00:27:00
he has since written more than 3,000
00:27:02
articles on stocks investing and
00:27:04
personal finance in 2022 Brian released
00:27:07
a bestselling book entitled why does the
00:27:10
stock market go up you can find Brian's
00:27:13
work at a new website that he's just
00:27:14
launching called longterm mindset. we'll
00:27:18
include that link in the show notes
00:27:20
Brian lives in Rhode Island with his
00:27:22
wife and three
00:27:26
kids
00:27:29
[Music]
00:27:33
Brian faldi thanks for being here and
00:27:36
I'll tell you what Brian I think
00:27:37
listeners of the best interest and
00:27:39
really readers of my blog the best
00:27:40
interest blog they know that I love
00:27:42
Stock Investing I'm really excited
00:27:43
because you are a preeminent Stock
00:27:46
Investing expert and I want to start
00:27:47
with something controversial the
00:27:49
controversial question is can investors
00:27:51
beat the market and if so how well thank
00:27:55
you and it's a pleasure to be here and I
00:27:57
will will say yes investors can beat the
00:28:01
market with an important caveat and
00:28:04
there probably should be many important
00:28:05
caveats there first off when people when
00:28:08
ordinary people ask me how do I invest
00:28:11
in the market my answer is always the
00:28:13
same dollar cost average into index
00:28:16
funds period full stop end of story The
00:28:20
reason I tell people to do that isn't
00:28:23
because those people aren't smart enough
00:28:25
or capable enough to do the work
00:28:28
necessary to beat the market it's
00:28:31
because those people 99% of people have
00:28:34
no interest in stocks or investing or
00:28:38
finance and I think the first step to
00:28:41
being able to beat the market is you
00:28:44
have to be interested in it period so
00:28:48
since 99% of people are not interested
00:28:50
in it I say no problem just dollar cost
00:28:52
average into the S&P 500 that's all you
00:28:55
need to know about investing full stop
00:28:57
however if you're in that 1% of people
00:29:01
that is naturally interested in stocks
00:29:05
and investing I do think that you can
00:29:07
beat the market so long as you're
00:29:11
willing to do the work necessary to
00:29:14
learn about investing about individual
00:29:16
stock selection about portfolio
00:29:18
construction you're willing to analyze
00:29:21
your results and see how you can improve
00:29:23
over time you're willing to increase
00:29:25
your skills through knowledge you're
00:29:27
willing to talk to and connect with
00:29:29
other investors you're willing to listen
00:29:30
to podcasts about investing and you're
00:29:34
able to track your results and be
00:29:36
brutally honest with yourself if you're
00:29:38
actually increasing the value of your
00:29:40
portfolio versus the index fund if
00:29:43
you're not willing to do any of the
00:29:44
things that I just said then no you
00:29:47
can't be to the market but if you're
00:29:49
willing to do that work I absolutely
00:29:51
think you can so I I don't understand
00:29:53
though Brian so you're saying that if I
00:29:55
just turn on my Uncle Jim Kramer for 10
00:29:57
minutes a night while he shouts stocks
00:29:59
at me you're saying that's not
00:30:00
sufficient I wish that would be
00:30:02
sufficient but no that is absolutely not
00:30:04
sufficient I know it's very come very
00:30:06
fashionable to knock on Jim Kramer and
00:30:08
deservedly so right with with many of
00:30:10
the things that he does I actually think
00:30:12
that mad money has some very good
00:30:14
segments to it the Deep dive research
00:30:17
that he does on individual stocks is
00:30:18
good the interviews that he does with
00:30:20
CEOs he does is very good it's the
00:30:22
lightning round and the and all the
00:30:24
other stuff that that is just pure
00:30:26
nonsense but Jim framer just doing
00:30:28
individual research and accessing CEOs
00:30:31
that that is useful and and I assume
00:30:33
that's something is that something that
00:30:34
you incorporate into your own work when
00:30:36
it I mean I know for a fact that you do
00:30:38
a lot of individual company research
00:30:40
deep Dives that kind of thing do you
00:30:42
reach out to Executives or do you try to
00:30:44
like make contact with them somehow or
00:30:46
or make reach out to Boards of companies
00:30:48
anything like that when you're doing
00:30:50
individual company research I have in
00:30:52
the past but that was mostly related to
00:30:53
my work with the mle fool if I was
00:30:55
working on an article I have interviewed
00:30:58
CEOs of companies specifically in the
00:31:00
medical device space because that was
00:31:01
the area that interested me the most and
00:31:03
I covered and I had a lot of knowledge
00:31:05
in so I have done and reached out to
00:31:07
boards and CEOs and CFOs and done
00:31:10
discussions with them but that is not a
00:31:12
part of my research process because most
00:31:15
of the companies that I invest in are at
00:31:17
a size and scale when they would waste
00:31:18
zero time talking to somebody like me
00:31:21
and I fully think that you can get a
00:31:23
really good sense of what a CEO manager
00:31:26
is like by reading their letters to
00:31:28
investors listening to them on
00:31:30
conference calls and I would say the
00:31:31
most critical one is actually listening
00:31:33
to them be interviewed on podcasts or on
00:31:36
YouTube or at lectures and that's when
00:31:38
you can really get a feel for the way
00:31:40
they think about investing and their in
00:31:42
their business uh and and their
00:31:43
personality so that that's all the
00:31:44
information that you need yeah I I I
00:31:46
love that answer I mean I love this this
00:31:48
entire answer you've given so far first
00:31:50
and foremost because right you you
00:31:51
started with the fact that what we're
00:31:54
talking about here doesn't apply to a
00:31:55
majority of listeners most likely even
00:31:57
though we have a very you know uh smart
00:31:59
intelligent we have you know next level
00:32:01
investors listening to this podcast even
00:32:04
then I love investing personally Brian I
00:32:06
own one single company outside of all
00:32:09
these index funds that you mentioned I'm
00:32:10
an index fund investor I have one single
00:32:12
stock it's burer halfway and the reason
00:32:14
why is mainly because I'm a big Charlie
00:32:18
and Warren Fanboy it's not because I did
00:32:20
the fundamental research I'm the first
00:32:22
one to admit it's I wasn't sitting down
00:32:24
looking at all their 10ks and 10 Q's or
00:32:26
I wasn't looking at all that stuff I was
00:32:28
just like well it's like being a fan of
00:32:29
the Yankees and owning a Yankees
00:32:31
baseball cap I'm a fan of Warren and
00:32:32
Charlie so I own their stock do you come
00:32:35
across average DIY investors on a
00:32:37
regular basis how much time are they
00:32:40
committing to researching individual
00:32:42
companies totally depends there are some
00:32:45
individual investors out there that are
00:32:48
absolutely fabulous and I would say that
00:32:49
their indivi that personal research
00:32:52
process can be compared to mutual funds
00:32:54
or hedge funds or they could go up
00:32:56
against anybody from a research
00:32:57
perspective and do just as well and then
00:33:00
there are plenty of other people that
00:33:02
just see a stock ticker they see it
00:33:03
mentioned on a Reddit board they see a
00:33:05
tweet about it they see one metric like
00:33:08
how much the stock has gone up recently
00:33:10
or the revenue growth rate or that's
00:33:12
profitable or that has a CEO that they
00:33:14
like and and they buy so the research
00:33:17
that individuals have varies hugely from
00:33:19
Individual to individual and I can speak
00:33:22
for myself when I first started
00:33:23
investing I had no idea how to do
00:33:27
research let alone what research to do
00:33:30
what benchmarks to compare them to I
00:33:31
knew absolutely nothing about investing
00:33:34
my initial round of research was what is
00:33:37
the dollar price of one share of stock
00:33:40
end of research right and if it was
00:33:42
under $5 per share I was interested in
00:33:44
it that that that was it now when I
00:33:46
started investing in 2004 coming across
00:33:49
information about investing was much
00:33:51
more difficult than it was today we did
00:33:53
have Yahoo finance but we did not have
00:33:55
conference calls that we could listen to
00:33:56
or transcripts we can read some
00:33:58
companies did not have websites or they
00:34:00
did not have investor relations
00:34:01
departments so it was much harder back
00:34:03
then than it is today but even if I was
00:34:05
starting investing today with my
00:34:07
knowledge right out of college I would
00:34:08
have no clue what I was even looking for
00:34:11
when trying to research a a business so
00:34:14
it makes total sense why so many people
00:34:16
when they first start out use the bare
00:34:18
amount of research and the bare amount
00:34:20
of information to make big investing
00:34:21
decisions right and so maybe we can dive
00:34:24
into some of that because I wanted to
00:34:25
ask you I know some relatively famous
00:34:28
individual stock investors and from what
00:34:31
I understand they tend not to pay
00:34:32
attention to macroeconomic themes things
00:34:35
like whether it's a bull or bare Market
00:34:37
or inflation or interest rates or
00:34:38
unemployment I mean these are things
00:34:40
that tend to influence the DIY people
00:34:42
that we're talking to they'll say
00:34:43
something like boy why are you investing
00:34:45
in in companies in 2022 don't you see
00:34:47
it's a bare market and and my
00:34:49
understanding is that most good stock
00:34:51
investors tend to ignore that stuff but
00:34:53
but what do you look for in these
00:34:55
companies or or what are some of the
00:34:56
metrics that you have Doven into uh
00:34:59
since those early days when you weren't
00:35:00
sure what you were doing well when I
00:35:02
first started out as I said my process
00:35:04
was nothing other than the share price
00:35:06
and over the last 20 years I have been
00:35:09
slowly refining the criteria that I use
00:35:12
to identify Investments to answer your
00:35:14
first question when it comes to
00:35:15
macroeconomic forecast and stuff I spend
00:35:18
very little time thinking about
00:35:21
macroeconomics because it's so big so
00:35:24
complex there is so much data that that
00:35:27
is out there that a smart person can
00:35:29
take that data and weave any story that
00:35:33
they wanted to believably two people
00:35:35
could be looking at the exact same data
00:35:37
sets one person could make you convinced
00:35:39
that the United States was set up for
00:35:40
the next biggest bull run in the history
00:35:43
uh of the world and another one could
00:35:44
take the exact same data set and say
00:35:47
we're at the Top This is a bare Market
00:35:48
we're entering a depression and both
00:35:50
arguments could be extremely convincing
00:35:53
so when it comes to macroeconomic
00:35:55
forecasting I try and keep Loosely aware
00:35:58
of where I think we are with regards to
00:36:00
unemployment and what valuations are but
00:36:03
I think very little about that when it
00:36:04
comes to building out my individual
00:36:07
portfolio of stocks the reason that I do
00:36:09
so is it doesn't matter to me as much
00:36:12
what interest rates are or unemployment
00:36:13
rates are what matters to me is how fast
00:36:16
are the companies that I own growing
00:36:18
what is their Market opportunity what is
00:36:20
their competitive Advantage what are
00:36:21
they doing with the capital that they
00:36:23
get are they profitable do they have a
00:36:25
strong balance sheet those things matter
00:36:27
much more over the long term than what
00:36:30
is the prevailing interest rate of the
00:36:31
day but to answer your question about
00:36:33
what goes into my research process I
00:36:35
have several categories that I look for
00:36:37
when I'm researching a a company broadly
00:36:40
speaking those categories are one The
00:36:42
Current financial picture of a company
00:36:44
the composition of its income statement
00:36:46
is it profitable is it free cash flow
00:36:48
positive does it have a strong balance
00:36:49
sheet two what is the competitive
00:36:52
advantage of that business this is boron
00:36:54
Buffett's moot analogy so does does it
00:36:56
have a moat what is the direction of the
00:36:58
moat what is the current strength of
00:37:00
that moat three would be the potential
00:37:02
of the business is the market it's in
00:37:04
growing or shrinking is it growing
00:37:06
organically is it a top dog does it have
00:37:09
something called operating leverage
00:37:10
built into the business four would be
00:37:13
the relationship that the company has
00:37:14
with its customers so are its customers
00:37:17
free to acquire and largely come to the
00:37:19
company through word of mouth or does
00:37:21
the company have to spend big on sales
00:37:23
and marketing to attract those customers
00:37:24
and once a customer comes on board is
00:37:27
their spending cyclical and dependent on
00:37:29
the economy or is that spending
00:37:31
Recession Proof as it would be for like
00:37:33
utility five would be the quality of the
00:37:35
revenue of the company is it recurring
00:37:37
or is it one time does the company have
00:37:39
pricing Power Six would be the quality
00:37:41
of the management team is it run by a
00:37:43
Founder is that person a long tenured
00:37:46
CEO do they own a lot of stock do they
00:37:48
get good ratings on glass door and then
00:37:49
the seventh category would be the stock
00:37:51
itself has that stock beaten the market
00:37:54
over time which is a good thing or has
00:37:56
it lost lost to the market over time
00:37:57
which would be a bad thing does the
00:37:58
company consistently outperform its
00:38:00
expectations does it buy back stock does
00:38:02
it pay a dividend so those are all the
00:38:05
positive things that I look for in a
00:38:06
company and then I have a big list of
00:38:08
the negative things that I look for in a
00:38:10
company such as customer concentration I
00:38:12
hate it when a company gets a lot of
00:38:14
revenue from a single customer isn't a
00:38:16
company dependent on interest rates or a
00:38:19
strong economy or commodity prices to do
00:38:21
well does that company have a very high
00:38:23
level of dilution through stock-based
00:38:24
compensation are the financial
00:38:26
statements complicated are they easy to
00:38:28
sift through Etc so that is my process
00:38:31
that I have I have a list of good things
00:38:33
that I look for a list of bad things
00:38:34
that I look for and now I can take any
00:38:36
company that I come across run them
00:38:38
through this checklist that I've
00:38:40
developed for myself and figure out is
00:38:42
this investment match what I'm looking
00:38:45
for in a business so so slightly more
00:38:48
complicated than 10 minutes on CNBC more
00:38:51
complicated than than than what is the
00:38:53
stock price today yes it's very
00:38:55
enlightening and it's very eye openening
00:38:57
because this should be uh an in-depth
00:38:59
process these are giant businesses
00:39:02
they're complicated there are uh a lot
00:39:04
of forces at play whether it's
00:39:06
competitive forces or or you know it's
00:39:08
more than that simple Peter Lynch ISM
00:39:10
that some listeners might have heard of
00:39:11
which is you know buy what you know
00:39:13
you're a fan of Dunkin Donuts well you
00:39:15
might want to buy it then I know Peter
00:39:17
Lynch had some Nuance to a statement
00:39:18
when he originally said that but some
00:39:20
investors they think that way they think
00:39:22
well Warren Buffett he likes Coke so he
00:39:24
owns Coke well there there's a little
00:39:26
bit more more to it than that I'm going
00:39:27
to t one up here for you Brian and I I I
00:39:29
think you can hit a home run on it is
00:39:31
there a resource that you've put
00:39:32
together where listeners can go access
00:39:35
some form of the checklist that you just
00:39:37
went through brianr aldi.com
00:39:40
checklist so what that is is it's a
00:39:42
download that I have that just gives you
00:39:44
access to a Google sheet that literally
00:39:46
has my checklist on it line for line so
00:39:49
if you're interested in a downloading it
00:39:50
I would encourage you to do so and take
00:39:53
the parameters that are in there and
00:39:54
make them your own delete things that
00:39:55
you think shouldn't be there add things
00:39:57
that you think should but it's it's a
00:39:59
good starting point awesome we are going
00:40:00
to throw that in the show notes for sure
00:40:02
speaking of Peter Lynch let's go back
00:40:04
when I think of the Mount Rushmore of
00:40:06
investors whether it's you know Buffett
00:40:07
or Munger or Lynch or Bogle there are
00:40:10
dozens more that I either don't know of
00:40:12
or I'm forgetting I mean everybody loves
00:40:14
a good investing quote it's like golf
00:40:16
quotes it's like the two most quotable
00:40:17
pastimes in history I feel like are
00:40:19
there any particular investing quotes
00:40:21
that really stick out to you as
00:40:23
Paramount above all others or just that
00:40:25
maybe fit into your investing style
00:40:27
perfectly yeah I mean I am a collector
00:40:29
of quotes I have a couple hundred quotes
00:40:31
that I that I've collected over the
00:40:32
years and I regularly share out on
00:40:34
Twitter so some that come to mind
00:40:36
immediately would be Charlie munger's
00:40:39
quote the first rule of compounding
00:40:41
never interrupt it unnecessarily what a
00:40:43
brilliant way to to express it so many
00:40:46
people myself included have a natural
00:40:48
inclination to look at their portfolio
00:40:51
and have a need to Tinker with it to
00:40:53
nibble here to buy more there to really
00:40:55
try and outthink it but but his quote
00:40:57
the first rule of compounding never
00:40:59
interrupt it unnecessarily speaks
00:41:01
volumes because it shows that to let the
00:41:03
asset do the work let the compounding do
00:41:05
the work don't fiddle with it because
00:41:07
I've heard it say that investing is kind
00:41:09
of like a soap the more you fiddle with
00:41:11
it the smaller it gets love it here's a
00:41:14
quick ad and then we'll get back to the
00:41:15
show serious question why do podcasters
00:41:19
constantly ask for ratings and reviews
00:41:21
yes they do help highlight our shows to
00:41:24
new listeners they help strangers find
00:41:25
us on Apple podcast and Spotify it's
00:41:28
totally true and a good reason to ask
00:41:29
for ratings and reviews but I have
00:41:32
something more important at least more
00:41:33
important to me I want to know if you
00:41:36
like this stuff I want to know if you
00:41:38
like my podcast episodes my monologues
00:41:40
my guests the information I share with
00:41:42
you in the stories I tell I want to
00:41:44
improve and make your listening more
00:41:45
enjoyable in the process so yeah I would
00:41:48
love to read your reviews and sure if
00:41:50
you throw a rating in there too that's
00:41:52
great if you like what I'm doing please
00:41:54
share it with me it's such a a great
00:41:56
feeling to read your feedback I'd love
00:41:58
to read your review or see a rating on
00:42:01
Apple podcasts or Spotify thank you and
00:42:04
now maybe a spicy question here are
00:42:07
there any quotes or philosophies from
00:42:09
these famous investors where you you
00:42:11
hear it and you're like no I I
00:42:13
completely disagree with that so one of
00:42:16
them that I don't necessarily I disagree
00:42:19
with the the exact nature of the quote
00:42:20
although I agree with the spirit of the
00:42:21
quote I don't have the exact quote in
00:42:23
front of me but it comes from Buffett
00:42:25
Buffett was once talking to a group of
00:42:27
college students and one of the things
00:42:29
that he said to those students is I
00:42:30
could make all of you much better
00:42:32
investors right now if I gave you a
00:42:34
punch card and that punch card had 20
00:42:36
spots on it the idea being that
00:42:39
throughout your life every time you made
00:42:41
an investment you had to punch one of
00:42:43
these holes in this Punch Cards and if I
00:42:45
own if I told you you could only make 20
00:42:47
Investments throughout your entire life
00:42:50
you would think very deeply and really
00:42:53
think things through before you wasted
00:42:55
one of those punches on buying an
00:42:57
individual stock now if you actually
00:42:59
look at what Warren Buffett has done
00:43:01
himself he has owned hundreds of stocks
00:43:05
throughout his 50 or 60 years investing
00:43:07
in the market so he himself has violated
00:43:10
that rule because he has bought far more
00:43:13
companies uh that than 20 I myself have
00:43:16
bought pro at this point more than a
00:43:18
hundred individual uh companies I don't
00:43:21
still hold them all but I have bought
00:43:23
hundreds of stocks Peter Lynch owned
00:43:25
hundreds of stocks Shelby Davis own
00:43:27
hundreds of stocks so I don't think I
00:43:29
don't agree with the premise that you
00:43:31
should only make 20 investments in your
00:43:33
life or or whatever I do agree with his
00:43:36
sentiment though that if you are going
00:43:38
to make investments you should do deep
00:43:40
research and deep thinking about them
00:43:43
before you throw money be behind any
00:43:45
particular asset and his General
00:43:48
philosophy was think carefully capital
00:43:51
is precious only allocate it when you
00:43:53
really think the odds are in your favor
00:43:55
so that Spirit of the quote I can get
00:43:57
behind but I just have never liked the
00:43:59
20 punch card limit for a life of
00:44:01
investing yeah and I I've had people
00:44:03
confuse that quote before too where they
00:44:05
say like well 20 Punch Cards I mean I'm
00:44:07
dollar cost averaging every two weeks
00:44:09
into my 401k that like right away I'm
00:44:11
there's 20 contributions takes me like
00:44:13
nine months and let you know again it's
00:44:15
just a misunderstanding of the quote but
00:44:17
I think of that quote a little along the
00:44:19
lines of the bar soap analogy actually
00:44:21
where it's you know investing or just
00:44:23
portfolio management kind of the
00:44:24
long-term investing mindset that
00:44:26
generally The More You Mess Around the
00:44:29
worse off you'll be you have to put a
00:44:31
lot of care into touching that portfolio
00:44:33
so you know the bar of soap if you touch
00:44:35
it too much it disappears but I I hear
00:44:37
what you're saying is the sentiment
00:44:38
behind it is you really have to care you
00:44:40
really have to care and and put thought
00:44:42
into these big money decisions I've been
00:44:45
an active participant in the mly fool
00:44:47
for more than 10 years now and the mly
00:44:48
fool has been making individual stock
00:44:50
recommendations for going on more than
00:44:52
20 years now and a few years back they
00:44:56
did an analysis of their own
00:44:58
recommendations and they make buy
00:44:59
recommendations and occasional sell
00:45:01
recommendations and their accuracy rate
00:45:03
on the sell recommendations in
00:45:05
particular is fairly High when they say
00:45:07
sell a stock they usually get that right
00:45:10
say eight out of 10 times or so so they
00:45:12
have a pretty good track record there
00:45:14
but one of their analysis that always
00:45:15
stuck with me is they reran the numbers
00:45:18
assuming that they never sold anything
00:45:21
that they never issued a single cell
00:45:23
recommendation and what they found is if
00:45:26
they did that their returns would be
00:45:28
higher so every single sell decision
00:45:31
even though many of them were correct
00:45:34
even with the benefit of hindsight they
00:45:36
would have made members more money had
00:45:38
they never issued a sell recommendation
00:45:40
at all and that's a great example of the
00:45:43
compounding never interrupt the
00:45:45
compounding process un unnecessarily
00:45:47
even though they sold eight out of ten
00:45:49
stocks and those stocks went down they
00:45:51
did end up selling Netflix early arm
00:45:54
Holdings early and these stocks that
00:45:55
went on to deliver enormous returns from
00:45:58
where where they said uh sell and
00:46:01
missing out on those winners that went
00:46:03
on to go up huge cost them far more than
00:46:06
correctly selling the losers that
00:46:07
continue to go down I love that example
00:46:09
and that's a great example of the kind
00:46:12
of nuanced math when it comes to
00:46:13
investing that maybe some people on the
00:46:15
outside don't understand which is you
00:46:17
can be right eight out of 10 times in
00:46:19
the in just like that example Brian and
00:46:21
maybe those eight out of 10 times you
00:46:23
saved yourself you know a 2% here a 3%
00:46:26
there as far as what other result you
00:46:28
would have had but if in one of your
00:46:30
mistakes you make a 50% mistake that
00:46:34
mistake can wash away all of the right
00:46:37
decisions you made eight out of 10 times
00:46:39
or or put another way you know when it
00:46:41
comes back to that concept of beating
00:46:43
the market you can beat the market 1% a
00:46:46
year for nine years in a row and you're
00:46:48
feeling like you're on top of the world
00:46:50
in that 10th year though if you
00:46:52
underperform by 30% well you just washed
00:46:54
away all of your POS positive and now on
00:46:57
that you're underperforming the market
00:46:58
so just suffice to say that measuring
00:47:00
wins and losses alone just as like
00:47:02
tallies isn't quite enough it's
00:47:04
important to understand the quantity of
00:47:07
your win you know how much did you win
00:47:08
by how much do you lose by and it just
00:47:10
goes to show that right investing is is
00:47:12
hard it's nuanced involves a good amount
00:47:14
of math for sure I mean speaking for
00:47:16
myself I've sold many stocks over the
00:47:18
last 10 years many of them went on to go
00:47:21
out of business or or go down from where
00:47:22
I sold but none of that matters because
00:47:25
I ALS o sold Microsoft for $24 a share I
00:47:29
so Microsoft I I sold it for $24 a share
00:47:32
it's currently trading at
00:47:34
47 so I missed out on a almost 20 bagger
00:47:39
on Microsoft like big obvious Microsoft
00:47:43
simply because I was in a rush to take a
00:47:44
profit so all of those sell decisions
00:47:46
that I got right eliminated neutralized
00:47:49
by a single bad decision to sell
00:47:51
Microsoft too early and also that that
00:47:54
mly fool recommendation or maybe not
00:47:56
recommendation but the the result they
00:47:58
found of would they would have been
00:48:00
better off if they never recommended a
00:48:01
sell uh a recommendation that's kind of
00:48:04
in a way almost like holding an index
00:48:06
fund where if you buy and hold it for
00:48:08
life if that's your idea you know you're
00:48:10
going to be holding a bunch of winners
00:48:12
and a bunch of losers you're never going
00:48:14
to sell those losers I suppose until
00:48:16
maybe they cycle out of the index that
00:48:18
you're holding but Index Fund investors
00:48:20
which many of us are we go into it
00:48:23
understanding that we're going to own a
00:48:24
bunch of losers we just know that over
00:48:26
time the the winners are going to
00:48:28
outweigh those losers it's Jack bugles
00:48:30
old don't spend time looking for the
00:48:32
needle on the Hast stack just buy the
00:48:33
Hast stack right and I I would actually
00:48:35
disagree with what you just said I I
00:48:37
don't think that many people that buy
00:48:39
Index Fund understand that the majority
00:48:41
of the stocks that they hold do go down
00:48:44
and do underperform the market because
00:48:46
the only thing they're paying attention
00:48:47
to is the dollar price of the index fund
00:48:50
itself I mean that is one big benefit of
00:48:52
investing in the index fund all of the
00:48:54
chaos that happens with with stocks
00:48:56
going down stocks going up stocks
00:48:58
quadrupling stocks getting uh cut in
00:49:00
half all of that is hidden from View and
00:49:02
the only thing they see is the aggregate
00:49:04
price so I would say from a
00:49:06
psychological perspective that's a huge
00:49:08
benefit of index funds thank you for
00:49:10
disagreeing with me because I I do think
00:49:12
you're right I think you hit the nail
00:49:13
right on the head maybe the needle right
00:49:15
on the head you threaded that needle
00:49:16
perfectly that's what I should say Brian
00:49:18
but another interesting thing I don't
00:49:20
have the data right in front of me but I
00:49:21
remember looking at it before and and
00:49:23
this data is very dependent on the time
00:49:25
period that you're looking at itself
00:49:27
even some investors who understand the
00:49:30
general premise of an index fund they
00:49:32
assume that 50% of the stocks in there
00:49:35
are are winners or beat the market and
00:49:38
that 50% are losers or underperform the
00:49:41
market and even that generally is not
00:49:43
right again it depends on the time frame
00:49:45
that you look at but the data that I've
00:49:47
seen before it was like call it 1980 to
00:49:50
2016 something like that it was
00:49:52
something like 65 or 70% of individual
00:49:55
ual stocks underperformed the market in
00:49:58
that period and only the remaining 30 or
00:50:01
so percent led to all of the
00:50:03
outperformance over time so it really
00:50:05
it's not a coin flip it you really are
00:50:07
looking for a minority of stocks that
00:50:10
bring relative outperformance which is a
00:50:12
really important stat to keep in mind if
00:50:14
you're going to be buying individual
00:50:16
stocks yeah I I had the exact same
00:50:18
mindset I used to think half of stocks
00:50:20
beat the market half of stocks lost to
00:50:22
the market so I used to think it was a
00:50:24
coin flip whether or not you right I've
00:50:26
since changed my mind after reading some
00:50:28
some studies and I actually think it's
00:50:29
much more helpful to think of am I going
00:50:31
to do well with this investment or not
00:50:33
as a rle of the dice four out of six
00:50:35
times so one two three or four if you
00:50:36
roll one two three or four with that
00:50:38
dice you're going to either lose money
00:50:40
or lose to the market both of which are
00:50:43
subpar results if you roll a five with
00:50:45
that dice you're going to outperform the
00:50:47
market but not by much you will make
00:50:49
more money than the market but just a
00:50:50
little bit but on occasion you roll that
00:50:53
six and the returns that you get from
00:50:55
the that that six will be so huge in
00:50:58
comparison to what the market earns in
00:51:01
general that what the returns from that
00:51:03
sixth rle power all of the returns of
00:51:06
the portfolio and then some so this is a
00:51:09
really important thing to keep in mind
00:51:10
if you're buying individual stocks if
00:51:12
you buy 10 stocks you just know you
00:51:14
should know ahead of time you're gonna
00:51:16
be wrong and lose money on six of them
00:51:18
you're G to do okay on three of them and
00:51:21
your goal as an investor is to have one
00:51:23
of them just one of them a mega winner
00:51:26
but that's okay as long as that company
00:51:28
wins so much it'll pay for all of the
00:51:31
losses of all other nine stocks combined
00:51:33
I love that we're gonna we're gonna use
00:51:35
that we're g to call it the the Brian
00:51:36
feroldi dice metaphor that's awesome we
00:51:39
all know you focus a lot on investing
00:51:42
it's a it's so much fun to listen to you
00:51:44
talk about it but I've also heard you
00:51:46
say that you're just a huge proponent in
00:51:48
general of financial wellness and that
00:51:50
is certainly something here on the best
00:51:51
interest this isn't just an investing
00:51:54
podcast we also talk about personal
00:51:56
finance Financial Wellness in general
00:51:59
and I think this is something I've heard
00:52:00
you say where just like in health where
00:52:03
in health you know lifting weights is
00:52:05
not the same as health Wellness there's
00:52:08
more to finances than investing in
00:52:10
stocks so what are your other favorite
00:52:12
areas of focus and I guess why do you
00:52:14
enjoy spending time thinking about them
00:52:16
why do you find them meaningful I am a
00:52:18
huge fan of investing in the stock
00:52:21
market it's one of my favorite things to
00:52:22
think about it's one of my favorite
00:52:23
things to talk about I've devoted a huge
00:52:25
amount of my personal free time to
00:52:27
thinking about just that but I'm
00:52:29
simultaneously a firm believer that what
00:52:32
you do with your investing finances are
00:52:34
in order of magnitude less important
00:52:38
than what you do with your personal uh
00:52:40
finances so I think buying individual
00:52:43
stocks is like Step 13 in terms of doing
00:52:46
well with money but you can't focus on
00:52:49
Step 13 in Step until steps one through
00:52:52
12 are already taken up are taken care
00:52:55
of so steps 1 through 12 are really
00:52:57
boring but they relate to personal
00:52:59
finances and they include things like do
00:53:01
you know how much money you spend each
00:53:03
year and on what categories do you have
00:53:06
a cash emergency fund set aside do you
00:53:09
have your debt paid off you have your
00:53:11
credit card debt eliminated your car
00:53:13
debt eliminated the only debt I think
00:53:14
you're allowed to have would be any debt
00:53:16
that you have on on on a mortgage are
00:53:18
you investing in uh tax advantage ways
00:53:20
so have you invested in 401K a rough IRA
00:53:23
have you got your insurance set up
00:53:25
properly have you done your estate
00:53:26
planning all of those kind of things are
00:53:28
incredibly boring to think about because
00:53:31
talking about stocks is far more
00:53:32
exciting but I think that that is the
00:53:34
requirement those are the table Stakes
00:53:37
that you need to have taken care of
00:53:38
before you should spend any mental
00:53:40
energy thinking about what investment
00:53:42
should I make or what stock should I
00:53:44
pick so my personal philosophy is that
00:53:46
you take care of your personal finances
00:53:48
first and that affords you the option
00:53:52
and the opportunity to make sure that
00:53:54
your personal life and your investor
00:53:56
life are two completely separate things
00:53:59
and that way one won't impact the other
00:54:02
for example if you lose your job the the
00:54:06
most important most likely time you're
00:54:08
you are to lose your income is the exact
00:54:11
same time when the economy is crumbling
00:54:13
and the stock market is is down and that
00:54:15
is the worst possible time to pull money
00:54:18
out of the market but if you have no
00:54:21
other option because your personal
00:54:22
finances have been exhausted you're
00:54:24
going to be selling stocks or selling
00:54:26
assets at the absolute worst time
00:54:28
because you have a desperate need for
00:54:29
the money so by making your finances
00:54:32
your personal finances Rock Solid you
00:54:35
protect your assets and your investments
00:54:38
from the volatility of everyday life and
00:54:41
that works in Reverse as well so I'm a
00:54:44
big fan of keeping your personal
00:54:45
finances Rock Solid and ridiculously
00:54:48
conservative which allows you if you
00:54:50
want to make your investing finances
00:54:53
aggressive and you can go after the
00:54:55
highest returns possible so long as
00:54:57
those two things never interact with
00:54:59
each other you could almost you know the
00:55:01
analogy is uh safety n or or a parachute
00:55:05
you could almost use the analogy of a
00:55:06
moat that you need to build a moat
00:55:09
around your own personal finances to
00:55:11
keep that volatility at Bay that
00:55:13
volatility is is in my Investment
00:55:14
Portfolio it's over there but my
00:55:17
personal financial house is Rock Solid
00:55:19
we we talked about it recently on the
00:55:21
podcast Brian that that right just
00:55:23
understanding monthly cash flow is at
00:55:25
least in my opinion it's the most
00:55:27
fundamental aspect of personal finance
00:55:30
and yet even that is often overlooked
00:55:32
the number of people who come to me with
00:55:34
just general investing questions which
00:55:36
is great to be asking it's great to be
00:55:38
thinking that but then part of my
00:55:40
response is hey before we get to that on
00:55:42
average what's your monthly income
00:55:44
what's your monthly spending and they
00:55:45
don't know the answer to that well
00:55:47
that's a problem it's putting the cart
00:55:49
before the horse because how can you
00:55:51
even think about putting 500 a month
00:55:52
into your Roth IRA if you you don't even
00:55:55
know if you have 500 a month to really
00:55:57
afford to put over there absolutely it
00:56:00
it's the basics it's just like the same
00:56:01
with Investments with with investing in
00:56:03
a stock a really important question to
00:56:05
ask is is this company profitable or is
00:56:07
this company unprofitable and if the
00:56:09
company said I don't know we've never
00:56:10
looked to figure figure that out well I
00:56:12
sure as heck would not invest in that
00:56:14
company so the same is true of your
00:56:16
personal finances very cool well Brian
00:56:19
we are talking before before recording
00:56:21
here and my understanding is that
00:56:23
probably by the time this is out this
00:56:25
podcast is out you will have a new shiny
00:56:29
website what what's going to be on that
00:56:31
website and and where can listeners find
00:56:33
both the website or just find you in
00:56:34
general to connect yeah so the easiest
00:56:36
place to connect with me is on Twitter
00:56:38
I'm Brian faldi I'm also on all the
00:56:41
platforms YouTube LinkedIn Etc depending
00:56:43
on where you like to hang out online but
00:56:45
yeah four years ago I started a
00:56:47
educational Finance education company
00:56:49
called long-term mindset with me and my
00:56:51
two business partners and we have yet to
00:56:54
launch a a actual company website I know
00:56:57
it's been it's almost embarrassing to
00:56:58
admit that out loud but we've been
00:57:00
working on it for the last couple of
00:57:01
months and it should be launching an
00:57:02
early February so that's long-term
00:57:04
mindset. Co awesome all of that will be
00:57:07
in the show notes Brian faldi thanks for
00:57:09
stopping by the best interest podcast
00:57:11
thanks for having me Jesse it was a
00:57:12
pleasure to be
00:57:13
[Music]
00:57:15
here thanks for tuning in to this
00:57:17
episode of the best interest podcast if
00:57:20
you have a question for Jesse to answer
00:57:21
on a future episode send him an email at
00:57:24
Jesse bestter interest. blog again
00:57:27
that's Jesse at bestter interest. blog
00:57:30
did you enjoy the show subscribe rate
00:57:33
and review the podcast wherever you
00:57:35
listen this helps others find the show
00:57:37
and invest in knowledge themselves and
00:57:39
we really appreciate it we'll catch you
00:57:41
on the next episode of the best interest
00:57:46
podcast the best interest podcast is a
00:57:49
personal podcast meant for education and
00:57:51
entertainment it should not be taken as
00:57:54
Financial advice and is not prescriptive
00:57:56
of your financial situation