[00:03:40] Clay Finck: did well for himself. And I wanted to talk through some of the things he did throughout his life. And some of the lessons I picked up from getting to know him throughout my own life, too. So I think of the investments he had really in these three pillars. So naturally he was born on a farm and he just went into farming.

[00:03:59] Clay Finck: So really Farmers, I think of them as entrepreneurs at heart. So throughout his life, he grew his operations on his farm. He acquired more land, worked with various other people in his family. But like a lot of other people out there in our world today, he didn’t, just make money from his work or make money from the farm and go out and buy nice vehicles or buy a nice house because he did so well throughout his entrepreneurial pursuits.

[00:04:23] Clay Finck: He started investing that money elsewhere. And this is where I wanted to tie in the second pillar. Of his investments, which was his private businesses and him and some other people that were active in the community. They started a local bank in a small town that he lived in and he wasn’t active in the day-to-Day operations of this bank.

[00:04:42] Clay Finck: He oversaw what was happening. I’m sure he helped get people onboarded, hiring people, and he had an equity stake in the bank. He was one of nine people that helped get it going back in 1984. And then over the years, the banks just had substantial growth and opened new branches. And last year, I actually attended their annual meeting, which was quite interesting in itself.

[00:05:03] Clay Finck: And it’s the type of situation where you see the managers, you There are people you can trust and their type of capital allocation decisions. You see their earnings just march up year after year at around that 10 percent mark, and they produce substantial free cash flow for a community bank.

[00:05:18] Clay Finck: It was very conservatively run. And then if those two pillars weren’t enough, the third pillar was that he was also very interested in the stock market. And I remember throughout my college years, when I started to gain an interest in it, about every time I saw him, he always had some story.

[00:05:33] Clay Finck: of a stock he owned or how his portfolio was doing at the time. And I believe he was brought into Berkshire around the great financial crisis. He was a huge fan of Buffett and I believe he also cloned Buffett’s purchase of Apple. And then he passed away in 2020 and it was time to distribute his assets. And he ended up donating.

[00:05:52] Clay Finck: a lot of what he accumulated over the years and just donated to charities locally. And that also reminded me of Buffett, just living this very frugal lifestyle and ending up just giving a lot of it all back to society. And one thing that really stuck out to me and where I’m going with the story is just how well he did financially and how just starstruck some people were when they saw hey guys, if you’re new here, don’t forget to hit subscribe. It means the world to me and I will see you in the next video. Like what? What am I missing? Is essentially what they’re asking themselves. Like it’s like why can’t I be in that sort of position. And then it was just such a great case study for me in my actual life of what compounding can do for us.

[00:06:46] Clay Finck: We always hear the story of Buffet and he got 99% of his wealth after he was 50 or 60, and just one of the richest people on the planet because he’s fully utilized compounding. But to see that in your actual life I think just really made a big impact on me and. What’s also very interesting and funny about the story is I saw him as the local Buffett.

[00:07:05] Clay Finck: He lived this frugal lifestyle. He gave a lot of his wealth away. And like I mentioned, the millionaire next door, he didn’t try to flash his wealth. He lived by an inner scorecard rather than an outer scorecard. And he really couldn’t care, could care less what other people thought about him.

[00:07:20] Clay Finck: And just had a lot of these Midwestern values that I think Buffett sort of embodies. So yeah, that’s the story I really wanted to share. And one of the things I’ve picked up over the years with regards to compounding. 

[00:07:32] Kyle Grieve: Yeah, and I can relate somewhat to this story because my grandfather was similar in some ways.

[00:07:37] Kyle Grieve: He passed away in his 90s. So he was around for a long time, but he was a very avid saver for most of his life. And not only did he save, but like you said, he compounded it by investing it in, putting money into the compounding engine. And so he never really discussed it. investing much with me because unfortunately he passed away when I was still a teenager, but from talking with my mom, I got a chance to learn about some of the different investments that he made.

[00:07:59] Kyle Grieve: So I know he had boring government bonds, which paid just a nice little coupon, but that worked for him. He was a child of the depression era and obviously, Was very risk averse. I know that he was very risk averse, so bonds made a lot of sense for him. And I know he also owned some Canadian blue chip stocks, things like banks, railroads, that paid a nice secure dividend and had very strong moats and most likely weren’t going anywhere.

[00:08:21] Kyle Grieve: So the thing that really stood out to me about my grandfather was that he helped use his savings. to provide me with a great life when he was still around, not even after he passed away. While I was in elementary school and high school, he paid for tons of things like my hockey equipment, back to school shopping, clothes, shoes, tons of activities.

[00:08:37] Kyle Grieve: So he managed to enhance my life with all the savings that he made from his working days and his frugality, which I’ll get into as well. So In regards to compounding I never ever got a chance to talk to him about it. But my grandfather’s pretty smart. I wouldn’t be surprised if he understood it to some degree.

[00:08:51] Kyle Grieve: But, he definitely compounded his money over a long period of time and it grew to a nice little chunk. And same thing, he gave away a lot of it while he was alive as well. So a funny story just to illustrate my grandfather’s frugality was in the beer he bought. I remember going to a store with him when I was in my teens and he asked me to go grab some beer.

[00:09:09] Kyle Grieve: This was before I started drinking and he gave me money and said just go buy whatever the cheapest one is. And I think it was like old Milwaukee or something. And I didn’t really give it much time at the thought cause I didn’t drink beer, He told me, I don’t even know why it came up, but he told me, he’s like, all beer tastes the same, just buy the one that’s cheaper.

[00:09:24] Kyle Grieve: It does the exact same thing. And I was like, yeah, you know what? That makes some sense. So this is a lesson that I still really continue to live by to some degree. Obviously I enjoy some things that are quality, being frugal and things where quality maybe isn’t as important to you is a way to, to increase your savings rate.

[00:09:39] Kyle Grieve: And that’s something that he really instilled in me. 

[00:09:41] Clay Finck: Yeah, that’s a really great point. I had Ramit Sethi, he always made the point in his book that you should cut ruthlessly in things that aren’t as important to you, but then spend lavishly in the things that are very important to you.

[00:09:56] Clay Finck: So it’s finding those things that you find value in. And obviously you and I highly value compounding our investments and we want to make sure we’re allocating some chunk of our income towards that and compounding. It’s really one of those things that amazes you when you first discover it, you pull up the compound interest calculator that everyone checks out the first time and you’re just in awe of the power it holds.

[00:10:18] Clay Finck: And then you wonder why in the world you weren’t taught this at an earlier age. And another thing I’ve noticed is that. You really either get it or you don’t. Just the other day I was playing basketball and I was meeting some guys, just telling us a little bit about ourselves. And I mentioned to them, what I do, what I’m invested in.

[00:10:35] Clay Finck: And right away, they just want to talk about things like Doge coins and all these other things. And it’s yeah, if they were shown the compound interest calculator, I don’t, I just don’t see it registering in the way that it would for you or me or all the people we talk with in the audience. And. There’s just something in terms of a personality trait of, the way we’re wired and to be able to see that power and see the value that it can add to our lives.

[00:10:58] Clay Finck: And I had mentioned that, many people that were surrounded by him were in awe of the gentleman I talked about. And I think the reason for this is partially because we’re not wired. to think in these exponential sort of frameworks, we’re pretty much wired to think linearly and I don’t want to bore people with, these compound interest numbers, but I do want to share an example of compounding using the story I had as a template, as much as we cover investing on the show, it’s not very often we talk about, this true long term power of, why in the world we’re so passionate about this.

[00:11:33] Clay Finck: That family member I talked about, he finished his active duty work, I went back and looked at his history, he finished his active duty work for the U. S. Army in 1956, 26 years old at the time, so just running the math, he was around 90 when he passed away in 2020, and let’s just say he managed to get 1, 000, When he was 26 years old.

[00:11:53] Clay Finck: I’m sure many people would say that’s ridiculous. There’s no way you could save that amount, but this is just for illustration purposes. And it’s just a one time investment is something he could have certainly built up over time. So if he started with 1, 000 in 1956, that’s equivalent based on just a CPI calculator.

[00:12:10] Clay Finck: equivalent to around 11, 400 a day. And let’s say he invested that in the S& P 500 and reinvested all the dividends over time. So this is what that journey would look like from 1956 through 2020 when he passed away. By 1970, that 1, 000 investment would be worth 3, 200. It’s not bad. Over 14 years, you’ve tripled your money.

[00:12:32] Clay Finck: Not life changing money, but. Seriously not bad returns. So fast forward to 1980, he’d be up to 5, 900. So almost six X in 24 years, 1990, it’d be over 27, 000. And the nominal return at this point would be 10. 2%. That’s over 34 years. Fast forward to 2000, the 90s was quite a great decade for stocks.

[00:12:55] Clay Finck: The 27, 000 increased now to 147, 000. So now from 1956 through 2000, 44 years, you’re up 147 X and that’s a 12 percent average annual return. And then Due to that really good decade in the nineties, we had a slower decade in the two thousands. So it actually shrunk to 138, 000 because the stock market was down over that 10 year time period.

[00:13:21] Clay Finck: And then as stocks do they rose again the following decade. So the year he passed away in 2020, that one time initial 1, 000 investment would be worth 400. In 92,000 a 492 x, like just mind blowing numbers. And people love Chris Mayer’s book on 100 baggers. But this investor didn’t analyze the company.

[00:13:45] Clay Finck: He didn’t look at an individual stock or understand a balance sheet or anything. He just bought the overall index and he is up nearly. 500 x over 64 years and just to just share the average return on that, it’s 10.2%. And, we often quote an average return of eight to 10% in the US markets at least.

[00:14:03] Clay Finck: And it’s no wonder that Buffett and Munger, they’ve preached for years that the key to success in life is deferred gratification. And in reflecting on this. Example, I wanted to share a few points that I think worth highlighting here before I throw it over to you Kyle again This is just for illustration purposes and not what he actually did So the first is that we have to consider the impact of inflation when looking at such long time periods Just do two math stocks are likely to go up All right.

[00:14:31] Clay Finck: It still Up over time, just because the currency is losing value. So it should be no surprise that stocks continue to hit new highs eventually at least over 10, 15, 20 year time periods. And then the first 14 years I had mentioned it went from 1000 to 3, 200. So in the first 14 years he gained 2, 200 on his investment in the last 10 years.

[00:14:53] Clay Finck: He gained 354, 000 and I think there’s just no way you can shortcut this process. You have to put in the time, put in the patience. You have to wait through that grind of the initial slow early years to get those massive gains down the road. And Morgan Housel in his book, Psychology of Money, highlights that much of the power of compounding comes from simply giving it enough time to work.

[00:15:16] Clay Finck: And for most people, investing success is not going to be from achieving Above average or high returns, but it’s just simply staying in the game for long periods of time. And we regard Buffett as the greatest investor of all time. And really, obviously he did generate high returns, but the most important part of the equation is him becoming the best and the wealthiest and.

[00:15:39] Clay Finck: known as the goat, he compounded his money much longer than the vast majority of other people. And then the third point here is in 1956, the S and P was trading around 45. And in 2020, it was around 3, 200. So while the S and P 500 was up 71 X over that period, his investment was up 492 X. So it’s okay, what’s happening here?

[00:16:02] Clay Finck: The reason he got such a much higher return than the index itself, what he was invested in is because he reinvested dividends. And that’s something that people sometimes ignore or exclude from this type of analysis. And, it’s common practice to just, nowadays, especially just with our, whatever account you use, just to automatically reinvest dividends.

[00:16:22] Clay Finck: You don’t even have to do it yourself. It can, you can just make it. Simply just click and automate it. So just by making that one decision of reinvesting dividends, this increased his ending amount that he ended up with by nearly seven X. And again, it just points to, people think that’ll just be a linear change, adding dividends Oh, he gets a slightly higher return, again, this is an exponential problem and it really helps illustrate the power of continuous contributions to your accounts, reinvesting dividends, and obviously sticking with the long run.

[00:16:53] Kyle Grieve: Yeah. Those are great examples, Clay. And like you said, the concept of compounding just really is not intuitive. There’s a great question that I believe I read from Thinking Fast and Slow by Kahneman and Tversky that I’ve read, that I’ve thought about a lot, and it illustrates this really well. So in a lake, there’s a patch of lily pads.

[00:17:09] Kyle Grieve: Every day the patch doubles in size. If it takes 48 days to cover the entire lake, how long does it take for the patch to cover half of the lake? So intuitively, I remember the first time I heard this, my brain just wanted to half 48 and say 24 is my answer. And it’s completely wrong. So the simple way to look at this equation is basically if the patch is full on day 48, then the day earlier, 47, it’s half full.

[00:17:31] Kyle Grieve: That’s it. So if you look at that lake, it takes 47 days or 98 percent of the time for the lake to fill up halfway. Then it takes one day or 2 percent of the time for the lake to fill up with lilies entirely. So that just goes to what Clay was talking about, you have to wait a long period and the longer you wait at the end, that’s when compounding really kicks in and that’s when you can really grow your wealth.

[00:17:53] Kyle Grieve: So Albert Einstein famously said, quote, Compound interest is the eighth wonder of the world. He who understands it earns it, and he who doesn’t pays it, unquote. If you don’t want to unlock the ability to compound money, you must try and understand how it works. And I don’t know about you, but I never learned how compound interest works in school.

[00:18:10] Kyle Grieve: But I think one of the most underrated parts about compounding interest that Einstein alludes to in that quote is that if you don’t understand it, you end up paying for it. So there’s a story about a king. a chessboard and the sage and I’m sure there’s, you’ve heard, there’s many different ways of saying it, but essentially there was a king and he liked playing chess, so he would go around and challenge people to play games of chess.

[00:18:31] Kyle Grieve: So one day there was a traveling sage and the king challenged him to a game of chess. So the sage, having played chess all his life, was obviously good and probably knew he could beat the king, but the king offered him a reward for beating him. So the sage said, okay you know what? Here’s what I want.

[00:18:44] Kyle Grieve: I want you to put a single grain of rice on the first chess square and double it on every consecutive square thereafter. The king didn’t understand compounding. So he said, that’s nothing easy. Sure, let’s do it. So they played the game, the sage wins, and being a man of the word, the king gets a bag of rice and starts putting one grain on, two grains on, four grains on, eight grains on, and keeps going, doubling on each subsequent square.

[00:19:07] Kyle Grieve: But of course, the sage, understanding compounding, knew that there’s no way that the king had even close to enough rice. to pay him. So after the king got to the 20th square of the chessboard, he would have had to put about a million grains of rice on by the 40th square, that would increase to a billion grains of rice.

[00:19:25] Kyle Grieve: And by the 64th square, that would have been 18 quintillion, which is 18 followed by 18 zeros grains of rice, which is equal to about 210 billion tons. So this story illustrates just how much of a benefit understanding compounding is versus how much of a detriment ignoring it really is for you. 

[00:19:42] Clay Finck: Those are both also wonderful examples.

[00:19:45] Clay Finck: And one of my favorite quotes on compounding is one from Gautam Baid. One he shared in his book, The Joys of Compounding is from Anshul Kaur, probably butchering that name. He writes, In the initial years, compounding tests your patience. In the later years, you’re bewildered. And I just absolutely love that quote.

[00:20:03] Clay Finck: And without talking too much about compounding and all the wealth and money it can give us down the line, some people might be listening and thinking that we’re totally obsessed with money. That isn’t necessarily what I want to communicate with this or it’s not because it’s not necessarily the case and I know it isn’t for me and I can only speak for myself and I’m sure it is for you, Kyle.

[00:20:26] Clay Finck: I really see money as a tool that enables us to help us live the lives we want and do the things we want to do. Really at the end of the day, money can give us the freedom to live the type of life that we truly want to live. Munger has long talked about how he didn’t just want to get rich. He wanted to have enough money to have the freedom to live life on his own terms.

[00:20:50] Clay Finck: And Kyle, it reminds me of the presentation you did for our mastermind community where you shared your portfolio results for 2023. And during that presentation, one thing that stuck out to me is that you have the financial goal of becoming financially independent. So talk about what this means to you and why you ended up setting that as your goal.

[00:21:13] Kyle Grieve: So to me, financial dependence is quite simple. I can’t remember exactly who said it, but it’s basically to do whatever I want with whoever I want, whenever I want. And so to me, like you said, obviously money is important, but it’s more of a, of an unlock to unlock these three characteristics that I hope to achieve one day.

[00:21:30] Kyle Grieve: So to me, being able to manage my own money while doing nothing else would mean financial independence. And I know some people think that if you have to do any type of work, they’re still saying that I’m, I would be working by managing my own money. And, in their defense, I guess if they use that as their definition, then.

[00:21:47] Kyle Grieve: I wouldn’t be financially independent, but to me, I love investing so much. So if I could just manage my own money and live off of that, I would basically be doing something I really love to do and not having to do anything else. I could set my own schedule. Like I said, do whatever I want, whenever I want with whoever I want.

[00:22:00] Kyle Grieve: So to me, that would be financial freedom. And, essentially I would have to build the portfolio up to cover all my family’s expenses for a long period of time. And then with the effects of compounding, that just grows, which is great. And then I can do whatever I want with that money.

[00:22:14] Kyle Grieve: And then just getting into, the nitty gritty of how that works, your income and your savings rate have a lot to do with how quickly you can reach financial independence, but it’s important to define in whatever light makes most sense to you. Another interesting point about finances is just the lifestyle there are tons and tons of people like.

[00:22:28] Kyle Grieve: Clay mentioned, the millionaire next door. They have tons of examples of people that are just, working blue collar jobs who retire with a lot of money. And then you have people making six, seven plus figures, and you hear about them going bankrupt after their career is over and they have nothing.

[00:22:43] Kyle Grieve: No matter how much money you’re making, it’s all about decisions in life and figuring it out. What you want to allocate your money towards. You’re either allocating it towards things that are shiny toys right now, which a lot of people do. And if you do that, perfectly fine. I’m not judging you, but me personally, I like to allocate a certain percentage of it basically to buying my freedom in the future.

[00:23:02] Kyle Grieve: So that’s how I look at it. And obviously that means I do have to sacrifice some splurges that I could make if I didn’t save money, but. I’m okay with that. So anyways, I just wanted to bring that up because it’s why people with lower paying jobs can retire with these ungodly sums of money.

[00:23:17] Kyle Grieve: Whereas people who have these really high paying jobs, just fade off or have to end up working for the rest of their life. 

[00:23:24] Clay Finck: A couple things stand out to me there. So first is. You mentioned an ideal life for you is like analyzing companies, managing your portfolio and keeping up with all those things.

[00:23:35] Clay Finck: It’s finding what you value in your life. And second, it’s recognizing that while a lot of people find value or find, believe that happiness for them lies in the next big purchase, the bigger house. the nicer car or whatever else it’s recognizing that, Hey, I don’t have to allocate my money, or show that I value those things.

[00:23:55] Clay Finck: I can use my money to buy freedom. That’s just a realization that I don’t think many people believe is even an option for them. Like money can be used as a tool to buy back our time because our time is finite and we have that freedom to chase things. You value most, for you, it’s managing your portfolio, spending more time with your family and generally just having free time to explore other things as well.

[00:24:19] Clay Finck: And it’s funny looking back when I go back to when I was in high school, considering what sort of career I wanted to pursue. One of the most important things for me, whether consciously or unconsciously, was having a pretty good income. And this wasn’t because I wanted to become financially independent when I’m 35 or.

[00:24:38] Clay Finck: whatever else. Really, it was the lifestyle that income could give me because I didn’t realize that you could use money to buy freedom because so few people I think, talk about it or just live that out in their lives. You just don’t really realize like growing up that’s even an option.

[00:24:54] Clay Finck: You can go and do other things. You can buy back freedom or work on things you really enjoy. And there’s that saying that true wealth is measured. personal liberty and freedom or essentially the ability to control your time. And it reminds me that someone could have all the money in the world, but if you’re selling your time like 14 hours of your day, and then you’re sleeping eight hours, then you have one or two hours to yourself to cook, clean, do laundry, all that.

[00:25:21] Clay Finck: And if you also have expenses that exceed your income, one has to question if that person is actually wealthy, even if they have the car, the house. whatnot. And one of my favorite books on financial independence is JL Collins’s book, The Simple Path to Wealth. And he explains why having, it’s a general rule of thumb, 25 times annual expenses is enough to be considered financially independent and never work again.

[00:25:47] Clay Finck: He goes into way more detail in the book that I’d rather not cover here. So just for simplistic sake, say you’re living in New York city.

[00:26:08] Clay Finck: to be financially free. And to me, really, when I try and implement this into my own life, I see the holy grail, not so much as hitting that Your number, but finding something that pays you a reasonable or decent income, but it’s also something you’ve really enjoyed doing. And many people in the financial independence community retire early.

[00:26:29] Clay Finck: They work jobs they don’t like. They’re making crazy good money. But they’re thinking five or 10 years out, they just want to work this job. They really don’t like it, so they can hit their number, go to the beach and live a totally different life. But everyone values something different. And everyone has to figure out what it is they want their life to look like.

[00:26:47] Clay Finck: And, I’m not really in a position to say what’s right, what’s wrong. You have to look at your options and educate yourself on what opportunities are available. And Charlie Munger. I mentioned him. He was a huge fan of Benjamin Franklin, and he was well aware that it’s not money that’s scarce.

[00:27:03] Clay Finck: It’s our time that’s scarce. Franklin knew that once you’re financially independent, you have the ability to buy back your time. And then he started doing things like giving back to society, just doing things that he thought were beneficial for society and fulfilling to him. He wrote about how he wanted to live a useful life rather than simply die rich, and it reminds me again of the story I mentioned at the start where, he just had a tremendous impact on society just because of the decisions he made and the contributions and, the investments he made in himself and understanding investing, compounding and such.

[00:27:36] Clay Finck: And again, one of my favorite chapters or favorite books overall is the joys of compounding and he has a chapter in that book on financial independence that I just loved. He tells the story of Munger going through some really tough periods early on in his life. He was broke, divorced, lost his kid when he was 29 and persevered through that.

[00:27:54] Clay Finck: And yeah, and making just like an amazing life at the end. And I just really wanted to mention that chapter. I wanted to transition here to talk about the ways we can achieve financial independence or hit that 25 times number that I mentioned, and that’s also referred to as the 4 percent rule.

[00:28:11] Clay Finck: There’s, I believe it’s called the Trinity study they put together, and there’s so much research out there online if anyone wants to dive in deeper on the 4 percent rule. But in terms of hitting our number, there’s a number of ways to get there. There’s plenty of asset classes, there’s stocks.

[00:28:27] Clay Finck: There’s bonds, real estate, one could use their own business to build their wealth, someone else’s private business invest in someone else’s business, or, I mentioned stocks, which is just public equities. And then there’s things like precious metals and Bitcoin, which Preston covers on the feed here.

[00:28:42] Clay Finck: So instead of diving into the ins and outs of each asset class, how about Kyle, you talk about why you’re Dedicating the vast majority of your time and energy towards the stock market. 

[00:28:53] Kyle Grieve: Yeah. So like you said, all those options are really good, but personally, I have a very large percentage of my family’s wealth in the stock market.

[00:29:00] Kyle Grieve: And essentially the simple reason for that is that if you look at long term charts, stocks are the best performing financial asset over 150 years. But that’s not everything. I think I’ve educated myself enough that I feel like I have the most amount of knowledge of businesses as compared to the other assets that you named on that list.

[00:29:16] Kyle Grieve: Things that I’ve learned about to understand stocks better are things like financial statements, moats, management, capital allocation, investor psychology, case studies of successes and failures, biographies are a really good source, and just learning about business models in general.

[00:29:31] Kyle Grieve: All these areas that I’ve really just educated myself on because I’m passionate about it really support me investing in public companies. And if I had to go outside of the public company realms, the next bucket would, that would make the most sense for me based on what I know would be private businesses because, there’s not much difference.

[00:29:48] Kyle Grieve: It’s just one has a stock price and one doesn’t. So I’ve had some experience investing in crypto in the past and I made a lot of mistakes. So I feel I proved to myself that That wasn’t an arena that I had much proficiency in. And, I know many others have succeeded and my hat’s off to them.

[00:30:03] Kyle Grieve: But when it comes to figuring out what to allocate your own savings to, you should take into account what you’re already good at. If you have spent decades in the real estate market, but don’t know the difference between a stock and a mutual fund then you’re probably better off investing in real estate.

[00:30:16] Kyle Grieve: This is why investing is such an exciting endeavor because there’s multiple roads that lead to Rome. and you just have to find which road is optimized for you before you make the trek. 

[00:30:25] Clay Finck: Yeah, you make a really good point on picking the game that we’re equipped to win. And part of that is how we’re wired.

[00:30:35] Clay Finck: Part of it also is just the skills we’ve developed over time. Like some people are just born into a real estate family where their parents have always invested in real estate. And that’s what, they taught their kids the same thing with the stock market and I do know a number of people that are deeply involved in real estate and that’s the game they know.

[00:30:51] Clay Finck: And I think that generally the sentiment with real estate is that you lose a lot of the control when you invest in stocks because you’re outsourcing the management of the companies that you own when you buy stocks, some see that as a benefit. Others see that as a drawback.

[00:31:06] Clay Finck: And to a large extent, that’s true. Like I don’t want to manage all the companies I’m investing in. I want someone else to do it. And you also might meet someone that’s a day trader. And for whatever reason, that might just be the game that they’re equipped to win. And that’s okay. And. It also just might be how they’re wired.

[00:31:24] Clay Finck: They don’t want to just sit back and not look at their investments for the next year. And you might talk with a day trader and be like, Hey, you could compound your money in whatever stock or index fund and watch it grow over 10 years. But they just want to focus on surviving that day.

[00:31:40] Clay Finck: They love that game, and that’s the game they’re equipped to win and just the way they’re wired. And again, that’s just the way it is and it’s common advice. in the world of the stock market. And what JL Collins talks about in his book is for the vast majority of people to just invest in an index fund or a basket of index funds and take the guesswork out of choosing individual stocks.

[00:32:00] Clay Finck: And for the vast majority of people, I think they may get better results just buying an index rather than picking stocks. That’s not only because of the returns, but also the time that must be invested in researching companies. doing the due diligence, keeping up with their quarterly earnings, looking at the company’s competitors, the list goes on.

[00:32:22] Clay Finck: And when you’re buying an index fund, if you’re not familiar, a couple of very common ones here in the US at least are Vanguard’s S& P 500, the ticker’s VOO. And the total stock market index fund is VTSAX, both very popular. And I believe they both have similar return prospects. And I mentioned the time that’s needed to manage a portfolio.

[00:32:44] Clay Finck: Kyle, you and I talk a lot about this. My question is, when does someone really get a feel for picking individual companies? Is the game they’re equipped to play and a game they’re equipped to win? Because there’s just so much more that goes into it when you’re picking individual stocks and you’re super passionate about this and you’re quite certain that’s the path for you.

[00:33:07] Clay Finck: So certainly you have some insights on. What we need to think through in deciding, yeah, individual stocks is something, a game that we should be playing. 

[00:33:16] Kyle Grieve: I get asked this a lot and, looking back at what I did, I probably took the incorrect path, which is fine, but for people who don’t understand businesses or don’t really understand stocks, you’re probably better off, like you said, and what I suggest to people if they ask me is just buy an index fund first and then go from there.

[00:33:32] Kyle Grieve: So I didn’t take that route. I just went right into stocks. But, the thing that’s cool about index funds is it’s very forgiving. You don’t. You don’t need to know how to read a balance sheet. You don’t need to know about financial statements. You don’t even need to know the CEO’s name or what the business sells.

[00:33:45] Kyle Grieve: And, because there’s 500 companies in the S& P 500, there’s no chance that you’re going to have, you might have in depth knowledge about a couple of companies and that’s cool, but there’s no way you’re going to know a lot about all the companies in an index fund. So to me, If you have an index fund and you find yourself spending time learning about some of the businesses inside of that index fund that might be a trigger that maybe stocks or maybe a portion of your portfolio might be invested in stocks.

[00:34:08] Kyle Grieve: Again, not financial advice is just what I foresee. So like I previously mentioned I love individual businesses. So for me to make that synergize with my investing strategy, it makes more sense to me just to own a few businesses that I feel I understand really well. Like I said, I can’t understand 500 businesses.

[00:34:24] Kyle Grieve: I can understand 10 to 15 businesses. So to me, that makes more sense to me and I’m willing and able to put in the work to understand those businesses. It is a lengthy analysis period. Like I said, if I was financially independent, I could manage my own portfolio or I could just own an index one and do absolutely nothing.

[00:34:40] Kyle Grieve: But part of the joy for me of investing is I actually enjoy it. I enjoy spending my time doing it. That’s just a personal thing. But Because the process is so lengthy, it requires a few things in order to make sure that you only have a few ideas. You have to make sure that you have conviction in your ideas and know what you have.

[00:34:57] Kyle Grieve: You have to understand that you are going to be spending a lot of time. It allows me when I know only a few ideas to put more money into certain ideas that I think will have really good returns or certain ideas that I think I have a lot of conviction in. And then, it gives me the ability to.

[00:35:10] Kyle Grieve: leave a business if I don’t think I like the direction that it’s going in. And so because I’ve learned all these things and I feel confident in using that as part of my strategy, it just makes more sense to own a few businesses and let the thesis that I find play out and see what happens. Just getting into strategy a little bit more.

[00:35:26] Kyle Grieve: I know that my thesis will be wrong at times. And when I’m wrong, I have to determine if my thesis can get back on track or not. Sometimes it can get back on and sometimes it’s permanently derailed. So if it is permanently derailed, that means I have to sell. And we’ll be getting over some mistakes and stuff that people make.

[00:35:43] Kyle Grieve: But for me, if I find something that Isn’t working out, then I just sell it and reallocate it to a different position. But the goal for me is to try and make it hard to find bad businesses or bad investments in my portfolio. I think that most people should go the way of index funds simply because you get that nice eight to 10% return.

[00:36:00] Kyle Grieve: And you literally have to don’t, you don’t have to do any of the work that I just mentioned above because, you can easily spend 40, 60, there’s people probably spending 80 hours a week doing all this. I don’t personally, because I have a life and a job and a family, but my goal is to hopefully get above those rates of return by utilizing my behavioral edge.

[00:36:17] Kyle Grieve: And yeah, this is my journey and I’m looking forward to how it ends. 

[00:36:21] Clay Finck: Yeah. And what’s really interesting and somewhat puzzling to some people is the enjoyment of it. I think I know a lot of people who would be happy to manage their portfolio. And even if they knew their returns were going to be slightly lower than the index.

[00:36:38] Clay Finck: They would probably still do it because it’s like a, it’s their way of interacting with the world and their way of learning more about that. So is that something you resonate with? 

[00:36:48] Kyle Grieve: Absolutely. Yeah. Ever since I started learning about investing, I learned all sorts of things that might not even have to do with investing because, obviously I’m trying to learn, be trying to be a generalist, right?

[00:36:58] Kyle Grieve: So I’m learning all sorts of things with different mental models, different sciences. psychology, all sorts of cool things. And 100 percent you nailed it. It really helps me understand the world better. It helps me keep up with things that I find important and interesting. And yeah, I agree.

[00:37:12] Kyle Grieve: I think there’s a lot of people that probably know that they’ll underperform an index, but. that little fee, that little change in return is worth it just because they get to partake in investing in individual stocks. 

[00:37:24] Clay Finck: Yeah. And I say the knowing they had underperformed kind of tongue in cheek because we never really know what our returns are going to be.

[00:37:31] Clay Finck: And we can always find reasons for why we underperformed in recent years and the mistakes we made. And hopefully we will improve on those mistakes and get better over time. And investing, it’s also a process of compounding. knowledge. I’m reminded of the Buffett quote that he’s a better businessman because he’s an investor.

[00:37:48] Clay Finck: He’s a better investor because he’s a businessman. And I feel that’s definitely applied to my life as well in thinking about business in general and what we do here at TIP. I think that feedback also goes back. To being an investor, I think of companies like Costco and the tremendous value they’re adding to society.

[00:38:06] Clay Finck: Like I know it’s not a company I’d ever own, but learning about that company is so cool to me and like the tremendous value they’re adding to society, like why no one else can do what they do. What’s their edge in the markets? And just like studying all these things is so fascinating and it’s just a rabbit hole that feels like it really never ends.

[00:38:23] Kyle Grieve: Absolutely. And I agree with you on Costco. I’ve spent some time researching them and learning about sole price and yeah, it’s an incredible case study and definitely worth it just to understand business better. 

[00:38:34] Clay Finck: So again, one of the things I think people have trouble with is the time commitment that it takes for managing a portfolio say someone wants to own 15 or 20 companies, they might end up analyzing 40 names and it takes quite a bit of time to dive into a name, read their reports, listen to some of their earnings calls, and all the research that goes into that. And a year or two ago, you wrote an ebook. It was called Five Minutes to Know, and it explains how you quickly say no to new ideas.

[00:39:02] Clay Finck: And Segway says to me that. Saying no is the best productivity hack. And it’s really good advice with all the things that can grab our attention nowadays. And I think before you go out and pick stocks, you need to figure out what you’re looking for. Ian Castle mentioned it just to me on the show that everyone, when they first start out, it’s like they show up to a restaurant for the first time of their lives and you don’t know what you want.

[00:39:26] Clay Finck: You see the menu and just, you just start trying things. And oftentimes People do the same thing in the stock market. They see Apple in the headlines, they go buy Apple, they shop on Amazon. So they go buy Amazon stock. And it’s pretty well in line with Peter Lynch’s advice of getting exposure to the market is just buying companies you interact with in your day to day life.

[00:39:44] Clay Finck: So talk more about some of the things you covered in your ebook five minutes to know and how we can quickly figure out what we’re looking for and filter out the rest. 

[00:39:54] Kyle Grieve: Yeah, great point. When I first started investing, I remember making the, I have, I still have these, Google spreadsheets of like a hundred businesses and I’d be looking in them.

[00:40:03] Kyle Grieve: And, I don’t think I bought any of them and I literally spent all this time making that list and it was a waste of time. So as I’ve gotten more and more experience, I’ve realized, okay I want. to have a system where I could, not do that and hopefully spend most of my time finding ideas that I actually want to invest in and make sense for me and my financial goals.

[00:40:24] Kyle Grieve: So I wrote the book specifically because I wanted to refine my own system and I thought it was pretty repeatable so that other people could hopefully use it as well. It’s super simple in my opinion, but basically it allows you to easily find out if a business has some degree of quality. and also finding the growth that I see personally.

[00:40:41] Kyle Grieve: So the beauty of the system is that you can pick and choose to have numbers to whatever specifications you want. I’m trying to find investments that are growing at pretty high rates, hopefully around 15%. And that’s what I want my returns to be as well. So I have numbers optimized. specifically for finding that kind of investment.

[00:40:58] Kyle Grieve: So other people might have different things they are optimized for. Maybe they want 10%, maybe they want dividends. And that’s cool. And you can pick and choose and change it however you want, but this was my system. So the way I do it, I literally just, I go over in the book, but I can literally just put a ticker symbol in FinChat and just, I click a couple buttons of things that I think are interesting.

[00:41:18] Kyle Grieve: And then it gives me those numbers in compound annual growth rates. So I might do things like checking revenues, net income, earnings per share, the shares outstanding, checking their debt, checking cash flows I can see the capital efficiency, and I can see all this just on FinChat, so it takes me a really short period of time, and then there’s other sources you can check to see insider ownership, as I do having pretty high insider ownership, and it basically just lets me see really quickly if a business meets the benchmarks that I’m looking for.

[00:41:43] Kyle Grieve: And, will it remove a lot of great investments? I know I’ve gotten a lot of flack on X from people being like, Oh like you would never have found Amazon. And yeah, for sure. It definitely removes tons of good investments, but the point of it is it just removes, it just adds an additional guardrail and simplifies things.

[00:41:58] Kyle Grieve: Now that I understand the system really well, I can easily make modifications to the system that work for me. And I break my own rules all the time because I understand it. And I know what I’m looking for and there might be certain situations that might not necessarily fit right away, but I feel like at its ground base, the system still runs. What I’m trying to do is just like I said there’s a lot of little nuance to how I use it.

[00:42:20] Clay Finck: You mentioned all those metrics. Revenue, net income, all these financial metrics. And one really important one is return on invested capital. And you’ve written about that in the ebook as well. I think a lot of retail investors don’t really understand what this means. And it’s actually one of the most important metrics to know.

[00:42:39] Clay Finck: And I’ve been recently reading the book you covered on the show, what I learned about investing. from Darwin by Pulak Prasad. And man, it is definitely one of the best investing books I’ve read in the past year or two. So Prasad, he uses return on capital employed instead of return on invested capital.

[00:42:58] Clay Finck: That’s his most important metric for filtering on business quality. because really it takes into account the profits that a company produces as well as the amount of capital it took to produce that level of profit. And when you filter on this, it’s quite interesting because you obviously narrow down your opportunity set of the companies you’re looking at.

[00:43:19] Clay Finck: And then you have a good number of high quality businesses. Once you filter on say 15 percent return on capital employed, for example, but when you. Don’t filter on that. Of course, you’re, you might be filtering out Amazon or Netflix and he makes such a great point that, you know, just considering the base rates of success.

[00:43:39] Clay Finck: There’s a host of tech companies in 1999 and obviously Amazon was the right one to invest in but what’s not in the headlines is the countless others who maybe had a leader just as brilliant as Jeff Bezos. But things just didn’t work out the way it did with Amazon. And, again, the base rates of success, that’s something that’s really important.

[00:43:59] Clay Finck: One thing that I’ve been thinking a lot about. Lately, reading this book is just minimizing the chance of luck playing a role in investment success. Obviously luck plays some role in a lot of companies, but you wanna try and minimize that and maximize. I always think back to in my interview with Morgan Housel, he tied in a quote from Naval where Navel is if you lived a thousand lives, you wanna make sure you’re wealthy.

[00:44:25] Clay Finck: And 999 of them. There’s plenty of alternative histories out there where maybe Amazon doesn’t do quite near as well as they did, or maybe there’s a scenario where, the retail business does well, the stock is average at best, but Amazon AWS was never a thing, just simple things like that, luck certainly plays a role and Again, we’re not here to say there’s a right or wrong way to invest, but what we can do is share how we think about things.

[00:44:51] Clay Finck: So turning back to return on capital employed here, it’s calculated simply as the operating profit of a business or the EBIT divided by the total capital employed. And the total capital employed is We’re going to be talking about how to get started with it. We’re going to be talking about just simply the total assets minus, total liabilities.

[00:45:06] Clay Finck: So again, how much profit does a company produce relative to the amount of capital it took to produce those profits? So it’s really bringing in two financial metrics into one. Since we mentioned Costco, I’ve pulled their numbers, their return on capital employed is around 23 percent and you’ll find that most other retailers have a much slower rate.

[00:45:25] Clay Finck: Return on capital employed. And that’s also why Costco trades at a higher valuation relative to their earnings. So really, if you put a dollar into Costco, it’s really a metric of how much earnings would that dollar give you back. So if you put $1 in and they go out and reinvest it back into the business you’ll get 23 cents in profits.

[00:45:45] Clay Finck: And Prasad, I just love the way. He explained why this metric is so useful. We’re told to look for so many things when selecting businesses, and he talks about how just this one thing is such a great filter for filtering on quality. Many businesses have managers that are impressive. They create amazing products, they’re very charismatic, but that doesn’t mean they’re great capital allocators or the business has great economics.

[00:46:09] Clay Finck: And he explains that many companies look to have great managers, but they either overlook or don’t understand capital allocation and it’s just a filter like instead of going, looking at a company and looking at the management before you look, dive in deeper into the company, what’s the return on capital employed?

[00:46:27] Clay Finck: Because a high return on capital employed tells you that Management’s doing something right. So a consistently high return on capital employed says it’s greater than 15%. It’s also an indicator of a strong moat And it’s just a really great starting point for what sort of return you can expect going forward and of course It’s not a magic Bullet, like just because you filter on this one metric, it’s just like the secret that no one’s talking about.

[00:46:51] Clay Finck: But it tends to be a good place to start in your analysis. And I wanted to also mention a point that Prasad made, I hadn’t considered too much. He explained that a high return on capital employed business, it allows a company to take. business risk without taking financial risks. So it really increases the chances of business success as they weather through, whether through this very intense capitalistic world and companies with a high return on capital employed and a strong balance sheet, they can go out and invest in new opportunities and afford for them not to work out because they’re in a strong financial position.

[00:47:27] Clay Finck: Whereas if you have another business, they have low returns on capital. Weaker balance sheet. And if that project fails, it could really hurt the business because it could weaken their position. They need to issue equity issue debt just to weather through that. And this is why you find in some industries that some one, two, or three players just dominate.

[00:47:45] Clay Finck: And then just the week continues to get weaker and you just see that divide in terms of the great businesses and the poor businesses. So again, such an amazing book. 

[00:47:56] Kyle Grieve: It truly was. I agree with you. Probably one of the best books I’ve read in the last couple of years. So Pulak did a great job like you already outlined about why he likes returns on capital employed and why it brings so many additional benefits to a business that has a number like a ROCE or ROCE over say 15%.

[00:48:13] Kyle Grieve: So I personally use ROIC, which has many similarities, but honestly. If you have a high ROCE business, there’s a pretty good chance it also has a high ROIC. You’re just nitpicking here, but just digging in a little more into the weeds. If you do decide to use these numbers, I would highly recommend breaking them down and finding out which numbers belong in there and which don’t.

[00:48:32] Kyle Grieve: So for instance, with returns on capital employed, you’re using earnings before interest and taxes with returns on invested capital. You’re using that operating profit after taxes. So these are just minor differences. The numbers are going to be a little bit different, but if you look at each line item and that you’re accounting for using those equations, you can take a look and maybe make a more accurate number by making certain adjustments.

[00:48:51] Kyle Grieve: So an example here might be like for me, when I’m looking at returns on invested capital, I remove cash from the invested capital equation. The reasoning for me is that cash isn’t invested in the business, so it’s not generating a return. So removing it makes sense, but, and this gets into really understanding a business, there are some businesses where they use their cash in their business to operate it.

[00:49:14] Kyle Grieve: So in that sense, you would actually keep a little bit of cash maybe in that invested capital number to get a more accurate return on invested capital number. So this is just saying that, look more into how you’re doing these calculations such as return on capital employed or return on invested capital and look at the adjustments that can and should be made to make a more accurate number because there’s a lot of data out there and you can make some really big blunders.

[00:49:38] Kyle Grieve: by just defaulting and putting every company into one bucket. So just a resource I would highly recommend. Just look up Michael Mauboussin’s papers on return on invested capital. They’re incredibly well done. I’ve learned so much from them. So just look at that. If you really want to get into the weeds, if you want to keep things super simple, just, Stick with whatever you learn on the data aggregators, but if you want to really understand a company really well, I would highly recommend digging into the weeds.

[00:50:01] Clay Finck: Another point that comes to mind here is the reinvestment rate. I’m reminded of Dino Polska because the formula just seems so simple and we did an episode on it. So many of the audience are going to be aware as well. So if their return on investing capital is in the 20 to 25 percent range. And they are reinvesting 100 percent of cash flows.

[00:50:22] Clay Finck: do you assume that that’s going to imply that level of earnings growth in the future? Maybe talk more about that reinvestment rate Because you might have a company with a high return on capital employed But their reinvestment rate might be zero. Talk more about that sort of dynamic of how that ends up playing into how the business develops and maybe its stock performance too.

[00:50:45] Kyle Grieve: So yeah, like you said, I think return on investment capital reinvestment rates are highly impactful obviously on the share price of a specific business. So let’s go over a quick example to show the audience why that would be. So let’s say we have two businesses. Let’s say they’re both earning 20 percent returns on invested capital, but the difference, let’s call them A and B.

[00:51:06] Kyle Grieve: A is retaining 100 percent of its earnings and B is retaining 50 percent of its earnings. So by retaining, that basically just means that all of the money that they’re creating all the profits are being reinvested into the business. So A is reinvesting all of that money back into the business, whereas B is only reinvesting 50 percent of that.

[00:51:23] Kyle Grieve: And then the other 50 percent is just being paid out as a dividend to shareholders. So let’s just go over some of what happens over a 10 year time period. So let’s assume both these businesses have a constant valuation. So I know that this is not possible in the stock market. We don’t have constant valuations, but just for simplicity sake, for the sake that we’re doing this on a podcast, we’re just going to say that the valuation just stays at a price earnings value of 20 for both businesses.

[00:51:47] Kyle Grieve: Let’s start with B, which is re retaining about 50 percent of their earnings. We’re going to start them both off at per share earnings of just a dollar. After 10 years, B is going to have an EPS of about 2. 85, and they are going to have a total return, including the dividends, we’re not reinvesting dividends just for the sake of simplicity sake, of about 330%.

[00:52:09] Kyle Grieve: and a compound annual gain of 12. 7%. So that’s really good, right? But you can see 12 there. 7 percent obviously isn’t 20%. It’s good. And that’s nice, but let’s see now what happens with a business that retains all of its earnings. So in business the same thing, earnings per share starts at 1, but after 10 years, that jumps all the way up to 7 and 43 cents.

[00:52:30] Kyle Grieve: So that gives you a total return of 743 percent and a compound annual gain of 20%. So you can see now that that high return on invested capital number is going to be much more accurate over a long period of time. If you assume that 100 percent of profits are reinvested into the business, if you’re not doing that, then that number is going to be significantly lower.

[00:52:52] Kyle Grieve: And obviously, if you have a higher return on investing capital business, you’re still probably going to do really well, even if that business is distributing a lot of the money to shareholders by dividends or buybacks. But. The point is, if you can find these compounders, these businesses that can put all of their profits back into the business and then just keep on compounding at historical rates, that’s where you’re going to make the most amount of the most amount of returns, just because, it’s just a math equation.

[00:53:15] Kyle Grieve: You I’m just plugging in some numbers into Excel and getting these numbers that I just described to you, but. Yeah, so that’s really powerful. So it’s really important that you look not only at returns on invested capital, but also at the reinvestment rates. So one just simple thing you can do to find out reinvestment rates is to look at retained earnings.

[00:53:36] Kyle Grieve: So retained earnings are a portion of the balance sheet that you’ll find under equity. Basically retained earnings is just like I just said, it’s basically the amount of money that the company retains. So if retained earnings goes up, a hundred million dollars, that means that company retained a hundred million dollars of profits and placed it back into the business.

[00:53:55] Kyle Grieve: If you saw that same company earned a hundred million dollars in profits, then you can deduce that they put a hundred percent of that money back into the business. But if that company lets say they earn 200 million and they only put 100 million back into the company, then that means they have a 50 percent retained earnings rate.

[00:54:10] Kyle Grieve: So you want to be really careful that obviously you can still do well. A business that Clay and I both own that does have a pretty high dividend payout ratio would be. Evolution, which is paying out about 50 percent of its profits, as shareholders. Yeah, of course, we would love to see that business be able to put all of its money back into the business and continue compounding that capital at really high rates.

[00:54:33] Kyle Grieve: But the fact is just, with certain businesses and evolution is definitely included, there’s just no places to put money. Evolution has done a couple of acquisitions where they’ve tried to to put that money into work, but. I would say the returns on invested capital on those acquisitions definitely is not anywhere close to their historical rates.

[00:54:51] Kyle Grieve: So yeah it’s just, you have to weigh the pros and cons. For me in a perfect scenario, I would just be looking at businesses that can have a 100 percent retained earnings rate and hopefully just keep on pumping money into the business into really high return on invested capital.

[00:55:10] Kyle Grieve: It also comes into the life cycle of businesses. More mature businesses, they run out of places to spend money, whereas a younger business might have a bunch of different places to have to spend their money. So you have to be the judge of where a business is in this life cycle and understand it really well.

[00:55:25] Kyle Grieve: And then the other thing also to look into is that, with Dino Polska, they’re reinvesting all their money into one thing, which is just new stores. And they have a long track record of doing that really well. Whereas some others, look at Google, they have a whole other bets part to their balance sheet of other bets that they put money into.

[00:55:41] Kyle Grieve: And a lot of them, probably were zero, but they have their own way of doing it. It’s like the Amazon model where they’re just throwing in some little things at the wall, not spending a lot of money and hoping one works. So in Amazon’s case, Amazon Web Services worked well, but there’s just something to be said with, if you have a business that can clearly reinvest its money into something that it’s already really good at, that’s where the magic comes from.

[00:56:00] Kyle Grieve: So that’s why Dino Polska, in my view, is. Price where it is. It’s just an incredible business that can keep reinvesting their profits for quite a long period of time, and they probably are still going to earn the same returns on invested capital. Yeah, I hope that’s helpful. 

[00:56:14] Clay Finck: Yeah. And another thing that you mentioned there that’s really interesting is each company has its own life cycle.

[00:56:22] Clay Finck: So when a company is in its first few years of operations, they found their niche. They found what they can do differently and what sort of value they can provide. They have a small part. of a large market generally. In a case where they found a formula that works and they can, they have something they could copy and paste time and time again.

[00:56:40] Clay Finck: I’m reminded I just picked up William’s book this morning and I was reading through Will Danoff. I believe his name was, he was at Fidelity and he has a very good track record. He interviewed Howard Schultz. One week before they went public, Starbucks, and they had, I believe it was 192 stores and Will Danoff saw that it cost 250, 000 to build a Starbucks location.

[00:57:03] Clay Finck: And then in year three, that store would earn 150, 000 in profits. So that’s 60%. Return in year three. And then hopefully that’s stable over time and competitors don’t come in and eat their lunch, but 192 stores. And, there’s hundreds of thousands, if not millions of coffee shops globally that they could try and steal some share from.

[00:57:23] Clay Finck: And that’s a case where it’s very early on in 1992 is the year it was when they went public. I think for you and me, we want to find companies that are earlier on in their cycle. There’s enough history to where we can see The formula works. It’s predictable. We have a sense of management knowing what they’re doing and the market opportunity that’s there, but say, there’s someone that’s listening to the show and they have a nest egg that they need to protect.

[00:57:49] Clay Finck: And they’re in their sixties or seventies or whatnot, then they might want companies that are later in their life cycle. where they can start collecting dividends from companies and they don’t need a lot of growth. And obviously there’s execution risk in terms of going and continuing to build and expand the business.

[00:58:05] Clay Finck: So I think there’s an alignment of as an investor matures and ages. The companies, they’re looking for changes as well, and that’s totally okay. And obviously there is some execution risk with a company like Dino Polska that, over time we’re hoping eventually they will double the size of their business.

[00:58:22] Clay Finck: And that’s not gonna be easy. No, I don’t care who you are. And Technion as well, they’re gonna have. to learn a lot of new things and grow and expand their operations. And yeah. 

[00:58:32] Kyle Grieve: And that’s perfectly fine. You don’t have to if you’re someone who’s averse to risk or is someone who’s going to be in need of your money in a very short period of time then your investing strategy is going to be a lot different probably than Clay and I, cause we still have probably decades until.

[00:58:45] Kyle Grieve: We’re gonna use our money. And that’s perfectly fine. You don’t have to get into everything. Definitely make sure you know where you are in your life cycle and how soon you’re gonna need the money. ’cause if you need the money really soon, then it might make sense to have a large portion of your investments in bonds.

[00:58:58] Kyle Grieve: ’cause they tend to be very reliable and don’t go down very much. But not something that interests me. 

[00:59:04] Clay Finck: What’s also interesting with regards to stocks is so many people. talk about the statistics that show that it’s very unlikely that a retail investor is going to beat the market.

[00:59:14] Clay Finck: And obviously I’m somewhat biased because I’m a stock picker, just like you. And maybe I’m way overconfident in my abilities to, to do well in the markets, but I’m led to believe that individual investors actually have some edges.

[00:59:35] Clay Finck: to share some of the things I’ve found in the research on why I should be picking stocks? Why not just park it in an index and just call it a day? So the first one I wanted to mention here is that I think the biggest edge that individual investors can harness is patience. It sounds so simple that it just can’t be true, but I truly believe it’s the case.

[00:59:56] Clay Finck: And Bill Miller, he’s well known for saying that there are three edges an investor can have. That’s informational, analytical, and behavioral. So in terms of information, everyone nowadays has access. That the company’s filings and the internet made that accessible to everyone. So Ben Graham might be able to have an informational edge, but I don’t think I’m going to ever have one.

[01:00:16] Clay Finck: The second one is analytical. So I don’t believe I necessarily have an analytical edge. There’s a lot of people out there that are a lot smarter than me and a lot of people that build complex programs that I’ll never be able to understand. So that leaves us with behavioral problems. So there’s plenty of data out there.

[01:00:34] Clay Finck: that shows that the average holding period of stocks continues to decline. And one of the more recent studies is in the 1970s. The average holding period was five years. And in 2023, it was just 10 months. So the average participant is holding a stock for 10 months. And I generally think that humans are really just biologically hardwired.

[01:00:58] Clay Finck: The American Savannah like you don’t care about the compounding that can happen 20 years down the line, you’re just wanting to figure out where your next meal is going to come from. And I’m led to believe that most Barkup participants aren’t willing to look out five years or more. And holding a great business that might have a PE that’s optically high.

[01:01:16] Clay Finck: So I’m also happy to see meta stock recently cross 450. And that’s not because I own shares, but I think it’s a perfect example of the market largely being inefficient. So in less than 18 months, this stock is up over 400 percent and I’m nearly 100 percent confident that the fundamentals of this business have not changed by that much in that short period of time.

[01:01:41] Clay Finck: And then the second point I wanted to mention here is the Gotham Bates book. It just really influenced me and led me to believe that quality companies have the potential to be underappreciated by the market. The best businesses tend to have earnings surprises on the upside. It’s quite funny where as value investors, we’re taught to have like conservative assumptions and that can keep a lot of people out of quality businesses because they’re conservatively doing 10 percent growth rates for Three years and maybe not willing to look out further when in reality the business has consistently grown at over 20% a year and you just never buy it because you don’t realize the quality that’s there.

[01:02:18] Clay Finck: And then investors also just underestimate the duration of how long a quality business can grow. So the difficult part with this is that it takes time to realize whether you were right in your initial assessment. So you might buy a business. Today in 2024, the stock price might not go anywhere for a few years and maybe the business continues to execute, but, it just takes time to recognize whether you made a mistake or whether you were right in your assessment.

[01:02:43] Clay Finck: So that’s really the difficult part with thinking long term and being patient. it might take years to recognize whether you’re any good at it or not. And the third point I wanted to mention here is not every business is as well covered as every other business. So many people pay close attention to the Magnificent Seven, but there are loads of quality businesses out there that 99.

[01:03:05] Clay Finck: 9 percent of investors have never heard of and don’t even know it exists. This really can create significant mispricings, and it’s funny, I mentioned the informational edge earlier, how, information available to everyone, that still doesn’t mean everyone’s looked at every single business out there, and there’s a lot of what we believe are great businesses that we’ve found and discussed with our mastermind community, where there’s little analyst coverage, Few institutions have probably looked at it.

[01:03:30] Clay Finck: You and I have talked about how we’re finding more opportunities internationally as of late. Internationally meaning outside the US at least. There are still great opportunities in the US, but there seems to be even more compelling opportunities for us in our view, at least when looking at these other markets on a risk adjusted basis.

[01:03:50] Clay Finck: It’ll take time to find out if we’re right or if the U S is still the place, a better place to look. And another example is smaller companies tend to be more illiquid, just because there’s so few market participants that move the price that can also create mispricings. And it also keeps a lot of institutions out from even investing in it, or again, even looking at it.

[01:04:10] Clay Finck: With that said, the beauty of index funds is that it still takes all the worry of even having to consider all these factors of company size, the country it’s in and whatnot. And, index funds allow anyone to harness the power of compounding and you don’t need to understand balance sheets and return on capital employed.

[01:04:27] Clay Finck: So again, like you mentioned, you can know next to nothing and still be able to harness it. 

[01:04:34] Kyle Grieve: I really think you nailed it with the three buckets on the edges that investors can have that were outlined by Bill Miller. So you had a recent interview with Scott Phillips of Templeton and Phillips Capital Management, and Scott was talking about these edges, and he said, quote, Am I going to go out and compete with a multi billion dollar hedge fund that has satellite imagery and unstructured data to get the edge on customer accounts at shopping malls in Walmart or oil fields or cargo?

[01:04:56] Kyle Grieve: You get the idea, unquote. So a retail investor with limited resources is there’s just no chance you’re going to be able to compete with a billion dollar hedge fund that has access to these types of information and analytical edges. But like you said, the behavioral department is where the individual investor really does have an edge.

[01:05:13] Kyle Grieve: So I’ve written about this. I call it the retail investors edge. And so I just wanted to share some key findings from what I wrote about it. So the first thing is. If you put yourself in the shoes of a professional investor, you have to understand there’s a whole bunch of different things that you have to worry about.

[01:05:27] Kyle Grieve: Whereas when you’re an individual investor, you don’t have to worry about it. You have to worry about your partners. You have to keep them happy. And so this usually means that you’re trying to basically match the index each quarter so that you can have similar results to other managements out there. So personally, I don’t care about that.

[01:05:43] Kyle Grieve: I don’t care. I might underperform sometimes, I might outperform, I might be the same. I don’t care. I’m looking out like Clay’s been mentioning a lot if we’re, we’re looking out 10, 20, 30, 30 years. So what happens in one quarter is completely irrelevant to me. So when you look at being an individual investor, You don’t have partners and it opens up a lot of strategies that institutions just simply can’t do.

[01:06:04] Kyle Grieve: So I’ll just list off a whole bunch of them here. So like I just said, you don’t have to track your performance on short term fluctuations of stock prices, prices go up and down. And a lot of times when they go down, I see it as an opportunity, whereas an institution might see that as I need to sell it.

[01:06:17] Kyle Grieve: You can look at The process. Your process is more important than your outcome. So whereas an institution might have to be worried about that outcome, I don’t, I can just make sure I have a process where over the long term, hopefully my outcome is going to be very good. And so I’m okay with short term losses, as I mentioned as well.

[01:06:33] Kyle Grieve: Another one is that you can use longer timeframes to make great investments. So maybe a company is going through some short term headwinds, but let’s say in the next year, they’re going to be out of those headwinds. You can buy these stocks, but if Wall Street thinks the stock price isn’t going to move, they’re not going to buy it.

[01:06:47] Kyle Grieve: They’re going to probably wait. So that gives the individual investor these huge advantages where it’s okay I’m going to buy the stock that’s gone down. Let’s say it’s gone down 50%. Maybe it goes down a little bit more. I’m going to hold it for five years. Whereas an institution might be like, okay, it’s at 50 percent it’s cheap, but it could go down another 10 percent this quarter and not provide any return for our partners.

[01:07:07] Kyle Grieve: So they’ll skip it. So another one is that you don’t need to try to time the market institutions, like I said, they want to try to match the market. And so if they think the market’s going to go down. they’re probably going to sell, which is not the right way to invest as we talk about all the time.

[01:07:21] Kyle Grieve: And if you read all the greats that, that, that’s not what you want to be doing. We as individual investors don’t have to fear short term losses and you should, in fact, live with them because if you’re a long term investor, you should understand that sometimes the market and the price will go down and as long as the fundamentals of your business are improving as you envisioned, then you’re good just holding onto it regardless of what happens with the stock price.

[01:07:44] Kyle Grieve: Another one is that you can buy anything in any industry or geography. So Clay already brought this up, we both look a lot outside of the United States. I still think the United States is probably the best market in the world, but. Everyone knows that it’s the best market in the world, right?

[01:07:56] Kyle Grieve: So that means that there’s a lot of investors looking at companies in the U. S. And because of that, the prices are simply high. Whereas if you look at other markets, there’s just prices that are not so high and a lot of very attractive opportunities and high quality businesses. And then, it also matters in the geography you’re looking at.

[01:08:11] Kyle Grieve: There might be even countries, whole countries that are unloved or that people don’t understand. So like Turkey, I know obviously. Monish Pabrai loves Turkey. I personally don’t understand Turkey at all, so I wouldn’t understand, I wouldn’t invest in it. If you have proficiency in other countries that other people don’t, that’s a huge edge that you can have.

[01:08:26] Kyle Grieve: Another edge that individual investors have that Clay also mentioned was market cap size. Let’s say you’re managing a billion dollars, are you going to buy a little nano cap that’s 20 million and has a 1 million float that, that’s not going to move the needle for you so that you’re not going to spend a second even thinking about investing in that business, even not nano caps, even like a small cap that’s 500 million, you’re probably still not going to spend much time on that.

[01:08:52] Kyle Grieve: Because of that, there’s not a lot of professional investors looking at a lot of these businesses that are smaller and a lot of them are really high quality. And that’s a huge advantage, especially when you’re an individual investor with, obviously, you probably don’t have a hundred million dollars to invest, you might just have a, whatever, a couple hundred thousand or a thousand dollars, whatever.

[01:09:09] Kyle Grieve: In that case, you can literally buy anything and that will move the needle for you. So you don’t have to worry about that and you don’t have to worry about liquidity as well. Another thing that individual investors can do is concentrate positions based on their conviction. So a lot of institutional investors have all sorts of restrictions that, for instance, the SEC will say, you can’t put more than, I don’t know, 5 percent into a position.

[01:09:30] Kyle Grieve: So for me, I have positions like Evolution that are 20%. And I have no problem with that. I sleep very well at night, but that’s an advantage for me because I think that it’s a position I have a lot of conviction in. And that’s something that institutions can’t do because if that were to go down a lot, they’d get in trouble with their partners, but they’d also get in trouble with the SEC.

[01:09:49] Kyle Grieve: And then lastly is that obviously as individual investors, we can live with a lot of volatility. I already hammered that point home, just because your portfolio is down doesn’t necessarily even mean you’re a bad investor. This kind of goes into the process over the outcome thing. You can have.

[01:10:02] Kyle Grieve: the best process in the world. And sometimes over the short term, the outcome won’t be what you want it to be. But if your process is really good over the long term, your outcome should be really good. And so you can take advantage of that by just shrugging off some of the short term losses that your portfolio makes, as long as you understand the businesses that you have in them.

[01:10:19] Clay Finck: I have a few points I’d like to add here. So I was on a call with a new member of our mastermind community and he manages a family office. I asked him if he managed other people’s money, friends or any other partners. And he said, no, it’s just a family’s money. And he mentioned one of the advantages of that is permanent capital.

[01:10:40] Clay Finck: It reminds me of Bill Miller and I don’t know the exact numbers, but the great financial crisis was a very tough time for him. And part of the reason for that was not only was his portfolio dropping like crazy because he had a heavy allocation to Amazon and the overall market was just getting hammered, but investors were just pulling their money out of the fund.

[01:10:59] Clay Finck: at the exact wrong time. At the end of the day, he really couldn’t control it. Obviously he let them invest in the first place. And Nick Sleep has talked about being careful who you partner with and ensure. I think sleep has people sign off that they should be investing for at least the next five years.

[01:11:15] Clay Finck: And it’s quite an interesting dynamic because you and I, Kyle, like when our portfolios go down, no one’s calling us trying to get us to sell our positions. As we earn income from what we do, hopefully we’re taking some of those free cash flows and buying better bargains when they’re at great prices.

[01:11:31] Clay Finck: And I was on a call with Chris Mayer for an interview the other day, and he mentioned to me that his funds closed. He’s mentioned multiple times that when his portfolio goes down he has a lot of investors calling him adding money so he can go and buy. That’s the ideal situation for a fund manager.

[01:11:47] Clay Finck: And it also creates this sort of paradox where if you’re a really good investment manager and you have a track record of outperforming. Naturally, just due to incentives, like naturally you’re going to bring on more investors and your funds are going to grow. It’s going to grow from 10 million to 100 million to likely much larger.

[01:12:05] Clay Finck: As long as you continue to do really well. Size becomes sort of a disadvantage where Chris, for example, isn’t invested in a company that’s sub 1 billion. And once he gets to a certain size, companies with less than a billion dollars, he just can’t really touch either just due to liquidity issues.

[01:12:22] Clay Finck: Or just isn’t going to move the needle. It might be a, even if he makes it a 1 percent position, it’s just not really going to be worth the time for him in the way he manages a fund. So there’s all these interesting aspects at play of how these incentives within how people manage funds and the downstream effects of bargains, where those bargains are to be found.

[01:12:43] Clay Finck: And again, once you’re aware of all these Inefficiencies of how money flows within different capital markets. You and I have a chance to hopefully capitalize on those. 

[01:12:54] Kyle Grieve: And there’s so much to do with how institutional money works that I’ve been learning a lot now. And it’s a really interesting realm to try to educate yourself on.

[01:13:03] Clay Finck: Before we wrap it up here, Kyle, I know you’ve read a ton. of investing books. And I know there’s a lot of people in our audience who are readers and they’re always looking for new books to read. And you found one that’s probably going to be one of the best reads for me this year. What I learned about investing from Darwin by Pulak. You can mention a few of some of the most impactful books that helped you develop as an investor and maybe one or two of the high level takeaways that you learned from reading them.

[01:13:32] Kyle Grieve: Yeah, absolutely. So the first one is probably one that’s going to surprise a lot of people and that’s Invested by Phil and Danielle Town. And the reason I think this book is so good, if you’ve been investing for 10 years, yeah, probably it’s not the best, but as an introduction to investing it’s hard to find a book.

[01:13:47] Kyle Grieve: I think that’s better just because it does such a good job of. Making investing really simple and covering the whole gamut of what you need to know in a very simplified way. So personally, it’s funny because he has a couple evaluation methods that he uses to evaluate, but I still use them to this day.

[01:14:04] Kyle Grieve: I still, they’re all really simple and I love simplicity. So that’s probably one of my biggest takeaways. And then you know, he talks a lot about motes and just simplifying what they are, what they mean and labeling them, which was really helpful. So if you’re a lot newer to investing, I think invest is a great book.

[01:14:21] Kyle Grieve: I’m lucky. That was honestly, I think it was like maybe the second or third book I read about investing back in 2020 when I really started getting interested in it. I still refer to it because it has some really good points and it’s really simple. So Highly recommend that, especially if you’re newer, then probably the one that has the most impact on me was the most important thing by Howard Marks.

[01:14:40] Kyle Grieve: There’s a lot of things that I learned from this, but I really think it’s probably the best book on risk in relation to investing that I’ve read. He does such a good job of showing you how market cycles work and where risk is off and where risk is on inside of that market cycle.

[01:14:57] Kyle Grieve: And it’s really important, I think, to understand that one thing I really like to do is when the markets are up and everyone’s euphoric and maybe me too, I’m happy as I’ll go back and look at risk and read about, he talks about things that happened in the great financial crisis and the tech bubble, just to get a reminder that, when everyone’s really happy is the time when you actually should.

[01:15:15] Kyle Grieve: start being scared because that usually means that the cycle is going to turn. Who knows when? Again, he makes a really good point that you shouldn’t be trying to try to time the cycles, but you should understand where you are in them. So I think that was really important. And then another book.

[01:15:31] Kyle Grieve: that had a really big impact on me was the Warren Buffett portfolio by Robert Hagstrom. That one, man, like I learned a lot about how I invest now, which was, things to do with conviction, concentrating your portfolio, being long term oriented. He uses tons and tons of different case studies from investors that everyone knows, such as Warren Buffett, of course, and Charlie Munger, John Maynard Keynes.

[01:15:51] Kyle Grieve: And all sorts of just really concentrated investors who had these really good track records and talked about the similarities in their strategies and how it works. And another thing also that I really liked was that he talked about being long term oriented in that book, and especially how if you’re long term oriented, you don’t necessarily have to look at the stock prices.

[01:16:08] Kyle Grieve: to determine how good you’re doing. So he talks a little bit about Buffett and look through earnings and how Buffett, he doesn’t, I don’t think he’s talked about it for quite a long time, but he has in his, in previous letters and, that’s a really good way of just measuring your performance without even necessarily having a ticket price.

[01:16:23] Kyle Grieve: You just, for instance, you can look at, add up the EPS of the businesses that you have and look at how that goes up over time. And that, that’s just a really easy way. Cause if your businesses are all growing at 15 percent per year, then generally speaking, your portfolio should probably grow at about 15%.

[01:16:37] Kyle Grieve: Obviously it won’t because the stock market is fickle and over the short term it likes things and it hates other things. But the point being that if you want to be long term oriented using metrics that maybe don’t have to do with stock price are really smart ideas to track your own performance.

[01:16:50] Kyle Grieve: So yeah, those are three books that definitely had a lot of impact on me. Obviously we could spend a lot of time digging into it. Specific things in there, but yeah, those were the three for me. 

[01:17:00] Clay Finck: Alright. I’ll be sure to get all three of those linked in the show notes. I’ll also add a couple comments on the invested one for anyone in the audience that’s like.

[01:17:09] Clay Finck: Pretty new to investing or they don’t really know where to start. I think one of the most important things is to just find the right resources to help get you going because so much of the learning comes in that early part of the phase. And now Kyle, when you and I read an investing book, we’re just happy to get just a few insights that we add to our investing toolkit.

[01:17:29] Clay Finck: But initially it’s just like information overload and when you find the right book, it can just be immensely helpful. So I’m glad you mentioned Invested by Phil and Danielle Town. And then regarding the Warren Buffett portfolio, you talked about looking through earnings and looking at the business performance rather than the stock performance.

[01:17:47] Clay Finck: And I’m reminded of 2022. I just chatted about this with Chris Mayer, where that was a year where many great businesses, it was really just business as usual. They continue to increase earnings. They continue to reinvest. They continue to do what they’ve always done, but there’s so much noise.

[01:18:03] Clay Finck: Markets overall went down, so a lot of these share prices went down. But if you just, I’m also reminded of Chris Mayer’s book a hundred Bagger. If you look at Monster Beverage, if you just look at their financials and that’s all you knew about the business, you probably never would’ve sold that stock because earnings just went up year after year.

[01:18:20] Clay Finck: And no, any of the noise you took in would’ve just been detrimental to. Potentially trimming your position or selling when the share price is down and such, but I don’t want to keep you too long here. Kyle, really appreciate you joining me and that wraps up our discussion on stock market basics and financial independence.

[01:18:37] Clay Finck: We’re actually going to be releasing a second episode here in a couple days on Saturday, March 9th. We’re going to be talking about what we’ve learned about investing in stocks over the years and some of the mistakes we’ve made and hopefully We can share some of those mistakes and you can learn from them and not make the same mistakes we did.

[01:18:54] Clay Finck: Be sure to follow the show and get notified of our episode’s next release. And Kyle, thanks so much for recording with me. It’s always a pleasure to have a chance to connect on the show. 

[01:19:00] Kyle Grieve: Had a blast.

[01:22:12] Clay Finck: All right. So as promised, I wanted to include some announcements related to our TIP mastermind community.

We’ve been quite surprised by the level of interest in such a community. And after launching the group in April of 2023, we’ve had an amazing inflow of high quality members, and we’re soon going to be capping the group at 150. For those not familiar, the TIP mastermind community is our paid community to network with like minded value investors.

One member described the group as a place to surround yourself with high frequency people, and I just absolutely loved that. We have weekly live Zoom calls to talk about various topics from the stock market to life. We also bring in special guests every month. Previous guests we’ve had with the group include Pulak Prasad, Chris Mayer, Gautam Bade, and Ian Castle.

We have an online forum to connect with others, get to know each other, and share ideas. And we have two live events each year, the first one being in Omaha in May during the Berkshire weekend, and the second being in the fall in New York City. Another cool thing about the community is that after you join, it only gets better and better over time as we attract to the right members, continue to share new ideas, and build a growing library of content as we record all of our calls, which is now over 55 videos.

We’ve recently decided to double down on our mastermind community as well. My co host, Kyle Grieve, will be spending more time with the group, and we’re going to be a bit more stringent on the type of people we allow to join in, and we’re working to have one more very special member of the TIP team get more involved, but more details are to come on that front.

Some of the upcoming Zoom events we have planned over the next month include a Q& A with Brett Kelly, the founder and CEO of Kelly Partners Group, A stock presentation on TextSA by one of our members, a book club discussion on Nassim Taleb’s book, Fooled by Randomness, and a social hour discussing new stock ideas and what we’re seeing in the markets.

We’ve also recently hiked the price due to the demand we’ve seen. I’ll also mention that we’d love to have more members that come from the investment industry. So if this is you, remember that we even have members that have their employers pay for their membership because of the value it adds to the work they do to apply to join the community.

You can go to the investors podcast.com/mastermind or simply click the link in the show notes. That’s the investors podcast.com/mastermind. So if you’re interested in joining, I encourage you to not wait because we’re going to be capping the group at 150 members and not go above that amount. Hope to see you there.

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