Dave: 00:35 Welcome to episode 77 tonight. Andrew and I are going to talk about a stock selling theory. Three strikes. You’re out. Andrew has some thoughts on selling a stock and you wanted to share them with you, so we’re going to go ahead and start us off. Andrew, why don’t you tell us your ideas.
Andrew: 00:53 Should I really? Does anybody want to hear them? I think they do. Okay. I will. I’m God this cold email today. I want us to share it because it’s inspiring. A email from Renee says,
Dave: 01:08 I just got into investing maybe 10 days ago and they’re already listened to around 10 podcast. Keep up the good work.
Dave: 01:14 Those are the kinds of things I love to hear. It fires me up a 10 day brand new investor. That might be. That might break our record as far as recorded record of being public. I don’t know if some of these beaten that. That’s pretty cool. It is. So keep those coming. Uh, that fires me up to get me a recording on an episode like today.
Andrew: 01:40 But you know, we want to talk about selling a. We talked previously in episode 65 a. If you go back and listen to the archives, I talked about how my approach evolved a bit. When I went back, I looked back at the history of some of the buys and sells I made through the Eli, their portfolio and Ivy. I used to break up the portfolio into two portions. I had the regular portion and the dividend fortress portion. I still have those two sections kinda a segregated off, but I had trailing stops on the regular portion. And in episode 65 I talked about why I no longer use trailing stops.
Andrew: 02:33 Kind of a cliff notes on that was I found that because the way I picked stocks is very, very conservative, very, very much so. Margin of safety, emphasis on the safety. A lot of these companies with strong balance sheets, maybe not explosive growth that leads the market, but Kinda just plugs along slowly but surely and quietly creating profits and with them is that grow over time and trading at prices that make them not popular. Right? So already by that, by that kind of definition, they’re not going to have momentum at least a start. And so what I found, looking back at some of the stock picks I had, I had several where if I would have not, you know, if I would have not applied the trailing stop if I were the let the stock run, than I would have actually had much higher performance. And that was a pretty consistent trend I noticed through several years of data. So, uh, coming up on, oh, I just hit the four year anniversary for the leather. So it was about three and a half years of data when I looked at that. So I kind of wanted it to look at that again.
Andrew: 03:53 I was listening to a podcast and kind of got me thinking about, you know, what are some of the reasons why, why you might want to sell a stock, particularly if, if you’re trying to lock in a profit, I’ve written on the blog before, how I don’t, uh, believe in, in, in locking in profits just for the sake of locking them profits. I think it’s an interesting discussion and I think, I mean, what’s cool about investing just in general, when you talk about the buy and the sell side, there’s, there’s no like set hard or fast rules that will guarantee success, but I think it’s a good idea to have them. But like within those hard and fast rules, I think there’s a lot of flexibility and that’s going to be at each individual investors discretion.
Andrew: 04:50 So like for example, I’m a hard and fast rule that I might have personally is I won’t buy a stock at a PE above 50. That’s ridiculous. That’s ridiculously overpriced. Uh, I’ll generally look for a stock that’s trading other PE below 25, but you know, if a stock scoring gray on all metrics except the PE is like a 26 or 27, I’m not going to necessarily exclude it. That’s going to be a judgment call. So while you have like hard and fast rules on the buy and you have kind of your, your boundary lines up will just never be crossed.
Andrew: 05:29 And these conditions that you’ll never buy on. Like for example, I’m also neck, never buy on negative earnings. I will never buy a stock that’s not paying dividend. Those are hard and fast rules and so I have those and that gives me good clarity. And you set those up and you’ve won 80, 90 percent of the battle. You’ve taking the most extreme parts of the market. Some of the stuff that we know that’s just inherent with, with the behavior of the stock market and if we can adjust to those and set up our system so that it’s automatically kind of filtering away from the worst parts of the market that then were the rest of it becomes fun because then we can kind of make these judgment calls, but they won’t affect our performance as greatly and as intensely as these hard and fast rules you set at the beginning.
Andrew: 06:28 Another example is dollar cost averaging, diversifying, right? All those things come together. They make sure you’re continually invested, you’re investing for the long term, you’re spreading your risk. And so again, a less of an emphasis on the actual stocks. You pick up more about the system you set in place. One last thing. So when I talk about the behavior of the market, right? It’s obviously very, very emotional and it’s too bad that that’s not talked about a lot. I was listening to that Howard marks episode that you were talking about last week, Dave, first off, like anybody who sounds like Warren Buffett, like he literally sounds like Warren Buffet’s brother, just his voice that’s gonna, that’s gonna Hook anybody like right then and there, and then he’s obviously like a best selling author to a value investor at its core. A wrote that great book and has another one that just came out.
Andrew: 07:26 But he was talking about the way that the market is very emotional. It’s, it’s made up of people and people are emotional and there’s so many different kind of fall out from that and so many ways that can kind of appear. I mean, you have people who are doing this for a living, people who are doing this because they want to get rich quick. You got people who are actually doing this the right way. I’m building a retirement. You have people who they can, uh, go through divorce and they could have to sell half their assets right off the bat. You got people who could go crazy. I could go off the deep end, they could get a gambling addiction. And then you have all the other components of the financial industry. The way it’s structured, the way there’s conflicts of interest, we talked about that a lot in episode four or six, so all these different forces that make the market emotional and so one way that, I mean if you think about the market, it’s up or down green, or red.
Andrew: 08:29 And so, uh, I know maybe it’s, it has different emotions but, but the two major ones are going to be fear and greed. And so if we know that that’s part of the market and no matter what, and you see it evident all the time when, when, when a stock will just take off, right? It tends to happen with an individual stock or the market as a whole. We’ll see a correction and that can happen very fast. We just saw a couple of days in a row now where, where it was a very big drop like a cliff. And so you see these things. It shows how emotional the market is and if we can structure things so that we are actively kind of mitigating that risk or actively working against it. It’s just very big picture ideas and, and it can really set us up for success really, really nicely.
Andrew: 09:24 So in the case of a market that’s very, very greedy, if you keep, you limit your stocks, two stocks that are not caught up in the green, you’re not going to be buying a closer to to, to where a stock goes at a much higher price and you’re paying a much higher price than what the company is really worth because there’s a lot of greed and, and momentum and a lot of optimism around it. Uh, well yeah, so you limit some of that upside but you limit allowed the downside when those things inevitably come crashing down. And so by having a strict rule like, okay, definitely above this PE, I’m not going to buy well now, now your systems is automatically, taking into account that there emotions in the market, there are components of the market and we are planning for them. So all to say when it comes to selling, I have my own,
Andrew: 10:20 Like these are my hard and fast rules, these are the lines that can’t be crossed. And I believe that’s important to have, just as it’s important to have on the buy. Unfortunately, the sell side isn’t talked about hardly enough. And just like when we talked last week, how we kind of broke down, it wasn’t last week, I guess it was two weeks ago, two or three weeks ago, we did like a q and a and we broke down like a specific individual stock and kind of talked about some of the implications, some of the events that happen around the stock and what some of those implications were and how it affects our analysis and kind of use that as a basis point kind of example of how you might look at the stock and how you might process the data and kind of try to make sense of it.
Andrew: 11:09 And, if you listen to that, you would kind of conclude that while there’s a lot to this, right, we might have some, some good rules that keep us on the right path, but you can really get into the weeds on this. And it’s very, very true for selling as well. And so I think this isn’t the, this isn’t the first time we’ve talked about what to do when you sell stock. It’s not the last. And the way I kind of wanted to talk about this was because I called it a theory. I think it’s something we should approach this with an open mind. Let’s come up with a hypothesis is that I’m not a science guy in the sense I don’t do. I’ll have a lab coat and a and then go for a phd in science, but I don’t know if you make a hypothesis to test the theory or what, how that kinda works.
Andrew: 12:00 But let’s do that today. And I also kind of wrap up with how, what are some, if we have a lot of the buying principles that we always talk about, margin of safety, emphasis on the safety, buy stocks, trading at a discount to their intrinsic value. Make sure you’re diversifying, buying for the longterm thinking like a business owner and you’re buying a piece of the business and not just some ticker. All those sorts of things. So we, we can come up with a couple of those on the south side too when you’re trying to sell a stock and think of brushed on it before but haven’t gotten this in depth. So I think this will be kind of helpful going. All right, so let’s, let’s, I guess let’s go. Let’s go there then. So tell me about your hypothesis. All right. So I kind of mentioned how, uh, the trailing stop originally, it’s, it’s focus is to try to limit your downside, right?
Andrew: 13:00 Like you’re exposing yourself to the upside and then limiting the downside. And what downside is, is a stock where if you really think about, I mean it can happen where you’re in the stock market. Stock just gets hated for one reason or the other and the stock price goes down, uh, but those tend to kind of recover over time. That’s were allowed. The opportunity comes from value investing. When you think about the other reason the stock might go down in prices because actually the business is failing, it’s going in the wrong direction and instead of growing, it’s shrinking and you know, business opportunities aren’t there either. They’re not able to compete. Are there industries just not as profitable as it used to be? Those are the types of situations you want to try to avoid. A trailing stop will naturally kind of take care of those situations because Wall Street smart enough to know generally when, when a, when a business is about to fail, and so depending on where you sit, your trailing stop, you’ll be out of the stock before it goes bankrupt.
Andrew: 14:04 But like I said, I had the research that showed that, with a low risk kind of strategy to try and stop doesn’t work as much. I’m kind of comes down to, in order for a child and stop strategy, the work you’re going to sell out of stocks a lot more than you should. And so you need high flyers that are going to create high gains that kind of mitigate the effect of, of, of all these small losses you took from the trailing stop. One of the podcasters I like to listen to and I talked about on my daily email the other day, how I’m,
Andrew: 14:42 I really respected, you know, Stansbury digest and the stuff they put out. I really like the Stansberry Investor Hour and the episodes that they produce. And in the latest episode, poor there, he’s a founder of the show. He talked about how he did research with all of his newsletter recommendations back over a decade. Okay, because he has multiple newsletter writers writing for his company and he writes one of as well. And he found that the higher the volatility and the higher the risk, you kind of equate the volatility and risk, uh, for this study. Don’t get bogged down in that, but just basically the higher the volatility of the portfolio, the better the performance with trailing stops and will for portfolios that were more quote unquote conservative that how lower volatility trailing stops actually kind of hurt more than they helped and so you know, what I found in episode 65 and how that was applicable to me.
Andrew: 15:46 It was kind of confirmed by that and it makes a lot of sense too when you think about it, you’re, you’re going to be doing a value strategy, not gonna see as much growth as like a gross stock so you won’t have as many of those stocks that kind of pop. And so if you don’t have those in your portfolio, then you can’t afford to have a bunch of little losses from a trailing stop. Like what would happen in a situation like that. So you know, you limit your loss kind of all around and you, you grow slowly and surely rather than depending on one or two gross stocks to kind of take off. So that’s kind of the background behind it. Now. I was kind of trying to think, okay, if, if the downside is, is this as a business that is failing, right? Not necessarily failing, but a business that maybe is headed in the wrong direction, right?
Andrew: 16:44 You can look at a chart and say, well, you know, the chart momentum is downwards, so this kind of reflects a failing business, but that’s more after the fact, you know, it’s so easy to look in the rear view mirror and say, Aha, that’s what was happening. Can we try to find from a fundamental analysis point of view from looking at the financials, can we find a way to kind of identify these, these symptoms of a failing business? We talked about this a little bit and the failing business episode, but you know, as it relates to specifically like making the sell strategy based on that, can we do that? Can we make specified rules and say if this happens with the financials, then we do this. That’s what I wanted to find out. And so that’s what I did. So I kind of went back again to some of the stocks that were stopped out by my trailing stop. I wanted it to go back and see, okay, uh, what did those financials look like? And was there like maybe it was a short term trend, right? That shows that the business is no longer as profitable. Kind of makes sense logically, right? If they have less revenues, that means either they have less demand or, or less.
Andrew: 18:02 Yeah. Less demand for their products or less capacity to be able to produce as many products as they could that could come in and revenue maybe a dad to drop prices because there’s more competitors that can come into job revenue. Obviously drop revenue tends to also, you’ll tend to see earnings drop from that profits, right? If you, if you don’t have as much money coming in, how can you make as many prophets and obviously with book value shareholders, equity shows the amount of assets that you’re able to buy and own.
Andrew: 18:34 That’s the idea. And so I thought, okay, let’s try this. Here’s the hypothesis. Three strikes and you’re out, right? If if you know, because the company could go from one year to another, there’s no company that’s going to be able to go up in a straight line forever. Maybe you could say Coca-Cola did, but I mean how many stocks are going to be able to do that? It’s not much so you want to give room for error for these companies to be able to understand that the way economics of an industry where it can be cyclical, it can be up and down. These things can fluctuate and just because of business has a bad year or even like a mediocre year doesn’t mean long term. It’s going to be bad. So I thought, okay, what if we said three strikes, you’re out an essentially three years of declining revenues and slash or declining earnings would mean that this is a stock we should sell and it will be one of those hard and fast rules where you say, now I don’t care what’s happening. We see this. We sell, right? So I went back. I wanted to. You’re not going to like this, Dave, because this is a stock that you’ve done praise about in the past. And I have as well, but this was a stock Gamestop that I stopped out of.
Andrew: 19:50 Uh, so I bought it in January of 2017. I stopped out in August 2017 and it’s actually one of those, one of the few trades that was good that I stopped out because it continued dropping. So in that sense, that year, I guess more than years past, it’s a down 21 point eight, one percent more than it was down and I sold out like a 25 percent trailing, trailing stop. So sorry. One stock that, you know, we saw value and I don’t know, are you still holding it and hoping for the recovery? I am, yes. I didn’t put a lot of money into it. So at this point now it’s just kind of an experiment to see what would happen. I’ll just say like, uh, if I still had that, I would definitely sell it. Especially, I mean that song. I’m sorry if I still had it, I would definitely hold it. Uh, and, and you’ll see why are they meeting at the very end, but, at least until it keeps, you know, at least it tells me that, okay, we can’t make a profit anymore.
Andrew: 20:56 Anyway, I wanted to test this thing, right? Are we able to see three years of declining revenues, declining earnings, and then if that’s the case and it gives us a good sell point, then we, then we can exit out and then essentially use a trailing stop, only focus it on companies that are in a bad direction financially rather than in a bad direction and the stock market. So I looked at Gamestop and I found one year of declining revenue, one year of declining prop, two years of declining profits one year before I sold it. So nothing really there. I went to another one. So here’s another good example was an insurance company knows to talk about this on Footlocker, uh, in the three years since I sold it. It’s, it’s down an extra seven percent. That’s terrible. Especially considering you compare it to the rest of the bull market in three years. You don’t want to lose seven percent. I did the same type of tests and I actually saw that in the financials leading up to when I sell, when I sold it, the revenues are going up, the earnings are going up. So that doesn’t help us either, right? We can’t, we can’t say that my trailing stop, if I wasn’t in the trailing stop, I probably would’ve continued to hold and earnings after two years finally went down. Um, essentially what I’m trying to say is it was like inconclusive.
Andrew: 22:31 One more, uh, Cincinnati Insurance, CIA, inf I don’t have the full name in front of me, a been down 30 percent since the three years when I sold it. And this was a very similar case where the last financial report before I sold, showed like actually increasing revenues, increasing earnings, and then you had a little bit of a dropoff, but, things actually went back up afterwards. So the trailing stop will tend to, you know, the market tends to kind of be ahead of a lot of these stocks. And so since they’re all up on the quarterly reports and they’re all up with projections and then the future and all these sorts of things, um, a lot of times you’ll see the movement and the stock price before you actually see it hit the annual report, which is why some of these got stopped out. And then after I got stopped out. That’s why if you were to look at those financials, you have seen that kind of do like a little drop and then go back up. So you kind of see, um, the market anticipating like a drop in earnings or a drop in revenue. This is pretty common I’ve found in my experience the market, well anticipate a drop in earnings, a dropper revenue, then they’ll sell out, then you’ll see the financials and you’ll see that drop.
Andrew: 23:51 And then from there it’s kind of like, either as a value investor, you’re, you’re coming in and you’re hoping for that recovery or you’re holding on and, and then it’s almost like a 50 slash 50 chance of it going up or down from there. Kind of what I’ve noticed. So based on kind of looking at some of some of the previous stock buys and holds I had and cells, I didn’t see anything there. So I thought the next, the next thing would be all right, well that was a very small selection that my little sphere of the universe. So let’s expand that out and let’s try to look at the worst case because it helps to look at the extremes as particularly if you’re looking at accompany. That is failing, right? We’re a company where the business is just so bad that it goes bankrupt.
Andrew: 24:49 I went back to the value trap indicator stuff. I have a, what’s nice about the spreadsheet packages. I have um, 30 of the bankruptcy, 30 of the companies that went bankrupt and I had inputted their financials into their own individual spreadsheets. So I may, I was able to pull this up really, really quickly and just glance at their financials, all 30 of them and you won’t see that anywhere else because I met, I imagine in time even, um, they might remove those, excuse me. They might remove those annual reports from the sec just because they figure why, why keep them up there, these companies are bankrupt. Nobody’s investing in them anyways, but I was able to just glance through because I had those 30 spreadsheets and I was able to look, okay, let’s, let’s take this three strikes and you’re out tests. Then let’s take it to these companies. Let’s see, you know, accompany. That completely goes bust, completely fails, was it, what was it a trend that we were able to identify and prepare for. And it’s like almost an inevitable thing. Right?
Andrew: 25:57 So I went through, again, there’s 30 bankruptcies and a couple. I found that Blockbuster had five years in a row of earnings is going down, down, down, down, and revenue going down, down, down. Borders were the same way, five years continuously going down. Um, a lot of these would have several years of negative earnings, so Borders, ACC had three years in a row of negative earnings. So you had plenty of time point being he had plenty of time to get out of those stocks before they went bankrupt. I’m one I found interesting silicon graphics nine years in a row of negative earnings and a revenue was down, up and down from year to year, but it went from really high 10 years ago to really low ball.
Andrew: 26:47 By the time it went bankrupt, another company, a span of seven years in a row of negative earnings. So you had a long time for these companies to be losing money and I’m surprised a lot of them lasted this long, but I went through, you know, let’s try three strikes and you’re out. How many of these companies would qualify for that? And so if they said if they showed us three strikes and you’re out, we were able to get out of those stocks before they went bankrupt, then it would be generally a good indicator of, of why we should sell. Because business is a bad investment. On the downside. I found out of those 30 companies, only nine of them had earnings that were, that went down three years in a row consecutively, consecutively like that. And only four out of the 30 went down on revenue.
Andrew: 27:39 So you’re looking at 33 percent and less than half of that for the revenue part. So basically trick or treat, right? Uh, we have this hypothesis, this theory, it sounds like a great idea. It makes sense. You would think that that accompany would show these signs and kind of gradually decline and that will give us a good indicator of when they get out of a stock. Unfortunately, that’s not the case and we don’t have, I don’t have anything that’s saying statistically relevant enough in order to make that a good rule. But A. However, on the bright side there are different hard and fast rules that make it very, very obvious when it’s time to get out of the stock because the business is in trouble and I’ll share those. And these are actually new. Not new, but like a different take on the same data that I’ve had. That really kind of is encouraging because it shows just how obviously these things are.
Andrew: 28:49 So the picture is we would kind of think like in the Blockbuster case or a business kind of just slowly bleeds to death, but actually what based on the value trap indicator data and the research I’ve done with that, a lot of these things can actually happen very, very fast, very, very quickly. So if you’re not out at the time of these big red flags, then you might be in trouble. So going back to that same group of 30, uh, instead of how many gave us this three strikes and you’re out kind of warning how many of them had negative earnings in the year before bankruptcy. So instead of just being nine, there were 24 companies, so 80 percent of the companies had negative earnings before bankruptcy. That’s an easy kind of red flag check for us. Second. The second one is negative shareholders equity book value.
Andrew: 29:42 That’s basically where I’m a company has more liabilities and their assets. And so if you ask like how is that even possible, how are they going to pay their expenses when they don’t even have enough assets to cover it? Well, and you’re absolutely right because that is the case, uh, most of the time, if they don’t have understated assets, that’s a different conversation, but it is, it can be a good, a good red flag indicator. Nine of those companies are 30, 30 percent of those had negative shareholders equity. Uh, but when you combine that with debt to equity, so another 43 percent of those had a debt to equity above two point two, two, essentially two and a quarter. And so if you look, so we have the earning side. If you look at the balance sheet side, if we look at how many of these companies were either negative shareholders, equity means they had like a negative net worth or they had so much debt that their shareholders equity was so low that again, just like in the case of the negative net worth than negative shareholders equity, they don’t have as many assets to cover all the liabilities they have.
Andrew: 30:53 So accompany a, the number of companies that had either negative shareholders equity or debt to equity above a two point two, two was 73 percent. And then if you combine those two, so that’s 22 out of 30 companies, that’s, that’s quite a lot. If you combine those two of metrics so you have the earnings, the earnings show us that the company is not profitable. The shareholders’ equity shows the balance sheet picture what’s, what’s the assets look like, what kind of liabilities as a company has. Now, if you combine those two, so either the company had negative earnings or had the debt to equity dilemma, it was 28 or 30 of those companies had one or the other. So a full 93 percent. What’s the takeaway here? The takeaway is if we have something that’s so common in all of these bankruptcy’s, over 90 percent of them had an issue either in the income statement or in the balance sheet, then it makes sense to have both of those as hard kind of stop red flags lines in the sand that we don’t want crossed.
Andrew: 32:09 It will help us stay away from a lot of these really failing businesses. I think the three strikes ideas as a nice idea in theory, but it kind of goes to show how you need to take ideas, you need to take theories and then you need to back it up with history and with research and see what, what’s actually happened with the stock market and what kinds of behaviors will we tend to see, what we can see from something like this, what the values are, but indicator research and kind of taking it a step further with this episode today is that you will have failing, uh, failing business, show certain things in the financials and it will show up either in the income statement or the balance sheet or sometimes even both. So if we can avoid both of those, we might lose some good opportunities, but we will mitigate a lot of the risks that these companies are just blatantly obviously showing us that these are signals that the company is very, very close to bankruptcy, if not very at risk.
Andrew: 33:11 And so yeah, uh, accompany could pull through, but why take the chance? I think something like this that has such a statistical significance that over 90 percent of the companies will display one of those things. It makes a good argument for being a reason why we should use it as like a hard selling role. And so that’s something that I’m definitely implementing it into my portfolio. Most definitely with the, um, the dividend fortresses and the regular positions and then kind of going off from there, the rest of it becomes a judgment call by my dividend fortresses.
Andrew: 33:54 Are going to be held longer and not have stringent rules as, as like the regular positions, they’re going to have more leeway on those judgment calls.
Andrew: 34:05 but you know, I need to have a, a downside protector for my regular positions too. And having something like these two roles where I’m not gonna, you know, if the income statement shows me this or the balance sheet shows me that I’m not going to buy, I’m not going to continue to hold them in the cell. It gives me clarity. It gives me a plan, gives me protection against the downside and something you can do too. So I mean, you have something like today, right where our recording this October 11th, and I don’t know if it was yesterday or two days ago when this all started going down, but basically everybody’s freaking out. The SMP or the Dow last like three percent, definitely at least three percent, four percent yesterday, today is down another, a couple of percentage points. The S&P is down a lot. And if you look at any sort of price char on the markets, you just see the price going down, causing lots of panic.
Andrew: 35:08 And if you don’t have a plan on when you’re going to get out, your panic just multiplies. And so you contrast that with some of the, like not the like pat my own back, but contrast to somebody like me where I know a were a failing business, kind of what that looks like. And so I know when to panic and when not to. And so I can look at a correction like we saw were almost like in the middle of right now and kind of not feel bad about my portfolio because I look at the individual stocks that are in there and I have belief in them for the long run and then their health. And so by, by having the, the downside all covered in place, I’m able to be confident and could see the whole regardless of what the market does because I know that these businesses are likely to be fine and I’m watching like a hawk.
Andrew: 36:03 Every time those annual reports come out, I’m going to check and I’m going to make sure one of these hard and fast rules isn’t being broken and I can kind of maybe play with depending on how my turnover, my portfolio turnover is going. Like I mentioned before, depending on some other things, if I see another opportunity, those things can kind of be judgment calls. But the majority of the time, uh, with the majority of my positions, I have these rules in place. And that gives me clarity. That gives me peace of mind. And that helps me weather the storm, like we’ve kind of seen the past several days.
Dave: 36:47 That was awesome. Fascinating information. That was really interesting. I appreciate you taking the time to, to dive into all that and kind of figure that out because that was really kind of interesting. And I, you know, I guess a couple of things that kind of popped into my head while you were talking about that that I wanted to maybe throw at you and see what your thoughts were.
Dave: 37:08 Number one is we’ve talked a lot about buying rules and, and we’re talking about selling rules today. What are your thoughts about like codifying those in such a way that you have them written down so that you have, when you have moments like what happened the last few days in the market that you can go back and look at those and it can kind of be a reassurance to you that if you own particular companies that you see the price going down. But you know enough about the financials to know that, okay, these are not really in trouble. This is more of an issue of the stock market is correcting what they may feel like is overvalued or overpriced and would that help people? Not quote unquote freak out. And I guess the other thought I had about that is how does one, how does one go about making sure that their company is not one of the ones that are failing?
Andrew: 38:09 Oh, 100 percent. I think people should write it down. I think that would be very, very helpful. It’s funny you mentioned it because I actually, I wrote that down to my spreadsheet. I have a spreadsheet where I look at my whole portfolio. I have a bunch of notes on the bottom and the side, but big caps. I’ve got my selling rules and those are written down. I can refer them at anytime.
Dave: 38:28 Okay. Yeah. I think the. I think that would be very helpful, especially for people that are just kind of starting out at the beginning. I think having those things solidified in your head, you know, it’s one thing to have them in your head, but like you know, I think what you have is a great way to do it and I know that I have those for me as well. When I look at my portfolio, I have my rules and my sell rules, you know, I have a little tabs for both of them so that if I ever do get like, you know, hey, you know, what’s going on? And then I could do some quick research to see, okay, well this is not the, you know, so, and so a company is still doing great, you know, all the things that we’re talking about today are not in play for this particular company.
Dave: 39:12 So I don’t need to worry about this one. I don’t need to worry about this one. And again to kind of throw this out there as well, not having super huge portfolios also makes this easier. If you’ve got 122 socks and you got to go through all 122 to decide whether any of these are mitigating circumstances for your company, that’s going to be a. that’s going to be a lot of work, but if you’re sitting into 15, 20, 25, you know, total company portfolio, that is going to be a lot easier to manage in a circumstance like this.
Andrew: 39:45 Yeah, I agree. Oh, how it would. How would somebody. How would somebody go about finding out whether these companies are failing or not, but what are some signs that they go look for? Oh yeah. I guess, yeah, to answer the second part, what investors can look for very easily. If a stock has negative earnings and you kind of agree with what I know how I like to set up my hard and fast rules and you want to follow. I’m simply, if a stock has negative earnings, you sell it. If a stock has a debt to equity above a two point two, two, and you calculate that by taking the total liabilities and you divide shareholders’ equity, let’s say you get my version of debt to equity that’s above, you can just say two and a quarter there and sell it. And then, uh, if it’s negative, if the shareholder’s equity is negative, then you sell it. So those would be the, I guess the three strikes, three strikes except one strike and you’re out, right? Yeah. Yeah. Okay. Perfect. All right, well that makes it easy. All right, well thank you. So what do you, what are your thoughts on the whole thing with everything we’ve seen in the past couple of days?
Dave: 41:10 What are my thoughts? I don’t know. So like my thoughts,
Andrew: 41:17 what’s it like? Is there are, are there too many people, uh, focusing in, on what’s going on and maybe not taking a big picture.
Dave: 41:27 I can, I can, I can show you on twitter. We can, we can, I can tag in some, in some thread. I’m sure you can that it spirals into all the politics. Yeah. Yeah. I can’t really go down a rabbit hole for sure. You know, I guess my thoughts are as somebody who doesn’t watch the news a lot and there are various reasons for that, sometimes when you miss things like this, like I didn’t even know this was a truly. I did not even know this was going on until this morning and so everything that happened yesterday, he just didn’t even enter my universe and it didn’t really it, it doesn’t at this point rise to an occasion where I think I need to like run to my portfolio and check everything because a seven percent drop in two days when the stock market is really kind of overheated to begin with is not that big of a deal and I don’t see any.
Dave: 42:30 I guess from an outsider’s point of view that’s not really paying attention to all the minute details that are going on in the world. I don’t see anything that’s triggering a recession or a, you know, a huge correction in the market. Adults, you know, unless there’s something else going on in the world that not everybody’s talking about, I can’t see anything that would cause this to trigger just out of the blue. I mean we’re not at the time of the year where you’re going to see any annual reports. I know that maybe earning season is coming and so maybe there has been some reports of some of the things that you know are softer than they’d like to see, but I don’t see anything large that would cause a huge correction. And so I just feel like, and I felt like this before with the great recession that we had and you know, seven, eight, nine that out.
Dave: 43:29 Some of it was fueled by the media and when you have people on TV and every talking head telling you that everything is negative, everything’s going bad. You start to feel that and it’s a. it’s a common human reaction to if everybody’s telling you the sky is falling, you’re going to think the sky is falling and you’re going to react to that. And irregardless of whatever other information you have, it’s just a natural reaction for us to, you know, react to that way because we want to go with her. Do you know if everybody else is telling us that this is bad, this is bad, this is bad, this is bad. Then we got to think it’s bad. And I think, you know, as a value investor, as somebody that we look to try to be that contrarians on purpose. But just the nature of what we’re trying to do is we’re always looking for deals.
Dave: 44:25 We’re looking for things going on sale and a correction. Like this is generally something that we kind of want because that’s when you can find, you know, a, a Google or a Facebook or a Microsoft or an Amazon or somebody. You have some of these great companies you can possibly find them on sale. And if everything else is going great with the company and the stock market’s decided to, everything is bad and all the prices are gonna drop, then you know, that’s when we get to have fun because now we can buy stuff cheaper. And that’s basically what we’re trying to do is buy stuff cheaper so that it will rise and we’ll make, you know, capital appreciation on that, not in that, not including dividends. I mean that’s the whole purpose of what we’re trying to do here. And you know, what you were talking about with the selling rules is a huge part of what Warren Buffet talks about.
Dave: 45:23 You know, rule number one, don’t lose money. Rule number two, don’t forget rule number one, you know, that’s, that’s what we’re talking. If you don’t lose money, that’s the whole basis of your VTI is you’ve, you don’t lose money, you’re going to make money. And what we’re trying to do is look at rational ways of thinking about how to invest and reacting to a two-day freak-out. And like you said in the twitter verse, you know, everybody and their brother is, you know, quote-unquote freaking out because it’s gone down for a couple of days that we’ve gotten so used to. It just always going up, always going up, always going up, always going up. And it’s a confirmation bias and all of a sudden everything’s going bad as well. It’s not really going bad. So I guess a long-winded version of what, what do I think, you know, at this point it feels like it’s just an overreaction to something else.
Dave: 46:18 And is it something systemic? Is it something, you know, negative in the economy, negative in the world, negative. I don’t think so. I could be wrong, but I don’t think so. Your thoughts? I mean, I agree it’s, there are so many moving parts, it’s not going to be even possible. The to pin it down to one thing. And this is what happens when markets get overheated or anything either cool off eventually. Yes, they do. You can’t, you can’t go up forever. It has to. It does have to go down to go back up. But we really want to. Dave.
Dave: 46:53 Yeah. That’s a whole other conversation. Did you have anything else you’d like to share? Did you want to end with that quote? I do. Okay. Sorry. I guess you had to coming already. Alright. Okay. One, two, three. All right. So something that I wanted to kind of finish up our conversation today. I thought this is really appropriate with our little conversation here at the end and everything that Andrew was talking about today. Uh, we’ve talked many times about Jim O’shaughnessy and we’re big fans. We are of him. Uh, he drops him great wisdom the other day on twitter and I wanted to share it with you all. If you do not already follow him on twitter, I definitely would recommend it. So he says,
New Speaker: 47:35 stop.
New Speaker: 47:35 Look at your life.
New Speaker: 47:36 Look at all your yesterdays.
New Speaker: 47:38 That had such great hopes for tomorrow.
New Speaker: 47:40 This is just another day I’ve lived through so many market bubbles and crashes.
Dave: 47:45 Remember, what is your timeframe?
New Speaker: 47:47 Is it tomorrow? Don’t invest. If it is, snap your fingers. Twenty years gone.
Dave: 47:52 I think that really says everything about what’s happened over the last few days. Relax. Look at your life. Pay attention to what you’re doing, understand why you’re investing. You’re investing for your retirement and don’t overreact. That’s says it all. So I guess without any further ado, we’re going to go ahead and sign us off. I hope you guys enjoyed our conversation about a so rules. I thought Andrew does fantastic information and great deep dive into his models of the 30 bankruptcies and all the information you shared with us. This is definitely something you guys should pay attention to and create your own rules on and it’ll help you save a lot of money through the years, so go out there and invest with a margin of safety. Emphasis on safety. You guys have a great week and we’ll talk to you next week.
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