Robert Leonard (00:01:55):

Just a few weeks back I had the pleasure of chatting with Nick Maggiulli about his new book, similar to what we’re doing today. And I have to say, both of your book titles are very good and hit two very common topics. His is to Just Keep Buying, and yours is, Why Does The Stock Market Go Up? These are two very common topics or questions that people have. And the subtitle for your book says, it teaches the reader everything they should have been taught about investing in school, but weren’t. Why do you believe these money and investing topics aren’t taught in school?

Brian Feroldi (00:02:28):

Yeah, so let me just say that I’m a big fan of Nick, him and I are friends and I got an early copy of his book and I just loved it too. So wonderful to see that you read it as well. To answer your question, like many people, I was taught absolutely nothing about money or investing in school. And I include in there when I went to college, I graduated with a degree in business. And think about what that says that I focused on business. And yes, I was taught things like legal, structures. I was taught about accounting. I was talking about marketing, but I never was offered a class on stocks, investing and savings, any of the really important topics that are foundational to doing well with money over time and building wealth. So if I wasn’t taught those things as a business major, what chances people have, even if they’re like an engineering degree or physical therapy degree or whatever it is.

Brian Feroldi (00:03:20):

And I don’t have a good answer to why they’re not taught in schools. I don’t think it’s anything nefarious going on. I don’t think there’s like some conspiracy to keep people from knowing these things. But when you look at the education system as it exists today, I think that a lot of the people that should be teaching these classes, the teachers themselves aren’t necessarily taught themselves about the key money principles, about savings and investing. So, how can they then teach their students if one, it’s not a requirement, but they themselves are also lacking the information? So it’s a real big problem that I think needs to change. And thankfully, we are seeing science of it changing. I saw last week that Florida, the State of Florida, for example, recently put in a new requirement that you had to take a class on personal finance in order to graduate from high school. That’s wonderful. And let’s just cross our fingers that that eventually spreads its way across the rest of the United States and the rest of the world. But it’s a huge piece of education that we are just failing to deliver to students.

Robert Leonard (00:04:15):

I think that piece about the teachers not knowing it either, that’s my number one kind of thought in terms of why it doesn’t exist. And the second thing is, teachers are applying for jobs for certain topics. And if the schools don’t offer a class on personal finance or investing, well, the teacher can’t teach it. They’re applying for a math job or a science job or whatever teaching job that it is. And if there’s no personal finance or investing, they’re not going to just start talking about this in Biology 101. So, the school has to have the structure in place in order for the teacher to even teach it.

Robert Leonard (00:04:43):

And the other piece that’s interesting is, I was a finance major in college, and I did take a bit about investing. They didn’t talk anything about personal finance, but what’s interesting, when you do get taught some of the investing stuff in school is a lot of times it’s really academic and it’s very different then what actually happens in practice. So that stuff taught in school is very theoretical, but if you spent any time studying anything outside of that, you know that in practice it’s very different. And so for me, I had a really hard time with it because I had already spent five, six, seven years studying Warren Buffet prior to taking these investments classes in college. And I just, I couldn’t agree with what the teacher was teaching me.

Brian Feroldi (00:05:16):

I had a very similar experience. I went back and got an MBA about more than 10 years after I graduated from college. And during that time I’ve been studying the stock market. I’ve read so many books about investing right. It’s just a topic that deeply interested me, and I just learned everything I can about investing. Like you, when I went back and got my MBA, I was required to take these kind of esoteric classes on investing and statistics. And it was like the things that were taught to me at the time were academically accurate, but I was like, “This in no way will help me make money in the real world.” I mean, just the study of beta, for example, and beta as being a shortcut for what investing risk is. I heard it said that, I think Charlie Munger said, he’s like, “The reason they teach about beta in school is because it’s something you can calculate and it’s easy to put on a test.”

Brian Feroldi (00:06:01):

When you think about what really matters in the real world about doing well with your money, 90% of it is psychology, right? 90% of it is like having the right mindset to invest well. So to me, I think a great college class would just be studying Morgan Housel’s book, The Psychology of Money, and talking about all the pitfalls that you can make it as an investor.

Robert Leonard (00:06:19):

It’s hard to test on that stuff though. You can’t make a 50 question exam on Morgan Housel or your book either, it’s tough. When I started reading your book, this is a little bit of an odd thing, but I was actually very pleasantly surprised to see how many chapters were in it and how short that they were. My personal preference when I’m reading a book is that I want more chapters that are shorter, rather than fewer chapters that are much longer. Because you made more chapters, each one really dives into one main concept. The chapter three talks all about why stocks have value. And I think too often newer investors or even experienced investors who are getting caught up in the exuberance of the greatest bull market in U.S. stock history forgets that stocks are not just blips on a screen. Why do stocks actually have value after all?

Brian Feroldi (00:07:04):

Well, I’m glad that you enjoyed the makeup of the book. To your point, I hate reading dense books that are really hard to read. And one of my favorite fiction books to read is Dan Brown, who wrote like the Da Vinci Code and Angels and Demons. One of my favorite thing about those books, all the chapters are two, three, four pages long. So when I was writing the book I tried my best to make each chapter as short as possible, make the point and get on so it makes you feel like you’re making progress with it.

Brian Feroldi (00:07:28):

But I think the question you just ask is so foundational, why do stocks have value? We see the prices on a screen. We know that they go up and down, but where do they derive their value from? Before we can talk about that, let’s just step back and say, “What is a stock? What are these things that are being traded electronically every day?” So a stock is just a handy record keeping tool that we invented so that we can figure out how much an investor owns in a corporation. People invest different amounts of money. They invest different time periods. They invest at different prices, and stocks are just a really easy way for figuring out how much of a corporation each individual investor owns. So when you are buying a share of stock, you are in a very literal way becoming a part owner of that business.

Brian Feroldi (00:08:12):

So why do businesses have value? Why is Apple worth a couple trillion dollars today, and if I started a business tomorrow would be worth zero or close to zero. Well, when you become a part owner of a business, when you become a shareholder, you have a legal claim. You’re buying a legal claim on that company’s assets, what it owns, and that company’s current and future profitability. So when you’re buying a position in a stock, you are buying that company’s future earning streams, as well as its current assets. That’s where the value of a company is derived from.

Brian Feroldi (00:08:45):

Let’s just do a real quick example so we can see this in action. Let’s say you and I, Robert start a really simple business selling say candy. It costs us $100,000 to get up and running. You put in 50K, I put in 50K, and to make things easy on ourselves, we price our stock at $1 per share. So we each own 50,000 shares. Well, our business is of course remarkably successful. In our first year in operations we make a profit of $100,000. Well, who owns that profit? Well, the answer is the company is the one that created the profit. But we as owners of that business have a legal claim on that profit.

Brian Feroldi (00:09:19):

So let’s say we have $100,000 and there’s a 100,000 shares outstanding. That equals $1 in earnings per share. Well, you and I are thrilled with our success. At least say, “Well, let’s take that money that’s in the business and give it to ourselves. Let’s pay it to ourselves as a dividend.” So for each share that we own, we extract that $100,000 for the business, we pay it to ourselves. So we just pay ourselves $1 per share. Since we each owned 50,000 shares, both of us got a check for $50,000 from owning this business for one year. Well, ask yourself, if you didn’t own shares in our company, would you want to? Would you on to own this thing that just paid us a dollar per share in earnings? I hope the answer is yes, this thing is making us money. So that is why stocks have value. You’re buying a company’s current and future profit streams. And as if those profits appear, and if those profits grow, that’s where stocks derive their value from.

Robert Leonard (00:10:17):

Why do you think this is so often forgotten?

Brian Feroldi (00:10:20):

I think it’s so often forgotten, one, because we’re never taught anything about that. Two, I think Jack Bogle said it best. He said, “The stock market is a giant distraction from the business of investing.” If you buy an iPhone, there’s an app on there that comes by default called the Stocks app. If you just open that, if you just click on that, what’s the thing you see? Prices, you see stock prices, right? You see Apple, you see Google, you see Microsoft, you see the biggest companies in the world. You see a number, which is the current dollar price of that stock. And you also see it going up and down. Now, if you were like me growing up, you were taught nothing about what that is, what it represents, why stock prices change all the time.

Brian Feroldi (00:10:57):

So you just think of it as so many people equate investing or investing in the stock market to gambling, because they think you’re supposed to buy low. You’re supposed to sell high. And it’s really just a matter of luck over the short term whether you make money on a stock or lose money on a stock. So I think it’s very natural for people to look at that, get that firsthand experience and just think that investing is pure luck. Because when you’re just looking at stock prices, you’re not at all paying attention to the underlying business. So that’s something that requires further education on the investor’s part to even understand.

Robert Leonard (00:11:27):

When you take all of these companies that you mentioned that you can buy stock in and you put them into it together, they often create what’s called an index. And three of the most popular ones are the S&P 500, Dow Jones Industrial Average and the NASDAQ. And these terms or concepts are thrown around in the investing world a lot. If you turn on financial news, you’ll see it pretty much anywhere. You go to any financial website, they’re pretty much everywhere. But they’re not really often explained in detail. I think it’s just assume that everybody knows what they are, but as we’ve already learned in the first 10, 12 minutes of this episode, that’s not the case. So break down for us what each of these are and then how they differ from each other?

Brian Feroldi (00:12:02):

Yeah, I can’t tell you how many times in the first 25 years of my life I’d heard that term Dow Jones Industrial Average. And it was like, it was said as if everybody knows what that means and what that is. And while I didn’t know what it was, I did know that it’s good news when it goes up, and it’s bad news when it goes down. But I couldn’t tell you anything beyond that. However, once you understand the history of the Dow Jones Industrial Average, how it came to be, same with the S&P 500 and the NASDAQ Composite, it just makes so much sense what these things are, why people pay attention to them, and why they exist.

Brian Feroldi (00:12:38):

So rewind the clock to 1896, so 1896. Just like today, back then there were publicly traded companies. Most of them at the time were railroad companies, industrial companies, chemical companies, et cetera, banks. These companies were publicly traded. And the Wall Street Journal at the time every day would print out stock prices. And that was the primary way that information about stocks and stocks was disseminated to the general public. A guy named Charles Dow was the editor at the Wall Street Journal at the time. And he was printing these tables of information. And he had a problem, he wanted to come up with a way that he could summarize for his readers what happened in the stock market that day. There was no way to do that because you just, it was this big table of stocks. Some were up, somewhere down, and there was no way for him to communicate to his readers, “Here’s what happened in the market.”

Brian Feroldi (00:13:31):

So he went to his business associate, his name was Edward Jones, for advice. And what the two of them came up with was they added up the share price of the 12 largest industrial companies of the day. And then they divided the total that they got by 12. Now, what’s it called when you add up a whole bunch of numbers and then divide by the numbers, that’s called averaging, right? That’s a very simple term. So they named their invention the Dow Jones Industrial Average, and they started reporting this in 1896. Suddenly they had a figure that changed day by day, and they could summarize easily for their readers what happened in the stock market broadly the day before. They were just looking at these 12 companies and that represented, that gave them something that they could reference to communicate what happened to the stock market broadly.

Brian Feroldi (00:14:19):

Now, over time the Dow Jones Industrial Average caught on with investors, and a big change was made to it in 1928. It went from just averaging 12 stock prices to 30 stock prices. And over the last 100 years some of the companies that are in there have merged or gone out of business or faded away into obscurity. And every few years a committee gets together and picks new companies to replace older fading away companies. So if you look at the Dow Jones Industrial Average today, it has companies like Apple and Disney and Home Depot in there. And we now have this price that’s been reported for over 125 years. And it’s become an incredibly and easy way for investors to get a sense of what happened with the stock market.

Brian Feroldi (00:15:02):

Now, we live in a capitalistic society. So in 1923 a competing company of the Dow called Standard Statistics, they made their own stock market index. And rather than using just 30 companies like the Dow, they decided to use 233 companies. Now this company Standard Statistics later merged with another company called Poor’s Publishing. And in 1957 they upgraded their index even further to have 500 companies. That’s the origin of the Standard & Poor’s or S&P 500.

Brian Feroldi (00:15:35):

And they stood out from the Dow in two important ways. First off, they have 500 components in there, the Dow only has 30. So there’s an argument that by having 500 companies in there, you get a broader view of what’s happening in the stock market than just looking at 30 companies. The second and the most important way that it’s different is the Standard & Poor’s weighs each component in its index by market capitalization. Market capitalization is a rough proxy for the size, the total dollar value of a company’s equity. So the larger a company, the higher the weighting, the smaller the company, the lower the weighting. That’s not true of the Dow. The Dow only looks at the dollar share price of one share of stock. So in a Dow, a stock that trades at a $100 per share will have 10 times the weighting of one that trades for $10 per share.

Brian Feroldi (00:16:24):

So that’s the Dow and the S&P 500. The final one is the NASDAQ. The NASDAQ was started in 1971, and the NASDAQ stands for the National Association of Securities Dealers, that’s an organization, Automated Quotations. So in 1971 computer technology had come along far enough that they started a stock exchange, a way to buy and sell securities, that existed solely on computers. Doing so made it so much easier investors to get accurate pricing information instantaneously. Prior to that, it was really hard for investors to get up-to-date pricing information, just because communication technology wasn’t advanced enough.

Brian Feroldi (00:17:03):

So they launched the NASDAQ as it’s called, N-A-S-D-A-Q in 1971, which is the world’s first computer stock exchange. And every company that listed on the NASDAQ was included in what’s called the NASDAQ Composite, which is just a grouping of companies that come together to report a price so that investors can get an idea of what the average stock trading on the NASDAQ did that day. So that’s the origin and why we have these three market indexes that are referenced so often in the media.

Robert Leonard (00:17:32):

That was such a great breakdown of the background. I personally know the ins and outs of these indexes and how they work and kind of the structural piece of it. But I had never actually heard of the origin story. So all of that you pretty much just explained was new to me. So that was actually really, really cool for me to hear. And I’m sure the audience is going to love it too. When I have spoken to new investors, even those in my own family, a lot of times in my own family when I mention that a company is publicly traded, they often have a puzzled look on their face because they aren’t sure what exactly it means to be public, or really what I’m talking about when I say that.

Robert Leonard (00:18:06):

And everything we’ve talked about so far today has been about public companies, except for our candy store. And so the one thing about our example is that if somebody wanted to buy stock in our candy store, they would have to come to us and we’d have to sell them shares of ours, because it’s not publicly traded, whereas all the other companies that we’ve talked about, and even the indexes, it’s all public. So, break down for us what it means to be a publicly traded company and how it differs from being a private company like our candy store?

Brian Feroldi (00:18:32):

So all corporations, whether you’re public or private are owned by their shareholders. So, if you are a private company, you have shareholders. And as those shares to your point, if you want to invest in a private company, you have to know people at the company, like the management team, the board to directors to make an investment and oftentimes you can’t do that. But when companies are started and they’re looking for venture capital, for example, those venture capitalists are buying equity in those companies and they’re buying shares of those companies. So, that was something that confused me. I thought that only publicly traded companies had a stock, but nope, every corporation has stock and it doesn’t matter, or if’s public or private.

Brian Feroldi (00:19:11):

But let’s talk with why does a company go from being a private company to being a public company? There’s many reasons why companies will take their stock and list it on a public exchange that the investors can’t buy and sell it as we can with Apple, Google, Microsoft, and et cetera today. The number one reason why companies do that is because when companies come public, it’s typically a capital raising event. So when a company is young and growing rapidly, it’s very common for that company to need capital in order to continue to grow. I think back to the ’90s when Amazon was founded by Jeff Bezos. Amazon was growing like crazy, and they needed money to inventory, to build the website. They needed to hire engineers and accountants and lawyers and HR people. They needed buildings to put them in. They needed to build their warehouses across the globe. They just needed a huge amount of capital in order to scale up the company.

Brian Feroldi (00:20:06):

So one ray that they raised that capital was Amazon created brand new shares of stock that didn’t exist before. And it sold them to the public by listing its stock on a public exchange. Now, the most common way that companies come public is through an initial public offering or an IPO. So, when this went through investment bankers priced Amazon stock, they took that stock they gave it to the investors in the company. The investors in that company gave Amazon the company hundreds of millions of dollars and Amazon could then invest that money in order to grow. So that is the number one reasons that companies come public. It’s a liquidity event. It’s a capital raising event. Companies need public and need capital and one way that they can get it is by coming public. So that’s by far the number one reasons why companies come public.

Brian Feroldi (00:20:50):

Another reason why companies come public is it’s a marketing event. Companies get a certain amount of cache around them for being publicly traded. They’re just in the public eye a heck of a lot more when they’re publicly traded than when you’re privately traded. A few years ago a company called [inaudible 00:21:05] came public. And if you look at that company’s financials, they weren’t desperately in need of capital. They raised plenty in the private markets, but when they came public, they were looking to grow within the commercial sector. And I think one reason that they came public was to get their name out there with companies that could be their potential customers. So that’s another reason why companies come public.

Brian Feroldi (00:21:25):

A third reason companies come public is to give liquidity to their existing shareholders. So, let’s go back to our business. So we have these shares in our company and our company’s doing well, but let’s say we wanted to liquidate. Let’s say we wanted to sell our position in a company. How would we do that? We would have to go out, find somebody that would be interested in buying our stock, and then we’d have to do a one-off transaction with them. That would be, take a very long time to do. There’s no guarantee that I would get a good price on it, et cetera.

Brian Feroldi (00:21:53):

Well, the same problem exists for private companies today. If their employees or their management team want to sell their stock, it’s often very hard for them to unload that stock to somebody else. By becoming a public company there’s a liquid market for your company stock and you can buy and sell that stock very, very easily. And this is especially true for venture capitalists. When a venture capitalist makes an investment in a company, they typically put their money in that company for a period of say three or five years. And at the end of that period, they want to realize the return on their investment. So if a company stays private, it’s really hard for them to get their money out. But if they become public, it’s very easy for them to do so. So, that’s why companies go from being privately held to publicly traded. There’s several reasons, but by far the number one is because they want capital.

Robert Leonard (00:22:42):

A very interesting concept or idea that we haven’t ever talked about on the show, and one that was honestly even confusing for me back when I first started studying investing is this idea of where the money goes when you invest. You log into Fidelity, you log into Vanguard, Schwab, Robinhood, whatever it is. And you say, “Okay, I want to buy Apple stock.” Where does that money go? I just assumed when I was a beginner investor, I think a lot of beginner investors do, is that the money goes to the company. I mean, you just told me, when a company goes public, they get all the money. Well, it’s a little bit different when you’re actually buying stock nowadays once they’ve been past the IPO period. So talk to us a little bit about where do investors money actually go when they buy a stock, and how does that process work?

Brian Feroldi (00:23:25):

Yeah, that’s very confusing. You see Apple, a Google or Tesla and you’re like, “Oh, if I buy that stock, that benefits the company. The company gets the stock.” Well, in truth 99.999% of the time, if you’re buying a company’s stock, that company in no way gets the capital that you are using to buy that stock. When you’re buying a stock in a company on a public exchange such as the New York Stock Exchange or the NASDAQ, et cetera, 99.9% of the time you’re buying that stock not from the company itself, but from another investor that owns shares in that company. So if I logged it by broker today and place to buy order for Tesla, for example, the money that I invested in Tesla wouldn’t be going to Tesla. It would be going to the investor on the other side of that transaction that currently owns Tesla stock, but doesn’t want to own it anymore. And I give him the money, he or she gives me the shares of Tesla. So, that’s what happens 99% of the time.

Brian Feroldi (00:24:23):

The only exceptions to that rule are when a company is creating brand new shares of stock and selling that on a public exchange. So if you’re investing in a company at the IPO, and literally at the IPO you’re buying those initial shares as soon as they are created, in that case you are giving your money to the company itself. The other time that you could be giving capital directly to the company is if the company does a secondary, what’s called a secondary stock offering. So once a company is publicly traded, they see their stock price going up and down, they can do what’s called a secondary offering. So they can create even more shares of stock in their company and sell that onto the public markets. Doing so gives them another to ready to raise capital from investors. But unless you are buying specifically at the IPO, or specifically during a secondary offering, your capital is not going back to the company itself, it’s going to another investor.

Robert Leonard (00:25:20):

So after I was confused about how that work, I learned about it, just like you explained. But then I said, “Why do companies care about stock price then?” I mean, they already got all their money, their IPO, they got their $100 million and now the shares are at $10 a piece. They already have their 100 million, why do they care if their stock goes from $10 to $5 or $2 or a dollar or a penny stock? Why does it matter to the company what their share price is, and why do they focus so much on it?

Brian Feroldi (00:25:44):

Well, if a company raises capital and never wants to raise capital from investors again, their share price doesn’t directly impact the company much at all. However, why is there a CEO of a company? That CEO, that management’s team job is to increase the value of that company over time. And one way that they can do so is by raising their revenue, enhancing their margins, growing their profits, etc. in an effort to make the business more valuable. And that in turn should lead to a higher stock price.

Brian Feroldi (00:26:13):

Now, what happens if that doesn’t happen? What happens if the management team is doing a bad job or market conditions are going in the wrong direction? Well, the investors in that company, the people that bought that stock from this company, are going to have a loss on their investment. And that does not make them happy, right? Nobody likes to invest in a company only to see the value of that company go down. If that stock stayed down for a long enough period of time or the owners of that company, the investors as a group felt that the management team was doing a bad job, they have some impact over who is running the company. The shareholders of that company elect the board of directors to that business. And the board in turn is the boss of the CEO of the company.

Brian Feroldi (00:26:52):

So if shareholders got together and said, “We’re not happy with how this company is doing,” they can influence the board and the board can influence again, who is in charge of the business. So if a company stock goes down for a long period of time, it’s not uncommon for that manager to be fired and for somebody else to be brought in. So that’s one reason why the manager of the company want the share price to go up.

Brian Feroldi (00:27:11):

The second reason they want the share price to go up is that share price that they have is a tool that they could use to enhance the business. So if a stock is very richly valued, that acts as a currency, the company’s own currency that it can use to raise capital from investors or to make acquisitions. So one way that a company can grow is by buying out a competitor or another type of business. And one way that they can do so is by selling shares in their own company to acquire that business.

Brian Feroldi (00:27:39):

Well, if your stock is trading at a low number at a very low valuation, that’s a really bad time to want to go out and make an acquisition, or it’s a really bad time to raise capital. But if the stock is trading at a very high valuation or a very high price tag, it’s a much more appealing time to use that capital to do so. And then the final reason why investors, the management team want the stock price to go up is oftentimes the people that run that company and the employees are given equity. They’re given shares in the business themselves. So they have their own capital on the line, right? And they’re experiencing the ups and downs of the stock just like outside investors are.

Brian Feroldi (00:28:12):

This is one big reason when I’m making an investment in a company, I want to make sure that the CEO and the management team that’s owning that company owns a whole bunch of that stock too. I like it when they have 90% plus of their personal net worth tied up in the value of that company’s stock. That does not guarantee success, of course, but it does guarantee that if they make poor decisions and that stock goes down, they’re going to feel the pain of that stock going down, just like I am as an outside shareholder.

Robert Leonard (00:28:37):

I read an interesting study that talked about how a company’s stock price can actually end up being a self-fulfilling prophecy for the company’s success or failure. And the reason for this is because companies are able to raise capital by issuing new shares or raising capital in the debt markets. For example, if a company hasn’t been executing the business strategy effectively and its stock is falling, then it might be difficult for them to turn it around, because they don’t have access to a lot of capital by issuing new shares or getting outside capital.

Robert Leonard (00:29:03):

On the other hand, say you have a company like Tesla who’s stock has done very well. Well, now they can go out and raise a lot of capital by issuing shares. And now that potentially puts them in an even better financial position than they would have been otherwise because their stock has gone up. They can now do a lot of things with that capital, like build a new Gigafactory, hire new engineers, or make an acquisition to strengthen their position. So it’s an interesting thing to about the dynamic of how a stock price impacts the company’s financial position and future growth opportunities.

Brian Feroldi (00:29:32):

Oh, for sure. If you just look at what’s happened with GameStop over the last two years, by the way. GameStop was a failing business in so many ways and its share price was down meaningfully prior to it getting all over or Reddit. And that was a big problem. That was a hindrance to GameStop the company, because it’s hard for them to attract a manager that wants where they see the business that’s failing, right? People are exiting the company, but more importantly, if they wanted to raise capital in order to say, pay off their debt or fund some kind of new business unit, it would be prohibitively expensive for them to do so with their stock price so low.

Brian Feroldi (00:30:04):

When GameStop stock went bananas and it was just skyrocketing, all of a sudden the company became much more appealing for the company to raise capital from investors at an extremely inflated price tag. And they could use that capital to eliminate their debt or make it reinvest in the business or acquire complimentary businesses. So in a real way, GameStop stock going up so much brought the management team at that company so many more options that they could use to kind of fix the underlying business. So in that way the stock price going up hadn’t saved GameStop, but it’s really made that company’s future much brighter than it would have been otherwise

Robert Leonard (00:30:38):

There’s talks that it helped Tesla a lot as well. And some people say that that’s really helped them be able to continue on as well. We’ve both kind of talked about how you can use your equity, your share price, your stock to raise more capital. You’ve even said in a secondary offering you can sell shares that don’t exist. I think people listening who are newer to the show or newer to investing that are hearing this for the first time they’re like, “How can you just create? You told me shares are ownership in a business. A business only has so many shares. How can you just create new ones out of thin air? Where does that come from? How does that happen?” So, talk to us a bit about how you could do a secondary offering with shares that don’t exist and how that process works?

Brian Feroldi (00:31:13):

This is a unique trait that companies have. Let’s go back to our business that we started together. So the 100,000 shares, you own 50, I own 50. You have 50% of the business and I have 50% of the business. Let’s say that we wanted to raise capital, but we didn’t want to put more capital in ourselves. So let’s say we wanted to raise a $100,000 to further the venture of this business. So we find another investor. Our stock is trading at $1 per share, and we bring on this new investor. So we create a 100,000 new shares of stock. We sell it to this new investor and the company gets a 100 grand.

Brian Feroldi (00:31:43):

Well, prior to us doing this, there were a 100,000 shares in total. You owned 50, I owned 50. Now we just created a 100,000 new shares of stock, so there’s now 200,000 shares in total. You still own 50, I still own 50, and this new investor now owns a 100,000. So what actually happened was your and my position in this company, we used to own half of it, now we only own 25% of it. This new investor that came in, they own a 100,000 shares of the 200,000 in total. So they own 50% of it.

Brian Feroldi (00:32:13):

So that’s the downside to creating new shares of stock. That’s called dilution. Whenever a company wants to raise capital for its investors and create these new shares of stock, the good thing about that is they can fill up their bank account almost at will if they want to. But every time they do that, their existing shareholders get diluted and they own less of the business than they did before even though they didn’t do really anything wrong. But that is something that companies can do.

Brian Feroldi (00:32:37):

And it’s one of the reasons I’ve seen, I’ve been studying the markets for years, and I’ve seen some really bad businesses, really bad businesses with no revenue growth, negative returns. And they’ve just been publicly traded for 5, 10, 15, 20 years down. You’re like, “How can this company still exist? It hasn’t made a profit this whole time.” And the answer is, they keep raising money from shareholders again and again and again. And each time they do so they’re diluting their existing shareholders horribly, but it’s allowing the company, which shouldn’t exist, to continue to exist. So, that is a trait that businesses have.

Robert Leonard (00:33:09):

It’s not exclusive, but a lot of times you’re going to see this with newer, not necessarily startups, but in smaller companies, earlier stayed companies, companies that are really trying to grow. They need that capital to grow. And so you’re probably not going to see that with like Walmart or maybe even Amazon, these more established businesses, but you’re going to see that with these newer, higher growth early stage companies. And it sounds like dilution is a really bad thing. You gave them a $100 and you owned a certain percentage of the business and now you still have a $100 worth, but you own significantly less of the business. Of course, that’s not really a good trade, but the caveat here is, ideally the whole goal here from the management team is not to dilute you or make you lose value or less ownership in the company, it’s so that they can reinvest that money and make your shares more valuable.

Robert Leonard (00:33:50):

So even though you own less of it, the goal is that even though the less percentage, it is ideally on a net basis, still more than you had previously. That’s the goal in theory at least. And then, it doesn’t only go in a dilution perspective. There’s a lot of companies, I mentioned Amazon or Walmart. Some of these later stage companies they’ll actually do the opposite of a share offering or basically dilute you, they’ll do a buyback and they’ll actually essentially give you more ownership in the company. Walk us through, Brian, about how the opposite of a secondary offering and dilution works with buybacks?

Brian Feroldi (00:34:24):

If you look at the stock market today, companies are often classified into growth versus value or small cap and midcap and large cap. I actually don’t think those classifications are all that helpful. And if I was to redesign things, I think stock should be classified into three different categories. One category would be capital raising. They’re going to be continuously going to investors because they’re in growth mode and they need capital. I think once you’re done raising capital, you go into the second category, which is self-funding. So you’re producing profits, you’re producing free cash. You have enough in your bank account that you don’t need to dilute investors anymore.

Brian Feroldi (00:34:56):

And then the third phase of that, I think is the capital return phase. Basically you’re past your hyper growth phase. You’re in a mature industry. You’re making so much in profits that you don’t know what to do with it. So you’re going to return that capital to your shareholders, and the two primary ways that companies can do that is one, through dividends. So that’s literally just giving them cash directly from the company’s bank account. And the second way is by doing a stock buyback. Now stock buybacks have been in the news for the last five or 10 years. They’ve really gotten a bad rep with investors that companies are spending billions of dollars on stock buybacks, and people are complaining that they should be doing other things with that capital.

Brian Feroldi (00:35:31):

Stock buybacks can be a fantastic use of company capital when and if they’re used appropriately. So let’s go back to our example that we just had. So we have 200,000 shares in total. A new investor came in, they bought a 100,000 shares. You and I each owned 50, so the current breakdown is, you and I have 25% of the business. This new investor has 50% of the business. Well, let’s say that our company is self-funding, it’s growing and has all this profits coming in, and we decide, you and I decide that we want to eliminate some of the stock that this outside investor owns so that we can own a larger percent of the business. So let’s say that we have $200,000 in cash and we want to buy back those a 100,000 shares that we sold previously for a dollar from that third investor, let’s say that we do that. So we take 200 grand from the company at $2 per share, the investor agrees to that. And he gives those 100,000 shares back to the company and the company retires, or just eliminates those shares altogether.

Brian Feroldi (00:36:25):

So previously there were 200,000 shares in total. Now there’s back to being just a 100,000 shares in total and just like magic our ownership in the business went from 25% each to 50% each. So we now own a larger percent of the business than we did prior to the buyback. That’s exactly what a buyback is. And if you look at companies like Berkshire Hathaway, Apple, Microsoft, large companies that just gush cash, they are currently actively buying back their shares from their existing pool of investors, which reduces is the total number of shares outstanding, which makes each remaining shareholder own a slightly larger percent of the business. And some of the best investments in history, some of the best managers in history, opportunistically buy back their stock from their investors in order to create more value for the shareholders that remain.

Robert Leonard (00:37:16):

And we can tie this back to part of our conversation earlier when we talked about how after the IPO, if you buy a stock, you go onto your brokerage account, Robinhood, Fidelity, whatever it is, you buy a stock or sell a stock. You’re not giving that money to the company, you’re actually trading it with an investor, like you said. But if a company is actually buying back their shares, they have to go back to these shareholders, like you said, these outside shareholders and buy back publicly held shares. So sometimes if you’re selling shares, you are selling it back to the company. I mean, you will never know this really, but it is very possible that if you go in there and you sell your Walmart shares, that it could be, on the other end that could be Walmart actually buying their shares back.

Brian Feroldi (00:37:52):

That is possible. Once a company’s stock is publicly listed, you the investor don’t really know who is on the other end of your transaction. And you shouldn’t really care all that much, all you care about is that you get the price that you want, and the transaction goes through. So all that’s handled by the broker itself, but you are a 100% right. You could be selling your shares, if you’re doing so, back to the company itself.

Robert Leonard (00:38:12):

Now, one of the most important things about buying stocks is the value. You don’t want to overpay. I think people know that they don’t want to overpay, you want to get a good deal. And there’s so many different opinions and strategies for valuing a stock. We’re going to talk about how you do it. But I think if I were to ask a 100 people, I could get at least a hundred answers. I think some people would provide more than one. So you could have 150 answers if you talk to a hundred different people about how to value a stock. So first, explain to us why it’s important to value a stock in the first place, and then explain to us how you do it and what your process is?

Brian Feroldi (00:38:44):

Yeah, valuation is something that deserves not only one podcast itself, probably 1,000 podcasts itself, because it’s an extremely complex process and there’s so much nuance to really valuing a business. But at its core, the best teacher that I’ve seen of how to figure out a value of business is Shark Tank. If you ever watch Shark Tank, you know that the investor, the company goes in and we’re selling blank, we’re trying to raise blank capital, and we’re going to give you 10% of the business. A business comes in and says, “We want to sell $50,000 and we’ll give you 10% of the business.” And then the investor say, “Well, we’ll give you a 50,000, but we want 20% of the business.” That’s valuation. It’s the art of figuring out how much a company is worth, how much a company is currently valued based on its financial numbers that exist today and its future projections.

Brian Feroldi (00:39:29):

Now, why is that important? Well, let’s take things to the extreme. Extremes really, really help. So we just went to an outside investor and we sold our stock at $1 per share. All right, well, let’s think about it from that investor’s perspective. They paid $1 per share to buy our company and they earned, if our business continues to be successful, $1 in earnings in their first year. That’s a 100% return on their investment. Is a 100% return in a year a detractive return? I think so, that’s extremely good. So we could really make the argument that our company valued at $1 per share is way too cheap, just way too cheap.

Brian Feroldi (00:40:08):

So let’s go to the other extreme. Let’s say that we want to sell our stock at a $1,000 per share, a $1,000 per share. That’s where we think are valued at, and this other investor agrees. So they buy stock in our company at a $1,000 per share. Well, again, we just earned $1 per share in earnings for the year. So if you take that $1 per share, divide by the $1,000 per share of price, that gives them a return on their capital of 0.1% in that first year. Now, why would they invest in our company and get a 0.1% return when they could go open a CD at a bank and get a 0.5% return, or buy the 10 Year Treasury Yield and get a 2.5% return? So, $1,000 per share is way too high. And $1 per share is way too low.

Brian Feroldi (00:40:57):

So what’s fair price to play? $20 per share, right? At $20 per share the investor would be buying and they would be getting a 5% earnings yield on their investment. Well, that might be a fair price. And maybe some other investor says, “Well, I’ll pay $25 per share.” In that case they’re getting a 4% yield on their investment. Or maybe the whole market goes down and everyone’s at a bad mood. And investor says, “I’m only going to invest in this company at $10 per share. I demand a 10% return on my investment.” Broadly speaking that’s what valuation is. When you’re making an investment in business and you’re buying into that company’s future profit stream. And the higher evaluation you pay the lower the yield you’re accepting today. And you’re assuming that the growth is going to be there to make up for it.

Brian Feroldi (00:41:40):

And conversely, the lower valuation you pay today, the less optimistic you are about that company’s future and the higher yield you’re paying today. So when it comes to valuation, it’s just a give and a take between how enthusiastic investors are about investing in a company and how pessimistic they are at any given time. But as we said before, valuation is an extremely complex topic that you could just fill, books have been filled on.

Robert Leonard (00:42:04):

It’s very common for investors to want to get stock ideas from other people, whether they’re super investors or even yourself, Brian. And I think that could be a good strategy to get ideas, but what’s really difficult about it is the valuation piece because you have one rate of return that you require. Brian, maybe you’re happy with a 5% return, maybe I need 10%. And so even if we both say Apple is the best company, we both want to invest in it. If you need a 5% return, I need a 10% return, we’re going to have to buy at different prices. So there’s no right or wrong really, it’s really whatever you think. And whatever you’re required rate of return is, is going to impact what you can pay for the stock as Brian just outlined. That’s an additional layer of investing and you can’t just copy other people.

Brian Feroldi (00:42:42):

Yeah, completely. Like you I love getting investing ideas from other people, especially investors that I respect, but you can’t ever just look at what another investor are doing and copy them. Because you don’t know how much of their portfolio they’re putting into that idea. You don’t know what their timeframe for holding that idea is. You don’t know their reasons for buying that stock. But it’s really the timeframe, I think that’s a big one. I might like Apple stock today for the next 10 years. But if you’re thinking, if somebody else is buying Apple stock for the next 10 minutes, what we’re going to be doing, what seems like the same thing, because our holding periods are so different. We’re just going to have wildly different expectations about to the company.

Brian Feroldi (00:43:18):

So this is why valuation is so tricky, because all market participants are looking at the price and investing in the company are the same way, but how long your holding period is and what your required rate of return is and your assumptions about that, what the company’s going to do in the future, vary hugely from person to person. And this is why the numbers move up and down all the time and why stock prices continuously move. Because all of those assumptions that each individual investors are making are different.

Robert Leonard (00:43:44):

If you look at a stock on a short-term basis, like you just said, you’ll see it going up and down, up and down, up and down very frequently. But if you zoom out a little bit and you look at it over five or 10 years, you don’t really see a lot of ups and downs. You do see a crash here and there, but generally speaking, a lot of times it’s pretty consistently going up, up into the right. Why does the stock market, at least in the U.S., trend up, and why has it always recovered from crashes?

Brian Feroldi (00:44:07):

Again, let’s get back to what is a stock. I think it’s always helped to start with what is a stock. When you’re buying a stock, you’re becoming a part owner in that business. And broadly speaking, while valuation on a moment-to-mobile basis changes drastically, if a company earns $1 in earnings per share, and then 10 years later that company is grown and is now earning $10 in earnings per share, you can be very confident that the company will be trading at a higher valuation and a higher number 10 years from now than it is today, all other factors held equally.

Brian Feroldi (00:44:38):

So companies are valued on a multiple of their profits. And as those profits grow, the value of the company, at least in theory, should also grow in lockstep. So when you look back and look at the long-term charts of the S&P 500 or the Dow Jones Industrial Average, or the NASDAQ, the fundamental reasons why those indexes are higher today than they were 10, 20, 30, 40 years ago, is that the individual businesses that comprise that index are far more profitable today in dollar terms than they were 10, 20 and 30 years ago.

Brian Feroldi (00:45:09):

So, that is the fundamental that drives a stock market higher over time. And when you’re talking about it at a macro level, what is it that makes the profits of American companies or the companies in the index higher over time? Well, there’s several factors that drive profits up over time. Factors like inflation. What is inflation? Inflation is when prices broadly speaking that businesses charge rise over time because the value of the underlying dollars decrease over time.

Brian Feroldi (00:45:35):

Well, when prices are rising, who is on the other side of those transaction? Businesses, right? Businesses, revenues, and their profits are rising broadly speaking at the same rate of inflation. So as inflation is positive, over time that drives companies’ profits higher. Two is productivity. Broadly speaking, each year humans get better and better at making stuff, producing stuff with fewer and fewer inputs, right? That’s productivity. We get there through efficiency gains in businesses. And as companies and American businesses become more productive, that leads to rising prices over time.

Brian Feroldi (00:46:09):

Another factor, population growth. The population of humanity is rising each year at a slower and slower rate, but it’s still a positive number. Historically that inflation population rate was much higher many years ago than it’s today. But each year roughly half to one and a half percent of the population of humanity grows. So, that means there’s more consumers out there. There’s more people that are actually buying goods and services. So the markets that these companies are are selling into is higher.

Brian Feroldi (00:46:34):

Another one is innovation. New products and new services come along each couple of years, and those open up brand new market opportunities. What was the smartphone? What was the value of the smartphone market in 1990? Zero, zero, there was worth nothing. What was the value of the smartphone market last year? I don’t know the exact number, but I can tell you it’s measured hundreds of billions of dollars. And to say nothing of all the ancillary markets that having smartphones have opened up, like things like ride hailing and person-to-person payments, Google Maps, et cetera. So as new innovations come along, yes, they sometimes destroy and eliminate old markets, but they often open up new market opportunities that businesses rush to fill. And that in turn allows profits to grow over time.

Brian Feroldi (00:47:17):

And then there’s things like stock buybacks. Companies are spending billions of dollars each year to repurchase their shares from investors. They’re also paying out billions in dollars in dividends each year. When you combine all of those factors together, over the course of a year, maybe each individual component adds half a percent to 2% to the earning stream of the fundamental companies underneath. But when you zoom out and look over long periods of time, the profitability of companies continuously moves higher and higher over time. As long as those fundamental drivers remain in place, that should be the case for the rest of our lives hopefully.

Robert Leonard (00:47:53):

I’ve actually become a little bit worried about this idea of the stock market always going up over the last couple years maybe. Maybe I’m just a pessimist, but I see a lot of posts on social media. And this is not even from you, Brian. This is just from social media in general, but I see a lot of people posting and saying that people should just keep buying, no matter what, or that the stock market always goes up. And I know that’s been true for the past 100 years. Everything you just explained, completely true. But when I see these posts, I can’t help but think of the Japanese Nikkei market, where if you invested in money back in the ’90, 1990 specifically, you wouldn’t have made a single dollar in that index or that market until December 2020. You wouldn’t have even gotten back to even for nearly 30 years.

Robert Leonard (00:48:38):

And I know the Japanese markets and the economy are different then the U.S., and that you would have had to buy at the peak of 1990 for what I said to be completely true. But nonetheless, I think the principle and the general idea stands. I’m concerned that one day this idea that stocks will always go up in the U.S. is going to be changed or wrong, especially at some of the valuations that we’ve seen the past year, two, three, four years. How do you think about the international markets that haven’t always had a stock market that goes up, and why couldn’t that happen in the U.S.?

Brian Feroldi (00:49:10):

So, I am not an expert on the Japanese stock market at all. The stock market that I know that I study, that I paid a bunch of attention to is the U.S. stock market. And all the data that I pulled for my book is based on the last 100 plus years that we have to look at. But the fundamental questions that you’re raising, I think are sound. Is there a risk that you can invest at the wrong time and you’re paying way too high of a evaluation and then interest rates rise or inflation rises and you don’t realize a return on your investment, just like the Japanese market has? Yes, that is a risk that investors are constantly taking on.

Brian Feroldi (00:49:43):

One way that you can mitigate that risk is I would never invest everything in the stock market once at one time and then just assume that’s going to be my own investment ever. Nick Maggiulli named his book right, Just Keep Buying. Meaning if you continually invest in the stock market again and again and again, at different times in the market cycle, at different valuation, at different dividend yields, over the long term, so long as those fundamental growth drivers, profit growth drivers that I mentioned before are still in place, I’m still very confident that 20 years from now you will have a smile on your face at what the markets did.

Brian Feroldi (00:50:19):

But you don’t have to look at Japan. Look at our own markets. From the year 2000 to the year 2010, if you made an investment in the NASDAQ or the S&P 500 during that time, and you bought at the peak price in 2000 and held until 2010, you went 10 years and earned basically a zero of return or some something close to zero of return on the price part of your investment. And during that time, valuations went from very high to very low. And when that happens, that is a headwind to you earning a return on your capital. However, if during that same 10-year period, when the stocks did nowhere, if you continued to invest on a regular basis, weekly or monthly, eventually you would be very happy today with those decisions. Because while the 2000s where bad period for the markets, 2010s were a wonderful time period for the markets, where the valuations went very low to very high.

Brian Feroldi (00:51:08):

And this is why trying to time the market is so incredibly hard. It looks so easy when you’re looking backwards to say, “Oh, just buy here, it’s an obvious low. Sell here, it’s an obvious high.” But when you’re living through it day by day, minute by minute, trying to make real-time decisions about what the market is going to do, is just incredibly, incredibly, incredibly challenging.

Brian Feroldi (00:51:30):

So I recognize that the next 10 years in particular could be very challenging periods for investors in the U.S. market. Interest rates are likely to be rising. Valuations today broadly speaking are still very high. So if you said to me, if you fast forward to 2030 and said, “The last 10 years haven’t been good for investors,” I would say that makes sense to me. However, that’s going to change nothing about what I do personally. I’m still going to invest continually into the stock market, because I have a multi-decade time horizon. And again, as long as the fundamental growth drivers I mentioned before are still in place, I’m confident that 20 plus years from now, I’m going to have a smile on my face by following that strategy.

Robert Leonard (00:52:09):

You recently tweeted a quote from Tom Engel that I really like, which was, “If this company is the next great growth stock, then a little is all I need. If it’s not, then a little is all I want.” Explain what this quote means and why you and I like it so much?

Brian Feroldi (00:52:27):

Tom Engel is one of my favorite investors ever to study, and he’s not someone that’s well known in the investment community. So Tom worked for nine years in the normal job market and then retired in the 1980s and has lived off of his portfolio in the last 40 plus years since. And the way that he’s done that is Tom is a phenomenal, phenomenal, long-term investors. He buys dozens of companies that he thinks can grow their revenues and their profits for years and years on years, he studies those companies intensely. And then his portfolio has averaged like a 15%-ish plus return over the last 40 years. And if you do that for any period of time that’s measured in decades, you’re going to have much more money at the end of that period than you would at the start.

Brian Feroldi (00:53:09):

But I love this quote from Tom and it just so brilliant explains why diversification is so important. If you find a company’s stock, random company’s stock that sounds like an exciting opportunity, it’s natural for new investors in particular to say, “That’s it, I’m going all in on this stock. I’m putting my portfolio on this company because I like what I hear.” But Tom’s point with that quote is, “Well, if this company turns out to be the next Netflix, the next Tesla, the next Amazon, and you have just a little bit of your portfolio devoted to it, that’s all you need to do extremely well in the markets.” I mean, Amazon is something like a 1,000 bagger, 1,000 roughly since it’s IPO. So if you put even a $1,000 into that, that $1,000 turned into a million dollars. Getting Amazon into your portfolio in the 1990s was a phenomenal decision, but you didn’t need to invest a lot of money to do very well.

Brian Feroldi (00:54:01):

Conversely, if that company that you’re investing in is the next pets.com, and it’s going to go down 99.9% and go bankrupt. If you only put a $1,000 into it and it turns out to be a terrible investment, you’re not going to lose your house, you’re not going to lose your car. You’re not going to get hurt that bad as an investor. So when I’m personally, this quote has influenced the way that I invest so much. I used to be much more interested in investing everything into the company on day one as soon as I learned about it. But I’ve learned from studying my own market history that I don’t always get them right. And some of the best investments that I’ve ever made were just starting with little bits of money into a company, and then following that company, then adding to it over time as it proves itself out.

Brian Feroldi (00:54:40):

So that quote to me is just a reminder that while we, even, if you have a checklist and you think you know a company really well, the future is not antiqued. And one of the best things that an investor can do is focus on risk management and covering their downside first.

Robert Leonard (00:54:53):

One of the first times that I experienced this was actually with Zoom. And so I had bought Zoom in late 2019, so I’d say anywhere from three to six months prior to the pandemic starting. And I had a small thesis about it, we were using it for the podcast. It was a pretty good software. This was almost two, three years ago now. So there wasn’t a lot of competitors like there are today, so it was a different landscape. And I just said, “You know what? They look like the market leader.” And I had this little bit of thesis. I didn’t put a lot of money into it. I just put a little bit, but because of the pandemic it went up so significantly. That was like my really first time that I’ve seen such a small position I really didn’t put into it, grow to a pretty substantial position.

Robert Leonard (00:55:30):

Because a lot of other times I had put relatively large sums of money or percentages into them. So to see them grow, I wasn’t really overly surprised, but when I put such a small dollar amount into it and then started to grow as much as it did, it really illustrated Tom’s quote to me. But I think the hard part is, like you mentioned before for is, timing the market is so hard and when you look back in hindsight, it looks so easy. And that’s the hard part about putting in small dollars is because you’ll have something like Zoom. And even myself, I study these concepts all day, every day, and I still look back and said, “Man, I should have put a lot more money in Zoom.” And then the problem is, next time I see a situation like Zoom, I’m going to put a lot more money in into and I might not be right. And so it’s this emotional behavioral piece of investing that is so, so difficult.

Brian Feroldi (00:56:15):

Yeah, you are a 100% correct. And what’s even more interesting about that quote is, if you look back at the greatest stock picks of the last 10, 20, 30 years, Netflix, Amazon, Tesla, it’s so easy now to look back and say, “They were obvious buys 10, 20 years. It’s obvious that they were going to do that thing.” But if you even had the foresight to make investments in those great companies 10 and 20 years ago, which you might not realize along the way is that those companies during their tremendous bull market rides up also put their shareholders through long periods of tremendous pain, tremendous pain. Amazon, again, up a 1,000 fold from when it’s IPO. And during that time it fell 92%, 92%. You had to hold through a 92% loss over a multiyear period in order to earn that 1,000 bagger return.

Brian Feroldi (00:57:11):

The same can be said of every other successful investment out there, including by the way, Berkshire Hathaway. Berkshire Hathaway, big boring value stock Berkshire Hathaway that’s up I don’t even know how many a fold for investors has fallen peak to trough more than 50% I think four times in its history, Berkshire Hathaway, right? So the price that you have to pay as an investor if you are going after those huge returns is you can be a 100% certain that at some time the position that you buy is going to be down huge on you at some point, that is just the price of admission of investing in stocks in the individual stock market. And if you can’t handle that, which is easy to say, it’s really hard to do, but that is the requirement if you want to be a stock picker.

Robert Leonard (00:57:56):

When you say 92%, that sounds like a lot, because it is. But if you put that in dollar terms, let’s just think about that. For everybody listening, you put a $100 into something, you have $8 left. Can you see a $100 go to eight? Just think about that for a second. You probably have seen a stock, say you put a $100 in, you’ve probably seen it go to 90, 85, 80, so anywhere from a 10 to 20% return, you probably didn’t feel very great. Now imagine that $100 went to $8 left. Imagine you put a 1,000. Now you have only $80 left out of a 1,000. I mean, that is a extremely difficult to stomach, very, very hard to do

Brian Feroldi (00:58:29):

Well, let’s just look at Zoom recently. Let’s say you put 10K into Zoom at the IPO. You put 10K into Zoom, within 14 months that 10K was worth 90K. 10K to 90K, that 90K currently worth 18. And here’s the other thing about that that’s really, really hard is, while every great stock has gone through an immense decline, every terrible stock has too. And it’s really hard to tell, “Is this going to be a great stock or is this destined to be a terrible stock during the decline?” So, that’s what makes this even trickier is, while all great stocks will go through declines, all bad stocks will too. And telling which was which in real time is incredibly hard.

Robert Leonard (00:59:10):

I’ve said it on the show time and time and time again. But investing is one of those very interesting fields where people wake up one day and they feel like they can pick stocks like people who have been studying it their whole lives. And I’m not saying you shouldn’t do it. It just fascinates me that people study decades to become a doctor or a lawyer or things like that and then wake up one day and think they can become an individual investor overnight. And it’s just, it’s hard. Everything we’ve talked about today, I hope we’ve illustrated how important it is, but also difficult. It’s not easy, and there are simpler ways you can get into passive investing through ETS and index funds, but it just really interests me as how difficult it is and how people still think that they could just wake up one day and do it.

Robert Leonard (00:59:50):

But Brian, there’s so many other things that I’d love to chat with you about. We could talk for hours and you’re always one of my personal favorite guests. We’ll certainly have you back on the show soon. Before we close out the episode, I want to give you a chance to tell the audience where they can go to connect with you. Best place to get your awesome book that’s coming out very soon. And yeah, just best place to connect with you.

Brian Feroldi (01:00:11):

You can get my book, which is released on, published date on April 5th at any retailer, including Amazon, Barnes & Noble, et cetera. I’m super excited for that to get out in the world so I can get some real world feedback. But if you want to connect with me directly, the best places to do so are on Twitter. I’m @BrianFeroldi. And if you’re interested in individual stock investing and some investing lessons, I also have a YouTube channel, which is my name, Brian Feroldi too.

Robert Leonard (01:00:35):

I’ll be sure to put a link to Brian’s book, YouTube channel, Twitter, everything Brian’s doing, in the show notes below. If you’re on social media, one of the best ways to make it a useful, a part of your day and not just a time suck is to follow people like Brian. I highly recommend, it’s one of my favorite follows. So all that information will be in the show notes below for anybody that’s interested in checking it out. Brian, really thanks so much for joining me. I enjoyed it.

Brian Feroldi (01:00:57):

I always have a great time here, Robert. Thanks so much for having me.

Robert Leonard (01:01:00):

All right, guys. That’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro (01:01:07):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.