Becoming Investors

Carlos shares the concept of "yearly portfolios," a mental model that he developed to help him overcome psychological blocks with with investing

Part two of our discussion on Intel (INTC). Intel is positioning itself to become a major player in emerging technologies such as self-driving cars, 5G, and IoT (Internet of Things). We discuss how likely we think their goals are to pan out, and how this affects the company's future. Then we dive in to valuation and say why we want to add this company to our portfolios at the current price.

Intel (INTC) has been a leading technology company for over 50 years. Aaron joins us to discuss Intel's impressive past, Moore's Law, and what the news about 7nm delays that caused the price to tank really means.

Floor & Decor Holdings (FND) is a flooring company that has been growing at phenomenal rates. They have a goal to increase their number of stores by 20% per year, and they are on track to meet that goal even in the midst of the pandemic. We see a lot of tailwinds for the flooring industry as a whole and think that FND is poised to be a real winner over the next decade.

Part 3 of our series on the book "Warren Buffett and The Interpretation of Financial Statements" by Mary Buffett. The cash flow statement shows the cash that flows in and out of a business due to operating expenses, capital expenditure, and financing expenses such as stock buybacks. We break down what we pay attention to when we look at cash flow statements with examples from DIS and TSLA.

Part 2 of our series on the book "Warren Buffett and The Interpretation of Financial Statements" by Mary Buffett. We discuss Buffett's benchmarks for profit margin and income growth, as well as specific types of expenses that he stays away from. This is crucial when we are attempting to understand and value a potential investment.

Part 1 of a series on the book "Warren Buffett and The Interpretation of Financial Statements" by Mary Buffett. This book is a treasure trove of tips on how to research a business. We discuss what Buffett looks for on a balance sheet to determine if a company has a durable competitive advantage and apply it to some of the companies we have researched.

Aaron joins us again to discuss the all important topic of asset allocation!Our time horizon should determine how we allocate our assets. We discuss how to balance different types of investments, and how this balance will change over time. Some types of investments discussed include bonds, stocks, index funds, commodities, gold, peer to peer lending, and real estate. https://nine-thrive.com/how-to-create-ray-dalios-all-weather-portfolio/

The staffing industry is one that is definitely affected by market downturns. Are there any companies in this sector that we want to invest in? We discuss BG Staffing (BGSF), Robert Half International (RHI), Mastech Digital (MHH), and ManpowerGroup (MAN).

Aaron guest stars to discuss the fundamentals of indexing, a different style of investing than what has been discussed on the podcast so far. Indexing, also known as passive investing, is easy to do, has very low expenses, and uses the idea of diversification to reduce risk. We discuss how index funds handle recessions and what your returns would be if you were unlucky enough to invest in an index fund right before each of the past three recessions.

Abiomed, a company that manufactures heart implant devices, was the first value investing pick for both Carlos and Ashley. They discuss the financial situation and growth potential of the company and the event that put the stock on sale. They also run some numbers to value the company using 10-Cap, Margin of Safety, and Payback Time methods as outlined in Phil Town's book "Rule #1."

Near the beginning of the Covid-19 pandemic, Carlos bought into several companies without following his normal research steps because he was excited about how far prices had fallen from their 52-week highs. He came to regret many of these and exited, in some cases taking a loss. Companies discussed include United, Delta, and Spirit airlines, Norwegian Cruiselines, Google, and American Express.

I broke the rules with Disney. When Coronavirus struck and the stock market started going bonkers, I was first drawn to the obvious candidates for undervalued companies- airlines and cruise lines. After I got that out of my system, I started looking around for solid businesses that were hit hard by the pandemic.Disney is a pretty obvious one- their parks have been completely shut down for a still undetermined length of time. I am very confident that the parks will eventually reopen and that they will find solutions for lingering Coronavirus concerns. This seemed like a textbook example of a market event that would impact the business for a year or two at the most before returning to its former levels of business. I was also wowed by the Disney+ subscription numbers and pleased that the income from their new streaming services could offset the temporary loss from the parks.Beyond all that, Disney has an incredibly strong brand moat. There are fans out there with mouse ears tattooed on their bodies. Disney movies are a bedrock of American culture. How did I decide on my buy price?This is the part where I broke the rules. What I should have done was determined the intrinsic value of the company per share and then cut that value in half to give myself a 50% margin of safety.What I actually did was look at the stock price graph and get fixated on the fact that the price had fallen 50% from its 52 week high, but was already starting to inch its way back up. The price was up to the low $100's when I started looking at it. I set an alert on my phone for when the price dipped below $100 and managed to snag a few shares and felt pretty proud of myself. I figured if I could get in at $99 then I could hold tight for a few years until Disney made its way back up to its former heights of $150 and make a whopping 50% ROI.This is where my major fallacy was. THERE IS NO GUARANTEE PRICES WILL GO BACK UP TO WHERE THEY WERE IN THE NEXT DECADE. I'm of the opinion that we are on the brink of a recession, but I kind of had this idea stuck in my brain that the businesses that survive will bounce back to the prices they were going for when as soon as we pull out of it. But if so many businesses were overpriced, what is more likely is that they will go back up to their appropriate prices. Looking at the drop from 52 week high is not something worth doing. I should be trying to determine the actual value and find the discount from that number.So what is the actual value?Analysts were predicting 5% growth on some sites and 23% on other sites. My $99 buy in price only meets my 50% margin of safety goal if the most optimistic of analysts are correct. I think somewhere in the 10-15% range is more accurate because it is hard for behemoth companies like Disney to keep growing at their current rates. This means I paid around sticker price and my Margin of Safety price should be around $55. I also ran the 10-Cap and Payback Time valuations using the techniques outlined in Phil Town's book "Rule #1." I came up with $98 and $58.After doing this analysis, I do regret getting in at $99. I don't have a margin of safety on getting my minimum goal of 15% ROI. I would breathe a little easier if I got in at the lowest price we have seen so far which was $79, but even then I wouldn't be confident about meeting that 15% goal.Carlos persuaded me to stay in despite of this, at least for now. Disney is a company with solid fundamentals and a track record of management successfully adapting to the times. DIS is a small part of my portfolio. I bought a small number of shares, hoping to buy more as the price fell even lower. I don't think I will buy in more unless it drops down to the $50 range, and I may sell if I find a better opportunity.

Investing can be risky, but there are techniques that can be used to reduce our risk. Value investing is a strategy where investors buy great companies when the market is selling them for less than what they are worth. The idea behind a margin of safety is that investors only buy into a company for a fraction, usually 50%, of what the company is actually worth. This helps investors ensure they earn the returns that they want, even if some of their analysis and calculations turn out to be incorrect.

How important is management to the success of a business? The CEO of Coca-Cola made a huge blunder by introducing "new coke," effectively breaching their own moat. Kodak's management failed to adapt to the new technology of digital cameras which resulted in an industry leader falling into irrelevance. Management needs to have vision and flexibility to maintain durable advantages and keep growing the company.

Carlos and Ashley are heavily influenced by the writings of Phil and Danielle Town. In this episode, they outline the principles from their books and podcast that form the foundation of their value investing strategy, focusing particularly on how to determine a company's meaning and moat.

Carlos' PositionsAshley's Positions

Are you ready to become an investor?Every individual has their own financial “culture” that is influenced by their family, friends, and personal circumstances. Money habits can change, and often do when you start paying attention to your spending and saving habits and create specific long term goals. Carlos’s BackstoryCarlos’s Grandfather was a very wealthy doctor in South America who ended up penniless due to poor financial decisions. It is a sad story and a great motivation for Carlos to plan for his future and not take for granted the fact that what is here today will still be around tomorrow. Carlos admits that he has made a number of mistakes regarding his personal finances. He got into debt and didn’t want to use his cash to pay the debt down, so the debt grew. He has definitely made some purchases that he came to regret, and he didn’t put aside very much at all in savings until a year ago.Carlos has started a number of businesses. His latest venture has resulted in him having more income than he was used to. He chose to use the extra income to get himself out of debt and start saving for retirement. He has a goal to pay off his house by age 35 and reduce his monthly living expenses to increase the funds available for him to invest. Ashley’s BackstoryAshley had one set of Grandparents who lived on a farm and raised 8 kids and 5 foster kids. One of their first homes together during WWII was a chicken coop that had been converted into a small house. Despite their humble beginnings, they saved and invested wisely. Ashley’s widowed grandma was able to live comfortably in a retirement home with all her needs met and even had some money to pass on to her children when she passed away. Her other set of Grandparents had spending habits that went far beyond their income level. They ended up being dependent on family and government support, which certainly strained family relationships. Ashley met and married her husband when they were both living the life of poor college students. They kept a lot of the money saving habits that they formed at the beginning of their marriage even after they entered the workforce. It would be fair to say that they blur the line between “thrifty” and “cheapskates.” They were aggressive with contributing to their retirement fund and other investments for shorter term goals like buying a second car and later a minivan with cash.Financial GoalsAshley’s Financial GoalsRetire comfortably without having to depend on anyone elsePay for kids’s collegeBe able to travel now and in retirementCarlos’s Financial GoalsRetire comfortablyHave a cushion so he can sleep better at night without fear of turbulent timesHave another source of income in case his business takes a downturnPersonal finance tools we recommend:Dave Ramsey YouTube Channel, Financial Peace University courseYNAB (You Need a Budget)Undebt.it

Meet Carlos and Ashley, two friends on a journey to become investors. They outline future content of the podcast including discussions on investing concepts and sharing updates on their research and portfolios.