Some of the Biggest "Lightbulb Moments" of Our Investing Journey

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2:03All right, folks. Welcome to Investing for Beginners podcast. Today, Andrew and I are going to talk about light bulb moments we've had along our investment journey. We're going to talk about some good things and some maybe not so good things that we discovered along the way and hopefully you guys can take some information and knowledge and some experience and wisdom away from our light bulb moments so with that i will turn it over to sir andrew and we can go ahead and get started so what was one i guess light bulb moment that kind of struck you uh this this sounds so obvious especially because we've had a lot of people on our show who have talked about this, but it took me a while until I figured this out.

2:50Basically, this idea that a company can grow out of a high valuation or growth at a higher rate can lead to a higher return. So just that idea from Charlie Munger that if a business is earning 6 % and it's growing at 6 % a year and it's quote unquote fairly valued, and you have a business that's earning 8 % and it grows 8 % year over year, and it's fairly valued, putting all this in quotes, they're going to end up at the same place if at the end of whatever period of time, they were also fairly valued. Obviously, Wall Street and the stock market's way more complex than that. But keeping that in mind, I think as a value investor, I didn't respect that enough.

3:35and then I remember plugging in and this changed my spreadsheets since then. It's been a life-changing thing for me. I had the first piece, I had the DCF piece but then I didn't have the whole how does growth play into this. So when I remember putting out a spreadsheet and literally having it grow, having the numbers grow from one cell to the next and the next and the next and then playing that out. so like one stock that stayed fairly valued grew at let's say 12 and then one stock that was 60 cheap so it had a 60 bump and then only grew at like 2 or whatever and seeing the higher growth went out in that case completely changed how i thought of things so it's not just margin of safety and you can buy a cheap stock and you can earn you know 20 30 on it but over a longer time period, a higher growth will probably take care of that.

4:34Now, it always depends on what numbers you're talking about, but that was a big light bulb moment for me. Yeah, that's a great one. That's a great lesson to learn. And I know it has changed how you look at companies and how you analyze them. So that was a great lesson for sure. I think I've had a lot of light bulb moments. I think one, I'll start with a negative one first, and that was making an investment in Intel a few years ago. And I think the light bulb moment for me was, in hindsight, discovering, you know, it wasn't a good investment. It didn't end up well. It didn't turn out well. And you always want to try to take away from failed investments.

5:22Why? Why did this happen? and I think it was a combination of things. Number one, I don't feel like I knew the business well enough. I didn't understand what it is they were doing and why they were starting to do poorly and I didn't get it. So I couldn't put the connection together. I just saw that the stock price was dropping and that other people that were far more knowledgeable about the company than I were saying fairly negative things about the company and because I didn't really understand that they had lost their edge, if you will, and were starting to fall behind, I missed the signs. And I also overestimated the impact.

6:05So I remember telling Andrew this. One of the things that I liked about them was that they were spending more in R &D than AMD was making in revenue, who was their, air quote, big competitor at the time. And so my assumption was that the fact that they're spending more on just R &D than their competitor makes in revenue puts them leaps and bounds ahead. And how could they possibly fail? And that was wrong thinking. I discovered the whole Innovators Dilemma book after this all happened. And that kind of helped me understand really what AMD was doing and in large part what NVIDIA was doing. In hindsight, it's easy to see now, but at the time it wasn't, at least for me.

6:54And so the thing I took away from this is that I have to better understand the business model and I have to better understand the intricacies of the business model and the interactions between competitors and what competitors are really trying to do. Sometimes they're not directly competing in a particular segment or part of their business, but it may be something tangential. And because management isn't paying attention, they can get caught flat-footed and that's exactly what happened to Intel. And so that was a big light bulb moment for me was I have to be more diligent about learning how the business operates and competition and who could be coming for them.

7:37That's a great one. So since we're on the topic of mistakes, I'll share one that I haven't shared yet on the podcast. And it is a little bit more, I don't know if ethereal is the right word, but just kind of theoretical. So don't take this super literally. But a light bulb moment of when a stock does this transformation from having a bunch of growth investors to having value investors come buy the stock, that that shakeout period can take a while. And so do not just jump at the first 20, 30 % drop and think that you're... I made the mistake with Crown Castle of putting too big of a position in a time period where the business wasn't necessarily going to rebound right away.

8:35And I think I did the same thing with Starbucks as well. So both of those companies have had these tough transformational periods. And so when I got really excited, because before their transformational periods, and before I had bought them, they had really great 10-year track records. And then things started to become uncertain leading to a transitional period. And when the things got uncertain, the stock crashed and then I got excited. And something that I'm seeing now more kind of as a pattern is these stocks that have great growth periods and then they crash. And then instead of it being a crash and then stock price continue to go back up as the price kind of normalizes, I'm seeing like flat periods in the stock price.

9:30And for every instance where you see that you can, you can talk about like a Google dip where it's like, everybody wishes they bought the dip in Google or like an ASML dip. Like if you miss that dip, you're disappointed. Um, but I guess there's different types of dips and different types of stock crashes. And so the, the stock crashes that come because there's transition in a business you'll have to be a lot more patient on how long until that money gets made back you know you might have a very hard time period of holding that stock versus and i know this is like it sounds it sounds easier in hindsight and it would be harder to do in the trenches but just contrasting that from a stock where the business doesn't really have anything big that's changing.

10:22Those are more urgent value opportunities than a value opportunity where it used to be a great business, but now things are changing. And now it's cheap, but now there's change that they're in the middle of happening. So that's a light bulb moment for me that there's two different types of buying the dip, I guess, would be a good way to describe it. That's a great example of circumstances like that. I had a similar circumstance happen with me with GameStop. I remember when I invested in the company, it was one of those value investor dreams, right? Everybody was talking about what a great yield you're getting on your dividend and how cheap the company is and whatnot.

11:06and I think the light bulb moment for me was the fact that I realized I was ignoring what was really going on with the business. I was blinded by the numbers and the fact that everybody else was talking about how great an opportunity this was, but I was blinded by the fact that the business had actually turned and the company wasn't turning with it and they didn't really have anywhere to go. And this is all pre-meme stock, so keep that in mind. there was a GameStop that was not a meme for a while. And I remember thinking that I was pinning all my hopes on a air quote turnaround. And as Warren Buffett has said many times, turnarounds don't often turn.

11:51And in this circumstance, he was right. And so there's a lot of wisdom we can get from Buffett for sure. And so sometimes his little pithy comments are, there's a lot of knowledge in there. And for me, that was a big light bulb moment to when you're looking at a company. Again, it goes back to what I said earlier about understanding the business and what it is they do, and also understanding the competition and what's going on in their whole industry and sector. I got lucky and bought Microsoft as they were at the bottom and starting to turn because they had changed management and the turnaround was starting to happen.

12:26So I got lucky with that one. But with GameStop, I did not. And so I lost 75, 85 % of my investment, something like that. And when I eventually sold it, I was like, okay, lesson learned, turnarounds don't often turn. And if I walk into a company and I'm expecting it to turn around, I probably need to either have a smaller bet or probably need to really strongly rethink how likely is this turnaround to turn? Yeah, that's a good one. I'm excited to share our friends over at the Plink app released a major upgrade featuring a sleek new look, real-time insights, smoother trades, and tools that help you feel more confident with every move.

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15:17So I'm going to kind of steer it differently for now. This one's company specific. I think if you haven't looked at this company, it's an interesting stock. I'm not saying it's a buy now because it's gotten kind of expensive, but it's been a great stock for us. Usually when you buy a commodity producer, that is a very cyclical thing. Commodities have a lot of supply demand. And so you'll have huge boom periods and then bust periods. And when you buy a commodity, in the short term, you really have to get that cycle timing really, really locked down. My light bulb moment was discovering that there is an industry where it is a commodity, but it's not cyclical.

16:04If you take the price of that commodity and you look at it over a very long time period, it's actually up and to the right. so i'm talking about the aggregates industry martin marietta that's the stock we own there's also a vulcan materials in there and then there's a couple smaller players but the reason why i mean there's there's several reasons why the price does that basically the number of queries is fixed so everybody talks about bitcoin has a fixed supply you know and that's why it's going to keep going higher well similarly so do queries and crush stone and the things, the crushed stone goes into concrete and asphalt.

16:44And so the fact that there are limited quarries that you also need these government permits to mine a quarry, all those things create this price in the commodity that is long-term up and to the right. Whereas if you look at some other commodities like copper or something, you'll see swings up and down, up and down. and you can't really depend on necessarily getting that nice organic growth like you can in the aggregates industry. So that was a huge one for me. Um, light bulb moment that happened when I was just randomly listening to a podcast and the guest was talking about aggregates and talking about that fixed supply idea.

17:24And then when that light bulb hit, I was like, I need to investigate this. And then I was like, I need to buy some of this. And, and I'm glad I made that a decent size. And And it's been an interesting long-term investment for us. It's done very, very well. It was a great pick. And it's certainly not sexy. But it is done very, very well. I mean, I can't remember the last time other than you I've heard somebody talk about Martin Marietta. I just don't hear. It's not discussed. If you go on social media or you go in the media world, nobody's talking about that company. But it's been a great investment for us along the way.

18:04And I'm glad you discovered that idea because that's a great light bulb moment for sure. All right. So I will throw out another one. This one was a little further into the journey that I'm probably a little embarrassed to admit, but was discovering how the financial statements connected. So once I discovered that white bulb moment, I was kind of stunned. I had learned, this is one of the challenges, if you will, of being a self-educated investor, is you're going to have gaps in your knowledge because there are going to be things that you may not discover right away. And sometimes you have to learn the hard way.

18:52And so discovering that the financial statement's connected so that, for example, that the inventory on the balance sheet is connected directly to the inventory on the cash flow statement. And so the money that they're spending on the cash flow statement connects to the inventory that you see on the balance sheet. Those kinds of things were huge light bulb moments for me. Like, oh, hey, I can, you know, because I got so used to looking at them in separation. You know, here's the income statement, here's the balance sheet, and here's the cash flow statement. And so understanding now that these items, these line items connect, and you can see where the money goes, air quote, through the business and through the financial statements was a huge unlock.

19:42So as you're reading the 10K and you discover that Amazon is spending so much money on inventory because they anticipate a huge Christmas rush, and then you see that on the cash flow statement, and then conversely, you see it on the income statement, you go, uh, okay. You know, so it's not just the metrics, it's also the numbers and how the money is moving through the financial statements. And kind of tangentially to that was I have always associated in my head the income statement followed by the balance sheet followed by the cash flow statement. But a better configuration is the income statement to the cash flow statement to the balance sheet.

20:22And because of the way the money moves, the income statement is really a P &L. It's an accounting number. The cash flow statement is the actual money, like the money that Google is spending on different things going in and out of their checking account. That's the actual cash. And then the balance sheet reflects where the money has gone. And so once I understood how those all connected, I was like, oh, I can now start to kind of figure out the story that the company is trying to tell me and what the numbers are telling me because of the interconnection of the statements. And it started to make the Sherlock Holmes part of analyzing a company started to make a little more sense.

21:07And that was a huge unlock for me. And it was literally because I was reading a blog post and somebody said something about this item going to this item going to this item. And I was like, what? So I remember looking at, I pulled up the actual statements from that company. And sure enough, yeah, they were right. It went from here to went from here to went to there. I'm like, wow, that's awesome. All right. So yeah, that was a huge unlock for me. Nice. I'll throw one out there that's kind of financial statement related that popped in my head while you were talking. So I've had some success buying stocks that were like the leaders in their industry and also had the best gross or operating margins in their industry.

21:54So I'm talking about Dick's Boring Goods and McKesson. And so I had some early success with those. So I assumed that you could just take that idea and that mental model and just blindly apply it in any industry. So I ended up applying that to CDW. And in hindsight, I think that was more of a mistake. And so to your point about when you said with Intel needing to know what's going on outside of the company and really in kind of like industries, either your own industry or industries around you, I think for CDW, and I haven't checked, maybe the stock price has gone through the roof because I sold it, as can happen.

22:34But not respecting, I guess, their place in their ecosystem and how there is a lot more competition going direct to them, even though if you were to line up on a spreadsheet, this company versus this company versus this company, oh, okay, they're the leader. But there's a lot, it's just a very fragmented kind of service that they provide. and so the mental model that applied in a more mature industry or more consolidated industry did not apply to this fragmented high-tech industry and so that was a mistake that i don't know i think i just came up with it one day or i was like oh maybe i made a mistake with cdw and then you know ended up selling it so um i think that's it's one of those things right like in investing, we want to find these surefire toolkits.

23:30And there's always exceptions to the rule where a toolkit may work well in this context, but not in a different one. So I still think it's a great mental model. I think it's probably going to win more times than not. But I would also caution just blindly applying it industry to industry to industry. Yeah, exactly. Because there's There's always oddities or exceptions, and some companies just don't always fit into our preconceived ideas or our models of this is using a PE ratio to try to value every company kind of thing. While it could be helpful for certain industries and certain companies, it just doesn't work.

24:13Look at Berkshire Hathaway. It just doesn't work. And so, yeah, I love that idea. That's a great mental model to learn from. I think a light bulb moment for me was this revolves around valuation. And when I first started investing, the financial advisor I was working with did talk to me a little bit about valuation and the price you pay matters. and he kind of gave me that idea and then he pointed me towards Warren Buffett and I kind of started going down that rabbit hole. But it wasn't until I discovered guys like Joel Greenblatt and Michael Mobison and others that I really started to understand that, hey, there's a method to how you try to value companies.

25:05And so then I kind of came across Professor DeModer and who I've talked a lot about throughout the course of the show. and I remember watching one of his videos and I understood almost literally nothing. Like the first hour and a half of his lecture, I was like, I have no idea what this is. And so I just started kind of grinding through it. I listened to the whole, I think it was 24, 26 episodes, hour and a half each, one, and I listened to all of them. Sometimes when I was at work, bad employee, driving in my car, boring my daughter to death. Anyway, I worked through all of them. And it wasn't until I started trying to build my own DCF model that I started to have a light bulb moment like, oh, I get this.

25:56It wasn't until I started trying to basically reverse engineer what Professor DeMotorin's models were trying to tell me. And once I started trying to figure that out, Then I started understanding, oh, this is why this is important. Oh, this is why this is important. This is how this impacts this. And so it wasn't just a matter of just plugging in the numbers. It was understanding why I was plugging in that particular number and how this number impacted the value of the business. And that was a huge unlock for me. Once I started to figure that out, then I was like, holy crap, this is how you can value a company.

26:35and while it's not perfect and there are certainly modifications you got to make along the way, it can lead you to the promised land and it can help you avoid making huge mistakes in investments thinking that everything goes up to the right because it doesn't. And that was a huge unlock for me, like just monumental. That is awesome. It's cool that you learned by doing also, which meant you aren't afraid to get your hands dirty. And that doesn't necessarily come naturally to, I think, beginners certainly. One of the things about Bitcoin that's really surprised me is how much easier it is to transact with these days.

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