MI Rewind: Do Stocks Only Go Up? w/ Brian Feroldi

24:16It's a liquidity event. It's a capital raising event. Companies need public and one need capital, and one way that they can get it is by coming public. So that's by far the number one reason why companies come public. Another reason why companies come public is it's a marketing event. companies get a certain amount of cachet around them for being publicly traded. They're just in the public eye a heck of a lot more when they're publicly traded than when you're privately traded. A few years ago, a company called Palantir came public. And if you look at that company's financials, they weren't desperately in need of capital.

24:45They raised plenty in the private markets, but when they came public, they were looking to grow within the commercial sector. And I think one reason that they came public was to get their name out there with companies that could be their potential customers. So that's another reason why companies come public. A third reason companies come public is to give liquidity to their existing shareholders. So let's go back to our business, right? So we have these shares in our company and our company is doing well, but let's say we wanted to liquidate. Let's say we wanted to sell our position in a company.

25:15How would we do that? We would have to go out, find somebody that would be interested in buying our stock, and then we'd have to do a one-off transaction with them. That would take a very long time to do. There's no guarantee that I would get a good price on it, et cetera. Well, the same problem exists for private companies today. If their employees or their management team want to sell their stock, it's often very hard for them to unload that stock to somebody else. By becoming a public company, there's a liquid market for your company's stock, and you can buy and sell that stock very, very easily.

25:47And this is especially true for venture capitalists. When a venture capitalist makes an investment in a company, they typically put their money in that company for a period of say three or five years. And at the end of that period, they want to realize the return on their investment. So if a company stays private, it's really hard for them to get their money out. But if they become public, it's very easy for them to do so. So that's why companies go from being privately held to publicly traded. There's several reasons, but by far the number one is because they want capital. A very interesting concept or idea that we haven't ever talked about on the show, and one that was honestly even confusing for me back when I first started studying investing, is this idea of where the money goes when you invest.

26:31You log into Fidelity, you log into Vanguard, Schwab, Robinhood, whatever it is, and you say, okay, I want to buy Apple stock. Where does that money go? I just assumed when I was a beginner investor, I think a lot of beginner investors do, is that the money goes to the company. I mean, you just told me, right? When a company goes public, they get all the money, right? Well, it's a little bit different when you're actually buying stock nowadays once they've been past the IPO period. So Talk to us a little bit about where do investors' money actually go when they buy a stock? And how does that process work?

27:00Yeah, that's very confusing, right? You see Apple, Google, or Tesla, and you're like, oh, if I buy that stock, that benefits the company, right? The company gets the stock. Well, in truth, 99.999 % of the time, if you're buying a company's stock, that company in no way gets the capital that you are using to buy that stock. When you're buying a stock in a company on a public exchange, such as the New York Stock Exchange or the NASDAQ, et cetera, 99.9 % of the time, you're buying that stock not from the company itself, but from another investor that owns shares in that company. So if I logged into my broker today and placed a buy order for Tesla, for example, the money that I invested in Tesla wouldn't be going to Tesla.

27:46It would be going to the investor on the other side of that transaction that currently owns Tesla stock, but doesn't want to own it anymore. And I give him the money, he or she gives me the shares of Tesla. So that's what happens 99 % of the time. The only exceptions to that rule are when a company is creating brand new shares of stock and selling that on a public exchange. So if you're investing in a company at the IPO, and literally at the IPO, you're buying those initial shares as soon as they are created. In that case, you are giving your money to the company itself. The other time that you could be giving capital directly to the company is if the company does a secondary, what's called a secondary stock offering.

28:27So once a company is publicly traded, they see their stock price going up and down, they can do what's called a secondary offering. So they can create even more shares of stock in their company and sell that onto the public markets. Doing so gives them another opportunity to raise capital from investors. But unless you are buying specifically at the IPO or specifically during a secondary offering, your capital is not going back to the company itself. It's going to another investor. So after I was confused about how that worked, I learned about it just like you explained. But then I said, why do companies care about their stock price then?

29:03I mean, they already got all their money, right? They IPO, they got their$100 million and now the shares are at$10 a piece, they already have their 100 million. Why do they care if their stock goes from$10 to$5 or$2 or$1 or a penny stock? Why does it matter to the company what their share price is and why do they focus so much on it? Well, if a company raises capital and never wants to raise capital from investors again, their share price doesn't directly impact the company much at all. However, why is there a CEO of a company? That CEO, that management's team job is to increase the value of that company over time.

29:38And one way that they can do so is by raising their revenue, enhancing their margins, growing their profits, et cetera, in an effort to make the business more valuable. And that in turn should lead to a higher stock price. Now, what happens if that doesn't happen? What happens if the management team is doing a bad job or market conditions are going in the wrong direction? Well, the investors in that company, the people that bought that stock from this company are going to have a loss on their investment. And that does not make them happy. Nobody likes to invest in a company only to see the value of that company go down.

30:08If that stock stayed down for a long enough period of time, or the owners of that company, the investors as a group felt that the management team was doing a bad job, they have some impact over who is running the company. The shareholders of that company elect the board of directors to that business. And the board in turn is the boss of the CEO of the company. So if shareholders got together and said, we're not happy with how this company is doing, they can influence the board and the board can influence who is in charge of the business. So if a company's stock goes down for a long period of time, it's not uncommon for that manager to be fired and for somebody else to be brought in.

30:43So that's one reason why the manager of the company want the share price to go up. The second reason they want the share price to go up is that share price that they have is a tool that they could use to enhance the business. So if a stock is very richly valued, that acts as a currency, the company's own currency that it can use to raise capital from investors or to make acquisitions. So one way that a company can grow is by buying out a competitor or another type of business. And one way that they can do so is by selling shares in their own company to acquire that business. Well, if your stock is trading at a low number, at a very low valuation, that's a really bad time to want to go out and make an acquisition.

31:21It's a really bad time to raise capital. But if the stock is trading at a very high valuation or a very high price tag, it's a much more appealing time to use that capital to do so. And then the final reason why investors, the management team want the stock price to go up is oftentimes the people that run that company and the employees are given equity. They're given shares in the business themselves. So they have their own capital on the line, right? And they're experiencing the ups and downs of the stock, just like outside investors are. This is one big reason when I'm making an investment in a company, I want to make sure that the CEO and the management team that's owning that company owns a whole bunch of that stock too.

31:56I like it when they have 90 % plus of their personal net worth tied up in the value of that company's stock. That does not guarantee success, of course, but it does guarantee that if they make poor decisions and that stock goes down, they're going to feel the pain of that stock going down just like I am as an outside shareholder. I read an interesting study that talked about how a company's stock price can actually end up being a self-fulfilling prophecy for the company's success or failure. And the reason for this is because companies are able to raise capital by issuing new shares or raising capital in the debt markets.

32:26For example, if a company hasn't been executing the business strategy effectively and its stock is falling, then it might be difficult for them to turn it around because they don't have access to a lot of capital by issuing new shares or getting outside capital. On the other hand, say you have a company like Tesla whose stock has done very well. Well, now they can go out and raise a lot of capital by issuing shares, and now that potentially puts them in an even better financial position than they would have been otherwise because their stock has gone up. They can now do a lot of things with that capital, like build a new gigafactory, hire new engineers, or make an acquisition to strengthen their position.

33:00So it's an interesting thing to think about the dynamic of how a stock price impacts the company's financial position and future growth opportunities. Oh, for sure. If you just look at what's happened with GameStop over the last two years, by the way, GameStop was a failing business in so many ways, and its share price was down meaningfully prior to it getting all over a Reddit. And that was a big problem. That was a hindrance to GameStop the company because it's hard for them to attract a manager that wants, if they see the business that's failing, people are exiting the company. But more importantly, if they wanted to raise capital in order to say, pay off their debt or fund some kind of new business unit, it would be prohibitively expensive for them to do so with their stock so low.

33:39When GameStop stock went bananas and it was just skyrocketing, all of a sudden the company, it became much more appealing for the company to raise capital from investors at an extremely inflated price tag, and they could use that capital to eliminate their debt or reinvest in the business or acquire complimentary businesses. So in a very real way, GameStop stock going up so much bought the management team at that company so many more options that they could use to fix the underlying business. So in that way, the stock price going up hadn't saved GameStop, but it's really made that company's future much brighter than it would have been otherwise.

34:13There's talks that it helped Tesla a lot as well. And some people say that that's really helped them be able to continue on as well. We've both kind of talked about how you can use your equity, your share price, your stock to raise more capital. You even said in a secondary offering, you can sell shares that don't exist. I think people listening who are newer to the show or newer to investing that are hearing this for the first time, they're like, how can you just create? You told me shares are ownership in a business. A business only has so many shares. How can you just create new ones out of thin air?

34:40Where does that come from? How does that happen? So talk to us a bit about how you can do a secondary offering with shares that don't exist and how that process works. This is a unique trait that companies have. Let's go back to our business that we started together. So there's 100 ,000 shares, right? You own 50, I own 50. You have 50 % of the business and I have 50 % of the business. Let's say that we wanted to raise capital, right? But we didn't want to put any more capital in ourselves. So let's say we wanted to raise$100 ,000 to further the venture of this business. So we find another investor, our stock is trading at$1 per share, and we bring on this new investor.

35:12So we create 100 ,000 new shares of stock. We sell it to this new investor and the company gets a hundred grand. Well, prior to us doing this, there were a hundred thousand shares in total. You own 50, I own 50. Now we just created a hundred thousand new shares of stock. So there's now 200 ,000 shares in total. You still own 50. I still own 50. And this new investor now owns a hundred thousand. So what actually happened was your and my position in this company, we used to own half of it. Now we only own 25 % of it. this new investor that came in, they own 100 ,000 shares of the 200 ,000 in total.

35:47So they own 50 % of it. So that's the downside to creating new shares of stock. That's called dilution. Whenever a company wants to raise capital for its investors and create these new shares of stock, the good thing about that is they can fill up their bank account almost at will if they want to. But every time they do that, their existing shareholders get diluted and they own less of the business than they did before, even though they didn't do really anything wrong. But that is something that companies can do. And it's one of the reasons I've been studying the markets for years. And I've seen some really bad businesses, really bad businesses with no revenue growth, negative returns, and they've just been publicly traded for 5, 10, 15, 20 years now.

36:27You're like, how can this company still exist? It hasn't made a profit this whole time. And the answer is they keep raising money from shareholders again and again and again. And each time they do so, they're diluting their existing shareholders horribly, but it's allowing the company, which shouldn't exist, to continue to exist. So that is a trait that businesses have. It's not exclusive, but a lot of times you're going to see this with newer, not necessarily startups, but smaller companies, earlier stage companies, companies that are really trying to grow. They need that capital to grow. And so you're probably not going to see that with Walmart or maybe even Amazon, these more established businesses, but you're going to see that with these newer, higher growth, early stage companies.

37:05And it sounds like dilution is a really bad thing. you gave them$100 and you owned a certain percentage of the business. And now you still have$100 worth, but you own significantly less of the business. Of course, that's not really a good trade. But the caveat here is ideally the whole goal here from the management team is not to dilute you or make you lose value or less ownership in the company. It's so that they can reinvest that money and make your shares more valuable. So even though you own less of it, the goal is that even though the less percentage is ideally on a net basis, still more than you had previously.

37:35That's the goal in theory, at least. And then it doesn't only go in a dilution perspective. There's a lot of companies, I mentioned Amazon or Walmart, some of these later stage companies, they'll actually do the opposite of a share offering or basically dilute you. They'll do a buyback and they'll actually essentially give you more ownership in the company. Walk us through, Brian, about how the opposite of a secondary offering and a dilution works with buybacks. If you look at the stock market today, companies are often classified into growth versus value or small cap and mid cap and large cap.

38:07I actually don't think those classifications are all that helpful. And if I was to redesign things, I think stocks should be classified into three different categories. One category would be capital raising. They are going to be continuously going to investors because they're in growth mode and they need capital. I think once you're done raising capital, you go into the second category, which is self-funding. So you're producing profits, you're producing free cashflow, you have enough in your bank account that you don't need to dilute investors anymore. And then the third phase of that, I think, is the capital return phase.

38:35Basically, you're past your hyper growth phase. You're in a mature industry. You're making so much in profits that you don't know what to do with it. So you're going to return that capital to your shareholders. And the two primary ways that companies can do that is one, through a dividend. So that's literally just giving them cash directly from the company's bank account. And the second way is by doing a stock buyback. Now, stock buybacks have been in the news for the last five or 10 years, and they've really gotten a bad rap with investors that companies are spending billions of dollars on stock buybacks, and people are complaining that they should be doing other things with that capital.

39:06Stock buybacks can be a fantastic use of company capital when and if they're used appropriately. So let's go back to our example that we just had. So we have 200 ,000 shares in total. A new investor came in, they bought 100 ,000 shares, you and I each own 50. So the current breakdown is you and I have 25 % of the business, this new investor has 50 % of the business. Well, let's say that our company is self-funding, it's growing, and it has all these profits coming in. And we decide, you and I decide, that we want to eliminate some of the stock that these outside investors own so that we can own a larger percent of the business.

39:40So let's say that we have$200 ,000 in cash, and we want to buy back those 100 ,000 shares that we sold previously for a dollar from that third investor. Let's say that we do that. So we take 200 grand from the company at$2 per share. The investor agrees to that and he gives those 100 ,000 shares back to the company and the company retires or just eliminates those shares altogether. So previously, there were 200 ,000 shares in total. Now there's back to being just 100 ,000 shares in total. And just like magic, our ownership in the business went from 25 % each to 50 % each. So we now own a larger percent of the business than we did prior to the buyback.

40:18That's exactly what a buyback is. And if you look at companies like Berkshire Hathaway, Apple, Microsoft, large companies that just gush cash, they are currently actively buying back their shares from their existing pool of investors, which reduces the total number of shares outstanding, which makes each remaining shareholder own a slightly larger percent of the business. And some of the best investments in history, some of the best managers in history, opportunistically buy back their stock from their investors in order to create more value for the shareholders that remain. And we can tie this back to part of our conversation earlier when we talked about how after the IPO, if you buy a stock, you go onto your brokerage account, Robinhood, Fidelity, whatever it is, and you buy a stock or sell a stock, you're not giving that money to the company.

41:04You're actually trading it with an investor, like you said. But if a company is actually buying back their shares, they have to go back to these shareholders, like you said, these outside shareholders and buy back publicly held shares. So sometimes if you're selling shares, you are selling it back to the company. I mean, you will never know this really, but it is very possible that if you go in there and you sell your Walmart shares, that it could be on the other end, that could be Walmart actually buying their shares back. That is possible. Once a company stock is publicly listed, you, the investor don't really know who is on the other end of your transaction.

41:34And you shouldn't really care all that much. All you care about is that you get the price that you want, right? And the transaction goes through. So all that's taken, handled by the broker itself, but you are a hundred percent right. You could be selling your shares if you're doing so back to the company itself. Now, one of the most important things about buying stocks is the value. You don't want to overpay. I think people know that they don't want to overpay. You want to get a good deal. And there's so many different opinions and strategies for valuing a stock. We're going to talk about how you do it.

42:02But I think if I were to ask 100 people, I could get at least 100 answers. I think some people would provide more than one. So you could have 150 answers if you talk to 100 different people about how to value a stock. So first, explain to us why it's important to value a stock in the first place, and then explain to us how you do it and what your process is. Yeah. Valuation is something that deserves not only one podcast itself, probably a thousand podcasts itself because it's an extremely complex process and there's so much nuance to really valuing a business. But at its core, the best teacher that I've seen of how to figure out a business is value a business is Shark Tank.

42:38If you ever watch Shark Tank, you know that the investor, the company goes in and we're selling blank. We're trying to raise blank capital and we're going to give you 10 % of the business. A business comes in and says, we want to sell$50 ,000 and we'll give you 10 % of the business. And then the investors say, well, we'll give you 50 ,000, but we want 20 % of the business. That's valuation. It's the art of figuring out how much a company is worth, how much a company is currently valued based on its financial numbers that exist today and its future projections. Now, why is that important? Well, let's take things to the extreme, right?

43:09Extremes really, really help. So we just went to an outside investor and we sold our stock at$1 per share. All right. Well, let's think about it from that investor's perspective. They paid$1 per share to buy our company and they earned, if our business continues to be successful,$1 in earnings in their first year. That's a 100 % return on their investment. Is a 100 % return in a year a detractive return? I think so. That's extremely good. So we could really make the argument that our company valued at$1 per share is way too cheap, just way too cheap. So let's go to the other extreme. Let's say that we want to sell our stock at$1 ,000 per share, right?

43:50$1 ,000 per share. That's where we think we are valued at. And this other investor agrees, right? So they buy stock in our company at$1 ,000 per share. Well, again, we just earned$1 per share in earnings for the year. So if you take that$1 per share, divide by the$1 ,000 per share price, that gives them a return on their capital of 0.1 % in that first year. Now, why would they invest in our company and get a 0.1 % return when they could go open a CD at a bank and get a 0.5 % return or buy the 10-year treasury yield and get a 2.5 % return? So$1 ,000 per share is way too high and$1 per share is way too low.

44:32So what's a fair price to play? $20 per share? At$20 per share, the investor would be buying and they would be getting a 5 % earnings yield on their investment. Well, that might be a fair price. And maybe some other investor says, well, I'll pay$25 per share. In that case, they're getting a 4 % yield on their investment. Or maybe the whole market goes down and everyone's in a bad mood. And investor says, I'm only going to invest in this company at$10 per share. I I demand a 10 % return on my investment. Broadly speaking, that's what valuation is. When you're making an investment in business, you're buying into that company's future profit stream.

45:08And the higher a valuation you pay, the lower the yield you're accepting today. And you're assuming that the growth is going to be there to make up for it. And conversely, the lower valuation you pay today, the less optimistic you are about that company's future and the higher yield you're paying today. So when it comes to valuation, it's just a give and a take between how enthusiastic investors are about investing in a company and how pessimistic they are at any given time. But as we said before, valuation is an extremely complex topic that you could just fill, books have been filled on. Let's take a quick break and hear from today's sponsors.

45:43Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you. We've got a handful of other shows for you to explore, from learning about Bitcoin to embracing a richer, wiser, happier lifestyle. Just go into your podcast app and type in We Study Billionaires to find our collection of shows. We Study Billionaires is our flagship podcast, and we've made a name for ourselves over the years by interviewing the best investors in the world, including Ray Dalio, Howard Marks, Joel Greenblatt, and many, many more. My colleagues Stig Brodersen, Clay Fink, Kyle Greve, Preston Pysh, and William Green each host their own We Study Billionaires episodes and bring their own unique perspectives.

46:24A whole new world of insights awaits you. Just go ahead and type in We Study Billionaires into your podcast app and see what you've been missing out on. Seriously, go ahead. I promise you'll like what you find. Bonus points if you show your support for our work by clicking follow. If something piques your interest, just start listening. No hard feelings. I'll be waiting for you back here. Just like everybody else, there was a time when I was a beginner investor, and I have to say, investing is particularly filled with jargon that and just make it so difficult for new investors to understand what is going on.

46:54But it's never too late to get smarter about stock investing from the ground up. At The Investors Podcast Network, we've made a habit of studying the world's best investors. And now I'm distilling those learnings into a simple course for you or for anyone in your life who you might want to share the gift of knowledge with. With my How to Get Started with Stocks course, you can master the principles of excellent lifelong investing with valuable insights for both beginners and pros. The course covers 10 different sections, beginning with the basics of what a stock actually is and how the stock markets work, to strategies to optimize your retirement savings, how to pick great companies for the long term, what to look for in ETFs, and how to monitor your investments, plus so much more.

47:33To begin getting smarter about investing, just visit theinvestorspodcast.com slash get started with stocks. That's theinvestorspodcast.com slash get started with stocks. And for a limited time, you can use code STOCKS15 for a 15 % discount at checkout. Not to be cliche, but building a market-beating portfolio really doesn't have to be a mystery, at least with the right tools. If you've listened to our podcast for a while, then you know we spend a lot of time learning from savvy investors. So why not use the same tools we do? With TIP Finance, you can. Screening for great companies, calculating intrinsic value, keeping up with legendary investors' portfolios, and more are all not just possible but easy to do.

48:19TIP Finance was created by investors for investors. It's quite literally the tools we wanted to use ourselves when researching investments in a simple-to-use interface. You can get started by creating an account for free. Who knows, maybe TIP Finance will help you find your next 100-to-1 investment. Between the screener and Legend Investment Portfolios to reference, I've gotten a ton of ideas from TIP Finance. What are you waiting for? Take the next step in your investment journey today with the right tools at your fingertips. Grab your device and type into your browser, theinvestorspodcast.com slash TIP-finance to get started.

48:57That's theinvestorspodcast.com slash TIP-finance. All right, back to the show. So it's very common for investors to want to get stock ideas from other people, whether they're super investors or even yourself, Brian. And I think that could be a good strategy to get ideas, but what's really difficult about it is the valuation piece because you have one rate of return that you require, Brian. Maybe you're happy with a 5 % return. Maybe I need 10%. And so even if we both say Apple is the best company, we both want to invest in it. If you need a 5 % return, I need a 10 % return. We're going to have to buy at different prices.

49:32So there's no right or wrong, really. It's really whatever you think and whatever your required rate of return is, is going to impact what you can pay for the stock, as Brian just outlined. That's an additional layer of investing that you can't just copy other people. Robert Leonard Yeah, completely. Like you, I love getting investing ideas from other people, especially investors that I respect. But you can't ever just look at what another investor is doing and copy them because you don't know how much of their portfolio they're putting into that idea. You don't know what their timeframe for holding that idea is you don't know their reasons for buying that stock, but it's really the timeframe.

50:05I think that's a big one. I might like Apple stock today for the next 10 years, but if you're thinking if somebody else is buying Apple stock for the next 10 minutes, well, we're going to be doing what seems like the same thing, but because our holding periods are so different, we're just going to have wildly different expectations about the company. So yeah, this is why valuation is so tricky because all market participants are looking at the price and investing in the company the same way, but how long your holding period is and what your required rate of return is and your assumptions about that, what the company is going to do in the future vary hugely from person to person.

50:36And this is why the numbers move up and down all the time and why stock prices continuously move because all of those assumptions that each individual investors are making are different. If you look at a stock on a short-term basis, like you just said, you'll see it going up and down, up and down, up and down very frequently. But if you zoom out a little bit and you look at it over five or 10 years, you don't really see a lot of ups and downs. You do see a crash here and there. But generally speaking, a lot of times it's pretty consistently going up, up into the right. Why does the stock market, at least in the US, trend up?

51:06And why is it always recovered from crashes? Again, let's get back to what is a stock. I think it's always helpful to start with what is a stock. When you're buying a stock, you're becoming a part owner in that business. And broadly speaking, while valuation on a moment to moment basis changes drastically, if a company earns$1 in earnings per share, and then 10 years later, that company has grown and is now earning$10 in earnings per share, you can be very confident that the company will be trading at a higher valuation and a higher number 10 years from now than it is today, all other factors held equally.

51:40So companies are valued on a multiple of their profits. And as those profits grow, the value of the company, at least in theory, should also grow in lockstep. So when you look back and look at the long-term charts of the S &P 500 or the Dow Jones Industrial Average or the NASDAQ, the fundamental reasons why those indexes are higher today than they were 10, 20, 30, 40 years ago is that the individual businesses that comprise that index are far more profitable today in dollar terms than they were 10, 20, and 30 years ago. So that is the fundamental thing that drives the stock market higher over time.

52:16And when you're talking about at a macro level, what is it that makes the profits of American companies or the companies in the index a higher over time? Well, there's several factors that drive profits up over time. Factors like inflation, right? What is inflation? Inflation is when prices, broadly speaking, that businesses charge rise over time because the value of the underlying dollars decrease over time. Well, when prices are rising, who's on the other side of those transaction. Businesses, right? Businesses, revenues, and their profits are rising, broadly speaking, at the same rate of inflation.

52:48So as inflation is positive, over time, that drives companies' profits higher. Two is productivity. Broadly speaking, each year, humans get better and better at making stuff, producing stuff with fewer and fewer inputs, right? That's productivity. We get there through efficiency gains in businesses. And as companies in American business become more productive, that leads to rising prices over time. Another factor, population growth. The population of humanity is rising each year at a slower and slower rate, but it's still a positive number. Historically, that population rate was much higher many years ago than it is today, but each year, roughly half to 1.5 % of the population of humanity grows.

53:29So that means there's more consumers out there. There's more people that are actually buying goods and services. So the markets that these companies are selling into is higher. Another one is innovation. New products and new services come along each couple of years, and those open up brand new market opportunities. What was the value of the smartphone market in 1990? Zero. Zero, right? It was worth nothing. What was the value of the smartphone market last year? I don't know the exact number, but I can tell you it's measured in the hundreds of billions of dollars. And to say nothing of all the ancillary markets that having smartphones have opened up, like things like ride hailing and person-to-person payments, Google Maps, et cetera.

54:06So as new innovations come along, yes, they sometimes destroy and eliminate old markets, but they often open up new market opportunities that businesses rush in to fill, and that in turn allows profits to grow over time. And then there's things like stock buybacks, right? Companies are spending billions of dollars each year to repurchase their shares from investors. They're also paying out billions in dollars and dividends each year. When you combine all of those factors together over the course of a year, maybe each individual component adds half a percent to 2 % to the earning stream of the fundamental companies underneath.

54:41But when you zoom out and look over long periods of time, the profitability of companies continuously moves higher and higher over time. And as long as those fundamental drivers remain in place, that should be the case for the rest of our lives, hopefully. I've actually become a little bit worried about this idea of the stock market always going up over the last couple of years, maybe. Maybe I'm just a pessimist, but I see a lot of posts on social media. And this is not even from you, Brian. This is just from on social media in general. But I see a lot of people posting and saying that people should just keep buying no matter what, or that the stock market always goes up.

55:16And I know that's been true for the past 100 years. Everything you just explained, completely true. But when I see these posts, I can't help but think of the Japanese Nikkei market, where if you invested in money back in the 90s, 1990 specifically, you wouldn't have made a single dollar in that index or that market until December 2020. You wouldn't have even gotten back to even for nearly 30 years. And I know the Japanese markets and the economy are different than the US, and that you would have had to buy at the peak of 1990 for what I said to be completely true. But nonetheless, I think the principle and the general idea stands.

55:53I'm concerned that one day, this idea that stocks will always go up in the US is going to be changed or wrong, especially at some of the valuations that we've seen the past year, two, three, four years. How do you think about the international markets that haven't always had a stock market that goes up? And why couldn't that happen in the US? So I am not an expert on the Japanese stock market at all. The stock market that I know, that I studied, that I paid much attention to is the US stock market. And all the data that I pulled for my book is based on the last 100 plus years that we have to look at.

56:26But the fundamental questions that you're raising, I think are sound. Is there a risk that you can invest at the wrong time and you're paying way too high of a valuation and then interest rates rise or inflation rises and you don't realize a return on your investment, just like the Japanese market has? Yes, that is a risk that investors are constantly taking on. One way that you can mitigate that risk is I would never invest everything in the stock market once at one time and then just assume that that's going to be my only investment ever. Nick Majuli named his book right, Just Keep Buying, meaning if you continually invest in the stock market again and again and again at different times in the market cycle, at different valuation, at different dividend yields over the long term, so long as those fundamental growth drivers, profit growth drivers that I mentioned before are still in place, I'm still very confident that 20 years from now, you will have a smile on your face at what the markets did.

57:22But you don't have to look at Japan. Look at our own markets. From the year 2000 to the year 2010, if you made an investment in the NASDAQ or the S &P 500 during that time, and you bought at the peak price in 2000 and held till 2010, you went 10 years and earned basically a zero return or something close to zero return on the price part of your investment. And during that time, valuations went from very high to very low. And when that happens, that is a headwind to you earning a return on your capital. However, if during that same 10-year period when stocks did nowhere, if you continued to invest on a regular basis, weekly or monthly, eventually, you would be very happy today with those decisions.

58:02Because while the 2000s were a bad period for the markets, 2010s were a wonderful time periods for the markets where the valuations went from very low to very high. And this is why trying to time the market is so incredibly hard. It looks so easy when you're looking backwards to say, oh, just buy here. It's an obvious low. Sell here. It's an obvious high. But when you're living through it day by day, minute by minute, trying to make real-time decisions about what the market is going to do is just incredibly, incredibly, incredibly challenging. So I recognize that the next 10 years in particular could be very challenging periods for investors in the US market, right?

58:39Interest rates are likely to be rising. Valuations today, broadly speaking, are still very high. So if you said to me, if you fast forward to 2030 and said the last 10 years haven't been good for investors, I would say that makes sense to me. However, that's going to change nothing about what I do personally. I'm still going to invest continually into the stock market because I have a multi-decade time horizon. And again, as long as the fundamental growth drivers I mentioned before are still in place, I'm confident that 20 plus years from now, I'm going to have a smile on my face by following that strategy.

59:11You recently tweeted a quote from Tom Engel that I really like, which was, if this company is the next great growth stock, then a little is all I need. If it's not, then a little is all I want. Explain what this quote means and why you and I like it so much. Tom Angle is one of my favorite investors ever to study, and he's not someone that's well known in the investment community. So Tom worked for nine years in the normal job market and then retired in the 1980s and has lived off of his portfolio in the last 40 plus years since. And the way that he's done that is Tom is a phenomenal, phenomenal long-term investor.

59:50He buys dozens of companies that he thinks can grow their revenues and their profits for years and years on years. He studies those companies intensely. And then his portfolio has averaged like a 15 %-ish plus return over the last 40 years. And if you do that for any period of time that's measured in decades, you're going to have much more money at the end of that period than you would at the start. But I love this quote from Tom, and it just so brilliantly explains why diversification is so important. If you find a company's stock, a random company stock, that sounds like an exciting opportunity.

1:00:23It's natural for new investors in particular to say, that's it. I'm going all in on this stock. I'm putting my portfolio on this company because I like what I hear. But Tom's point with that quote is, well, if this company turns out to be the next Netflix, the next Tesla, the next Amazon, and you have just a little bit of your portfolio devoted to it, that's all you need to do extremely well in the markets. I mean, Amazon is something like a thousand bagger, thousand roughly since it's IPO. So if you put even a thousand dollars into that, that thousand dollars turned into a million dollars, right?

1:00:57Getting Amazon into your portfolio in the 1990s was a phenomenal decision, but you didn't need to invest a lot of money to do very well. Conversely, if that company that you're investing in is the next pets.com and it's going to go down 99.9 % and go bankrupt, if you only put a thousand dollars into it and it turns out to be a terrible investment, you're not going to lose your house. You're not to get hurt that bad as an investor. So when I'm personally, this quote has influenced the way that I invest so much. I used to be much more interested in investing everything into the company on day one as soon as I learned about it.

1:01:29But I've learned from studying my own market history that I don't always get them right. And some of the best investments that I've ever made were just starting with little bits of money into a company and then following that company, then adding to it over time as it proves itself out. So that quote to me is just a reminder that while we, even if you have a checklist and you think you know a company really well, the future is not guaranteed. And one of the best things that investor can do is focus on risk management and covering their downside first. One of the first times that I experienced this was actually with Zoom.

1:01:59And so I had bought Zoom in late 2019. So I'd say anywhere from three to six months prior to the pandemic starting. And I had a small thesis about it. We were using it for the podcast. It was a pretty good software. This was almost two, three years ago now. So there wasn't a lot of competitors like there are today. So it was a different landscape. And I just said, you know what? They'd look like the market leader. And I had this little bit of thesis. I didn't put a lot of money into it. I just put a little bit, but because of the pandemic, it went up so significantly. That was like my really first time that I've seen such a small position because I really didn't put much money into it grow to a pretty substantial position because a lot of other times I had put relatively large sums of money or percentages into them.

1:02:37So to see them grow, I wasn't really overly surprised. But when I put such a small dollar amount into it and then saw it grow as much as it did, it really illustrated Tom's quote to me. But I think the hard part is, like you mentioned before, is timing the market is so hard. And when you look back in hindsight, it looks so easy. And that's the hard part about putting in small dollars is because you'll have something like Zoom. And even myself, I study these concepts all day, every day. And I still look back and said, man, I should have put a lot more money in Zoom. And then the problem is, next time I see a situation like Zoom, I'm going to put a lot more money into it and I might not be right.

1:03:12And so it's this emotional behavioral piece of investing that is so, so difficult. Yeah, you are 100 % correct. And what's even more interesting about that quote is if you look back at the greatest stock picks of the last 10, 20, 30 years, Netflix, Amazon, Tesla, it's so easy now to look back and say they were obvious buys 10, 20 years ago. It's obvious that they were going going to do that thing. But if you even had the foresight to make investments in those great companies 10 and 20 years ago, what you might not realize along the way is that those companies during their tremendous bull market rides up also put their shareholders through long periods of tremendous pain, tremendous pain.

1:03:56Amazon, again, up a thousand fold from when it's IPO. And during that time, it fell 92%. 92%. You had to hold through a 92 % loss over a multi-year period in order to earn that thousand bagger return. The same can be said of every other successful investment out there, including, by the way, Berkshire Hathaway. Berkshire Hathaway, big, boring value stock Berkshire Hathaway that's up, I don't even know how many fold for investors, has fallen peak to trough more than 50%, I think four times in its history, Berkshire Hathaway. So the price that you have to pay as an investor, if you are going after those huge returns, is you can be 100 % certain that at some time, the position that you buy is going to be down huge on you at some point.

1:04:47That is just the price of admission of investing in stocks in the individual stock market. And if you can't handle that, which is easy to say, it's really hard to do, but that is a requirement if you want to be a stock picker. When you say 92%, that sounds like a lot because it is. But if you put that in dollar terms, let's just think about that for everybody listening. You put$100 into something, you have$8 left. Can you see$100 go to eight? Just think about that for a second. You probably have seen a stock, say you put$100 in, you've probably seen it go to 90, 85, 80. So anywhere from a 10 to 20 % return, you probably didn't feel very great.

1:05:20Now imagine that$100 went to$8 left. Imagine you put$1 ,000. Now you have only$80 left out of$1 ,000. I mean, that is extremely difficult to stomach. Very, very hard to do. Well, let's just look at Zoom recently. Let's say you put 10K into Zoom at the IPO. You put 10K into Zoom, within 14 months, that 10K was worth 90K. 10K to 90K. That 90K currently worth 18, right? And here's the other thing about that that's really, really hard is while every great stock has gone through an immense decline, every terrible stock has too. And it's really hard to tell, is this going to be a great stock or is this destined to be a terrible stock during the decline?

1:06:02So that's what makes investing even trickier is while all great stocks will go through declines, all bad stocks will too. And telling which was which in real time is incredibly hard. I've said it on the show time and time and time again, but investing is one of those very interesting fields where people wake up one day and they feel like they can pick stocks like people have been studying it their whole lives. And I'm not saying you shouldn't do it. It just fascinates me that people will study decades to become a doctor or a lawyer or things like that, and then wake up one day and think they can become an individual investor overnight.

1:06:36And it's hard. Everything we've talked about today, I hope we've illustrated how important it is, but also difficult. It's not easy. And there are simpler ways you can get into passive investing through ETFs and index funds, but it just really interests me is how difficult it is and how people still think that they could just wake up one day and do it. But Brian, there's so many other things that I'd love to chat with you about. We could talk for hours and you're always one of my personal favorite guests. We'll certainly have you back on the show soon. Before we close out the episode, I want to give you a chance to tell the audience where they can go to connect with you, best place to get your awesome book that's coming out very soon.

1:07:11And yeah, just best place to connect with you. Robert Leonard You can get my book, which is published late on April 5th at any retailer, including Amazon, Barnes & Nobles, et cetera. I'm super excited for that to get out in the world so I can get some real world feedback. But if you want to connect with me directly, the best places to do so are on Twitter. I'm at Brian Feraldi. And if you're interested in individual stock investing and some investing lessons, I also have a YouTube channel, which is my name, Brian Feraldi too. I'll be sure to put a link to Brian's book, YouTube channel, Twitter, everything Brian's doing in the show notes below.

1:07:43If you're on social media, one of the best ways to make it a useful part of your day and not just a time suck is to follow people like Brian. I highly recommend it. It's one of my favorite follows. So all that information will be in the show notes below for anybody that's interested in checking it out. Brian, really, thanks so much for joining me. I enjoyed it. I always have a great time here, Robert. Thanks so much for having me. All right, guys. That's all I had for this week's episode of Millennial Investing. I'll see you again next week. Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by the Investors Podcast Network.

1:08:16Every Wednesday, we teach you about Bitcoin and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.