Gotta Know the Lingo, Vol. 8

24:21Okay, let's now move from our simpler to our more advanced terms. I'm going to turn back to Amanda Kish. Amanda, what is your more advanced term, Forgot Another Lingo, Volume 8? So I'm going to turn to talk about reflexivity. And reflexivity, it's a concept that had its origins in the field of sociology, where this theory was that defining situations as real makes their consequences real, or in other words, your thoughts shape your reality. And when you apply that to the investing world, reflexivity is the idea, and this is something that George Soros advocated, market participants don't just observe the market conditions, they influence them.

24:59So their perceptions, actions, feedback into the fundamentals that they're analyzing, creating kind of a loop, a self-sustaining loop where reality and belief both shape each other in real time. So if we think about kind of the classical model of markets, it assumes that markets are efficient. Prices reflect fundamentals, earnings, growth rates, et cetera. And then as investors analyze that, the markets adjust to the true value. Well, reflexivity says that that's not quite the case. It says that the act of investors believing something can actually cause that thing to become true, or at least to shape the fundamentals themselves.

25:36So a classic example of that is a company stock is doing very well. It's flying high. So that rising stock price means it can then raise cheap capital. With that cheap capital, it can do all kinds of things, acquire competitors, attract talent. And now those fundamentals actually improve because the stock went up. So that belief helped create that reality. On the flip side, think about something like a bank run. So depositors fear a bank is insolvent. They pull their money in a panic. Now that bank actually is insolvent. It's that fear that became the fact. So basically, this argument says that markets are not fundamentally self-correcting in that neat, efficient market way that economists might think they are, at least in the short run.

26:17And we see evidence of that in these boom and bust cycles and these sequences where these feedback loops really can take prices very far from reality before everything kind of reverts back to the norm. And I think that's important for investors, because if you understand that, that narrative and the fundamentals can kind of co-create with each other, then you think a little bit differently about momentum, bubbles, what it means for, does a stock deserve its valuation? So sometimes the story is doing the work, you know, it's attracting capital, enabling strategy, building that moat. And other times that story is just a story and those fundamentals haven't shown up yet.

26:58So understanding that phenomenon and that it exists and that we all participate in it, I think is a very important first step for investors. I was really excited when you let me know that you were bringing this term to this week because it is one of my favorite concepts, Amanda. We have never covered this one before on this series. And especially for rule breakers and rule breaker investing, it's just so meaningful. In a lot of ways, venture capital is what enables things to become real in the world. And how do you obtain venture capital? You need to be persuasive enough, a combination of the product or service you're offering, along with your human capital, who you are as a person.

27:34Are you convincing to others who can write you checks? And all of a sudden, the people who are get the checks, and their products or services become real and enter the world. And I do think often phrases that I lean on a lot like, winners win, what do they do? What do winners do? The answer is they win. That does create a self-reinforcing dynamic, which is very important. And as you point out, Amanda, it also can be the opposite. If there's just a sense, you know what? That person is not persuasive to me. They're not going to get the money. Therefore, they're not going to get the opportunity, in some cases, the prosperity that others might have gotten.

28:09Of course, it can be faked. Some people go with the fake it until you make it approach. That can work through reflexivity. It can also backfire if they're not ultimately worthy. But this is such a helpful concept. I think it explains a lot of the venture capital world. And I love that it came from our financial planning lead because, Amanda, you're right. Soros wrote a great essay on this topic, and I'm definitely a student of it, but just an undergrad student. I'm sitting at the feet of anybody who wants to tell me more about reflexivity. Nick Seipel. Oh, yeah. I mean, I think one of the better examples in the market of the past decade is Tesla, right?

28:43Tesla benefited from reflexivity all the way up. access to capital, willingness to, you know, go through what I think, you know, Musk called it like, you know, manufacturing hell to actually get up to scale. And the magic of Elon created a reflexivity that made Tesla happen in a way that Ford GM never could have. It is a great example. And Tesla has also been a fantastic stock for Rule Breaker investors. They're not always going to work out that way. But Tesla is now 171 baggers since we first recommended it. And I watched this one and several other rule breakers, Nick and Amanda, get that moxie behind it and that public perception that it could happen, that it could be real.

29:24We can love the velveteen rabbit into existence if we will just love it enough. And I think Tesla's a fantastic example. Well, Amanda, it's about time for the interesting illustrative sentence, except that I want to go longer on this one. And Alicia, I think you got something. Yeah, I wanted to ask what mindset tools can investors use to deal with the potentially negative impacts of reflexivity in the market? So I think a big part of that is just understanding long-term averages, having that long-term mindset and really understanding what it is that you're investing in and understanding your thesis.

29:59Like any concept that's more behavioral finance focused, if you understand kind of what's going on and understand that there's going to be these strays from the fundamentals for the long-term averages, I think that's really going to help you kind of stay put and really help you not make moves at the wrong time that you may be selling into a bear market or hopping on a hot trend too late in the game. So I think being confident in your plan, knowing where things are over the long run, sticking to your thesis, sticking to your financial plan, and refreshing that in times when markets are crazy are really going to help you stay grounded.

30:34All right, put your hand up, fools, fellow fools, listeners everywhere, if you already knew what reflexivity was. I don't see every hand up, so I'm glad that we went over this one. And Amanda, how about an interesting illustrative sentence to close here for term number four? Flexivity is the market's way of reminding us that sometimes the story doesn't follow the stock price. Sometimes the stock price writes the story. Really well said. And while I think I've presented a mostly bullish view of this, and it's because I believe it is such a fundamentally important dynamic for the winners among our rule breakers, it also can cut the other way just as easily.

31:10And so it's sort of an ambiguous neutral term, but it's a real concept out there. And Amanda, thank you for bringing it. Let's move on to term number five. Nick, earlier, spoiler alert, I said you'll be bringing an acronym. And I'm going to let you throw down the letters first. And then for those of us, me included, who didn't know what those letters stood for, could you please lay it out? Yes, David, happy to do it for you and for the listeners. LCOE is my term. Stands for levelized cost of electricity, or sometimes you'll hear it as levelized cost of energy. And it is a metric that gives the average net present cost of generating one unit of electricity over a power plant's entire lifetime, counting for the cost to build it, fuel it, operate it, finance it, etc.

31:54So it allows you to compare solar power generation against wind, against gas, against nuclear, against coal, one for one in a way that makes them apples to apples. And as you've charted levelized cost of electricity over the past decades, solar power has come down dramatically. And now, according to that metric, is by far the cheapest form of electricity today. However, it's important to caveat that term. Levelized costs of electricity does leave out some really important costs of energy production, one being distribution. It doesn't account for the distribution, the power lines that it takes to get that power from your solar power plant in the desert to your factory in the city.

32:33Also, it doesn't account for dispatchability. So everybody knows the sun doesn't always shine. The wind doesn't always blow. That means if you have, for example, an AI data center that needs to be on all the time to serve your customers, solar and wind may not be able to service those loads in the way that these tech companies need them. So that's why we've seen a big explosion in the past several years in natural gas. Nuclear is having a renaissance because it can provide that firm 24-7 power that data centers need to run. And for that reason, folks are willing to pay a higher price on a level-edged cost of electricity basis to assure that reliable supply.

33:11Thank you very much, Nick. I know this partly comes because part of your focus of The Motley Fool has been energy companies. This is an area of expertise for you, and therefore you're rocking acronyms I didn't know before this week's podcast. Looking at levelized cost of energy today, you're pointing out that solar is the cheapest by far, even including wind. Is that right? I believe so. Yes, sir. And that makes me happy because I've always thought, I try to think backwards from the future as an investor, and it just seems like the end game, the end state would be the sun. It's just, it's the sun.

33:41How could it not be our number one source of energy ultimately? But boy, does it still take a lot of effort to get there. And of course, in the meantime, nuclear and other options are showing up and are very interesting as well. Wouldn't we love to see nuclear fusion happen in some real way at some point? Nick, when you look at solar, do you find yourself generally bullish because of that low LCOE or is the cost of distribution, etc. still daunting? I think it's really an all hands on deck. The panel makers have been challenging because of commoditization competition from China and other markets.

34:15I do think there are interesting opportunities to invest in solar. Next was Next Tracker. Now it's now I believe it's Next Power. They've changed the name tickers NXT. They provide actuators that allow solar panels to track the sun throughout the day, maximize the production of those solar panels, and they've become kind of the one stop shop for that business. So it has exposure to this massive growth in solar power production without being in the commoditized panel part of the business. So I think there's certainly opportunities to invest in solar power, but I think the entire energy grid is an opportunity today.

34:47A lot of folks don't know if you go back to 06, 07, all the way through 2020, electricity demand in the US was basically flat. And as we enter the 2020s with the rise of AI, potentially electric vehicles, we're at a whole new growth trajectory that we hadn't seen in better part of 20 years. And that's going to require solar, nuclear, gas all across the board. And so I think it's a very interesting time to be looking at energy and electricity. Glad to use the word gas because I hadn't really presented that yet. We hadn't talked too much about it, but it is such an important and relevant source of energy today.

35:16And yet I still want to pin down on the future. Nick, what about nuclear? How do you assess nuclear energy today? Do you have a general sense of the LCOE of nuclear as it compares to gasoline, for example? And are you invested in any nuclear stocks? Yes. So levelized cost of electricity for nuclear power is the most expensive. And a large part of that is this is the most regulated form of electricity production by far. And also, we've essentially not built nuclear power plants at scale in North America since the 1970s. If you look at other markets like China, where they've been building at really a rapid pace, or in Canada, where really the backbone of their grid is nuclear power, they've been able to bring down costs and get these projects in under budget and before deadlines.

36:00So if we can get our pace of nuclear power plant generation to the point where we're building one, taking that workforce, moving on to the next one, I think costs will come down over time. There is opportunity in these small modular reactors where you can make the reactor in a facility and ship it out to its end destination. But it's really a question of us as a society. How much are we willing to invest in nuclear? If you go back to the 1970s, we had 40 plants up and running. And then as energy costs came down, we moved on to other things. There was also safety concerns, of course. But if we remain committed to nuclear, I think in the long run, I think it's only going to grow.

36:34Right now, it's 20 percent of electricity in the United States. still, nuclear of clean, non-carbon producing energy is still the number one producer on the grid. And I think we're in a new era when it comes to electricity demand growth. And I think that will be a tailwind for nuclear for the next decade. Thank you for those thoughts. I think we've strayed from just defining our term because I get interested in these things and I like to hear from people who know more than I do. So thank you, Nick. I want to ask you just one quick follow up before we go to your interesting illustrative sentence.

37:03Whenever I hear that we've levelized, to use that term, not one of my favorite verbs, I don't think, but when we've levelized a cost, but then you go on to say, well, not really, because we haven't actually factored in these other costs. It starts making me wonder, can we levelize those? Is there a true apples to apples that we can create that better expresses without asterisks, real comparisons? I realize it might be local and contextual, et cetera, but is anybody working toward a true levelization of the cost of energy? Levelized cost of storage is out there. There are different metrics you can use that will account for what you have to spend to back up that solar power plant or that renewable power plant.

37:43JP Morgan does some work on this. Michael Semblis has some great data to look at, but there are efforts out there. JP Morgan is one of the better ones. All right. Thank you, Nick. How about an interesting illustrative sentence using either your acronym or your full phrase? When people argue that nuclear energy is too expensive, They're usually looking at levelized cost of electricity in isolation. But that's like saying a backup generator is too expensive until the power goes out. Boom. Thank you for that, Nick. And thank you for the discourse as well. Let's move on now to our final term this week.

38:17Back to Alicia Alfieri. Alicia, what do you have for us? Term number six. Risk tolerance or how comfortable a person is with volatility at the potential to lose money with an investment. This one seems straightforward on the surface, but it can be more complicated than many realize because it can change over time based on the individual and phases of life. I believe that it's something an investor can only truly know after a market downturn with losses and self-reflection. And also, I think it's something that you can understand better, make peace with, and perhaps get better at through journaling.

38:54In a previous episode, Amanda discussed risk capacity. So risk capacity is more about your ability to weather the storms of losses. And it looks at things like how much money you bring in, what are your assets, and what are your expenses. So that's different. Again, risk tolerance is a bit more squishy and personal. It's dealing with emotional reactions to things like volatility and the potential to lose money. And it can change over time. So why I brought this today. The market has been volatile. and not the upward kind that people don't mind. So I think regardless of where people are on their individual investing journey, there's a lot we can learn in terms of how we're dealing with volatility now, how we're viewing the overall market at different opportunities, and how we're thinking about the potential for losses.

39:45Thank you for that, Alicia. And on the face of it, you're right. This doesn't feel like an advanced term necessarily. And as a term, it's probably not. But as an important concept that you kind of need to earn your stripes over time, you need to live to understand yourself and the markets at large. It is a more advanced concept. And I want to open it up with Amanda as well, because she did, as you mentioned, Alicia, she brought risk capacity last time. I want to kind of open up to you both. My question is, has anybody ever actually tried to quantify this? Because whenever we say risk tolerance, you're right, it feels squishy, Alicia, because nobody has any actual number or there's no Myers-Briggs where I can say on these four letters for my risk tolerance.

40:29And yet I feel like the investment world would be helped if somebody did compartmentalize or quantify in some way, shape or form. And presumably, Amanda, someone's doing it out there. Someone probably is, although it's such an individual specific concept, it's really hard to get a more group quantitative type of idea and put numbers to it. But I think it's, as Alicia said, I 100 % agree that it's very much something that you have to live through. It's really, that's where you earn your stripes and understand what your true risk tolerance is. and compared to risk capacity, I think a good way to look at it is Alicia mentioned, risk tolerance is the emotion, risk capacity is the spreadsheet.

41:11So if you want to actually put some quantification behind that, run the numbers, run the analysis. So if you want to know, you know, how would it feel if your portfolio falls 30%, 40%, 50%, you run those numbers. That's important to do that and make those calculations to really get comfortable with that. Yeah. And David, I could be mistaken, but haven't you done some work around risk tolerance? I think you call it, and correct me if I'm wrong, sleep number? It's true. And I appreciate that. I was not actually, that was not a leading question. And I wasn't thinking you were going there, Alicia, but you're right.

41:46I do think about that. And that is, in fact, principle number four of the Rule Breaker portfolio, which is to establish your sleep number. And sleep number, in brief, is the percentage that you would allow your largest holding to become as an overall slice of your investment pie and still sleep well at night. So, for example, if someone has a sleep number of 12, that means if a single stock or holding becomes more than 12 % of their overall net worth, they start to lose sleep. And some people have a sleep number of 12. Other people have a sleep number of 2. And some have a sleep number of 32. And I do think there's something about knowing yourself, Alicia.

42:27And you're right. It's hard to know for sure until you've really lived it and experienced it. So thank you for that. I don't think everything needs to be quantified. One of my favorite lines is there are no numbers for the things that matter most. But I do feel as if risk tolerance, squishy, such a good term that you brought, Alicia. And it's because we haven't really done a good enough job creating a construct or framework that we can hand our fellow fools or the world at large and say, what's your risk tolerance? By the way, whatever you think it is now, as Alicia said earlier, it might change and you also might not be right about yourself as well.

43:05So I appreciate this concept. Nick, any final thoughts here before we go to Alicia's interesting illustrative sentence? Well, just a reflection on investing or risk tolerance. It teaches you about yourself. When you find yourself in those scenarios, when every headline is about how the market is crashing, it teaches you a thing about yourself that you can learn no other way. And I think as much as investing is about trying to make money for your family and give your family a better life, there are some other fringe benefits as well along the line. And one of those things is you're a more interesting person.

43:37You learn more about the world. You're more curious about the world. You learn more about yourself and how you respond to world events. I give you a heck yeah. Thank you. Well said, Nick. Alicia, how about that interesting illustrative sentence here for risk tolerance? Sure. I explore my risk tolerance by journaling about my investments and my reactions to wins, losses, and reactions to the overall market. Thank you. Very well done. And it sounds like, I mean, I know you read and write stories, so you also, turns out, have an investing journal. I do. And maybe just a broad journal, or is the investment journal specialized apart from another life journal?

44:14Well, I collect journals. So the investing journal is definitely separate from other journals. Excellent. Thank you for that. And there you have it. Gotta Know the Lingo, Volume 8. We had six terms this week just to review them in order. A retirement smile. Depreciation. Dollar cost averaging. Reflexivity. Levelized cost of energy. LCOE. and risk tolerance. And I think my talented fellow fools did indeed bring some simpler and some more advanced terms this week. How'd you score us? How'd you score us at home? Remember, zero, one, or two for each of those. Feel free to tweet it out if you got a high score or a particularly low score.

44:57And we hope your results, dear listener, speak for themselves. Whether it was a zero, a one, or two for each of our terms, we had a lot of fun bringing that to you this week. So thank you again to Amanda and Nick and Alicia. And in fact, I want to give each of them an opportunity for a final line. We've tried this the last few episodes here. So, you know, it's baseball season again. And in Major League Baseball, as hitters come up to bat, they get their requested walk-up music played. Well, for my analysts and my advisors, I'm going to give them a walk-off line. So let's do it in order. Amanda, you're first up.

45:32What is your walk-off line today? When investing, we spend a lot of time talking about returns, but the real goal is never the number. It's the life that number makes possible. That's kind of a mic drop with everything blowing up behind you in slow motion walk offline. That was powerful, Amanda. Thank you. Nick, I wouldn't want to have to go next, but you're next. No bonus points for degree of difficulty. Investing is not like gymnastics. The obvious easy thing can pay just as well as the backward somersault backflip. Investing is as hard as you make it. And just remember, you don't have to do a backward somersault backflip to score a 10 out of 10 from the judges.

46:10And one of the reasons I love showing off my fellow fools in weeks like this is because I am both learning from you, but also inspired by you. And we sometimes mirror back to each other because, Nick, one of my favorite essays that I once wrote on investing, I think you can probably Google it and find it out there on the internets somewhere, but it's great stocks don't make you think. And that really, for me, is thematic. It's not that much more difficult. My first great stock pick was America Online. It seemed totally overvalued at the time to much of the world at large. But I was like, hey, let's not do the double backflip with Nick Seiple here.

46:44It's the decade America is going online. Let's own America online. So great stocks don't make you think. Really appreciate that point. Alicia, what is your walk offline? Investing is a journey and a key thing to leverage here is self-reflection, especially with losses. There are things to learn as well as in times of volatility and uncertainty. Very well said. You know, whenever I think of journey and that word, which means a lot to literature majors, I think about the construct of the hero's journey, which I know many of us would have studied at some point in school. And I really do think each of us should be the hero of our own investing journey.

47:22And one of the best ways to learn about yourself and become a little bit more heroic is to reflect, as Alicia just shared. And for those who are inclined to write, you're probably going to accelerate those learnings and probably improve your journey even more if you take the time to set down your thoughts and then revisit them from time to time. Well, in closing a few episodes ago Our colleague at the Motley Fool's Sun Meet Theo went with, this was his walk Offline, stay curious Fools, and that is indeed The spirit of this series, gotta know the lingo Where we're here to educate, especially of course Always, to amuse and enrich As well, but yeah, educate We're actually building up quite a Glossary of terms at this point, A to Z Once you start multiplying eight Episodes times six Terms each, we've done about 50 terms and concepts at this point.

48:11So if you enjoyed what you heard and you want to keep learning with your child in the car or just listening by yourself on a jog, you can go to RuleBreakerInvesting.com where under our podcast tab, you will find each of our Gotta Know the Lingo episodes in order so you can binge listen to the whole series and quiz yourself all the way through. Again, thank you, Amanda. Thank you, Nick. And thank you, Alicia. Thank you. Thank you, David. Thank you. And to you as well. Thank you for suffering fools gladly this week. Stay curious, fools. Fool on. As always, people on this program may have interest in the stocks they talk about.

48:49And The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com.