6 Warning Signs a Company Is Quietly Dying (Part 1)

0:00In the beginning, I used to think that the biggest risk to what investors do is buying the wrong company, just the wrong company in general. But now that I've been around this for a while and I've learned more and more, I'm starting to realize that there's kind of a sneakier risk than that. And it's buying a company that used to be great. And you're not noticing that it's quietly dying until the stock's down 70 percent. And the story has completely changed. And it seems like overnight. So today, Andrew and I are going to be discussing kind of like a business autopsy. We're going to go through six symptoms of a company that is in decline, what the early warning signs are, and how you can protect yourself from this insanity.

0:42I remember starting my first business. I had no clue what I was doing. I just knew I had an idea and I didn't want to be that guy who talked about it forever, but never actually did anything about it. So I went for it. And honestly, that one decision taught me more than I could have ever learned sitting on the sidelines. If you've got something like that sitting in the back of your head, my best advice, start. The timing is never going to be perfect. Summer's packed, fall gets busy, winter's coming soon, and before you know it, another year has gone by and that idea is still just an idea. Shopify makes it a whole lot easier to take the leap.

1:12They've got thousands of templates so you don't need to know how to code or design. Just point, click, and your storefront looks professional from day one. Once customers start finding you, Shopify's checkout saves their info so they can buy with one click. and when you hit a wall their built-in ai assistant sidekick has answers on the spot no waiting no digging all you need is the idea shopify handles the rest if you're serious about hearing your first start your free trial at shopify.com slash beginners today you heard that right start your free trial today at shopify.com slash beginners that's shopify.com

1:47Stephen:slash beginners one of the things about bitcoin that's really surprised me is how much easier it to transact with these days. I was always under the impression that using Bitcoin as payment was inefficient, expensive, and risky, but Cash App has made it easy. It seems like Cash App is being accepted by more and more merchants everywhere I look. It's usually a lot of small business owners like myself, and now many of them are starting to accept Bitcoin as payment. Bitcoin is often talked about as an investment, but it was built to be used. With Cash App, you can actually do that. Send Bitcoin instantly, pay at local Square businesses that accept it, or move it to your own wallet whenever you want.

2:20Stephen:It works more like real money and less like something locked in an account. For a limited time, new customers can get$10 added to their balance. Just use code CASHAPP10 when you sign up and don't forget this part, send at least$5 to a friend in the first two weeks. Terms apply. CASHAPP is a financial services platform, not a bank. Banking services provided by CASHAPP's bank partners. Bitcoin services provided by Block Inc. brand. For additional information, and see the Bitcoin disclosures at cash.app.legal.podcast. You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast.

2:54Stephen:The show for the long-term investor. We cut through the noise to focus on what works. Compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. And welcome back to the Investing for Beginners podcast, everybody. My name is Stephen Morris, and he is Andrew Saylor. And I don't know if I've ever shared this on air with you guys or not, but I'm like a huge philosophy nerd. I love philosophy. I took a bunch of philosophy classes in college, and eventually one day, hopefully, I want to get a PhD in philosophy. No reason just other than to just do it.

3:41But I love philosophy. And in one of my classes, and I don't know if this was a quote the professor was saying or if it was his own thought, but he was talking about how history never repeats itself. Only humans repeat themselves. and I got to thinking about it and I'm like that is that's such a weird thought because of course history repeats itself but then after I thought about what he was saying for a while I realized that he yes he's not really implying that history doesn't repeat itself he's implying that humans cause history to repeat itself if it wasn't for the human factor then you know history would just go on.

4:24And so I bring that up to say, Andrew, that that human factor is kind of good because it makes it predictable. We, you know, since humans constantly repeat themselves and keep making the same dumb mistakes, we can kind of predict and see whenever they're going to do those things. And that's kind of what we're talking about today. You know, when it comes to the obvious signs or maybe not so obvious signs that a company is in decline. And I guess the first thing that I learned when I was researching on all of this is, and I got corrected very quickly, is a stock never dies, a company dies. Stocks don't decline, companies decline.

5:14The stock is the aftermath of a company declining. And that was a very important perspective that I gained from that is that the stock is the final verdict of the declining company. And once I put it into that frame of reference, it's like, oh, now all this kind of starts to make a little more sense.

5:43Stephen:totally like the the whole warren warren buffett following benjamin graham like figuring out what a business is worth because in the short in the short term it's a voting machine in the long term it's a weighing machine that stock price will catch up with a failing business eventually so one thing i want to make just plain and clear before we actually dive in today, Andrew, is like, you know, a lot of this is research I did, but it's not a doctoral thesis. This isn't, you know, hard, stone cold fact. Like these are just observations when researching this topic and these companies. These are just things I've found.

6:26So with that said, don't base your entire investing thesis on what I'm saying today. Do your own research and and go find your own things. So the first thing I want to dive into, Andrew, is just kind of your definition of what a great company is, because I think we all have a different idea of what a great company actually is. For me, they got to have a great if they don't have a great story with a great moat, I don't even really care. Like, I don't even want to see what your numbers are. Well, what's yours?

6:58Stephen:It is a concoction of a bright future. And then like you're saying, the story and the moat because um i want i want to see growth down the horizon but i also want to see why is this business going to be able to stiff arm the competition um i think we're fortunate if you want to call it fortunate in that we've been around with amazon kind of making its name to investors like amazon just takes on everybody and just you know they go into an industry and they just destroy anybody in it so they are like the poster child of competition is coming to eat your lunch um we have to remember that's the case for every business they're all competing and um as much as you see growth in some of these emerging places and where it seems like a rising tide lifts all boats, oftentimes the weaker businesses get shaken out and you don't hear about it because of survivorship bias.

8:02I love that you mentioned like the philosophy teacher

8:05Stephen:and how human beings, we all repeat ourselves. We're like predictably dumb. We all have the same problems that are wrong with us. And it's all these biases. And I love to like throw them in and sprinkle them in as we keep going. But I think that's a big one is like survivorship bias. We never take the time to do an autopsy. So we never are aware of reasons why businesses can fail or even aware that they do fail. And so I love this topic. I love that you're bringing it up. And I think that's why a moat to me is very important. But I'm curious, like, what draws you to the idea of a moat? And is it like a similar kind of idea or how are you looking at it?

8:53it's i guess part of like my military background um you know the the old adage is uh the best defense is a good offense i kind of apply that same perspective to companies you know if i want to you know if you look at sherman williams coca-cola these companies that have been around for literally a century. It's their moat that has kept them relevant all those years. And so kind of that same mindset, like their defense is what's allowed them to have an amazing offense repeatedly time after time, after time, after time. And while I would agree that offense, or I'm sorry, the old adages, defense wins championships, I would reverse that as well and say that in these cases, it's the offense that wins the championships, but their defense is what allows them to have that stellar offense.

9:54Does that make any sense at all?

9:56Stephen:Yeah, yeah, it totally does. But yeah, and I mean, Mo is so, so important to me. And then the reason the story is equally as important to me is because you can learn a lot from their story, obviously. You know, one of the, you know, I'll use Coca-Cola again as the example. How do they act when times are tough? How do they act when their supply or their distribution gets completely interrupted in some sort of way? And what do they do? And they've shown that, you know, they don't freak out. They stay cool, calm, collected, and they figure it out. And Coca-Cola has innovated the logistics game in many ways, you know.

10:43Before I started doing all of this, I worked in a logistics field and Coca-Cola is credited to many of the tradecraft, if you will, still today. And it's because of those things they had they had to figure it out. And so, you know, it's how you know, that's part of their story. How do they do the, you know, navigate these rough waters? Just as important. how do they navigate calm waters because calm you know when it's calm that that's how you get a complacent and complacency kills so uh how do they how do they fight the complacency of the calm waters as well so that's that was you know for me the the story is just as important as the

11:32Stephen:mode is because of those factors yeah it's awesome coca-cola is i think you could do endless business case studies on Coca-Cola and semester after semester, you'd be coming up with fresh material. But my question then is, all right, if we have these companies, obviously we're all trying to find moats with these companies and not every moat lasts. And a lot of businesses have what they think are moats and then those fail. So why do investors miss the early signs of a company that's going the other way. One that's the moat is failing. The business is starting to fail. Well, that segues perfect into the first symptom we're going to talk about, which is denial.

12:23And, you know, I'm guilty of this all the time. I've said it on this podcast. I don't know how many times, you know, it's Amazon. How is Amazon going to fail? Like it's Amazon. Of course, they're a safe bet. It's Amazon. You know, Meta, like Apple, so many legacy companies, even Coca-Cola, you know, they could fail. And it's not a far stretch or reach to say that they could. And that's that bias, that denial that locks, I think, us as investors into that. And the example I wanted to use for this symptom is Sears. because Sears was that legacy around for over a century. And I didn't know this until researching, but Sears is still around today.

13:14They have five open stores, which blew my mind. I was so shocked. But, you know, Sears was too big to fail. And I'm sure that in the 80s, investors were saying the exact same thing that I say about Amazon today. Sears, they can't fail. they're always going to be a staple in people's lives and so i think denial is is the number one way we go about just lying to ourselves and we look at it we see the moats failing and one point i wanted to say on that is it would be interesting to go back and look at coca-cola and see how their moat changed each decade. And because I guarantee it's their moat isn't near what it was back in 1940.

14:05And so I mean, is that part of it that Sears moat? Did they not change it, grow it, revolutionize it, whatever word you want to apply to it over the years? Did they just get complacent themselves and end up going the way of bankruptcy.

14:26Stephen:Yeah, I love that. Like, I think it's called the halo effect. This idea that certain brands, certain companies, certain people in the business world, they get this halo that goes around them and, oh, well, they'll never fail. But obviously that's not always the case. I don't even know whether they sell at Sears. I've never been to one. And that was the biggest downfall of Sears is when Sam Walton introduced Walmart. And I can't remember the year. I think Sam Walton started Walmart in the 60s, 50s or 60s. And it just slowly crept up on Sears, eating away at its revenue year after year after year after year.

15:16Walmart got bigger, Sears got smaller. I'm sorry, I'll say that differently. Walmart's market share got bigger, Sears got smaller. And I don't know why Sears or why they ignored it. I think they thought, and this is, again, this is just an assumption on my part. I think they thought that they're Sears. Everybody's going to love them forever. And that obviously wasn't the case. You know, if I can buy a lawnmower at Sears for$800 or Walmart for$400, which do you think they're going to pick? And sure, there are some people that will go to Sears just because they're Sears. But the vast majority of people, as they proved, chose Walmart.

16:03And then the final nail in the coffin of Sears was when Amazon came along. And Sears no longer had the revenue. And we'll talk about this again later. They didn't have the revenue to get their online presence in order to keep up with Amazon. And Amazon just absolutely decimated them. And in the early 2010s, Sears was trading at, I'm sorry, in the early 2000s, Sears was trading at$150 per share. and when they finished their final chapter, what is it, chapter 11 in 2018, they were trading at 10 cents a share and then they got sent to the pink sheets.

16:50Stephen:What if you could get a 25 % match on every dividend you earn? Well, now you can. When you earn dividends on the Plink app, you'll receive a 25 % cash boost up to$250 bonus per year. That means if you earn$1 ,000 in dividends, that's$250 more in your pocket. Your bonus can be taken as cash or reinvested, giving you potential to grow your earnings. No opt-in, no extra steps. As long as you own eligible dividend paying stocks, ETFs, or funds on the Plink app, your dividends are automatically boosted each month. And to make sure you never miss a bonus or a payout, that's where the Income Hub comes in.

17:25Stephen:It gives you one clear, simple view to track your bonus earnings, upcoming dividend payouts, and easily discover dividend earning opportunities. Goodbye, spreadsheets. Hello, smarter and more rewarding investment income management. Head to the show description to download Plink and start earning your 25 % bonus. Max dividend bonus is$250 per year, payouts made monthly. No opt-in required. Other terms apply. Investing involves risk, including risk of loss. Opinions expressed on this podcast are not necessarily those of Digital Brokerage Services, LLC, member FINRA, SIPC. I've been paying a lot more attention to what's actually happening inside my body when I train lately, especially when I hit a wall with my performance and nothing I do seems to move the needle.

18:03Stephen:What surprised me is how much of how you perform and recover actually comes down to what's happening in your blood. Markers most people never think to check. Here's what most people overlook. Training gives your body the stimulus, but your internal environment determines what actually happens next. Things like your glucose, whether your body is burning clean or running on fumes. Your omega-6 to omega-3 ratio. Which one is winning the inflammation battle after pushing your body? Your DHEAS, one of the building blocks your body uses to make testosterone, and one of the first things to quietly decline without you noticing.

18:32Stephen:When these markers are off, the right moves don't hit as hard, and the wrong moves hit way harder. When they're dialed in, the work you put in actually pays off. That's why I use Function. 160 plus lab tests a year so I can see exactly what's going on under the hood, not guess at it. If something is working against my performance, I want to know. That's what actually taking your training seriously looks like. I use this, and you should too. Check your health the way I do. Function provides 160 plus lab tests for a dollar a day and member pricing on MRI and CT scans. Join at functionhealth.com slash beginners or use gift code beginners25 for a$25 credit toward your membership.

19:07Stephen:What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. Not the sheets that you want. No, no, no. And in case you're wondering or don't know, pink sheets are non-regulated stock that are traded directly between the consumer and the company. To my knowledge, it's not regulated hardly at all. Not a great place to invest your money, in my opinion. I'm sure people have won there. I have no idea, but that's what a pink sheet is. It has another more common term. I can't remember what it's called, though. Over-the-counter? Is that what they call them? Yeah.

19:56Stephen:OTC, yeah. So, I mean, some of the signs that I noticed in this, Andrew, was revenue and earnings. For a long time, for Sears, they looked okay. They looked fine. but you notice that sears their their language was changing so the revenue was was pretty pretty flush but sears like they knew something was wrong their their language was changing um their growth uh slowed um and like i better like i said with that slow growth uh management was calling it temporary um and then uh like i said i guess the the one of the other signs for final signs is that uh you're just anchored into that legacy uh mindset and so if any of you listeners myself included if you have a mindset of it's whatever company it can't fail you need to check yourself on that immediately um because i think that was was one of the biggest factors in sears uh going the way they did yeah the the slowing growth thing that that can be dangerous because then you'll see the stock people are just kind of capitulating they're just slowly getting tired of it but as a person in denial you're like what we're still growing you know it's like it's It's still growth, but slowing growth, especially when you're losing market share.

21:42Stephen:I don't want to derail us too much, but there's a difference between an industry slowdown and a specific company slowdown. So every industry kind of goes through its cycles. You're talking about Walmart taking market share, Amazon taking market share. It's not an industry slowdown. This is a company slowdown and getting as much as it hurts. If you can, I guess, take that punch to the face and be like, you know what? The facts have changed and I just need to cut paint can save yourself a lot. I mean, what you're saying to go from 150 in the 2010s, I think you said. No, I correct myself. It was early 2000s.

22:30Stephen:Early 2000s. So like, that's a long time to, that's a long opportunity to cut your losses because that fall from 150 to 10 cents is massive. So this is like a train wreck in slow motion. And if you just kind of stuck to your guns, like I'm in denial, I'm in denial, I'm in denial, did not end out well. So I think it's a good lesson to be okay with being wrong and be okay with understanding sometimes the facts do change. right absolutely and yeah it's such a tricky thing andrew because while you're while you're you know yeah of course industries have their ups and the downs but even companies like it's easy to say like yeah sears is is experiencing this trouble but they can still turn it around that wasn't a far-fetched idea that they would be able to and i guess I don't know how to combat that because I mean, they're, they're, I mean, we have stock in our, in both our portfolios now that is, you know, maybe the company is not doing so great, but we have total faith that it's just a phase and they'll get through it.

23:48I don't know what makes them different from Sears. I couldn't figure it out. Like, I don't know.

23:55Stephen:well let's take um like dick sporting goods as an example they very much did not get wiped out by amazon even though they're very similar brick and mortar and i guess if you armchair quarterback hindsight is 2020 they were able to stay strong because they had a specific lane that they stuck to there like we are sporting goods that is our area of uniqueness and what you said earlier about how sears kind of sold everything to everybody maybe that's why there's only room for one or two retailers like that and if walmart or amazon does it better than you then you're going to lose share but um you look at like a dick sporting goods they're not trying to compete directly they're just trying to have kind of stay in their lane And who knows, like it could, it could all be something that happened behind the scenes.

24:55Stephen:And we're just, we're just, you know, a couple of guys like on ESPN, just talking about why, why the game turned out the way it did. But if I had to like put money on it, that would be my guess is that Dick's Sporting Goods had their own lane and their own specialty. And they really doubled down on that. I remember they at some point made a change where they started calling their customers athletes. And so it was like just every way that they behaved, even in the way that they would refer to their customers, they were differentiating themselves by really doubling down on serving athletes. And it's done well for them so far.

25:37Stephen:And maybe that's why Sears didn't succeed. well and i know dicks put a lot of capital into developing apps um the i know they have a golf app and a baseball app in particular i'm sure they have much more um but and and that's just to help you with your game like literally the app i believe they're all free those those two are free but but the apps themselves are just to help you track and improve your game as you play as and as you train and practice all that stuff um no different than like a gym app um but i mean that you know obviously with the dick branding and of course you got the recommendations for products as you get to certain stages in your game which i mean one that's brilliant marketing and two like what a great way to stay relevant um because we all love those little apps that help us track our metrics in the gym or on our runs or whatever the case may be.

26:42So, I mean, I think that was huge.

26:45Stephen:They were printing apps and Sears was still printing catalogs. Exactly. This was a good symptom. We stuck pretty long on this because denial is, man, that can really kill you. But what would be another symptom of a business going the way we don't want? So the next one I noticed is called I'm calling IncentiveRot. And you talk a lot about it, Andrew. It's one of your biggest pet peeves, I would say. I could be wrong, but I think it's definitely in your top 10, I think. And IncentiveRot is when management is just changing their focus and trying to engineer the product. They're trying to engineer the financials and the statements.

27:34They're trying to trying to make everything paint this pretty picture while their fundamentals are just slowly getting weaker and weaker and weaker. You know, in their earnings calls, they're using either like half truth language or very. What's the word? Very. Oh, good grief. When I ask you a specific question, but you give me a generality. What's the word? Yeah.