Debunking Wall Street: Why Common Sense Hurts Your Portfolio

0:00Most investing podcasts out there are going to tell you what to buy, what not to buy, what to do, what not to do. But today we're going to be talking about something else entirely. We're going to be talking about common sense advice, common sense things that sound great, but they very well could be holding your portfolio back. We're not talking about saving your pennies or buy low, sell high. Instead, we're exposing 10 sophisticated sounding traps that even smart, educated and experienced investors can sometimes fall into. Let's get it started.

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3:16Stephen:You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast. 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. Welcome back to the Investing for Beginners podcast, everybody. I'm Stephen Morris, and he is Andrew Sather across from me. And today, we're going to hurt stock market's feelings, or we're going to try to hurt stock market's feelings. And we're going to expose a lot of the, I don't know, the sleazy self-help jargon that sounds great.

4:09but when you actually dig into the math and dig into the the the simple psychology of it it doesn't make sense and it never works out for you so the very first one Andrew I guess first are you ready to go Andrew is there anything that you want to say before we get this kicked off

4:28Stephen:no uh no pressure though I mean dang if this isn't knock somebody's socks off I feel like I've let down the audience here every time all right so the very first one is we're going to be talking about um the low share price equals cheap trap and we've all heard it or at least thought it i know i have the because a stock is five dollars that is cheaper than a stock that is$500. And it is such a hard mindset to be, for me at least, because it's like, I can, we're so, we're taught, we're ingrained to like make every penny stretch as far as we can, or at least I was like, that's, that's what I learned about finances, make every dollar matter.

5:20And so whenever I look at that, it's like, man,$5, like I can buy, you know, if I'm investing 100 shares i can buy a handful of shares have some money left over to go someplace else as opposed to the 500 i'm only getting a very small fraction of that share and so it doesn't it's really hard to let that sink in to the brain bucket of that five dollars is actually way more expensive than the 500 what is the reality of that mindset i know it's it's so hard like um

5:56Stephen:i just feel more wealthy if i have 100 shares of something than if i have 0.2 even if it's the same dollar amount it's it's so strange and i've been and i've been investing for a while and i haven't been able to shake that so obviously unless you're an absolute beginner you kind of know the reality is it's all about the market cap. It's not about how many shares you own. It's not about how high the stock price is or how low it goes. Companies will do stock splits. They will manipulate the shares, but all that matters is what is my slice of the pie and how much of that high am I getting whether it's 10 shares of a$20 stock or it's 0.2 shares of a thousand dollar stock a dollar amount of us of a stock is a dollar amount of a stock we have to remember and keep ourselves grounded in that and really remind ourselves when we're looking at something that's $15 a share.

7:03Stephen:I remember American Eagle being$15 a share and that felt really cheap. And then if you start playing the options game, then you're like, oh, I can actually buy options, you know, because it's such a cheap stock price. Have to just remind ourselves. And I don't have a good solution other than just just recognize that that's something your brain is going to trick you in and try not to be swayed by it. well and even to that point you know i made the comparison of a 500 stock versus a 500 stock uh regardless like you said of the price we're we're looking at the market cap we're looking at looking at the the valuation so even if it's a five dollar stock compared to a five dollar stock is the key point to take away there is the one is extremely expensive and one is extremely cheap maybe or they might be extremely yeah yeah they might be very expensive so the key takeaway is focus on the market cap focus on the valuation and understand that you're probably in the majority of people that have this fallacy floating around in their head that they have to make their dollar stretch and so they're doing that by buying the bargain bottom or the bargain bin stocks and like andrew said too i'm sorry to get on on a soapbox like just because a stock is five dollars doesn't mean it's bad there are there are some great five dollar stocks out there um none come to my mind right now but i'm sure they exist um but was it the bear the bear company build a bear that was a great five dollar stock yeah yeah that's now like a 60 stock i'm still beating myself up about that so the next one is uh i missed the boat fallacy and this is a stock that you know if you're looking at a Microsoft or a Costco, there's been just going crazy for the past decade.

9:16Your brain, other people, especially other people, I've heard this a lot for, I think I've heard this more from other people than I have from myself. And that is, I bet you wish you got in on that 10 years ago or whatever the case may be. and even I say it because I talk about, you know, missing the boat on Tesla when I got my army bonus. It's not too late a lot of times. A lot of times there's an entry point. You just got to find what that entry point is to make that stock a winner for you. So, Andrew, how do you navigate this fallacy? Because I know you have this often as well floating around in your mind as well.

10:02Stephen:It's hard. you have to unlock the imagination and optimist part of your brain and turn off the pessimism part. Because is some of it just the fact that you want to say, I don't deserve a great opportunity like this. And so if it's in my lap, it must be too good to be true, right? But a lot of times, the best companies can compound for long, long times. And I think we don't realize that compounding can come from multiple ways. You look at a company like Home Depot or Domino's. Actually, Domino's Pizza was one that really threw me off. And I might have shared this with you recently. did you know if you looked at the time period from i believe it was 2013 to 2023 the stock that performed better than google apple all those big tech mac 7 names that you think of was actually domino's pizza and you're like domino's pizza like they didn't do much but they bought back so much stock that your slice of that domino's pizza pie got so big that even though Domino's, the company was small, the stock just did crazy.

11:20Stephen:And that can happen with a lot of the stocks in your portfolio. And it has happened a lot of times in the stock market. Home Depot and Lowe's were great examples in the 90s. Harley Davidson was another great example. The power of dividends, buybacks, and compounding can really turn these companies that might on the surface look like, oh, they're too big. Everybody already knows the story, but they can continue on and do some really, really amazing things. One last thing I'll say about this, which it's just been burned in my memory. There's a story in one of the books about Coca-Cola, which yes, I'm going to mention Warren Buffett again.

11:57Stephen:I apologize. I think either Warren Buffett said he put this on his desk or he had it like in his desk drawer or something, but there was a clip of somebody in a magazine saying that, man, I wish I bought Coca-Cola, but the company was too big at the time. It was already the number one stock in the S &P or whatever the market equivalent was at the time. It's already the number one stock. Everybody knows the company. It's already big. I missed the boat. I wish I... It's too late to buy that stock. That quote was from a magazine in 1927 or something like that and so if we remember buffett bought coke in 1987 60 years later and had one of the best returns in the 10-year period that we've seen for a big company like that so yeah coke was not it was not too big at the time it was not too big 60 years later the company you might be looking at now might not also be too big you just have to think a little bit outside the box and we love to use sports analogies especially baseball uh on the show so so you know i have to bring up the new york yankees um and i know it hasn't been recently they've been in a slump recently but winners winners tend to keep winning you know and losers tend to keep losing Boston Red Sox.

13:25So I like throwing that out there. But yeah, I mean, and one of the things you brought up is in the stock market, I would say, especially even if something looks too good to be true, that doesn't always mean that it's too good to be true. And I remember when you were teaching me about um what is it cc's uh or not cc's uh seize candy am i saying it wrong csc candy yeah cc's candy okay i was thinking of something else but these candies i guess technically yeah i think that's anyway you were teaching me about that and as you were explaining to me like the valuation and the company and everything i'm like there's no way this makes money like there's no way like this is a like a great investment it just seems too good to be true it's because it really is simple like what they do is simple and you when you brought it up a few podcasts ago you're like you can't even really call them a store it's a stand like because their their business model is just so bare bones it's just what it needs to be it's just enough so even if you're looking at it and it's like man this is too good to be true dig deeper because it may it may very well be too good to be true but it may not be you may be catching your coca-cola at the right time because i'm sure if knowing what we know today you know we're looking at some of those stocks back then it's like oh man like the writings on the wall it's just people were too paranoid So, I mean, that's a really great one, Andrew.

15:05So the next one is, I think, probably the most painful for so many people that try to buy stocks themselves. And that is diversification. um we think that diversification for some crazy reason means that we gotta have i don't know like a two to one ratio or what is a one to two ratio like we're we're evenly dividing up our portfolio and by the time we get done it done with it we have we have 50 freaking stocks in our portfolio and we're trying to manage all this and do the math and do do valuations make sure we're keeping up with all that stuff and that is like i don't think you could do that with a full team with 50 stocks like that would be a hard portfolio to run um well why do why do we get in such a it's so weird knowing what i know now but what i guess that's more of a beginner fallacy

16:05Stephen:why is that so easy for them to believe i i actually i think it goes deeper than this i don't want to get whatever who cares i'll say it like it's not just a beginner problem i it's almost like um pokemon it's like you got to collect them all it's like that that next stock i buy is going to be the one that's going to make me rich and so you just keep collecting them like pokemon and we and all of a sudden you look back and it's like wow i have a 50 stock portfolio how did that happen so it's it's psychological i think um and if if that's you and you're in that place i wouldn't feel guilty because it's a natural thing but this is one of the things i struggle with is once you have a really strong portfolio

16:59Stephen:would adding more stocks to that portfolio really help or are you just what was it called from the league are you uh tinker not tinkering a tinker stinker tinker yeah are you just doing a tinker stinker in the morning every morning like at a certain point like you you've you picked the the good businesses so it's all balancing act i think it's really hard it's it's different for everybody we all have different situations and you obviously don't want to rest on your laurels i think that's a a risk of um saying i have a good portfolio as you could be wrestling on your laurels and maybe you're wrong.

17:36Stephen:But the flip side of that is if you're always chasing the next stock, the next stock, the next stock, that diversification isn't helping you. And if anything, it's like counterproductive because now you just have an average mess of returns and your good ideas didn't get enough money. And so it's like your good ideas got wasted. People miss meetings and emails and lunches, which reminds me, I've got to call him back. but my task routing agent never does. With Notion's new AI-powered custom agents, my task routing agent automatically imports meeting notes, emails, and other chats that I want and clearly lists out tasks assigned by team member and forwards them a list.

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20:39Stephen:That's einvestingforbeginners.com slash reignite. And I love that you brought that up, Andrew. You actually did a really great interview with uh lee freeman shore about that that exact thing of uh picking your winners and then and then identifying it and doubling down on that but i think another thing i've never thought of the pokemon like analogy that you made that is such a good analogy um gotta collect them all yeah as soon as soon as you said it the pokemon theme song started playing in my head and i just imagined like being on wall street like how the peers apple computer i summon you oh such a nerd anyway um but no that was a great analogy and i i think what you put in the notes today i thought was a brilliant takeaway is diversion diversification is about types of assets.

21:44It's not just a headcount. And I think that that just sums it up beautifully. Just remember assets versus headcount. Yep. So the next is the one that I really struggle with. Not because I do it too much or too often or whatever. It's because I'm scared to do it. and that is the average down on everything danger and and i bring that up just because i think it's a danger whether it's buying on the dip or being too scared whenever you see like the you know you're saying in your valuation like no this is actually a really good time to buy um even with that information i'm still scared to do it and i have no idea why it's very very silly but there have been times where i've looked at a stock and it's been like okay uh i should i should it's low i should reinvest and at costco is a great example of that um and like we were just talking about i'm kicking myself because i didn't do it i got scared and didn't pull the trigger um so i mean i i think it works both ways but i know you specifically one to touch on everyone feels like they have to buy in the dip yeah because if you're not doubling down that shows you were wrong and we don't want to admit we were wrong so it's easier

23:20Stephen:to double down on a position because i'm not wrong i just i'm just waiting for it to turn out that I'm right. And that can be a very dangerous thing because, um, the mistakes you have will be, they're going to happen because the stock goes down after you bought them. That's why it's a mistake. So like, I don't know if I've communicated this correctly. Like your winners will go up and your losers will go down. And so if you're going to buy every single loser, you're probably going to be just buying your your your mistakes right so um obviously it's not that simple not that straightforward but um chances are if you make a mistake i've never thought of it like that that's actually a really good point like if it's down there there's a solid chances is because you made a bad decision.

24:20So, I mean,

24:24you know, 50-50. Right. Like, I've never even thought of it that way.

24:33Stephen:But, like, on the reverse, too, like, all the stocks that are good decisions have to have gone up by definition. So, yeah. No, no, Costco's a great example of that. so i mean they went down i think i'd have to go back and look at the chart but i'm pretty sure they got down under 800 dollars a share for a while yeah and i was looking at it and i was like man i need to buy more i gotta buy more and i did the valuation it's like i really gotta buy more and i didn't and then you know going back to the miss the boat i totally missed the boat on that uh buying buying while it was was down and now they're back up and they're stronger than ever and i don't i don't there's a reason they were down i don't remember what it was um but yeah totally it's it works both ways man i'm telling you um but i i love i love it again i love the takeaway you have in your notes actually you know what screw that i like your takeaway you just threw out there because i've never thought of it that way like chances are you're buying your loser so we're just i don't think we can say anything better than that the next one then the next one is the uh expert price tag mirage and i've actually never uh heard of this one um and so andrew just go ahead and take us through what the expert price tag mirage is and why it's so bad.

26:12Stephen:Some context. I think if you're interested in this, and I think everybody should listen to this episode, it's worth taking a listen. And I didn't know when we recorded this back in 2021 that I would reference this episode so much, but we had Todd Wenning on in October 2021. The episode is called On Sell Side Analysts and How Company Culture Can Affect a Stock. and he really pulled back the curtain on really why wall street analysts kind of do what they do why they kind of play the game that they play why they have to play the game that they play why the incentives are rigged so that what happens on wall street happens on wall street and so the i'll let you like listen to that episode and make your own takeaways but But basically the idea is that the sell side analysts and their buy ratings and their price targets are not in line with your incentives as a long term investor.

27:14Stephen:If you're investing the way we talk about on the show, which is we're trying to buy businesses for the very long term. And what Wall Street's putting out there, the products are putting out there with these buy ratings and their price targets. and all of those things have nothing to do with what we're trying to do, which is find good businesses and hold them for the long term. So I wouldn't even look at them. I don't look at them. Bernstein did a price target upgrade to$436. I seriously could not care less. Tell me that the flowers, I don't know. I just couldn't care less. right like there's there's nothing else that um doesn't doesn't excite me less than than the price target change so we shouldn't even like use their data period i don't just i don't completely ignore it i completely ignore it yeah okay uh i have nothing to add um because like i said i i never heard of of that before makes total sense now that you've explained it and i guess i did like i was taught that like you gotta be real careful when you're looking at those things but i never had heard that term put to it um but the the next one is i think possibly one of the biggest myths around the market whether no matter what type of investing we're talking about and that is volatility is risk um and i guess the most current example of that is maybe tesla um that's a very volatile stock or at least it has been recently um but let's be honest they're they're not going anywhere um they're they're a strong company they're going to remain a strong company and they're just having volatility right now um but how do you how do you look at this myth and especially when it comes to people like you're talking to people in the street you know they walk up to you for an autograph hey you're in drew say that right listen to your podcast um like how how do you handle that that that fallacy the volatility equals risk i yeah i mean i still struggle with it I think we have to remember that, like, I feel like I'm going to go to my grave yelling about home building and how it's like the greatest opportunity.

29:51Stephen:And like, nobody cares. Nobody will care ever. Like, what's not to like about growing 15 to 16 % a year? Nobody cares. I don't know. And then anytime homebuilders' stocks do go up, people are like, oh, volatility. It's going to come back down. It's just housing. Like, okay. So that's kind of how I look at volatility is, yes, if you buy a homebuilder stock, yes, you are subject to the swings of the economy. And if the economy is weak, homebuilding will probably struggle. But you have to take a long-term view. if somebody has a long-term view on tesla that i don't have and they use it to make a bunch more money than i do then that's like more power to you like you are rewarded for that insight you had um but just because a lot of like we can't throw the baby out with the bathwater right just because a lot of volatile stocks are risky doesn't mean every volatile stock is risky and yeah like i I like what you say.

30:56The stock price and the business quality are very often not aligned.

31:04Stephen:And we have to be cognizant of that. And I mean, sometimes the stock can be volatile for a number of reasons. Yeah. You know, I mentioned a while back Starbucks. I don't remember what year it was, but they made their CEO at the time made a comment like, weren't going to send coffee to troops overseas because they didn't support the wars in iraq and afghanistan and that like crushed uh starbucks like everybody's like nope not drinking starbucks until they support the troops and so they like had to do like this grand gesture and make this statement like oh we support the troops just not the wars and then uh what was awesome about that is like we had starbucks coffee like for years on deployments because they sent us so much freaking coffee um but i mean like something as simple as just a off the wall comment completely and i i not for a second do do i think that uh i don't remember his name but do do i think he was being i don't know like there was malice yeah malicious and what it what what he said i think it was just an off-the-wall comment that got caught on tape and then just blown out of the water and then everybody's pissed off about it and i mean right i mean yeah especially as a soldier i'm like you know what the heck dude like give us some coffee but yeah that totally destroyed starbucks for a while and so that that just drives home the point that the the stock price or the volatility like you said i think you said it best it doesn't reflect necessarily a good company and starbucks has been a great company um for over the years um and so now we're getting into my this is my big one is uh

33:09number seven i can time the bottom arrogance um and i i love oh we've talked about it i i love the adrenaline of trading and all of that so um but i have i have done that with my portfolio as well um where it's like i can definitely time this and i'm going to time it and it's going to be a huge payout and why is this such a why is this so dangerous andrew because who because nobody can

33:41Stephen:time the market nobody can time the market so when you're when you're trying to time the bottom like what does that mean like you have a stock that's you're like i'm just gonna wait for it to get five percent cheaper is like is that what we're talking about like when you see this yeah so so it's it's I'm waiting for it to time out. So basically I'm going to buy at the very, very bottom that I can possibly get. Yeah. And then it's going to start to climb so I can maximize my, my revenue. But I can't tell you how many times, like it's like, all right, there's the signal. This is the bottom. And I buy and it's just like, yeah.

34:25God, I hate you stock market. But so, yeah, like I am the worst at timing, you know, having the time I can time the bottom area against 100 percent.