There are six questions in this podcast:
- 1. Who is Calin Yablonski?
- 2. How should an investor start picking stocks?
- 3. Can I apply common valuation techniques for index funds?
- 4. Where does risk come from?
- 5. How much time should I spend on Investing?
- 6. Ask The Investors: Should I buy the same stocks as Warren Buffett?
Who is Calin Yablonski?
Calin is the founder of the successful digital marketing company Inbound Interactive from Calgary, Canada. Calin has been studying value investor for six month, and describes himself as a “value investor in training”. He used to think that the stock market was risky, but after studying the art of investing a little closer, he is now convinced that the craft isn’t all smoke and mirrors.
How should an investor start picking stocks?
For most new investor an index fund is recommended. An index fund is a low cost alternative where the risk is spread over many different stocks. New investors typical run a larger risk picking individual stocks because of the lack of knowledge they posses. Another option are mutual funds, but they typically performs worse than index’s (a recent study showed 84% did worse!). It might seem contradictory since a mutual fund is actively managed, but the problem occur as the fund gets capital at the wrong time (when stocks are expensive) and investors take-out capital when markets dropping. If you want to take a closer look at different index funds and relevant selection criteria mentioned in the podcast, use the link below:
US News Reports Top 25 Index Funds
If you’re curious how this list was determined, here’s a write-up on how they were selected. For a new investor it is also recommended not to invest all of your money at once. By investing just a little, you get your feet wet. You’ll have the opportunity to see how you react to good and bad news in the market and ensure you have the stomach to deal with wild market swings. Once you have realized that you can handle the emotions of being in the stock market you should consider investing close to the full amount. The reason for this can best be explained by the concept of “opportunity cost”. That is the return you could have received in the stock market if you had chosen to invest in all the available alternatives.
Where does risk come from?
In stock investing, risk stems from not knowing what you are doing. If you have ever felt sick to your stomach just before making a stock purchase this is most likely the reason. If you don’t know what you are investing in, it shouldn’t come as a surprise why you feel a little sick. Something that might calm you down is taking a look at the historical returns of Warren Buffett. As you see, Buffett himself had many years where he had been performing worse than the general stock market, but over time his stock picks have proven extremely successful. This also illustrates that having a short investing horizon is another thing that invites risk. As a value investor you should be aiming to hold the stock forever. We have made a video about this idea on BuffettsBooks.com, you can access this financial risk video here.
How much time should I spend on Investing?
All investors that are following financial news are getting a lot of information and it can both appear to take too much time and energy. When exposed to a high amount of information, a very important skill is needed: the ability to separate catalyst events from the noise. The road to acquiring that skill is simple: Spend time each day educating yourself within accounting and business principals. The more knowledge you have, the easier it is to filter relevant information.
As an investor you should mainly be studying the 10Q (corporate quarterly reports), and not be looking closely into daily fluctuations. You also want to be familiar with the financial news. When something is happening to the particular company you should consider if it is temporary or permanent? Temporary occurrences (which are most common) should typically be completely ignored, while permanent changes might lead to changes in your portfolio. In this specific episode shale oil was discussed, and whether it was a temporary or permanent change. We had to wait until episode 8 before Preston and Stig did not have the exact same opinion about stock investing.
Ask The Investors: Should I buy the same stocks as Warren Buffett, just at a lower price
The Investors answered with a quote from Warren Buffett: “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over”. In order to Invest just like Warren Buffett, one approach is to buy Berkshire Hathaway whenever the stock is trading at a reasonable price.
Another approach is, as the listener asks himself, buying the same stocks as Warren Buffett at equivalent or lower prices. If you choose this approach as a private investor it is very likely you will be achieve good returns. However, you should also be aware that some of the best picks made by Buffett have never reached the same price level after he initial purchased them (i.e. Coke). Another disadvantage to this strategy is that a private investor only has the option to buy stocks in listed companies, whereas Warren Buffett also has the option to buy unlisted stocks, thereby making it even harder to mimic his purchases.
Books and resources mentioned in this episode
Calin’s digit marketing business: Inbound Interactive
US News Report’s Top 25 Index Funds
Ben Casselman’s article, The Law Of Supply And Demand Suddenly Applies To Oil, Too
This week’s guest is Calin Yablonski. Calin is an SEO expert who owns a company called Inbound Interactive in Canada. He is also a value investor in trading who just started 6 months ago through conversations with friends, families and colleagues about the stock market. Investing is very risky and unpredictable as it is like essentially gambling with money.
Calin found out about Preston and Stig when he googled something related to investing rules when the video #17 of Buffett’s Books popped out. Ever since, he’s been reading books and watching series. He is a avid reader of Preston and Stig’s books. In fact, he has questions that prompted them to invite him into the show. This time, Calin will take control of the show by asking questions to Preston and Stig. The rules are reversed today.
Where to Start with $10,000 – $15,000
Most people are hesitant to dive in an individual stock pick when starting. There are a lot risks, because when a company loses, they lose as well – a large amount, indeed. The question for starters is whether to pick index funds or mutual funds.
In the past 10 years, Preston used mutual funds, because someone else was managing it actively. Preston thought the money manager was doing better than someone who’s just managing it that just went off straight the index. In reality, money managers managed mutual funds worse than those who managed index.
The reason why is because people tend to give their money to money managers at the exact wrong time. There’s a bunch of people giving more and more money to invest. Value investors very well know that when they get the money at the wrong time, they will have a hard time pulling the money out once the market collapses. The money managers hoard the money when you need the money most to be buying stocks at a cheap price. The money manager moves the money around.
Deciding Which Index to Buy
Somewhere in the page, a link is provided that shows the 25 best indexes. The news broke down index funds and ranked in from best to worst. The 4 factors are:
- Expense ratio – how much are you paying to be part of that fund?
- Tracking air – how close does it come to the performance of the S & P?
- Bid-ask ratio – measures the price between the bids and asks of the EPS.
Having a fund with a large gap between its bid and ask ratio may be risky when sold. The last is very important as it is the diversification factor. For example, Calin went to an index that is fidelity. When he buys it, they might have too much diversified money. When it’s offset, he won’t have a return that matches the actual performance of the S&P 500.
For fist time investors who are not comfortable with an individual stock pick, they are advised to spread their money at many companies. An index fund is just a collection for common stocks. It is more advised to use common value investing techniques such as using a PE ratio to know whether an index bond is over priced or under priced.
Absolutely, valuing an index is easier than valuing individual stocks. For example, the PE ratio for a pick is 20. That means the investor is paying $20 to get $1 of that entire index. The easiest way to figure out how much he’d get is 1/20 – a 5% return that constantly reassesses overtime.
Starting with a Large Amount of Capital
The truth is it’s psychological. For people to see their account down by a large amount of money might bother them, and there’s a chance that they can’t handle the loss and end up selling their stocks. Stig advises starters to invest with a small amount of money to see how they will go with it emotionally. The emotional and psychological process is critical in investing. When Calin bought his first stock as a new investor, he felt a huge rock in his stomach to the point that he was nauseating. He couldn’t believe he was throwing money to a company that he has no control over.
When Preston started, like Calin, he didn’t know most of what he was doing. He was investing in companies that he had no idea about – earnings, debt, growth, etc. However, when he understood what are behind stocks and the equity of owning a business, things become better and easier. Now that Preston already has knowledge in investing, here are some of his questions before he finally lay his money on stocks:
- Was I the smart person or the dumb person on this deal?
- Am I doing the opposite of everyone else?
Never buy anything if it does not feel comfortable and peaceful. Preston said, “Why put your self through overthinking and paranoia?” Most investors have a short-term horizon when picking stocks. Looking back in 2008, it’s easy to think and be afraid for things like that might happen again. In the end, the risk actually comes from not knowing what one person is doing.
What New Investors Should See
New investors should check the losses and gains of Buffett. Buffett actually did much worst than the S&P 500. He lost so much money also, but he recovered and became richer.
Making investment decisions is very long-term decision. When buying stocks, the question should always be, “Would I sell this when it goes down the next month or would I keep it?” Buffett had bad years, but his performance was a 20% return annually. His principles worked for a very long period of time.
Buffett advises investors to be greedy when others are fearful and to be fearful when others are greedy. To know when to take this advice, find out first whether the change is permanent or temporary. If it’s temporary, it’ll pass; don’t fret too much on it. If it’s permanent, it’s time to think about it.
Statistics is a lot of noise in the number. Statistician Nate Silver correctly forecasts the presidential elections for years now. All these news networks follow him, because his counts in the United Sates are almost so accurate. He discovers whether there is essence in getting a person elected or it’s just noise. Investing in the market is all the same.
The law of supply and demand is also a factor sometimes. It suddenly applies to the oil industry, too. The supplies show a drastic shift out of the United States. Preston’s opinion is that there has been obvious change in the supply in demand, that’s why he’s slowly pulling away from his oil acquisitions. It’s not because of the income or the return.
How often Should an Investor Check His Stocks
Focus on the quarterly results released every 3 months. Review the stocks you own and understand its standing in the market. On a regular basis, if people would spend an hour a day on learning accounting than reading news about a noise, the world will have a better success.
Stig’s advice to himself: “Don’t swing the pitch.” When Stig started, he was anxious. He just wanted to get in, because he thought the sooner he entered, the sooner he will get benefits. He would just buy whenever he wanted something. The best advice he got was patience. Great stocks require patience.
For Preston, first, find people that are the best and study their investment decision process. Second, stock investing is relative to opportunity cost, specifically interest rates. Understanding the opportunity cost is understanding the capital. Understanding the capital means being on the right side of the wealth equation.
Question from the Audience
What do you think about looking at stocks of Berkshire Hathaway purchases and buying the same stocks for the same or lower price?
What does it mean by buying shares of Berkshire Hathaway? Wouldn’t that get a result of the same research and judgment?
Warren Buffett said, “I don’t look to jump over 7-foot bars. I look around for 1-foot bars that I can step over.” I’m not saying that is the best strategy, but when you define the good strategy for yourself, it’s great. You need to know the best for you to get the best results.
Leonardo Da Vinci said that simplicity is the ultimate sophistication. why would you try to mimic Buffett if he’s getting fantastic returns? Buy stocks based on the value on a specific period of time.
Nobody buys cokes just before Buffett owns it. It was completely different now when Buffett bought it 2 decades ago. It’s a lot better, more profitable, and more returns. Today is different!
Use Buffett’s stock picks as a hint to where to start your research. Start with it and go to the best place where you can get better.
We are typing executive summaries in every book that we read. We will discuss a book every other week. If you want a copy of the outline chapter by chapter, go to the reading list: Preston-Stig Investing Book Club. If you want to receive outlines, sign up to the mailing list.
The next book that we will discuss is The Science of Success by Charles Koch. You may read it ahead so you can follow better during the discussion next week.
If there’s anything you’re interested, we’ll have that in the notes at theinvestorspodcast.com.
We want to hear your voice if you have questions. Go to asktheinvestors.com and record your question. We may play it in the show and if your question gets picked, you win a prize – a signed copy of the book The Warren Buffett Accounting Book.