Welcome to the Investing for Beginners podcast. In today’s show we discuss:
- Thoughts on different classes of stock, such as B shares
- Reading through proxy statements and what to information you can learn.
- Different ideas around keeping “dry powder” in the event of market downturns.
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I love this podcast because it crushes your dreams and getting rich quick. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern with a step-by-step premium investing guide for beginners. Your path to financial freedom starts now.
Welcome to the Investing for Beginners podcast. Tonight. We have episode 195 tonight. Andrew and I are going to read a really good list of questions we got recently. So I’m going to go ahead and start reading the first one, and then we’ll just do our usual give and take. So here we go. Hello Andrew. Hello, Dave; I love your podcast. Weren’t so much, but I still have a problem investing in certain companies. Many companies have several different stocks available. How do I decide which one to buy and where I can find a good resource, which helps me understand the differences between these stocks. Recently, it got interested in Viacom, they got three different stocks. BIAC Vic EI and BI ACP. What are those? Why do they have them? And how can I decide which one to get? Cheers, Timo. Andrew, what are your thoughts on Timo is really good question about Viacom. I know, you know, a little something about the company.
I do know a little bit about them. They had that huge blow up lately. But before we get too off track on that, the reason you see different tickers for different companies is because there can be different classes of shares for a company. And so it can be confusing cause there could be like sometimes two classes, sometimes three classes and all that. The easiest way to think of it is a very common one would be where they split these classes into voting and non-voting shares. So let’s take Viacom as, as a good example here. The first two tickers, you mentioned via C and VIAC are the two classes of shares. One is voting. The other is non-binding. So class a is the VI a C a that one is a voting stock and class B is non-voting. So what does that mean by the, the non-binding basically as part of running the company and the governance of a company, the shareholders will have the authority to vote on certain issues. So every company has like a CEO and then they have the board of directors and then you have the shareholders.
And So the CEO reports to the board of directors and the board of directors will propose things and then the shareholders will vote on those things. And so, you know, obviously they’re not voting on what’s the CEO doing that 8:00 AM on Friday, but they’ll vote for the bigger issues. Like, do we want our company to be bought out next year? We have this offer from Google and want to buy us out for a billion dollars. Is that something we want to do? Okay. Let’s let’s hold it to a vote. Or maybe the board of directors decides that the CEO is not doing a good job. So maybe then they’ll put that out on the vote and decide from there. So there there’s, there’s just, there’s major events that are voted on. And so that’s why you’ll have these classes where most stocks have just a single class where you have your shares and each share is one vote, but sometimes these companies will split it up.
So they’re almost like taking the power away from, from, from one group and going to the other, another example of this would be I think Snapchat was one of the more recent ones where the founders kept all of the voting power. And so the public could buy one of the class of shares, but they couldn’t vote on anything. So really effectively, the founders kept all voting power and did whatever they wanted with the company. That’s, that’s, that’s what it comes down to. So you’ll see those tray that slightly different values, you know, VA via CA or vac they’ll trade, slightly different values to make up for that difference, and why the price is slightly different. And that’s going to be the big reason and pick mostly, unless you want to like make a fuss about it. Usually your votes don’t don’t get counted.
Usually a lot of the votes will just go through if the board of directors recommend something, then the, the votes will just kind of go through. But for investors who are kind of the more activist people, those managing billions of dollars can have huge sway and how things happen with the company. And the more shares you own, the, the higher voting power you have and the more you can influence what goes on at the company level.
Yeah, that’s a very interesting take. And I think I agree with all those things you were saying, and that’s, those are great things to keep in mind because you will see these kinds of things pop up once in a while. One that that Springs to mind for me is Berkshire. They have a, a Berkshire, a and a Berkshire B shares, and most of us
Peasants invest in the Berkshire B shares because they’re far more affordable. The Berkshire acres, I was just looking online and they’re selling free, cool, $417,000 per share. Now those are voting shares. So you do get a chance to vote for all the things that Andrew was talking about. Whereas the B shares, which is what I own is I don’t get any share any, any say in what happens with the company and I’m okay with that. But that’s primarily the difference in anybody that’s owned stocks like, like we do, you’ll get notifications. I know that I get them every year that they’re saying, you know, Hey, you know, we’re, we’re announcing our voting for Intuit or Costco or whoever that the voting is coming up and do you want to vote? And in some cases you could do it by phone, some cases, I think you can even go online and cast your vote.
But like Andrew said, most of the time it’s, it’s, you know, for us, for us small folk, it doesn’t make much impact, but it’s more impactful when you start talking about the, the big money managers and the activists that are trying to get involved and get seats on the, on the board, or have some sort of say in what happens with the company. So I guess could you tell us a little bit about Viacom the company and what you, what your thoughts are on kind of what’s going on with that company? They were in the news recently, too, weren’t they?
Yeah. I mean, they had one of these fund manager guys. He was managing his own money and was getting caught up with these swap contracts. And so basically what he did was he was able to make a hugely levered bet, which means he was, he was able to cause, you know usually if you’re borrowing money to buy a stock, the broker, I was going to make sure you have enough money as collateral And are there to, you know, if, if the tray goes the wrong way, when you’re, when you’re trading stocks borrowing other people’s money obviously the winds are magnified, but so are the losses. And so if the losses outpace how much you can physically pay for, then whoever made that trade for you is going to be in trouble. So these brokers will force you to put up money as collateral. There’s A, there’s some loopholes around that. And
We saw exactly how the aftermath of that can happen with what happened in Viacom. And so you had a guy with a fund and he was doing these swap contracts. And so basically the banks that were involved in this transaction, they didn’t know how much collateral he had. So was able to lever way more than his, than as usual and kind of prudent. And so once they kind of figure it out that this trade was going bad, there was a panic. And once all of his positions got liquidated, you saw the price of via just completely cratered. And it was like, it was, it was a pretty, I think it was like a week or two weeks of just huge loss followed by huge loss fall by huge loss.
And there was, as these positions were unraveling, cause he, he was a big, he was a big a big billionaire and it was, I think the fastest, any billionaires lost their entire fortune. It was a huge deal. I, you know, I’m not an expert at what happened by any stretch. I looked at Viacom after the crash to see if it was there, some potential value. And so that’s kind of what happens. And it’s scary because we don’t know how much more of these kinds of swap contracts are, are, are still in play. I mean, we know, we know, like if you ever look at a annual report for a bank, they will, they will talk about how they have their different default swaps credit, default swaps and derivatives and everything. But the accounting for it’s kind of weird. So stuff like this can happen and it’s kind of scary.
It can be very scary. And I’m sure for, for the gentleman that was involved in, the people would involve with them is probably not a fun period for them, by any stretch. It didn’t get all the publicity that the whole game stop fiasco did, but it certainly had a big impact on some companies and some different banks. I know Deutsche bank got some hot water because they were one of the companies that allowed they’re one of the banks that were allowing this gentlemen to, to execute all these trades. And we’re kind of deciding to bank a lot of those, those trades with money that he didn’t have. And so that got them in some hot water. I think the two people that were involved, I think lost their jobs because of that. So it’s yeah, it’s shows you the, I guess the perils of investing with leverage and how dangerous that can be from time to time. For sure. So I guess a question to follow up with is what do you think is a good resource for him to, or anybody to try to find out more about kinds of these different kinds of stocks or companies?
It’s, it is interesting because every stock can do it a little bit differently. So like you could, you were talking about the whole Berkshire thing where they have a bear, a shares and B shares and the huge price difference, right. Hundred, a couple hundred dollars versus hundreds of thousands. Right. And you’ll have these weird things too, where they’ll say, you know, if you have B shares, then you, the voting rights
Of 10 a shares, and those are called super voting shares. So it’s, it can get complex. What you would want to look to research would be the proxy and it’s something we’ve covered on, on our blog. So you can go investing for beaners.com, you can search for it. And then it’s basically, I believe the broker. So like I never kind of look, I kind of ignore a lot of the email I get from my brokers just cause it’s, I don’t know I did. That’s just something I do. So I don’t know if they send proxies through email. But I know you can look it up on the sec website. And so in the proxy I’ll show you, they will disclose, you know, unless somebody is doing credit default swaps or these crazy derivatives, they will show who owns what. So like if you look up a proxy for Berkshire, you’ll see, okay, buffet owns 30% of this company.
And so they’ll list like people who have more than 5% ownership in the company, they’ll also tell you which classes of shares there are, and they’ll tell you which ones are voting and which ones are not. And then like, if there’s any special rules with special voting, super votes, whatever another resource you can just go to Google and that’s at least how I figure out what classes, what, because, you know, via VSC, that was kind of, they didn’t put me in there. We had to Google to figure that part out, but yeah, that’s the two resources would be Google and then the proxy statement will show you the details. Yeah. That’s, that’s a great, great resource. And the proxy is is kind of an interesting document to look at. It’s not something that gets talked about a whole lot, but the cool thing about the proxies like Andrew was saying is it kind of gives you a little more flavor about who runs the company and who owns the company.
And sometimes it’s not always the people running the company that owned the company and other things that can be interesting too, is to see who some of the bigger owners of the company are. And sometimes it’s family members, sometimes it’s boards of directors and sometimes it’s other funds like Blackstone or Vanguard, for example, they may own a big chunk of the company. And so those kinds of things are just interesting to know. It doesn’t always necessarily mean much, but it’s an interesting tidbit, but there’s also information in the proxies about how much the board gets paid and the executives that run the company. And so you can kind of see some of their incentives and see what drives them to get paid. And so, and those sometimes can help you understand a little bit of why the company is making some of the decisions that they do, particularly if there are decisions that are either not well received on wall street or from us where we don’t think as an investor, we don’t necessarily agree with why the company is doing what they’re doing.
And you can see sometimes that the, the incentives are what drives the, the performance. It’s something Charlie Margaret likes to say is, show me, show me the incentive and I’ll show you the results because he he’s reasoned out that the reason people will do things is because of the incentive. So that’s a, that’s a great resource and it’s free. It’s on sec.gov and they’ve changed their format of their website recently. And so there is a little wink to the bottom, right? When you look at the page where it says proxy, and you just hit that and it’ll open it up and you can go right to the, to the actual proxy. So it makes it real easy for you to look at they could be long they could be dry and could be a little bit technical. You don’t need to read every single word.
It’s not like the 10 K per se there’s and there’s usually pretty good. They usually do a good job of outlining where different sections are breaking it down. So you can kind of search through what you’re needing to find, as opposed to having to read through 87 pages of stuff you don’t want to know.
I know I won’t, I won’t read through that. I’ll usually just look for the ownership section, as you know, I think if, if, if you’re looking at, if the, is this a practical solution for me, I think, if you’re playing in like the S and P 500 kind of game, most of those are pretty standard, but you’d be surprised sometimes. But like, as you, if you liked to swim around the very small companies, then I think looking at the proxies, definitely something you should do.
Cause sometimes you’ll see companies that own other companies and they can have a huge ownership. And so those interests might not align if one company owns most of this other company, why would you want to buy into that? And so that’s something to keep in mind. Yeah, it’s a great point. Very good point.
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And now back to our show, all right, let’s move on to the next question. So we have Andrew, Dave, I would like to start by thanking both of you for the great insight you provide beginners in investing. I started investing in January, 2020, and immediately purchased the VTI and continued to use it religiously while searching for companies. With the possibility of a market correction shortly, due to the state of evaluations, at the point they are currently how much air quote, dry powder would you recommend keeping on hand for when good companies go on sale? I currently dollar cost average, approximately a thousand dollars per month into a 90 10 split of stocks and bonds. But I want to be able to take advantage of a correction when it happens.
I look forward to hearing your thoughts and appreciate all the past and future advice you provide readers and listeners. Thanks, Chris. So, Andrew, what are your thoughts on Chris? Great question. I would be curious to know what kind of timeline Chris is on, you know, is he on the tenure track or the, for the year track? It’s tough because I, I know it’s, it’s really fun to talk about how, you know, as an investor, you were able to wait for a stock market crash and you were able to back up the truck and you bought a bunch of stocks when they were down and beaten up and, and you, you made a huge success. I think reality is those, those stories are so few and far between, you know, something that kind of pops into my head. That makes me think of like those big fitness challenges.
Have you ever seen like the biggest loser? Yeah. So yes. So, you know, they’ll, they’ll make this huge deal about it, but yeah. As soon as they get off the show, they, they don’t, they don’t continue with that. Right? Cause like when you see it on TV, it seems like it’s this big event. If you live it out, it’s a, it’s a daily process, it’s a lifestyle. And so I think investing is a very similar way. You want to have opportunity. It’s, it’s such a, it’s such a oxymoron. It’s such a paradox because it’s like, okay, you want to have dry powder so that you can attack when stocks get beaten up. But to compound your money, you need to have your money in the market. Instead of having that sit as dry powder where it’s not making anything. And so depending on how much dry powder you’re, you’re holding there, at what point do you call that? Trying to just time the market, because we have a possibility of a market correction soon because of valuations, it’s been that way for years. And so I have some ideas on, when I look at my portfolio, there are certain things that I have stocks
That are almost like dry powder to me, but keeping dry powder as cash. That’s not earning a return If, if I’m looking at the very, very longterm, I just want to put it to work. And I want to, I want to let, let it do its job rather than trying to play, play. Like I have a, a magic eight ball or, You know, like, I, I just know the feature because you could be Keeping that dry powder, it could stay dry for another decade. It could stay dry for another decade. And that’s, that’s the hard part.
It depends the, I like the question that Andrew asked when he first started kind of thinking about this question from Chris was where, where on the timeline is Chris, if he’s, if he’s in my camp or he’s on the older side of things, and he’s closer to the finish line, then that changes the equation. If he’s more like Andrew, where he’s got a 40 year runway, then that changes the equation as well. So there’s, there’s different aspects of the other things you have to take into consideration too, is where are you with having some sort of emergency fund and where are you with any sort of debt that you may have? And so some of those things have a bearing on, on kind of how you think about doing something like that. You know, I know for me, it’s something where I, I kept about 500 to 750 bucks, just sitting around, waiting for something like this to happen.
And I’d only been doing that for about a year or so. So it wasn’t something that I actively started doing. It was more of a situation where I may have been struggling a month or two to find something to buy. So instead of buying something, I just set it aside and waited for it. That could be something you consider. But the other part of it too, is like Andrew was saying, is that the power of compounding doesn’t take effect until you put it to work. And so unfortunately savings accounts are terrible for saving money as far as setting it aside and getting in that habit of saving money. Great, perfect. Those are awesome. But as far as like, actually air quote, putting your money to work, they suck because the interest rates are so brutal right now. Even if you go to an online bank, they’re still putrid.
So they’re not a great place for you to store lots of money. And none of us are Warren buffet and we don’t have $139 billion just sitting around in cash, waiting to pull the trigger on something. But he’s also got, I don’t know, three or 400 billion in the market right now making a cool 25% you know, a month a year. So he’s doing great, but we’re not all in that situation. So for us average, Joe’s, you have different choices to make and different ways to go about doing it. And I guess my, I guess my idea is to kind of follow what I was talking about is maybe take one of these months and set aside a thousand bucks and then just everything else, you just keep putting into the market. And then when something comes along and you have an opportunity to do it, because one of the things about these opportunities that we’re talking about, for example, what happened in March of last year?
So in March, 2020, when everything went to hell in a hand basket, because the COVID eight, didn’t all happen at once, it kind of did, but it kind of didn’t, and it didn’t take it didn’t rebound immediately either. So you had time to get into some of these things that were happening. And I know some of the companies that I bought during that period have done well since that period. And I, you know, I kind of long for that, cause it was, you know, kind of nice, but everything that proceeded it was not nice. And it’s, you know, I feel guilty for saying that. So, but I guess my point with all that is that the recovery is not going to be overnight and it’s not going to be immediate. So you’re going to have targets if you will, that you can take advantage of for all, for a good period.
I would argue that during the great financial crisis in 2007 to 2009, there was lots of opportunities to find great investments during that period that didn’t evaporate in a single day or a single month that it went on for years. So you had plenty of opportunity to buy into companies that may have been distressed because of the market. The turnaround with this one was, was quicker for sure, but I guess the air quote, normal recessions or downturns in the market generally take a little bit longer. So you have more time to work into something like a Microsoft, if it, if there’s a correction. So I guess that would be, I guess, a couple ideas I have along those lines. You could also, if you have a balanced portfolio, so, you know, maybe you have some parts of your portfolio, that’s a little more cyclical, you know, and then maybe you have other parts that are a little more defensive. You could look at your defensive positions, almost like it’s dry powder in a sense. And you know, one of the best times to sell a defensive position would be when everybody’s panicking. And a lot of people flee to defensive stocks. We saw that in the end of March, early April in 2020, everything that had to do with a grocery store went up big. And so that would have been a great time to both sell high and buy low. And of course, in theory, it’s, it’s, it’s a good idea. So
That would be every situation is different. Every company, every specific company, whether you’re buying or selling, will be a little bit different. So you want to keep those things into mind and always think of your longterm goals too. But that’s another idea if you’re trying to think of having like dry powder that could be one way to do it you know and follow up on that. Just one more second, you could have situations too, where I, when I’ve been looking at companies in my portfolio, I’ve, I’ve changed a little bit how I, how I perceive them. So you could have companies that are not performing like you expected they would, but they could also not be completely dropping the ball. And it’s, and it’s, it’s, it’s pretty common for companies to, to stumble at one time or another.
And so, you know, as you look at a company and if you, if you look at a stock that you, you used to want to hold for 40 years, it’s, it’s done things or it’s performed, or it’s changed its business model, whatever there’s things have changed, where it’s not looking like it’s going to be a 40 year plan for anymore. Maybe it’s kind of like a stock that you have as dry powder in the sense that, like it, hasn’t done anything to say, man, this thing’s a sell, but maybe it’s not your favorite anymore. And so when things do sell off, maybe that’s something you could roll off of and, and capitalize on something. That’s, that’s down a little bit more if you’re a long-term and if you’re really in, for a longterm to S to sell something that that’s off like 5% to buy something that was off like 50%, that could be a good trade over the long-term too.
But it all depends again on the actual companies, but those are some ideas for taking that, that approach of wanting to take advantage of when things go on sale while still staying invested and getting that compounding that’s, that’s, that’s a great advice. And I like those ideas. And that does that kind of go along with the lines of, I guess, really kind of understanding your portfolio and where each company is in its, in its I guess a life cycle. And I guess also the idea that not every single company that we’re going to invest in is going to be an Amazon. That’s going to be just an upward trend forever. They’re going to be peaks and valleys and plateaus and all those kinds of things. And so is that, is that kind of things you just have to take into consideration when you’re thinking about all this? Yeah. I think you got to consider it all and you have to be careful that you’re not just selling because you freak out. I think it’s easy to get buyers are more SU right. So you want to make sure you’re not just turning Over your whole portfolio every year, just because you’re justifying it. So do it in moderation. But if over time you can kind of make these, these, these observations and after enough time has passed, maybe you realize, okay, things have changed. And then that’s where you can start to execute on some of these ideas.
Yeah. That’s, that’s very good. All right. So I guess a few other things, I guess I’m thinking about with the whole dry powder thing, it, Andrew was, was bringing up some great ideas as far as liquidating part of your portfolio, or are looking at those as opportunities to use those, to kind of be your dry powder in storage in he brought up something that I think is, is a really good idea to think about. And that is the idea of some of the stocks that you buy are not always going to be the forever, you know, the hold forever kind of thing.
And especially if you’re looking at maybe some bond funds, some of those things could be things that when the market turns, those could be things that you could liquidate to use to get into other other opportunities. And I also know that for me as somebody that likes to invest in, in banks, for example, when the market started to correct in March of 2020, one of the sectors that got hammered was the, the banking industry. And some of those companies lost 20, 30, 40, 50% of their value in a month. And some of it was justified, but a lot of it wasn’t. And in hindsight, almost none of it was because there was a huge fear of the market turning and all these people defaulting on their loans, on their mortgages, on their business loans, all those things, there was this huge fear. And so these banks were setting aside billions of dollars to cover potential losses for these loans defaulting.
And for the most part, none of that came to pass in part because Congress got their butts in gear and did something for a change, but that’s a whole other conversation, but they were able to help put money into the system. Then there was the whole fed and what they did. So there was a lot of reaction from the government and they were able to help kind of fill the gap and allow banks, for example, to stay afloat. Plus there was also the banking industry, rightfully ranked ranked. They rightfully corrected some of the big problems that occurred during the great financial crisis. And one of those was making sure that they had enough cash on hand to handle any sort of downturns, like what just happened. So for those of you not familiar with this, they did, they started doing what’s called stress tests, which means that they would look at the most horrible, horrific kinds of, I don’t know scenarios you could ever imagine.
I don’t know if pandemic was on there, but certainly there are horrible things and they try to predict whether a bank would have enough money on hand to handle any sort of financial crisis that would occur because of these events. And they rank these banks based on how the stress tests go, whether the banks are, are liquid enough to handle these stress tests. So anyway, because of that, the banks were a lot more capitalized, which means that they had a lot more money to handle any sort of shock to the system, which is what happened in their new pandemic. So because of that, a company like I’ll just throw out there, ally, for example, dropped in price from around $32 a share to about $13 a share, it’s now trading around 48, 49 bucks a share. I was lucky enough to buy it on the way down and was able to benefit from that.
And it wasn’t, it wasn’t a dry powder situation. It was a situation where I was like, Oh, Hey, I’m I need to make investments this month. And Hey, this is a great opportunity because when it kind of goes back to that selling on fear, when you look at the company’s financials, everything looks fine. Nothing has changed just because the stock price has gone down the earnings and the balance sheet and all the things that made a company like ally, a good investment were still there, but the stock price had attained big time. Now, of course, was the, was there a lot of fear? Absolutely. Was there, was I scared? Yeah, I was nervous, but I also realized that this could be a great opportunity and I guess kind of to use Monice [inaudible] favorite phrase heads, I win tails. I don’t lose that much.
So at $13 a share, I’m not going to lose out that much. And if it goes up, that’s great for me. And if I lose, I, you know, it’s okay. I lost and I could learn from it. But I guess my point with all this is that part of the investing philosophy and part of the investing mantra of continually putting money into the market keeps you habit, putting money into the market. And when things happen like this, you can take advantage of those situations because you’ve already got that habit established. If it’s, if it’s a situation where you’re just hoarding all your money until something goes South, then yeah, you could pile into a great company at a really good price at that one time, and you could make a lot of money, but what if you choose wrong? What happens if you make the rat a bad choice?
Now you’re screwed and now you got all this time to wait before it happens again. Whereas if you’re continually putting money to work, then that helps smooth out any of those choices. And it just makes it a lot easier. And I guess that’s, I guess that our thought to think about when you’re investing in and trying to anticipate possible downturns in the market very, very well done. I think that was a perfect way to give us a tangible example of how we can look and how we could approach it.
All right, folks, we’ll with that, we are going to wrap up our conversation for today. I wanted to thank everybody for sending us those fantastic questions and keeping them coming. We enjoyed doing this and we hope you guys are getting some great takeaways from all this. So without any further ado, I’m going to go ahead and sign us off, 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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