The DIY Investing Podcast

Want Investing Research Directly to your Inbox? Sign-up for my Free Substack: https://diyinvestingstocks.substack.com/subscribe? Mental Models discussed in this podcast: Delayed Gratification Time Horizon Personal Responsbility Compounding

Want Investing Research Directly to your Inbox? Sign-up for my Free Substack: https://diyinvestingstocks.substack.com/subscribe? Mental Models discussed in this podcast: Second-Order Effects Mean Reversion Factor Investing Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Show Outline Selling Series A lot of time is spent on buying stocks. Yet, almost just as important, if not more is knowing when to sell stocks.  I find this area relatively underexplored, so I want to begin a long-term series on selling stocks from the framework of a value investor.  Previously talked about selling in a single episode on Ep. 106 Today's focus: Strategy matters There is no one-size fits all approach How you buy stocks will influence how you sell them Your portfolio allocation strategy will matter THe number of stocks you review in a year will matter Whether you plan to own a cash position or not will matter. Excluded from this series: Won't be discussing momentum investing Won't be discussing trading or technical analysis investing (except as a marginal part of value investing when relevant) Entire focus assumes that you are a value investor of some sort (whether deep value, compounder, graham value, quality, etc…) Deep Value: Buy at 2/3rds of value and sell at “full price” Compounders: You want to hold for a long-time.  Sell when compounding ends, plateaus or you were wrong Net-Nets Hold a year then reassess Waterfall Stocks:  Hold so long as dividend yield is sufficient to provide target return Dividend Growth Investing: Buy companies that pay dividends and grow them and sell them when they cut or eliminate their dividends Buy and Hold “Never sell” Works for a subset of stocks Tends to overlap well with compounders and Dividend Growth investing

Want Investing Research Directly to your Inbox? Sign-up for my Free Substack: https://diyinvestingstocks.substack.com/subscribe? Mental Models discussed in this podcast: Second-Order Effects Mean Reversion Factor Investing Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Show Outline Today's podcast will focus on a single precept: You can't predict the future First and Second Order Effects Margin of Safety Preference for cash now vs cash later (Plays into want for profitable companies) Time value of money.  Growth is important because it can correct for mistakes, but you know you can't predict it Some of what you “know” about investing may not be true Importance of Zero-Based Thinking (what is the best decision today based on what you know today) Wrong because past price performance can't predict the future (it may, but it may not) Wrong because it assumes that winners will keep on winning and losers will keep on losing “Don't catch a falling knife” “Hold onto winners, trim your losers” The central problem with rebalancing It is definitely true that successful rebalancing CAN add value It is also true that it is IMPOSSIBLE to know if your rebalancing will be successful How then do you behave? How do you invest in the face of uncertainty? First order: Second order: Investing in the face of uncertainty You cannot assume business momentum. You plan for it and buy stocks you think will have it, but your strategy cannot assume it will continue. You cannot assume reversion to the mean. You plan for it and buy cheap stocks because it offers the opportunity of reversion to the mean, but your strategy cannot assume stocks WILL mean revert in the time frame you want. You cannot assume that growth will continue. You cannot assume a specific growth target will be hit. You cannot assume that your predictions about business quality will be better on company A than on company B.  The only thing you can know to be true is that the future is uncertain.  I personally use some absolute rules (like no margin debt, no options, and no shorting). Not because they're optimal, but because they limit my risk and allow me to take risks in other areas.  Some of your decisions will be a mistake. That doesn't mean you don't make a decision. Indecision is a decision.  Selling some winners may be correct and selling others may be a mistake. Your strategy needs to incorporate that understanding. “Absolute rules” can be helpful to limit mistakes, but they will inherently be suboptimal.  What is my point: It would be a mistake NOT to trim when I am given the opportunity to do so. Failing to take advantage of opportunities that ignore zero based thinking will result in me having lower returns across an investment lifetime.  You want to build a strategy that follows this precept: “If I lived my life 10,000 times, what strategy would result in a favorable outcome across the most possible lifetimes?”  Don't optimize for the “perfect” scenario. Don't optimize for the “worst case” scenario.  Optimize for uncertainty. Prepare for the worse, plan for the best, and adjust daily.  There are aspects of my strategy that go against established norms. However, there are clear reasons for that. I know that I cannot predict the future.  Therefore, I am willing to sell or trim my winners when I believe it improves my potential returns and reduces my risk.  Summary:  You cannot predict the future. Be more humble. 

Want Investing Research Directly to your Inbox? Sign-up for my Free Substack: https://diyinvestingstocks.substack.com/subscribe? Mental Models discussed in this podcast: Look-Through Earnings Dollar Cost Averaging Earnings Yield Opportunity Cost Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing

Mental Models discussed in this podcast: Dead Money Opportunity Cost Time is Money Intrinsic Value Compounding Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Show Outline The Dead Money Problem and Solution “If you remember only one thing today: Time is Money”  What is Dead Money?  Any asset you own that is not growing intrinsic value over a period of time.  The focus here is on the fundamentals of the business. NOT the stock price. We can't predict stock prices. We're not going to try. Why is this a problem?  The longer you hold a dead money position the worse off you are. Principle: Time x Position Sizing x Expected Return of Alternatives = Lost value  By using this formula you can anticipate how much exposure you have to dead money losses. The Solution:  The impact is large (Big “lost value” bucket) [>> 1%] The likelihood of success is high (Big difference in expected return between opportunities) At least 10% Passivity is better than action. Action leads to errors. Always remember that you had good reasons for your original buy decisions. Summary: Time is Money! Investors lose value on any asset they own that is not growing intrinsic value over time. This episode provides value investors with my solution on how to optimize their portfolio in the face of dead money assets and potential opportunities

Mental Models discussed in this podcast: Incentives Skin-in-the-Game Accredited vs non-Accredited Investors Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Show Outline Key Concepts for thinking about compensating a Portfolio Manager Management Fees  Management Fees are priced a percentage of the assets under management.  A 1% management fee means that you will pay 1% of your assets being managed to the investment manager regardless of the returns you receive on your investment.  If you have $100k invested at the beginning of the year, you'll pay $1k in fees, if your investment doubles, and $1k in fees if your investment gets cut in half. (ignoring the weighted average effect) Management fees can be charged to both accredited and non-accredited investors Performance Fees  Performance fees are priced as a percentage of the profit earned on investments over the course of a year.  For instance: A 10% performance fee would provide the manager with 10% of the total profits earned during the year. If you invested $100k, and the $100k grew to $200k, then the investment manager would earn $10k. (10% of the 100k gain).  However, if the investment fell to $50k, the investment manager would earn nothing.  Performance fees can be charged only to accredited investors. Hurdle Rates  Hurdle rates are often paired with performance fees to ensure that investment managers only earn performance fees above a certain level of return.  For instance: A hurdle rate of 5% would mean that the profit sharing only kicks in after 5% returns have been earned for the year. In our prior example, if you invested $100k that doubled to $200k, then the “profit pool” is instead $95k, because the first $5k is exempt. The investment manager then only earns $9.5k. High Water Marks  High water marking is where hurdle rates are compounded across multiple years.  In this case, let's assume you invest $100k, and the hurdle rate is 5% per year.  In year 1: your investment declines to $80k. You pay no performance fees.  In year 2: Your investment grows to $110k. You still pay no performance fees because despite earning 37.5% rate of return in year 2, the hurdle rate of 5% compounded in each year, so the investment manager only starts to earn fees after 10% (5% + 5%) on the original $100k. So they would only earn returns above $110k in year 2.  In year 3: They only earn performance fee returns above $115k (ignoring compound growth here). The Buffett Model  0 % management fee, 6% hurdle rate (w/high water marks), 25% performance fee  I think this is an attractive setup and I'd prefer to structure any future fund of mine with a similar arrangement.  This is the best alignment of incentives in my view. You don't get paid for AUM growth (directly), and only get paid for performance that beats a certain hurdle rate.  However, to do so excludes non-accredited investors. Therefore, if I want to serve non-accredited investors I'd have to charge a management fee at least for them. What is the right answer then? Non-accredited: You only have management fees. You obviously want a manager willing to charge them, or you don't get that manager at all. Accredited: Performance Fees may be your instinctual first option. They tend to align your interests with management. However, there are also downsides for you. May encourage managers to take more risk. Unless they beat a hurdle, they don't earn anything. They'll never be 100% aligned with you.  Without a management fee, you are limiting yourself to investment managers who are already financially independent and can afford to have years without income. Personally: I would be willing to pay or charge both sets of fees. My ideal setup is the Buffet arrangement: 0, 6, 25%. However, this isn't ideal for all investors. I could see the benefit of a 0, 10, 50% setup. I can see the benefit of only charging management fees (especially for retired investors who are seeking wealth preservation, not growth) As always: The answer is it depends. But, I hope that I have given you the information you need to understand how it applies for you. Summary: As an investor, you want to properly align your interests with your portfolio manager. A key consideration is how to compensate and incentivize that manager with either management fees, performance fees, or both.

Mental Models discussed in this podcast: Opportunity Cost Alpha Superpower of Incentives Competitive Advantages Process vs Results Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Show Outline Key Concepts for selecting a Portfolio Manager Choosing an investment manager is a lot like choosing a stock Don't invest in anything you don't understand - this includes managers What is their process? How do they earn alpha? Do you need alpha? What are your financial needs? Wealth preservation? Wealth Growth? Do you need alpha? Not every manager can provide alpha.  Not every manager seeks alpha Not every investors NEEDS alpha Value Cost - How are they paid? What is the expense structure? How does it compare to alternatives? Management Fees  Performance Fees  Next podcast will be a whole podcast on fee structure, so I'll limit my discussion on it here. Growth Investment managers inherently benefit from growing AUM. This is unavoidable. Regardless of pay structure. However, you want to understand what drives them. Is investing a passion or a money seeking endeavor? Are they trying to grow AUM? Do they plan to shut down growth at some point? Quality Competitive advantages? How are they different from other investors? Communication? How do they communicate with clients?  Do you understand their process? Are you comfortable with them? Style Size of stocks Liquidity Value vs Growth vs Quality?  Overlooked companies? Index hugging? Concentration vs Diversification   Custom Portfolios vs Investment Fund  Some managers will setup a customized portfolio just for you Or do you simply want to own a portion of a mutual fund or hedge fund. Past Performance - Luck vs Skill It is difficult to analyze a portfolio manager based on past performance Instead, focus on their process.  If you understand their process you can potentially understand the odds of future outperformance (if you even need outperformance) Summary: Choosing an external investment manager for your wealth is a difficult decision. In this episode, I outline the key concepts you should consider when evaluating someone to be your personal portfolio manager.

Mental Models discussed in this podcast: Stress Testing Time Horizon Stoicism Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode130 Key Concepts for Investing during a Crisis Stress Testing - Bankruptcy Risk? Goal: Survive Stress test businesses not stocks Focus on Fundamentals Long-term is where all of the value is at The next 1 or 2 years is only 10-20% of the value most of the time. War somewhere is not inherently a crisis for your portfolio Are your specific businesses being affected? Land war in your country? Destruction of infrastructure owned by your companies? Sanctions against your companies? There has been almost constant war for the entirety of the last 100 years somewhere in the world Doomsday Scenarios It is usually worth betting on optimistic outcomes If you're wrong, you likely won't be around to deal with it. (Nuclear war) Summary: The Russian Invasion of Ukraine has created a situation where three crisis grip the world: War, Inflation, and COVID-19. How should investors think and act during such a crisis?  Stress test your portfolio. Focus on the Fundamentals. Does the war affect you directly? Avoid doomsday thinking.

Mental Models discussed in this podcast: Catalyst Activation Energy Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode129 Catalysts in Value Investing Catalyst Definition Trade vs Hold Return Free Call Option Catalysts speed up the rate of multiple expansion leading to a high IRR "trade" return Business Catalysts vs Stock Catalysts Solitron Devices Example   Summary: Catalysts can supercharge investing returns for value investor if utilized properly OR they can distract from a central thesis and cause you to make poor decisions. A catalyst should be seen as a free call option that boosts a "trade" return. 

Mental Models discussed in this podcast: Investing Ratios Break Points Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode128 Key Investing Ratios P/E: Goal: 15% Ideal: >20% Gross Margin: Higher the better (>50%) Stability is more important than the absolute number Focus: Limits and Break Points Source: https://twitter.com/solvealways/status/1486992514196324354?s=20&t=xGDVCwWNDXmL9VM7hpQN2A   Summary: The important thing to remember about the key investing ratios is to understand that they are always relative. What you're looking for is understanding the limits you don't want to pass, and key break points that signify certain things about the business. Above all, stability is critical when evaluating a high quality business. 

Mental Models discussed in this podcast: Scuttlebutt Quality Investing Capital Stack Dark Stocks Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode127 Scuttlebutt on Overlooked Companies - Areas of Focus Capital Stack: Clean is better. Ideally only common stock. No lending to insiders or other self dealing. Has management issued themselves options in the past? Were the prices reasonable? How much of the company does this represent? "Overdue or delayed payment to insiders." Red flag. This basically menas the company is in default putting your equity at risk. Can't even really mount a proxy fight because the management could force the company into bankruptcy. Filings: Current or pink limited on filings with the SEC I want to see financials. (They don't have to be audited) Some sort of management commentary is nice. (Shows shareholder friendliness) Business Model: Change New products New management Growth of some kind Asset Base: Ideally assts to cover the market cap (providing a margin of safety) Earnings Power: Profitable (every year for 10 years, no more than one loss in 10 years)   Summary: Overlooked companies are often cheap. Therefore, scuttlebutt on overlooked companies needs to focus on filtering for the quality of the business. High-quality and cheap makes for a great stock. Look for abnormal signs of positive potential. 

Mental Models discussed in this podcast: Inflation Emergency Fund Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode126 Series I Bonds Current Yield: 7.12% (through April 2022) Re-rates every 6 months according to an inflation index (not sure which one) Combination of a fixed rate (currently 0%) and a variable interest rate.  Maximum of $10k/year per person.  On a calendary year basis. Available for purchase on TreasuryDirect.gov Emergency Fund Need Liquidity Principal protection Normally lacks inflation protection (nice to have, not a need) My plan: 50% savings account 50% Series I Bonds Take a few years to move into the I Bonds slowly to limit liquidity risks Normal recommendation is 3-6 months of expenses. I like 12 months as a long-term goal.    Summary: Series I Bonds are an inflation protected security issued by the United States Government to individual US Citizens. These non-marketable securities offer interest rates comparable to inflation and are an ideal asset to include in an emergency fund. 

Mental Models discussed in this podcast: Phase Change (Chemistry) Earnings Power Consolidation Period Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode125 Phase Change Mental Model In Chemistry, you have the mental model of a phase change. Think: Solid, Liquid, Gas In order to exercise a phase change youhave to increase the energy in a fluid. Increasing energy causes the temperature to rise, but when a phase change is close to occurring, the temperature will stop increasing for a period of time.  During this time, you have to keep increasing the energy, but the temperature will stay the same. Why? The excess energy is being applied to changing the phase of the fluid. This pause is incredibly important and the amount of energy needed to change phase is the "latent heat."  In the same way, you should try and profit from businesses undergoing a phase change. Applying the Phase Change Mental Model to Stock Investing Two ways to look at this: Underlying earnings power Shareholder base changes Underlying Earnings Power Often, stocks may be stuck in a trading range for a period of time, months, maybe years. On the surface (via the stock price) no change appears to be occurring. However, under the surface, the company is improving, cutting costs, building new products, and pleasing customers. Then all of a sudden, th e company breaks out to new highs as eanrings go up 50%, 100%, or 200% when a new product launch occurs and operating leverage plays itself out. Shareholder Base Changes There are a diverse set of possible shareholders you need to be aware of.  Types:  Deep value Value Growth Momentum Speculators Sizes: Retail Institutional Investors Active Funds Passive Funds It can take a long time for a shareholder base to change over and that's one of the things that can occur during this consolidation period. Deep value sells to value, value sells to growth. Retail sells to Active funds, and active funds sell to passive. If you want above-average returns, it can help to ride the wave from one set of investors to another. If you can buy stock as a retail investor when NO isntitutional investors are involved and then wait long enough to sell to institutional investors, you can be bneefit from massive multiple expansion as the liquidity that they bring forces the stock price up faster than earnings.  Phase Change Investing Applied to My Portfolio I want to buy stocks when they are nano-caps, trading for sub $50m and sell them after they have 10-20x becoming Small-Cap companies. The goal is to hold them through their nano-cap and micro-cap phases when there are no institutional investors and sell them once they are in the $500m-$1bn+ range. At that time, ETFs, mutual funds, and hedge funds will be involved and I may be able to benefit from buying at sub 10x P/E multiples and sell at 25+ P/E multiples to these passive investors. This process may take many years, but it can lead to supercharged returns.  Summary: A phase change occurs when excess energy is added to a fluid. For aperiod of time, energy rises without temperature changing. Investors can learn from this mental model how to seize investing opportunities during consolidation periods. 

Mental Models discussed in this podcast: Value Trading Horizontal Risk Shifting Rebalancing Look-Through Earnings Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode124 Value Trading Definition Partial selling of a core holding to buy more of another core holding. If the core position size is 20%, you may buy up to 25% or 30% of a surplus position when relatively undervalued and then sell it back when it is relatively overvalued.  Key: Using valuation specifically to change the weightings in your portfolio Necessary assumption: Assuming you have a sufficiently good comparable idea Goal Only value trade when the exchange is clearly beneficial High bar 50-100% increase in look-through earnings I use a spreadsheet that constantly calculates look-through earnings for each position. Horizontal Risk Shifting Diversification of my risk by reducing my exposure to a single stock without having the value trade component. May not increase look-through earnings but minimizes risk.  Say splitting a 30% position in Coca-Cola into a 10% position in KO, Pepsi, and Dr. Pepper.  Want to target similar P/E ratios or better, but this has a lower bar.  Really used mainly for overly high current allocations or used when a stock is highly valued.  Summary: Value Trading is the process of rebalancing a portfolio using valuation specifically to adjust the weightings of your individual stocks. I value trade to optimize the performance of my portfolio, increase returns, and reduce risk.

Mental Models discussed in this podcast: Due Diligence Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode123 Due Diligence Thought Process I can't accurately predict the future, so I know I will make mistakes, but I do make estimates on future performance AND management decision-making. Therefore, I attempt to monitor where future performance deviates from my estimate. That allows me to steadily inform myself whether the company is a mistake OR a success from an investment process standpoint.  Short: I want to know where I was wrong when I predicted the future and to validate or destroy my thesis.  Summary: Maintenance due diligence is a critical skill that experienced investors practice in order to minimize potential mistakes after buying a stock. This ongoing effort is spent validating or proving wrong the original stock buy thesis.

Mental Models discussed in this podcast: Second-Order Effects Passive vs Active Investing Standing on the Shoulders of Giants Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode122 Key Observations I have seen many writers, presentations, and discussions around this idea that YOU are NOT the next Warren Buffett, therefore...X "Don't concentrate" "Don't buy individual stocks" "Buy Index Funds" "You won't outperform...etc..." What is the impact of this? Is it true? How many future Warren Buffett level investors will never arise because we've convinced them it is impossible? Imagine if we treated scientists like this. "You aren't the next Einstein (or Bezos or Zuckerberg)" The lesson: Don't even bother trying How many future inventions would we lose out on? Summary: Are you the next Warren Buffett? This question discourages potential investors from attempting to outperform. I discuss the second-order effects this has on the investing landscape and your personal financial situation. 

Mental Models discussed in this podcast: Capital Allocation Due Diligence Share Dilution Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode121 Questions: Sourced from this Tweet: https://twitter.com/TreyHenninger/status/1431243068662067204  Best questions to ask management and/or investor relations When would you be happy to see management raise capital by issuing shares? How much time do you put on initial vs maintenance due diligence? What are some of your preferred research resources for due diligence? Favorite company filing and why is it the proxy statement?

Mental Models discussed in this podcast: Concentration vs Diversification Hurdle Rate Circle of Competence Conviction Opportunity Cost Satisficing Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode120 How many stocks should you own? As many as you can that meet your hurdle rate? Only the best opportunities available? Optimal vs Satisficing Constraints on Holdings: Time Circle of Competence Conviction Additional Thoughts Collector of Businesses Hypothetical: What is the highest level of concentration an individual investor should be willing to place into a single stock (when buying?) Specifically, asking about non-special situations, more long-term holdings. Presumably, at some point, cat-risk is too high even when you have an edge. Imagine you own a 5-10 stock portfolio. Over the weekend, it is announced that all 10 companies are merging and will be subsidiaries under a single capital allocator that you like. Do you make any portfolio changes? You still own the same companies, but now 1 stock, not 10. What are you buying when buying a stock? Concentration: " The number of stocks you own is dependent on how you view yourself as an investor."  Is it possible to produce alpha? If yes, concentrate If no, diversify Are you a good investor? If yes, concentrate If no, diversify Conviction If yes, concentrate If no, diversify Summary: How many stocks should you own? This is a critical question without a single answer. Your portfolio concentration is constrained by time, circle of competence, and conviction. 

Mental Models discussed in this podcast: Self-Made Millionaire Cumulative Advantage Compounding Power of Habit Privilege Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode119 Inspired By Joshua Kennon Article https://www.joshuakennon.com/who-is-the-future-self-made-american-millionaire/ Book Recommendation: Millionaire Next Door https://amzn.to/3wDVPy3 Summary: Self-Made Millionaires are created by the choices and habits under your control, not your starting point in the world. Focus on the slow accumulation of advantages and ignore anything outside of your control. 

Mental Models discussed in this podcast: Durability Post-Mortem Resulting Capital Allocation Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode118 Timeline NACCO spun off Hamilton Beach Brands in September 2017 I first bought shares in March 2018 at a price of $40 per share I averaged down in May and June 2018 with shares at a price of $34 per share. Averaged down in September 2018 at $32 per share and October 2018 at $29 per share Within a year, the stock doubled to over $65 per share in October 2019. This is the recent peak. Instead of selling, I held because I valued the company at $75 per share at the time. It wasn't yet at fair value. May and June 2020, I averaged down again at $26 per share and then $22-24 per share. In March 2021, I recognized that holding $NC was a large opportunity cost on my portfolio and I shifted some money to other stocks while the stock was around $24-25 per share. In May 2021, I exited my stake in $NC completely at a loss around $25-26 per share. Some lots were sold at a gain and some at a loss. Overall, the position was a net loss and a much bigger loss on an opportunity cost basis. Thoughts and Key Questions I should have sold or trimmed after the stock doubled in less than a year. $65 per share was within my error margin for my $75 fair value estimate. Even simply reducing my stake by half would have been a good decision. The main reason I didn't do this was that it would have had to sit in cash. I didn't have many other good ideas at the time. My biggest mistakes are often made when I'm in cash or when I would be creating a cash position. (Always do research for new ideas!!!) Was buying $NC in the first place a mistake? No, I don't think so. My theory was sound. I expected positive news from NACCO and it was cheap at $40 per share. It was the best idea I had at the time, I was also running a diversified 10-15 stock portfolio when I bought NACCO.  My thesis was correct, but I had thesis creep as news flow came out. My original valuation placed the stock as worth between $50-65 dollars. I only upped my estimate after high natural gas income. I should have recognized that was temporary and sold.  I thought NACCO was a 3-5 year hold business, but it probably should have been sized as a last puff cigar butt. When that puff came within a year, I should have sold.  Did I accurately assess NACCO's business model quality? Yes. NACCO's service model of earning money from unconsolidated subsidiaries allows it to earn high returns on capital as the customer puts up all of the capital. Did I accurately assess the durability of NACCO's business? No. I misestimated the likelihood of a coal mine closure. I did assess that coal mine closures were likely and I accurately predicted the degree to which they would harm the business. However, I underestimated the degree to which NACCO's stock would decline. I thought the decline was overdone.  Did I accurately assess management/capital allocation? Partial yes, Partial No. I accurately predicted that management would NOT dedicate new capital to new coal mines. I accurately predicted that free cash flow would be dedicated to growing the North American Mining business. However, I underestimated the maintenance CapEx needed for the MLMC consolidated coal mine. This sucked up a large amount of cash flow for the 3 years I owned the stock. Future maintenance CapEx is going to be lower, but the timing was bad on my part.  I also underestimated the ROIC from the money put into the North American Mining business. I expected higher returns for the cash outlay. Thoughts and Lessons Learned Don't buy companies that lack durability and really dive into this question of durability.  A mistake on durability could mean that a very low P/E is justified.  Personal preference: I highly prefer buying steady growth companies. I did not enjoy the constant negative and bad news reports from the company while I owned it. The primary problem with owning NACCO for the last 3 years was the opportunity cost of how that money could have grown with other better companies. My actual losses weren't that high. Some of my purchases made a profit. However, the process of turning one profit center (COAL) into a new profit center (NAM) is slow and costly. That's basically a turnaround situation. I don't want to own turnaround situations until after they've been turned around. It's basically dead money Creates large opportunity cost situations Management is critical I want a management team that I believe is fully aligned with me on skin-in-the-game. NACCO has a good management team, but they don't run the company how I would run the company. They receive regular ongoing stock options and issuance which dilutes me as a shareholder. There isn't a lot of insider buying and there weren't a lot of share buybacks which I would have preferred. If I were assessing NACCO today, while I still believe it is cheap, I don't think it would pass my current management/capital allocation filter. Perhaps that will change in the next 5-10 years.  Be wary of thesis creep. NACCO would have been one of my best success stories if I simply sold it after it hit $60 per share. A quick double and it would have been a lot of money for my portfolio as a 20% position.  Instead, I allowed my thesis to creep which resulted in $NC being a drag on my performance for years 2 and 3 of my holding period.  Summary: I want to buy and hold high-quality, durable businesses that are growing AND are selling at a cheap price. NACCO had a cheap price and was high-quality, but it was of low durability and had no growth. Going forward, I am going to be more diligent at filtering out ideas that don't meet ALL of my highly stringent criteria. 

Mental Models discussed in this podcast: Operational Leverage Risk Management Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode117 Business Risks Stock specific Acceptable: Price - I'm willing to compromise on my price target of less than 10x earnings in recent days. Now I'm willing to accept up to 15x earnings per share for high-quality businesses Growth Rate Estimates - I'm willing to accept being wrong on my estimate of growth. I'm usually targeting businesses that grow revenue/earnings at double-digit rates. If my pricing is right, I can be wrong on my growth rate assumption and still do fine. Operational Leverage - I'm willing to bet on and be wrong about operating leverage Unacceptable: Balance Sheet Liquidity - I want a liquid cash-filling balance sheet Self Funded - I don't want to buy a company that has to be funded by debt Bankruptcy Risk - No bankruptcy risk of any kind, which means I am unwilling to accept highly leveraged companies. Commodity Risk - I'm not willing to accept exposure to commodity prices.  Portfolio Risks Related to your overall strategy or investment portfolio Non-stock or business-specific Acceptable: Illiquid stocks - I'm willing to accept lower liquidity in my stocks than other investors. I'm willing to spend months building my positions instead of just days or hours.  Concentration Risk - I'm willing to hold fewer stocks than other investors. (3-5 companies) Tracking Error Risk - I'm willing for my results to be dramatically different from the results of an index like the S&P 500 or the Russell 2000.  Unacceptable: Unwilling to underperform inflation for long periods of time. (5-10+ years) Unwilling to underperform a 10% baseline absolute return over time Brings in decisions like how to address cash drag I have realized while preparing for this show that I don't really know what my "unacceptable risks" should e on a portfolio-wide basis. So let me know what I'm missing. You can send me an email or DM me on Twitter.  Summary: As an investor, the risks you take can be categorized as either business risks or portfolio risks. In order to earn a return, you must take some risks from each type. In other words, how are you willing to fail? 

Mental Models discussed in this podcast: Confirmation Bias Skin in the Game Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode116 mCloud Technologies - $MCLDF SaaS company Trading at just 1x expected revenue Energy efficiency (Oil and Gas Plant efficiency) Green Energy (Wind Turbines, HVAC efficiency) Uses AI Problems: Cash flow negative (Presumably in the name of growth) Regular ongoing stock issuance and dilution Both shares and warrants "An assumption that this is the last time." Very promotional management (with skin-in-the-game?!?) "Uplisting to the NASDAQ" talk A lot of examples of SaaS names going from 1-2x revenue while on the Canadian TSX market to 10x+ revenue on the NASDAQ in the US Still hasn't occurred many years later Mergers and acquisitions using stock (Not cash, because they don't have any) Growth targets include non-organic growth (REALLY BAD) Dilution is required, but it makes it impossible to model per share returns Exit: Liquidity event needed for the payoff (Either sell to another company or an uplisting) Lessons Learned: Don't buy promotional companies Don't buy companies that dilute Don't buy companies that can't self-fund growth Insider ownership does not equal skin-in-the-game Be wary of 'uplisting' as a catalyst Summary: Investors need to constantly be wary of confirmation bias and stay alert for possible red flags. mCloud Technologies stock $MCLDF taught me this lesson. Don't buy promotional companies that dilute shareholders and can't self-fund growth. 

Mental Models discussed in this podcast: Occam's Razor Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode115 Key Rebalancing Principles I use in my portfolio Occam's Razor - Keep it Simple Rank every position in your portfolio Price Matters Default to Inactivity - Don't make your portfolio worse by taking action Summary: Rebalancing a portfolio should be based on four key principles: Occam's Razor, rank every position in your portfolio, price matters, and default to inactivity. Too often rebalancing makes a portfolio worse by taking action. Investors should be wary of using set rebalancing rules based on time or set portfolio allocation percentages. Anytime you rebalance your portfolio while ignoring price and valuation, you may be making a mistake.

Mental Models discussed in this podcast: Quality Investing Operating Leverage Barriers to Entry Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode114 Important links for SODI stock investors Public Thesis: https://www.diyinvesting.org/microcapclub-application-solitron-devices-stock-thesis/  Business Quality Report: [$5/month paywall] https://www.diyinvesting.org/solitron-devices-business-quality-report/  Intrinsic Value Report: [$10/month paywall] https://www.diyinvesting.org/solitron-devices-intrinsic-value-report/  Also, reference the SEC Filings Summary: Solitron Devices is a high-quality niche manufacturing company in the defense industry. This Solitron Stock Thesis focuses on SODI stock which I believe will become a ten-bagger in ten years or less. Solitron Devices is poised for massive stock outperformance due to the key factors of a high-quality business, double-digit revenue growth, operating leverage, and a skilled management team focused on shareholder-friendly capital allocation.

Mental Models discussed in this podcast: KISS Principle (Keep it Simple Stupid) Process vs Outcomes Insurance Tail Events Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode113 Investing Rules: Never Buy or Sell Options Investing rules are simple and short rules that limit mistakes, improving future performance or returns.  "You don't need to be smart to make money investing. You just need to be consistently NOT STUPID." Using Options tends to be stupid The key idea is that you cannot predict short-term market prices. Ever. Therefore, you shouldn't own options. There are four cases that I will address independently. Options are one of the easiest ways to lose a lot of money fast. In addition, options allow you to turn all of the advantages of investing in the stock market into disadvantages.  Long-term investors have time on their side: option holders do not. High-frequency traders will always beat you on options. Even retail brokers that don't sell order flow for equities (like Fidelity) still sell order flow for options. Normally if you're long you can't be forced to sell. Options can force you to sell when you don't want to do so. Buying Calls Limited Downside, Infinite Upside Negative: Time limit on your return Time works against you. You want time to work for you. Selling Calls They limit your upside. You should absolutely never sell "naked" call options. This would be where you sell call options on stock you don't own. This is basically shorting a stock. (See the last episode) If you sell "covered calls" which means you own the stock, you've now taken away the upside on a stock you have already determined you like. This is terrible. You should focus on buying companies with upside optionality. When you sell a covered call you destroy this process.  Buying Puts The limited downside, limited upside. These are typically known as insurance. You pay a premium, and you get a payoff if something negative happens. Insurance is always a net negative on your investment return over time. Unless you market time (bad idea), buying puts will lower your returns if implemented over an investment lifetime. Selling Puts The limited upside, limited downside. Selling insurance tends to be more profitable than buying insurance. However, you have two options: "naked puts" which means you don't have the cash to buy the stock. "Cash covered puts" which means that you lock up your cash for an extended period and lose the optionality of cash. I am big on optionality. Never sell your optionality. Never sell your upside. Bet on yourself. Summary: You should never buy or sell options because options can cause you to be stupid and lose money.  You don't need to be smart to make money investing. You just need to be consistently not stupid. Investing rules improve your future performance and returns by limiting your mistakes.  Focus on finding high-quality companies at good prices and harness the advantages of an individual investor. Options destroy these advantages and you should avoid them accordingly. 

Mental Models discussed in this podcast: KISS Principle (Keep it Simple Stupid) Process vs Outcomes Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode112 Investing Rules: Never Short Stocks Investing rules are simple and short rules that limit mistakes, improving future performance or returns.  "You don't need to be smart to make money investing. You just need to be consistently NOT STUPID." Shorting Stocks is Stupid Case Study #1: GameStop short squeeze of 2021 Case Study #2: AMC squeeze of 2021 I submitted a competition for a Long/Short stock choice for 2021 $SODI was my long $AMC was my short. Thesis: Bankruptcy Everyone wants you to fail if you are shorting stocks. Unlimited downside. Limited upside. Summary: Investing rules improve your future performance and returns by limiting your mistakes. You don't need to be smart to make money investing. You just need to be consistently not stupid. Shorting stocks is stupid. Investing is about aligning the odds in your favor. Shorting is the exact opposite. Everyone wants you to fail. It is impossible to have a margin of safety. You pay interest costs and you could lose everything. Never short stocks!

Mental Models discussed in this podcast: Signal vs Noise Process vs Outcomes Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode111 Thesis - Eliminating your investment mistakes is the easiest way to improve your investment returns What have been your past investment mistakes? Are there any commonalities between them? What can you learn from those mistakes? Don't repeat the same mistake! Make sure you're learning the Right Lessons Example: A brief discussion of GameStop Episode 5: https://www.diyinvesting.org/asymmetric-risk-and-reward-gamestop-2018-episode005/  Episode 30: https://www.diyinvesting.org/gamestop-stock-investment-post-mortem-episode30/  GameStop is a good example for me to learn the right lesson. I had to identify the difference between signal and noise or process and outcomes. These mental models have served me well going forward.  Summary: A focus on eliminating your investment mistakes is the easiest way to improve your investment returns. Don't repeat the same mistake twice by making sure you learn the right lessons. Signal vs Noise. Process vs Outcomes.

Mental Models discussed in this podcast: Momentum Inertia Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode110 Two Types of Momentum: Price and Busines Fundamentals Business fundamental momentum is the most important, but price momentum can be helpful.  How to use Price Momentum in your investing process Downtrend or Uptrend or Consolidation Period Price momentum isn't a deal-breaker on the purchase decision. However, you should understand where the momentum is if any. Some of the best times to buy are during consolidation periods. (Months or years of relatively flat stock price).  I learned this from ElementaryValue.com (David Flood) Business Momentum applied to Value Investing Is the business improving or deteriorating? I no longer want to buy deteriorating businesses. They may surprise to the downside. It is psychologically harder to hold bad businesses or declining businesses. Improving businesses are likely to surprise to the upside. Summary: Both momentum investing and value investing provide excess returns. This episode outlines how I plan to profit from both forms in my investing process. Specifically, price and business momentum will be added to value investing. The use of price momentum should limit my losses when mistakes are made. Meanwhile, by analyzing business momentum I am likely to reduce the probability of making mistakes.

Mental Models discussed in this podcast: The Pareto Principle (80/20 Rule) Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode109 How much time should you spend researching stocks? It Varies As long as it takes to answer your questions 80/20 Pareto Principle 10 hours - I don't think I've ever spent more than 10 hours before buying a stock I like.  How to prioritize your research time First ten minutes: Is it cheap? If you can't answer in ten minutes, the answer is NO. Next 1-2 hours: Is it good? If you can't answer in 2 hours, the answer is NO. Next 8 hours: Is it safe? If you can't answer in 8 hours, the answer is NO. The efficiency of research time is important: The most important: Safe > Good > Cheap The easiest to verify: Cheap > Good > Safe All you need to know in ten hours: Is this my best current idea? Is it better than something I currently own? You need to answer "YES!" to both.  If you hold cash, then the second question becomes: Is it better than cash?   Summary: The process of researching stocks requires a significant amount of time investment. You should optimize the time you spend researching by focusing on three questions: Cheap? Good? Safe? You should be able to answer in ten hours or less. My personal process focuses on two additional questions: Is this my best current stock idea? Is this company better than something I currently own? If you can answer both questions affirmatively, you should probably buy the stock.

Mental Models discussed in this podcast: Deferred Tax Liability Skin-in-the-game Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode108 Coffee Can Portfolio Seeking "Never Sell" stocks - only certain companies qualify Benefits from a deferred tax liability (Can become quite significant over time) Preferable for individual investors. Hard to implement professionally Characteristics of a Coffee Can Stock An industry that lacks disruption risk Banking (Example) Stable and high returns on capital/equity (15% or higher) Long-term sustainable organic growth of at least 5% but preferably 10-15%. (You don't necessarily want 20%+ growers that will eventually lose all growth) Low competition, could be regulated monopoly or oligopoly Founder led company or a long-term CEO with skin-in-the-game Zero or low debt/leverage policies The ability to be a ten-bagger or a 100-bagger Usually small with the ability to grow large. A small competitor with a competitive advantage (cost perhaps) over larger competitors in a big market. Think early Walmart, Costco, Home Depot, GEICO Intelligent capital allocation strategies that benefit shareholders Lack of dilution Growing dividends or buybacks over time (Dividend Champion type stocks) Unless it is a roll-up strategy, an average to acquisitions can be helpful, because they often destroy shareholder value.  You can't think of your stocks as a "Portfolio" You are a true business owner Judge your success by the performance of individual companies, not the overall portfolio return. Logical point: If every individual company compounds at 10% per year or more, then the portfolio as a whole by definition must also compound by at least 10% per year. Position sizing no longer matters. Your greatest winners may eventually become 50%, 75%, or 90% of your total portfolio. That's okay. That's how the strategy works. This is how the strategy outperforms.  How to implement a Coffee Can Portfolio (The Process) Buy one new stock a year, each year you work. Put all of your savings for the year into that company. Never sell. Ideally register for the shares in direct certificate form. It can be electronically held at a transfer agent, but after the year, don't hold the shares directly with a stockbroker. This limits your ability to sell the shares and is a huge psychological boost in implementing the strategy.  Summary: In this episode, I discuss the coffee can portfolio approach to investing. This investing strategy involves never selling a stock once it is bought. Therefore, you must seek high-quality companies with long runways for growth and high returns on capital.

Mental Models discussed in this podcast: Goals and Habits Concentration vs Diversification Signal vs Noise Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode107 2021 Investing Goals Identify 2 new companies worthy of holding a 20% position in my portfolio Actually, build those new 10-20% positions by selling out of 2 of my current holdings. (I have already identified which ones to sell) Become more comfortable with high levels of concentration. My current largest holding is 35% of my portfolio. It's grown to this size from 20% and if all goes as I expect, it will likely continue to grow as a percentage of the portfolio. I need to become comfortable with 50% of my portfolio in a single stock if that company earns it through business performance.  I may also sell 2 of my current positions before I have found the two new positions. Consequently, I need to tolerate holding less than 5 stocks for part of the year. Earn a 20% annual return for the year 2021. I earned a return of 22% in 2020, beating the S&P 500 by 3.7%.  Read my full annual letter here.  I believe I can match or exceed that return again this year. My discount rate is 10%, but that is used solely for the fundamental analysis portion of my stock analysis. With the current setup of my portfolio companies, I am often seeking 10% of the cash flows of the business, and an additional 10%+ from multiple expansion. I am optimistic that I can achieve this rate of return and perhaps substantially exceed it due to the types of companies I currently hold. We'll see how that comes to fruition. This is clearly an inferior goal as it is results based instead of process-based. I'm simply documenting it s that I have it as a reminder. 2021 Business Goals Pass the Series 65 Exam Needed to become a Registered Investment Advisor Will allow me to take on clients interested in me managing their portfolio. If you'd like information about this and are perhaps interested in joining a waitlist, you can reach out for my information at my email: trey [at] diyinvesting.org Marketing Goals: 5,000 Twitter Followers (Currently just over 2k) 1,000 YouTube Subscribers (Currently just over 300) At least 1 outside investing client Useful research goals: Screen X number of companies this year (Say 100) Write-up 12 companies this year Read a 10k a day or a 10k a week, etc... Goals I will no longer pursue It used to be my goal during 2020 to move to only checking stock prices once a week.  Going forward, I will no longer have that as a goal. I have found that my focus on illiquid stocks means that I'm often monitoring stocks frequently because it takes a long time to build a stock position. If I had completed that prior goal, my results would have been worse.   Summary: In this episode, I outline my top investing goals for the new year. I aim to identify 2 new companies worth buying and my goal is to attain a 20%+ annual return for 2021. I also cover process-based goals relating to how to go about investing research. Finally, I would like to pass the Series 65 exam so that I can begin managing money for outside clients. 

Mental Models discussed in this podcast: Opportunity Cost Rebalancing Coffee Can Portfolio Intrinsic Value Optionality Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode106 When should I sell stocks? (Question from Patron) There are a few key considerations:  Opportunity Cost What else do you own? What is your current best idea? How much of it do you own? Trimming Positions I don't like doing this. All-or-nothing for me. There is a huge difference between selling into cash versus selling to buy a new stock Perhaps you consider selling to cash at a P/E of 35, but otherwise only sell if you have a better stock to put it in. I may be fine selling a stock at a P/E of 20 (that I think is worth 25) and buying a stock at a P/E of 5 (that I think is worth a P/E of 15). My return prospects are better. What if my thesis was wrong? You should sell a stock if you've made a mistake. If you were wrong about the thesis or your thesis has broken you should sell.  This is hard to do and I struggle to do so myself, especially if the price has fallen substantially.  Other Considerations: Coffee Can Portfolio Seeking "Never Sell" stocks - only certain companies qualify Benefits from a deferred tax liability (can become quite significant over time) Preferable for individual investors. hard to implement professionally. Return Differential Don't sell a stock because a new idea is 1% better.  You want at least a 5% return differential. Future returns are 5% when the new idea is 10% OR future returns are 10% when the new idea is 15%.  Don't quibble over small differences because those differences are within your margin of error.  Question from Patron: "Should I buy great companies during their growth phase and then sell when they lose their advantages?" A few problems here. It is difficult to predict when a company will lose its advantages. Likewise, once a company is recognized to have lost its advantages, usually, the price deterioration has already occurred.  If you want to maximize profits, you likely need to sell BEFORE advantages have been lost.  Positive Optionality and Selling Above Intrinsic Value It is almost impossible to accurately calculate intrinsic value. Consequently, it is likely a mistake to sell when a company reaches your calculated intrinsic value.  Summary: Many value investors lack a clear strategy on when to sell stocks in their portfolio. This decision ought to be based on opportunity cost, potential investment mistakes, intrinsic value, and return differential between old and new companies.

Mental Models discussed in this podcast: Investing Speculation Gambling Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode105 Definition of an Investment An investment meets all 5 conditions: Utilizes a Margin of Safety Provides an Adequate Return (>10% for me) The 10% hurdle is met solely on a fundamental cash flow basis Is a Positive-Sum Game Bounded by a specific range of prices and terms Any investment operation that fails to meet all five conditions is either speculation or gambling.  Gambling is both a negative-sum game or an operation with a negative expected value.  References Based on this Twitter Thread I made: https://twitter.com/TreyHenninger/status/1336004138061209604?s=20 Which was a rebuttal of this thread by @10kdiver: https://twitter.com/10kdiver/status/1335267196625244162?s=20 Previous Podcast Episodes cited: Episode 30 - GameStop Post-Mortem Episode 95 - How to build conviction (FAQ) Good source of discussion on Margin of Safety Episode 23 - What's a good discount rate? Episode 31 - Buying Stocks is not a zero-sum game Episode 32 - Shorting Stocks is a negative-sum game

Mental Models discussed in this podcast: Terminal Value  Intrinsic Value  True Historic Value  Discounted Cash Flow Calculation  Net Present Value  Fog of War  Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode104 Why does Intrinsic Value grow over time? There are multiple ways to answer this question.  It doesn't. Intrinsic value is fixed, but your estimate of intrinsic value will change.  Your assumptions were wrong because you made a mistake.  Your assumptions were wrong because you can now see more of the future. A year moved from being inside Terminal Value to inside your forecast range.  What is Terminal Value? How is it calculated? Why does it matter? Terminal Value is the net present value of all future cash flows discounted back to a specific year in the future. (Perhaps 5 or 10 years from now) In other words, Terminal Value is your estimate of the Intrinsic Value of a stock 10 years from now. As each year passes, the "fog of war" that is the future becomes illuminated. That means that we can now *SEE* the future. Concept: True Historic Value  Summary: Terminal Value is the net present value of all future cash flows discounted back to a specific year in the future. Intrinsic value is fixed, but your estimate of intrinsic value will change over time. In addition, you can evaluate how the intrinsic value of a company has changed over time in the past by calculating the True Historic Value. This value is the intrinsic value at a past date assuming 10% future annualized returns all the way to the present.

Mental Models discussed in this podcast: Deflation Inflation Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode103 The Deflation Myth Deflation is considered bad because economists assume that consumers will hold off making purchases with the expectation that prices will decline in the future.  My rebuttal: This just doesn't happen.  The "rational consumer" doesn't exist. This is why you have a whole field called 'behavioral economics.'  For whom is deflation bad? Deflation is bad for debtors (Those in Debt) Governments (because they are all debtors) Leveraged Companies Companies with pricing power For whom is deflation good? Creditors (Those who lend money to others) Those without debt (Whether people or companies) Companies without pricing power. (Simply holding prices stable will lead to increasing profits) The Myth of "Stable Pricing" Stable is 0% inflation, not 2% inflation as the US Federal Reserve would like you to accept.  Summary: The Deflation Myth has been accepted primarily because economists have used false assumptions in their analysis and because debtors, namely world governments, tend to hold massive political and cultural power. It is in their best interest to convince you that deflation is bad so that they can inflate away their debts. Yet, most investors are harmed more by inflation than they would be by deflation. 

Mental Models discussed in this podcast: Enterprise Value Return on Invested Capital Weighted Average Cost of Capital Net Cash vs Net Debt Leverage Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode102 Enterprise Value Definition Enterprise Value = Market Cap + Net Debt or Market Cap - Net Cash Key Thesis: Instead of using Enterprise Value, I would rather use Market Capitalization and have excess cash be part of my margin of safety.  When Cash > Debt use Market Cap. When Debt > Cash use Enterprise Value.  This is a conservative approach. Why is Enterprise Value useful? Corporate takeovers because you have to assume the debt, not just buy out the equity. On the flip side, if you take over a company you get access to the cash box.  This doesn't apply to minority shareholders.  "Net Cash or Skip" Investing Approach Should you calculate ROIC with cash or without cash? Is Excess Cash Bad? Does a company holding excess cash mean the company is a poor capital allocator? WACC is BS Why ever bother valuing debt? I don't trust capital allocation at companies to be what I want it to be. Solution: Be Conservative Buy companies with net cash, but value them as if they had none. Buy companies with growth, but value them as if they had none. Buy companies with good capital allocation, but value them as if they did not.  Buy companies with good management, but assume management is only average. (Because someday it will be) Summary: Be conservative when valuing companies. Don't give managers credit where they don't deserve it. Enterprise value should only be used when companies hold debt. Yet, you should only buy companies with net cash.

Mental Models discussed in this podcast: Cloning / Copycat Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode101 Question: How do I find good stock ideas? Identify 3-5 of your favorite investors you follow Open a new spreadsheet For each investor: Go to their website and write down the ticker and company name for every single company they've ever written up If articles are paywalled that's fine. You don't need to read the articles, simply take down the name and ticker.  With 5 investors you should have a nice long list. At least 100 stocks.  Now simply go one by one and read the annual report or 10k for each company. Value the company and add the valuation to your spreadsheet.  Now you have a watchlist.  Alternative Idea: Access the OTC Manual Database with an exclusive coupon code! Purchase the OTC Manual Database access at SvendaManual.com  Exclusive Coupon Code: "Trey" Without quotes Receive a discount on your annual subscription cost Summary: The best way to identify good stock ideas is to copy a watchlist of investors you trust and respect. Their best ideas can form a strong foundation for your watchlist.

I want to hear from you, my audience Email me your thoughts, feedback, or encouragement: trey [at] diyinvesting.org Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode100 Vision Educate others on how to invest as if I was my target audience Build a network of fellow investors Grow and develop as an investor myself Use this podcast and blog as a platform for launching my own investment management business Basically, market to potential clients who may want me to invest money for them How you can support the show Become a Patron: Here Amazon Purchases  Always the top left-hand corner link on my website displaying the current book I'm reading.  Any purchase made from Amazon after using that link, I would earn a commission on at no additional cost to you. Or use this link: https://amzn.to/3mY1Lwu WP Engine Coupon If you're setting up your own blog They are the website host I use The coupon is available on my website on the left-hand side.  Mr. Rebates Earn cash back while shopping online.  Just sign up using the link above or type in my Referral ID when signing up: 1200774 The link is also always available on my website left-hand side.  Current Listener Base 640 average listeners Goal: I need 5000 to monetize the show and offset my costs 1300 Twitter followers Goal: Exceed 10k How to: Start your own podcast: Libsyn Start your own blog: WP Engine (Hosting Service) WordPress (Web Design) Genesis Framework (Web Design) Sign-up using these affiliate links to support the show. (Discount included) Summary: As I reflect on my first 100 episodes of The DIY Investing Podcast, I want to hear from you my audience. Share your thoughts and feedback so the next 100 episodes are even better. I've met a lot of great investors and I've started to build a network of like-minded peers. At least one good stock idea that I wouldn't have had if I didn't host this podcast. I learned it from one of my podcast guests and have earned thousands of dollars from that one idea. 

Access the OTC Manual Database with an exclusive coupon code! Purchase the OTC Manual Database access at SvendaManual.com  Exclusive Coupon Code: "Trey" Without quotes Receive a discount on your annual subscription cost Follow Jan Svenda: Website: SvendaManual.com Twitter: @JanSvenda Follow David Flood: Website: ElementaryValue.com Twitter: @ElementaryValue Past Interviews with David Flood: Episode 48 - David Flood Interview: Dark Stock Investing Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode99 OTC Manual Database Exclusive Coupon Code: "Trey" OTC Market has a bunch of pump and dumps Critical to filter those out Database saves you time Pre-filtered for the types of qualities value investors want Stock Picks $GANS Gainsco Insurance $RSRV Reserve Petroleum Co. $ECRO ECC Capital $EQTL Equitel International Corp. SEC Ruling on Dark Stocks The baseline expectation is that many dark stocks will be moved to the Grey market May present new opportunities If you're not afraid to invest in illiquid stocks, the stock prices may drop.  Could move to an expert market (only accredited investors) SEC is trying to combat fraud (Not convinced this will achieve their goal Summary: I interview two guests in today's show: Jan Svenda of SvendaManual.com and David Flood of ElementaryValue.com. We discuss their new product, an OTC Manual database for finding stock ideas. The OTC Manual database sorts through all 7,000 OTC Market stocks and filters down to the best 450 ideas. These stocks are undervalued or offer interesting catalyst driven opportunities. You will also find Grey market stocks and dark stocks with financials.

How to connect with Value Stock Geek Website: ValueStockGeek.com Twitter: @ValueStockGeek Articles Referenced in the show: Mistakes have been made and lessons have been learned Margin of Safety Still Matters Why Quality is Essential for a concentrated Portfolio General Dynamics $GD Write-up Past Interviews with Value Stock Geek: Episode 49 - Value Stock Geek Interview: Cheap and Good Balance Sheet Episode 62 - Passive Asset Allocation Strategy with Value Stock Geek Mental Models discussed in this podcast: Margin of Safety Quality Investing Diversification vs Concentration Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode98 Transforming your investing process Margin of Safety Still Matters Why Quality is Essential for a concentrated portfolio How COVID-19 impacted your investing strategy General Dynamics Stock $GD Price Still Matters How to buy Wonderful Companies at Wonderful Prices Summary: In my third interview with Value Stock Geek, we discuss his effort to transform his investing process in light of COVID-19 and recognition of past mistakes. His new goal is to buy wonderful companies at wonderful prices. No compromises.

Mental Models discussed in this podcast: Margin of Safety Backup Systems Scale Failure Points Leverage Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode97 Margin of Safety Example of building a bridge Backup Systems Example of loss of power Scale (or Economies of Scale) The volume of a sphere increases faster than the surface area. Therefore it is more efficient for vessels to be larger. Failure Points The more complicated a system is, the greater number of failure points. Leverage You can move large objects with a small amount of force with a sufficiently large lever.  "Give me a large enough lever and I can move the world." Summary: As an investor with an engineering background, I believe I bring a unique perspective to investing in businesses. The mental models: margin of safety, backup systems, scale, failure points, and leverage originate in engineering are useful for investors.

Mental Models discussed in this podcast: Discounted Cash Flows Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode96 Summary: Your goal as an investor is not to be the most accurate in your calculations or to do everything the 'right' way. Your goal is to make money. Sometimes the right way technically leads you to make worse decisions.

Mental Models discussed in this podcast: Opportunity Cost Margin of Safety Conviction Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode95 Conviction Formula Conviction is a function of Opportunity Cost, Margin of Safety, Position Sizing, and Upside How much conviction do you need? Opportunity Cost - If you have a lot of good current positions, you need greater conviction to overcome that opportunity cost Position Sizing - Smaller positions need less conviction How to build conviction in stocks Margin of Safety - You want it all! (Build a checklist) Above Average Industry Above Average Company within the industry High Returns on Capital Durable Business Skilled Management Management with skin-in-the-game No dilution with buybacks preferred Lower than average prices "Conviction is like a checklist. The more boxes you can check, the greater your conviction." Upside - How high can this stock go? Is it possible to be a 10-bagger or 100-bagger? Summary: Conviction is a function of opportunity cost, the margin of safety, position-sizing, and upside. Your required conviction is determined by opportunity cost and position sizing. You increase conviction by improving the margin of safety and upside potential.

Mental Models discussed in this podcast: All Else Equal Shareholder Primacy Culture Net-Nets Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode94 How Japan and the United States differ culturally Culture Matters Shareholder Primacy Matters Japanese Net Nets are less reliable than the United States based Net Nets  Summary: This podcast episode outlines some key differences between Japanese culture and American culture which influence how investors should value Japan based stocks versus United States based stocks. Shareholder primacy and culture are important.

How to connect with Ralph Molina Website: MidStoryVentures.com Twitter: @RalphAtMidstory Email: Ralph@MidStoryVentures.com  Mental Models discussed in this podcast: Float Infinite Return on Capital / Free Growth Arbitrage Pricing Power Unit Economics Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode93 Midstory Ventures Partnership  Investment club 3 partners Building an investment history Seeking partners  OTC Markets Business Analysis ($OTCM) Business Model Overview Segments: Listings Trading Data Float Pricing Power What scuttlebutt did you perform? How good is management? How do you feel about management compensation? What about dilution? What does it mean for OTC Markets to have infinite returns on capital? How do you see future growth playing out? OTC Markets may have a good business today, but how durable is that advantage? Summary: I interviewed Ralph Molina of Midstory Ventures where we discuss a stock pick: OTC Markets. Stock Ticker: $OTCM The focus of the podcast episode is a fundamental analysis of the business with a focus on business quality, infinite returns on capital, float, and OTC Market's flywheel strategy. Listeners will learn how OTC Markets makes money and why they are a high-quality business. We also discuss scuttlebutt and key fundamental analysis factors that investors can use to value the company.

Mental Models discussed in this podcast: Discount Rates Supply and Demand Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode92 Discount Rates have changed over time  Past Short Lives A small or non-existent investor class No control of interest rates Present Longer lives Larger investor class Central Banks and controlled interest rates Future Massively longer lives (no death?) Massive investor class Discount rates will approach 0%.  Summary: Discount rates form the foundation for the process of stock valuation. Value investors, therefore, rationally adjust their discount rates based on their expectations for their future. Changing expectations will reduce discount rates over time. 

Mental Models discussed in this podcast: Generally Accepted Accounting Principles (GAAP) Owner's Earnings Free Cash Flow Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode91 Owner's Earnings definition and its Approximations GAAP Earnings vs Owner's Earnings vs Free Cash Flow Everything is an approximation attempt at Owner's Earnings What are the Owner' earnings? The cash available to be distributed from the business TODAY without impacting the competitive position of the business for the future. How much cash could be paid in dividends today if the business didn't grow AND didn't shrink? We're going to talk about Amazon today Using Amazon's 10k. (2019) Investing Rules for Fundamental Analysis of GAAP Earnings Expenses should be treated as expenses even if they don't involve cash outlays Think like an owner, not a manager If your estimate of free cash flow exceeds 110% earnings you're probably wrong. (Not always but probably). It is rare for a company's free cash flow to exceed earnings. Stock-Based Compensation This is the big one. How you calculate this can be a problem. Amazon recorded a $6.8 billion non-cash expense for “stock-based compensation” in 2019. Jan 2019 shares: 491.2 million Jan 2020 shares: 497.8 million An increase in 6.6 million shares during that period. Yet, using Amazon's market price of $3,200, it would require $21.1 billion to buyback that many shares. Should you use $6.8 billion as the expense or $21.1 billion? In January 2020, Amazon was priced at $1,800 per share, so let's use that price. That's still $11.8 billion to buy back the shares. This means Amazon is understating the cost of its share issuance by AT LEAST $5 billion, in a single year. Maintenance CapEx vs Growth CapEx vs Depreciation It is a fallacy to say that Growth CapEx is simply Total CapEx minus Depreciation. Inflation will cause maintenance CapEx to exceed Depreciation in most cases. Also, have to consider property plant and equipment acquired under finance leases. $13.7 billion in Amazon's case. Questions from Twitter Valuation Adjustments Land Inventory Investments Goodwill is ambiguous Deferred revenue classified as a liability (false reading of a firm's financial condition) Response: Pay upfront is useful as a float when growing but harmful when growth reverses. May have to pay refunds? Change in accounting rules for operating leases (now considered an asset with a matching liability) Software and R&D immediately expensed even though it can be an asset like a factory or a machine. Non-GAAP adjustments are either (1) non-recurring or (2) non-cash. On (1), can you explain how you factor in non-recurring costs into a forecast for valuation, and (2) how to deal with the amortization of acquired intangibles vs total amortization (ie. incl. Non acquired intangible assets) Companies will sometimes only back out acquired intangibles and not amortized internally developed assets. Adjusting CAPEX for operating leases.  Summary: GAAP stands for "Generally Accepted Accounting Principles" and GAAP earnings represent net income available to shareholders using these accepted accounting principles. GAAP is foundational for investors trying to calculate the owner's earnings.

Mental Models discussed in this podcast: Intrinsic Value Extrinsic Value Define your terms Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode90 Extrinsic Value vs Intrinsic Value Definition Tweet: “Be very careful when describing an asset's “value.” Define your terms. They matter. Intrinsic value is the NPV of all future distributions of cash. (Not the NPV of FCF) Extrinsic value is the market value as determined by others for any reason at all. Responses: This is an extreme view What about Berkshire? What is their cash worth? My thoughts: “There is no fundamental difference between equity that doesn't distribute cash *ever* and a bond with a 0% interest rate that not only doesn't make interest payments but also defaults prior to returning your principal. How much would you pay to own that bond? “If I knew *with certainty* that a business would never distribute cash. (Dividends, buybacks, or liquidation) Then the company is fundamentally worthless to shareholders. It means all of its growth is for nothing because it will reach bankruptcy before giving cash. Summary: Be very careful when describing an asset's "value." You need to define your terms because they matter. Intrinsic value is the Net Present Value of all future distributions of cash. (Not the NPV of Free Cash Flow) Extrinsic value is the market value as defined by others.  By focusing on intrinsic value investors can alleviate the need to predict price action in order to turn a profit. Investors, as opposed to speculators, earn their return from business performance. Therefore, it is critical to focus your time and effort on studying business performance. 

Mental Models discussed in this podcast: First Principles Asset Duration Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode89 Investing First Principle Every security or financial asset MUST be owned by someone at all times until that security is retired. This holds true for stocks, bonds, cash in the bank, QE, and any other similar financial asset. This is an investing first principle. Implications for Investors It is impossible for investors to "get out of the market" in the aggregate. There are never more sellers than buyers or more buyers than sellers.  Buyers and Sellers MUST match in order for transactions to occur. If the price rises to handle demand, that doesn't mean there were more buyers in the market than sellers. Likewise, if prices fall it doesn' mean there were more sellers than buyers.  Once the transaction occurs, sellers and buyers match. Someone, somewhere, will receive the implied rate of return for each and every asset that exists. If bonds are priced to lose money through maturity (due to negative interest rates) then it is guaranteed that investors, in the aggregate, WILL lose money on the bonds. It is possible for some speculators to make money in the interim and sell out to greater fools. But someone has to lose even more money to accommodate that speculator's profit. Stocks don't discriminate. Stocks don't care what your race, ethnicity, skin color, gender, age, sexual orientation, or country of origin is. Stocks don't know that you own them. Everyone is presented with an equal opportunity to own stocks as long as they are willing and able to pay the market price. In some respects, that makes stock investing (and other financial assets) one of the most egalitarian ways of building wealth available. If a financial asset has an unlimited duration (such as common stock), no one can force you to sell it. All of the proportional dividends for that company are yours and your future beneficiaries for the rest of time. This should be very empowering. Once you acquire a share of stock, you have permanently locked-in a share of future profits and dividends. You have permanently raised your lifestyle potential. Implies buying a company that won't go bankrupt and will have future dividends, but you should be seeking only those companies if you're a listener to this podcast. Summary: Every security or financial asset MUST be owned by someone at all times until that security is retired. This holds true for stocks, bonds, cash in the bank, QE, and any other similar financial asset. This is an investing first principle. First-principles are useful for investors seeking to develop investing strategies from the ground up.  By using first-principles you can be assured of limiting your blindspots and not basing your strategy simply on what has worked in the recent past. 

Mental Models discussed in this podcast: Satisficing Absolute vs Relative Returns Optimization Min-Max Game Theory Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode88 Satisfice definition and Mental Model Uses Question from Wobble: “I think it would be interesting to discuss whether it has implications for whether you should focus on absolute or relative returns. Something I've been thinking about and it seems relevant. Looking forward to it!” Satisfice: accept an available option as satisfactory. (Oxford Languages via Google Search) I tend to be an optimizer If you optimized everything, you would be paralyzed in life. Unable to make a decision. Clothing Furniture Food Choices Where to go to eat? Consumers make choices like this every day The same can be true in investing. The goal isn't to maximize your portfolio. Your goal should be to find satisfactory investments that allow you to achieve your financial goals with minimal risk. In any short-term time period, the investor with the highest return likely took big risks that are not sustainable over the long-term. Yet, over the long-term maximization of returns is not necessary. Summary: Satisficing is defined as accepting an available option as satisfactory. This mental model is useful because consumers use it instead of optimizing for every purchase. Investors can learn from this behavior to improve their portfolio and investing strategy. Your goal should be to find satisfactory investments that allow you to achieve your financial goals with minimal risk. Simply trying to maximize the returns of your portfolio could cause you to fail in attaining your goals.

References: This episode was inspired by a Twitter thread where I responded to a poll on how to value companies. That thread is available at the following link: https://twitter.com/TreyHenninger/status/1288475399861817352 Mental Models discussed in this podcast: Cost of Growth Valuation Gordon Growth Model Asset / Earnings Equivalence Retained Earnings Return on Invested Capital Earnings Yield Dividend Yield Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode87 Summary: Growth is not free for most companies. It costs something. The cost of growth valuation model takes into account return on invested capital when valuing stocks. Most companies have to retain earnings in order to grow. Assets are only as valuable as the earnings they create. You can't take credit for both book value (assets) and earnings power in the same valuation on a stock. It's a problem of double counting that leads to overvaluation.