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Scott: 00:36 All right folks, we’ll welcome to Investing for Beginners podcast. This is episode 126 tonight; we’re going to have some fun. We are going to interview an author, gentleman named Scott Chapman. He wrote this amazing, fantastic book called Empower your Investing, and we’re going to chat about this tonight. So without any further ado, I’m going to turn it over to Scott. Scott, why don’t you tell us a little bit about yourself?
Scott: 01:00 Well, thanks to Dave and Andrew, that’s a pleasure to join you tonight. A little bit of background about myself. I’m a professional portfolio manager. I founded my firm about six years ago called Chapman investment management. And this, this book that you mentioned in power, you’re investing. The subtitle is adopting best practices from Peter Lynch, John Templeton, and Warren buffet. This whole project started about 25 years ago and I had gone through and gotten my MBA in finance and had gone through the CFA or chartered financial analyst program, which is a three-year program with at that time, at one test given each year you have to pass those to be success with tests.
Scott: 01:52 And the pass rate was somewhere around the 30 or 40% range. Three years later, I had that certification, and in 1993 I was named the portfolio manager for our large-cap growth fund, which had a one-star rating by Morningstar, which was the lowest star rating they gave. It was a poor performing bottom of the barrel fund. And I was challenged to come up with a strategy that made sense that could resurrect the mutual fund. And unfortunately, despite having an MBA in finance and having the CFA under my belt and having taught a review program in the evening for CFA candidates for this on behalf of the security analyst society of San Francisco, I felt frankly naked that I wasn’t prepared to manage a mutual fund. And the reason was through all the material and thousands of pages of assigned readings for all those programs, all of that was all of the readings were academically oriented, written by professors who never actually managed money.
Scott: 02:57 There was no material for this study of successful money managers. And unlike virtually every other profession or even kids these days and nowadays who wear their hero’s uniforms on their back and try to model their play after they’re there. Their sports heroes what comes naturally to them and what comes naturally to many other professions, whether it be cooking or plumbing or carpentry. Virtually every other profession there is an opportunity to study or mentor or apprentice under someone good at what they’re doing, who has seasoned, experienced, and success. And unfortunately in the investment world, that generally does not happen. Not only are the readings very academic and theoretical and not based on practical, real-world success knowledge, best practices. But in the investment world, a lot of successful money managers prefer to keep their cards close to their vest. And when they hire young enterprising analysts they generally allow them to sink or swim on their own, and very little guidance is given.
Scott: 04:06 And, and maybe some of the reason for that is that the investor partners have a reluctance to share their total philosophy for fear that that new hire will eventually leave the firm and take their methods and clients with them. And so, I embarked on self-study and chose these three iconic legendary investors as models of excellence. And I wanted to learn all I could about them. So I read what was there at the time, which frankly wasn’t a whole lot. And so instead, what I did is I supplemented that with research at a university library at night, and after work I would go there and download through microfish. This was before Google old old articles that dealt with the news environment that existed at the time. Those three investors were making their successful stock picks. So, for example, when Warren Buffett invested in American express in 1962 and devoted the bulk of his net worth in that one company, I wanted to understand what was happening back then.
Scott: 05:15 And then years later those three investors would give interviews that provide some rationale as to why they bought those companies. And so what I did is I combined the news context plus the interviews and formed case studies. And then, those case studies formed a pattern where there are some common threads that ran between them that formed the investment process that I used. And four years later that one star, the bottom-ranked mutual fund became a five-star fund. And so I decided that it made sense to offer a seminar to the CFA candidates in San Francisco to supplement their knowledge with some practical real-world knowledge that I was able to find. And that I did that for two years. And one of the students said, you know, you survived, write a book on this because no one had ever integrated best practices from investors before and were starving for you know, their technique.
Scott: 06:16 And their philosophy and what drove them to become who they are. And you know, that would be a great book to offer to supplement the material that’s out there. So it also streamlined the process for beginning investors as well as professional investors. And so I embarked finally six years ago when I formed my firm and was much more productive with my time. And I finally tackled the material that has been continually updated, obviously with Warren Buffet’s ongoing news. And so the book came out in August. I’m very excited about it, but anyway, I was able to replicate this same process at another firm, which offered a mutual fund. And that too was ranked five stars when I left the firm about six years ago. So it’s a proven process, and it’s very exciting to continue to be a learner too, to learn best practices, and offer something tangible and practical to the investor base out there.
Andrew: 07:22 That’s super cool. So, Hey Scott, thanks for, thanks for coming on and everything. Congrats on your success. Too. Wow, you know, one great turnaround story and another string of great successes. I’m curious how what made you decide on the three investors that you picked?
Scott: 07:43 Yeah, good question. These, these three investors had done well, not just over a few years but over decades. And you know, I way back long before CNBC, I was a big fan of watching wall street week with Louis Rukeyser on Friday nights on PDs in Maryland public broadcasting. And to me that was always a night to look forward to. And I loved Louis Rukeyser his way of making information, investment information, fun and entertaining because he was a big punster. But he also had on great guests, and two of those were John Templeton and Peter Lynch. I thought they were the sharpest of all the DSC hat on. And, and then obviously Warren buffet is in a league of his own, but those are the three that immediately came to mind. I think they’re head and shoulders above everyone and they all had they’re, the, that there’s some common overlap between them, but there are also some differences. So analyzing all three of them w was very insightful.
Andrew: 08:48 No arguments there. I’m a huge fan of all three. Yeah. Ditto. Yeah, that was, that was amazing. So I guess
Dave: 08:56 A question about John Templeton, he to me was honestly the the the weest known to me, and I just found his background and his life fascinating. I mean, he, he wasn’t he didn’t come across as like a, a prodigy by any stretch. And he, his determination and his willpower and his, you know, I guess sticktoitiveness was incredible. And just the fortitude that he had just to keep going and doing all the things that he did. For example, when he was, you know, his, his parents didn’t have enough money to help him go through college. So he had to, he had to, he had a, weren’t gambling to, to help him, you know, subsidize himself as he went through college. I mean, I just thought that you know, those kinds of things were fantastic. So I guess I’m curious, what about him drove you to include him in the,
Scott: 09:52 In the book? Well, like I said, I was very inspired by listening to his his thought process on Lewis RW Kaiser’s wall street week, way back when and when, then when I ran, when I read his interviews as well as a few books that he’s written, he seemed to offer much more than just an ordinary investor. He was, I mean, he had a fantastic track record. He was from 1954 through 1992. His compound rate of return was 14 and a half percent versus not quite 11% for the S and P. And so he, he’s his career you know, spanned many, many decades, and he was a pioneer in worldwide investing in long before it was popular. So those angles, and then also he comes across very humbly. He’s, you said he’s very resourceful and determined. But at the same time he was a pioneer, not only in investing worldwide but also in funding. The Templeton Foundation, which its first prize for religion had was $1 million, which was more than a Nobel prize awarded. So he’s a very well rounded and very humbling and very optimistic person. I had the pleasure of meeting him in person, and he was his unassuming and, and humble that the way he comes across in the book is much more so in person. And unfortunately he passed away. But his legacy lives on.
Dave: 11:28 Yeah, it was, it that all came through in the book for sure. You know, the impact that the ruler Jenn had on his life and just the positivity that he had and how upbeat he was. And he just was, he just, it was not a negative person. He just EO I noticed throughout his wife, you know, his, he grew up kind of during the depression era and right after that. And so he just really had a positive outlook on life and he just never really let any of these potential hurdles swollen down. I just thought that was fascinating. So what I did notice that he also studied with Ben Graham, which I did not know. So that was an eye-opening thing. So what did you think that he pulled from that compared to what Buffett adopted from Ben Graham?
Scott: 12:24 Well, both of them I think borrowed from Ben Graham. The view that investing in stocks is a stake in a business. It’s not just some stock symbol that moves up or down and as easy to buy herself. It actually represents a share of ownership in a business. I think both of them also shared his philosophy that you always insist on a margin of safety when you buy. And then thirdly that take advantage of the market. Don’t let it be your surf. Don’t let it be a master of you. You, you let it be a servant of you. So take advantage of the volatility. He, he, his, his credo was to always buy at the point of maximum pessimism. And that makes a lot of sense, but it’s also 20, 20 hindsight. The only, no, the point of maximum pessimism when we’re able to evaluate that in, you know, looking backward, but you’re never quite sure in the moment if that’s the maximum pessimism, pessimism or not, but that’s still borrowed from, from Ben Graham, which is to insist on a margin of safety. But I think both buffet and Templeton move beyond; they recognize that what Ben Graham did work for him and during that time, but those opportunities didn’t exist past the 19, I’d say from the Sunday 1970s on. And even Ben Graham admitted that at the end. [inaudible]
Dave: 14:07 Yeah, I know, I know that. So I guess one thing that I also kind of struck me too is he I kind of, he kind of feel like I, I could be wrong about this, but I kind of feel like he was maybe one of the first quant investors. He seemed to embrace the security analysis portion of the books. And really took to that type of analysis of the companies, which, you know, like you were talking about the microfiche back in his day, that would’ve been, yeah, even harder because you would have had to wait for the quarterly and annual reports to come to you and you would’ve had to get them in the mail, and it’s just the time spent would have been so much more than it is today.
Scott: 14:51 His you right. And, but he, he ever reflected the fact that he had a very open mind. I mean, he had, he, he insisted on value. And by the way, his, his flagship mutual fund, was called the Templeton growth fund. It wasn’t called the Templeton value fund, which a lot of people kind of gloss over. But he was looking for value in different ways. And I think the fact that he was able to transition from a strict so-called cigar, but philosophy from, from Dan Graham where that he wanted to buy tangible book value at less, at less than it’s worth basically of this concept of his net-net working capital, which basically took the current assets, less all liabilities per share and, and tried to buy that at a, at a discount to that value. So basically you’re buying tangible assets for free.
Scott: 15:51 And you know, that’s, unfortunately, a lot of businesses were dying businesses that looked attractive from a tangible book value, but we’re both buffet and Templeton transitioned beyond that was to redefine value as a discount to the present value of future core earnings, power or future cash flows and a normalized basis. So they were able to look beyond the horizon instead of looking backward like Don Graham did, they would look forward to the windshield and say, what is the future earnings power of the business? Is it predictable? And then discount that back and say, is that a good value relative to today’s price? But the fact that Templeton adopted quantitative analysis, even some technical analysis to help give him comfort that his stock had bottomed it was starting to perform, or you know, starting to move off that low base, that he would defer some of his purchases to wait for the momentum to start kicking out instead of buying it may be too early and sitting on dead money for a long time.
Scott: 16:56 Right. So, yeah, he had an open mind. Yeah, that came through in, in the chapters about him. I guess so I a question for you then. So as you doing this research and studying all three of these gentlemen and trying to work for them, what did you take from, from Templeton that you use in your process as you tried to find investments too for you and your, you know, your clients? Well, the number of things. He was, he thought, he always thought positively. He was an optimist. He believed in free enterprise. He also believed in this principle called the retreat principle. So he, when he moved to The Bahamas at the, came out in The Bahamas, he’s at his performance improved dramatically. He wasn’t; he was away from all the hustle and bustle of wall street. And I think there’s a lesson to be learned there if you want to outperform the crowd, you can’t do the same things as a crowd does.
Scott: 18:04 And so by physically removing himself, he could discern things more clearly and think a research things more thoroughly. Probably where I part from him is, is that he had he traveled the world and he had a staff also that helped him in that regard. In the end, it’s all about conviction in what you understand and what you know. And you know, by not traveling the way he did on not going to Taiwan and, and Columbia and trying to unearth all of these nuggets out there. Instead, I’m more focused on what’s in the US because if I’m, frankly, because of convenience and better reporting other political issues. But I think you know, the fact that he was a bargain Hunter in a V, you know, a value sense, but value defined, as I said, differently than just peanut pure contrary. And a lot of people think value is about just simply being different than the crowd. It’s not necessarily that it’s being, it’s thinking logically and rationally, with numbers and figures and convincing yourself that whatever that market price is, is it’s a bargain relative to the future earnings power of the company. And so you know, he, he ideally preferred gross stocks, which is how is why it’s fun was named that. And that’s, that’s where I borrow from him on heavily on that concept.
Andrew: 19:35 Oh, that’s awesome. That’s right. That’s interesting. Go ahead, Andrew. Sorry, I like how you talked about how both Templeton and Buffet kind of take from what Graham had from the past, and you know, looking at tangible book value and then now what we’re doing is looking in the future, trying to find growth. And I’m looking for future cashflows. I know this is obviously a loaded question and I’m obviously not trying to get you to talk about your entire philosophy, but can you give like one example of whether that’s something quantitatively, qualitatively, something that you would come across along your investment process that would say, okay, this kind of lends me the think maybe company A’s earning power in the future will be higher than company B’s. As far as, you know, aside from what may be Templeton or any of these guys will do, but like for you personally, what would be one example of that Of determining like, you’re trying to figure out value by, right. By figuring out what, what business has good potential for great, you know, future cash flows, and growing future cashflow. So what’s one example?
Scott: 20:56 Sure, sure, sure. Okay. I gotcha. Now. Yeah, great. It’s all about conviction and borrowing a term from Warren Buffett. He talks about staying within your circle of competence and staying with basically companies that you understand and understand what is the competitive advantage of the company and is it durable. So to give it, to bring it down to granular terms. Companies like a company like visa and MasterCard for example, are companies that I like to think of as a tollgate business in the sense that if if you use your credit or debit card, and they get a small fraction of your purchase price as a fee for processing that transaction in a secure manner, and you come to rely and more that’s happening with mobile PR digital eCommerce and using mobile phones that do that.
Scott: 21:57 And so you can’t do that with cash or checks. It has to be with the e-commerce transaction with a, which relies on either PayPal or Visa or MasterCard and or annex. So if, if what you’re, let’s say gas prices double five years from now, and you’re filling up your tank, and now it costs $70 instead of $35, They get the same percentage of that 70 versus the 35. Right? And it costs them no more to do that. So that incremental profit on the same base of fixed costs is, is huge — return on capital on that incremental purchase. So the best businesses are those that have high returns on capital, and buffet would say high returns on tangible capital. In other words, a company that can generate a lot of free cash flow with very little assets to do that is worth more than another company that generates the same amount of income a, on a huge amount of fixed assets.
Scott: 23:06 Those fixed assets need to be placing, and you have to be replaced and maintained, whereas if you don’t have that is so much more profitable. So those two companies, for example have a high incremental return. They’ve already got a big fixed base of transaction capability. They can handle three times. The amount of today is with what they have now. And so when you, every time you swipe or, or insert your card to do a transaction, there are benefiting from that. And, and like I said, as inflation continues to grow and each transaction grows in the secular change, secular trends change toward more e-commerce on, they benefit from all of that. And so the more predictable the company is, the more of a tollgate business it is. The easier it is to estimate what those future cash flows are. And then it’s a matter of just simply this, those back to today’s value and comparing it to the stock price.
Andrew: 24:07 I love that metaphor of the whole toll gate idea. So I think, I guess when I think of those two businesses in particular, and it reminds me of, you know, you’re saying buffet has that preference for high return on capital, and you know a business like a MasterCard or Visa, they don’t have to spend billions of dollars on equipment to dig into the earth and build an infant structure. It’s all there in the brand name. And so of the, you know, those, those are good examples because they ran me as some other ones that guys like buffet have had success with see’s candies being one of those examples. You talk about a company where every year people are buying chocolates as gifts for Christmas. And if you’re, you don’t have to be the chocolate company with, if you’re one that’s I know being from California in particular, it’s a little bit more popular there than it is on the East coast, at least from, from what I’ve experienced. But having like some brand power really allows you to not spend as much from an NBN like a capital intensive and, and need a lot of these heavy liabilities to turn a big profit. And I think some of the case studies that you talked about with buffet, particularly with see’s candies, really helped highlight that
Scott: 25:37 That was a real catalyst and turning point in his views on buying what he calls a wonderful company at a fair price versus what he had done under the influence of Ben Graham of buying fair companies at a so-called wonderful price. And sometimes it was fully scuttled, sometimes it wasn’t so wonderful, and the dying business showed evidence of that. But he, that was a transitional purchase for him largely under the, what the influence of Charlie monger who convinced him to pay up for quality businesses. And in fact, Buffett later said that one of his biggest mistakes was not paying up for quality businesses early enough. And that even with his experience with Ben Graham, if you, if you were to take out the impact of Geico on the record of Ben Graham it would be a fraction of what it was. It was a huge contributor to his performance. And Geico was another example of a very high return on capital business, with a very strong, unique competitive advantage and pricing power. And so, and it continues to this day. They have, low cost advantage, and they continue to take market share under Berkshire Hathaway.
Dave: 26:58 Yeah, those are some fantastic examples.
Scott: 27:00 Oh, there was, another thing I meant I forgot to mention about visa and MasterCard is that they don’t bear any of the credit losses. It’s the banks that issue the cards that bear that. So it’s, it’s a true, wonderful business where it’s a, it’s a toll gate and the more you can see with eCommerce, which I think is about somewhere in the low teens, percentage of overall con commerce is that continues to grow. You can just see the secular trend benefiting both of those companies as people transact more and more with digital money instead of cash and checks.
Andrew: 27:37 Yeah, I mean, people have got to pay people, right? I don’t think that’s going anywhere anytime soon, no matter what happens with the economy. Right. It’s hope. Then the other thing I liked about something I’m pulling from the book here when you’re talking about businesses and in particular good businesses you mentioned both Templeton and Lynch favorite two types of companies blue-chip turnarounds and smaller growth companies. So I’m a huge fan of buying small-cap stocks for some of the who’s, maybe that’d be more of the beginner area of our, you know, of our show maybe hasn’t dug too much into our archives. Can you simplify what makes small caps and smaller growth companies? Pretty attractive compared to the rest of the market.
Scott: 28:44 Well, the first and obvious reason is that they’re small. They aren’t suffering yet. The law of large numbers that a, as you get larger, it becomes more and more difficult to sustain very high growth rates. And so that’s, that’s a plus. The other plus is that a lot, lot of the innovation occurs at the small-cap level and a lot of them, you know, every large-cap started as a small-cap and yeah, ideally you want to find the next Amazon or Google, and they’re still small caps. The challenge today is a lot of these dynamic, innovative companies are staying private longer before going public. And so when they do go public their market cap is no longer small-cap. Nevertheless, there’s still a lot of fertile ground to choose from. The other positive about small cap is more often than not there’s still led by an owner founder.
Scott: 29:42 And and that founder still has all the passion and energy and commitment to make that business successful. That sometimes that is lacking in, in very mature large-cap companies where that passion and focus seems to dissipate where they’re trying to serve multiple masters whether they be social, economic or political, and not just purely focused on delighting the customer. So there’s a lot of other constituencies to satisfy. The larger companies get. Also, larger companies get more bureaucracy. There tends to be in somewhat an as again, very matures. A set of complacency sets sometimes sets in. So all of those factors favor small-cap. I’d say also based on experience with small-cap, the failure rate is higher. So while the reward can be higher, the failure rate is also higher. With small-cap, if you focus on the ones that have no debt or very little debt you don’t have debt threats; you can’t go bankrupt.
Scott: 30:51 So that’s, that eliminates a risk there. And I’d say another risk with small-cap is that often the founder is someone who has the vision, but they need a strong number, to help execute that vision. And if there is such a dominant founder that has a hard time delegating, then that can be problematic for sustained whatever growth they’ve enjoyed early on. And eventually even small-cap companies as they go through that S curve of growth they go through transitional issues where they have to delegate, they have to hire more people, and sometimes it’s problematic finding the same zeal and focus and passion as I’d found your has as they hire more people. So it’s a dynamic, fertile field for a lot of promising growth, but it also requires a lot of homework as any investment as, but it can be very, very worth it. The other issue with small-cap is sometimes it can be very overvalued because of that promise of growth. There’s a lot of small-cap companies that promise growth and don’t have profitability yet. And so it can be hard to value them if they’re being valued. On multiple revenues instead of a multiple of earnings and ultimately the stocks are, are valued based on the, on earnings and cash flow in the long run. So yeah, it’s an exciting area. It just requires some good due diligence.
Andrew: 32:22 Yeah. When you say things like a small-cap growth, and then you use terms like companies that aren’t profitable yet and then maybe ones that,
Andrew: 32:33 Like you mentioned today’s conditions were a lot of these businesses that maybe would have a tray that a much lower market cap had they gone IPO earlier are now so overvalued. I think of names of pop up like Spotify, Airbnb; you know, lots of good, you know, like good sir, good products and services that I can see a future in. And you know, not going away anytime soon for years and years and years. But the problem with that going to what you said is with so many businesses going IPO, and it seems like you need a, a business that has public recognition for it to go IPO these days. And because so much of that is happening, you’re getting such crazy overvaluations and so a lot of these stocks that maybe might have been good investments had they IPO that smaller valuations, now they’re not.
Andrew: 33:38 I mean, I know for me, I’m looking at a lot of these different businesses and wishing I could invest, but looking from a distance and being like, or I will at that price, I don’t want to invest no matter how good I feel about the prospects and the future cash flows of this business. And so it’s, it’s, it’s frustrating on one on one hand because there’s a lot of businesses that just you have to stay back and then just say, either I’m going away and either it will become a good enough price one day, or maybe it’s just will never become a good investment as far as a valuation perspective goes. But on the other hand, I have found that there are a lot of other small-cap stocks that portray a lot of the characteristics that you talked about that would come with success and have lower risks. Such things like stocks with low debts, stocks with good earnings, and stocks with good growth and even good innovations. I think those things can all be found. You just kind of have to turn over enough rocks and, and look and know what you’re looking for. To look, you know, to find things you need to know what you’re looking for.
Scott: 34:56 Yeah. And I think the other thing to point out is small caps and other big advantage of searching in that area is that the access to senior management is so much easier and better than large-cap. So a lot of the large-cap companies have senior management that can often be shielded by layers of other people you have to get through the gate through to get to. Whereas with small-cap, they’re, they’re anxious to tell their story and you, you know, you can visit them and, and I think more often than not, they’re, they’re happy to tell their story.
Andrew: 35:33 Yeah. And I know that that’s a great point. I know we didn’t have much time to talk about Peter Lynch today. I think he exemplifies a fantastic example of somebody who’s been able to find great small-cap growth stocks and build huge wealth with that. Kind of to Dave’s question, when he talked about with Templeton, when it comes to lanch, what part of what you learned about Peter Lynch? Do you try to emulate or have found success in implementing some of his principles?
Scott: 36:06 Keep digging. So each of the investors I chose as a symbol to represent the essence, so their investment style. And for Peter Lynch it’s a rock with gold streaks running through it. And he liked to say that the person who turns over the most rocks when wins the game, it’s about keeping an open mind and doing a lot of work. And it is, he, he was tireless, I call him the tireless prospector, and that’s what he was. So he, he had somewhat of an advantage at fidelity. They had a revolving door of company management coming through, giving presentations in their office. But he didn’t stop there. He went out. And even on vacations, he would I’m, I’m sure, much to the chagrin of his wife and family he would always make a point to stop along the road to visit a company headquarters that you knew was along the way.
Scott: 37:01 Even in foreign countries, he would do that. So he, he was a Digger, and he believed that the more rocks your turnover, the more likely it is that you’re going to find valuable something valuable under there. So that’s one is keep working. He also was adamant that the novice investor can do just as well are better actually than the professional investor because they’re more aware of what’s happening locally in companies that eventually grow from small-cap to mid and large-cap later on. And if you focus on at the grassroots level, what’s happening, where are people congregating, where are they? Where’s the parking lot fall. And you can learn a lot about those earlier stage companies by just keeping your eyes and ears open. As a, as a prospecting ground, it doesn’t automatically mean by where people are heavily attending. It just means that’s a good prospect list. So he was a big advocate that a lot of a novice investors can be aware of those situations long, long before they’re picked up by analysts who are most of whom are in New York and often have to wait until they reach New York before they pick up coverage. So there are a lot of situations that help to support his mutual fund fidelity Magellan prosper because of those situations.
Andrew: 38:30 I can’t remember where I read this, but I remember reading something where he said there is a place that his wife likes to shop. And then he eventually asked her a question about it and then ended up being like a huge stock pick forum. Yeah, that was legs. Okay. Penny has, she was constantly working for him that, that poor thing, right? Everyone’s just trying to have fun. He was looking everywhere. Tyler prospect or that’s, that’s awesome. So if, if Peter Lynch is the rock, whether the other two, well the [inaudible]
Scott: 39:06 For John Templeton, all of symbols are in the form of a circle. It can be consistent. So John Templeton was a symbol of the globe to represent his worldwide investing in a pioneer there. And for Warren Buffett, it’s a baseball. And you know, I could have chosen to use pictures of those three investors on the cover of the book, but these invite the reader to explore a why, why choose a baseball, and for buffet he was a big fan of basically waiting for the fat pitch waiting until the ball comes down the middle of the plate before you swing. And it’s a metaphor for investing. So unlike baseball where if a ball comes down in the middle of the plate or anywhere in the strike zone and you don’t swing, it’s a strike against you. Whereas an investing he likes to say that a, they can throw an Apple computer at you right down the middle of the plate.
Scott: 40:02 And if you stand there with a bat on your shoulder and don’t swing, it’s not a strike against you. It’s only as it only matters when you do decide to swing. And another thing that he mentioned was he was a big fan of Ted Williams where Ted Williams was the last great 400 hit her. And Ted Williams wrote a book called the science of hitting where he did a study and divided the strike zone into 77 different baseballs. And he analyzed his average where he hit each of those baseballs in a game and found that the sweet spot of the strike zone, he would hit anywhere from three 80 to four Oh six or as balls even on a strike zone. But on the low outside corner, the strike zone his batting average would drop to two 30. So what buffet picked up from that was wait until having the patience to wait until you’re sure about what you’re investing in at a price makes, has an adequate margin of safety and makes sense to buy it.
Scott: 41:03 And only then do you pull the trigger. And only then are you evaluated on how well it does. So don’t, you know, even though stock prices these days have no commission to trade, and you can do it in the middle second on a computer just because they’re easy to buy. Does it make, it doesn’t mean that it’s right to buy unless it’s in the middle of your strike zone. And the middle of the strike zone means, do you understand the business? Does it have the durability of competitive advantage to make sure that it’s going to have staying power and do the future earnings? Is there earnings power going forward? Just kind of BAFTA today, warrant buy at today’s price.
Dave: 41:46 Yeah, that was a home run right there. Great way to summarize everything and put it into concise words. I know David’s a baseball fan over there too. David, do you have anything else said? Oh yeah, no, I’m I am a huge baseball fan, and I love the, I love the story about Ted Williamson and how that connected with buffet cause I think that’s the perfect metaphor. I know so of Carmen used kind of the same language in his fantastic book too. So I think that’s a great analogy.
Scott: 42:15 Well, yeah, I think kudos to both of you for hitting home runs and what you’re doing with these podcasts because you know, as, as we have talked earlier before the call about the fact that there’s a real-life skill called investing that isn’t, is not generally taught in school and the fact that you’re making these podcasts available for everyone is, is a real service. So thank you for doing that, and hitting home runs there.
Dave: 42:44 Yeah, thank you. And if the listeners out there are interested, this was a great read. Again, that’s called the Empower your Investing. You should be able to purchase one anywhere books are sold. And, you know, I like to recommend, I’ve always recommended for years reading Peter Lynch’s as one of your first books. And so I think a book like this is just a natural fit either whether you’re beginner because it gives you that, that background on some of these investors that have done well and then good insight into how they did it. The case studies are great too. And then even for somebody who’s maybe more advanced and, and been investing for years already, I, I really, I think with any book I pick up generally I learned something I did. And with this there was a lot of stuff in there. I love digging through the case studies, and I have that mindset too of how did somebody do this and can I put myself in their perspective of how they looked at things back then and see if those kinds of results could have been replicated. So I appreciate it. Scott, all the work you put into doing that and going through all those are the calls and then news clippings and everything. I think that’s cool.
Scott: 44:02 Yeah, I mean, the purpose of, of going through that exercise was first of all to understand what they were looking at then, but more importantly, identify them in a way that if you see the similar shadow on the wall occurring, now you can recognize that as a similar opportunity and capitalize on it and act on it because you’ve had, you’ve had the foundation of seeing how it’s worked before in, in a different circumstance.
Andrew: 44:28 Did you, so outside of listeners going in and getting your book, did you have anywhere else where people can interact with you online or if not, that’s cool.
Scott: 44:40 My my email address is Scott@chatmaninvestment.com. Mitzi, C H, a, P as in Peter, M an N investment.com, and I’d be happy to respond to emails, and you know, share, share the knowledge. It’s exciting to test to see this book come to fruition after quarter of a century of work on it. And it’s really rare actually to see these three iconic investors profile in one book. A lot of the information is in disparate interviews and other books, but if someone wants to get a jumpstart and streamline their, their learning curve and look at, you know, one resource where it’s one read, and it’s very narrow, it’s very readable in a sense that it’s a narrative written. It’s not written in a textbook style. And I asked my wife who read it, who, who she thought the level of reader could be, and she said, actually high schoolers and possibly even advanced middle school people. So not to take away from the content, but it’s just simply the way it was written. So yeah. And I, I’m excited to see it get into the hands of people and help fill the gap of that. What was missing from it, their financial, their education for investing in, which is such a critical life skill?
Dave: 46:04 And I always appreciate it too. I like that you have such an extensive background in the finance world and the academic side of it, and you still talk about how it’s important to emulate those who have been successful. And I do agree it is an easy read. It’s a fun read. I learned that Warren Buffett bought a farm at the age of 15, which I’d never heard that anywhere else before. That kind of blew my mind. So there’s a lot of just like random facts in there like that, which is fun then. Yeah. So thanks. Thanks for coming on, Scott. Thanks for joining us, giving us your additional thoughts and also providing a service where you’re helping educate people on finances and personal finance and financial independence and the fact that people can learn about it, and it’s something that doesn’t need to be arcane, and you don’t need to go to school for years and years and years for it in order to make a difference in your life. So thanks again, and really appreciate your time and for you writing the book.
Scott: 47:10 Thank you, Andrew. And thank you, Dave. Both for the opportunity and it’s been a pleasure.
Dave: 47:15 You’re welcome. I was, it was our pleasure. We enjoyed it very much. And you know, I want to echo what Andrew was saying too. We appreciate you taking the time to talk to us and, and for sharing all your knowledge and, and all that hard work and effort that it’s amazing. And the book is Fantastic. It’s, it is very easy to read and it, it, it, it comes across from a place of, of humbleness and, and, and learning. And I enjoyed it.
Scott: 47:41 Awesome. Thank you so much.
Scott: 47:43 All right folks, we’ll have that is going to wrap up our conversation tonight with Scott. I hope you enjoyed our discussion. If you get a chance, check out the book is fantastic. Empower your investing adopting practices from Peter winch, John Templeton and Warren Buffett. It’s a fantastic view on investing, and you can learn a lot whether you’re a beginner or whether you’re a little more advanced or even if you’re like a super-advanced. There’s, there’s a lot of great information in here in Scott’s, but a lot of time and effort into it and it’s worth your time, and it will help you with your investing journey. For sure. So without any further ado, I’m going to go ahead and sign this off. You guys go out there and invest with a margin of safety, emphasis on the safety. Have a great week, and we’ll talk to y’all next week.
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