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Hi, I'm Jim O'Shaughnessy and welcome to Infinite Loops.
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Sometimes we get caught up in what feel like infinite loops when trying to figure things out.
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Markets go up and down, research is presented and then refuted, and we find ourselves right back where we started.
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The goal of this podcast is to learn how we can reset our thinking on issues that hopefully leaves us with a better understanding as to why we think the way we think and how we might be able to change that to avoid going in infinite loops of thought.
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We hope to offer our listeners a fresh perspective on a variety of issues and look at them through a multifaceted lens — including history, philosophy, art, science, linguistics, and yes, also through quantitative analysis.
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And through these discussions help you not only become a better investor, but also become a more nuanced thinker.
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With each episode we hope to bring you along with us as we learn together.
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Thanks for joining us, now please enjoy this episode of Infinite Loops.
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Disclaimer: Jim O'Shaughnessy is chairman and Co-Chief Investment Officer of O'Shaughnessy Asset Management, where Jamie Catherwood is an associate.
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All opinions expressed by Jim, Jamie and podcast guests are solely their own opinions and do not reflect the opinions of O'Shaughnessy Asset Management.
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This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions.
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Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
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Jim O'Shaughnessy: Well, hello everyone.
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It's Jim O'Shaughnessy with yet another addition of Infinite Loops today, I have my friend Brian Feroldi. Do I have that right? Brian Feroldi: Sure. Sounds good.
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Jim O'Shaughnessy: Now, come on, pronounce it to me again. Brian Feroldi: Feroldi.
2:24
Jim O'Shaughnessy: There we go.
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Today I have my good friend, Brian Feroldi, the author of the forthcoming, Why Do Stocks Go Up?
2:33
Everything You Should Have Been Taught About Investing In School, But Weren't. Great. Title. Love it.
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My friend Morgan Housel said that basically that you are an amazing author, writer.
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Morgan doesn't give that stuff out very easily.
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He said that your book was the practical and best guide to understanding the greatest wealth creating machine of all time, the stock market, something I believe in.
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And here's the one I love.
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David Gardner of the Motley Fool has called you, Brian has a silver tongue and heart of gold.
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Now I've just raised the expectations for all of our listeners, but I'm going to let you go, welcome.
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Brian Feroldi: Thank you, Jim. It's awesome to be here.
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I'm pretty sure I've been listening to your podcast since day one.
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So, it's awesome to [crosstalk]. Jim O'Shaughnessy: Wow.
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Oh, I'm delighted to have you.
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So, before we get into the book, which thank you for sending me a copy.
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I'm not all the way through it yet, but as I expected, and people sometimes misinterpret this, there wasn't anything in there that I didn't expect, because I've read your other stuff.
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I've read the way you look at markets and the consistency actually is great.
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So, I've written four books about the market.
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If I suddenly started saying, hey, you know what?
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I just discovered this great way to trade oil futures minute by minute.
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Your eyebrow should go up.
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But the book is really important, because you're absolutely right.
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People are afraid to ask that question.
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That's why I love the title of this book. They're afraid.
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They feel like, oh, I'm an idiot.
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Everybody who knows why the stock market goes up.
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And the fact is most people don't.
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But where I want to start is did you have a childhood and education that influenced you becoming the man you are in terms of investing today?
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Brian Feroldi: No, my father is an accountant by trade and he is actually, he made his way all the way up to a CFO of a company.
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But largely there was little to no education in my household growing up about what a stock is, what the stock market is. Any of that.
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In fact, the only time I really remember us talking about it was he was interested, like I was, when I first started in penny stocks, starting out.
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And he found some penny stock through some random broker.
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And he said if this stock goes to, I don't remember, it was $5 per share, you guys can get dirt bikes.
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So, me and my brother would come home every day and we'd look at the share price of this thing and be like, come on, come on, go up.
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And it never cracked that $5 price.
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So, we never got our dirt bikes, but by and large, my exposure to the stock market was extremely limited.
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We never talked about it when I was at home.
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I and I even went to college as a business major.
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And what really is amazing to me is I think I got a good education, but we were taught almost nothing about the stock market, about compound interest, about how companies are valued, any of that, even though I was a business major.
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So, I didn't really start researching and getting into the stock market until after I graduated college.
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Jim O'Shaughnessy: Interesting.
5:58
And you'd think with a CPA father that he might have been a little more interested in that.
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Did you ever wonder, what's your memory of the first time you were like, this stock market thing, was it the penny stock that ignited your interest or was it something else?
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Brian Feroldi: Yeah, that was the first time I started paying attention to the stock market in earnest.
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But I remember as a kid having various run-ins with the stock market.
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I remember I worked at a retail store growing up.
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It was one of my first jobs and in the break room they would have the paper.
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And this was in the late 1990s.
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I remember seeing on the front page of the paper, a Dow and NASDAQ set records.
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All-time highs or whatever.
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And I remember being like one, I don't know what the Dow is.
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Two, I don't know what the NASDAQ is, but I'm pretty sure it's good news that those things are at all-time highs.
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And then I also remember in 2001, like many people on September 11th, I was glued to the TV, watching the terrorist attacks.
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And I remember post that when the stock markets reopened, the numbers were just plunging.
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They were just going straight down.
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And I remember being like, wow, things are bad.
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And capitalism, we had a great run.
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It's been a good couple of centuries, but it's over.
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I mean, look at these things just go straight down.
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And that was, of course, in the middle of the . com bust.
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And magically we rebounded.
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And then I was paying attention much more in 2006, 2007.
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And I remember investing through 2008 and I thought the exact same thing again, I was like, wow, this is the great depression part two, the stock market is plunging.
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We're never going to come back from this.
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Everybody's losing their jobs.
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Everything's going to be terrible.
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And yet we've recovered from that.
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So, it was more these random run-ins that I had with the stock market on occasion, but they were all accidental.
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Jim O'Shaughnessy: I love that because one of your missions that you state is to spread financial wellness, which I love that term because I think too many people who are new to investing.
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I mean, all you got to do is go on Twitter.
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And you see the people with their diamond hands and their laser eyes and all of this.
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And that is, just my opinion gang, that is not investing. That is speculating.
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Now, if you want to speculate, okay, go ahead and speculate, but understand that the rules that make the stock market the greatest wealth compounding machine in history, aren't going to be working for you.
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You are becoming a temporal discounter on a massive, massive level.
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And so speculation, trading very, very different than investing. What do you think?
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So, on this mission, what are we looking at here?
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In terms of like, you're everywhere.
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You're on YouTube, you're on Twitter, you're on podcasts.
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What are you seeing as, are we collectively, because it's something I believe in to, are we collectively moving the needle on people's understanding of investing and what their goals ought to be?
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Brian Feroldi: I like to think so.
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So, I'm a huge believer in the power of mission statements, both personally and professionally.
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When I'm researching a company for investment, it's one of the first things I try and look up.
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And to me, a mission statement so often is overlooked as this thing that HR made us do and we have a website.
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So, I guess we have to put one up there.
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So, so many companies abuse and don't even understand what a mission statement is.
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So, I view a mission statement, a well-crafted one as a north star that just dramatically simplifies decision making.
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If you have a really good mission statement, say, this is why the company exists, this is what we're aiming towards, it just simplifies decision making.
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So, I was very deliberate with when I came up with my personal statement to spread financial wellness and I chose every word with extreme care.
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So, when I'm making a decision about, should I do this thing professionally?
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One of the first questions I ask myself is will this thing spread financial wellness?
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If the answer is yes, I consider it.
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If the answer is no, I just eliminate it.
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And financial wellness is a funky term, because if you interact with me on YouTube or social media, chances are pretty good that you think that I'm just a stock junkie. I love the stock market.
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I love everything about investing, but I'm a firm believer that taking care of your personal finances is an order of magnitude more important than taking care of your investing finances.
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So, if somebody comes up to me in real life and they're like, "Brian, what stock should I invest in?"
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I don't say, "Well, let's talk about that."
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I say, "Well, do you have any debts? Do you have a will.
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Do you have an emergency fund?
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How many sources of income do you have?"
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Because the better you take care of your personal finances.
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I actually think that enables you to be a better investor.
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My personal philosophy is I'm extremely conservative of with my personal finances, extremely conservative, multiple sources of income, high savings rate, zero debt, six month plus emergency fund.
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So, my personal finances are extremely conservative.
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That enables me to be essentially a hundred percent equities with my investments and 0% bonds, because I know my personal finances are so rock solid, I'm immune to volatility.
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Volatility does not bother me in the least, my portfolio, like many people's portfolio over the last year, is down huge.
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I've lost zero sleep over it, because my portfolio being down in no way threatens my lifestyle, because my personal finances are so well taken care of.
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So, that's the message that I really try and spread to people, investing, I love it.
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It's incredibly important, but let's focus on your personal finances first.
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Jim O'Shaughnessy: Yeah, I think that's a great message.
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And it's in the book, where you start is not, let's not talk about investing, let's talk about what's your debt.
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What do you have in savings? I like adding the will.
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All of those things, it seems to me, would give ...
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people are interesting to me.
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I always say that basically what I really do all day long is study human operating system, because I think arbitration human behavior is the last sustainable edge.
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And one of the things that I see time and time again is this point, people don't have any of these things.
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And so well, of course they feel at risk.
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Of course they feel worried.
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They're also just recency biased machines on steroids, because they don't have all of these things.
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So, I think if you were going to be doing seminars, if you could get a person to just understand your first point, I think that, that would open up the receptiveness to, okay.
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It's the Maslow hierarchy of needs.
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If you don't have the ones at the bottom of the pyramid covered and really covered with, as what I would call a portraits balance sheet for your personal wellbeing.
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Well, I mean, you're going to make mistake after mistake after mistake.
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You're going to think, oh, I got to get rich.
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Let's see if I can do it this year. And so I'm 61.
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Younger people are like, yeah, you're old, you're an old, you don't understand, it's a whole different world now.
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And I'm like in many ways. Yeah, it is.
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I think it's a better world in many ways.
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And I think that there's a lot more access to things that I never had.
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So, I think that's awesome, but I don't think you'd negated anything on the compounding miracle.
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Let's talk about that for a minute.
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It's something Morgan, my friend, who I just recorded one with as well, he says, hi.
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Morgan Housel, that's one of his big things.
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Morgan is super conservative and I've known Morgan for seven years now.
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And I remember being in a car with him and I bring it up on his podcast, so I'm not telling tales out of school, with him.
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And I'm like, "Morgan, dude, you are so young, you've got all of this other stuff.
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Why don't you take more risk?"
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Because I am, I have always been, I'm not afraid to take risk because it just doesn't phase me the way most people get phased.
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His answer was really great though.
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And I think I want to hear, I know that you have a somewhat similar outlook, even though you are far more willing to dive into individual stocks than Morgan is.
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But his answer was like, "That's not my goal.
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My goal is to be able to take my walks, come up with the stories I love to write.
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And so yes, the stock market is the vehicle that allows me to do all of these things, but my goal is not to be super rich or outperform someone else.
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My goal is to, as Brian Portnoy would say fund a contented retirement or lifestyle." Same with you?
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Brian Feroldi: Yeah, completely.
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So much of my money philosophy on life has been shaped by Morgan and Morgan's writing over the years.
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But I think that if you were to ask me even five years ago, is paying off your mortgage a good idea?
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I would've looked at you in the face and said, no, that's a terrible idea.
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Interest rates are 3%, something like that.
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After inflation, what's the real interest rates you're paying 1% maybe.
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Why on earth would you pay off your mortgage early?
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The math is clearly in your favor, keep your mortgage as long as possible, lever up buy stocks.
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And it was only even the last couple of years that I've kind of changed my tune on that.
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And me and my wife decided to pay off our mortgage way early, even though mathematically, it was a really stupid thing to do.
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Emotionally it was, I think, the right thing to do.
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And I think it's worthwhile to just step back and just say, what's the point of money?
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What is the point of money?
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What is money's value to us as humans?
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Well, I think the highest use of money is to allow us to live exactly the lifestyle that we want without having to consider the financial ramifications of doing so.
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So, when I looked at money through that lens, paying off my mortgage actually made complete sense to me.
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It was like, well, I'm permanently eliminating my largest monthly expense. Let me say that again.
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I'm permanently eliminating my largest monthly expense, no matter what happens to us in our life, no matter what curve ball gets thrown our way, no one can ever take our house away from us.
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So, if we lose a job, if we have some medical emergency, if our income is permanently impaired or something like that, we just never have to worry about, well, what's going to happen to our house.
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So, when viewed through that lens, I don't care that I would be, my net worth would be higher today if I didn't pay off my mortgage, I think my life is better today because I did.
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So, when viewed through that at lens, I'm a fan of paying off your mortgage early. Jim O'Shaughnessy: Yeah.
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That's a really interesting concept too, because I honestly had, I struggled originally with Morgan.
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Well before he wrote the book, I mean, he told me about the book and the idea behind the book and I'm like, yeah, I think that'd be a great book.
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But then when we kind of went over how he lived.
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And that's when I was like, "Dude, you got to take more risk.
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I mean, you're young, you you're a time billionaire.
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Just take advantage of that."
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And then when he and others got me to look, reframe, so to speak, one of the things that my son, Patrick, always jokes that I ruined any survey they put me in.
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In other words, I'm kind of like a cohort of one.
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And so taking extreme risks, I started three companies, I never had outside financing and that was normal to me.
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But one of the things that I did do, although I did finally let the math dictate to me, I'm being really dumb here, but I'm at a different place.
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That this is basically free money.
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And so I did in fact get a small mortgage just because my younger family members were like, dad, I mean, you're crazy.
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This is free money, et cetera.
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But the one thing, that was a holdover from my idea of leverage will kill you.
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And so I did an experiment long, long time ago.
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I would bet that it still holds up now.
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And it was, the thought experiment was, okay a Wall Street journal from one year hence falls through a time loop and it lands right in your lap and the money and that section has its premier article on the 10 stocks that have done the best over the last 12 months, the top one's up 1100%, the 10th one is up 600%.
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And then I would ask the question to the people and mind you, Brian, I was asking this question to incredibly sophisticated financial types.
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I won't name them, but you would know every name.
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And I'd say, okay, so these are the circumstances I'm going to waive all of the margin stuff in terms of limits to margin.
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I'm giving you an account at Goldman Sachs or Morgan Stanley or wherever.
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How much margin are you going to use to buy these 10 names?
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The answers dismayed me, because the answers were I'm going to use infinite leverage. Well, okay.
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What people mistake, the mistake that people make is they forget the path that the stock takes to you get up 1100%.
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And every time you're leveraged, I think this was a while ago, but was like four and a half times.
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If you use more than four and a half times leverage you were always wiped out with perfect foresight, perfect foresight.
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I said this to some friends who were using a lot more leverage than that on illiquid instruments.
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And everyone of those guys hated me.
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It's just like shut up O'Shaughnessy.
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And I'm like, this is math.
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This is just simple math.
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So, I love this idea and I'm much more willing to say, you know what, if having that certainty, like you paying off your mortgage, that's great, because the certainty as I look at it and I'm looking at tradeoffs, the certainty that your home can't be taken from you, no matter what, I mean, that is such a primal human emotion that when you are freed from that, great things happen.
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And so I think it's great.
22:29
One of the things that your strategy is in a nutshell, buy high quality companies and then let them compounding do its magic. Okay. So, sound simple.
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But you got to tell me what is a high quality company?
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Brian Feroldi: Boy, that's a loaded question, huh?
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That's a hard thing to define and broadly speaking, that is my strategy.
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I know that if you're an investing [inaudible], that can't be the only thing that you do.
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Does valuation matter when you're buying companies?
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Of course, of course that it does.
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But I've learned the hard way that when I first started out as an investor and I first learned of Warren Buffet, of Charlie Munger, Seth Klarman, et cetera.
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It's like the way that they describe investing to you is that all intelligent investing is value investing.
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That's the lens that people put things through.
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All intelligent investing is value investing.
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You want to buy a dollar for 70 cents.
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You want to insist on a margin of safety.
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And I was like, yes, this makes sense to me.
23:35
This may makes sense to me. I want low PE stocks.
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I want high dividend yields. That is smart investing.
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And it was really only through getting in contact with David Gardner, one of the co-founders of the Motley Fool.
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He invest the exact opposite of that.
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The exact opposite of that.
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He would recommend stocks that had already doubled in the preceding three months.
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He recommended stocks that were trading at a hundred times earnings, 15 times sales and his whole philosophy is find excellence, buy excellence, hold excellence.
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And whenever he would make these recommendations, I would be like, are you insane?
24:14
You can't buy this stock. It just doubled.
24:21
The price to earnings ratio is so high.
24:21
And yet, if you look at his returns, they just obliterate the market's returns.
24:29
They just obliterate it.
24:29
His model is so backwards.
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But what I've learned from studying him, from studying Warren Buffet, from studying other great investors that I super respect, Jeff Fischer is one, Tom Engle is one.
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They're not nearly as well-known as many of the other investors, but what their styles are is to largely seek out high quality businesses that can grow for a far longer time period than Wall Street is expecting them to.
25:04
Buy those companies and then hold them for as long as they remain excellent companies.
25:04
And you should really, if you follow that method, you shouldn't let valuation dictate what you do.
25:10
You should always consider valuation.
25:17
I certainly do, but I look at valuations last.
25:17
I don't look at valuation first.
25:24
So, when I'm trying to find great companies, I'm asking myself all the things that most people ask themselves about great companies.
25:29
I want to see high quality revenue.
25:33
I want to see it being recurring in nature.
25:33
I want to see high returns on capital, high insight ownership.
25:38
I love investing in founder-led businesses, high gross margins.
25:38
I want operating leverage.
25:44
I want a source of a moat and I want to believe that, that moat is durable.
25:44
I want a strong brand name.
25:50
I want a stock that's already beaten the market.
25:50
It smashes Wall Street's estimates.
25:55
It has low customer concentration, low dilution, et cetera.
25:55
So, I of a huge list of factors that tell me whether I found a good company or not.
26:00
I run, I take companies and I run them through my checklist to figure out if they're a match for my investing style.
26:06
And then I largely buy the ones that are best match for what I think is the high quality business, ignore everything else.
26:16
And then give those companies the time they need to prove me right or wrong. Jim O'Shaughnessy: Yeah.
26:22
Well, so everyone erroneously, as it turns out, thinks that I'm a deep value investor. I'm no such thing. I am a quant.
26:32
And so we have on the growth side, momentum, price momentum, has proven itself.
26:40
We have data back to 1927.
26:40
And man, it is a barn burner.
26:40
Speaking about your, looking at a company that's already doubled.
26:49
I remember this is the advantages of being an old, because you remember all these Wall Street Journals from when you were probably, I don't even know if you were born yet, but they did a piece, I'll have to find it, where they said what characteristics do these stocks that soar, what do they have?
27:05
And back then they were cheap.
27:12
So, they did have the value in there, but almost all of them were at or near 52 year highs and were in many cases, double or triple over the previous six months.
27:30
I read that and I'm like, okay, I've got to take my momentum studies much more seriously here.
27:36
And so it is so counterintuitive for deep value guys.
27:36
I don't even bring it up often, because it's like, it's like the world views just conflict there.
27:43
And look, I love the deep value stuff.
27:52
A lot of our stuff has value parameters.
27:52
Because you can get burned very, very badly if a company is absent that momentum, if it has negative momentum.
28:01
I mean, my God, if you really want to destroy portfolio value just by the biggest losers over the last one year or six months, I mean, that returns less than T bills over the last 90 years.
28:14
So, with me, it was always like I am going ...
28:23
because I knew that I was just as likely to fall prey to all of these behavioral traps as anyone else.
28:31
Brian Feroldi: That's a sign of strength.
28:34
Jim O'Shaughnessy: Yeah, exactly.
28:35
And so nevertheless, you do have, on your website, you do have these ideas of quality and of, I love this one, anti-fragile, and they're kind of checklist-y.
28:42
You want to go through them for us, both of them? Brian Feroldi: Sure.
28:51
So, in regards to momentum investing, I would actually consider myself a momentum investor, but perhaps not in the way that you're thinking of it.
29:00
I actually think there's a thing called business momentum, business momentum.
29:05
Companies that have got such a head of steam behind them and they're executing well.
29:11
And it's more a matter of finding the companies that are executing and have business momentum and saying to myself, I think this company that's already doing great things will continue to do great things for a long period of time.
29:22
And one way that you can find companies like that is businesses that are executing at such a high level, they tend to be the ones who stocks are going up.
29:33
So, I'm not going to stock just because it's been up so much.
29:39
However, when a stock is up and outperforming the market, that's an indication that there's something going on in the business that Wall Street is recognizing.
29:49
And I just have to believe that, that trend can continue for a long period of time.
29:49
But to your point, yes, my investing checklist, as it exists today, it's currently on version three.
30:00
And I know that it's going to change over time, as my knowledge continues to improve.
30:00
And this thing I've put out to the world now for a couple of years and one thing I absolutely love is peer review.
30:10
People have poked holes in this things.
30:10
They've come up and said, well, have you thought about this?
30:15
Have you thought about this?
30:15
And every time I get feedback on it, I'm like, you're right. And I update it.
30:19
But my system, as it exists today, I essentially started by making a huge list of all of the business attributes that are most appealing to me as an investor.
30:33
So, I just made a huge list.
30:33
What attribute if a business had, would be attractive to me?
30:37
So, that would be things like very strong balance sheet, high gross margin, high returns on capital, positive and growing free cash flow, positive and growing net income, low customer acquisition costs, high customer dependence, founder-led management team, high insight ownership, et cetera.
30:56
Then I made another list, which was what are all the attributes that I hate seeing in a business.
31:01
And that things like accounting problems. I don't like those.
31:08
Accounting problems are bad.
31:08
I don't like customer concentration.
31:08
I don't like it when one company relies on one customer for 20, 30, 40% of its sales, I don't like it when it's in an industry that's actively being disrupted.
31:19
I don't like it when an industry is dependent on some outside force.
31:25
So, I'm thinking commodity prices, interest rates, if it needs a strong stock price, because it's going to be raising capital.
31:31
Those are forces that are outside management's control.
31:35
And I don't like having needing those to go right in addition to the business executing.
31:40
I don't like it when a company grows by acquisition.
31:40
I don't like it when there's very high dilution rates, et cetera.
31:45
So, I made these two lists, one positive, one negative, and then I forced myself to rank the attributes from most important to least important.
31:51
And it's amazing how much you learn about your investing style when you actually go through this process.
31:58
So, when I had these two lists, I gave myself a hundred points for the positive side, and I started dolling them out to the attributes, according to what I found was most important.
32:13
And what I about limiting the number to a hundred is you have to make some hard decisions, because if you're giving out points to one category, you're by definition, removing it from another.
32:24
So, after doing this a couple of times, I now have eight different categories.
32:24
So, that's the financials, the moat, the long term potential of the business, the relationship between the customers and the company, the quality of the company's revenue, the management and the cultural aspects and then how the company has performed for Wall Street, sorry, that's seven, seven attributes.
32:46
And then the eighth one would be the negative thing.
32:46
So, after I go through all the positives, I subtract out all the negatives and I have a point system for those negatives that I mentioned too.
32:56
And at the end of this process I get a number that gets computed.
33:01
And that tells me how high quality I think this company is and how much it matches my personal investing style.
33:10
And then after running the companies through this hundreds of time manually, I now have a big list of companies that are a really good match for my investing style and another one that's, I'm never going to be interested in.
33:21
And then from there I buy the ones that are the highest quality, the best match for me that are simultaneously offering the most long term upside potential and trading at the best valuation at any given time.
33:33
And then I just repeat and repeat and repeat.
33:39
And I know, or at least I believe in my bones, while my short term performance could go anywhere, I firmly believe if I stick this process for 5, 10, 15, 20 years, that I'm going to be delighted with my results. Jim O'Shaughnessy: Yeah.
33:55
So, you mentioned a couple of things there that as quants, we test it.
33:55
So, one of our things is, yeah, that sounds like a good idea. Test it.
34:03
So, companies run by founders.
34:11
We have no quantitative evidence that, that works.
34:11
I understand that it's a great idea, but as far as we know, we've got a big research graveyard and that's in it.
34:26
But what I like as I listen to you is this idea of a process.
34:26
I always say to people, look, I happen to like the way O'Shaughnessy Asset Management invests.
34:36
And that's right for me and it's right for many of our clients, but it could be totally wrong for you, Brian.
34:44
It could be totally wrong for Morgan.
34:51
And so one of the things that I've learned over time as I've listened to people, is that what I have come to conclude that the ability for an investor to A, totally believe in their criteria, but B, have a process that is followed time and time again, by the way, the process evolves, like it should, because you learn new things.
35:24
Our process has evolved dramatically.
35:24
Is it foundationally still the same? Yeah.
35:30
But in terms of the methods that we use, I mean, imagine if we hadn't evolved it, I mean, we would look like idiots, because we learn all the time.
35:37
And I also strongly believe that as much as we are narrative driven creatures, in markets, for the most part, narrative follows price, not the other way around.
35:52
And I have lived this and seen it happen over my 30 plus year career in investing.
36:01
One of the ones that just really sticks out in my mind was in the mid or the early 2000s.
36:11
So, after the dot bomb thing.
36:11
One of our most aggressive strategies, which was a small cap growth strategy, so lots of momentum.
36:16
Started buying all these tiny steel companies.
36:22
And so my analyst comes in, my chief analyst comes into my office and he goes like, "I am talking to investors and I can't come up with a story about why all these tiny steel companies are in our portfolio."
36:36
He goes, "I have done the research.
36:36
I've been trying, I'm trying to find a narrative here. And I can't."
36:41
And so I said to him, "Louis, just tell them that narrative follows price."
36:49
And he's like, "Oh, that's kind of like, I don't know, people are going to be kind of pissy about that one."
36:55
And I said, "Just try it."
36:55
Well, six months later, all of a sudden, all the stories start appearing in the Wall Street journal about the fact that China is building the equivalent of a Boston every month.
37:05
Wow, look at they were buying all that steel and it was reflected.
37:14
And so how important do you think narrative is to an investment strategy?
37:24
Brian Feroldi: That's a good question.
37:31
So, when I'm thinking about the criteria that I use to identify good businesses, it's definitely a marriage of quantitative factors that are truly measurable and qualitative factors that are not.
37:42
So, a big part of my process is to read through a company's annual report.
37:50
And in doing so, I'm trying to figure out what kind of markets this company plays in.
37:56
What are the competitive advantages that this company has over its rivals and a really esoteric one is what are the optionality that I could be taking on as an investor?
38:06
So, to me, optionality is one of the most important qualities that a company can have.
38:11
And optionality, loosely speaking, is the ability of a company to roll out new products and new services that open up new revenue opportunities for a company down the road.
38:23
Like the classic example is Amazon and Amazon Web Services.
38:29
If you were buying in 2004, you were buying Amazon Web Services, but you didn't know it at the time.
38:37
And if you look back at what has driven, what's responsible for a huge amount of Amazon's growth and profits, it's Amazon Web Services.
38:43
Same thing if you bought Netflix in 2005, 2006, you had no idea that streaming was going to be around the corner and driving so much of the company's growth.
38:55
But yet if you bought Netflix during that time period, that's exactly what you were buying.
39:00
So, that's something that I actually try and account for in my criteria.
39:06
And one way that I do that is I look backwards at the company and saying, is this company innovative?
39:11
Do they have a history of trying to open up ROA new products and services?
39:17
Those are the kind of companies that have a higher percent chance of experimenting and being able to do so into the future.
39:22
So, that's something that's infused into a company's culture.
39:22
Bezos famously infused that into the company's culture saying we're spending billions on failures.
39:28
We just don't know until we actually try them.
39:32
I love that ethos, that it's okay to try new things and it's okay to fail.
39:37
And I want companies that are willing to do that in my portfolio, knowing that sure, I'm going to get many of them wrong, but all I need is to get the next Amazon, the next Netflix in my portfolio.
39:49
And that will drive my long-term returns.
39:49
Is that part of the narrative? Absolutely.
39:54
Absolutely that's a part of the narrative.
39:54
How much of Tesla stock price today is driven by the narrative.
40:00
It's a story that Elon has told the entire way that makes up a huge amount of investors' willingness to put capital into that business.
40:07
So, narrative absolutely is a part of my process. Jim O'Shaughnessy: Yeah.
40:15
So, on the first part on the Amazon Web Services O'Shaughnessy Asset Management had that exact thing happen.
40:25
So, I started a company back in 1999 called Netfolio.
40:25
And it was the idea behind the company was it was going to offer personal funds.
40:32
It was going to offer the ability to customize a portfolio via the web. I got a patent on it.
40:38
And you should see the patent.
40:38
We had the patent to the generation and distribution of a stock portfolio over a worldwide network.
40:53
So, this was a big dream of mine.
40:53
I thought, wow, this is where I always try to think, where do things end?
40:59
And back then I was like, they're going to end in pure customization.
40:59
Well, the tech sucked at that time.
41:06
I made a huge mistake going B2C as opposed to B2B and made a lot of mistakes.
41:15
I've written about them, all of the mistakes that I made.
41:15
But when we rolled out of Bear Stearns into OSAM a right in the middle of the global financial crisis, I was still driven by this.
41:26
I've always been an early adopter in technology.
41:26
And so I looked at my guys and I said, "Guys, we just have to understand we're not going to sell another long only portfolio for about four years, would be my guess.
41:40
So, what I want to do is not waste our time.
41:40
I want the best technology possible in every aspect of what we do."
41:46
And a lot of it's really, really boring, like data integrity.
41:54
You have to cleanse the data.
41:54
And my people hated me for making them do that.
42:00
But you get much better results just by that little tiny edge.
42:00
But so we built it over a 10 year period.
42:08
Come to 2017 or late 2017.
42:08
I'd already made Patrick the CEO of the company, because he proved it, he had earned it.
42:15
And he walks into my office and he goes, "Hey dad, you know how I'm always banging on about Amazon Web Services." And I'm like, "Yeah."
42:25
And he goes, "We've done the same damn thing.
42:25
We built a death star to kill a mouse." And I'm like, "Oh."
42:35
And he goes, "Let's repurpose it, let our clients use it and Bob's your uncle, your dream of customization comes to fruition."
42:44
And so what I love about that is, and it's a soft skill that I don't know and I'm such a quant.
42:53
Believe me, I've been looking for ways to test this quantitative, but open-mindedness, and the willingness to try and fail, I think not only are good as you grow as an investor ...
43:05
whatever your investment thesis happens to be. It can be quant. It can be checklist.
43:13
It can be high quality companies that meet these metrics.
43:20
And as long as you have a process that you're willing to continually work on and continually update as you learn new things, I think you are going to be in that small minority of people who actually let compounding use work for them. So, I'm a huge fan.
43:40
Boy, I go to entire book about all the mistakes I made, because I don't look at them as mistakes.
43:47
I look at them as learning opportunities and 18 years later, Patrick had the good sense to walk into my office and say, "Oh yeah, we're doing that like right now."
44:00
And I'm like, "You're the CEO, do it."
44:05
And then of course we found that was exactly what people were looking for.
44:05
And yet I'm also kind of a believer in one of the statements you've made, which is 99% of great investing is doing nothing.
44:20
Want to talk to me about that? Brian Feroldi: Yeah.
44:23
Investors in so many ways are their own worst enemy.
44:29
Investing is one of the only fields where the ability and the willingness to consistently do nothing is a competitive advantage.
44:34
I know it's an offsited study and I don't even know if it's true, but I remember reading that some of the best performing assets that fidelity where accounts where people were actually are dead, or they forgot how to log in.
44:45
And to me what is investing?
44:52
Investing in the way that I do it, I look for companies that I think can grow at above average rate for a long period of time, I try and find them.
44:58
I try and buy them and I try to hold them veraciously.
45:04
But if you've done any studying of the market over any period of time, you know that all of the best performing stocks of all time have put their shareholders through immense periods of pain, just immense periods of pain.
45:17
Peak to trough, Netflix was down 92%, 92% from 2000, 2002.
45:30
Apple has done the same thing, Berkshire Hathaway.
45:30
Does it get any bigger, boring, more predictable than Berkshire Hathaway?
45:37
That stock has fallen peaked to trough 50%, I think four times through its history.
45:43
So, if you're going to be investing in the market or if you're going to be picking individual stocks, you just have to know that the price, the price of admission, the price that you have to pay as an investor is to be able, be willing, ready, willing, and able to stomach extreme periods of short term volatility and pain.
45:59
And the only way that I think you can go through that as an investor is if you just drill into your head that 99% of good investing is doing nothing. One side note.
46:13
When I graduated from college, I got a job at a startup and medical device company outside Boston.
46:19
The company was a hundred percent VC backed, pre-revenue, pre FDA approval, all that kind of stuff.
46:26
And that company eventually got FDA approval, started to sell, and eventually went public.
46:31
We went public at $15 per share.
46:36
And within a year, our stock was at 27.
46:36
For pretty much no reason at all. No reason.
46:44
Yes, sales were growing and stuff like that, but were we really 90% more valuable? No, no, we weren't.
46:49
And then came the great recession, then came 2008.
46:49
And I had to watch our stock go from over $27 per share to under three, under three.
46:56
Everybody at the company, all our stock options were underwater. The mood was terrible.
47:04
Even though every single quarter, our numbers got better.
47:14
Every single quarter, during that period, our numbers got better.
47:19
We were a better company at under $3 per share than we were when we were over $27 per share. But that's what? A 90% plus loss.
47:27
Well, that company is called Insulet Corporation.
47:27
And the company is currently valued at $250 per share.
47:35
It's about 17 billion business.
47:35
So, if you had the foresight to buy when it was below three, it's a 90 X return.
47:42
And oh, by the way, even if you bought it 27, you're still up eight X return.
47:48
So, that just shows to me, you have to train yourself to keep an eye on the business.
47:55
And it's so easy to get down and to follow the short term gyrations of the market, but that will drive you crazy.
48:00
Hence why I just have this almost like religious affinity for buying great companies, holding great companies.
48:06
And I just accept that those stocks are going to visit some interesting prices along the way.
48:18
Jim O'Shaughnessy: That's a great story.
48:18
And one of the things that I've always struggled with, I completely agree with you that if you can't honestly say to yourself that you can stomach 50% drawdown, you have no business in the stock market at all.
48:38
And the challenge with that, that Jason Zweig has really framed it really well.
48:38
It's like, and boy, I'll tell you, sitting with clients across the table.
48:49
Now I want to show you the drawdown on this strategy that you think is great.
48:55
The biggest drawdown was 62%, not on a stock in the strategy, on the strategy, on the portfolio.
49:03
Do you think you could really stomach that? And it's like, oh, sure.
49:09
Well Jason's little example is that's like showing people a picture of a snake and saying, do you see this? Does this scare you? No, it doesn't scare me.
49:24
Really, though, if you want to test their risk tolerance, throw a live snake in their lap, then you will find out whether they can stomach that kind of drawdown.
49:36
And so the challenge that I have continually found is this one, and maybe it's because there's the agency problem that I have as a professional money manager that an individual investor doesn't have.
49:54
Listen, I have long said, individuals have so many advantages over me, in terms of my need for liquidity, in terms of my need for buying stocks of a certain number of shares being traded every day, having to have a quarterly meeting, which I find meaningless.
50:17
And yet everything that we to be true about the market, you've been saying much of it. 99% is just do nothing.
50:26
Ben Goodspeed, who wrote the book, The Tao, T-A-O, Jones Averages said we humans confuse activity with effectiveness.
50:36
And so it seems like we're designed that way to be hyperbolic discounters.
50:43
It's why I say the last sustainable edges to our human nature.
50:43
And so my question for you is, have you had moments where you really fucked up and did you learn from those moments or did you kind of like say, oh, I hope I won't ever do that again?
51:10
Brian Feroldi: Of course I've had moments.
51:11
Of course I've made a series of horrendous blunders with my investments.
51:18
I mean, one of the worst dollar loss I've taken so far.
51:18
And I say so far, because I know bigger ones are coming.
51:25
Jim O'Shaughnessy: That's right.
51:27
Brian Feroldi: The biggest dollar loss I've taken so far was on a company that I was convinced no way it could go down convinced.
51:36
That company's Kinder Morgan. It's a pipeline company. Jim O'Shaughnessy: Yes. I know Kinder Morgan.
51:41
Brian Feroldi: Operated by Rich Kinder.
51:41
I mean, recurring revenue, check.
51:45
Founder led management team, check.
51:45
Dividend yield, guaranteed growth prospects.
51:51
And it had the thing that sold me was these take or pay contracts.
51:56
Take or pay, meaning we don't care.
51:56
We move oil and natural gas.
51:56
We don't care about the price.
52:02
We just get paid to move it.
52:02
And you're paying us whether you move it or not.
52:02
And I was like, how can this company lose? How can they lose, Jim? How can they lose?
52:07
The price of natural gas, oil doesn't matter. It does not matter.
52:13
So, I think the year was 2014, 2015, one of those two.
52:20
It was my biggest position and I had a synthetic long on, if you're familiar with options trading, that's the most bullish options trading that you can make. It's pure leverage.
52:34
Now, I was smart enough to even cap all of that.
52:34
My total was 8% of my portfolio with all that on there, but it was my largest position.
52:41
Well, what happened next?
52:41
The price of oil and the price of natural gas started to plunge.
52:45
And to my shock, Kinder Morgan stock was going down with it.
52:45
And I was like, what, what is happening here? This makes no sense.
52:52
The market can't be this stupid.
52:58
It has these contracts in place.
52:58
Well, as you can imagine, I was the stupid one.
52:58
It doesn't matter if you have a contract if the person on the other side of the contract can't pay you.
53:09
So, I learned a lesson, I learned a very important lesson from taking that loss, which was avoid companies that have outside forces.
53:17
So, Kinder Morgan relies on high energy prices.
53:24
Oil companies rely on high energy prices, gold companies.
53:24
It could be the best gold mine operator in the world.
53:31
If the price of gold gets cut in half, that company's going to do terribly.
53:36
So, be because of that, I learn the hard way, avoid companies that also need luck in addition to execution brilliance.
53:42
So, that's one example of a loss that I've taken.
53:42
But I know in my portfolio today are companies that I'm wrong about for one reason or another.
53:50
And I'm very confident I'm about to learn, I'm going to continually learn lessons throughout the rest of my life, but I'm okay with that, because I find the process of studying business, studying investing, buying and selling stocks to be so engrosing and so much fun that I'm okay with losing money if I learn a really important lesson. Jim O'Shaughnessy: Yeah.
54:14
And say that to me, having done this as long as I've done it, that distinction is, I think, almost required for investors to be successful over long periods of time.
54:31
Listen, if you don't know who you are, the stock market is a very expensive place to find out.
54:36
And if you ever find yourself saying the market is wrong and I am right.
54:36
You are wrong and the market is right.
54:43
And you might have to wait as much as six months to a year to find out why the market was right, but the market is right.
54:48
And if you can't just make that simple statement, even if it just makes no sense to you, even if you're offended by the fact that this is bullshit man, these are the greatest stocks in the world and they're getting hammered and all this crap over here is going up.
55:06
You are wrong, market's right, let the process work.
55:13
So, what you need is a mix of a personality type, which is you have to be willing to be continually kicked.
55:23
I said that sort of, if you, I made a joke on Twitter, and I said, and I put up a gif of a sine wave.
55:31
And I said, "I think that this is the best example of what it feels like to be a professional asset manager."
55:39
You go from genius to idiot, genius to idiot, genius to idiot.
55:46
And so it requires a really thick skin, but it also requires a humility in the face of like I'm wrong.
55:53
And if you can cement that way of learning and not be afraid to be wrong, just kind of seek it out.
56:05
Because when you're wrong, there's a lesson there, there's something to learn.
56:11
What you learned was you're not ever going to buy stocks that need luck as well as all of these other things.
56:14
That is a massively good learning.
56:21
So, it seems to me that whatever you lost on Kinder is pennies to your overall tuition that you have to pay the market.
56:30
And so the challenge that I keep back to, I've been trying to do this a long time.
56:39
I wrote one general interest book called How to Retire Rich.
56:46
I was paging through it and paging through your book.
56:46
We cover a lot of the same things, not in the same way, but basically the same.
56:51
The gist is very, very similar.
56:51
And what worries me, and I mean The Intelligent Investor by Ben Graham.
57:00
I mean, how old is that book?
57:00
I like your take in the idea of no one's ever told your arbitrator why the stock market goes up.
57:13
So, I love that was one of the reason when I saw it, I'm like, oh, got to get him on the podcast, because that's really smart. But what do you think?
57:17
It seems like that we've known about all of this for a really, really long time.
57:23
And yet we still have, I don't pay attention to the stats anymore, but a minority of people doing well.
57:33
And by the way, I'm willing to let you define doing well anyway you want.
57:41
And so being able to not care what day of the week it is.
57:49
Having a free schedule to be able to pursue what you want.
57:49
It doesn't even have to be beating some random benchmark, like the S&P 500.
57:55
I just wonder and it kills me to say it, but it's just like, is this so deep in our human programming in our human operating system, that it's almost unnatural to be able to be good at this stuff?
58:09
Brian Feroldi: Well, what's so wonderful about the stock market to me is that if you can just understand what the stock market is, how it works and how, if you just dollar cost average into index funds for a couple of decades, you'll do great. Jim O'Shaughnessy: Done.
58:35
Brian Feroldi: You will do absolute great.
58:35
You don't have to know what a PE ratio is, what a founder is.
58:35
You don't have to know about share count or stock buybacks.
58:40
You don't have to know any of that stuff.
58:40
All you have to know is that if you dollar cost average into stock market and hold voraciously, that the odds of you doing well are exceptionally high.
58:53
And to honest, I didn't write this book for the people that are stock pickers are really into to finance.
59:00
I wrote it for, there's a hundred million Americans, a hundred million Americans that have money in the stock market in one way or the other.
59:11
And I have zero data to back up what I'm about to say, but I just know it's true.
59:16
If you ask those a hundred million Americans, why does a stock market go up over time?
59:16
Why, when you were born, the stock market was X and now it's three X, four X, five X, 10 X. Why is that?
59:27
I just know that 99% of the time you will get the wrong answer.
59:27
You will get the wrong answer.
59:32
And people will say, I don't know, or there's been no wars or fill in the blank president or the fed or whatever it is.
59:38
And most people have just no idea about the basic connection between what the businesses do, business profits and stock prices.
59:47
And once you understand that super basic connection, when I understood that, it just flooded me with confidence that, oh, that's why the stock market goes up.
1:00:01
Oh, that's why the stock market recovers from crashes.
1:00:07
That's when you really need to embrace this stuff.
1:00:07
When stock prices are going up, it's easy to be an investor.
1:00:13
When they're going down, that's when you really need that story of why stock market goes buck and has been such a good investment to hold onto.
1:00:18
So, yes, I totally think that we are naturally hardwired to be bad at investing. We just are.
1:00:26
Humans are pre-programmed to be terrible investors.
1:00:34
I know that I was a terrible investor when I first started.
1:00:34
I made tons and tons of mistakes, but the beauty to me, the true beauty of the stock market, the US stock market, is if you just understand a few of the basics and you just set up an automatic investment plan, the odds of you having a comfortable life and not having to worry about money, 20, 30, 40 years from now are exceptionally high.
1:00:56
Jim O'Shaughnessy: That is such a great point.
1:00:59
And one of the reasons why I got excited about your book was because I've been stumbling around trying to convince people of these things for a long time.
1:01:09
And I like, I think you're right, by the way, I don't have any stats on it.
1:01:14
I haven't had my guys look at it, but I think you're right.
1:01:14
99% of the people, if you ask them the simple question, why did the stock market go up over time?
1:01:23
They'd probably not be able to know or they would give you some bullshit answer.
1:01:23
Or they would think they would know and then they'd argue with you of about it. All sorts of behavior.
1:01:34
But this book coming out at this a little at what a year and a half after Morgan's book, The Psychology of Money, then you've got Nick Maggiulli's book, Just Keep Buying, coming out.
1:01:45
And it was funny because I blurred Nick's book for him. I know Nick pretty well.
1:01:45
And I said to him, "You know Nick, you are going to have the most secret ... I know. Yeah, perfect. You're going to ... I have one too. I don't have it handy.
1:02:00
I said to Nick, though, "You are going to have the best indicator that no one else is going to have, but you."
1:02:06
And he goes, "I'm intrigued.
1:02:13
Tell me what this indicator is, Jim."
1:02:13
I said, "All you've got to do is make notes of the number of times either a publication, like the Wall Street Journal or social media, Twitter, the number of times you are called an idiot and taunted for writing a book with the title, Just Keep Buying."
1:02:34
And I said, "When this gets, and you can do a histogram, when this gets to the highest and it starts to fall off, you have been able, single handedly."
1:02:40
And I said, "And Nick you'll disappoint me if you don't do this, you're going to issue a report that says, buy now, back up the front.
1:02:51
And he was like, "Damn, I hadn't even thought about it that way.
1:02:59
Brian Feroldi: Yeah, it's so funny.
1:02:59
Jim O'Shaughnessy: "Because I was crucified so many times by so many publications, but they also wrote really great things about me and they treated me fairly."
1:03:10
And if you're just able ...
1:03:10
if I was teach a class on this.
1:03:10
I wouldn't teach it, because I, honest, this sounds horrible, but it's like ... I would [inaudible] ...
1:03:21
I'm passionate about this stuff.
1:03:25
And I would like to do the thing about why bees and ants teach us a lot about human hierarchies and why that trips us up and investing and everything.
1:03:32
But you know what, why don't the high schools ...
1:03:39
this could be a high school class, doesn't even have to be a college class, your book, Nick's book and Morgan's book.
1:03:43
If you could literally just get kids to read those three, I think, and I'm not going to even be ambitious in my estimate here.
1:04:00
I think you would make, let's call it 15% of the kids who went through that class in high school, maturely better off for the rest of their adult lives.
1:04:14
And I don't know, talk about putting a dent in the universe.
1:04:14
I mean, if you could do that, your book, Nick's book, Morgan's book and they really understood it and they really, really took it to heart. That's it, man.
1:04:27
You just said it earlier.
1:04:27
All you do is dollar cost average into your 401k and your passion is movies or whatever it is.
1:04:35
Good, go do that passion.
1:04:35
I, and you just happen to be passionate and driven by our desire about what drives markets. And so that's our thing.
1:04:52
You don't have to be like that.
1:04:52
And so I tell you, that would be like a really cool thing.
1:04:52
And a lot of people are afraid about it though, because as you also point out, capitalism is brutal.
1:05:06
And one of the reasons why it works so well is because capitalism is brutal.
1:05:06
And it's like, I'm always amused by the youngsters who are like socialism and Marxism is the way to go.
1:05:14
Tweet it from my iPhone while waiting at Starbucks.
1:05:21
I mean, what part of this are you missing?
1:05:28
And so I think you're right, capitalism is brutal.
1:05:28
400 stocks were removed from the S&P 500 between 1980 and 2019, because why? They didn't succeed. They didn't measure up.
1:05:36
And markets enforce that discipline and it's cruel.
1:05:44
But look what happens in Japan.
1:05:44
They call them the zombie companies, because they're all supported when they shouldn't be, and they're kept alive on life support.
1:05:57
And that's why you've had the experiences that you've had in that kind of economy.
1:06:01
So, final thing I want to ask you about is you wrote about your friend, Tom Engle, who has a really interesting kind of twist.
1:06:09
If you wouldn't mind just talking a little bit about that and letting our listeners understand there's some ...
1:06:15
you said the one that I want everyone, the headline here, the headline is, dollar cost average into the stock market funds.
1:06:27
They can be index funds if you want to make it real, real simple, and 25 years from now you're going to be way ahead of everyone else.
1:06:36
But he has kind of an interesting thing that I'd like you to tell me a little bit about.
1:06:40
Brian Feroldi: Yeah, Tom Engle is one of my favorite investors ever, and he is not someone that's known well outside of the Motley Fool.
1:06:43
So, Tom is someone that worked for nine years, just an absolute love affair with the markets.
1:06:51
After nine years of working retired and has lived off of his portfolio ever since.
1:07:00
And I don't know the exact year, it was in the 1980s that he retired and he's been living off his portfolio ever since.
1:07:11
And he is just a student of the market.
1:07:11
And what Tom's investing style is he finds, he owns dozens of companies, but he concentrates most of his assets into his top 20 companies.
1:07:25
And these are companies with "growth hooks".
1:07:25
So, he basically looks for companies that he think have some unique attribute that will allow them to grow and grow and grow for years.
1:07:34
So, some of the companies that he's identified would be like Starbucks, Chipotle, Monster Beverage, Netflix, Amazon, Google, Alphabet.
1:07:39
Lots of popular companies that are well known today.
1:07:46
And he basically says, this is a company.
1:07:46
I'm going to study this company.
1:07:46
I'm going to know everything about this company and I'm going to buy it and I'm going to hold it for a long period of time.
1:07:56
And one thing that he taught me to do that I just love is this concept of buying at better and better value points over time.
1:08:02
So, if he takes a position in, let's say, Starbucks opens up a new stock today.
1:08:08
He'll write down at the time of his purchase, price of sales ratio, 4. 2.
1:08:14
Price to free cash flow, the free cash flow yield, 2. 7. Dividend yield, 0. 7.
1:08:20
Whatever the numbers are at the time.
1:08:20
And then he studies the company and he watches it from there.
1:08:26
And what he's trying to do with each subsequent purchase after that, so long as a thesis is on track, is he's trying to buy the company at a better valuation than he bought it for last time.
1:08:37
So, that could mean that either the price has gone down or it could mean the price is up, but the financials are up more and he just buys and buys and buys again and again and again.
1:08:49
And he's always trying to lower his valuation basis from the company.
1:08:54
And I just love that idea, because with his first purchase, he gives himself permission to overpay.
1:09:00
He gives himself permission to just get some skin in the game.
1:09:00
And now he has a target that he gets to lower that number with each subsequent purchase.
1:09:05
He also believes in finding great core positions in companies and trading around them.
1:09:13
So, when valuations are high he's lightning, when valuations are low, he's adding.
1:09:18
And he has a very strong cash management strategy, but I just love his core idea about finding companies, buying them, buying them at better and better value points, and then essentially holding them indefinitely.
1:09:34
Jim O'Shaughnessy: I love his thing about cash management, because that's another one.
1:09:40
And that would require probably a college level course.
1:09:40
But listen, Robert Prechter, who was an Elliott wave aficionado and had a big newsletter in the 80s, won a trading contest.
1:09:53
And he admitted that he only won it because of cash management.
1:09:57
He didn't win it because he was right about the direction of the market.
1:09:57
And then the poor guy went on to be a bear starting in the 1982. And he's still a bear.
1:10:02
I haven't checked in on him, but I think he's still a bear today.
1:10:10
But I always was struck by the fact that he was open about, yeah, I won that.
1:10:16
The only reason I won it was because of cash management.
1:10:20
I have my current podcast that's up is with my friend, Steve Begleiter, who was out of my rabbi when I was at Bear Stearns, super smart guy, won tons of money in poker competitions.
1:10:34
And he would tell you the same thing, cash management.
1:10:34
If you get that piece down, you're going to do so much better.
1:10:41
And I like his, your friend Tom, the way he allows his cash to go up and go down.
1:10:50
I wrote a piece, I don't know, maybe 10 years ago about rebalancing your portfolio.
1:10:50
If all you needed to do was enforce rebalancing.
1:10:57
And I chose the popular.
1:10:57
And by the way, I don't know why this is popular.
1:11:04
The 60, 40 portfolio, 60% equities, 40% bonds. A, I hate bonds.
1:11:04
I liked bonds in the early 80s when I was making recommendations for my dad.
1:11:13
And I'm like, "Dad, you will never, even though I'm wildly bullish on the stock market, after taxes, you're never going to be able to outperform these Minnesota municipals that were non cullable revenue bonds."
1:11:33
And they were 30 year bonds yielding double digit returns.
1:11:33
And so my dad lived in Minnesota. I grew up there.
1:11:39
That was the last time I liked bonds. So, am I wrong? Probably.
1:11:39
But just for me, my personal preference is like, I hate bonds.
1:11:45
I like equity, it's growth and everything else.
1:11:45
So, I wrote an article saying, if you could just for your force yourself to rebalance, boom, you're going to win, because '08 into '09 is going to happen and you're going to look at your allocation and you're going to see that it, God, now it's the other way around.
1:12:05
Instead of 60% equities, it's 60% bonds.
1:12:12
If you just had the guts to flip it and put it back into equities, you'd be golden, but this is the problem.
1:12:20
So, our company was sold to Franklin Templeton, which is a huge asset manager.
1:12:28
And I always had great admiration for Sir John Templeton, the founder of that company, who he had this trick that I just love.
1:12:33
And a lot of people aren't aware of.
1:12:40
And I always bring it up because it shows that even one of the greatest investors of all time, Sir John Templeton, realized his own human failings.
1:12:46
And so he would write about this, and he would say one of the things that helped me more than anything was I would take all the stocks that I liked.
1:13:00
And I would put limit orders in on those stocks at prices that were so low the broker would say to me, "What are you insane?"
1:13:09
And he goes, "Just good till cancel, good till cancel."
1:13:14
And he said, "I did that because I knew if those prices ever got to that point, there is no way in hell that I would have the guts to actually issue a buy order."
1:13:22
I mean- Brian Feroldi: Love that.
1:13:31
Jim O'Shaughnessy: Talk about a guy way before his time.
1:13:35
And so I like Tom's idea of moving that cash up and down. I call it rebalancing.
1:13:42
I think that is part our capitalism is brutal that allows for that. Well, okay.
1:13:42
So, I always go over when I don't have my school [inaudible] joining me on here, Jamie Catherwood.
1:13:52
He's like the oldest 26 year old I've ever met in my entire life.
1:13:58
He's older than me for sure and I'm 61. This has been great.
1:14:05
Brian Feroldi: Well, you're like the youngest 61 year old that ever met in my life.
1:14:06
So, you're a good bear pair.
1:14:11
Jim O'Shaughnessy: So, listen, I think your book is great.
1:14:14
As I said, I'm not done with it yet, but the message is fantastic.
1:14:19
If you paired it with, I'm going to be gifting it to young people along with Morgan's and Nick's book, because I think if they get these three books together and they actually read them, you can change lives.
1:14:32
And I think that, that's really important.
1:14:36
That is really super cool.
1:14:36
And I think, and hope that the feedback on your book is going to be the same.
1:14:41
I mean, honestly, Brian, if you save 12 people, 20 people, people say, well, that doesn't sound like very many, oh, well, 20 lives and then their kids and their kids, you're talking about making a dent in the universe and I applaud you for that.
1:14:59
And I think that I highly recommend your book.
1:14:59
I think a lot of people might say, well, I know what makes the market go up and they'll avoid it. Trust me guys.
1:15:08
I've been in this for a long time.
1:15:13
I've written a lot of books about this.
1:15:13
My guess is you really don't know what makes the stock market go up.
1:15:18
So, buy Brian's book so you can find out why it is.
1:15:26
It's pretty simple reason, but it's a good reason as well.
1:15:32
For my final question, you listen to the podcast so you know this, so you probably had a little more time to think about it than other people.
1:15:35
I make you emperor for the day of the world. You cannot kill anyone.
1:15:42
You can't put anyone in a reeducation camp, but you can incept the global population with two ideas.
1:15:48
And when they wake up the next morning, they're going to think that they thought this, and they're going to say, oh my God, honey, if they're talking to their significant other, I just had the two greatest ideas and I'm going to go do that.
1:16:08
What two you got for them?
1:16:08
Brian Feroldi: That is an incredible power.
1:16:14
So, if I could have any power, I know this isn't exactly what you asked, but I would say I would make people feel the consequences of their decisions immediately.
1:16:30
And if we could shorten the time like between when you make a decision and when you feel the pain or the gain from it, especially with the long term decisions about money or exercise, holy cow, would the world be just a better place.
1:16:39
But if I could incept any idea into them, I would just say think long term.
1:16:45
Think about the long term ramifications of your actions, not just the short term, which is, it's so counter to human nature to do so.
1:16:53
All of our existence has been about reacting to what we see in front of us. And I'm hungry now. I want to mate now. I'm in pain now.
1:17:08
And I want to fix what's in front of me now.
1:17:08
But we are in a world where we are afforded the luxury of being able to think and act to long term and it takes training to do so.
1:17:19
But if I could incept anyone one idea, it would be that. Think long term.
1:17:25
Jim O'Shaughnessy: I like it. You got two though.
1:17:26
So, you got to give me another one. Brian Feroldi: Oh, geez.
1:17:29
I do have to give you another one.
1:17:29
I think about that long term.
1:17:39
Well, I'm just going to cheat and say, get an electric car.
1:17:42
Jim O'Shaughnessy: You know what? That's not a bad one.
1:17:45
If you're thinking of long term results as your first one is, that's not a bad second one.
1:17:52
Well, listen, Brian, tell our listeners and viewers how they can keep up with you. Where can they find you? Brian Feroldi: Yeah.
1:18:00
The easiest place to connect with me is on Twitter. I'm @BrianFeroldi.
1:18:00
If you're interested at all in my investing checklist that talked about there before, I go over that on my YouTube channel, which is also my name, Brian Feroldi.
1:18:09
Jim O'Shaughnessy: Perfect. This has been a blast.
1:18:12
I think the book is great.
1:18:12
I think it's going to do very, very well.
1:18:17
And I can't wait to see maybe have you on in a year and see what you learned, because that, by the way, that's why I had Morgan on.
1:18:23
I texted him, I'm like, "Are you willing to do a non-traditional podcast with me?" And he's like, "What?"
1:18:28
And I said, "What you learned from a million people giving you feedback?"
1:18:34
And he's like, "Oh, I love that idea." Brian Feroldi: Oh yeah. Awesome.
1:18:41
Jim O'Shaughnessy: So, I hope to do the same with you, Brian.
1:18:43
Brian Feroldi: Oh, that would amazing. I'd [crosstalk] on, Jim.