IFB136: Investors Don’t Know Anything (About the Future)

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers. Your path to financial freedom starts now.

Dave:                                    00:35                     All right folks welcome to Investing for Beginners podcast. this is episode 135, tonight Andrew and I are going to discuss that Andrew had this great idea that we would talk about what investors know, which is nothing he is forecasting the future and what analysts mean when they think about what’s going on in the future and how we don’t know what could become. And if we do well, then you’re smarter than us. So without any further ado, I’m going to go ahead and turn over to Andrew and Andrew is going to go ahead and take it away. All right, Andrew

Andrew:                              01:10                     Yeah, thanks, Dave. I had, so I have four bullet points on this, just kind of different examples because something about this topic is pressing and I feel it needs to be sent at the same time. I think it’s very inspiring and it can certainly help somebody who’s a value in this or somebody who’s trying to be a contrarian. When you’re trying to buy stocks at a discount to their intrinsic value, you’re going to have to go against a lot of them. Maybe at first, these not the right word, but you know, you have to go against the grain. You have to go against what the popular opinion is on the stock and you know, sometimes the popular opinions, right? And sometimes it’s wrong. And so we can kind of look at the stocks we’re looking at today and maybe our South, here are some reasons why the stock is probably undervalued. Maybe there are good reasons and here are some reasons that are probably just been alerted talk, you know, just like,

Andrew:                              02:11                     Well, I think a lot of times when a stock goes down, everybody wants to come up with reasons why that is. And so if the narrative is making up a reason, well it shouldn’t keep you away from a stock that’s a great business just because everybody thinks a certain way. So the very first example when a share, so the first example I want to share is Lam research. This is one that I’ve shared in the past where it’s been by far my best performing stock I’ve ever bought, and I might have talked about why I recently sold it. That could be an old topic within itself for a whole episode, but I want to touch on, especially with the way that the stock market has gone lately. We’re recording this in January of 2020 and for the past two, three months, certainly for January.

Andrew:                              03:12                     It’s just the narrative has been tech like as long as you are long technology stocks, it seems like everybody, everybody in their best friends making money in tech and all you have to do is own like Facebook or Apple. Any of the tech stocks I’ve done just extremely, extremely well. What is, that’s easy to remember because it’s such a recent development, but while it seems a tech is always strong in a bull market will market quotes because that’s hard to define when you’re in one. But w while tech seems always to be strong, that was not the case in 2015 2016 and certainly when I bought into land research, and so, you know, I’ve talked about the story about how lamb went from something like one and a half to something like seven or eight and the price to book ratio. And there were reasons why it was so cheap.

Andrew:                              04:15                     So if you go way back into the archives, and so as the seventh issue I ever did for the E letter, and I talked about why I bought lamb research, and I was also talking about some of the developments in some of the related socks regarding that. So there were a lot of different stocks in the technology space that dropped one that was very, very notable with Western digital because it felt 14.93% and so there were these big fears at the time of a PC slowdown and it just all across the board, it just seemed.

Andrew:                              04:53                     I, I, you know, I talk about this in the, in the issue and I talk about some of the technology behind it with Moore’s law and your viewer, technology nerds, a mother without one. And so there were just a lot of slowdowns and the way kind of tent works. You have slowdowns and maybe technological advancements, slowdowns and innovation or you have an oversupply of certain components within industries and that can have a ripple effect. And so as one tech stock goes, maybe three others go down with it. And so that was the landscape. And there were a lot of people, if you think about where were we in 2015 it seemed like, at least the way I remember it, it seemed like, okay, how many more of these iPhones are they going to come out with? Right? It’s like, you know, we’re at four or five, six, seven, whatever.

Andrew:                              05:53                     It just seemed like, all right, we’re, we’re starting to get over this cycle. Same thing with computers. Same thing with the console. The same thing again with phones, just a lot of the technology just seemed like it was regurgitated and like there was just nothing new. So at the time, you know, there’s not that much to be excited about. And so a lot of the stocks then really get beat up. Like we see today. There were also recession fears back then. I remember people saying, Oh, you know, we’ve had a bull market since 2009 whereby 2000 by 2016 or 2017 you know, we’ll have match the bull market of 2000 to 2008 and so maybe that’s, you know, that’s coming up soon. So we should be cautious with our money. Just a lot of different ideas that may or may not have been married, but they caused some of these tech stocks to trade at very low valuations.

Andrew:                              06:54                     And so for investors who had there, what do you call the little detectors up, right? And if you had your radar on and you’re looking for the stocks that are deals and the ones that are trading with low valuations, then you are, you know, picking the stocks when they’re not when people are not excited about, they’re not and about the technology, they’re not excited about the profitability. They’re not excited about the future and they’re not excited about growth. And then, you know, you fast forward to where this today, where it was a year ago, and all of a sudden you turn around and you blink and the whole story had changed and all of a sudden you could have had a lot of money if you were invested in certain different stocks. So that I think is good, and the first example of how investors can get excited or very pessimistic about how they feel about a company or an industry.

Andrew:                              07:59                     And that can change very quickly. And you know, wall street will kind of move first, and then the story will change later. So if you’re always following the story, you’re always going to be behind. And so that’s why looking at the numbers, looking at the financials and looking at valuations give you a step ahead because then you can get in before these stories change. And as long as you’re investing in good businesses, they’re investing for the long term. It doesn’t matter where the story goes. As long as at some point you, your business that you own is continuing to grow and continue to compound its earnings, you’re probably going to be in a good spot. The next thing, and this is not one that I experienced, but this is one that I’ve observed from reading books, reading some people online, getting some insight into some of the other big narratives of the day. Back in 2006, 2007, there was this huge, huge narrative that we were about to run out of oil.

Andrew:                              09:13                     And, you know, it sounds silly now, but it’s, of course, it sounds silly after all the drilling we’ve had the past two, three years, there was a serious concern 10, 15 years ago, it seems like, you know, as the oil deposits get lower as, as they’re drilling deeper and deeper and not finding as much oil, and then you start to think, well you know, the earth has to be tapped out sometime, right? And so this was a huge concern. And if you go back a couple of episodes, we talked about just like a, a big intro into commodities and basically how supply and demand will set the price of the commodity and be a big factor in that, right? So when it came to oil, if you think there are these spheres of peak oil, if, if we do run out of oil, then the price of oil is going to shoot up because there’d be less supply.

Andrew:                              10:14                     And so there were a lot of price targets for oil being high. There were just, just a lot of experts and scientists and analysts and gurus and just all these people who were saying that based on the trends, where we’re, we’re experiencing and you know, you can look at data back then and you can, you can always do this with Dana. You know, you can look and you can say, well, here’s the path that we’ve, we’ve gone on. We’ve projected us into the future. This is what we’re going to see. And it’s going to be some catastrophic, intense, huge thing is we’re going to see a shortage. We’re going to see a spike in the price. All of these things were predicted to be happening. And so that affected how some investors allocated their capital. It turned out that

Andrew:                              11:14                     Instead of the world running out of oil, some smart person, some genius figured, well, we, we’ve been drilling downwards for this oil. Why don’t we drill to the side? And so, you know, it’s a little more complicated than that. But this innovation came around called fracking. And now we had all this access to new oil supplies for oil. You know, the production just went insane. The US you know, we, we had a big boom in production in the US and the Permian and the Balkan. And so what happened with that is they’re able to use the fracking to discover a lot of the new oil and instead of the oil prices rising and some of these energy stocks taking off instead, the price of anything dropped or stayed this lot. And so a lot of the sector has not participated in this bull market over the last ten years because of this factor among many.

Andrew:                              12:29                     And so once again, whereas with the first example of Lam research, we have a narrative that’s produced as, as wall street goes along and then it might change later, but we had with peak oil as this idea where we’re, we’re just taking the president and we’re not, we’re not thinking about that, that, you know, the future has a lot of possibilities and the future very rarely continues. What has happened recently? And so as investors, you know this is true whether you’re investing in one stock or you’re missing the entire market, and this is true with how we experienced the business world on a day to day basis. You, you can’t predict everything and you don’t know what one idea or one innovation, what one development is going to change the whole course of a market, an industry, a particular company. And so that’s why while you want to be observant of what’s going on, now you don’t want to put all your eggs in that basket. You don’t want to formulate a strategy where you’re just basing it on projections or you’re just basing that on what you can see with your, you know, in front of your fingertips today. You want to also always account for the fact that the future is unpredictable. We don’t know what it’s going to turn on, what’s going to change and how life will be different in the future.

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Andrew:                              14:15                     We don’t know what’s going to happen. There are so many unpredictable factors that we need to cater to a strategy to account for that, whether it’s a positive event or a negative event. And so we need always to keep that in mind. And hopefully, you can tell that this is why a lot of the principles we teach, a lot of the basics and the fundamentals that we try to pound into your head. That’s a big reason why too, because yes, he had the narrative, but you know, also had to be unknown and comedic to think about what they’ll see I know I said for, I don’t know. The third one is just me patting myself on the back. I guess I could; I could spare minute or two to pat myself on the back again. One just real quick example of another sock where the narrative was, really, it’s just funny how it changes.

Andrew:                              15:10                     Disney, this was another one. If you go back in the archives, I bought it back in 2016. They were all; the whole story was how cable TV was going to die. And it was dying and we could see it, right? You could see the numbers with fewer, fewer and fewer people to need in to live TV, more and more people streaming. And the stock was taking a hit and you know, viewership and ESPN were dropping or in the stock would drop because Disney owns ESPN. So, you know, back then they weren’t, nobody was thinking about the fact that because Netflix was coming in and taking a lot of the market share from not only Disney but all of the major Gabriel corporations, nobody considered the idea that, well, I guess Disney could do an FX is doing. But you know, now we’re listening to this now in 2020 I think this, this encompasses both of those ideas that I first presented, right?

Andrew:                              16:16                     With the narrative changing and then also the idea that innovation could change the future. So the same with Disney back then. The sound over there, Chris, how can anybody compete with Netflix? And now Disney is coming out with, you know, Disney came out with Disney plus the manual. Lillian was a huge hit. NBC is coming out with this thing they’re calling peacock. And then there’s one other streaming service. I can’t remember. There might be one more. And it just seems like now cable TV is morphing into this all the cart streaming thing instead of channels. Now we have streaming apps. So now that all have played out, you fast forward three, four years now the narrative has shifted from all Disney’s in the diamond business. And now all of a sudden wall street sees Disney in a huge growth business.

Andrew:                              17:14                     And now it’s like money to Disney is burning on this. It’s just comical. It doesn’t matter if you burn money; it just matters how you do it and what the story is. Fine. So that’s, that’s, that’s where we have seen ourselves today. And so again, another example of stock used to be cheap. There used to be a story behind it of why it was cheap. But you continue to, even something as small as this, like four years, you take those dividends; generally dividends are higher and that dividend yield you’ll get is higher when the stock is hated. So now you have like not only do you get a good chance at having gains because the stock is hated and the valuations are a little bit. Now you also have a chance for higher gains because you start with a higher dividend yield that’s going to create a larger drip and you’re just getting that drip to happen much larger than, you know if you were to buy a stock that was at a very low yield and you know at super high evaluations, whether you’re looking at earnings or book value or anything like that.

Andrew:                              18:25                     So like for the example of Disney, you know, they, I remember when I bought them, I think they had like a one or 2%. It didn’t seem like much compared to today. It’s, it’s a good amount. But in those four years, you know, my return went from, if you look at the return from when I bought the stock to when where this today, it was somewhere around 10, 10 and a half percent per year. With the drip that I’ve had over those same four years, my returns around 11 and a half percent. So just a small, you know, we talk about drip and I’ve talked in the past about how over decades it can make a huge, huge difference. I gave some examples and you can go to the archives if you want to get excited about drip. But even in just such a short period for years, and we’re talking about, you know, really 1% over outperformance, I’ve talked again how that can become hundreds of thousands and millions of dollars over a very long period.

Andrew:                              19:33                     And so you’re already seeing that outperformance in the stock over such a short time. And so I think that’s just another Testament to how buying into a hated environment, pessimistic environment, a bearish environment can be good as long as, you know, as long as the stock has a good balance sheet, as long as, you know, Disney has a great brand, right? Disney had, it was, it was not losing money, it still had profits. It still had good sales. So I, you know, I made sure of that. And then moving forward, you buy some of these stocks and you don’t know what it’s going to be that’s, that’s going to make them take off. But you, you believe in not only the business but the people who are working in the business. And so if you know that just because a business has a rough patch there, people who work in that business who are going to do amazing things and that can set off a lot of prosperity for the investors for all the people involved.

Andrew:                              20:41                     And you have to believe in that. I mean, I think that’s why it’s great to be optimistic. It’s great too, you know, instead of taking what we see in the world today and projecting that and thinking that the world will never change. Well, it can change and it can change for something good and that can happen within these stocks in these businesses and they can unlock a lot of gains. The last thing I just felt led to say this thing and I hope there’s maybe one or two people out there who, who need to hear it, but I know with, you know, we talk about how the president is now and what the future will hold. And I think as a podcast that talks about investing, we talk a lot about the future. I also know that being an investor, there’s more than just picking stocks.

Andrew:                              21:33                     A lot of it has to do with your finances. Now, hopefully, we’ve stressed that a lot through their various episodes. Something that can be very discouraging as you’re going along with your investing journey is that life can come and throw you a curveball when you don’t when you least expect it. And so I think it’s when, when you get stuck in a place financially where things do not go as you planned and things, you know, seem like be coming at you at all angles, maybe you’re usually a financially responsible person and you’re getting these bills that popped up out of nowhere. You’re getting this debt that’s piling up and you know that debt should not be piling up and you know, for one reason or the other just financially you’re going backward and it seems like you’re digging yourself into a hole when all you want to be doing is pushing forward and, and you know, getting your finances and getting that compounding interests going and all of them, all of those things.

Andrew:                              22:44                     And all of that I’m going to say is that in my short time being alive, I’ve seen a lot of different stages, and then a lot of different financial journeys and, and I don’t know, just a lot of different conditions and situations and it’s sometimes it’s some, at least personally for what from me, that I’ve experienced it can be very hard to dig out of a financial hole. And it can seem like a never-ending struggle, but at the same time, I think there can be an opportunity in the future and there can be, you know, maybe not in business innovation, but some door that needs to be knocked on that it’s just impossible to see right now. But I think, you know, that’s why building the habits having the right, maybe find some inspiration and encouragement when you feel down and understanding that financial, the path to financial freedom is not a perfectly straight line.

Andrew:                              23:56                     It never was. And I’m sure if you talked to any financially free person, any entrepreneur that will tell you that same thing and you look at the soccer game, look at the socks. None of them go up in a perfectly straight line either. There are peaks and there are valleys. So keep that in mind with your finances. Maybe you, you’re sick of the finance stuff because all it does is reminds you of where you’re at now. But understand that what’s going on now is not what the future means all the time. And so there could be something out there that’s, that’s up in the future that you don’t, you haven’t even considered yet, but it’s, it’s developing. So hopefully that’s inspiring for some of you, whether it’s your portfolio that’s taken a beating, which I hope not because we’ve had a great market recently, whether it’s that, whether it’s your finances or whether it’s just that stock pick you bought last month that’s driving you nuts, whatever it is, remember that it’s easy to get stuck in a narrative. But it’s proven to be wise about how the result could become or probably will become. So keep us fighting the fight and I hope that these four bullet points have at least one of them start calling for some of you and helps you out with the stocks and your finances moving forward.

Dave:                                    25:25                     All right folks, that’s going to wrap up our discussion for this evening. I hope you enjoyed our conversation about investors and what we do and don’t know about the future and predicting things. So I thought Andrew had some great comments and some great points, and there was a lot to learn from this conversation so I hope I enjoyed it. If you are enjoying the podcast and would like to give us a review, please go to iTunes and give us a five-star review. That’d be great to help us rise in the rankings and we can help more people, which is what we’re here to do. 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 safety. Have a great week and we’ll talk to y’all next week.

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