The DIY Investing Podcast: Recent Episodes

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Mental Models discussed in this podcast: * Delayed Gratification * Time Horizon * Personal Responsbility * Compounding

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Mental Models discussed in this podcast: * Second-Order Effects * Mean Reversion * Factor Investing

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YouTube Channel: DIY Investing

Show Outline

• Selling Series
  • A lot of time is spent on buying stocks. Yet, almost just as important, if not more is knowing when to sell stocks.
  • I find this area relatively underexplored, so I want to begin a long-term series on selling stocks from the framework of a value investor.
  • Previously talked about selling in a single episode on Ep. 106
• Today’s focus: Strategy matters
  • There is no one-size fits all approach
  • How you buy stocks will influence how you sell them
  • Your portfolio allocation strategy will matter
  • THe number of stocks you review in a year will matter
  • Whether you plan to own a cash position or not will matter.
• Excluded from this series:
  • Won’t be discussing momentum investing
  • Won’t be discussing trading or technical analysis investing (except as a marginal part of value investing when relevant)
  • Entire focus assumes that you are a value investor of some sort (whether deep value, compounder, graham value, quality, etc…)
• Deep Value:
  • Buy at 2/3rds of value and sell at “full price”
• Compounders:
  • You want to hold for a long-time.
  • Sell when compounding ends, plateaus or you were wrong
• Net-Nets
  • Hold a year then reassess
• Waterfall Stocks:
  • Hold so long as dividend yield is sufficient to provide target return
• Dividend Growth Investing:
  • Buy companies that pay dividends and grow them and sell them when they cut or eliminate their dividends
• Buy and Hold
  • “Never sell”
  • Works for a subset of stocks
  • Tends to overlap well with compounders and Dividend Growth investing

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Mental Models discussed in this podcast: * Second-Order Effects * Mean Reversion * Factor Investing

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Show Outline

• Today’s podcast will focus on a single precept: You can’t predict the future

• First and Second Order Effects

  • Margin of Safety
  • Preference for cash now vs cash later (Plays into want for profitable companies) Time value of money.
  • Growth is important because it can correct for mistakes, but you know you can’t predict it
  • Some of what you “know” about investing may not be true

  • Importance of Zero-Based Thinking (what is the best decision today based on what you know today)

    • Wrong because past price performance can’t predict the future (it may, but it may not)

    • Wrong because it assumes that winners will keep on winning and losers will keep on losing

    • “Don’t catch a falling knife”

    • “Hold onto winners, trim your losers”+ The central problem with rebalancing

    • It is definitely true that successful rebalancing CAN add value

    • It is also true that it is IMPOSSIBLE to know if your rebalancing will be successful
    • How then do you behave? How do you invest in the face of uncertainty?
    • First order:
    • Second order:

• Investing in the face of uncertainty

• You cannot assume business momentum. You plan for it and buy stocks you think will have it, but your strategy cannot assume it will continue.
• You cannot assume reversion to the mean. You plan for it and buy cheap stocks because it offers the opportunity of reversion to the mean, but your strategy cannot assume stocks WILL mean revert in the time frame you want.
• You cannot assume that growth will continue.
• You cannot assume a specific growth target will be hit.

• You cannot assume that your predictions about business quality will be better on company A than on company B.

• The only thing you can know to be true is that the future is uncertain.

  • I personally use some absolute rules (like no margin debt, no options, and no shorting). Not because they’re optimal, but because they limit my risk and allow me to take risks in other areas.
• Some of your decisions will be a mistake. That doesn’t mean you don’t make a decision. Indecision is a decision.

• Selling some winners may be correct and selling others may be a mistake. Your strategy needs to incorporate that understanding. “Absolute rules” can be helpful to limit mistakes, but they will inherently be suboptimal.

• What is my point:

  • It would be a mistake NOT to trim when I am given the opportunity to do so. Failing to take advantage of opportunities that ignore zero based thinking will result in me having lower returns across an investment lifetime.
  • You want to build a strategy that follows this precept: “If I lived my life 10,000 times, what strategy would result in a favorable outcome across the most possible lifetimes?”
  • Don’t optimize for the “perfect” scenario.
  • Don’t optimize for the “worst case” scenario.
  • Optimize for uncertainty. Prepare for the worse, plan for the best, and adjust daily.
• There are aspects of my strategy that go against established norms. However, there are clear reasons for that. I know that I cannot predict the future.
• Therefore, I am willing to sell or trim my winners when I believe it improves my potential returns and reduces my risk.

Summary:

• • You cannot predict the future.
  • Be more humble.

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Mental Models discussed in this podcast: * Look-Through Earnings * Dollar Cost Averaging * Earnings Yield * Opportunity Cost

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience. 

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YouTube Channel: DIY Investing

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Mental Models discussed in this podcast: * Dead Money * Opportunity Cost * Time is Money * Intrinsic Value * Compounding

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Show Outline The Dead Money Problem and Solution * “If you remember only one thing today: Time is Money” * What is Dead Money? + Any asset you own that is not growing intrinsic value over a period of time. + The focus here is on the fundamentals of the business. NOT the stock price. We can’t predict stock prices. We’re not going to try. * Why is this a problem? + The longer you hold a dead money position the worse off you are. * Principle: Time x Position Sizing x Expected Return of Alternatives = Lost value + By using this formula you can anticipate how much exposure you have to dead money losses. * The Solution: + The impact is large (Big “lost value” bucket) [>> 1%] + The likelihood of success is high (Big difference in expected return between opportunities) - At least 10% + Passivity is better than action. Action leads to errors. Always remember that you had good reasons for your original buy decisions.

Summary: Time is Money! Investors lose value on any asset they own that is not growing intrinsic value over time. This episode provides value investors with my solution on how to optimize their portfolio in the face of dead money assets and potential opportunities

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Mental Models discussed in this podcast: * Incentives * Skin-in-the-Game * Accredited vs non-Accredited Investors

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Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

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Show Outline Key Concepts for thinking about compensating a Portfolio Manager * Management Fees + Management Fees are priced a percentage of the assets under management. + A 1% management fee means that you will pay 1% of your assets being managed to the investment manager regardless of the returns you receive on your investment. + If you have $100k invested at the beginning of the year, you’ll pay $1k in fees, if your investment doubles, and $1k in fees if your investment gets cut in half. (ignoring the weighted average effect) + Management fees can be charged to both accredited and non-accredited investors * Performance Fees + Performance fees are priced as a percentage of the profit earned on investments over the course of a year. + For instance: A 10% performance fee would provide the manager with 10% of the total profits earned during the year. If you invested $100k, and the $100k grew to $200k, then the investment manager would earn $10k. (10% of the 100k gain). + However, if the investment fell to $50k, the investment manager would earn nothing. + Performance fees can be charged only to accredited investors. * Hurdle Rates + Hurdle rates are often paired with performance fees to ensure that investment managers only earn performance fees above a certain level of return. + For instance: A hurdle rate of 5% would mean that the profit sharing only kicks in after 5% returns have been earned for the year. In our prior example, if you invested $100k that doubled to $200k, then the “profit pool” is instead $95k, because the first $5k is exempt. The investment manager then only earns $9.5k. * High Water Marks + High water marking is where hurdle rates are compounded across multiple years. + In this case, let’s assume you invest $100k, and the hurdle rate is 5% per year. + In year 1: your investment declines to $80k. You pay no performance fees. + In year 2: Your investment grows to $110k. You still pay no performance fees because despite earning 37.5% rate of return in year 2, the hurdle rate of 5% compounded in each year, so the investment manager only starts to earn fees after 10% (5% + 5%) on the original $100k. So they would only earn returns above $110k in year 2. + In year 3: They only earn performance fee returns above $115k (ignoring compound growth here). * The Buffett Model + 0 % management fee, 6% hurdle rate (w/high water marks), 25% performance fee + I think this is an attractive setup and I’d prefer to structure any future fund of mine with a similar arrangement. + This is the best alignment of incentives in my view. You don’t get paid for AUM growth (directly), and only get paid for performance that beats a certain hurdle rate. + However, to do so excludes non-accredited investors. Therefore, if I want to serve non-accredited investors I’d have to charge a management fee at least for them. * What is the right answer then? + Non-accredited: - You only have management fees. You obviously want a manager willing to charge them, or you don’t get that manager at all. + Accredited: - Performance Fees may be your instinctual first option. They tend to align your interests with management. However, there are also downsides for you. * May encourage managers to take more risk. Unless they beat a hurdle, they don’t earn anything. They’ll never be 100% aligned with you. * Without a management fee, you are limiting yourself to investment managers who are already financially independent and can afford to have years without income. + Personally: I would be willing to pay or charge both sets of fees. My ideal setup is the Buffet arrangement: 0, 6, 25%. However, this isn't ideal for all investors. I could see the benefit of a 0, 10, 50% setup. I can see the benefit of only charging management fees (especially for retired investors who are seeking wealth preservation, not growth) - As always: The answer is it depends. But, I hope that I have given you the information you need to understand how it applies for you.

Summary: As an investor, you want to properly align your interests with your portfolio manager. A key consideration is how to compensate and incentivize that manager with either management fees, performance fees, or both.

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Mental Models discussed in this podcast: * Opportunity Cost * Alpha * Superpower of Incentives * Competitive Advantages * Process vs Results

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Show Outline Key Concepts for selecting a Portfolio Manager * Choosing an investment manager is a lot like choosing a stock + Don’t invest in anything you don’t understand - this includes managers + What is their process? + How do they earn alpha? Do you need alpha? * What are your financial needs? + Wealth preservation? + Wealth Growth? + Do you need alpha? - Not every manager can provide alpha. - Not every manager seeks alpha - Not every investors NEEDS alpha * Value + Cost - How are they paid? What is the expense structure? How does it compare to alternatives? + Management Fees + Performance Fees + Next podcast will be a whole podcast on fee structure, so I’ll limit my discussion on it here. * Growth + Investment managers inherently benefit from growing AUM. This is unavoidable. Regardless of pay structure. However, you want to understand what drives them. Is investing a passion or a money seeking endeavor? - Are they trying to grow AUM? - Do they plan to shut down growth at some point? * Quality + Competitive advantages? - How are they different from other investors? + Communication? - How do they communicate with clients? - Do you understand their process? Are you comfortable with them? + Style - Size of stocks - Liquidity - Value vs Growth vs Quality? - Overlooked companies? - Index hugging? - Concentration vs Diversification * Custom Portfolios vs Investment Fund + Some managers will setup a customized portfolio just for you + Or do you simply want to own a portion of a mutual fund or hedge fund. * Past Performance - Luck vs Skill + It is difficult to analyze a portfolio manager based on past performance + Instead, focus on their process. - If you understand their process you can potentially understand the odds of future outperformance (if you even need outperformance)

Summary: Choosing an external investment manager for your wealth is a difficult decision. In this episode, I outline the key concepts you should consider when evaluating someone to be your personal portfolio manager.

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Mental Models discussed in this podcast: * Stress Testing * Time Horizon * Stoicism

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode130

Key Concepts for Investing during a Crisis * Stress Testing - Bankruptcy Risk? + Goal: Survive + Stress test businesses not stocks * Focus on Fundamentals + Long-term is where all of the value is at + The next 1 or 2 years is only 10-20% of the value most of the time. * War somewhere is not inherently a crisis for your portfolio + Are your specific businesses being affected? + Land war in your country? + Destruction of infrastructure owned by your companies? + Sanctions against your companies? + There has been almost constant war for the entirety of the last 100 years somewhere in the world * Doomsday Scenarios + It is usually worth betting on optimistic outcomes + If you're wrong, you likely won't be around to deal with it. (Nuclear war)

Summary: The Russian Invasion of Ukraine has created a situation where three crisis grip the world: War, Inflation, and COVID-19. How should investors think and act during such a crisis?

Stress test your portfolio. Focus on the Fundamentals. Does the war affect you directly? Avoid doomsday thinking.

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Mental Models discussed in this podcast: * Catalyst * Activation Energy

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode129

Catalysts in Value Investing * Catalyst Definition * Trade vs Hold Return * Free Call Option * Catalysts speed up the rate of multiple expansion leading to a high IRR "trade" return * Business Catalysts vs Stock Catalysts * Solitron Devices Example

Summary: Catalysts can supercharge investing returns for value investor if utilized properly OR they can distract from a central thesis and cause you to make poor decisions. A catalyst should be seen as a free call option that boosts a "trade" return.

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Mental Models discussed in this podcast: * Investing Ratios * Break Points

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode128

Key Investing Ratios * P/E: + Goal: <10 + Max: <15 * P/S + Max: <10 * ROA: + Goal: >10% + Ideal: >15% * ROE: + Min: 10% + Goal: >15% + Ideal: >20% * Gross Margin: + Higher the better (>50%) + Stability is more important than the absolute number * Focus: Limits and Break Points * Source: + https://twitter.com/solvealways/status/1486992514196324354?s=20&t=xGDVCwWNDXmL9VM7hpQN2A

Summary: The important thing to remember about the key investing ratios is to understand that they are always relative. What you're looking for is understanding the limits you don't want to pass, and key break points that signify certain things about the business. Above all, stability is critical when evaluating a high quality business.

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Mental Models discussed in this podcast: * Scuttlebutt * Quality Investing * Capital Stack * Dark Stocks

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode127

Scuttlebutt on Overlooked Companies - Areas of Focus * Capital Stack: + Clean is better. Ideally only common stock. + No lending to insiders or other self dealing. + Has management issued themselves options in the past? Were the prices reasonable? How much of the company does this represent? + "Overdue or delayed payment to insiders." - Red flag. This basically menas the company is in default putting your equity at risk. Can't even really mount a proxy fight because the management could force the company into bankruptcy. * Filings:

+ Current or pink limited on filings with the SEC
+ I want to see financials. (They don't have to be audited)
+ Some sort of management commentary is nice. (Shows shareholder friendliness)

• Business Model:
  • Change
    • New products
    • New management
    • Growth of some kind
• Asset Base:
  • Ideally assts to cover the market cap (providing a margin of safety)
• Earnings Power:
  • Profitable (every year for 10 years, no more than one loss in 10 years)

Summary: Overlooked companies are often cheap. Therefore, scuttlebutt on overlooked companies needs to focus on filtering for the quality of the business. High-quality and cheap makes for a great stock. Look for abnormal signs of positive potential.

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Mental Models discussed in this podcast: * Inflation * Emergency Fund

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode126

Series I Bonds * Current Yield: 7.12% (through April 2022) * Re-rates every 6 months according to an inflation index (not sure which one) * Combination of a fixed rate (currently 0%) and a variable interest rate. * Maximum of $10k/year per person. + On a calendary year basis. * Available for purchase on TreasuryDirect.gov

Emergency Fund * Need Liquidity * Principal protection * Normally lacks inflation protection (nice to have, not a need) * My plan: + 50% savings account + 50% Series I Bonds * Take a few years to move into the I Bonds slowly to limit liquidity risks * Normal recommendation is 3-6 months of expenses. I like 12 months as a long-term goal.

Summary: Series I Bonds are an inflation protected security issued by the United States Government to individual US Citizens. These non-marketable securities offer interest rates comparable to inflation and are an ideal asset to include in an emergency fund.

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Mental Models discussed in this podcast: * Phase Change (Chemistry) * Earnings Power * Consolidation Period

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode125

Phase Change Mental Model * In Chemistry, you have the mental model of a phase change. * Think: Solid, Liquid, Gas * In order to exercise a phase change youhave to increase the energy in a fluid. Increasing energy causes the temperature to rise, but when a phase change is close to occurring, the temperature will stop increasing for a period of time. + During this time, you have to keep increasing the energy, but the temperature will stay the same. + Why? + The excess energy is being applied to changing the phase of the fluid. This pause is incredibly important and the amount of energy needed to change phase is the "latent heat." + In the same way, you should try and profit from businesses undergoing a phase change.

Applying the Phase Change Mental Model to Stock Investing * Two ways to look at this: + Underlying earnings power + Shareholder base changes * Underlying Earnings Power + Often, stocks may be stuck in a trading range for a period of time, months, maybe years. On the surface (via the stock price) no change appears to be occurring. However, under the surface, the company is improving, cutting costs, building new products, and pleasing customers. + Then all of a sudden, th e company breaks out to new highs as eanrings go up 50%, 100%, or 200% when a new product launch occurs and operating leverage plays itself out. * Shareholder Base Changes + There are a diverse set of possible shareholders you need to be aware of. + Types: - Deep value - Value - Growth - Momentum - Speculators + Sizes: - Retail - Institutional Investors * Active Funds * Passive Funds + It can take a long time for a shareholder base to change over and that's one of the things that can occur during this consolidation period. Deep value sells to value, value sells to growth. Retail sells to Active funds, and active funds sell to passive. + If you want above-average returns, it can help to ride the wave from one set of investors to another. + If you can buy stock as a retail investor when NO isntitutional investors are involved and then wait long enough to sell to institutional investors, you can be bneefit from massive multiple expansion as the liquidity that they bring forces the stock price up faster than earnings.

Phase Change Investing Applied to My Portfolio * I want to buy stocks when they are nano-caps, trading for sub $50m and sell them after they have 10-20x becoming Small-Cap companies. The goal is to hold them through their nano-cap and micro-cap phases when there are no institutional investors and sell them once they are in the $500m-$1bn+ range. * At that time, ETFs, mutual funds, and hedge funds will be involved and I may be able to benefit from buying at sub 10x P/E multiples and sell at 25+ P/E multiples to these passive investors. * This process may take many years, but it can lead to supercharged returns.

Summary: A phase change occurs when excess energy is added to a fluid. For aperiod of time, energy rises without temperature changing. Investors can learn from this mental model how to seize investing opportunities during consolidation periods.

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Mental Models discussed in this podcast: * Value Trading * Horizontal Risk Shifting * Rebalancing * Look-Through Earnings

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode124

Value Trading Definition * Partial selling of a core holding to buy more of another core holding. * If the core position size is 20%, you may buy up to 25% or 30% of a surplus position when relatively undervalued and then sell it back when it is relatively overvalued. * Key: Using valuation specifically to change the weightings in your portfolio + Necessary assumption: Assuming you have a sufficiently good comparable idea

Goal * Only value trade when the exchange is clearly beneficial * High bar * 50-100% increase in look-through earnings + I use a spreadsheet that constantly calculates look-through earnings for each position.

Horizontal Risk Shifting * Diversification of my risk by reducing my exposure to a single stock without having the value trade component. May not increase look-through earnings but minimizes risk. + Say splitting a 30% position in Coca-Cola into a 10% position in KO, Pepsi, and Dr. Pepper. + Want to target similar P/E ratios or better, but this has a lower bar. + Really used mainly for overly high current allocations or used when a stock is highly valued.

Summary: Value Trading is the process of rebalancing a portfolio using valuation specifically to adjust the weightings of your individual stocks. I value trade to optimize the performance of my portfolio, increase returns, and reduce risk.

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Mental Models discussed in this podcast: * Due Diligence

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode123

Due Diligence Thought Process * I can't accurately predict the future, so I know I will make mistakes, but I do make estimates on future performance AND management decision-making. Therefore, I attempt to monitor where future performance deviates from my estimate. That allows me to steadily inform myself whether the company is a mistake OR a success from an investment process standpoint. * Short: I want to know where I was wrong when I predicted the future and to validate or destroy my thesis.

Summary: Maintenance due diligence is a critical skill that experienced investors practice in order to minimize potential mistakes after buying a stock. This ongoing effort is spent validating or proving wrong the original stock buy thesis.

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Mental Models discussed in this podcast: * Second-Order Effects * Passive vs Active Investing * Standing on the Shoulders of Giants

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode122

Key Observations * I have seen many writers, presentations, and discussions around this idea that YOU are NOT the next Warren Buffett, therefore...X + "Don't concentrate" + "Don't buy individual stocks" + "Buy Index Funds" + "You won't outperform...etc..." * What is the impact of this? * Is it true? * How many future Warren Buffett level investors will never arise because we've convinced them it is impossible? + Imagine if we treated scientists like this. + "You aren't the next Einstein (or Bezos or Zuckerberg)" - The lesson: Don't even bother trying + How many future inventions would we lose out on?

Summary: Are you the next Warren Buffett? This question discourages potential investors from attempting to outperform. I discuss the second-order effects this has on the investing landscape and your personal financial situation.

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Mental Models discussed in this podcast: * Capital Allocation * Due Diligence * Share Dilution

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode121

Questions: * Sourced from this Tweet: https://twitter.com/TreyHenninger/status/1431243068662067204 * Best questions to ask management and/or investor relations * When would you be happy to see management raise capital by issuing shares? * How much time do you put on initial vs maintenance due diligence? * What are some of your preferred research resources for due diligence? * Favorite company filing and why is it the proxy statement?

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Mental Models discussed in this podcast: * Concentration vs Diversification * Hurdle Rate * Circle of Competence * Conviction * Opportunity Cost * Satisficing

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode120

How many stocks should you own? * As many as you can that meet your hurdle rate? * Only the best opportunities available? * Optimal vs Satisficing

Constraints on Holdings: * Time * Circle of Competence * Conviction

Additional Thoughts * Collector of Businesses * Hypothetical: + What is the highest level of concentration an individual investor should be willing to place into a single stock (when buying?) Specifically, asking about non-special situations, more long-term holdings. Presumably, at some point, cat-risk is too high even when you have an edge. + Imagine you own a 5-10 stock portfolio. Over the weekend, it is announced that all 10 companies are merging and will be subsidiaries under a single capital allocator that you like. Do you make any portfolio changes? You still own the same companies, but now 1 stock, not 10. * What are you buying when buying a stock? * Concentration: " The number of stocks you own is dependent on how you view yourself as an investor." + Is it possible to produce alpha? - If yes, concentrate - If no, diversify + Are you a good investor? - If yes, concentrate - If no, diversify + Conviction - If yes, concentrate - If no, diversify

Summary: How many stocks should you own? This is a critical question without a single answer. Your portfolio concentration is constrained by time, circle of competence, and conviction.

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Mental Models discussed in this podcast: * Self-Made Millionaire * Cumulative Advantage * Compounding * Power of Habit * Privilege

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode119

Inspired By Joshua Kennon Article * https://www.joshuakennon.com/who-is-the-future-self-made-american-millionaire/

Book Recommendation: Millionaire Next Door * https://amzn.to/3wDVPy3

Summary: Self-Made Millionaires are created by the choices and habits under your control, not your starting point in the world. Focus on the slow accumulation of advantages and ignore anything outside of your control.

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Mental Models discussed in this podcast: * Durability * Post-Mortem * Resulting * Capital Allocation

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode118

Timeline * NACCO spun off Hamilton Beach Brands in September 2017 * I first bought shares in March 2018 at a price of $40 per share * I averaged down in May and June 2018 with shares at a price of $34 per share. * Averaged down in September 2018 at $32 per share and October 2018 at $29 per share * Within a year, the stock doubled to over $65 per share in October 2019. This is the recent peak. Instead of selling, I held because I valued the company at $75 per share at the time. It wasn't yet at fair value. * May and June 2020, I averaged down again at $26 per share and then $22-24 per share. * In March 2021, I recognized that holding $NC was a large opportunity cost on my portfolio and I shifted some money to other stocks while the stock was around $24-25 per share. * In May 2021, I exited my stake in $NC completely at a loss around $25-26 per share. * Some lots were sold at a gain and some at a loss. Overall, the position was a net loss and a much bigger loss on an opportunity cost basis.

Thoughts and Key Questions * I should have sold or trimmed after the stock doubled in less than a year. $65 per share was within my error margin for my $75 fair value estimate. Even simply reducing my stake by half would have been a good decision. + The main reason I didn't do this was that it would have had to sit in cash. I didn't have many other good ideas at the time. + My biggest mistakes are often made when I'm in cash or when I would be creating a cash position. (Always do research for new ideas!!!) * Was buying $NC in the first place a mistake? + No, I don't think so. My theory was sound. I expected positive news from NACCO and it was cheap at $40 per share. It was the best idea I had at the time, I was also running a diversified 10-15 stock portfolio when I bought NACCO. + My thesis was correct, but I had thesis creep as news flow came out. My original valuation placed the stock as worth between $50-65 dollars. I only upped my estimate after high natural gas income. I should have recognized that was temporary and sold. + I thought NACCO was a 3-5 year hold business, but it probably should have been sized as a last puff cigar butt. When that puff came within a year, I should have sold. * Did I accurately assess NACCO's business model quality? + Yes. NACCO's service model of earning money from unconsolidated subsidiaries allows it to earn high returns on capital as the customer puts up all of the capital. * Did I accurately assess the durability of NACCO's business? + No. I misestimated the likelihood of a coal mine closure. + I did assess that coal mine closures were likely and I accurately predicted the degree to which they would harm the business. However, I underestimated the degree to which NACCO's stock would decline. I thought the decline was overdone. * Did I accurately assess management/capital allocation? + Partial yes, Partial No. + I accurately predicted that management would NOT dedicate new capital to new coal mines. + I accurately predicted that free cash flow would be dedicated to growing the North American Mining business. + However, I underestimated the maintenance CapEx needed for the MLMC consolidated coal mine. This sucked up a large amount of cash flow for the 3 years I owned the stock. Future maintenance CapEx is going to be lower, but the timing was bad on my part. + I also underestimated the ROIC from the money put into the North American Mining business. I expected higher returns for the cash outlay.

Thoughts and Lessons Learned * Don't buy companies that lack durability and really dive into this question of durability. + A mistake on durability could mean that a very low P/E is justified. * Personal preference: I highly prefer buying steady growth companies. + I did not enjoy the constant negative and bad news reports from the company while I owned it. The primary problem with owning NACCO for the last 3 years was the opportunity cost of how that money could have grown with other better companies. + My actual losses weren't that high. Some of my purchases made a profit. + However, the process of turning one profit center (COAL) into a new profit center (NAM) is slow and costly. That's basically a turnaround situation. * I don't want to own turnaround situations until after they've been turned around. + It's basically dead money + Creates large opportunity cost situations * Management is critical + I want a management team that I believe is fully aligned with me on skin-in-the-game. + NACCO has a good management team, but they don't run the company how I would run the company. They receive regular ongoing stock options and issuance which dilutes me as a shareholder. There isn't a lot of insider buying and there weren't a lot of share buybacks which I would have preferred. + If I were assessing NACCO today, while I still believe it is cheap, I don't think it would pass my current management/capital allocation filter. Perhaps that will change in the next 5-10 years. * Be wary of thesis creep. + NACCO would have been one of my best success stories if I simply sold it after it hit $60 per share. A quick double and it would have been a lot of money for my portfolio as a 20% position. + Instead, I allowed my thesis to creep which resulted in $NC being a drag on my performance for years 2 and 3 of my holding period.

Summary: I want to buy and hold high-quality, durable businesses that are growing AND are selling at a cheap price. NACCO had a cheap price and was high-quality, but it was of low durability and had no growth.

Going forward, I am going to be more diligent at filtering out ideas that don't meet ALL of my highly stringent criteria.

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Mental Models discussed in this podcast: * Operational Leverage * Risk Management

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode117

Business Risks * Stock specific * Acceptable: + Price - I'm willing to compromise on my price target of less than 10x earnings in recent days. Now I'm willing to accept up to 15x earnings per share for high-quality businesses + Growth Rate Estimates - I'm willing to accept being wrong on my estimate of growth. I'm usually targeting businesses that grow revenue/earnings at double-digit rates. If my pricing is right, I can be wrong on my growth rate assumption and still do fine. + Operational Leverage - I'm willing to bet on and be wrong about operating leverage * Unacceptable: + Balance Sheet Liquidity - I want a liquid cash-filling balance sheet + Self Funded - I don't want to buy a company that has to be funded by debt + Bankruptcy Risk - No bankruptcy risk of any kind, which means I am unwilling to accept highly leveraged companies. + Commodity Risk - I'm not willing to accept exposure to commodity prices.

Portfolio Risks * Related to your overall strategy or investment portfolio * Non-stock or business-specific * Acceptable: + Illiquid stocks - I'm willing to accept lower liquidity in my stocks than other investors. I'm willing to spend months building my positions instead of just days or hours. + Concentration Risk - I'm willing to hold fewer stocks than other investors. (3-5 companies) + Tracking Error Risk - I'm willing for my results to be dramatically different from the results of an index like the S&P 500 or the Russell 2000. * Unacceptable: + Unwilling to underperform inflation for long periods of time. (5-10+ years) + Unwilling to underperform a 10% baseline absolute return over time - Brings in decisions like how to address cash drag + I have realized while preparing for this show that I don't really know what my "unacceptable risks" should e on a portfolio-wide basis. So let me know what I'm missing. You can send me an email or DM me on Twitter.

Summary: As an investor, the risks you take can be categorized as either business risks or portfolio risks. In order to earn a return, you must take some risks from each type. In other words, how are you willing to fail?

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Mental Models discussed in this podcast: * Confirmation Bias * Skin in the Game

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode116

mCloud Technologies - $MCLDF * SaaS company + Trading at just 1x expected revenue * Energy efficiency (Oil and Gas Plant efficiency) * Green Energy (Wind Turbines, HVAC efficiency) * Uses AI

Problems: * Cash flow negative (Presumably in the name of growth) * Regular ongoing stock issuance and dilution + Both shares and warrants + "An assumption that this is the last time." * Very promotional management (with skin-in-the-game?!?) * "Uplisting to the NASDAQ" talk + A lot of examples of SaaS names going from 1-2x revenue while on the Canadian TSX market to 10x+ revenue on the NASDAQ in the US + Still hasn't occurred many years later * Mergers and acquisitions using stock (Not cash, because they don't have any) * Growth targets include non-organic growth (REALLY BAD) + Dilution is required, but it makes it impossible to model per share returns * Exit: Liquidity event needed for the payoff (Either sell to another company or an uplisting)

Lessons Learned: * Don't buy promotional companies * Don't buy companies that dilute * Don't buy companies that can't self-fund growth * Insider ownership does not equal skin-in-the-game * Be wary of 'uplisting' as a catalyst

Summary: Investors need to constantly be wary of confirmation bias and stay alert for possible red flags. mCloud Technologies stock $MCLDF taught me this lesson. Don't buy promotional companies that dilute shareholders and can't self-fund growth.

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Mental Models discussed in this podcast: * Occam's Razor

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode115

Key Rebalancing Principles I use in my portfolio * Occam's Razor - Keep it Simple * Rank every position in your portfolio * Price Matters * Default to Inactivity - Don't make your portfolio worse by taking action

Summary: Rebalancing a portfolio should be based on four key principles: Occam's Razor, rank every position in your portfolio, price matters, and default to inactivity. Too often rebalancing makes a portfolio worse by taking action.

Investors should be wary of using set rebalancing rules based on time or set portfolio allocation percentages. Anytime you rebalance your portfolio while ignoring price and valuation, you may be making a mistake.

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Mental Models discussed in this podcast: * Quality Investing * Operating Leverage * Barriers to Entry

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Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode114

Important links for SODI stock investors * Public Thesis: + https://www.diyinvesting.org/microcapclub-application-solitron-devices-stock-thesis/ * Business Quality Report: [$5/month paywall] + https://www.diyinvesting.org/solitron-devices-business-quality-report/ * Intrinsic Value Report: [$10/month paywall] + https://www.diyinvesting.org/solitron-devices-intrinsic-value-report/ * Also, reference the SEC Filings

Summary: Solitron Devices is a high-quality niche manufacturing company in the defense industry. This Solitron Stock Thesis focuses on SODI stock which I believe will become a ten-bagger in ten years or less.

Solitron Devices is poised for massive stock outperformance due to the key factors of a high-quality business, double-digit revenue growth, operating leverage, and a skilled management team focused on shareholder-friendly capital allocation.

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Mental Models discussed in this podcast: * KISS Principle (Keep it Simple Stupid) * Process vs Outcomes * Insurance * Tail Events

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode113

Investing Rules: Never Buy or Sell Options * Investing rules are simple and short rules that limit mistakes, improving future performance or returns. * "You don't need to be smart to make money investing. You just need to be consistently NOT STUPID."

Using Options tends to be stupid The key idea is that you cannot predict short-term market prices. Ever. Therefore, you shouldn't own options.

There are four cases that I will address independently.

Options are one of the easiest ways to lose a lot of money fast.

In addition, options allow you to turn all of the advantages of investing in the stock market into disadvantages.

• Long-term investors have time on their side: option holders do not.
• High-frequency traders will always beat you on options. Even retail brokers that don't sell order flow for equities (like Fidelity) still sell order flow for options.
• Normally if you're long you can't be forced to sell. Options can force you to sell when you don't want to do so.

Buying Calls * Limited Downside, Infinite Upside * Negative: Time limit on your return + Time works against you. You want time to work for you.

Selling Calls * They limit your upside. * You should absolutely never sell "naked" call options. This would be where you sell call options on stock you don't own. This is basically shorting a stock. (See the last episode) * If you sell "covered calls" which means you own the stock, you've now taken away the upside on a stock you have already determined you like. This is terrible. * You should focus on buying companies with upside optionality. When you sell a covered call you destroy this process.

Buying Puts * The limited downside, limited upside. * These are typically known as insurance. * You pay a premium, and you get a payoff if something negative happens. * Insurance is always a net negative on your investment return over time. Unless you market time (bad idea), buying puts will lower your returns if implemented over an investment lifetime.

Selling Puts * The limited upside, limited downside. * Selling insurance tends to be more profitable than buying insurance. * However, you have two options: "naked puts" which means you don't have the cash to buy the stock. * "Cash covered puts" which means that you lock up your cash for an extended period and lose the optionality of cash. * I am big on optionality. Never sell your optionality. Never sell your upside. Bet on yourself.

Summary: You should never buy or sell options because options can cause you to be stupid and lose money. You don't need to be smart to make money investing. You just need to be consistently not stupid. Investing rules improve your future performance and returns by limiting your mistakes.

Focus on finding high-quality companies at good prices and harness the advantages of an individual investor. Options destroy these advantages and you should avoid them accordingly.

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Mental Models discussed in this podcast: * KISS Principle (Keep it Simple Stupid) * Process vs Outcomes

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode112

Investing Rules: Never Short Stocks * Investing rules are simple and short rules that limit mistakes, improving future performance or returns. * "You don't need to be smart to make money investing. You just need to be consistently NOT STUPID."

Shorting Stocks is Stupid * Case Study #1: GameStop short squeeze of 2021 * Case Study #2: AMC squeeze of 2021 + I submitted a competition for a Long/Short stock choice for 2021 + $SODI was my long + $AMC was my short. Thesis: Bankruptcy * Everyone wants you to fail if you are shorting stocks. * Unlimited downside. Limited upside.

Summary: Investing rules improve your future performance and returns by limiting your mistakes. You don't need to be smart to make money investing. You just need to be consistently not stupid. Shorting stocks is stupid.

Investing is about aligning the odds in your favor. Shorting is the exact opposite. Everyone wants you to fail. It is impossible to have a margin of safety. You pay interest costs and you could lose everything. Never short stocks!

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Mental Models discussed in this podcast: * Signal vs Noise * Process vs Outcomes

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode111

Thesis - Eliminating your investment mistakes is the easiest way to improve your investment returns * What have been your past investment mistakes? * Are there any commonalities between them? * What can you learn from those mistakes? * Don't repeat the same mistake! * Make sure you're learning the Right Lessons

Example: A brief discussion of GameStop * Episode 5: https://www.diyinvesting.org/asymmetric-risk-and-reward-gamestop-2018-episode005/ * Episode 30: https://www.diyinvesting.org/gamestop-stock-investment-post-mortem-episode30/

GameStop is a good example for me to learn the right lesson. I had to identify the difference between signal and noise or process and outcomes. These mental models have served me well going forward.

Summary: A focus on eliminating your investment mistakes is the easiest way to improve your investment returns. Don't repeat the same mistake twice by making sure you learn the right lessons. Signal vs Noise. Process vs Outcomes.

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Mental Models discussed in this podcast: * Momentum * Inertia

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode110

Two Types of Momentum: Price and Busines Fundamentals Business fundamental momentum is the most important, but price momentum can be helpful.

How to use Price Momentum in your investing process * Downtrend or Uptrend or Consolidation Period * Price momentum isn't a deal-breaker on the purchase decision. However, you should understand where the momentum is if any. * Some of the best times to buy are during consolidation periods. (Months or years of relatively flat stock price). + I learned this from ElementaryValue.com (David Flood)

Business Momentum applied to Value Investing * Is the business improving or deteriorating? * I no longer want to buy deteriorating businesses. They may surprise to the downside. + It is psychologically harder to hold bad businesses or declining businesses. * Improving businesses are likely to surprise to the upside.

Summary: Both momentum investing and value investing provide excess returns. This episode outlines how I plan to profit from both forms in my investing process. Specifically, price and business momentum will be added to value investing. The use of price momentum should limit my losses when mistakes are made. Meanwhile, by analyzing business momentum I am likely to reduce the probability of making mistakes.

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Mental Models discussed in this podcast: * The Pareto Principle (80/20 Rule)

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode109

How much time should you spend researching stocks? * It Varies * As long as it takes to answer your questions * 80/20 Pareto Principle * 10 hours - I don't think I've ever spent more than 10 hours before buying a stock I like.

How to prioritize your research time * First ten minutes: Is it cheap? + If you can't answer in ten minutes, the answer is NO. * Next 1-2 hours: Is it good? + If you can't answer in 2 hours, the answer is NO. * Next 8 hours: Is it safe?

+ If you can't answer in 8 hours, the answer is NO.

• The efficiency of research time is important:
  • The most important: Safe > Good > Cheap
  • The easiest to verify: Cheap > Good > Safe
• All you need to know in ten hours:
  • Is this my best current idea?
  • Is it better than something I currently own?
  • You need to answer "YES!" to both.
  • If you hold cash, then the second question becomes:
    • Is it better than cash?

Summary: The process of researching stocks requires a significant amount of time investment. You should optimize the time you spend researching by focusing on three questions: Cheap? Good? Safe? You should be able to answer in ten hours or less.

My personal process focuses on two additional questions: Is this my best current stock idea? Is this company better than something I currently own? If you can answer both questions affirmatively, you should probably buy the stock.

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Mental Models discussed in this podcast: * Deferred Tax Liability * Skin-in-the-game

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode108

Coffee Can Portfolio * Seeking "Never Sell" stocks - only certain companies qualify * Benefits from a deferred tax liability (Can become quite significant over time) * Preferable for individual investors. Hard to implement professionally

Characteristics of a Coffee Can Stock * An industry that lacks disruption risk + Banking (Example) * Stable and high returns on capital/equity (15% or higher) * Long-term sustainable organic growth of at least 5% but preferably 10-15%. (You don't necessarily want 20%+ growers that will eventually lose all growth) * Low competition, could be regulated monopoly or oligopoly * Founder led company or a long-term CEO with skin-in-the-game * Zero or low debt/leverage policies * The ability to be a ten-bagger or a 100-bagger + Usually small with the ability to grow large. + A small competitor with a competitive advantage (cost perhaps) over larger competitors in a big market. - Think early Walmart, Costco, Home Depot, GEICO * Intelligent capital allocation strategies that benefit shareholders + Lack of dilution + Growing dividends or buybacks over time (Dividend Champion type stocks) + Unless it is a roll-up strategy, an average to acquisitions can be helpful, because they often destroy shareholder value.

You can't think of your stocks as a "Portfolio" * You are a true business owner * Judge your success by the performance of individual companies, not the overall portfolio return. + Logical point: If every individual company compounds at 10% per year or more, then the portfolio as a whole by definition must also compound by at least 10% per year. * Position sizing no longer matters. Your greatest winners may eventually become 50%, 75%, or 90% of your total portfolio. That's okay. That's how the strategy works. This is how the strategy outperforms.

How to implement a Coffee Can Portfolio (The Process) * Buy one new stock a year, each year you work. * Put all of your savings for the year into that company. * Never sell. * Ideally register for the shares in direct certificate form. It can be electronically held at a transfer agent, but after the year, don't hold the shares directly with a stockbroker. + This limits your ability to sell the shares and is a huge psychological boost in implementing the strategy.

Summary: In this episode, I discuss the coffee can portfolio approach to investing. This investing strategy involves never selling a stock once it is bought. Therefore, you must seek high-quality companies with long runways for growth and high returns on capital.

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Mental Models discussed in this podcast: * Goals and Habits * Concentration vs Diversification * Signal vs Noise

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode107

2021 Investing Goals * Identify 2 new companies worthy of holding a 20% position in my portfolio + Actually, build those new 10-20% positions by selling out of 2 of my current holdings. (I have already identified which ones to sell) * Become more comfortable with high levels of concentration. + My current largest holding is 35% of my portfolio. It's grown to this size from 20% and if all goes as I expect, it will likely continue to grow as a percentage of the portfolio. I need to become comfortable with 50% of my portfolio in a single stock if that company earns it through business performance. + I may also sell 2 of my current positions before I have found the two new positions. Consequently, I need to tolerate holding less than 5 stocks for part of the year. * Earn a 20% annual return for the year 2021. + I earned a return of 22% in 2020, beating the S&P 500 by 3.7%. - Read my full annual letter here. + I believe I can match or exceed that return again this year. + My discount rate is 10%, but that is used solely for the fundamental analysis portion of my stock analysis. With the current setup of my portfolio companies, I am often seeking 10% of the cash flows of the business, and an additional 10%+ from multiple expansion. + I am optimistic that I can achieve this rate of return and perhaps substantially exceed it due to the types of companies I currently hold. We'll see how that comes to fruition. + This is clearly an inferior goal as it is results based instead of process-based. I'm simply documenting it s that I have it as a reminder.

2021 Business Goals * Pass the Series 65 Exam + Needed to become a Registered Investment Advisor + Will allow me to take on clients interested in me managing their portfolio. + If you'd like information about this and are perhaps interested in joining a waitlist, you can reach out for my information at my email: trey [at] diyinvesting.org * Marketing Goals: + 5,000 Twitter Followers (Currently just over 2k) + 1,000 YouTube Subscribers (Currently just over 300) + At least 1 outside investing client * Useful research goals: + Screen X number of companies this year (Say 100) + Write-up 12 companies this year + Read a 10k a day or a 10k a week, etc...

Goals I will no longer pursue It used to be my goal during 2020 to move to only checking stock prices once a week.

Going forward, I will no longer have that as a goal. I have found that my focus on illiquid stocks means that I'm often monitoring stocks frequently because it takes a long time to build a stock position. If I had completed that prior goal, my results would have been worse.

Summary: In this episode, I outline my top investing goals for the new year. I aim to identify 2 new companies worth buying and my goal is to attain a 20%+ annual return for 2021. I also cover process-based goals relating to how to go about investing research. Finally, I would like to pass the Series 65 exam so that I can begin managing money for outside clients.

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Mental Models discussed in this podcast: * Opportunity Cost * Rebalancing * Coffee Can Portfolio * Intrinsic Value * Optionality

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode106

When should I sell stocks? (Question from Patron) There are a few key considerations:

1. Opportunity Cost
   1. What else do you own?
   2. What is your current best idea? How much of it do you own?
2. Trimming Positions
   1. I don't like doing this. All-or-nothing for me.
3. There is a huge difference between selling into cash versus selling to buy a new stock
   1. Perhaps you consider selling to cash at a P/E of 35, but otherwise only sell if you have a better stock to put it in.
   2. I may be fine selling a stock at a P/E of 20 (that I think is worth 25) and buying a stock at a P/E of 5 (that I think is worth a P/E of 15). My return prospects are better.

What if my thesis was wrong? You should sell a stock if you've made a mistake. If you were wrong about the thesis or your thesis has broken you should sell.

This is hard to do and I struggle to do so myself, especially if the price has fallen substantially.

Other Considerations: * Coffee Can Portfolio + Seeking "Never Sell" stocks - only certain companies qualify + Benefits from a deferred tax liability (can become quite significant over time) + Preferable for individual investors. hard to implement professionally. * Return Differential + Don't sell a stock because a new idea is 1% better. + You want at least a 5% return differential. - Future returns are 5% when the new idea is 10% - OR future returns are 10% when the new idea is 15%. - Don't quibble over small differences because those differences are within your margin of error. * Question from Patron: "Should I buy great companies during their growth phase and then sell when they lose their advantages?" + A few problems here. + It is difficult to predict when a company will lose its advantages. + Likewise, once a company is recognized to have lost its advantages, usually, the price deterioration has already occurred. + If you want to maximize profits, you likely need to sell BEFORE advantages have been lost. * Positive Optionality and Selling Above Intrinsic Value + It is almost impossible to accurately calculate intrinsic value. + Consequently, it is likely a mistake to sell when a company reaches your calculated intrinsic value.

Summary: Many value investors lack a clear strategy on when to sell stocks in their portfolio. This decision ought to be based on opportunity cost, potential investment mistakes, intrinsic value, and return differential between old and new companies.

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Mental Models discussed in this podcast: * Investing * Speculation * Gambling

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode105

Definition of an Investment An investment meets all 5 conditions:

1. Utilizes a Margin of Safety
2. Provides an Adequate Return (>10% for me)
3. The 10% hurdle is met solely on a fundamental cash flow basis
4. Is a Positive-Sum Game
5. Bounded by a specific range of prices and terms

Any investment operation that fails to meet all five conditions is either speculation or gambling.

Gambling is both a negative-sum game or an operation with a negative expected value.

References * Based on this Twitter Thread I made: + https://twitter.com/TreyHenninger/status/1336004138061209604?s=20 * Which was a rebuttal of this thread by @10kdiver: + https://twitter.com/10kdiver/status/1335267196625244162?s=20 * Previous Podcast Episodes cited: + Episode 30 - GameStop Post-Mortem + Episode 95 - How to build conviction (FAQ) - Good source of discussion on Margin of Safety + Episode 23 - What's a good discount rate? + Episode 31 - Buying Stocks is not a zero-sum game + Episode 32 - Shorting Stocks is a negative-sum game

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Mental Models discussed in this podcast: * Terminal Value * Intrinsic Value * True Historic Value * Discounted Cash Flow Calculation * Net Present Value * Fog of War

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode104

Why does Intrinsic Value grow over time? There are multiple ways to answer this question.

1. It doesn't. Intrinsic value is fixed, but your estimate of intrinsic value will change.
2. Your assumptions were wrong because you made a mistake.
3. Your assumptions were wrong because you can now see more of the future.
4. A year moved from being inside Terminal Value to inside your forecast range.

What is Terminal Value? * How is it calculated? * Why does it matter? * Terminal Value is the net present value of all future cash flows discounted back to a specific year in the future. (Perhaps 5 or 10 years from now) + In other words, Terminal Value is your estimate of the Intrinsic Value of a stock 10 years from now. * As each year passes, the "fog of war" that is the future becomes illuminated. That means that we can now SEE the future. * Concept: True Historic Value

Summary: Terminal Value is the net present value of all future cash flows discounted back to a specific year in the future. Intrinsic value is fixed, but your estimate of intrinsic value will change over time.
In addition, you can evaluate how the intrinsic value of a company has changed over time in the past by calculating the True Historic Value. This value is the intrinsic value at a past date assuming 10% future annualized returns all the way to the present.

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Mental Models discussed in this podcast: * Deflation * Inflation

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode103

The Deflation Myth Deflation is considered bad because economists assume that consumers will hold off making purchases with the expectation that prices will decline in the future.

My rebuttal: This just doesn't happen.

The "rational consumer" doesn't exist. This is why you have a whole field called 'behavioral economics.'

For whom is deflation bad? Deflation is bad for debtors (Those in Debt)

• Governments (because they are all debtors)
• Leveraged Companies
• Companies with pricing power

For whom is deflation good? Creditors (Those who lend money to others)

Those without debt (Whether people or companies)

Companies without pricing power. (Simply holding prices stable will lead to increasing profits)

The Myth of "Stable Pricing" Stable is 0% inflation, not 2% inflation as the US Federal Reserve would like you to accept.

Summary: The Deflation Myth has been accepted primarily because economists have used false assumptions in their analysis and because debtors, namely world governments, tend to hold massive political and cultural power. It is in their best interest to convince you that deflation is bad so that they can inflate away their debts. Yet, most investors are harmed more by inflation than they would be by deflation.

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Mental Models discussed in this podcast: * Enterprise Value * Return on Invested Capital * Weighted Average Cost of Capital * Net Cash vs Net Debt * Leverage

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode102

Enterprise Value Definition Enterprise Value = Market Cap + Net Debt or Market Cap - Net Cash

Key Thesis: Instead of using Enterprise Value, I would rather use Market Capitalization and have excess cash be part of my margin of safety.

When Cash > Debt use Market Cap.

When Debt > Cash use Enterprise Value.

This is a conservative approach.

Why is Enterprise Value useful? Corporate takeovers because you have to assume the debt, not just buy out the equity. On the flip side, if you take over a company you get access to the cash box.

This doesn't apply to minority shareholders.

"Net Cash or Skip" Investing Approach * Should you calculate ROIC with cash or without cash? * Is Excess Cash Bad? * Does a company holding excess cash mean the company is a poor capital allocator? * WACC is BS * Why ever bother valuing debt? * I don't trust capital allocation at companies to be what I want it to be.

Solution: Be Conservative * Buy companies with net cash, but value them as if they had none. * Buy companies with growth, but value them as if they had none. * Buy companies with good capital allocation, but value them as if they did not. * Buy companies with good management, but assume management is only average. (Because someday it will be)

Summary: Be conservative when valuing companies. Don't give managers credit where they don't deserve it. Enterprise value should only be used when companies hold debt. Yet, you should only buy companies with net cash.

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Mental Models discussed in this podcast: * Cloning / Copycat

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode101

Question: How do I find good stock ideas? * Identify 3-5 of your favorite investors you follow * Open a new spreadsheet * For each investor: + Go to their website and write down the ticker and company name for every single company they've ever written up + If articles are paywalled that's fine. You don't need to read the articles, simply take down the name and ticker.

With 5 investors you should have a nice long list. At least 100 stocks.

Now simply go one by one and read the annual report or 10k for each company. Value the company and add the valuation to your spreadsheet.

Now you have a watchlist.

Alternative Idea: Access the OTC Manual Database with an exclusive coupon code! * Purchase the OTC Manual Database access at SvendaManual.com * Exclusive Coupon Code: "Trey" + Without quotes + Receive a discount on your annual subscription cost

Summary: The best way to identify good stock ideas is to copy a watchlist of investors you trust and respect. Their best ideas can form a strong foundation for your watchlist.

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I want to hear from you, my audience * Email me your thoughts, feedback, or encouragement: * trey [at] diyinvesting.org

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode100

Vision * Educate others on how to invest as if I was my target audience * Build a network of fellow investors * Grow and develop as an investor myself * Use this podcast and blog as a platform for launching my own investment management business * Basically, market to potential clients who may want me to invest money for them

How you can support the show * Become a Patron: Here * Amazon Purchases + Always the top left-hand corner link on my website displaying the current book I'm reading. + Any purchase made from Amazon after using that link, I would earn a commission on at no additional cost to you. + Or use this link: https://amzn.to/3mY1Lwu * WP Engine Coupon + If you're setting up your own blog + They are the website host I use + The coupon is available on my website on the left-hand side. * Mr. Rebates + Earn cash back while shopping online. + Just sign up using the link above or type in my Referral ID when signing up: 1200774 + The link is also always available on my website left-hand side.

Current Listener Base * 640 average listeners + Goal: I need 5000 to monetize the show and offset my costs * 1300 Twitter followers + Goal: Exceed 10k

How to: * Start your own podcast: + Libsyn * Start your own blog: + WP Engine (Hosting Service) + WordPress (Web Design) + Genesis Framework (Web Design) + Sign-up using these affiliate links to support the show. (Discount included)

Summary: As I reflect on my first 100 episodes of The DIY Investing Podcast, I want to hear from you my audience. Share your thoughts and feedback so the next 100 episodes are even better.

I've met a lot of great investors and I've started to build a network of like-minded peers. At least one good stock idea that I wouldn't have had if I didn't host this podcast. I learned it from one of my podcast guests and have earned thousands of dollars from that one idea.

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Access the OTC Manual Database with an exclusive coupon code! * Purchase the OTC Manual Database access at SvendaManual.com * Exclusive Coupon Code: "Trey" + Without quotes + Receive a discount on your annual subscription cost * Follow Jan Svenda: + Website: SvendaManual.com + Twitter: @JanSvenda * Follow David Flood: + Website: ElementaryValue.com + Twitter: @ElementaryValue * Past Interviews with David Flood: + Episode 48 - David Flood Interview: Dark Stock Investing

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode99

OTC Manual Database * Exclusive Coupon Code: "Trey" * OTC Market has a bunch of pump and dumps + Critical to filter those out * Database saves you time * Pre-filtered for the types of qualities value investors want

Stock Picks * $GANS + Gainsco Insurance * $RSRV + Reserve Petroleum Co. * $ECRO + ECC Capital * $EQTL + Equitel International Corp.

SEC Ruling on Dark Stocks * The baseline expectation is that many dark stocks will be moved to the Grey market + May present new opportunities + If you're not afraid to invest in illiquid stocks, the stock prices may drop. * Could move to an expert market (only accredited investors) * SEC is trying to combat fraud (Not convinced this will achieve their goal

Summary: I interview two guests in today's show: Jan Svenda of SvendaManual.com and David Flood of ElementaryValue.com. We discuss their new product, an OTC Manual database for finding stock ideas.

The OTC Manual database sorts through all 7,000 OTC Market stocks and filters down to the best 450 ideas. These stocks are undervalued or offer interesting catalyst driven opportunities. You will also find Grey market stocks and dark stocks with financials.

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How to connect with Value Stock Geek * Website: ValueStockGeek.com * Twitter: @ValueStockGeek * Articles Referenced in the show: + Mistakes have been made and lessons have been learned + Margin of Safety Still Matters + Why Quality is Essential for a concentrated Portfolio + General Dynamics $GD Write-up * Past Interviews with Value Stock Geek: + Episode 49 - Value Stock Geek Interview: Cheap and Good Balance Sheet + Episode 62 - Passive Asset Allocation Strategy with Value Stock Geek

Mental Models discussed in this podcast: * Margin of Safety * Quality Investing * Diversification vs Concentration

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode98

Transforming your investing process * Margin of Safety Still Matters * Why Quality is Essential for a concentrated portfolio * How COVID-19 impacted your investing strategy * General Dynamics Stock $GD * Price Still Matters * How to buy Wonderful Companies at Wonderful Prices

Summary: In my third interview with Value Stock Geek, we discuss his effort to transform his investing process in light of COVID-19 and recognition of past mistakes. His new goal is to buy wonderful companies at wonderful prices. No compromises.

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Mental Models discussed in this podcast: * Margin of Safety * Backup Systems * Scale * Failure Points * Leverage

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode97

Margin of Safety Example of building a bridge

Backup Systems Example of loss of power

Scale (or Economies of Scale) The volume of a sphere increases faster than the surface area. Therefore it is more efficient for vessels to be larger.

Failure Points The more complicated a system is, the greater number of failure points.

Leverage You can move large objects with a small amount of force with a sufficiently large lever.

"Give me a large enough lever and I can move the world."

Summary: As an investor with an engineering background, I believe I bring a unique perspective to investing in businesses. The mental models: margin of safety, backup systems, scale, failure points, and leverage originate in engineering are useful for investors.

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Mental Models discussed in this podcast: * Discounted Cash Flows

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode96

Summary: Your goal as an investor is not to be the most accurate in your calculations or to do everything the 'right' way. Your goal is to make money. Sometimes the right way technically leads you to make worse decisions.

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Mental Models discussed in this podcast: * Opportunity Cost * Margin of Safety * Conviction

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode95

Conviction Formula Conviction is a function of Opportunity Cost, Margin of Safety, Position Sizing, and Upside

How much conviction do you need? * Opportunity Cost - If you have a lot of good current positions, you need greater conviction to overcome that opportunity cost * Position Sizing - Smaller positions need less conviction

How to build conviction in stocks * Margin of Safety - You want it all! (Build a checklist) + Above Average Industry + Above Average Company within the industry + High Returns on Capital + Durable Business + Skilled Management + Management with skin-in-the-game + No dilution with buybacks preferred + Lower than average prices + "Conviction is like a checklist. The more boxes you can check, the greater your conviction." * Upside - How high can this stock go? Is it possible to be a 10-bagger or 100-bagger?

Summary: Conviction is a function of opportunity cost, the margin of safety, position-sizing, and upside. Your required conviction is determined by opportunity cost and position sizing. You increase conviction by improving the margin of safety and upside potential.

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Mental Models discussed in this podcast: * All Else Equal * Shareholder Primacy * Culture * Net-Nets

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode94

How Japan and the United States differ culturally * Culture Matters * Shareholder Primacy Matters * Japanese Net Nets are less reliable than the United States based Net Nets

Summary: This podcast episode outlines some key differences between Japanese culture and American culture which influence how investors should value Japan based stocks versus United States based stocks. Shareholder primacy and culture are important.

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How to connect with Ralph Molina * Website: MidStoryVentures.com * Twitter: @RalphAtMidstory * Email: Ralph@MidStoryVentures.com

Mental Models discussed in this podcast: * Float * Infinite Return on Capital / Free Growth * Arbitrage * Pricing Power * Unit Economics

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode93

Midstory Ventures Partnership * Investment club * 3 partners * Building an investment history * Seeking partners

OTC Markets Business Analysis ($OTCM) * Business Model Overview + Segments: - Listings - Trading - Data * Float * Pricing Power * What scuttlebutt did you perform? * How good is management? * How do you feel about management compensation? * What about dilution? * What does it mean for OTC Markets to have infinite returns on capital? * How do you see future growth playing out? * OTC Markets may have a good business today, but how durable is that advantage?

Summary: I interviewed Ralph Molina of Midstory Ventures where we discuss a stock pick: OTC Markets. Stock Ticker: $OTCM

The focus of the podcast episode is a fundamental analysis of the business with a focus on business quality, infinite returns on capital, float, and OTC Market's flywheel strategy. Listeners will learn how OTC Markets makes money and why they are a high-quality business. We also discuss scuttlebutt and key fundamental analysis factors that investors can use to value the company.

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Mental Models discussed in this podcast: * Discount Rates * Supply and Demand

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode92

Discount Rates have changed over time * Past + Short Lives + A small or non-existent investor class + No control of interest rates * Present + Longer lives + Larger investor class + Central Banks and controlled interest rates * Future + Massively longer lives (no death?) + Massive investor class + Discount rates will approach 0%.

Summary: Discount rates form the foundation for the process of stock valuation. Value investors, therefore, rationally adjust their discount rates based on their expectations for their future. Changing expectations will reduce discount rates over time.

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Mental Models discussed in this podcast: * Generally Accepted Accounting Principles (GAAP) * Owner's Earnings * Free Cash Flow

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode91

Owner's Earnings definition and its Approximations * GAAP Earnings vs Owner’s Earnings vs Free Cash Flow + Everything is an approximation attempt at Owner’s Earnings + What are the Owner’ earnings? - The cash available to be distributed from the business TODAY without impacting the competitive position of the business for the future. - How much cash could be paid in dividends today if the business didn’t grow AND didn’t shrink? * We’re going to talk about Amazon today * Using Amazon’s 10k. (2019)

Investing Rules for Fundamental Analysis of GAAP Earnings * Expenses should be treated as expenses even if they don’t involve cash outlays * Think like an owner, not a manager * If your estimate of free cash flow exceeds 110% earnings you’re probably wrong. (Not always but probably). * It is rare for a company’s free cash flow to exceed earnings.

Stock-Based Compensation * This is the big one. How you calculate this can be a problem. * Amazon recorded a $6.8 billion non-cash expense for “stock-based compensation” in 2019. * Jan 2019 shares: 491.2 million * Jan 2020 shares: 497.8 million * An increase in 6.6 million shares during that period. Yet, using Amazon’s market price of $3,200, it would require $21.1 billion to buyback that many shares. * Should you use $6.8 billion as the expense or $21.1 billion? * In January 2020, Amazon was priced at $1,800 per share, so let’s use that price. That’s still $11.8 billion to buy back the shares. This means Amazon is understating the cost of its share issuance by AT LEAST $5 billion, in a single year.

Maintenance CapEx vs Growth CapEx vs Depreciation * It is a fallacy to say that Growth CapEx is simply Total CapEx minus Depreciation. * Inflation will cause maintenance CapEx to exceed Depreciation in most cases. * Also, have to consider property plant and equipment acquired under finance leases. * $13.7 billion in Amazon’s case.

Questions from Twitter * Valuation Adjustments + Land + Inventory + Investments * Goodwill is ambiguous * Deferred revenue classified as a liability (false reading of a firm’s financial condition) + Response: Pay upfront is useful as a float when growing but harmful when growth reverses. + May have to pay refunds? * Change in accounting rules for operating leases (now considered an asset with a matching liability) * Software and R&D immediately expensed even though it can be an asset like a factory or a machine. * Non-GAAP adjustments are either (1) non-recurring or (2) non-cash. On (1), can you explain how you factor in non-recurring costs into a forecast for valuation, and (2) how to deal with the amortization of acquired intangibles vs total amortization (ie. incl. Non acquired intangible assets) + Companies will sometimes only back out acquired intangibles and not amortized internally developed assets. * Adjusting CAPEX for operating leases.

Summary: GAAP stands for "Generally Accepted Accounting Principles" and GAAP earnings represent net income available to shareholders using these accepted accounting principles. GAAP is foundational for investors trying to calculate the owner's earnings.

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Mental Models discussed in this podcast: * Intrinsic Value * Extrinsic Value * Define your terms

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode90

Extrinsic Value vs Intrinsic Value Definition * Tweet: + “Be very careful when describing an asset’s “value.” + Define your terms. They matter. + Intrinsic value is the NPV of all future distributions of cash. (Not the NPV of FCF) + Extrinsic value is the market value as determined by others for any reason at all. * Responses: + This is an extreme view + What about Berkshire? What is their cash worth? * My thoughts: + “There is no fundamental difference between equity that doesn’t distribute cash ever and a bond with a 0% interest rate that not only doesn’t make interest payments but also defaults prior to returning your principal. + How much would you pay to own that bond? + “If I knew with certainty that a business would never distribute cash. (Dividends, buybacks, or liquidation) + Then the company is fundamentally worthless to shareholders. + It means all of its growth is for nothing because it will reach bankruptcy before giving cash.

Summary: Be very careful when describing an asset's "value." You need to define your terms because they matter. Intrinsic value is the Net Present Value of all future distributions of cash. (Not the NPV of Free Cash Flow) Extrinsic value is the market value as defined by others.

By focusing on intrinsic value investors can alleviate the need to predict price action in order to turn a profit. Investors, as opposed to speculators, earn their return from business performance. Therefore, it is critical to focus your time and effort on studying business performance.

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Mental Models discussed in this podcast: * First Principles * Asset Duration

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode89

Investing First Principle Every security or financial asset MUST be owned by someone at all times until that security is retired. This holds true for stocks, bonds, cash in the bank, QE, and any other similar financial asset. This is an investing first principle.

Implications for Investors * It is impossible for investors to "get out of the market" in the aggregate. * There are never more sellers than buyers or more buyers than sellers. + Buyers and Sellers MUST match in order for transactions to occur. + If the price rises to handle demand, that doesn't mean there were more buyers in the market than sellers. + Likewise, if prices fall it doesn' mean there were more sellers than buyers. + Once the transaction occurs, sellers and buyers match. * Someone, somewhere, will receive the implied rate of return for each and every asset that exists. + If bonds are priced to lose money through maturity (due to negative interest rates) then it is guaranteed that investors, in the aggregate, WILL lose money on the bonds. + It is possible for some speculators to make money in the interim and sell out to greater fools. But someone has to lose even more money to accommodate that speculator’s profit. * Stocks don’t discriminate. + Stocks don’t care what your race, ethnicity, skin color, gender, age, sexual orientation, or country of origin is. + Stocks don’t know that you own them. Everyone is presented with an equal opportunity to own stocks as long as they are willing and able to pay the market price. + In some respects, that makes stock investing (and other financial assets) one of the most egalitarian ways of building wealth available. * If a financial asset has an unlimited duration (such as common stock), no one can force you to sell it. All of the proportional dividends for that company are yours and your future beneficiaries for the rest of time. + This should be very empowering. + Once you acquire a share of stock, you have permanently locked-in a share of future profits and dividends. You have permanently raised your lifestyle potential. + Implies buying a company that won’t go bankrupt and will have future dividends, but you should be seeking only those companies if you’re a listener to this podcast.

Summary: Every security or financial asset MUST be owned by someone at all times until that security is retired. This holds true for stocks, bonds, cash in the bank, QE, and any other similar financial asset. This is an investing first principle. First-principles are useful for investors seeking to develop investing strategies from the ground up.

By using first-principles you can be assured of limiting your blindspots and not basing your strategy simply on what has worked in the recent past.

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Mental Models discussed in this podcast: * Satisficing * Absolute vs Relative Returns * Optimization * Min-Max Game Theory

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode88

Satisfice definition and Mental Model Uses * Question from Wobble: “I think it would be interesting to discuss whether it has implications for whether you should focus on absolute or relative returns. Something I've been thinking about and it seems relevant. Looking forward to it!” * Satisfice: accept an available option as satisfactory. (Oxford Languages via Google Search) * I tend to be an optimizer * If you optimized everything, you would be paralyzed in life. Unable to make a decision. + Clothing + Furniture + Food Choices + Where to go to eat? * Consumers make choices like this every day * The same can be true in investing. The goal isn’t to maximize your portfolio. * Your goal should be to find satisfactory investments that allow you to achieve your financial goals with minimal risk. * In any short-term time period, the investor with the highest return likely took big risks that are not sustainable over the long-term. * Yet, over the long-term maximization of returns is not necessary.

Summary: Satisficing is defined as accepting an available option as satisfactory. This mental model is useful because consumers use it instead of optimizing for every purchase. Investors can learn from this behavior to improve their portfolio and investing strategy.

Your goal should be to find satisfactory investments that allow you to achieve your financial goals with minimal risk. Simply trying to maximize the returns of your portfolio could cause you to fail in attaining your goals.

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References: This episode was inspired by a Twitter thread where I responded to a poll on how to value companies. That thread is available at the following link:

https://twitter.com/TreyHenninger/status/1288475399861817352

Mental Models discussed in this podcast: * Cost of Growth Valuation * Gordon Growth Model * Asset / Earnings Equivalence * Retained Earnings * Return on Invested Capital * Earnings Yield * Dividend Yield

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode87

Summary: Growth is not free for most companies. It costs something. The cost of growth valuation model takes into account return on invested capital when valuing stocks. Most companies have to retain earnings in order to grow.

Assets are only as valuable as the earnings they create. You can't take credit for both book value (assets) and earnings power in the same valuation on a stock. It's a problem of double counting that leads to overvaluation.

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Books Referenced: Fooled by Randomness by Nassim Taleb

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Mental Models discussed in this podcast: * A priori knowledge * Deductive vs Inductive Reasoning * Empirical Evidence * The Scientific Method * Curve Fitting and Extrapolation Problem * Boundary Conditions * Hindsight Bias * Ergodicity

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode86

Why Backtests are harmful and counterproductive * Empirical Evidence - backtesting is a form of empirical evidence. I.e. observation of the past * A priori knowledge - knowledge, justifications, or arguments that exist independently from experience. (Ex: Mathematics) (Wikipedia) + a form of knowledge that can be derived by reason alone. * Deductive reasoning - the process of reasoning from one or more statements to reach a logically certain conclusion. (Wikipedia) * Inductive reasoning: + “inductive reasoning as the derivation of general principles from specific observations (arguing from specific to general)” - Wikipedia (same link as below) + “While the conclusion of a deductive argument is certain, the truth of the conclusion of an inductive argument is probable, based upon the evidence given.” -Wikipedia * Scientific Method: + Form a hypothesis + Propose an experiment to test that hypothesis. + Results of the experiment either support or disprove the hypothesis. No experiment can prove a hypothesis. * The problem with the theory: + A theory only follows the scientific method if it can be disproven. If a theory is unable to be disproven, then it is not a true scientific theory but something else. * Curve Fitting and Extrapolation problem (using a curve or model beyond the range of observed data is subject to uncertainty) * Boundary conditions. * G Merani (Twitter) (Website) - Covers net-net study backtests in depth

Summary: Investors use backtests in order to test whether a portfolio's asset allocation would have performed well in the past. The use of backtesting is harmful to a portfolio because it ignores uncertainty and overstates the value of empirical evidence.

It is much better to reason from first principles using deductive reasoning. This deductive reasoning is better than inductive reasoning for investors because it eliminates hindsight bias.

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Mental Models discussed in this podcast: * Discount Rates * Gordon Growth Model * Discounted Cash Flow Calculation

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode85

Why DCFs should not be used * What is a DCF? + An estimate of all future cash flow (dividends or earnings) and discounted back to the present. + When you add up these values you get the intrinsic value of a company. * Gordon Growth Model (perpetual constant growth of a dividend - DCF) + P = Div (next year’s) / (r-g) + R = discount rate (10%) + G = constant growth rate in perpetuity. * Example: + Dividend = $1.64 (Coca-Cola) + Specific estimates: $27.85 (based on specific year estimates) + Growth rate: 3% = $23.42 (equivalent to a 7% dividend yield) + Growth rate: 5% = $32.80 (equivalent to a 5% dividend yield) + Current price: approx. $46 per share + Always invert. - Dividend yield of 3.5% or growth rate of 6.5% in perpetuity. * Example 2: P/E ratios for growing companies. + I want to estimate how quickly I can reach a 10% earnings yield. + I want it to be less than 5 years. - Without compounding this means a 10% grower you can pay P/E of 15. - A 20% grower you can pay P/E of 20. - All of these imply you can sustain that growth for 5 years. - Why ignore compounding? It’s simpler and conservative.

Summary: Discounted Cash Flow calculations and models provide precise estimates of intrinsic value but tend to be flawed. It is much better to improve accuracy by ignoring DCF and using a simple intrinsic value calculation like the Gordon Growth Model.

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Mental Models discussed in this podcast: * Scuttlebutt * Circle of Competence

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode84

Scuttlebutt Challenge: Your Employer's Stock * If your company isn’t public, assess it qualitatively or do this work on your spouse's company or where a friend works. * If you work for a non-profit or government, do the same. * Email me your write-up during the month of July 2020 and I'll send you a response.

Questions to Ask / Areas to Assess * Assess the industry * Assess your company’s place in the industry * What is the culture of your company like? * What is the priority of management? Are they shareholder friendly? Are they employee-friendly? Other concerns? * How are capital allocation decisions made? * How are CapEx decisions made? * Does your company earn high returns on capital? * Does it use leverage? * In summary: Is it a high-quality business? * What are the risks? * How would you value your employer’s stock? (Write down an explicit intrinsic value)

Summary: The company you work for should be the first place you look to begin understanding how to perform scuttlebutt. Investors should analyze their employer's stock as a potential investment candidate. Culture, Quality, and Management are key areas.

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Mental Models discussed in this podcast: * Commodity * Leverage * Availability Bias (re 2008 Financial Crisis)

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode83

Key Characteristics of the banking industry which make it unattractive for investors * 2008 Financial Crisis + I could probably end this episode with that statement alone. However, there is value in expanding on what bank investors can learn from the 2008 financial crisis. Specifically, how that event may be repeated or rhyme in the future and how to avoid owning a bank that may be affected. * Risk Management is primary - which is heavily influenced by management + A poor management team can quickly ruin a good bank. This is a problem for investors because it requires evaluating management and understanding their ability and focus on managing risk. + This is harder to do than you may expect because nearly all bank managers are going to pay at least lip service to risk management. + Buffett once talked about wanting to own a business that could be run by an idiot because eventually, an idiot would run it. Unfortunately, this does not often apply to banks. Why? It will be more clear as we discuss further issues. * Banks operate with high leverage + In many industries, high leverage can be seen as a sign of risky decision making. With banking, leverage is a feature. High leverage is not only present across the board in the banking industry but is required in order to earn an adequate return. I covered why in episode 79 when we discussed the banking business model. + The more leverage a company uses the higher risk of blowing up or bankruptcy due to deteriorating loan performance. This is why management plans such a big role. It is easy to grow a bank by offering loans to people and companies that are not creditworthy. However, doing so sets up failure down the road. + Leverage = Double-edged sword. Required for adequate returns, but the potential source of bankruptcy. 2008 was a prime example of how this could occur. * Value Traps abound -> History of low returns, especially among small banks + While high returning banks that are able to reinvest capital into growth offer great opportunities, there are many more banks that could be a value trap. + Small community banks often trade below book value which can appeal to value investors. Yet, you’ll find thousands of banks like this which may have returns on equity below 10%. Any growth that these banks experience will lower an investor’s return instead of improving it. + Time is not on your side if you select the wrong bank because they often don’t earn a high enough return. - Why? Small towns especially have limited capital available to be stored in a bank. These towns are also heavily hit hard by the move towards online retail, urbanization, and loss of manufacturing jobs. * Bankruptcy risk is higher than a normal industry + While all companies can fail due to leverage, banks have more leverage than normal. + While all companies can fail due to a liquidity trap, a bank’s entire business model is based on lending long-term and borrowing short-term. + Remember, in episode 82, I talked about the benefit of fewer banks in the industry over time. That only exists because banks continue to fail and/or be bought out by larger competitors. This exemplifies that failure IS an option for many banks and requires a prudent investor. * Money is a commodity and banks don’t control its price. + The Federal Reserve in the United States makes a common practice of manipulating the value and price of money. They determine what short-term interest rate should be. There may come a day when that is no longer true, but for now, at least, banks operate in a manipulated market. + This means that in general, banks don’t have pricing power. The most cost-efficient banks will win, prosper, and grow. Everyone else will fail or shrink away into obscurity. + The profitability of your common bank will be quite different in different interest rate environments. The shape of the yield curve is critical, but any bank you invest in doesn’t control the yield curve.

Summary: I want to end this episode with a question. It pertains to both my last episode on the attractive qualities and this one on the unattractive. Which of these two sets of information was most new to you? My guess is that my average listener will be more familiar with the downsides of the banking industry. The 2008 financial crisis is fresh in everyone’s minds. We understand what can happen when banks fail. It is harder to see the massive deals available in the banking industry when a recent crisis is so prominent.

Either way, I hope this information is useful and challenges you to think deeply about the industries you invest in. Don’t simply focus on the attractive qualities. Also, understand what makes an industry unattractive.

Banking is an industry with many key drawbacks including dependence on management for risk reduction, high leverage, low returns on equity, bankruptcy risk, and lack of pricing power because money is a commodity.

References: * Quote: https://www.goodreads.com/quotes/3240452-i-try-to-invest-in-businesses-that-are-so-wonderful

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Mental Models discussed in this podcast: * Retention Rates * Lindy Effect (Durability)

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode82

Key Characteristics of the banking industry which make it attractive for investors * Fewer Banks over time in the United States + Over 23k commercial banks in the United States in 1966. + By 2002, that number dropped to 7.8k. + In 2018, there were only 4.7k FDIC-insured commercial banks in the United States. * Number of New Banks being created has fallen to near zero + Before the 2008 financial crisis, about 146 new banks were created each year. + Since then, only 1 bank per year has been created. * High Retention Rates + Relationship-Based - If you're a local business you may work with a dedicated banker that helps you out, offering you a loan. You'll probably also hold your personal household accounts with them, your mortgage, college savings fund, checking accounts, etc... - Each type of account or loan you have with a bank increases the stickiness of the customer. - A bank that is only a checking account is easy to switch. A bank where you have a checking account, multiple savings accounts, a debit card, credit card, mortgage, and car loan is much harder to change away from. + Low Competition (Hard to steal a customer) - Switching banks is time consuming, difficult, and there is often only a small benefit for doing so. * As an industry, bank efficiency is improving over time. + Fewer commercial banks in the US = less competition. - The weaker banks are the ones failing or being acquired. + Fewer bank branches = higher concentration of deposits per branch + High retention rates = Large amount of recurring revenue, the stability of deposits, and reduced risk of bank liquidity problems. + Financial service companies and the internet = lower costs to service customers, which means more profit per dollar of deposits. * Banking is a durable industry + It has existed for thousands of years and will continue to exist for thousands more. + Lindy Effect * Banking as a business is very simple. + You collect deposits and make loans. Specifically, we're focused on commercial banking. + There is no R&D. + Product innovation is unnecessary. + There is no inventory that can expire and become worthless.

Summary: Banking is an industry with characteristics that are quite attractive to long-term investors. Properly evaluated, a bank can make a great investment. High retention rates, lower competition over time, and the durability of the industry are what attract me to bank investing.

References: * https://ilsr.org/number-banks-u-s-1966-2014/ * https://www.statista.com/statistics/184536/number-of-fdic-insured-us-commercial-bank-institutions/ * https://ilsr.org/number-of-new-banks-created-by-year-1993-to-2013/ * https://ilsr.org/vanishing-community-banks-national-crisis/

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Mental Models discussed in this podcast: * Discount Rate * Greater Fool Theory * Circle of Competence * 5-Why Framework

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode81

Bond Returns In the aggregate, bond returns cannot exceed the coupon rate of the bond. Your interest rate earned sets the maximum expected rate of return on that investment. Any potential for gains above this threshold is purely speculative in nature.

Greater Fool Theory * In today's bond bubble, the only way to justify purchasing bonds in a portfolio is a dependence on the greater fool theory. * If you want or expect high returns from your bonds, then you hope that others are foolish enough to buy them from you before they mature.

Circle of Competence Your circle of competence is probably smaller than you think.

5-Why Framework This framework is used in the industry to evaluate failures for a root cause analysis. Basically, don't stop with understanding a problem after only asking "Why?" once. You need to dig deeper. Ask "Why?" five times, to reach down to deeper levels of explanation.

Find the root cause of a problem, not simply the surface contributing causes.

Summary: Investors should always ask why when evaluating investments. This includes understanding the underlying reasons for their investing strategy, why they earn an excess return, and the edge of their circle of competence.

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Mental Models discussed in this podcast: * Discount Rate * Equity Risk Premium * Second-Order Effects

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode80

Interest Rates I discuss The Fed and their recent actions to lower interest rates to zero using the overnight lending rate.

I also cover the equity risk premium and second-order effects of zero interest rates.

Discount Rates * Your Required Rate of Return * Your need to save and invest can increase as rates fall

Summary: When the Fed reduces interest rates to zero the first-order effect is a disincentive to save. Yet, zero interest rates should not reduce your discount rate because the second-order effect is because lower returns would increase your need to save money.

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Mental Models discussed in this podcast: * Leverage * Fractional Reserve Banking * Margin * Economies of Scale * Operational Leverage

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode79

Banking Business Model - Key Concepts As some of you may remember, one of my goals for this year is to improve my understanding of bank stocks. Today’s podcast will focus on the basic business model that banks use to make money.

Key Concepts:

• Deposits
• Cost of Deposits
  • Direct Cost: Interest Rates paid on Deposits
  • Indirect Cost: Overhead (Employees, Rent, etc...)
• Loan Yields
• Loan Losses
• Fractional Reserve Banking -> Leverage Rate
  • ROE = ROA * Leverage
• Banking Profits = Loan Yields - Loan Losses - Cost of Deposits - Overhead

A recent movie I enjoyed about Banking * Recently watched: The Banker on Apple TV+ * Two black entrepreneurs in the 1960s buy two Texas banks. * Samuel L. Jackson * Anthony Mackie

The movie follows their journey and the ensuing blowback by Jim Crow.

One of the things the movie did very well was to explain the basic banking business model. Banks are easiest to understand when you focus on single branch banks instead of large money center banks like JP Morgan or Wells Fargo.

Summary: Banking is the business of bringing in deposits and lending them out.

Banking is a perfect example of a capital intensive business. A bank cannot grow unless it receives capital in the form of deposits. Deposits are the lifeblood of a bank and only through healthy deposit growth can a bank sustainably grow loans and therefore profits.

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Mental Models discussed in this podcast: * Earnings Yield * Discount Rate

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode78

Earnings Yield on Cost * In our last episode, we discussed the source of investment returns. In this episode, we’ll dive deeper into the nuance of stock valuation. * A rule of thumb is a simple reference point method to quickly determine whether a stock is overvalued or undervalued. A rule of thumb for valuation is not a substitute for valuation, but simply a starting point to allow you to focus and prioritize your time on ideas that appear to be good values. * Earnings Yield - Current Earnings / Stock Price * Earnings Yield on Cost: Possible Future Earnings / Original Stock Purchase Price * Rule of thumb: Earnings yield on cost must eventually exceed 10% in order to earn a 10% rate of return on your investment (due to business performance) versus speculation.

Investing Rule - Earnings Yield and Discount Rate Stocks must eventually trade at an earnings yield on cost equal to your discount rate in order to earn your required return on capital for you as an investor.

Stock Investing Examples * Amazon + $1.22T Market Cap + 2019 Earnings: $11.5B + Earnings Yield: 0.9% * Apple + $1.38T Market Cap + 2019 Earnings: $55B + Earnings Yield: 3.9% * Discover Financial + $14.5B Market Cap: + 2019 Earnings: $2.9B + Earnings Yield: 20% * NACCO + $184m Market Cap + 2019 Earnings: $39m + Earnings Yield: 21.2%

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Mental Models discussed in this podcast: * Mean Reversion * Inertia * Reinvestment Rate * Return on Incremental Invested Capital (ROIIC)

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

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Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode77

Source of Investment Return Investments, as opposed to speculations or gambling, is a method of seeking returns while protecting principal. Therefore, it is critical to understand the source of your investment returns. You are not entitled to investment returns. You don't have a God-given right to earn an excess return on your investments.

So what is the source of your returns?

Hint: It will vary by the type of investor you are.

Examples: * Mean Reversion + Net-Net Investors + Value Investors * Inertia + Momentum Investors * Future Business Performance + Quality Investors - Low Reinvestment Rate - High Return on Incremental invested capital + Growth Investors - High Reinvestment Rate (often 100%) - Low-Medium return on incremental invested capital - No dividends + Dividend Growth Investors - Low-Medium Reinvestment Rate - Stable return on incremental invested capital

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Mental Models discussed in this podcast: * Operating Leverage * Davis Double Play

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Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode76

How to identify 10-bagger investments * A 10-bagger investment: We're going to focus on how to 10x your money over a 10-year time period. I'll discuss examples and what to look for in an investment in order to identify these types of opportunities. * This represents a 25.8% annualized rate of return. (Massively exceeding the average 10% return in the stock market.)

Example 1: "Davis Double Play" * Grow an investment from $10 per share to $100 per share. * If done over a period of 10 years we know this is a >25% rate of return. * Starting EPS: $1, doubles every 5 years, so it ends at $4 per share. * Starting buy price: $10 per share (P/E of 10.) * Sell price: $100 per share (P/E of 25) - Find companies capable of becoming overvalued * Earnings growth rate: 14.8% per year * Multiple expansion contribution: 9.6% per year

Example 2: Deep Value * Starting EPS: $2.50 per share * Ending EPS: $5.00 per share (7% growth rate) * Starting price: $10 per share (P/E of 4) * Ending Price: $100 per share (P/E of 20) (17% contribution from multiple expansion)

Example 3: Hypergrowth * A very simple example * Starting EPS: $0.50 per share * Ending EPS: $5 per share (25% EPS growth rate) * Starting price: $10 per share (P/E of 20) * Ending price: $100 per share (P/E of 20) (0% contribution)

Key Characteristics of 10-bagger potential stocks * Low Price (Ideally target companies with a P/E multiple less than 10) * Operating leverage (Should be able to grow earnings faster than revenue) * Turnarounds (Flipping from unprofitable or breakeven to profitable can lead to large earnings growth AND multiple expansion) * Microcaps and Nano caps (Smaller companies are more likely to benefit because they may be more overlooked) * Growth is critical to a 10-year ten bagger

Summary: My preferred method of identifying potential 10-bagger stocks is to seek Davis Double Play type investments. I want cheap stocks with the potential to become overvalued.

In order for an investment to become a 10-bagger and earn 10x your money in 10 years it needs to have certain traits: Low price, operating leverage, turnaround situation, overlooked company, and earnings growth.

References * Focused Compounding Note on Davis Double Play

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Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode75

How coronavirus has modified the distribution of investment returns * Reference: + Episode 63 - Your Portfolio should reflect your investing strategy * Net Nets can be incorporated into a high-quality portfolio by portioning out a subset of the portfolio for that new strategy.

Summary: In this episode, I describe how to incorporate multiple investing strategies into a single stock portfolio. Your portfolio can successfully leverage dividend growth investing, momentum, high-quality stocks, and deep value stocks like net-nets.

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Mental Models discussed in this podcast: * Arbitrage * Efficient Market Hypothesis * Brand Power * Luxury Power

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode74

Merger Arbitrage - Examples and Discussion * What is Merger Arbitrage? * On November 24th, 2019, Louis Vuitton announced the acquisition of Tiffany for $135 per share. * As of today's record, on April 18th, 2020, Tiffany was trading at $129.15. (4.5% gain to reach a takeover price of $135 per share) * As of March 18th, 2020, Tiffany stock reached a low of below $112 per share. (represents a 20.5% gain to reach $135 takeover price) * Very low-risk takeover. On the day of the announcement, shares rose to over $134 per share.

Summary: Merger Arbitrage is an investing strategy designed to capture the value in price differences between a soon to be acquired company and the acquisition price. Investors can sometimes earn high returns at low risk using this strategy.

References * SpecialSituationInvestments.com + @InvestSpecial on Twitter * https://www.foxbusiness.com/markets/tiffany-stockholders-approve-merger-with-lvmh

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Mental Models discussed in this podcast: * Second-Order Effects

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode73

How COVID-19 could cause a depression * The world economy has caught the flu and it is unlikely to go away once COVID-19 is under control * The problem with the flue is that it hits like a truck and knocks you down for a few days. Then for weeks afterward you're likely to feel tired and exhausted. * While the coronavirus doesn't cause the flu, it has created a global shutdown of the economy. Global trade is massively impaired due to borders being closed. * The domestic economy is impaired due to shelter-in-place orders and government-mandated closure of non-essential businesses. * Right now we're in the phase of economic flu where the economy feels like it has been hit by a truck. This phase will be relatively short. The problem that most aren't anticipating is the second-order effects, the long period of feeling tired and exhausted that our economy is going to go through while we recover. * Second-order effects will be set off due to: + Large layoffs where people are not quickly hired back after the shutdown. + Small business failures due to the limited margin in their operations. - Restaurants will close permanently. - Hair salons - Dentist offices - Your local auto repair shop - Gas stations may fail - Each of these businesses is cumulatively a large part of the employment for individual cities and towns. Yet, we can expect a potential failure of these businesses at an alarming rate if the shutdown continues for too long. + Large businesses will layoff employees for longer than the shutdown period. - Move Theatres may go bankrupt. (See: AMC) - Cruise lines will be restructured. (Carnival already has) - Air travel may be impaired for a year. - The automotive industry is likely to be impacted by reduced consumer income for a long time. * There is a time limit to this shutdown. If it continues past a certain date, a date which we cannot know where the line is in advance, the economy could dive into a depression. * The line between recession and depression is blurry. The tipping point is the failure of small businesses that cannot simply be restarted after the shutdown is lifted.

Summary: Investors today are likely underestimating the second-order effects of the coronavirus shutdown. Layoffs and bankruptcies will have long-lasting adverse effects on the economy. If the number of layoffs and bankruptcies gets too high, the economy will likely exceed a simple recession and enter a medium-term depression.

References * Joshua Kennon's question: What Price Should We Pay to fight COVID-19?

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Mental Models discussed in this podcast: * Normal Distribution (Statistics) * Resulting (Read: Annie Duke's book) * Efficient Market Hypothesis

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode72

How coronavirus has modified the distribution of investment returns * Typical investing outcomes - single distribution of possibilities + High likelihood of a single point of returns (say 6%) + Low probability of super high returns (>12%) + Low probability of super-low returns (<0%) * Today's environment has a bimodal outcome for many companies directly impacted by the coronavirus shutdown. + Instead of a single point of high probability outcomes, we have two center points. (15% and -80%) + One may be around 15-20% annualized returns, but the other is highly negative and bounded by the zero-based outcome of the bankruptcy of the company. * "The market has priced it in." + It is almost impossible for the market to accurately price in a bimodal distribution of potential returns.

Summary: Investors today are likely underestimating the potential for bankruptcy of their favorite companies. Regardless of the long-term return of underlying assets, bankruptcy is possible when debt covenants are breached or a negative liquidity event occurs.

Both are possible outcomes in today's investing environment as most companies are not well situated for handling a long period of zero revenues. (Not zero profits, but zero revenues)

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Mental Models discussed in this podcast: * Moral Hazard * 2nd Order Effects * Anti-Fragile

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode71

Government Bailouts create moral hazard in the economy * Government bailouts reduce or eliminate the incentive for businesses to prudently manage their finances. * Moral hazard is created by these bailouts. CEOs, board members, and shareholders know that any profits they make they get to keep. Yet, if massive losses appear they can simply appeal to future government leaders to save their job. + This has to stop! * If you privatize profits and socialize losses, this isn't capitalism. Instead, it creates a situation where the public becomes aware that the game is rigged and wants to tear down the whole system. * The Federal Reserve and the United States government have repeatedly implemented a playbook where they try and prevent recessions and bankruptcy. This perverts the intent of capitalism. * We are meant to have cycles. We are expected to have businesses fail. Only by allowing weak and poorly managed businesses to fail can we truly have stronger businesses arise and grow at their optimal rate.

Summary: The United States Government and governments around the world have been behaving in a manner that is counterproductive. They have created a moral hazard of encouraging individuals and businesses to take selfish action and to not manage their affairs prudently because they know that they can expect bailouts in the future.

In the short term, this seems like the right thing to do. Yet, it lays the groundwork for the long-term failure and fragility of our economic system.

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Mental Models discussed in this podcast: * Dividend Aristocrats * Dividend Growth Investing * Discount Rates

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode70

Current Clearance Sale on Oil Major Stocks * As of recording on March 20th, the oil majors trade with the following dividend yields: + ExxonMobil $33 per share, $3.48 dividend, 10.5% yield - Dividend Aristocrat = 37 consecutive years of dividend increases - Uninterrupted dividends since 1882 + Chevron $58 per share, $5.16 dividend, 8.9% yield - Dividend Aristocrat = 32 consecutive years of dividend increases - Uninterrupted dividends since 1912 + Royal Dutch Shell $24 per share, $3.76 dividend, 15.6% yield + BP $18 per share, $2.52 dividend, 14% yield + TOTAL $27 per share, $2.93 dividend, 10.8% yield

Summary: During stock market crashes correlations tend to go to 1 and many stocks trade together, both the good and the bad. Market dislocations like this, therefore, offer many opportunities to buy individual stocks at great prices. Today offers that opportunity in the oil supermajors. You have the ability to buy companies at double-digit dividend yields that have raised their dividend every year for over 30 years. This is a once in a 50-year occurrence in the oil industry.

Other References: * Episode 12 of the DIY Investing Podcast on Oil Majors * 2015 Oil Stock Clearance Article * Joshua Kennon's review of investing in oil majors

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Call to Action: * Support the Podcast: If you're subscribed to the podcast and have been enjoying my content on the podcast, consider giving me a five-star rating and review. I need many more ratings and reviews than I have currently received if the podcast audience is to grow. Right now I only have about 1-2% of my podcast audience having left a rating and review. If you're in that 2% thank you very much. If you're part of the 98%, please consider taking just 30 seconds to leave me a 5-star review in your podcast app. I would really appreciate it.

Mental Models discussed in this podcast: * Tax Avoidance

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode69

Questions from Listeners on Twitter * Why should you study Value Investing at all? * Roth IRA vs Taxable Accounts * What to do when friends and family ask advice about stocks?

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Call to Action: * For You: Do you agree with my view on cash not being worthy of a strategic allocation in your portfolio? Either way, you should write down and document your view on cash in your asset allocation strategy. This should be a line item in your investment strategy document. If you don't have a written strategy for cash you're more likely to make subpar decisions because you likely won't have a strategy at all. * Support the Podcast: If you're subscribed to the podcast and have been enjoying my content, consider also subscribing to my YouTube Channel. One of my goals this year is to publish short investing videos to my YouTube channel in addition to my weekly podcast. Right now most of my YouTube videos are simply podcast episodes. But if I can grow my audience of subscribers on YouTUbe that would be greater encouragement for me to produce additional YouTube videos this year.

Mental Models discussed in this podcast: * Opportunity Costs

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode68

Listener Question from Twitter: * "Most value investors aren't what you would call market timers. But how do you think of cash strategically in your portfolio? Do you view it as an option on a better future opportunity set? Or as a potential drag on returns?" -Brian from Twitter * Follow me on Twitter and send me your questions and they may be answered on the podcast in the future.

My views on Strategic Cash Allocation Strategy

• Both. I view cash as both an opportunity on a better future opportunity set AND a potential drag on returns.
• My preferred cash allocation is 0%.
• I want to be 100% invested in assets that can meet my hurdle rate of return of 10% or greater. Therefore, preferably I would be 100% invested in stocks that each individually offers me a high probability of achieving a 10% rate of return during my holding period.
• Am I always 100% invested in stocks: No.
• Cash should be held if you don't have any good ideas and/or already have too much money invested in the good ideas that you do have. In order to prevent myself from holding cash, I concentrate my portfolio, so I need less good ideas.

Summary: I don't hold a strategic cash allocation in my portfolio. That is because I view cash as both an option for a better opportunity set in the future and as a drag on returns. This means that my ideal cash allocation is 0%. As soon as I identify assets that meet my target rate of return, I buy them to eliminate my cash allocation. I am not going to wait for 12% return opportunities when 10% opportunities are available today.

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Call to Action: * For You: Take out a notebook or word document. Write a list of everything that you can think of that is preventing you from achieving your goals. This can focus on whatever part of your life you want. If its investing, identify the weaknesses of your investing process. If its personal finance, what are you spending money on that you can eliminate? Whatever your goals, make a list, and start allowing addition through subtraction to work for you. * Support the Podcast: Pick your favorite episode of my podcast and share it with one of your friends or family members. Talk to them in person, send them an email, or share it through text. I would really appreciate your support.

Mental Models discussed in this podcast: * Addition through Subtraction

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode67

Addition through Subtraction Mental Model * First introduced to me by Joshua Kennon on his blog. + https://www.joshuakennon.com/mental-model-addition-through-subtraction/ * You can improve aspects of your life, whether that's personal finance or your investing process by removing things instead of always trying to add things. * Companies can do this as well. Apple is a great example of a company that has been able to leverage Addition by Subtraction. + They improved the smartphone by removing the physical keyboard. This led to the creation of the iPhone. * Challenge for you today: What is preventing you from achieving your goals? What actions are you taking, what distraction are you allowing into your life, and what investments do you currently own, that are limiting your ability to achieve success?

Summary: When trying to improve don't solely focus on adding things to your life or adding steps to your investing process. It is important to also spend time trying to identify and remove pieces that are slowing you down or preventing you from achieving your goals. The addition through subtraction mental model captures this simple truth in a way that I believe is useful.

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Call to Action: * For You: Check your current stocks for the presence of net operating losses that can offset future taxes and read about Myrexis and Affymax to gain a better understanding of some of the extremes you may find in the market. * Support the Podcast: The best support you can give me right now is to follow me on Twitter: @TreyHenninger

Mental Models discussed in this podcast: * Tax Avoidance

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode66

Net Operating Losses are a form of Hidden Asset * NOLs are past losses by the company that offset future taxes * They are only valuable if you have the ability to earn a profit in the future * Elementary Value recently highlighted two companies that are an interesting avenue for future research. + Myrexis (MYRX) - https://www.elementaryvalue.com/blog/myrexis-inc-myrx-another-couchman-nol-stub + Affymax (AFFY) - https://www.elementaryvalue.com/blog/affymax-affy-a-couchman-controlled-nol-stub

Summary: When researching a company be on the lookout for hidden assets. Net Operating Losses are one form of hidden asset that can either be found on the balance sheet or in the notes to the financial statements about a company. The ability of a company to not pay any taxes for 10-15 years into the future can be extremely valuable in the right situation.

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Call to Action: * For You: Write down a list of every country which you will exclude from investing for reasons such as this or similar. Stick to it. * Support the Podcast: The best support you can give me right now is simply to give this podcast a rating and review in your podcast player.

Mental Models discussed in this podcast: * Corruption * Property Rights * Government Ownership of Means of Production

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode65

Two Key Characteristics Shared by Russia and China * High Government ownership of key businesses + Could lead to corruption + Businesses could be influenced to make uneconomic investments * I can't trust the numbers. (Due to the communist government) + Corporate frauds are more common + Both Russia and China have a critical lack of property rights.

Summary: If you are going to make any investment you need to be sure that your principal is safe and a reasonable return on your investment is likely. Lack of strong property rights threatens my principal and government control of businesses threatens my reasonable rate of return.

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Mental Models discussed in this podcast: * Modern Portfolio Theory * Compound Interest * Rebalancing * Beta / Volatility

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode64

Modern Portfolio Theory * According to Investopedia: Modern Portfolio Theory definition

Modified Doubling Penny Example Three scenarios are compared:

1. Base Case Compounding
2. Diversified Portfolio
3. Diversified Portfolio with Rebalancing

It is a mistake to rebalance from an investment with high return potential into an investment with low return potential. * If you are going to sell an investment that is up for one that is down then you should be confident that the lower cost investment actually offers a better return. * Don't trade 10% return expectations in stocks for 2% return expectations in bonds. * Betting on future volatility to allow you to rebalance back again is gambling not investing.

Summary: Rebalancing is an often mentioned tactic utilized in modern portfolios but seldom is it examined from first principles. The act of rebalancing can be useful to offset volatility amongst assets within similar return profiles. However, rebalancing between assets that differ in potential returns can lead to disaster. Compounding requires the ability to earn interest upon interest. If you rebalance away from the compounding asset, then you will counteract the powerful effects of compound interest.

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Mental Models discussed in this podcast: * Concentration vs Diversification * Expected Value * Probabilistic Thinking

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode63

Not every stock is right for every Value Investor * Just because a company is cheap doesn't mean you should own it * You need to learn to recognize the types of stocks that appeal to you and your strategy, while at the same time ignoring those stocks which don't work for your strategy.

Focus Areas to Discuss: * Deep Value Stocks * Quality Stocks * Momentum Stocks * Growth Stocks * Concentrated vs Diversified Portfolios

Summary: Portfolio management is a critical means by which an investor implements their investing strategy. Everything flows from your portfolio decisions: including returns, risk, and your general feeling and emotions of investing. Therefore, it is critical to align your portfolio and stock selection with your chosen strategy. Concentrated investors should not be buying deep value stocks. By the same token, diversified portfolios are better able to incorporate coin flip stocks with binary potential and high expected value. Don't make the mistake of building a diversified portfolio with stocks that fit a concentrated portfolio and vice versa.

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Recommended Resources: * Unconventional Success by David Swenson * William Bernstein's books on Asset Allocation * PortfolioVisualizer.com * Bogleheads Forum (Simba's backtesting spreadsheet) * PortfolioCharts.com

How to connect with Value Stock Geek * Follow his work on Twitter: @ValueStockGeek * Check out his website: + ValueStockGeek.com + Lazy Portfolio

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline: Interview with Value Stock Geek The full show notes for this episode are available at https://www.diyinvesting.org/Episode62

Passive Asset Allocation Strategy * Why should active investors have a passive asset allocation strategy? * Goals of a passive investing strategy as compared to active investing * Principles used to create the strategy * Are bond allocations obsolete with interest rates so low? * Backtesting performance and planning for the future

Portfolio Allocation * US Small Cap Value: VBR (0.12% expense ratio) * International Small Cap Stocks: VSS (0.12% expense ratio) * REITs: VNQ (0.12% expense ratio) * Long-Term US Bonds: VGLT (0.07% expense ratio) * TIPS: VTIP (0.06% expense ratio) * Equal weighted at 20%

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Mental Models discussed in this podcast: * Leverage * Risk Management * Uncertainty / Probabilistic Thinking

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode61

What is good about leverage? * Using other people's money to make investments has the potential to improve your long-term financial outcomes.

What is bad about margin debt? * Callability (#1) * High-interest rates * Non-fixed interest rates * Can be forced to sell your investments at a bad time * Solution: We need a method that is the opposite of margin debt: + Result: Mortgage Debt

What is good about mortgage debt? * Non-callable * Low fixed interest rates * A missed mortgage payment doesn't force you to sell your investments. * The bank you owe the mortgage to is often a different financial entity than the custodian of your equity portfolio.

Would you rather have home equity or stock equity? * Risk tolerance * Return Potential

Summary: Over the long-term, you will maximize your investment returns if you can somehow use other people’s money to invest. Debt leverage allows you to access other people’s money for your personal benefit. However, we must remember Benjamin Graham’s words: “On what terms and at what price?” The terms of the debt matter and the price of the debt also matters. Margin debt has bad terms and a high price. If you choose to leverage your portfolio, you need to select the best form of debt in which to do so. Mortgage debt tends to have the best government protections.

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Mental Models discussed in this podcast: * Carpe Diem (Seize the Day)

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode60

Opportunities are Rare: Go the Extra Mile * What do you do when you've identified a great opportunity? * This is an opportunity that meets all of your requirements: + High Quality + Cheap + Easy to Understand + Durable business + Predictable * Do you buy it? * What if you can't easily do so? What if your current broker won't let you buy it? Is it time to give up and move on? * No. It's harder to find new opportunities than it is to go through some work and find a way to make the purchase happen. * Go the extra mile! + When Warren Buffett wanted to buy small companies he sometimes had to go searching for the individual owners and convince them to sell. He went the extra mile. + What will you do?

Summary: Investors can sometimes fail by not seizing available opportunities. When an investment opportunity meets your requirements you should go the extra mile if needed to make that investment. Opportunities are relatively rare. It is sometimes easier to put in additional effort to purchase the stocks you already have identified as worthy, then to find similar companies that meet the same high standard.

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Mental Models discussed in this podcast: * Hedging and Insurance Costs * Purchasing Power Parity

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode59

Understanding Currency Exchange Rates * Most world currencies are free-floating * Their value fluctuates in price every day against all other currencies * They are fiat currencies. Which means no assets back up their value. Such as gold or real estate. * Instead, the value of all currencies is simply based on trust. * Exchange rates, therefore, embed assumptions about the future outlook for each country. This can include factors like interest rates, currency creation, or central bank policy.

Purchasing Power Parity * Hamburger test: How much does it cost to purchase a McDonalds Hamburger in each country. + In some countries, the hamburger will be cheaper than the others.

How does this relate to investing in companies? * When you buy foreign stocks, you have two key risks: + The company buys and sells its goods in a different currency than the one you use in your country. + You bought the stock in a different currency than the one you use in your country. * If exchange rates change, you could face additional gains or losses.

How to manage currency risk * Question: Should you hedge? * Answer: No. (Hedging is a form of insurance => Therefore, you lose in the long run.) * In the long run, currency exchange rates are fairly stable. If you're a long term investor, then currency risk should be fairly minimal. As long as you avoid leverage and only ever buy companies with cash, you shouldn't be forced into a situation where currency risk threatens your well being. * With that said, it can be helpful to be aware of potential major macro changes that could affect your investments in foreign currencies. Stuff like Brexit which is a known item that caused a decline in the British Pound during uncertainty could have been expected to rise (as it has) once the uncertainty was reduced. * Simply avoid countries where negative surprises are likely. (Dictatorships, Corruption, Massive Debt problems, etc...) [Hint: You should be doing this anyway]

Summary: Your goal as an investor it to earn an acceptable return on your investment capital over your investing lifetime. One potential risk of earning an acceptable return is for your investment returns to be eroded by changes in the value of foreign currency. You can limit this risk by avoiding countries with large problems that may impact the currency. Hedging this risk is a mistake because it guarantees a loss if you always hedge currency risk over your investment lifetime.

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Mental Models discussed in this podcast: * Circle of Competence * Habits * Resulting (read: "Thinking in Bets" by Annie Duke) + Focus on Process over Results * Networking Effects * Signal vs Noise

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode58

How to think about investing goals * The important thing to remember about goals is that you need to focus on what you can control. You don't control investing outcomes, you can only control your investing process. * Therefore, any goal that explicitly mentions a specific investing outcome is bound to result in disappointment and frustration. (Such as "My goal is to earn a 10% return this year." Replace 10% with whatever number you like, it's not a helpful goal.)

Parts of the Investment Process Worthy of Goals * Your research process * Investing Habits * Growing your circle of competence * Building a network of investors * Refining your investing strategy (Finding weaknesses)

My personal investing goals for 2020: * Identify one company worthy of investing 20% of my portfolio. + Actually invest in that company. * How might I do that? + Filter through a lot of companies. Maybe I set a goal of reading one 10k a week. That allows me to read over 50 10k's in the year. Perhaps after looking at 50 companies, I might find one worth investing money in. + Focus on identifying high-quality companies. If a company is unlikely to be of high quality, it probably shouldn't fit in my list of 50 companies to review in detail. + Focus on cheap companies. If the company isn't cheap, it's unlikely to be a stock I invest in this year. + Focus on companies with the ability to distribute a large amount of cash to shareholders. I tend to prefer capital-light businesses, so I should focus my time and effort there. * Investing Habits: Identify and eliminate one bad investing habit that I'm currently doing, and implement one new investing habit that should have a positive outcome. + In 2018, my focus was on removing investing noise from sources like CNBC. + In 2020, I think my goal is to only check stock prices once a week. * Grow your circle of competence: + In 2020, I really want to better understand banks and the banking industry. Banks seem like fertile ground for new long-term investments especially when interest rates are low. So, I want to focus on building expertise as a bank investor. * Building a network of investors: + In 2020, I want to interview 12 different investors on my podcast. Each interview teaches me something new about investing and grows my network of investors to learn from and source ideas. + In addition, in 2020 I want to grow my Twitter following to surpass 1,000 followers. I have found FinTwit (Financial Twitter) to be a huge boon in helping me learn more about investing. As I connect more with other investors on Twitter, I hope to become an even better investor. * Refining my investing strategy (Finding my weaknesses) + If I knew my investing weakness that I would discover today, it wouldn't be a goal. So, I'll simply plan to complete a post-mortem analysis on each of the companies that I sold in 2019 to see what I can learn from those investments. + I wish I had already completed those post mortems, but I should have time to complete it in 2020.

Summary: In summary, focus on improving your investing process. Only by focusing on what you can control and improve on, will you actually see long-term improvements in your investing results. Simply making a goal to improve investment results will not help you. You have to identify your weaknesses and eliminate them. Meanwhile, grow and build on your strengths. Over time, and executed on each year, you should become a much better investor.

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How to connect with David Keller * Follow his work on Twitter: @DKellerCMT * David Keller's Websites: + MarketMisbehavior.com (home of Sierra Alpha Research) - Includes a blog and YouTube Channel + https://stockcharts.com/

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode57

Part 1: Applied Technical Analysis for Fundamental Investors * Technical analysis quantifies investor behavior * Charts can help you filter investment ideas after they have passed a fundamental analysis process. "What are the best 5 ideas TODAY." * Value Investors would most benefit from using: + Leading indicators: Demark Indicators anticipate reversals + Lagging indicator: RSI (Relative Strength Index) measures price momentum

Part 2: Behavioral Finance and Mental Models * Key Behavioral Biases / Mental Models that investors struggle with: + Confirmation Bias - Give greater weight to evidence that agrees with you + Narrative Bias - We love stories + Endowment Effect - Falling in love with your stocks * Investor Habits that lead to Success: + Keep an investment journal (Why are you buying?) + After each investment: Write a post-mortem analysis + Find a tribe. Who will hold you accountable and help you grow?

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How to connect with Dan Schum * Follow his work on Twitter: @NoNameStocks * Dan Schum's Website: + NoNameStocks.com

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode56

Part 1: Dan Schum's Investing Process * Large diversification 30-60+ stocks * Buy "NoNameStocks" that no one else has heard about * Target characteristics: + Left for dead companies + Often unprofitable + Dark or Deregistered from the SEC + A long-term chart that shows abandonment by investors

Part 2: Example Stocks * HemaCare Corporation $HEMA - Dan's 100 bagger in 4.5 years (From $0.25 to $25.40 buyout on the podcast recording date of 12/16/2019) * Clancey Systems International $CLSI - A wild ride on a shell company with no assets leading to a 1000% gain in a few months * Dewey Electronics $DEWY - A company that just won't die, but with hidden real estate assets worth more than the market cap.

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Mental Models discussed in this podcast: * Inflation * Mr. Market * Purchasing Power * Pricing Power * Discount Rates * Risk Premium

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode55

What is inflation? * Inflation has many definitions depending upon your source and audience. However, for investors only one definition matters. * Inflation is the loss of purchasing power of your money over time.

Inflation Risk * Key Aspect #1: The simple presence of inflation requires an investor to profitably invest their money at a rate of return higher than inflation. Therefore, inflation risk, on the one hand, can mean that investors have a constant need to invest otherwise their money loses value. * Key Aspect #2: Inflation is a critical input to many theoretical investment pricing models. Whether explicit or implicit, investors around the world make assumptions about future inflation when choosing what investments to make. + If future inflation does not match these expectations substantial changes in the price of securities (including stocks and bonds) may occur. * Key Aspect #3: Companies price their products and services in nominal currency. (This coat costs $100 USD or $100 EUR). They don’t price goods in real terms, like “4 hrs of labor” or “8 hrs of labor.” + As inflation occurs some companies will be able to raise their prices. Others won’t be able to. + This means that companies will generally fall into 3 categories in the presence of inflation: - Category 1: As their costs rise, the company is unable to pass on these costs to their customers. Therefore, the company becomes less profitable. * Examples: Commodity companies - Category 2: As their costs rise, the company is able to pass on these costs to their customers. Therefore, the company can maintain profitability in the face of inflation. * Examples: Media companies, TIPS, NACCO - Category 3: As their costs rise, the company is able to raise their prices at a rate faster than inflation. Therefore, the company can become more profitable during periods of inflation. Sometimes known as Defense Companies, High-Quality Companies, or Blue Chips. * Examples: Tobacco Companies, Banks, + Category 1 & 2 are much more common.

How to manage Inflation Risk * In times of high inflation, be aware that low inflation may return in the future. You can sometimes lock in high rates of return on low-risk investments when others only anticipate ever-higher inflation forever. * In times of low inflation, don't forget that high inflation is always a possibility. Position yourself to own companies that can thrive in both low and high inflation. Don't simply latch onto those companies that only thrive in low inflation environments. Pricing power is critical to successful investing.

Summary: Your goal as an investor it to earn an acceptable return on your investment capital over your investing lifetime. The very minimum must be to at least earn a return that exceeds the rate of inflation. Ideally, you’ll earn a risk premium above inflation. In today’s investing environment, low inflation is the accepted norm and many predict low inflation far into the future. Perhaps one of your biggest opportunities is to, therefore, find and invest in the subset of companies that will thrive when high inflation returns. When the rest of the market gets hammered, your investments would be safe.

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Mental Models discussed in this podcast: * Margin of Safety

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode54

What is a quality business? (Classification Guide) * What is a quality business? + One thing above all else determines whether a business is "high quality." That is predictability. A high-quality business is predictable in terms of future cash flows available to owners. + This definition may differ from others you have heard that focus purely on return on invested capital or other quantitative metrics. + The reason is simple: The hardest part of investing is predicting the future. Therefore, you should prioritize investing in companies that are easiest for you to predict their future. * A quality pyramid of 7 tiers. Each progressively smaller than the tier before it * Tier 0 - Too Hard Pile * Tier 1 - Speculations * Tier 2 - Bad Businesses * Tier 3 - Average Businesses * The above tiers are the bulk of companies. If you are rating companies and most of your ratings fall outside of those tiers, then you are either rating companies wrong or you are already narrowed down into a select group of companies. [Buy Line] * Tier 4 - High-Quality Businesses * Tier 5 - Excellent Quality Businesses * Tier 6 - Generational Businesses

Business Quality Reports: Patrons (or Premium Members of DIY Investing) receive free access to my personal investing research and all of the business quality reports that I create. If you're interested in learning more, you can read all about the premium membership here.

Every listener of this podcast can read this free sample report on Disney.

Summary: Your goal as an investor it to earn an acceptable return on your investment capital over your investing lifetime. One way to improve the odds of achieving this goal is to classify the companies you research into quality tiers. By always beginning your research with a quality classification, you can limit investing mistakes and maximize your margin of safety during the quantitative part of the investing process

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Mental Models discussed in this podcast: * Bias towards action * Liquidity * Mr. Market

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode53

How to buy illiquid stocks * The purchasing of illiquid stocks presents some challenges. Your buying process needs to be focused on overcoming those challenges. The challenges are 3-fold: + Acquiring a full position size + Not pushing the stock price up too far - Too far is defined as beyond a purchase price that provides a sufficient margin of safety + Managing your personal impatience and bias towards action * Initial purchase attempt: + Ideally, you've studied how the stock price has traded in recent days. If the average daily trading volume exceeds your total position size, it's not an illiquid stock for you. + Use limit orders + If last trade is above my target price, set a limit buy order at your target price + If the last trade is below my target price, consider setting a limit buy order at the last trade price, but above the current bid. (if any) * Adjust your purchase price based on new information + Study changes in ask price and any executions that occur + More liquidity usually exists than is actually traded on an average day. You can take the whole volume if the price is right. + Offer up a large number of shares in a bid that doesn't actually move the stock price up.

Summary: Purchasing illiquid stocks is all about managing your relationship with Mr. Market. When you seek to acquire a full position you need to avoid pushing the stock price up too quickly. This can draw attention to the stock from competing investors. Meanwhile, you'll need to manage your personal impatience in order to successfully fill your position at a reasonable price.

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Book: The Acquirer's Multiple by Tobias Carlisle If you enjoyed this podcast episode and would like to learn more about Deep Value Investing, consider purchasing the book through one of the following affiliate links.

• Available at Amazon for Kindle
• Available at Audible as an Audiobook
• Available at Amazon as a Paperback

Thank you for your support.

How to connect with Tobias Carlisle * Follow his work on Twitter: @Greenbackd * Tobias Carlisle's Website: + AcquirersMultiple.com + His website includes a Free Deep Value Stock Screener * Tobias Carlisle's ETF: + https://acquirersfund.com/ + Ticker: ZIG

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline: Interview with Tobias Carlisle The full show notes for this episode are available at https://www.diyinvesting.org/Episode52

Book: The Acquirer's Multiple (Interactive Review with Author) * Deep Value Investing * Is Deep Value only a good strategy when control situations are viable? * Activists benefit deep value investors beyond themselves * Mid-Cap Stocks are a prime market because of so many activists * Negative Enterprise Value Stocks – Great portfolio for investors without liquidity restrictions * The Acquirer’s Multiple: EV / Operating Earnings + A multiple of 10 or less or a 10% earnings yield is a good target * How could Mean Reversion fail or stop working? (Key Deep Value Assumption) * Can Business Analysis be learned? (And is it even worth it?) * What value does a portfolio manager provide over a computer in the deep value space? * Tobias’s ETF: ZIG (‘ZIG when the market zags’)

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Mental Models discussed in this podcast: * Opportunity cost * Loss Aversion * Diversification vs Concentration * Price Anchoring * Zero-Based Budgeting * Commitment Bias * Game Theory: Minimax Theorem

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode51

My portfolio Current/Future State * Owned 11 stocks + 5 winners + 5 losers + 1 borderline loser * The goal is to reduce to 5 positions * Sold 4 stocks so far (made money on 2, lost money on 2) * Not all "losers" lost money. Some made money. * It's all about future return potential from here

Summary: It's all about opportunity cost. Use rational analysis to overcome your behavioral biases.

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How to connect with Tim Eriksen * Follow his work on Twitter: @eriksen_tim * Reach out by email + Tim@eriksencapital.com

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline: Interview with Tim Eriksen The full show notes for this episode are available at https://www.diyinvesting.org/Episode50

Part 1: Tim Eriksen's Investing Process * Own 20-25 positions * Top 5 positions will be generally 50% of the portfolio * Microcap stocks outperform large, mid, or small-cap companies * Stability and modest growth investor * Target low P/E stocks * Stable earnings are punished in the current market

Part 2: Example Stocks * Beaver Land Company $BVERS - 50,000 acres in the United States leased out and royalty revenue * Western Capital Resources $WCRS - A net-net closely tied to a private equity firm in Maryland * P10 Holdings $PIOE - A private equity management company. They earn asset management fees. * JG Boswell $BWEL - Own 150,000 acres north of Baker's Field in California including 400,000-acre feet water rights.

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How to connect with Value Stock Geek * Follow his work on Twitter: @ValueStockGeek * Check out his website: + ValueStockGeek.com

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline: Interview with Value Stock Geek The full show notes for this episode are available at https://www.diyinvesting.org/Episode49

Part 1: ValueStockGeek's Investing Process * Basket of Stocks (20-30 positions) * Value: Cheap Stocks with Good Balance Sheets * Uses multiple valuation ratio's but prefers "Acquirer's Multiple" + EV/EBIT + See Tobias Carlisle's book: The Acquirer's Multiple * High portfolio turnover 50-100% churn every year * Why the Quality factor reduces your returns * How to improve your stock-picking success rate by focusing on the balance sheet

Part 2: Example Stocks * Micron Technology ($MU) - Cheapest stock in the S&P 500 * Flanigan's Enterprises, Inc. ($BDL) - A microcap company that owns bars, restaurants, and liquor stores in Florida * Dick's Sporting Goods ($DKS) - A retail company focused on the niche of outdoor sporting goods equipment

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How to connect with David Flood (Elementary Value) * Follow his work on Twitter: @ElementaryValue * Check out his website: + ElementaryValue Investing Blog * The company articles discussed in this podcast: + Pinelawn Cemetary (PLWN) - Intro Post - Follow-up with financials + Beaver Coal Co. (BVERS) + Network-1 Technologies (NTIP) + Mirriad Advertising (LON: MIRI) - Intro Post - Follow-up + Hemagen (HMGN)

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline: Interview with David Flood of ElementaryValue.com The full show notes for this episode are available at https://www.diyinvesting.org/Episode48

Part 1: David Flood's Investing Process * How have you developed as an investor over time? * David Flood's Investing Process:

+ Basket of Stocks (20-30+ positions - 2.5-5% each)
+ Overlooked stocks (Low liquidity, sub $10 million market cap)
+ Deep Value
+ Price charts to identify stocks at all-time lows and long-term base

• Investing in Net-Nets vs Nano-Cap Chart-based deep value
• SEC seeking to ban quotation of Dark Companies
• Wants to find and own companies no one else has written up

Part 2: Example Stocks * Pinelawn Cemetary ($PLWN) - Dividend yield of 9-10%, nearly zero liquidity * Beaver Coal Co. ($BVERS) - Misunderstood land company 50,000 acres diversified with coal, gas deposits, timberland, log cabins, and mobile home parks * Network-1 Technologies ($NTIP) - A net-net with catalyst. Cash bucket patent troll. * Mirriad Advertising (LON: $MIRI) - Video insertion tech company partnered with Tencent * Hemagen (HMGN) - Market Cap: $155k USD. Dark since 2013.

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Mental Models discussed in this podcast: * Liquidity * Diversification

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger

YouTube Channel: DIY Investing

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline: Forced Diversification and Illiquid Stocks The full show notes for this episode are available at https://www.diyinvesting.org/Episode47

Illiquid Stocks * Offer the chance for higher returns with lower risk * Less competition from professional investors

Forced Diversification * Can be caused by either: + Insufficient stock liquidity + Insufficient Conviction in High-Quality Ideas * Don't dilute your returns with low-quality ideas held in too large of a position size * My goal: Hold 5 stocks at 20% each. + Currently, I am unable to achieve this goal because I do not have five ideas that are good enough to be worthy of a 20% position.

Summary Illiquid stocks offer substantial opportunity, but can also lead to an inability to purchase as many shares as you would like. This situation, along with a lack of good ideas, can lead you to rationally diversifying your portfolio more than intended. Cash has a high opportunity cost, so it is okay to build small positions in companies that are still high quality, but may not currently trade at wonderful prices.

However, stick to your strategy and don't build full positions in companies if they do not meet both your quality and price standards.

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Mental Models discussed in this podcast: * 2nd-order effects * Price Competition

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline: Broker Price Wars The full show notes for this episode are available at https://www.diyinvesting.org/Episode46

Major Online Brokers eliminated commissions on Stock Trades: * Interactive Brokers (IBKR) - On September 26th announced IBKR Lite, with unlimited free trades on United States exchange-listed stocks and ETFs. * Charles Schwab (SCHW) - Effective October 7th, Schwab eliminated commissions for stocks, ETFs, and options on U.S. and Canadian exchanges. * TD Ameritrade (AMTD) - Effective October 3rd, TD Ameritrade eliminated commissions for stocks, ETFs, and options on U.S. and Canadian exchanges. * E-Trade (ETFC) - Effective October 7th, E-Trade eliminated retail commissions on U.S. listed stock, ETF, and option trades. * Fidelity (Private) - Effective October 10th, Fidelity eliminated retail commissions on U.S. listed stock, ETF, and option trades. [Not announced prior to the recording]

Robinhood: The beginning of the end * Popular with young investors (Millenials) * Free trading - announced in 2013 as a startup * Receives payments for order flow

2nd-order effects * The potential demise of the paid index fund + Why pay a non-zero management fee, when you can replicate the entire index for free? + Fidelity has already shown this with zero-fee index funds. * Higher returns for investors all-else equal + If you don't change your trading behavior, your returns should rise with this change. You have lower expenses but the same gross return. Your net return should be higher. * Changing behavior that promotes more frequent trading. (Could be a major negative) * Changing behavior that increases the number of investors and the amount they invest + Leading to lower returns in the aggregate as more money chases the same number of assets.

How do brokers make money? * Robinhood makes money through order flow * Brokers also earn money through: + Spread between cash interest paid and earned by the broker to investors + Internal ETFs and Mutual Funds + Asset Management Fees

Summary The end game has begun in the brokerage price wars. We have reached the zero bound in terms of commissions now at $0 for US and Canadian exchanges. This will have a major impact on the accessibility of investing and will certainly change the recommendations I have made in the past to new investors.

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How to connect with Geoff Gannon * Follow his work on Twitter: @FocusedCompound + Managed by Geoff's partner Andrew Kuhn * Check out his website: + FocusedCompounding.com + Weekly Email and Watchlist * Listen to his podcast: + The Focused Compounding Podcast

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Outline: Interview with Geoff Gannon of Focused Compounding Capital Management The full show notes for this episode are available at https://www.diyinvesting.org/Episode45

Part 1: Background and Geoff's Investing Process * How have you developed as an investor over time? * Willow Oak Partnership - Hedge Fund Launch * Geoff Gannon's Investing Process:

+ Concentrated (5 positions - 20% each)
+ Overlooked stocks (Low liquidity, low beta)
+ High Quality & Value Focus

• What to look for in corporate management
• Does selling stocks add value?
• Village Supermarket (VLGEA), Activision (ATVI), Coinstar (now private)

Part 2: Example Investments - NACCO ($NC) * Up 90% YTD (as of October 3rd, 2019) * Finding value during spin-offs * How to earn infinite returns on capital while mining coal

Part 3: Stock Talk - Karelia Tobacco (KARE.AT), Nekkar (NKR), Truxton Trust (TRUX)

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Mental Models discussed in this podcast: * Credit * Leverage

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Show Outline: Bank Investing The full show notes for this episode are available at https://www.diyinvesting.org/Episode44

Four Types of Banks for discussion: * Wells Fargo (WFC) - National and Global Bank (ROE about 13%) * Frost Bank (CFR) - Regional bank focused solely on Texas (ROE about 13%) * Ally Bank (ALLY) - Online-only bank (ROE about 12%) * Discover Financial (DFS) - Niche bank focused on credit cards (ROE about 26%)

The Business Model of Credit Card Companies * Take in deposits and then make loans on those deposits * A highly leveraged business model + Leverage is your enemy + Leverage is your friend * Two ways to make money: + Bring in deposits at low cost + Make loans at high returns

Quality of the business: * Driven by two factors: + Deposit retention + Cost of deposits * Infinite durability - there will always be a need for banking services * High switching costs

Potential Threats * The high number of competitors * Low-interest rates * Competition on rates paid for deposits * Liquidity crisis - see 2009 financial crisis * Making bad loans - see 2009 financial crisis * Too much leverage - see 2009 financial crisis

Summary Investing in banks is an attractive proposition. However, banks also come with major risks. Even your most average bank operates at a very high rate of leverage. Leverage can be both a curse and a blessing. Unfortunately, you will have to do your research on each individual bank to determine how their leverage is being used.

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Mental Models discussed in this podcast: * Credit * Rent-Seeking * Networking Effects

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Show Outline: Credit Card Company Investing The full show notes for this episode are available at https://www.diyinvesting.org/Episode43

Four Major Credit Card Companies * Visa (V) - payment processor * Mastercard (MA) - payment processor * American Express (AXP) - payment processor and bank (high-end focus) * Discover Financial (DFS) - payment processor and bank

The Business Model of Credit Card Companies * Take a cut of all transactions on the payment network * Credit risk vs no credit risk * Payment processor + Extremely valuable service to the marketplace

Quality of the business: * Extremely high for Visa and Mastercard * Quite high for American Express and Discover as well * Automatically inflation-adjusted sales growth

Potential Threats * Overvaluation (particularly for Visa and Mastercard) * New payment mechanisms such as digital currency like bitcoin * A resurgence in cash (unlikely)

Summary Investing in credit card companies is an extremely attractive proposition. They are some of the highest quality companies in the world with clear inflation-adjusted growth.

References * https://en.wikipedia.org/wiki/Card_scheme

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Mental Models discussed in this podcast: * Tax Shelters

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How to invest in an HSA - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode42

What is a Health Savings Account or HSA? * High Deductible Health Plan Definition: + Minimum annual deductible of $1,350 (single) or $2,700 (family) based on 2019 requirements + Maximum out-of-pocket expenses of $6,750 (single) or $13,500 (family) based on 2019 requirements * Contribution Limits: + Individuals = $3,500 per year + Family = $7,000 per year * HSAs or Health Savings Accounts are tax shelters designed for maximum benefits when used to cover medical expenses. * These limits and requirements can change on an annual basis.

Health Savings Accounts are the best tax shelter for employees in the United States of America * Triple Tax Savings: + Up-front tax deduction (Traditional IRA benefit) + Tax-deferred growth (Tradition and Roth IRA benefit) + Tax-exempt withdrawals (Roth IRA style benefit) - Only when used for qualified medical expenses * The only tax shelter that avoids payroll taxes (Social Security and Medicare) + Equivalent to 7.65% for individuals and 15.3% for self-employed workers. + Must use paycheck withholding for deposits

Documentation Management is critical for HSAs You will want a detailed set of documentation for each of your medical expenses. I use a spreadsheet to collect a master data sheet to track ongoing and past expenses since I opened my HSA.

I also keep scanned copies of my Explanation of Benefits (EOB), Invoice, and payment receipts for each medical expense.

I make no guarantees that this is sufficient documentation. Consult a tax lawyer or CPA.

Cash Buffer Planning Have a cash buffer of at least 1 full year of "maximum out of pocket expenses" as defined by your health insurance plan before investing your HSA savings.

This cash buffer allows you to weather any volatility in the portfolio.

An even better buffer would be 2 full years of "maximum out of pocket expenses" because this prevents the problem of a December injury or illness running into January and maxing out two years worth of health expenses.

Maintain this cash buffer throughout the investing process

Consider avoiding illiquid stocks * While I normally find illiquid stocks to offer increased opportunity, you should consider carefully the additional risks this involves for HSA based investing. * I place my highest liquidity stocks in my HSA, but otherwise, manage them like a traditional or Roth IRA in terms of stock selection.

Summary A health savings account is the best tax-advantaged account currently available for workers in the United States. Thus, it is important to have a plan and understanding of how to invest your HSA money and maximize the benefits of this unique tax shelter.

References * https://www.irs.gov/irb/2019-22_IRB#REV-PROC-2019-25 * https://www.forbes.com/sites/ashleaebeling/2019/05/29/irs-announces-2020-health-savings-account-limits/#284466d43f3c * http://www.hsacenter.com/how-does-an-hsa-work/2019-hsa-contribution-limits/

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How to connect with The Science of Hitting: * Follow him Twitter: https://twitter.com/TSOH_Investing * Read his articles on GuruFocus: + GuruFocus - Author: The Science of Hitting + RSS Feed

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You can find out more information by listening to episode 11 of this podcast.

Show Outline: Interview with The Science of Hitting The full show notes for this episode are available at https://www.diyinvesting.org/Episode41

Part 1: Background and Investing Process * Investing Background * Science of Hitting's Investing Process * Portfolio Management and Position Sizing * Evaluating Corporate Management * Capital Allocation * Advantages and Disadvantages of being a DIY Investor * Investing Mistakes and how to avoid them * How to judge your investment success

Part 2: Example Investment - Microsoft (MSFT) Self-written Bio: "I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification." - Science of Hitting (GuruFocus)

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Mental Models discussed in this podcast: * Leverage

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Should you invest in Private Prisons? - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode40

What is averaging down? * Averaging down is the process of buying additional shares of stock as the stock price declines. * This lowers your average price of acquisition for a stock. * The last time I discussed investment rules was about lessons learned from my investment in GameStop. Today, we focus on new lessons learned from other people’s experience: * + In particular, Bill Miller and the lessons learned from him by John Hempton at Bronte Capital.

Portfolio Management Cheaper is not always better when it comes to portfolio management

Three new investment rules 1. Do not average down on a highly leveraged business model. 2. Do not average down on an operationally leveraged business that is declining 3. Do not overage down where the primary risk is obsolescence.

90% decline vs 95% decline A stock that is down 95% is not substantially better than a stock down 90%.

However, they may appear similar when superficially compared. Yet, the additional 50% decline needed to reach 95%, doesn't necessarily equate to a bargain.

Always avoid going back to zero * Bankruptcy risk is the primary concern that you are trying to avoid with these new investing rules. * Leveraged companies, in particular, have a higher than average bankruptcy risk.

Summary Cheaper is not always better when it comes to portfolio management. Once you have hit your investment allocation for a position it can be a mistake to throw good money after bad. Assuming your investment analysis is correct, you will still end up making money. Yet if you are wrong, you will exasperate a bad situation by averaging down on a losing leveraged position.

References Bronte Capital: When do you average down?

A full list of my investing rules available on DIYInvesting.org

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Mental Models discussed in this podcast: * Mr. Market

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Should you invest in Private Prisons? - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode39

Expectations Investing * Investing involves evaluating current and future business performance. * The greatest returns are often made when two things are true: + Your expectations of future business performance differ from market expectations + You are correct - This second point cannot be understated enough. - Contrarian alone is not a useful strategy

Mr. Market is Vague Often the market is unclear on what exactly it wants the business to do or what standard management needs to meet to be considered a positive performer.

Mr. Market is fickle Expectations can change quickly, often as quickly as an analyst report or price target revision

Mr. Market is short-term You can win with a longer time horizon

Conviction is Critical * You must be confident and specific about what your expectations are * The market will challenge your conviction * Without conviction, even your best ideas are unlikely to make you money. * If you know what you are expecting, and management continues to perform according to your expectations, then ignore how the market chooses to respond. You can't control the market, you can only control your own actions. * Example: I was recently challenged by a company I own. A recent earnings release largely met my expectations. However, the market disagreed and the stock price dropped by 40%.

Summary Investing expectations drive short-term changes in the market. However, your personal expectations of management and business performance will drive the strength of your conviction in a company. Don’t let Mr. Market dictate your investing decisions. Mr. Market’s price offers should only ever be seen as an opportunity, not a necessity to act.

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Mental Models discussed in this podcast: * Blood in the Streets

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Should you invest in Private Prisons? - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode38

Blood in the Streets - Mental Model * The best time to invest is often when an industry is most hated. * The private prison industry is a current example of an industry with large amounts of negative news coverage leading to lower stock prices. * Previously, I took advantage of a similar situation in 2015/2016 during the oil price crash. At that time, the oil industry was similarly hated.

Major Companies in the Private Prison Industry * Core Civic * The GEO Group * Both offer dividend yields exceeding 10%

Reasons for the current industry hate * Political headwinds * Alleged problems at specific companies * Moral reasons

Summary Opportunity in the stock market does not often coincide with the hot industry of the day. Instead, you are most likely to find value investments when broad industries or individual companies suffer from temporary hatred and disdain. The private industry currently fits the bill. The companies in this industry may not be a good investment or companies that you even want to invest in. However, the private prison industry currently offers a good example of the sorts of occasions where value investing tends to shine.

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Mental Models discussed in this podcast: * Liquidity * Risk * Insurance * First Principles

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Liquidity: Risks and Opportunities - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode37

What is Risk? * Merriam Webster has a few definitions for us: + Possibility of Loss or Injury + Someone or something that creates or suggests a hazard + The chance of loss or the probability of loss + The chance that an investment (such as a stock or commodity) will lose value * What this should suggest to you is that there are many different types of risk. * This is especially true for investing risk. Each type deserves its own discussion and it would be a mistake to believe that * Two Key Elements to risk: 1. Uncertainty, 2. Negative Event

Liquidity Risks * Personal + Value of an Emergency Fund + Value of Life Insurance * Investment + Liquidity Risk - Time to receive your money back in cash + More liquid stocks reduce liquidity risk

Opportunities offered by Liquidity * Personal + Large sums of cash provide flexibility - Move across the country - Make investments - Get a good deal on a car * Investment + Liquidity Opportunity - Less liquid stocks tend to have higher returns than high liquidity stocks

When is Liquidity Important? * Time-Bound: On the personal side, liquidity is important when you need to spend a large sum of money. Can either be planned for or it is an emergency. * When you want to sell: On the investment side, liquidity is important only when you sell a stock. You don't really care about liquidity when you are purchasing a stock. The key point is that you want to be able to sell a stock at a price close to its fair value at the time you determine you need to sell. + If done optimally, you can buy illiquid stocks during your buying period and when yous ell them, they will have transitioned into liquid stocks.

Liquidity First Principle: More liquid stocks are better than less liquid stocks because they reduce liquidity risk.

• "All else Equal" Considerations:
  • Unfortunately, this statement is only true when we can rely on everything else being equal.
  • In practice, less liquid stocks tend to have higher returns.
  • Therefore, you really have to make a tradeoff. Would you rather have low liquidity and high returns or high liquidity and low returns?
  • The reason this first principles still holds true is that there may be circumstances where high liquidity can offer high potential returns. When that occurs, it would be preferable to low liquidity options.

Summary Liquidity is a topic that offers both risks and opportunities. Lack of liquidity is fraught with risk, especially in your personal life. However, a lack of liquidity can offer many opportunities when it comes to investment potential. You should manage your liquidity risk across all spectrums of your life such that you can receive optimal returns with minimal risk of a total loss of principal.

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Mental Models discussed in this podcast: * Velocity - Direction matters * Relative vs Absolute measures * Volatility / Beta * Risk

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Shorter Holding Periods are Better (Investing First Principle) - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode36

What is Risk? * Merriam Webster has a few definitions for us: + Possibility of Loss or Injury + Someone or something that creates or suggests a hazard + The chance of loss or the probability of loss + The chance that an investment (such as a stock or commodity) will lose value * What this should suggest to you is that there are many different types of risk. * This is especially true for investing risk. Each type deserves its own discussion and it would be a mistake to believe that * Two Key Elements to risk: 1. Uncertainty, 2. Negative Event

Volatility / Beta - the size of uncertainty or risk related to the size of changes in a security's value. (Reference: Investopedia) * Problems: the definition of volatility is based solely on the size of fluctuation. * The more volatile the stock, the riskier the stock. However, this fails to account for only negative volatility. Instead, you can calculate high volatility for a stock that goes up quickly. This would not be a risk though. High returns are the exact opposite of risk. * Often used as a relative measure. Relative measures are not useful to an individual investor, because all they care about is their own personal results. The focus should be on absolute results.

Price Risk - The potential for short-term downside fluctuations in stock price below the intrinsic value of the company and below your purchase price * Focus is only on the downside * Highlights the importance of price fluctuations being short-term in nature * Price relative to intrinsic value is what matters * Price relative to your purchase price is important solely for the psychological harm it can cause if you lack the proper temperament for long-term investing. * Unavoidable - present in all investments * Can be mitigated by only purchasing stocks below their intrinsic value. Purchasing overvalued companies will increase your price risk.

Summary Risk involves two key elements: Uncertainty and Negative Events. Volatility and Beta are false measures of investments and make key errors in their assumptions. They measure both upside and downside price movements as risk and they equate stock prices to stock values. You should ignore calculated measures of volatility in your investment decisions. Price risk is the key focus. Price risk is the potential for short-term downside fluctuations in stock price below the intrinsic value of the company and below your purchase price. You can mitigate price risk by only buying companies below their calculated intrinsic value.

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Mental Models discussed in this podcast: * Reversion to the Mean * Moats * First Principles

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Shorter Holding Periods are Better (Investing First Principle) - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode35

Hypothetical Question: Would you rather earn a 10% return in one year or ten years? * To clarify: I don’t mean compound annual return, but total return. * Would you rather earn a total of 10% return in one year or in ten years? * When phrased in this manner, the answer should be obvious. (One year) * The shorter the holding period, the better, all else equal. * When you hold total return constant, you want to earn that return in the shortest period possible.

“All Else Equal” considerations - There are a lot of them * Long-term thinking is critical for successful investing * Difference between CAGR and Total Return * The methods by which you earn a high long-term CAGR might be different from how you achieve a short-term high total return * In the end, the long-term is made up of many short-term periods * Value vs Growth Investing perhaps? + I consider all investing to be value investing + However, traditional Benjamin Graham value investing was the result of harnessing the power of mean reversion to earn high total returns over short time frames of 3-5 years. - Net-Nets strategy - Buying at a 30-35% discount to fair value and selling when the stock price reaches fair value after a 50% gain. (The shorter time period over which this occurs, the most profitable the investment) + Warren Buffett is an advocate of buy-and-hold and his returns are driven by long-term growth investments in earnings over time. - Focus on High Quality - The longer that high profitable growth of earnings per share, the higher the returns. - Returns are driven by moats and high ROIIC.

Summary Shorter holding periods for the same total return result in better investments. The key question: Is the brevity of your holding period within your control. I would argue it is NOT. While reversion to the mean is powerful and can be a huge driver of high returns, you should always make investments with a long-term time horizon. As Warren Buffett would advise, don’t invest in a company if you aren’t willing to hold it for ten years.

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Mental Models discussed in this podcast: * Potential Energy vs Kinetic Energy * Leverage * All Else Equal * First Principles

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Companies with no debt are better than companies with debt (Investing First Principle) - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode34

Mental Model: Potential vs Kinetic Energy * There is a concept in physics called potential energy and kinetic energy. * The basic explanation is that potential energy is the energy available in an object to perform work. Meanwhile, kinetic energy is a measure of the current energy an object possesses due to its motion. * Example: Water held in a lake behind a dam. (A lot of potential energy) This energy can be used to produce electricity if the water is allowed to flow through turbines at the bottom of the dam. Yet, once the water is released, the potential energy no longer exists. Instead, it has been converted to kinetic energy, creating motion, and electricity. You’ve used up potential future gain for the benefit of the present.

How does this apply to companies and investing? * A company without debt is like water held in a lake behind a dam. It has a lot of potential energy. When a company has no debt, there is the possibility of adding debt in the future in order to increase earnings and therefore returns. * However, a company with large amounts of debt is like water already past the dam. There is no longer any potential to quickly increase earnings by taking on additional debt. Instead, you have to “PAY” cash to reduce debt if you’d like to gain additional potential energy in the future. + In our water example, this would be analogous to pumping the water back uphill to put it behind the dam again.

Debt also increases risk * Companies without debt or liabilities cannot go bankrupt. * However, the presence of debt creates the possibility of bankruptcy. * When you own companies with medium or high levels of debt, you are taking on the risk of permanent wipeout of your capital due to bankruptcy. * While the additional return is possible due to leverage, your risk is inherently higher.

Debt creates automatic forced future payments * The value of a company is the net present value of future cash flows available to be paid to you in dividends. * If a company has debt, any earnings in the future must first be used to make interest and principal payments on the debt, before you can receive any dividends. * By owning companies that use debt to earn higher returns, you are allowing debt holders to have the first claim on future cash flows.

“All Else Equal” considerations * Debt creates leverage - While leverage can be dangerous it can also provide benefits. It is possible that the leveraging effects of debt can allow a company to increase its returns. + This is why I use the term “all else equal.” You need to compare apples to apples. + If a company provides 10% returns with no debt, this is inherently better than a company that provides 10% returns while holding large amounts of debt. The debt-free company is lower risk. + This investing first principle doesn’t apply if you are trying to compare a 10% returning debt-free company to a 20% returning high debt company. That’s not a fair comparison.

Summary Companies without debt are better investments than companies with debt, all else equal. While debt can provide the benefits of leverage, you must never forget the risks. If debt-free companies offer returns that exceed your discount rate, then you should always prefer them over debt-laden companies.

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Mental Models discussed in this podcast: * Margin of Safety * Price vs Value * Time Value of Money * All Else Equal * First Principles

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Low stock prices are better than high stock prices (Investing First Principle) - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode33

It is preferable to purchase stocks at low stock prices for 2 key reasons 1. The margin of safety is higher (What happens if you are wrong) 2. Potential Return is higher (What happens if you are right)

Relationship between Price and Value * Value investing, at its core, is all about purchasing assets for less than they are worth. * Price represents what you pay * Value is what you receive * Obviously, the lower the price you pay, the better the outcome. (Regardless of the value you actually receive)

"All Else Equal" considerations * Time Value of Money - You can’t directly compare the stock prices across time. (ie. today versus the stock price one year ago.) It’s quite possible that it makes sense to pay a higher price today than it did a year ago if the value has increased. * Variable Business Quality - Some businesses are of higher quality than others. You can’t directly compare one company’s P/E ratio to that of another. A high-quality business might be worth 20x P/E while another business is only worth 10x P/E. It would be a mistake to assume the 10x P/E company is a better deal. * Variable Growth Rates - Some businesses have the capability of profitably growing their earnings, and others do not. Those with profitable and sustainable growth in the future are going to be worth more. You can’t directly compare P/E ratio’s in that circumstance. * Industry Differences - some industries are more attractive than others

Summary The scope of this first principle is limited to simply understanding that your goal is to purchase the highest amount of present and future earnings possible. The way you do this is by paying a low price for those earnings.

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Mental Models discussed in this podcast: * Zero Based Thinking * Negative Carry * Opportunity Cost * Hidden Costs

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Shorting Stocks is a Negative-Sum Game (Investing First Principle) - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode32

Mental Model: Zero-Sum Games * Any gains by one participant must be offset with losses by other participants. * The sum total of all value for all participants is equal to zero

Why shorting Stocks is a Negative-Sum Game * Stocks as a whole provide a positive expected value + Shorting stocks is the opposite. Now you have a negative expected value. * Further complicated by the issue of "negative carry." + When you purchase stock in a company the only cost of holding it, is an opportunity cost. What you could have spent the money on or what alternative investments you could have chosen. This opportunity cost is an implicit or hidden cost. + Shorting is different. + The act of shorting a stock involves two key explicit costs, both of which create negative carry. - Borrowing Costs - Dividend Payments

Other Key Problems with Shorting * Time Horizon Matters a lot: + You can be right and still lose money * Everyone is working against you. CEO, Employees, debt markets, other investors, etc... * The economy generally gets better over time. You're fighting the tide. * Like gambling in a casino + "The House Always Wins."

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Books Referenced in the Podcast * Stocks for the Long Run by Jeremy Siegel: + Buy on Amazon + You can support the podcast by making a purchase through the above affiliate link. If you do, I'll earn a small commission at no additional cost to you.

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Buying Stocks is NOT a Zero-Sum Game (Investing First Principle) - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode31

Mental Model: Zero-Sum Games * Any gains by one participant must be offset with losses by other participants. * The sum total of all value for all participants is equal to zero

Why buying Stocks is NOT a Zero-Sum Game * Stocks as a whole don't provide a positive expected value * You don’t have to “take” from others in order to receive. When companies create value this is “new value.” The economy grows, everyone becomes wealthier.

Stock Picking vs Index Funds? * The thought is that half of the money must underperform an index, and half of the money can outperform an index. The thought, therefore, is that buying stocks is zero-sum. * Where is the fallacy? + Index’s have historically had a positive expected value. If an index returns 10%, even if half of the money receives 8%, and half receives 12%, both parties are successful in growing their wealth. + One party doesn’t lose 10% so that the index can grow 10%. That’s not how this works. + Instead, stock ownership is best described as a positive sum game.

What is a Positive-Sum Game? * A positive sum game is where the total value received of all participants is greater than zero. * This means that you can be successful without worrying about the success of others. * Frees you from the need for comparison, jealousy, or envy.

+ Just because someone else made money, doesn’t mean you lose money.

• Takeaway: You can ignore index funds and focus on your own personal goals
• Takeaway: You can ignore macroeconomic trends. As long as your fundamental analysis of a company is correct, the broader economic picture is irrelevant.

Why is this true? - Capitalism grows the economic pie * Companies are full of employees who go to work each and every day trying to find a way to make your profits grow. * While this sometimes involves taking market share from other companies, the greatest gains come from innovation, improved efficiencies, new markets, and new products. * This raises the standard of living for all and the overall economic pie for the economy.

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Mental Models discussed in this podcast: * Zero Based Thinking * Resulting + Check out Annie Duke's book "Thinking in Bets" to learn more * Skin in the Game + Check out Nassim Taleb's book "Skin in the Game" to learn more

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

GameStop Stock Investment Post-mortem - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode30

Initial Buy Thesis * Dividend yield exceeds 10% * Dividend is sustainable * Check out Episode 5 of the podcast to learn more

Investment Results * Loss of 50-55% of the principal invested in GameStop stock

Investment Process * Was my Buy Thesis correct? * Root Cause of my Investment mistakes * Was my Sell Thesis correct? * I did not sell solely because the dividend was eliminated * Free cash flow from declining businesses ought to be distributed to shareholders

Conclusion * My bad process led to bad results in this case * Could have been better or worse

Lessons Learned Investment Rules 1. Never buy a retail company with declining revenue 2. Never buy a physical retail company with debt on its balance sheet (If they lease their locations) 3. Do not hold onto a stock once you know your investment thesis is wrong 4. Prioritize investing in companies where management has skin in the game

Red Flags 1. A combination of large stock price declines without insider buying or stock buybacks 2. Non-investors you talk to think the company will be a bad investment

References: * Investing Rules - How I limit investing mistakes

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Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

"All Else Equal" Mental Model or Ceteris Paribus - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode29

Background of Ceteris Paribus Mental Model * Often a tool used in economic theory * Especially used for explaining concepts such as supply and demand

'All Else Equal' Mental Model applied to Personal Finance * Increased income is better than lower income * Lower expenses are better than higher expenses * The longer you live, the more wealth you'll build

Application to Investing * The All Else Equal Mental model can be applied to investing to create Investing First Principles

Next Episodes: A series on First Principles of Investing * Uses what learned in this episode and combines it with Episode 9 where we first introduced the concept of First Principles.

References: * https://en.wikipedia.org/wiki/Ceteris_paribus

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How to Sign Up for Mr. Rebates Sign up through this link!

• You can support the show by typing in:
  • trey@diyinvesting.org
  • In the section that says "Did someone refer you to Mr. Rebates?" as the "Referrer Email"
• This is clearly marked optional and I encourage you to see the section in the show notes below called "What's in it for me?"

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

How to earn cash back online using Mr. Rebates - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode28

What is Mr. Rebates? * Online tool for earning cash back from your shopping online * Works at thousands of online retailers including Amazon.com * Available here: https://www.diyinvesting.org/cashback

How does it work? * What I call a "Win-Win-Win"

3 Step Process:

1. You make a purchase at a retailer's website through your Mr. Rebates affiliate link
2. The retailer pays Mr. Rebates a commission
3. Mr. Rebates passes that commission on to you for cash back after taking a small cut.

Benefits of Using Mr. Rebates to make Online Purchases * Earn bonus cash back on top of any cash back you receive from your credit cards * My most recent purchase: + Received 2% cash back from my credit card + Received 5% cash back from Mr. Rebates + Total: 7% cash back * Membership is Free and you receive a $5.00 bonus added to your account when you make your first purchase. (as of recording date, this may change in the future)

Drawbacks I have used Mr. Rebates for over a year now testing it out. I wanted to make sure that the website was authentic and worked before recommending it to anyone. Here is my review of the drawbacks.

• Doesn't work on every website
  • Thousands of stores are available to use Mr. Rebates on
  • Includes Amazon
  • Yet, there are numerous stores that Mr. Rebates does not work on. You'll have to see what stores Mr. Rebates offers compared to the online stores you shop at.
• I have not had a 100% success rate in receiving the cash back.
  • I'd say my success rate has been about 90%.
  • The other 10% of the time is usually due to my adblocker preventing the tracking link from working.
• You only earn cash back on the Pre-Tax Pre-Shipping price.
  • This is your sub-total, not the final total.
  • While credit card purchases will provide cash back on the total, you only earn Mr. Rebates cash back on the Pre-Tax Pre-Shipping price.

What's in it for me? Disclosure: If you sign up and write in my email address the referral email section on the form, "trey@diyinvesting.org" then I will receive a commission when you save money using Mr. Rebates.

• Our incentives are aligned:
  • I don't earn any commission for you signing up.
  • I ONLY earn a commission WHEN YOU SAVE MONEY.
  • Listing me as having referred you will not affect the cash back you receive in any way.
    • You'll not earn more or less cash back because I referred you.
  • My goal is to save you money.
    • I only earn a commission if you actually save money and earn cash back.
    • I hope you will and I hope you'll save a lot of money by using Mr. Rebates
• The easiest way to sign up is to click my affiliate link at the top of the show notes of the podcast. Or you can go to www.diyinvesting.org/cashback

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Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

How to calculate Intrinsic Value using Discounted Cash Flows (DCF) - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode27

What is Intrinsic Value? * The present value of all future free cash flows produced by a business.

Time Value of Money * Cash today is worth more than cash in the future. * Therefore, you need to discount future cash flows to be worth less than their stated value.

The simplified discounted cash flow formula * Intrinsic Value = Owner's Earnings/(Discount Rate - Growth Rate) + Discount Rates: 10% (nominal) or 6.5% (real) + Growth Rates: Bounded between 0% and 5% + Owner's Earnings: Manually calculated by adjusting Net Income

Complex Discounted Cash Flow Calculations * When to use: + Company is in a high-growth phase of its business (has not yet saturated the market) + You are highly confident in short-term projections and the business is predictable + Reported earnings have a lot of temporary adjustments that make the next few years not match the long-term * When not to use: + Almost always + Why? - Complex calculations can trick you into thinking you have a better understanding of the business than you do - You'll likely rely heavily on growth and fast growth assumptions are very risky to make

References: * Part 1: Episode 23 - Discount Rates * Part 2: Episode 25 - Long-Term Growth Rates * Part 3: Episode 26 - Owner's Earnings * Example Intrinsic Value Reports [$10+/month Patrons receive exclusive access]

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Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Owner's Earnings - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode26

What is Net Income? * The total after-tax profits that a company earns in a year

What is EPS or Earnings per Share? * The After-Tax profits of a company divided by the total number of shares outstanding.

The problems with Net Income and EPS as a metric for investment * They are not comparable across different companies and industries. * Some companies are more capital intensive than others. * Net Income and EPS will overstate the economic "cash earnings" for capital intensive businesses that require large capital outlays on a regular basis.

Implications for the usefulness of P/E Ratios * Since P/E ratios are based on Net Income or Earnings per Share for the "E" component, they share the same problems. * P/E ratios are not comparable across industries or even companies within the same industry

Owner's Earnings - A better metric * Definition: * Owner's Earnings - Earnings that can be paid out in cash to shareholders without impacting the earning power of the business

How to calculate Owner's Earnings * Take Net Income and make some adjustments * Joshua Kennon's formula is the best that I have found. See link below in the references.

References: * Joshua Kennon's Owner's Earnings Formula * Examples of how to calculate Owner's Earnings and Intrinsic Value [Intrinsic Value Reports - Exclusive to Patrons of $10+/month]

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Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Long-Term Growth Rate Assumptions - Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode25

What is a long-term growth rate assumption: * A key component of a discounted cash flow calculation. (Along with Discount Rate [Ep.23] and Owner's Earnings[Ep.26]) * How much growth a company can expect in its earnings over an infinite time horizon.

How you can make long-term growth rate assumptions * Bounds: + 0% lower bound (no growth) + 5%-6% upper bound (nominal GDP growth rate) * Key components: + Inflation + Population Growth + Productivity Growth * Don't assume that a company can grow faster than the economy in the long-term.

How to calibrate long-term growth rate assumptions based on management's regulatory disclosures * Example: Omnicom (OMC) * Using management's forecasts of 4% long-term growth rates, I lowered my growth forecast from 5% (matching nominal GDP growth) to match the 4% forecast by management. * This lowered my calculated intrinsic value by 13% for Omnicom stock. + Read the full Omnicom Intrinsic Value Report ($10/month - Patron Exclusive Benefit) [Become a Patron here]

References: * Omnicom's 2018 10k - Required Management Disclosures (pg. 11)

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Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Emergency Fund Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode24

Emergency Fund Sizing: * Recommended Size: 1 year * Mainstream Alternatives: + 3 months + 6 months + $1,000 + $10,000

Why? * Liquidity is all-important for investors * Value investing requires managing risk and accepting volatility * Lack of liquidity can cause you to sell investments when your stocks are undervalued and priced too low * A strong emergency fund protects you from this possibility

Where should you store it? (Hint: Maximize Safety) You should maximize the safety of your emergency fund. Don't worry about maximizing the rate of return you receive.

Store your emergency fund in a government guaranteed account. This can be with either an FDIC-insured savings account. I believe Ally Bank is a good option.

A great alternative is TreasuryDirect.gov where you can lend money directly to the US government. Emergency Fund money would obviously need to be invested only in short-term government bonds. (3 months or less to maturity)

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Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Books Referenced in this Podcast * Stocks for the Long Run by Jeremy Siegel

You can support the podcast by purchasing the book through one of my affiliate links:

• Available in Hardcover
• Available for Kindle
• Available as an Audio Book (from Audible)

Disclosure: If you make a purchase through one of these links, I may earn a commission. This commission comes at no additional cost to you. Please understand that I have personally read all the books that I review. I recommend them because I believe they are helpful and useful, not because of any small commission I might receive. Please do not spend any money on these books unless you feel you need them or that they will help you achieve your goals.

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode23

Trey's Discount Rates: * Nominal Discount Rate = 10% * Real Discount Rate = 6.5% * Long-Run Inflation Expectations 3.5%

How to Select a Good Discount Rate: Your discount rate should be based upon the rate of return you expect to earn on your investments. If you want or need to earn 8% on your investments, then your discount rate should be 8%.

If you want or need to earn 10% on your investments, then your discount rate should be 10%.

When to use Nominal versus Real Discount Rate: You should use a Nominal discount rate when you are uncertain whether the company you are analyzing will be able to always grow their earnings at least at the rate of inflation.

You should use a Real discount rate when you are confident that a company will be able to automatically adjust their prices at least as fast as the inflation rate. In other words, the company must have pricing power. This behavior is typically only seen in high-quality companies.

Use the Same Discount Rate for ALL Companies The discount rate you use heavily impacts the result of your valuation analysis. Therefore, it is critical to base this discount rate off of your expected rate of return.

You should also not adjust the discount rate you use based upon the risk of one company versus another. If you make this mistake, then you are likely investing in companies that are too risky to make reliable forward estimates of long-run earnings.

If you find yourself wanting to use a higher discount rate for a single company, take that as a red flag.

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Thank you for your support! In this podcast episode, I mentioned one of the exclusive member benefits for those who choose to financially support this podcast as a Patron.

Patron's of The DIY Investing Podcast, receive exclusive access to my business quality reports.

Check out the Business Quality Report on Disney. (Exclusive to Patrons of the Show)

Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode22

Disney+ * $6.99 per month or $69.99 per year ($5.83 per month if paid in advance - basically 2 months free) * Launch Date: November 12th, 2019 * Access to Disney's incredible library of old TV shows and movies, including: + The entire Pixar lineup of movies by the end of the first year + All of the Marvel Cinematic Universe (eventually), but Captain Marvel will be available on Day 1 + National Geographic + All 9 main Star Wars movies, with Rogue One and Solo on top of that + Historic Disney Channel movies and TV Shows + The Signature collection of Disney classics including Cinderella and Lion King

Disney's Business Model * “Content is King” * Well Disney is the “King of Content” * Entertainment giant that has a flywheel effect allowing shareholders to profit off of branded content in numerous ways + Disney+ combines the best parts of the TV Channels, Movie Rentals, and Theatre Releases + Creates lasting fans * + Movie Releases in Theatres + DVD and Movie Rentals and Purchases + Theme Parks (Disney World and Disney Land) + TV Channels like Disney Channel + Cruise Lines + Toy Sales and Licensing + New Addition: Direct to Consumer Streaming Service (Disney+)

Streaming is Sticky * Disney + is going to be a Brand Ambassador for Disney. * They will “lock-in” families when they have young children, building life long fans.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.

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Thank you for your support! This podcast was inspired by the book "The Power of Habit" by Charles Duhigg. You can support the podcast by purchasing the book through one of my affiliate links:

• Available in Hardcover
• Available in Paperback
• Available for Kindle
• Available as an Audio Book (from Audible)

Disclosure: If you make a purchase through one of these links, I may earn a commission. This commission comes at no additional cost to you. Please understand that I have personally read all the books that I review. I recommend them because I believe they are helpful and useful, not because of any small commission I might receive. Please do not spend any money on these books unless you feel you need them or that they will help you achieve your goals.

Keystone Habits of a Healthy Lifestyle 1. Exercise Regularly 1. The definition of "regular" will vary by the person. The key is to exercise at least every week with a focus on multiple times per week. 2. My personal goal is to exercise 6 times per week every week. This is as close to "daily" as I consider reasonable. 3. The more often you exercise, the greater the results you'll gain from turning exercise into a keystone habit. 2. Cook most of your meals at home from scratch 1. Inspired by the books of Michael Pollan outlining how and why of eating healthy to promote a healthy lifestyle. 1. "In Defense of Food" by Michael Pollan 2. "The Omnivore's Dilemma" by Michael Pollan

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Notes are available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode21

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and also grow the show's audience.

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Thank you for your support! This podcast was inspired by the book "The Power of Habit" by Charles Duhigg. You can support the podcast by purchasing the book through one of my affiliate links:

• Available in Hardcover
• Available in Paperback
• Available for Kindle
• Available as an Audio Book (from Audible)

Disclosure: If you make a purchase through one of these links, I may earn a commission. This commission comes at no additional cost to you. Please understand that I have personally read all the books that I review. I recommend them because I believe they are helpful and useful, not because of any small commission I might receive. Please do not spend any money on these books unless you feel you need them or that they will help you achieve your goals.

Keystone Habits of Investing With investing there are both habits that you should consider adopting and habits that you should avoid.

Positive Keystone Habits of Investing you should adopt 1. Read one 10k every week. 2. Always write out an investment thesis BEFORE purchasing shares of stock in any company. 1. [Patron Only Benefit] - Read the Buy Thesis that I have written for the stocks that I buy.

Negative Keystone Habits of Investing you should avoid 1. Checking stock prices every day 1. Once a week is the most frequently you need to check your stock prices. 2. Ideally, target once a month. 3. Use price alerts for stocks you're interested in buying. That way you will be alerted if they hit your buy price. Otherwise, don't spend any time worrying about stock prices.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Notes are available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode20

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and also grow the show's audience.

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Thank you for your support! This podcast was inspired by the book "The Power of Habit" by Charles Duhigg. You can support the podcast by purchasing the book through one of my affiliate links:

• Available in Hardcover
• Available in Paperback
• Available for Kindle
• Available as an Audio Book (from Audible)

Disclosure: If you make a purchase through one of these links, I may earn a commission. This commission comes at no additional cost to you. Please understand that I have personally read all the books that I review. I recommend them because I believe they are helpful and useful, not because of any small commission I might receive. Please do not spend any money on these books unless you feel you need them or that they will help you achieve your goals.

Keystone Habits of Personal Finance 1. Track every dollar you spend 2. Track the monthly changes in your net worth

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Show Notes are available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode19

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and also grow the show's audience.

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Support the show by purchasing The Power of Habit through one of my affiliate links: * Buy Hardcover * Buy Paperback * Buy Kindle Book * Buy Audio Book (from Audible)

Thank you for your Support

Disclosure: If you make a purchase through one of these links, I may earn a commission. This commission comes at no additional cost to you. Please understand that I have personally read all the books that I review. I recommend them because I believe they are helpful and useful, not because of any small commission I might receive. Please do not spend any money on these books unless you feel you need them or that they will help you achieve your goals.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode18

A written blog post review of this episode is available here.

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

1. In your podcast app, click the search icon that looks like a magnifying glass in the bottom right-hand corner.
2. Type “The DIY Investing” into the search bar. This podcast should be one of the first shows that display.
3. Select the podcast show icon.
4. Scroll down to the “Ratings & Reviews Section” and click on the button that says “Write a Review”.
5. Write a short one or two sentence review and give me a rating that matches how you feel about the podcast.

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In today’s episode, I will be sharing ten of the most important lessons I’ve learned from Joshua Sheats. These are lessons that apply to personal finance, investing, and beyond.

The Top 10 Personal Finance Lessons I have learned from Joshua Sheats 1. Conventional advice should not be accepted simply because it’s conventional advice 2. Conventional advice should also not be rejected simply because it’s conventional advice. 3. A strategy is more important than tactics. Tactics change over time, but a strategy is enduring. 4. Action leads to life change. Ideas, learnings, and study are all meaningless if you don’t take action to improve your life. 5. There is more than one way to become financially successful. 6. There is more than one definition of success. Don’t simply accept the definition given to you by society. 7. Don’t compare yourself to others, only your past self. 8. Personal finance is behavioral, not mathematical. The mathematics is simple and straightforward. Mastering your behavior takes a lot more effort. 9. You are capable of controlling and curating your desires by what you expose yourself to. 10. Don’t be afraid of helping others. Sharing of ideas, knowledge, and skills do not less your own worth. It only improves yourself, others, and the world. (Could be a business idea, how to get ahead, etc. ties into action.)

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode17

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

1. In your podcast app, click the search icon that looks like a magnifying glass in the bottom right-hand corner.
2. Type “The DIY Investing” into the search bar. This podcast should be one of the first shows that display.
3. Select the podcast show icon.
4. Scroll down to the “Ratings & Reviews Section” and click on the button that says “Write a Review”.
5. Write a short one or two sentence review and give me a rating that matches how you feel about the podcast.

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In today’s episode, I will be discussing Joshua Sheats’ Framework for Wealth Building.

The 5 Key Parts of Personal Finance 1. Increase Income 2. Decrease Expenses 3. Invest Wisely 4. Avoid Catastrophe 5. Optimize Lifestyle

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode16

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

1. In your podcast app, click the search icon that looks like a magnifying glass in the bottom right-hand corner.
2. Type “The DIY Investing” into the search bar. This podcast should be one of the first shows that display.
3. Select the podcast show icon.
4. Scroll down to the “Ratings & Reviews Section” and click on the button that says “Write a Review”.
5. Write a short one or two sentence review and give me a rating that matches how you feel about the podcast.

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In today’s episode, I will be discussing the idea of investing in advertising holding companies. My guess is that many of you have never even considered investing in an advertising holding company. I hope that this podcast will introduce you to advertising holding companies as a possible investment candidate.

List of the largest Advertising Holding Companies: * WPP * Publicis * Omnicom * Interpublic * Havas * Dentsu

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode15

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

1. In your podcast app, click the search icon that looks like a magnifying glass in the bottom right-hand corner.
2. Type “The DIY Investing” into the search bar. This podcast should be one of the first shows that display.
3. Select the podcast show icon.
4. Scroll down to the “Ratings & Reviews Section” and click on the button that says “Write a Review”.
5. Write a short one or two sentence review and give me a rating that matches how you feel about the podcast.

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In today’s episode, I will be discussing the Pros and Cons of Retail Chain Investing. This topic is particularly interesting for me right now as I have been studying multiple retail chains as potential investments this past month.

Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode14

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

1. In your podcast app, click the search icon that looks like a magnifying glass in the bottom right-hand corner.
2. Type “The DIY Investing” into the search bar. This podcast should be one of the first shows that display.
3. Select the podcast show icon.
4. Scroll down to the “Ratings & Reviews Section” and click on the button that says “Write a Review”.
5. Write a short one or two sentence review and give me a rating that matches how you feel about the podcast.

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In today’s episode, I will be discussing the Tax Cuts and Jobs Act of 2017 and its effect on reported 2017 earnings for US-based companies.

Full-Length Article Available at DIYInvesting.org

https://www.diyinvesting.org/tax-cuts-2017-fake-earnings-chuys-stock/

Show Notes available at DIYInvesting.org The full show notes for this episode are available at https://www.diyinvesting.org/Episode13

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Oil majors: ExxonMobil (USA), Chevron (USA), Royal Dutch Shell (UK and Netherlands), BP (UK), TOTAL (French)

Traditionally, being an oil major has meant being a fully vertically integrated company from oil exploration, drilling, refining, and chemical production. ExxonMobil continues to fulfill that role, but they are much more than an oil company today. Although they are typically billed as an oil AND gas company. They are much more.

• Business Model Overview
  • Energy Company
• Durability
• Competition
• Quality
• Growth
• Capital Allocation
• Value
• Potential Errors
• Conclusion

Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode12

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

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Why Patreon? The DIY Investing membership site is hosted on DIYInvesting.org with Patreon used as the payment processor and platform partner. Members are offered exclusive access to investing research and educational resources on how to be a better investor. Patreon allows me to carefully curate this insider content for each individual member of our community.

Exclusive Community Member Benefits The public facing content of DIY Investing is focused on providing general purpose investing insight and personal finance education to the masses. In contrast, your membership will offer you exclusive behind-the-scenes access to my personal investing process. As you increase your contribution/membership level you will gain an increasingly inside look at the investment research that I perform on weekly basis.

All of the benefits provided here are meant to save you time and help you earn more money from your investing. You'll be gaining access to my personal notes, fundamental analysis, and valuation on companies.

Member Benefits Include: * Company Quality Analysis Spreadsheet * Individual Company Quality Reports * Company Intrinsic Value Spreadsheet with Buy/Hold/Sell Ratings * "Insider Access" to my Personal Investment Portfolio and Company Holdings * Small-Cap Stock Research - My personal notes and fundamental analysis * Micro-Cap Stock Research - My personal notes and fundamental analysis * "Buy Thesis" reports on each and every company that I currently own and purchase in the future * Short-Term Investment Alerts - Updates when I make changes to my personal portfolio

Review Full Details at Patreon.com Join our Investing Community Today!

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Gilead Sciences is a biopharmaceutical company with a focus on treating and curing diseases. Their areas of focus include HIV, Hepatitis C, Oncology, Inflammation, and NASH.

Gilead Sciences (GILD) * Business Model Overview + HIV + Hepatitis C + Oncology/Cancer Treatment (KITE) – Yescarta + Inflammation - Filgotinib + NASH (Liver disease) – Selonsertib - Leading cause of liver transplants. Generally related to Obesity + Durability + Competition + Quality and Growth + Capital Allocation + Value + Potential Errors + Conclusion

Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode6

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

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First Principles are a critical mental model for you to understand to be a successful investor. Most people don’t make decisions based on facts and reality. Yet, the world of investing is unforgiving. The only way to succeed in the long run is to align your actions with fact-based decision making. There are specific fact-based actions that will increase your odds of financial success. These are the first principles of investing and personal finance.

Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode9

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

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Recommended Brokerage Companies: 1. Ally Invest

1. Fidelity Investments

2. Vanguard

3. Motif Investing

Recommended Motifs (My pre-built index funds for you) 1. Dow Jones Industrial Average (No-Fee Index)

1. Magic Formula Index

2. Generational Wealth Index

Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode8

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

1. In your podcast app, click the search icon that looks like a magnifying glass in the bottom right-hand corner.
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Description In this episode, I answer a listener question about how to save for retirement. Specifically, "Should I be using a traditional IRA, Roth IRA, or both for retirement saving?"

In order to answer this question, I provide a general overview of the features for both a Traditional and Roth IRA. I compare the similarities and differences. Finally, I provide some rules of thumb which you can choose to make a decision on which type of IRA best fits your situation.

Important Links What is your #1 question about investing or personal finance? Answer this one question survey and your question might appear in a future podcast episode.

Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode7

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

1. In your podcast app, click the search icon that looks like a magnifying glass in the bottom right-hand corner.
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Synopsis This is a book review of The Little Book that Beats the Market by Joel Greenblatt. The basic concept of the book is that it's quite simple to beat the market. So simple in fact, that a specific magic formula can be used to beat the market.

If that sounds too good to be true, that’s understandable.

The author Joel Greenblatt understands your skepticism. His goal is twofold:

1. Share his magic formula with you

2. Explain the concepts that make the magic formula work.

Purchase the book through one of my affiliate links Buy the Book on Amazon

Buy the Kindle version on Amazon

Buy the Audiobook on Amazon

If you make a purchase through one of my affiliate links, I receive a small commission at NO additional cost to you*. This small commission helps to support the show and keep the episodes available for free.

Would you like to invest using the Magic Formula? I have developed what I believe to be the easiest and cheapest solution. I created an index version based on the formula. You can buy a 30 stock index of companies chosen using the Magic Formula which I plan to update on an annual basis. All for a single low commission of $9.95. (In contrast to an estimated $150 if you bought each stock individually, at $5 per stock commission)

Just go to https://www.diyinvesting.org/magicformula

Show Notes available at DIYInvesting.org The full show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode6

Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

1. In your podcast app, click the search icon that looks like a magnifying glass in the bottom right-hand corner.
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GameStop in 2018 is a prime example of an investment with asymmetric risk and reward. The company offers a greater than 10% dividend yield with a payout ratio less than 50%. As long as the dividend can be paid we'll make a good return. (NYSE: GME)

The show notes for this episode, including my outline for today's podcast, are available at https://www.diyinvesting.org/Episode5

If you enjoyed this podcast and found it helpful, please consider leaving me a review. On an iOS platform such as an iPhone or iPad, you can do so by following these steps:

1. In your podcast app, click the search icon that looks like a magnifying glass in the bottom right-hand corner.

2. Type "The DIY Investing" into the search bar. This podcast should be one of the top shows that displays.

3. Select the podcast by clicking on the show icon.

4. Scroll down to the "Ratings & Reviews Section" and click on the button that says "Write a Review"

5. Write a short one or two sentence review and give me a star rating that matches how you feel about the podcast. I would love to receive a five-star rating, but please be honest. Your feedback will help me to improve the podcast.

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In this episode, I review the personal finance classic, The Richest Man in Babylon. This book provides the basic formula for building wealth. Every investor should be aware of the basic habits one must have to become rich.

If you'd like to purchase The Richest Man in Babylon, I would appreciate it if you use my affiliate links below:

Buy on Amazon

Buy Audiobook

Buy for Kindle

If you purchase through one of my affiliate links, I will receive a small commission which helps to support the show. Thank you for your support.

If you would like to see a full written review of The Richest Man in Babylon, you can check it out through this link.

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In this episode, I discuss the effect of stock options or stock-based compensation expense on the after-tax returns of shareholders. These expenses paid to executives as compensation are often excluded from expenses when non-GAAP earnings are reported.

The show notes for this episode, including a transcript of today's podcast, my sources, and more can be found at https://www.diyinvesting.org/episode3

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In this episode, I discuss the mental model of Gradualism and how to become a millionaire by investing only $1 a day. Gradualism is a mental model built upon biology and geography which can be leveraged to enable you to achieve financial independence.

The show notes for this episode, including a transcript of today's podcast, my sources, and more can be found at https://www.diyinvesting.org/episode2

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In this episode of The DIY Investing Podcast, I discuss the common myth that stocks are riskier than bonds. Join me as I bust this myth, by discussing the capital asset pricing model, beta, volatility, and redefine risk for an investor.

The show notes for this episode, including a transcript of today's podcast, my sources, and more can be found at https://www.diyinvesting.org/episode1