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IFB69:Listener Q&A: ESPP and Ally Brokerage

ESPP

Welcome to investing for beginners podcast this is episode 69, tonight Andrew and I are going to take a few minutes we’re going to answer some listener questions. We got some great questions over the last couple weeks, and we wanted to take a few moments to read through those and answer those on the air, so without any further ado I’m going to turn it over to my friend Andrew, and he’s going to go ahead and start us off.

Andrew: yep cool so let’s get going got an email it says.

Hi, Andrew and Dave thank you so much for your podcast which is very helpful to me as a beginner I also enjoyed Andrews free ebook I feel like both of you guys have a lot of useful insight for people trying to get into the market as beginners.

My question is a bit specific and then is about employees stock purchase plans ESPP particularly the one that my employer. I’m not going to say which employer he has. But let’s see he says the cool thing about the ESPP is that in addition to being a no-cost except for on sales which I wouldn’t plan on regularly doing Drip plan I get a 15% discount on the market price of the stock at the time of the buy for every buy.

Also get the discount when shares are purchased with automatically reinvested dividends then when I stop then when I sell the stock I get the full market price at the time of the sell for taxes. The capital gain would be the same would be the sale price plus the disc – the discounted price not the market rate at the time of the buy.

I still get taxed on the bonus 15%, and he says while this sounds like a great deal I have been hesitant to participate. The main reason is simply that I am unsure as to whether the stock is a good investment, so and then he asks he talks about the particular stock in some of the characteristics in there.

He also says the other obvious reason is that it will limit my ability to diversify properly since I have a pretty limited amount of extra cash for long-term investment. I do participate in my employers 401k as well which is also great matches 50 percent up to eight percent though doesn’t offer much flexibility regarding which funds to choose from. I also have a small amount and other dividend stocks and ETFs that’s all meant for the long term.

He talks about the stock how he’s worried about the price crashing he says now I’m not worried about the stock price crashing he’s just wondering if there are better stocks out there including the discount. Wondering what my thoughts were on this should I start investing a small amount in the ESPP see how that goes or do you think definitely stay away with the debt-to-equity so high thanks so much.

Jay from Boston

This is a really great question and I know for two of the companies I’ve worked for they offer ESPP it’s going to be different depending on your company, and the terms are going to be different so obviously it’s very important to understand what those terms are first for those of you who don’t know what ESPP is generally from what I’ve heard and seen and obviously in this question as well is they’ll give you as an employee you will get an option to buy stock in the company.

What you tend to see they will incentivize you to buy stock in the company by giving you some sort of discount on it, so I’ve heard of 15% that’s what I’ve seen Jay talked about 15% here.

What that means is they take your money out of your paycheck just like a 401k and then they will buy shares for you at the certain purchase date and then so let’s say if the company that you’re working at their stock is trading that like ten dollars you would get 15% off of that. so essentially I apologize because I am not thinking of the math so 15% a dollar 50 so you’d be able to buy the stock at 850 even though the stocks trading that 10.

The company working for is going to pay that extra $1 50, and you get that 15% essentially free return and there are some other like I had a company I was at where they would take the stock price. And where it’s been over the past two years or whatever the period is, and they will let you buy in at the lowest price that the stock was in.

That’s like really good, so they have like a certain period and if you’re participating in the program let’s say they collect your ESPP deposits for a year and then they’ll let you buy in at the best three month period the best price. So that was at so if the price now is that like 14 but it once was at 10 you’d be able to buy it the 10 plus you get the 15% discount, and you’d be out like 850 like we said and then you could sell it right away and make all the gains that they’ve made.

It can be very very lucrative especially if you get a nice discount and especially if the price happens to go up.

Now Jays obvious concern here is that he might see other stocks out there and so he feels his money who might be better off in a different stock right he wonders about not having great diversification because if you’re taking a large chunk of your paycheck and putting it into ESPP then essentially all your money’s being tied up in this one stock.

What I’ll say to that is the way I’ve always thought of it the way I’ve heard recommended to me by other co-workers of peers and what makes really the most sense if you think about it is they’ll generally have like a minimum holding period for this ESPP, or they’ll have I believe most of them have the option where you can just buy and sell like the same day.

Let’s say they’re taking your money for ESPP for six months or a year and then they will buy and you’ll get the discount you’ll get whatever stock price cost is and most programs are structured, so you don’t you won’t lose money right if it has like that option where you they put you in at the lowest cost then there’s no way to lose money there. The worst that you can do is you get that fifteen percent return essentially that’s free.

What I would do is and what I’ve done is I tried to max out ESPP as much as I could you want to do like if you have a order of priority you want to do 401k first if they’re giving you a match because that’s free money if you’re getting like 50 percent match or 100 percent match you’re getting a 50% return or 100 percent return on your money you’re not going to get that in the stock market without taking on risk or without having to wait right. so that’s that’s like no-brainer the best return you can get max it out as much as you can.

Then you can look at the ESP P as like a 15% guarantee to return and again you the average stock market returns 10% a year so if you can get 15% here as a one-time return and you only had to wait like six months or even the year that’s still an excellent return and it’s free there’s no risk on that the employers essentially giving you that as a benefit for working for them.

You want to take that and you want to max that out as much as you can to I think sometimes they’ll let you maybe do 5% your paycheck maybe 10 or 15% so I tried to max that out as best I could. and then whenever they let you sell it you just sell it right away and so you make that 15% return you have basically an automated savings program for you because you tend to figure out how to live on your take-home paycheck no matter no matter what happens right and so you’re not seeing this money and so you almost get like a bonus at the end of every ESPP whenever pay you out whenever you sell it.

And then you can take that money and just diversify after the fact so I kind of really like that idea I think it’s an it’s a great way to a get that free return be you can diversify once you have that pile of cash and then see you can get into better stocks that you see once you have that pile of cash so yeah you might have to wait an extra year to get into that stock you really like but you’re still getting that 15% free return which is really excellent.

And it’s nice if you think about  the market risks with being in the market trying to time the market not being able to pick the best stock every single time it’s really nice to have these options where you can have basically free return free money from a company and so I really like that idea.

He says should you stay away because the debt equity is so high I see where you’re saying there unless people are getting laid off and even if they are with something like an ESPP there they’re going to have to pay that out right.

I mean I don’t know how it would work if the company goes bankrupt but as long as the ESPP programs a like not locking up your money for five years right if it’s only like six months unless you see like the company teetering on bankruptcy and people are talking about layoffs and everything and you probably have to read the fine print to write like what would happen what’s the situation going to be if the stock is worthless after you buy it.

But in this example we talked about the debt equities one point four and that’s perfectly fine that’s nowhere near bankruptcy risk so I really highly recommend in most cases read the fine print is going to be different for everybody the terms will be different but if especially if you’re going to get a discount on the price you have to pay on the stock and the fact that it works as a savings program automated for you.

I really like the idea of capitalizing on it trying to maximize it and doing what we talked about on the podcast with the money once it’s in your hands after you sold it. I think the risk set that you talked about if the stocks not ideal those really come into play if you’re trying to hold it after whatever the time period is that they say once you can once they allow you to sell it just sell it take your free discount and run with that.

I think there is risk and you really have to think about what are the characteristics of the stock if you’re trying to hold it longer than what the automated kind of required holding period is.

so keep all those things in mind that’s not an exact answer for everybody it’s going to depend on your situation whether the terms of the ESPP and whether you’re there options as far as 401k match how much extra take-home pay do you have all those sorts of things.

I think the last thing to consider too is so yeah that’s pretty much my thoughts on the ESPP and like I said it’s going to depend on the person but generally the terms are really beneficial.

Next question.

Hi Andrew, I’ve started watching your podcasts about a week ago and just got into your YouTube channel which has been extremely helpful something that’s been on my mind is what the average amount of time you hold a stock for that’s not one of your dividend fortresses.

In other words how long does it usually take for an undervalued stock to become what it’s worth or even overvalued or does it differ for each stock and do you always sell when it becomes what it’s worth or overvalued or do you keep holding?

I guess a more general question that relates is when do to sell thanks so much to both you and Dave. I’m only 18 and I know I still have a lot to learn but I also know that I have the time and passion to do it and you guys have been such a great help. before last week I had no interest in to investing until I stumbled across your podcast which I truly think will shape a huge part of my future so I really can’t thank you guys enough. Austin.

Super cool glad to be able to help Austin and it’s exciting to hear how passionate you are getting into investing know what Dave take this one all I’ll say is whether a stock so a stock that’s not one of my different fortresses the amount of time is really going to vary and there’s no heart or set rules that I make for how long I’m going to hold a stock and I know Dave has some thoughts on just kind of that topic in general and how it relates to intrinsic value and value investing.

Dave: yeah absolutely so Austin as well thank you very much for listening and we’re glad that we’re able to give you some guidance and excited to hear about your passion. And yes you are setting yourself up for a life and this is awesome.

To answer your question  when you’re looking at intrinsic value really what you’re trying to do is you’re trying to find a discount to the fair value price of whatever that means be so  using easy numbers as I like to do. So let’s say the stock is selling for $100 and you figure out that the intrinsic value is actually a hundred and fifty dollars well you can buy that at a discount now because it’s actually less than what it’s really worth.

Remember Warren Buffett always says that value is what you are sorry he always says that price is what you pay value is what you get and so you’re always looking for a discount. so the margin of safety which is something Andrew and I are very big passionate fans of because the reason why you’re looking for that is you want to find a discount because if your calculations are off if you’ve made an error in your judgment or your assessment you’re not going to get burned or if you are going to get burned you’re not going to get burnt too badly.

That’s really kind of where we look for that so when you’re looking for intrinsic value looking for a discount to the price of what it’s selling for right now or what you think its worth.

So do you hold it forever yeah I mean that’s really kind of that’s really kind of the goal is to find a company that you can hold on to forever.

Now are you going to always be able to hold on to every single company? no you aren’t and that’s unrealistic to think that you can buy a Coca-Cola of your generation at 18 years old and hold it for the next 50 60 years that’d be awesome and I’m sure they’re out there.

But who that’s going to be and when that’s going to be that’s really hard to determine so how long do you hold it for well there is no set time and you hold it too it’s overvalued well I like to argue that you hold it for as long as you want to hold it as long as you’re comfortable with the risk of holding it and that’s really what it boils down to is how comfortable you are with the risk.

In do you I know some people advocate selling it as soon as it gets to the price that they think its worth and then moving on and trying to find other investments I guess I prefer to just keep riding that horse.

It it’s out of favor I’ll use a company let’s say Johnson & Johnson for example huge company and it’s probably a little bit overvalued at the moment but let’s say that there’s a downturn in the market and then you in the future and you can buy this company which is a great company and it’s been paying a dividend for a really long time.

It’s a it definitely fall into the dividend aristocrat realm and so that being said let’s say that the market has a downturn and you can also buy this company in a discount to what you think it’s worth and then you can hold that for the next 30 40 50 years because it’s that type of company that will continue to grow.

The some of the tech companies out there they that can be more of a challenge because you never you’d never know how long that particular product or the service that they offer is going to be relevant. and that’s one of the risks of getting involved with Facebook for example I’m not bashing Facebook by any means but I am saying that  10 years ago who would have heard of Facebook  everybody was on MySpace now who even talks about MySpace.

So I guess the whole point of this is that you how do  when to sell that’s a very hard question and you always have to have a reason for buying the company also have the reason for selling the company.

And Andrew has very specific reasons for why he sells the company and I have them as well and when there’s a negative earnings for a year when there’s a downturn in the metrics of the company the CEO leaves and the person that comes in maybe is not the right direction for the company.

I’m not saying these things are all immediate sells but they’re definitely things for you to keep an eye on and for to keep it track of no downturn in earnings or a downturn in the revenue of the company yeah that could definitely be an alarm bell for sure.

But I think  how long do you keep holding and how long do you sell those are really questions that you’re going to have to learn as you go.

But I think the general rule is I keep it until I feel like I don’t own it anymore because remember we’re not buying a stock we’re buying a company and that gives you a different perspective than when you’re just thinking about a piece of paper or ticker on the computer.

When you’re thinking about the business are you actually buying whether it’s Starbucks or Ace hardware or grocery store whatever it may be it gives you more of a tangible feeling that you’re actually buying a business and when you’re buying a business it tends to make you want to hold on to it just like when you buy your car you don’t want to give it up until it’s dead. So I think that’s kind of the way I think about it.

Andrew: yeah I agree I think the focus is figuring out when you want to sell if a company struggling rather than what’s going on with the price.

Dave: yes yep exactly it’s never about the price it’s about what’s going on with the company.

Andrew: yep 100% agree. Uh, so next question.

ESPP

Hi I’ve recently come across your podcast and from that I have learned from it along with discovering about dividend kings which I’ve added to my portfolio but my question if you don’t mind spending a few minutes answering is what do you think about m1 finance they are a brokerage service and automatically invest funded or dividends back across your portfolio evenly.

I’m sure you are familiar with them from what I’ve gathered though you guys use TradeKing which I guess is a Ally now I’m curious to know if you would consider m1 finance legitimate for investing even though you can’t stop our investments going into the whole portfolio instead of dividends going back into that particular stock thanks Daniel.

So Dave what do you like about Ally and then maybe I’ll talk about m1 finance because I did a little bit of research on that brokerage maybe we can compare and come up with.

Dave: okay all right sounds good what do I like about a lie I like the several things that I like about a Ally first of all the price of the trades is remarkably low and it’s stayed low for a very long time now they have not adjusted their rates basically since I got involved investing with them which was over four years ago.

I like the fact that they’re not trying to gouge me and that they get what their clients are and what they’re looking for. I also like their the ease of using their platform I know that  some people are concerned about how laborious it may be to actually by a stock and it takes a couple of minutes  it’s it doesn’t take long to actually purchase the stock.

You’d be buy the ticker you put the amount in yeah how many shares you want to buy and when you want to buy it and you’re done. So I mean as far as that goes it’s it’s very easy.

I like their platform and you’re able to do some research on their platform and their app is decent so you can use that to check your portfolio to see where the balances are dividends when they’re being reinvested what’s being reinvested  all those kinds of things so I mean I’m a big fan of that.

And I also like the fact that it’s with my bank now i bank with a Ally bank and so the ease of me transferring money from my account to my finance accounts is super easy and that is for me a nice advantage as well.

Before when I was with Wells Fargo I would take a anywhere from two to three days for my money to transfer from Wells to Ally and so when you’re ready to buy a stock sometimes it could be a little irritating that you have to wait a few days to get the money in your account before it can actually invest it. So that’s another advantage for me.

Andrew: yeah I remember because I have Bank of America set up to go to Ally I remember what I maybe well back windows Trey keynote would take 2 to 3 days and lately when I’ve been putting money in and sometimes it goes in the same day sometimes within 24 hours so I think they’re getting even better in that aspect I like the customer service from Ally because I remember calling them and I was on hold for maybe 10 seconds that was really cool and the only guy do is like give them a phone call tell them you want drip on all your positions and they will do that for you automatically and for the rest of the life of your portfolio something that’s really cool too.

To talk about m1 finance did some research they talked about some of the positives which Dave you kind of touched on they say that they can structure your portfolio with a click. Instead of a Ally where you have to make individual trades and one Finance will do it for you automatically but like you said Dave I mean that’s such a short easy quick process anyways the other thing about m1 finances they talk about how they don’t have transaction fees there’s no account fees.

Ally doesn’t have any account fees obviously there’s a $4.95 trade transaction fee for Ally so m1 finance doesn’t have those which is nice however they do have to make their money somewhere right so I wanted to investigate like how do they make their money.

And from what it sounds like they get paid for recommending particular funds they also get they offer like debt products so I’m assuming they’re going to try the market you these different loans once you have an account with them they make money on investors who are trying to invest with margin and with debt they’re essentially you’ve been able to be a bank in that sense.

So some of the things I saw and obviously a big drawback is not being able to drip in your individual positions. we loved I love to talk about drip and how important that is for your investing especially if you’re doing small amounts right if they’re just putting it back into your portfolio rather than putting it into an individual stock if you’re investing small amounts that dividend isn’t going to be able to buy a new position so really the money is not compounding it’s you’re getting the dividend payments and it’s just sitting in your account you’re not going to get the same compounding as you would with fractional shares through a drip.

Also it’s not clear whether they have every stock available I know other than over-the-counter stocks which  you’d have to do extensive research on anyways like pretty much anything publicly traded on NYSE or Nasdaq you’re able to buy through a lie it’s not clear whether and when Finance is able to do that for you.

And I just like the control being able to structure my own portfolio the exact specific way I want to rather than m1 financed which they’re going to structure it for you but you don’t know how many shares you’re going to get you don’t know how they’re going to necessarily do the buys and sells.

They could be that spread might be different the way brokerages work is they you give them an order and they’re they try to fill it within a certain number of cents within where the buy or sell was if we’re sorry note our talk about like old-school brokerage and Wall Street and stuff that still happens even though it’s online.

And so we don’t know if the m1 finance spreads a lot worse right if you’re wanting to buy these stocks in at like ten fifty and then you’re really buying them at like 10 80 or $11 that might be costly over the long term. Lots of different pros and cons I guess we just really like I like is it’s more options right more control and I really like that aspect and for $4.95 a trade that’s not terrible to be able to have all that control all the additional things to really be buying stocks real way in the right way and managing stuff yourself rather than kind of pawning off to somebody else.

Dave: Hi Andrew I found your end days podcast and I have binged all 66 episodes that’s amazing. I am a new subscriber as of last month and I was very excited to receive the August a letter.

I have a few questions and hoping you able to shed some light for me I am getting ready to start a new position with a new company I’m going to roll over my 401k to my Roth IRA they’ve started to use for they letter I will have enough and then some to get caught up on all the positions in the real money portfolio should I do this all at once or like you mentioned in the e letter split it over a period of time thanks for everything that you and Dave do it has really made me more excited to learn more about the market and now you use finviz.com  and I have opened I have created my own spreadsheet to track my investments I am also going to start reading the books that you both have recommended thanks again and all the best Constantine.

Andrew: alright so I’ve done this rollover thing before rolled my 401k to Roth IRA when I had a new job what I talked about in the e letter how I recommend is taking that lump sum and doing it I divide it by 10 and I did it one position every month for 10 months and then I reached full diversification by ten months.

I know you can obviously have different ways to invest I think the studies have shown that actually just investing that all at once 10 style perform doing it the way I did it there’s personal preference of risk and I think the outperformance they saw was like really small

I like the idea of getting in a different especially if it’s a significant amount of money for you getting in at different kind of time periods because the market can move within ten months so you can kind of be getting in some lower times of the market some higher times getting into different positions another understanding that the stocks other buys now might not be buys in five months so I kind of like having that longer time periods to kind of get myself into the best positions.

So like for an example if you were the lump sum everything right now depending on how many buy recommendations are in the e letter right you might not be able to get into a fully diversified portfolio or you would have to overpay for it.

Right now I have 20 positions in the e letter if you were to just split it up into all 20 with your lump sum some of those are going to be really expensive because those were stocks I bought three four years ago and they’ve really gone up in price since then so either you like wouldn’t want to get into that one or put more in a different one it can make for a lot of confusion a lot of different decisions you have to make.

Or every time I’m buying the new stock I’m doing a new buy recommendation I always know the price is exactly where I want it because I’ve been researching it and done my analysis and that’s when I know I want to buy.

If I have the patience to kind of spread it out over ten months I’ll still hit that diversification sure it might not happen month one but they’ll also be rolling into these new positions at great discounts intrinsic value at great margins of safety every single time.

And so I really like that idea I don’t know if you’ve had to do a lump sum before or what your thoughts on lump sum would be?

Dave: I have not had to do that yet.

Andrew: okay so that’s what I did I don’t I don’t regret it at all and I don’t know like you can’t really go wrong either way it’s really a small detail. but I understand how you can kind of trip some of the up so that’s the way I like to do it if you want to do a different way that’s completely fine I think you might turn out fine okay but that’s what I do and that’s kind of why.

I’ll go ahead and read the next question.

First of all Andrew I want to thank you and Dave for producing the Investing for Beginner’s podcast. It’s truly remarkable I’ve been listening to all the episodes and enjoying the learning experience it’s helped me get through some tough days here and there’s really military now I think a drip is only a good thing if the price of a stock is still at a good price or at least fair value but if the price of the stock has passed its intrinsic value by using the drip you are overpaying for that stock.

Since dividends are taxed as soon as they are distributed to the stock holder so what are you doing is taking your money and point it into an overvalued business and thus losing your margin of safety.

You’re better off taking that money and just putting into your next stop so he has an example so bottom line he wants to drip into a new position instead of dripping into the position that he is.

Hey I like the automation of being able to have a drip done for me without me needing to do anything right. so I my stance on drip is is I like to drip no matter what keep the drip in the same position regardless of how overvalued it gets. While it’s true that particular dividend might be you might be paying a little bit more for it and to understand the dividend payment is a fraction of the overall investment right.

It’s very important for that initial investment to be made with a margin of safety but when you’re talking about something that’s like 3% 5% of the original position that little premium your paying on the margin of safety isn’t going to it’s not affecting your total return it’s just like a small portion of it and we’re just collecting little portions of this reinvestment that’s going to add up to a lot over time.

That’s kind of how I look at it is I’m okay paying a much higher price on these reinvested dividends because not only is it like small in the grand scheme of things when you compare it to the entire investment but it’s also if the stock price is generally going up the business is probably also doing well so you got in with the most most of your capital you got in at a great price.

Now if the price is going up the business is doing well I want to keep getting more shares of that right I don’t want to maybe put a whole other new huge investment in it. Where I’m paying a huge premium to the intrinsic value.

But if I’m getting little portions of the business even if it’s overvalued those are basically coming to me for free because I put that money in anyways and so I’m able to pick up more shares of a stock that’s hot a business that’s hot a business that I want to ride to the end if I can.

And so just continue picking up the cash and letting it grow over time so that’s a big reason the whole kind of thing we talked about with m1 finance and if you have a small amount of money you’re investing that you’re not going to be able to buy a new share with that dividend.

That plays a factor the idea that I don’t have to because these drips are coming in like I’m getting these emails I’m getting three four drips every single month right and so I don’t want to have to try to find a new stock three four times a month that’s now we’re starting to talk about me picking up a second full-time job.

Investing is supposed to be something that happens naturally and passively. so a lot of different reasons why I prefer to keep the drip in a single stock I hope that’s helpful and it gives you some kind of insight and really I think that difference in the margin of safety intrinsic value makes a huge impact on your initial investment but on the little portions of businesses you’re accumulating over time I don’t think that really it’s not worth my time to try to make an extra percent on something that’s already only a percent of my original investment anyways that’s my thoughts on drip and why I prefer to keep it on an individual stock rather than putting it into a news.

Dave: I would agree with you and all that and I think to throw my log on the fire with that so much of your overall wealth and your growth in your investment portfolio is going to come from dividends continuing to grow and compound over time and I know that something Andrew has pounded on about many times is  the great compounding that you can get from dividends and dividend stocks.

And you can look at all kinds of research on the web about how much dividends has affected the overall return of the market over the last 100 plus years.

It’s been a two or three percent portion of that and when you look at that percentage over a long period of time or even a shorter period of time it’s just amazing the accumulation effect of compounding is just ridiculous and it needs to be taken advantage of and by moving in and out of positions like you’re recommending that could lead to an under performance over the long period of time.

Additionally you’re also talking about buying and selling a lot of stocks and even at $4.95 a part a trade that can add up pretty quick and that would eat into your returns as well over a long period of time.

One of the advantages to buying a company that does drip or that you can drip is that continual free money that Andrew was talking about that is so impactful and such a huge portion of your returns and  why would you give that up I guess that’s my thought.

Andrew: yeah thanks for adding that and I think something about taxes too right he mentioned taxes if you’re in a Roth IRA you’re not paying any taxes on dividends so that’s a really nice feature and if you aren’t and you’re paying taxes I mean you’re going to pay that or whether you drip or whether you take that and put it into a new stock so I don’t think tax is coming to this.

Dave: yep I would agree alright I am going to take the next question.

Andrew first off thank you for such a great podcast and Dave of course. Both of you do a wonderful job breaking things down so it’s easily understood. I’ve only started diving into all of this three months ago and I already feel pretty well-versed thanks to the both of you.

I am a strength and conditioning coach personal trainer baseball coach and hitting structure by trades I like them already so I appreciate your guys love for baseball like him even more and the analogies to baseball and fitness you so commonly use.

My question pertains to how to enter new positions and diversify for the beginning investor. After being financially ignorant for most of my life I’m 36 and just now starting to climb out of financial hell I find myself constantly battling to either enter new positions or adding two current positions I feel are still trading at discounts.

I currently hold full four primary never want to sell positions and three other minor positions and want to continue diversifying I just can’t overlook adding to current positions and do a way for each position to start edging towards a fair value before starting new positions elsewhere or should I look into investing in new positions to diversify evenly? I have a very finite flex fund to invest alright Scott.

Thank you Scott alright so here’s my thoughts on that so I guess where I would go with that is I would continue to try to add to those positions then the older positions until you feel like you have added enough.

When you’re first starting out you want to build it to I guess let me let me back up. So Warren Buffett always says that the best way to invest is thinking about having a punch card and you have let’s say 20 punches on that card so you can only buy 20 stocks over though over your entire life. If you think about that that certainly gives you more pause to think about what you’re going to be investing in and you’re going to be more careful about your choices and you’re going to be more careful about where you allocate your money and how you make your decisions and do your research and all those great things.

When I think about what am I going to buy I think about what are my choices out to her to invest in so if it’s something that you want to do on a monthly basis like Andrew does with his e letter. You have to do research to find companies to buy and every month you have to look for a new company or you look to invest in a company that you currently have.

Every month when you’re doing your research to try to find a company who however that we’re research process may be whether you using screeners whether you’re looking for highs or lows in the market for a particular company or you just saw somebody driving down the road they saw a billboard or a sign on a truck or something and sparked an interest whatever that may be.

When you start digging into those companies you may find that you may not find anything that’s an investable at that particular time so then you have a choice do you invest in a company that I already own or do I just sit on my money for another month two weeks whatever it may be before I invest again.

And just because you have the money and you have to invest doesn’t mean you have to pull the trigger right then and there to use a baseball analogy because I know you’re a baseball coach you do not have to swing at every single pitch you see. And there are no three strikes and you’re out like in our favorite sport.

Every time you have a choice to make an investment you do not have to pull the trigger if it’s not something that you’re absolutely convinced is something that’s either going to make you money over the long period of time because that’s really what we’re looking for.

That being said if you find something that you really like go and invest in it and if you don’t find anything you don’t like then don’t invest in it and if you want to continue to build the positions of the four companies that you are going to hold forever your primary accounts that you’re talking about.

Then if they’re still at a good buy price then pull the trigger on them keep adding to those positions because this is not a race this is this is a marathon you’re looking at the long term of what you wanted to do. And so by taking it slowly is again this is not a race you don’t have to buy all 20 positions if that’s what you want to get up to today.

Mohnish Pabrai who’s one of my favorite investors the guy owns like five stocks so they talk a lot about trying to find great positions and really piling into him that’s something you can do with your finances go for it.

If it’s not then using more of a dollar cost averaging is a great strategy to use for that but I guess my recommendation would be every time the year however your system works for you to buy something. It’s think about those different philosophies and how you want to attack them.

But I guess that would be kind of how I go about it would be looking at continuing to add to those positions as long as you’re still being able to get a good value for what you’re paying for. And if you’re not then you can look for other options and if those other options are not available then it’s okay to wait you do not have to buy if you don’t want to so I guess that’s kind of my thought.

Andrew: yeah that’s a piggyback on that I really like the idea that it’s not a race at 36 you probably like I always say you want to be investing for the rest of your life so got plenty of time to build a fully diversified portfolio nobody’s putting a gun to your head saying you need to be diversified by two months three months or even two years.

It took me about two years to have a fully diversified portfolio and I love adding to current positions as well and then once you hit full diversification you will have to add to current positions anyways most likely assuming the opportunity is still there.

So yeah I like that I like the fact there’s no perfect answer for it it’s what you’re comfortable with I’m super comfortable at dollar cost averaging. I liked the idea of being diversified sooner but I also didn’t rush it right I didn’t do it right the way that I did it over a relatively longer period of time and it’s also going to depend like what’s your conviction on these positions right. Is the opportunity just so amazing or is it just kind of like it’s a decent so I’m just going to do it just because I want to keep it in primary position.

That’s all things to keep in mind and I like the baseball metaphors and if I were to add one it would be the whole Ted Williams approach right he didn’t focus on which pitches do I want to hit he said which ones do I not want to swing at and I’m going to make sure I don’t swing at those makes things a lot simpler and so having a long-term a patient approach these are all good things to have.

Last question for today.

Hi Andrew, I am a New Zealander and I mid-50s and I’ve been listening to your and Dave’s podcast this year and have learned a great deal about investing in stocks I think you guys give great independent and prudent advice to investors and I’ve learnt a lot thank you very much. I just wish I had this information thirty years ago I haven’t purchased a VTI spreadsheet because I don’t know if it can be used to evaluate stocks listed on the NZXT and the ASX which is what i am concentrating on at this moment because of the tax laws in NZ. And because the online share trading account i’ve opened the only deals with stocks listed on these stock exchanges.

So I guess the question here is the spreadsheet any real use for stocks for data is only available for the last four or five years or is ten years of data required kind regards M.

So for the VTI spreadsheet I require five years that’s how much earnings data I want to look at and so like that keeps me out of IPO stocks that keeps me out of stocks have only been public for two or three years and I’m fine with that.

Benjamin Graham actually in his book the Intelligent Investor when he met he didn’t talk about growth much he really focused on the discount to intrinsic value but he did also say that a business with stable earnings is important hopefully a business with growing earnings is preferred.

And he talked about looking at ten years right he looked he talked about looking at what were the earnings today what were they last year what were they ten years ago and what’s like the trend there. So it’s something that’s definitely something that’s good to keep in mind something to consider I like to look at five years four just to fill out the VTI spreadsheet that keeps it simple enough for me when I’m filling one out.

And then when I start to think about like qualitative factors or I start to think more about which businesses do I prefer the growth in then I start to look at 10 years of data and things of that nature but when it comes to just a spreadsheet itself I used five years.

And I know while a lot of value investors might have similar metrics and calculations and valuation techniques when it comes to kind of the intrinsic value things can get really out of control and you start to talk about growth and there’s so many different opinions. But I would say the more data you have the better. Buffett likes to focus on growth but he focuses on consistent growth Coca-Cola one of the big reasons why he bought Coca-Cola back in the heyday was they just had like a very predictable amount of slow steady growth.

I don’t think maybe slow is not the right word but it was definitely consistent and it wasn’t like this crazy tech growth it was just slow and steady sufficient growth and something that had a very long track record. So more data can be better for you as long as it’s not paralyzing.

I like to use at least five years I know that’s way more than most analysts use anyways.

Dave: alright folks well that is going to wrap up our a little question and answer session I hope you guys enjoyed that it was a lot of fun for us to talk about these different questions.

Please keep them coming you guys are asking great questions and this is awesome and like Andrew likes to say if one person is thinking it and asking it ten more people are thinking it as well.

So remember we’re here to help you guys learn as much as you can and we want to help you grow as an investor and learn as much about this great system that is out there.

So without any further ado I’m going to go ahead and sign us off you guys have a great week go out there and invest with a margin of safety emphasis on the safety have a great week and we’ll talk to guys later.

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