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All right, folks, we’ll welcome to the Investing for Beginners podcast. This is episode 176 tonight; Andrew and I will talk about three things you can learn from investing, from Shark Tank. This is one of Andrew’s favorite shows, and we talk about the episodes from time to time, and it’s really interesting stuff. We thought we would share some ideas that Andrew and I have picked up, mostly Andrew, from the show. So Andrew, why don’t you go ahead and tell us a little bit about your idea.
Yeah, sounds good. So, you know, you’re talking about how you’re just watching it before we came on. I thought that’d be a fun idea for those of you who haven’t seen Shark Tank. It’s a show on CNBC, and you have big investors on there. Mark Cuban, Raymond James, the sky, he calls himself Mr. Wonderful. And they have entrepreneurs to come on the show, and basically, they try to pitch these investors to try to get these investors, to give them money as investments for their businesses.
And so you’ll have all range, all sorts of a range of businesses between people, with ideas, to people, with multimillion-dollar businesses, looking to get money to take them to that next level. And so really, if you think about what investing is. We talked about this way back in the archives, in our back to the basic series, which started on episode four, the two, we talked about how, when you buy a stock, what you’re getting is a piece of ownership of a business. And as that business grows, it deals with all the same market forces as the businesses you see on Shark Tank or your local small business; it’s all business and the language of businesses, the language of business. So I think I’ve kind of picked up it’s, it’s been something I’ve I’ve liked to have on the, in the background or, you know, like to watch for fun and kind of say, there’s, there’s some good stuff in here.
So maybe we can, we can share it for first and foremost. You know, Mr. Wonderful is, by far, my favorite character. He’s; she’s, she’s the best way to describe it would be. He’s just a character; he’s funny. And I think a lot of the way he looks up businesses is similar to how I look at them. So he mentions a priority first and foremost on dividends. I saw on CNBC on a different show. He was on there, and they were talking about Disney’s dividend. A couple of months ago, an activist investor was pushing the company to stop paying their dividends to focus more cash on a growing business, such as Disney plus. So Mr. Wonderful being an investor who understands that an investment’s basics are to get cash flow from your investments.
You know, you could buy all sorts of things as investments, you could buy art paintings, you could buy baseball trading cards, you could buy Bitcoin, you could buy anything really that trades in the market. And if that thing you buy rises in price and you sell it, you can profit. And that’s something that’s thought of as investing. But in reality, a good investment is one that puts your money to work. And that’s the basics of investing. It’s the basics of buying dividend stocks if you’re putting that money to work. And as that money goes to work, you know, we can only work maybe nine to five. Some of us work 10, 12 hours, but money can work 24 seven. And as it is used in the business, it can create cash flows over time. And that’s really what investing is all about.
It’s about creating cash flows, making those cash flows grow in the future, having that cashflow build more cash flow, and working off compound interest. And so I think it’s very easy to lose sight of the importance of dividends. I, for sure, I do that from time to time, but I think a great lesson to be learned is how dividends work and how they can be such a crucial part of investments. And how if somebody pulls a dividend away that it’s, it’s something that causes you to pause and think, is this aligned with what my long-term goals are? When you look at investments and look at trying to maximize the compounding that you can get and not maximize the compounding from like, well, I’m going to buy Amazon at the IPO and sell it. When it’s trading at a trillion dollars of market cap, we can all say that about all sorts of stocks. But if you want to talk about investing money safely, reliably consistently, you have to think about building money slowly doing it from compounding. And the best way to do that is with dividends. It is.
I’m always curious about why you think dividends get a bad rap, but maybe that’s going to be not the right way of putting it. It sometimes feels Like people associate dividends as kind of from the age of the dinosaurs. Do you feel like that’s sometimes?
Yeah, I do. And I’ve, you know, I’ve seen emails where people either imply it, you know, they won’t say outright, or they will be upfront. And just say, I don’t understand why you care about one or 2%. And it really, it’s not about the one or 2% that you get at any given time. That’s not what we care about when it comes to dividends. What you care about with dividends is that dividend stocks can become compounding machines and create something that can be basically like a triple compounding factor, for whatever reason. I’m getting a picture in my head of like an atom, you know, like a real science Adam with the electrons and having multiple rings. And you can think of your compounding in that way.
It’s all the way that it can work if it’s done correctly. And if you pick the right stocks to do it with and reinvest your dividends, it can spread like a fire. If you think about how a fire spreads, it doesn’t do it linearly like a fire. Doesn’t go and say, well, I’m going to burn this foot in one second. And then the next second, I’m going to burn another foot. And then the next time I burn our foot. Now, when the fire spreads, it accelerates. And so as it multiplies it, it’s growing on top of itself, and that’s really how compounding works. So let me give an example. If you had said you had like a hundred dollars and you got $2 from a dividend a year on that whoop de doo, it’s 2%, but that’s going to grow over time.
And so what a good company does is they grow their dividend. Maybe it’s 10% a year. So maybe that first year you’re only getting like $2. Then the next year, maybe you get 10% of that. So it’s two 20 next year after that,u22 plus two 20, and that goes on and on and on. And so it’s not that you’re getting a $2 dividend, $2 dividend, $2 dividend. What you’re getting is this expanding funnel, and it’s multiplying as fire does. And so that 10% from last year is growing 10% from the year before, which grew 10% from the year before. And so it expands like a balloon when, so that’s just the dividend itself, that’s coming from a company. And then you also have the fact that as you receive these dividends, you can funnel it back into the fire yourself. And that creates a double compounding effect.
And so not only is the company growing dividends and that’s compounding on itself, but you’re also reinvesting those dividends, and those give you more and more of the company. So you’re getting a bigger and bigger ownership stake. And so as you get more and more shares, you’re getting bigger dividends. So if you had one share this year and then you had five, okay, that’s maybe an extreme jump, but okay. Let’s say you had ten shares this year. Maybe in five years, you have 11 shares. Then that’s 11 shares of dividends and not 10. And so over time, that grows too. And then you have the fact that the company within itself, to pay those growing dividends, they’ve also grown their profits over time. And so those profits also grow on themselves and a lot of good companies will take their profits and they’ll buy back shares.
And so what that does is it’s almost like a drip on its own, where you’re getting a bigger and bigger piece of the pie as they buy back shares. And it’s great for the company, too, because as the number of shares shrinks, that’s fewer dollars. They have to pay to maintain the same dividend. So you, and, and, you know, that increases the earnings per share because the shares are shrinking, but the earnings are the same, but that will increase earnings per share. So you have all these like wonderful things like in the Adam with electrons all around it, all working together to grow your wealth. And I don’t know where else, whether that’s in real estate or other places of the stock market, I don’t know where else you can get that kind of a compounding effect from something as simple as a small dividend over a long period, letting compound interest do its work and dripping that dividend that you receive to maximize that return potential.
Yeah, that is that’s, that’s a great point. And that’s a great analogy. And that’s one of the many, many, many things that I love about dividends. And I guess just thinking of it from a simple viewpoint, if you’re going to buy the company anyway, getting the dividend is just that bonus of investing in that company. And I just think that that’s something that you just need to take advantage of. And even if it’s a company that you, I don’t know if it’s, if it’s a company that you like and they pay you a dividend on top of that, you know, that’s just like frosting on the cake. And studies have shown that over the last 80 to a hundred years, when you look at the returns that the stock market has, has provided, it’s in the nine to 10% range over that period. And I want to say that two to 3% of that is from dividends. So if you remove that component of investing over all that period, that’s all that kind of money you would not have been able to compound or that time. And I think one of the things that are a very strong, I guess, an indicator of how powerful something compounding interest
Can be Warren buffet over the last, I guess 10, 15 years of his 50 plus year investing career is really where he’s made the majority of his wealth, simply for the fact of compounding doing his work. He wasn’t a gazillionaire until just recently; he wasn’t as fabulously wealthy 50 years ago as he is now. And a lot of that stems from the fact that he’s benefited from, from all the dividend revenge reinvestment, as well as just the compounding of all the companies that he’s held for all those many, many, many years. So there are fantastic benefits that can be gathered from dividends, for sure. So Andrew knows what he’s talking about there. So what’s idea number two?
Yeah. So point number two would be to know your competition. This is something I’ve seen several times throughout the show where new entrepreneurs will come in with their new ideas, but they’ll have, if you, you, you come into a market where there’s a big player, and you have a tough Hill to climb.
It can be very hard to climb that even if you have the best product in the world. And so a lot of Sharks will choose not to invest in them. So I’ve seen entrepreneurs with shaving companies or entrepreneurs with drink companies that would compete like the soft drink company would compete with like a Coca-Cola or a shaving company would compete with Gillette. And so these are established businesses, and you’ll hear the Sharks sometimes say if you understood how hard it is to get the distribution in place, to try and compete against one of these guys, I’ve heard from another show in another context where they mentioned, you know, if you succeed in this business, then once you reach a billion are now the billion, a million dollars in revenue. The leaders in the space are just going to buy you out.
And you’ll be lucky if they buy you out the worst case, they’ll, they’ll squeeze you out. So these are the types of things that you’ll hear from time to time on the show. And you do see it in the investing world as well. As you look at investments, it’s important to take that kind of an entrepreneurial approach. I think it’s; it’s obvious in the entrepreneurial space because people talk about, you know, what’s out there, you always do market research when you’re, you’re, when you’re about to launch a new product. Well, as investors, aren’t you doing market research when you’re looking at the company you want to invest in too. So it’s something that I didn’t focus on much when I was first starting. I wish I started sooner but knowing your competitors, knowing what the market is doing, that market research. So you get a good sense of where the company you’re looking at, investing in, how it has to face who its competitors are, and how that market is growing. Those are all huge things that can determine the success of a company. You know, you’re never going to know for sure, but if you can increase your chances of putting yourself in companies set up for success, then I think that can go a long way towards helping you pick the best businesses.
Yeah. That’s fantastic advice. And frankly, that is one of the things I think is most under-appreciated when we’re talking about investing and knowing who the company is competing against. Sometimes it’s, it’s, it’s obvious you think about Coca Cola, the first name that rises to your mind is Pepsi. Do you think of McDonald’s you think of Burger King? You think a Starbucks and well, maybe that’s such the best analogy, Duncan.
Okay. Thank you. I think of coming to the rescue. So when you think about competition and think about the company you’re getting involved with because when you invest your money, make no bones about it, you are getting involved with them, and you’re buying that part of the business. Part of thinking about embracing what Andrew was talking about, thinking about what space they are competing in, who their competitors are, and how they stack up? And one of the things that buffet talks a lot about in his shareholder letters and, like talks that he gives and has given, talks a lot about moats and talks about competitive advantages. And one of the things that he’s kind of trying to dial in is looking for advantages that the company you’re buying has in their particular space. Whatever that may be, it could be a technological edge.
It could be a distribution edge. It could be, they have a superior product over everybody else. There are lots of different avenues and ways that you can think about that. And it’s really easy to look at a company and think about the strength that that company has, especially when they’re big players. When you think about Amazon, for example, Amazon has several different competitive advantages over its competitors. They have a huge size; they have distribution abilities that could beat everybody else. And then you think about the technical part of it. When you think about the AWS there, their server part of it, the cloud, they have huge advantages over their competitors in that realm. And so under all that umbrella, Amazon sits over all those properties, if you will. And they help them be a successful business. If you’re going to buy a business that will compete against Amazon, then you have to think about some of those that are going against, and how can that company fit in that market?
It doesn’t necessarily always have to be that the company is going to beat Amazon. It could be that that company may have a particular niche or a particular type of entity or, or a style of business or a service, something that Amazon maybe does, but maybe doesn’t do as well. That company can be successful in that niche, even though they’re not necessarily as powerful as Amazon is. And sometimes it, it, it can be direct competition. Walmart is trying to take on Amazon in the retail space because that’s where Walmart lives. And so with some of their latest concoctions of, you know, a prime type of service, and they’re looking at drones. Some of the different things that they’ve been doing recently, they’ve stepped up their game as far as online retail, and all those things have helped Walmart do well, especially over the last six to seven months because of that.
They compete directly against Amazon, but other companies out there don’t compete as closely and have different niches. But I guess the bottom line of all this, of what I’m trying to say is when you’re looking at buying a company, one of the things that you should ask yourself is what area does this company play in and who are the other people that they’re playing with and how do they fit into that? You think about car dealers and the people who are making vehicles; Tesla has a competitive edge as one of the main electric car producers. But there are many other car companies out there, and there’s a lot of other car companies that are starting to make electric vehicles as part of their product mix. And as those become more and more popular, it’s going to be interesting to see how that kind of shakes out. Will Tesla re remain as the market leader in that space, or are they going to lose part of their market share?
When you’re investing in GM or Ford, you have to think about how they fit into that and where they will go down the road? You can have all the answers, probably not, but the easiest way to do that is to just, I guess, think sometimes logically about it. Google is our friend. Do lots and lots of research, talk to people, talk to your friends, and talk to other people. You can even send eight or nine questions. So we’ll, you know, see if there are ways that we can help you with those things. There are lots of different avenues, but Andrew is right on the money about the competition. That is a very, very important thing. And it’s not talked about enough. So I guess with that, let’s talk about number three.
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Yeah, not a groundbreaking thing. Just know your accounting. You know, Warren buffet talks about to quote him for the 13th time. He talks about how, for him, accounting is like breathing. When I watched the show, you know, obviously they’re going to talk about how much money you want to invest? You know, what percent of the company do you want? But you know, they’ll also talk about things like gross margins or operating the margin, or, you know, churn. If it’s a subscription business, these are all things you’ll notice. If you watch the show and know there are some trends, the entrepreneurs who tend to get deals with the Sharks are the ones who know these numbers, like the back of their hand. That’s because they’re working in the business; they know what they’re doing. So as an investor, you have to know your numbers too.
You could have a great business, but if you pay too much for that business, it’s probably not going to be a good investment. You could have a business that you think looks good because you see its name everywhere. But if you dig into the books and find out that, wow, this company has a lot of debt or, wow, I didn’t know this company was losing money. Wow. I didn’t realize this company is shrinking in size, even though it seems like they’re doing so well. These are all things that you can find out by learning to account. And that’s something that we strive to try to do with the podcast. The blogs that we write are trying to learn about accounting and understand it’s not something you learn from day one. I think I struggle with not trying to vomit too much accounting now on the podcast because as the beginning, it could be like telling somebody how to run a marathon when you don’t even know how to walk, but just, you know, taking steps and learning that over time.
It’s something you can figure out. If you do put your mind to a B, I think you have to put your mind to it. If, if you do want to learn about how the businesses work,
I agree. And that is an area that I have worked on very, very hard since I started getting into investing. And I felt like from the get-go, that was an area that I was going to struggle with because I didn’t go to college and didn’t get a finance degree. I did go to college, but I didn’t get a finance degree. But my point is that I realized after starting to read through different documents that accounting was going to be a different language. And it was something that I needed to embrace if it was going to continue down this path. And so I, I just started kind of chipping away at it. And I would always like to think about learning things like eating, eating a pizza, as much as we’re starving for that pizza.
We can’t eat the whole thing all at once. At least I can’t. And the easiest way for me to do those kinds of things is to eat, eat the pizza piece by piece. So work on one piece and work your way around the pie. And I think that’s the same kind of thing applies to accounting and learning how to learn the language of business. And that’s really what accounting is, is it’s the language of business. And it doesn’t mean that you have to become an accountant and understand every nuance of everything. But it does mean that you do have to understand some of the general principles of how accounting works and credit and debit and understanding that money is coming in can sometimes equal money going out, but it can also meet money staying behind and what, how that all works on itself and thinking about the different financial statements and how they are connected and how they impact the business and the decisions that the management makes in regards to the money that it makes.
And like Andrew said, if you are investing in a company, you need to understand where the money is coming from and where it kind of sits about all the other competitors and thinking about the shrinking of the business seeing that revenues. For example, if you look at a longer period, and you see that they’ve gone down over the last six or seven years, and those will be questions you’d want to ask yourself, do I, am I buying a business as maybe a the end of their life cycle? And what it does when you’re looking at these things helps you get a bigger picture of where the business is in their life cycle and how they’re performing. We all want to see businesses that are starting with revenues lower and going up into the right at all times, but that’s not always going to happen.
You’re going to have bumps in the road. You can have little down years and blips and this kind of thing. And I mean, think about how this year has all shaped out for 2020. It’s going to go into the record books as an asterisk for sure. Everybody looks back and 10, 15 years, and sees what happened with the companies and everything this year. It’s there; most of them are going to look not so great. And most people, if they aren’t familiar with what happened in 2020, we might just kind of look and go, Oh, what happened there? But we’re all living through it. So we all know what’s going on, but I guess the point I’m trying to make with all that is Andrew. One of the things that uuVitaly writes a lot about recently has been about some of these companies’ dead money.
And if you’re not, if you’re not looking at the numbers of, of a company, you could be buying dead money. And when I talk about dead money, what that means is you’re investing in a company that isn’t going anywhere. And a company that Springs to mind right away as IBM nobody would say it’s a bad company, but at one point it was a market leader, and now it’s not. And because of that, it’s maybe not the greatest investment. And I think that’s why it’s struggled, because there’s, hasn’t been a lot of growth in the company. And because of that, if you invest a common phrase, if you invest $10,000, that would be worth X amount this many years later. And if you invested $10,000 in IBM, five years from now, it might be worth 10,000 or one, or it might be worth $999,000.
It’s just; it hasn’t done much. And those are the kinds of situations that we want to avoid and ways that you can avoid by looking at some of the financials that Andrew and I have talked about. Again, you don’t have to be an accountant. You don’t have to be an expert on all this stuff, but there are ways that you can learn some basics about some of the numbers that some of the things that you can look for common ratios that can help give you an idea of where the company is and how they’re doing and all those things. As you start to use them more, they start to become more familiar. You’ll start to feel more comfortable using them and use the earlier analogy of dividends. Your knowledge is going to compound on itself. And the more that you do it, the more you’re going to understand it.
And the more you’re going to feel comfortable with it like Andrew was talking about running a marathon. If you want to walk and then try to run a marathon, it’s going to be a struggle. But if you learn how to walk, and then you learn how to jog, and then you learn how to run, then obviously running a marathon will be more within your capabilities. So when you’re trying to learn how to do all this stuff, I’m weird. And I like to dive deep dive into the deep end, but not everybody does. And I’m not suggesting you do that for everybody. But if this is something that you want to embrace and learn more about, there are bazillion resources out there; Andrew and I have spent a lot of time writing many great blog posts about different aspects of accounting.
So there’s lots of great stuff on our website. The podcast that we’ve been talking about goes back to our beginning of series at episode 42 and listens to some of those beginner series. Those are great resources to help you learn some of the basics and start from there, but just remember you have to walk before you run, and it is something you can do. If it is something of UAE’s interest, strongly encourage you to take a little bit of time and start hacking away at it. My grandmother used to have this great saying when I was a kid that I didn’t appreciate until I was older, but she used to say that water dripping on a stone. And eventually, it makes an impression. And I thought that was so appropriate. And I think that’s the greatest way to think about persevering and working on the things you want to get better at.
And I know for me, that’s something that I’ve applied to my whole life, and it’s helped me be successful at whatever measure you want to account that for my life. And I was struggling to encourage you guys to keep, keep doing what you’re doing.
All right, folks. Well, that is going to wrap up our conversation for this evening. Thank you, guys, for taking the time to listen. And I hope you enjoyed our conversation about the Shark Tank. You’ve not checked it out before to check it out. It’s interesting. It’s very entertaining. And Mr. Wonderful is my favorite character as well. He’s a; he’s a character that’s probably the best way to describe him. He’s definitely worth the watch. So without any further ado, I’m going to go ahead and sign this off. You guys go out there and invest with a margin of safety emphasis on the safety. Have a great week. We’ll talk to you all next week.
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