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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 (00:36):

All right folks, welcome to Investing for Beginners podcast. This is episode 130, tonight, Andrew and I are going to talk a little a bit about how the news can impact the market. Lately, there have been some bigger news things that have hit the news and have had a big impact on the market lately and Andrew and I thought that this would be kind of a timely subject to talk about. So we thought we would chat a little bit about this. So Indra and I were talking off-air about some of the things that are going on in the world and whatnot. And we thought we would share our thoughts on those and how they can impact the market. And you can see some of the things that are going on right now, which are very, very fresh in everybody’s mind. You know, we’re recording right now in February of 2020 and so some of the big things that are talked about in the news recently are Coronavirus has been a big thing.

Dave (01:31):

The trade Wars and also with the Tesla stock, a big shock here in the last week or so since our earnings came out. Those are some big items that Andrew and I thought we could talk a little bit about. So why don’t we talk a little bit about Tesla first, how they have some fun with that. That’s always a fun conversation for us. Our favorite, right? Yeah, exactly. I’d like to hear what you were talking about before we hit the record button because you’re, I mean, we should have been recording then and there you got the fire that yeah, it was, it was pretty interesting. So for those of you that have been under hiding under a rock recently Tesla put out their wait as to quarterly earnings, which came out, I believe it was towards the end of January. It might’ve been January 29th or 30th.

Dave (02:23):

I can’t remember the specific day. But anyway for them they had a good earnings report. They showed some free cashflow for change. They had revenue increased. It has been increasing over the last three or four quarters. So good for them. They are selling more cars, which is awesome. But I was kind of looking through the earth through the financials before we came on the air. And I was talking to Andrew A. Little bit about it. So some things I wanted to kind of point out. So number one, their earnings per share for that quarter was $.056. Whole cents, wait for it. 56 whole cents. Yeah, huge numbers. Right? And so for a company that has orange or marker cap, then gosh, I can’t think of anybody else for combined. Yeah, exactly there. Thank you. Very good point. So obviously 56 cents per share, it’s a joke.

Dave (03:22):

So here’s the even bigger joke. At one point, it got up to over $900 a share for this company. It was sitting in the $300 range until this news came out about a week and a half ago. And since then it was up like, was it 800% or some stupid thing like that? It’s just, you know, crazy numbers, people going crazy for this. And it jumped up. I think it finished today around $748. So I want to put this in perspective if you will. So we talk about priced earnings, we talk about some of the value metrics, the internet like to, you know, drill into everybody’s heads. So I just kind of want to put this in reference. So at $748, which closed that today with a 56 cents that it’s earning per share, that would give us a PE of 1335 so 1,335 times the earnings. So just to kind of put that in perspective, just for giggles, I went on Google and looked up how much are Mercedes Benz C 300 series or costs, and that’s selling for around $41,000.

Dave (04:33):

So if you do the math, if you take $41,000 times 1335, you get $54 million, you would pay for that Mercedes Benz. So who in her right mind would pay $54 million for a car, but you would be willing to pay $900 for a share of 56 cents of money you would earn from Tesla. To me, that’s just crazy. And that’s what I think illustrates how nuts and how emotional people can get when the stock market is involved and when they have a chance of making money or losing money and all those things. You know I think it was Andy posted something on Facebook yesterday where he showed a Google search where, how do I sell it? How do I give back a stock? It’s like Tesla owners cause it went from 900 to seven 48. So you know, who knows where this is all going to end up.

Dave (05:32):

And you know, this is, you know, I don’t mean, I don’t mean to make light of people losing money or making lots of money at, you know, it’s a serious thing. But my point to that, I want to get across with these discussions and as Andrew said, bringing data points to these conversations. It’s the sheer lunacy of what people can get wrapped up into and what kinds of emotions that can get involved when you’re trying to, you know, buy a company. And if you look at any of the other metrics that are involved with Tesla, it’s just, it’s just a train wreck and why you would put your heart and earn money into something like that is just crazy.

And another point that I want to make about some of this is to think about it. If anybody here watches the super bowl, raise your hand, which is probably most of us. One of the things that I noticed during the game besides the chiefs winning gay was that a lot of the commercials were electric cars. I thought that was quite interesting and there was one company that was noticeably not involved in that and that was Tesla. I thought that was very interesting.

Andrew (06:43):

I noticed that, too actually. I said I said that, particularly while I was watching it. Did you hear the Hummers are making a comeback and it’s going to be electric? Yep, I did hear that. Yeah. So I mean on the one hand, yes, like the push to electric is, is does come here and I think it’s nice for your Tesla to get kind of like that free advertising. But the flip side of that is you have competitors now who are coming for them and they have a large scale. They have large manufacturing capabilities, and you know, we could talk all day long about how we feel about, you know, the business behind it. The feelings about how we feel customer demands are going to go or manufacturing. You could point to the problems they’ve had with that in the past.

Andrew (07:35):

You can; you could argue on either side, you know, a company being this trailblazer and shaking up the industry on the one hand, on the other hand, define all odds. But when it comes to being an investor, you have to think about the data points. And yes, you know, whether quarterly earnings, everybody got excited because for the longest time their earnings were negative core there, you know, different corridors and different years. So they did post positive earnings. It’s probable and, and you know, it’s reasonable to expect maybe they’ll continue more quarters like that. So maybe instead of earning 50 cents for the year, they’ll earn, let’s say $2. But still, you take that math and overlay it with Dave’s same example; you’re still talking about the PE of let’s say 300. You’re still talking about like a $10 million thing. And the fact of the matter is is yes, the revenue has grown like crazy.

Andrew (08:41):

Putting them into one of our favorite websites, quickfs.net, you get a ten year compounded annual growth rate of 70% so I mean they’re like rev top line is exploding but it’s not coming at no cost. So debt is accelerating as their sales are accelerating. The other factor that I think gets no recognition whatsoever is the fact that their shares have been diluting from year to year to year. So I talked about that briefly in the podcast before in the that you can find in the archives, but they’ve been dilating those shares as the years go on, which I think is a smart business move because anybody can see with obvious eyes at the stock is crazy, if not crazily overvalued, crazily valued. And there’s a lot of money there. So from a business perspective, it only makes sense to take advantage of that high stock price and throw some cash into your business along with that.

Andrew (09:49):

But you have to realize that as an investor you’re essentially funding that and it’s working out now while the bowls are going crazy at this point now, it’s almost become like a circus where it’s almost not even about the business anymore, but it’s just about how, how, how can we time and how can we jump in and catch the wave and then get out. And I think this past week has been the perfect example of that because I watched Tesla pretty closely this week as far as what their share price was doing. It’s fascinating to witness. So we’re talking about regularly going in the double digits. So obviously, you know they had earnings recently so that the stock pop there, that’s expected. But then in the days to follow, they had some developments in China, they had a couple of analysts turn bullish on the stock.

Andrew (10:48):

And so we’re talking about trading in the pre markets in double digits and malt for multiple days in a row and then shooting up to double digits. And I can’t give you the exact number because it was up and down. I mean we’re talking 11% 16% and so, you know, 5% moves in the stock are a joke. And, and for a company of that size, a $100 billion market cap to have those types of jumps, we’re talking about huge inflows and outflows of capital that’s going into this. And so getting back to my point that it seems that now it’s gone even further away from what’s going on with the business. And now it’s more like this game and casino is, we had that huge run-up in the stock where it went up double digits multiple days. And had, I think it had one day where it was eight or 9% and then the next two days that followed, you had the same thing happened, but in the reverse direction.

Andrew (11:54):

So

[inaudible]

and on, on the day I had its top, which was February 4th, the money it was, it was close. So people were saying Tesla might hit 1000 and so they, they crossed over $900, which by the way, I mean they cross over $420 in December and now they’re shooting up, almost hitting a thousand. Incredible. And the stock had jumped across over 900 went down below again and then crossover it again. And it looked like it was about to hit a thousand and then at some point in the afternoon it dropped and dropped off a cliff and it lost billions, probably billions maybe not billions, but it lost five to 10% in a matter of seconds or, or a few minutes. It was insane. And since then, it’s kind of deflated. We’ll see where it goes from here. But the mania around it is just insane. You get every; it’s, it’s something, I think there’s so much general knowledge now about investing in the stock market.

Andrew (13:08):

It’s not a surprise anymore when people compare this to Bitcoin, or they compare it to other bubbles that we’ve seen in the past. Like there’s no denying that those charts look the same. But you know, we have this development here and something that I feel that is kind of interesting about Tesla is something I’ve forgotten. I didn’t really know for a while. They’re not in the S and P 500 and so they’ve been moving like crazy and the market has been pretty turbulent in the past couple of weeks as it is like super high, big days and super down low days with the whole Coronavirus fears. And so Tesla is a beast on its own and it just kind of moves on a whim. And so you’ll have a day where the S and P are up 1% for the day, which is a strong day for, for the market. And Tesla will be down like six or 7%.

Andrew (14:09):

And on the flip side, everybody’s freaking about coronavirus, and everybody else is excited about Tesla and it’s up 12%. So it’s, I mean, if, if people out there have the stomach for it, kudos to them. I think that’s cool. But it’s no denying that if you’re buying in now at this point with these valuations you’re

[inaudible]

, I think you need to admit to yourself that you’re playing a big momentum game a lot more than you’re playing a fundamental analysis game. And it’s not even a question at that point. So I know moving forward, I wouldn’t be surprised to see a break, a thousand. I think it’s, it makes a good story and there’s something there. There’s something that is going on. Some people want to see it hit a thousand, and I think it will. But then I also think that there’s going to be a lot of bag holders and at some point, it probably will drop back down.

Andrew (15:14):

And we’re, we’re seeing, we’re seeing some of that now. There’s with, with the whole Coronavirus thing, there are now reports that Tesla had to shut down a couple of plants in China because of it. So they’re going to see an economic slowdown. And there are other stocks as well who are affected by this Coronavirus, which are seeing slowdowns. So I guess moving forward, whether you think Tesla breaks through to a thousand or not, probably depends on the impact of the coronavirus, but as a longterm investor to think that you’re going to buy into the stock and be profitable over the next five 10 15 years. I’d be very cautious and at least if you’re educated on how bubbles work and how other stocks that I’ve had mania like this have performed over the very long term, then, by all means, have at it, but at least educate yourself first. And so I think that how it performs in the next two to three months is more so on what the news around the coronavirus will be. But the longterm is such a different story.

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Dave (16:35):

Yeah, I would agree with that. And I think, you know, the mania around a company like Tesla, Tesla is, I think that’s really kind of the best way to describe it because, you know, you were mentioning that their revenue has been exploding, but if you look at the overall picture of the revenue exporting, their costs are exploding as well. And I think that’s the one question or the one big red flag for me is that as they, you know, most companies as they get better at what they do, their costs start to even out or decline. And then that’s what weeds to the profitability. And it doesn’t seem like as long as Tesla has been in a business that that’s happening. And I know the Vitaly talked about that in his dissertation that he wrote about Tesla a little while ago. And I think that’s a big concern for me about the company is that it just seems like, yeah, more people want their cars, but the costs for each car is not coming down in line.

Dave (17:40):

And so the profitability is, it’s just not there. And until they can figure that part out, you know, I just don’t a path to profitability because if it just keeps costing more and more and more to build the cars, then at some point something has to give and maybe I’m just not getting it. Maybe I’m, you know, Hey, I’m the old, old dude sitting in his, you know, on his porch, you know, yelling at people to get off my lawn. You know, I don’t know. Maybe that’s entirely possible. But I, I don’t see it. And I guess the point that Andrew and I are trying to drive home with what our discussion is today when you’re investing your harder and money in trying to think about what it is that you’re investing in, what are your goals?

Dave (18:28):

What are you trying to do with this money? And you know, like Andrew said, if you can stomach the ups and downs of something like a Tesla, then more power to you. I, I can’t, that’s just not in my DNA to handle that. I would be stressing out like crazy if I had a ticker on my computer all day that was showing a company that I was invested in jumping up and down like that as much I would be, I couldn’t concentrate, I wouldn’t do anything else. I know myself well enough to know that that’s something that I have to step away from and not be involved in because everything would be, would be going on. And you know, when we think about the news and what kind of impact it can have on our life, we have to remember always that the news is sensational.

Dave (19:12):

And there their job is to make things more exciting because they want more people to watch. And that’s really what drives it. And when you think about watching CNN, you know, a lot of it is driven by them trying to create, not create things. That’s not the right way of putting it, but they’re trying to elicited emotion, a strong emotion, good or bad. And that’s what they’re trying to do. And I was listening to a podcast today and they were talking a little bit about the coronavirus and I don’t mean to make light of any of the people that have died. I’m certainly not going to do that. And that’s a horrible, horrible thing for anybody that’s sick and is going through this terrible thing. But to put it in perspective, at least for what the news is reporting, as they’re saying, there’s been around 500 people that have, that have died from this disease so far.

Dave (20:05):

To put it in comparison, to put it in reference, to give you an idea of the impact that it can or cannot have. We don’t know what’s going to. You know, I can’t predict the future. But this gentleman on the podcast was saying that last year in the United States alone, 50,000 people died of the flu. Just the regular flu, 50,000 people. So if you put that in perspective, it doesn’t seem quite as scary. And you know, everybody gets the flu. We all get sick, you know, every year I get sick and you know, I get sick twice a year. It sucks. But when you put it in perspective, it makes you think about, okay, it doesn’t, it doesn’t make you feel, I mean it’s, you know, it’s horrible either way, but it doesn’t make you feel the panic that the news is trying to elicit by their, their coverage of what’s going on in China and it just makes you feel something and they want you to get a reaction. And when we’re thinking about the stock market, we always have to try to take emotion out of it as much as we can and we have to be as dispassionate as you possibly can because when you’re Basing your decisions on a strong emotion, sometimes that’s not always the best way to think about it.

Andrew (21:22):

Yeah, that’s, that’s good. I think we, we tried to touch on that a little bit last week too, with the emotions and, and trying to get a handle on that. Being really engrossed with the daily fluctuations is most likely, if not guarantee way to ensure that you’re, you’re going to have a lot of stress about your portfolio. So maybe stepping back and trying to look at the big picture as somebody who’s a longterm investor, somebody who’s trying to find, you know, at the end of the day, whether you’re trying to do with your investments, going back to what Dave was saying, are you trying to beat wall street and you know, they’re getting a piece of news and they’re bidding down, they’re adjusting valuations in seconds, so they’re, they’re going to bid down the stock 5% and 30 seconds or they’re going to beat up the stock.

Andrew (22:21):

In the same token, are you trying to be to beat that and be ahead of that? Or are you trying to say, you know, certain stocks are generally overvalued or generally undervalued? I’m going to try to buy stocks that are generally undervalued and then let the events play out as they may. You’re not going to stick your head in the sand necessarily, but try it, if you’re, if you have that, that zoomed out perspective, then as each little news piece and the article comes out you’re not necessarily freaking out about what’s going to happen to the businesses in your portfolio. So in December, it was the tariffs. It was Trump’s tweets this month. It’s been the Coronavirus. It’s been, I don’t know, without what else has it been the impeachment? Yeah. You know, interest rates, again, not knowing if they’re going to stay dovish or not.

Andrew (23:28):

So yes, those things do have an impact. Yes, they do push profits up or down, but you’re also talking about very large corporations with hopefully, you know, if you’re investing in the business, hopefully, they have large customer bases or large means of acquiring, you know, lots of revenue and profits. So while that will fluctuate, if you’re, if you’re getting businesses that in general have enough of the right things to survive and weather the different storms, then your investments should be fine. So I’ll give you an example. I have a stock in my portfolio. It’s in the travel and leisure space. And so when I bought it, I felt good about where it was priced at. Wall street felt good about it. Maybe like a week or a couple of weeks later and it went up like 10% and then now this Coronavirus thing happened.

Andrew (24:25):

And obviously with all the quarantines and everything, yes tourism gets limited, and yes, that’s going to impact the, their revenue moving forward. However, how, how, what, what’s the extent of that impact and how much of that is fear over, you know, the unknown. Because, as Dave said, it’s not, it’s sad, it’s sad, but it’s not statistically a large number yet. You know, the fear is, is in the growth, but you can fear anything about anything with the economy, anything about the future. So are you going to, because now, so going back to my stock and my portfolio, it shot up 10% and then now it’s down, you know, it lost all those gains and now it’s down, I think 2% close to 3% last time I checked? So for me, quite literally living through that, that news cycle, how am I going to react? Am I going to sell right away? Because, because a wall street is valuing my company less because they’re, they’re seeing how the impact is going to affect the profits. Am I going to sell because of that? Well,

Andrew (25:43):

If my big picture is that I think they’re, they’re going to survive through it, and I think they can stay profitable through it, then yeah, maybe I’ll have one year coming up where they don’t have as many profits as they had the year before. But for me as a longterm investor, I want them to stay profitable and not get into a super bad situation with, with the balance sheet and everything. Right. So yes, I’ll be watching. Yes, I’ll be watching to see how they report the next year’s earnings. Right. If that’s negative, then wow, maybe this thing did take such a huge hit that now the company could be in trouble, but we don’t know that at this point now. So, even though a lot of investors have bailed out of the stock, I’m not going to bail out, even though the news has been negative because we don’t know the impact.

Andrew (26:35):

And so I’m not trying to play the game of being smarter than everybody else. So I’m going to get the timing right and get out before, you know, I’m just not trying to play that game. I’m, I’m trying to be a business owner first and foremost. And so as a business where you need to see how it plays out and accept that, yeah, there might be some stocks that you’ll eventually have to take a loss on. But I think if, if there was some way to have like an academic study on AI, I bet you could find an overwhelming percentage of news pieces that ended up being, if not irrelevant then to, to take up such a small effect on various businesses to be almost, I don’t want to say negligible, but whatever the step above and that negligible is. And so taking that perspective across your whole portfolio, I think it is a healthy way to think about it. And react to what you see in the financials. Don’t react to what the feelings or emotions are that you get from the news. Don’t react to how you think the business is going to either weather the storm or not weather the storm. React to what the business gives you and I think that that makes things so much simpler.

Dave (27:53):

All right, folks, well, that is going to wrap up our discussion for this evening. I hope you enjoyed our conversation and you were able to pick a thing or two outs that will help you with your investing. If you are enjoying our show, please give us a subscription. We’d love to have you come back and listen to us again and if you’re enjoying the show, give us a five-star review, a more five-star reviews we get, the higher we go in the rankings and the more people we can help when. That’s where Andrew and I are here for, so without any further ado, I’m going to go ahead and sign us 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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