Chit Chat Stocks - BONUS Episode - Monthly 7investing Discussion

Episode Date: April 20, 2022

Simon Erickson and Steve Symington join us from 7investing to discuss various topics. Listen in to hear Brett, Ryan, Simon, and Steve banter about topics ranging from optimal cash balances to investing mistakes. Enjoy the show! We will conduct Bonus Interviews periodically whenever Brett and Ryan are eager to speak with a certain guest but know that the discussion wouldn't fit our traditional show format. Sign-up to 7investing with code "MONEY" and get $100 off your annual subscription: https://7investing.com/subscribe/ Want more of Simon Erickson? Follow him on Twitter here: https://twitter.com/7Innovator?s=20&t=Oapx59Aurv3wen1HN05qMw Want more of Steve Symington? Follow him on Twitter here: https://twitter.com/7investingSteve?s=20&t=6ElHa91Tpa-yCvMkLFWoGA Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Optimal Cash Balance | (2:06) Mistakes | (15:45) Time Horizon | (27:43) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing.

As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Money. This is our monthly seven investing discussion where we have on Steve and Simon today, and we usually flip-flop it. So sometimes it'll be on the seven investing

podcast feed. Sometimes it'll be on ours. I think we do it every month. So if you enjoy these, let us know. We intend on keeping it going. And we usually don't prep for these shows either. It's minimal prep, but we have a few topics in mind. And today, one that Brett wanted to talk about. Do you want to kind of introduce it? Yeah, I just want to say, first off, thanks for guys for coming. Steve, Simon, how are you guys both doing today? Good. Great. Happy to be here.

Always. It's so much fun every month. Yeah. Actually, let's mention the 7investing promo code. Perfect timing. If you use the code money, you get $100 off the 7investing annual. We've got the 7investing. no one's really watching this on video, but we've got the 7investing logo here behind us and they have a redone website now. So it's sleek. I'm looking at it right now. Go ahead, check it out. Use our code money at checkout if you want $100 off the annual. But yeah,

am I forgetting anything on the little plug there? Yeah, no. I think let's move into our topic here. And the one I wanted to talk about and something we discussed here a lot, me and Ryan is a few disputes, disputes, debates, healthy debates, as you might call it, is the optimal amount of cash to have in your portfolio or call it, you know, cash just sitting around and maybe waiting for, I don't know, a rainy day or not even a rainy day, a rainy day in the stock market. More optimal time to enter, or I guess, curious about how you guys think about using, do you have a cash balance? Is that a regular thing for you guys? And then is there like a minimum percentage of your portfolio that you always have in cash or when do you deploy that? Yeah, maybe Steve, we'll start with you and then go to Simon. Yeah. I mean, I try not to overthink it too much personally. And let's maybe talk about this. There's a couple of different perspectives, right? You could approach it as like a money manager where you might want that optionality for cash all the time and to take advantage of the clients. But personally, I mean, I keep my cash balance at a minimum in my personal portfolio. Most of it is comprised of additional capital that I put in there and doesn't stay cash very long because I just buy my favorite stocks every single month, month after month with

whatever cash that I can actually afford to part with and be without on top of whatever I might have for just a regular savings account, emergency funds, et cetera. But I keep my cash at a minimum. And really, the only times I tend to have excess cash is when I'm revisiting my portfolio periodically to cut usually losers or stocks where I believe the thesis is broken while letting my winners run. And I'll sell those off and redeploy that cash somewhere else. But I don't have any hard and fast rules about, all right, I need 5% cash all the time. okay, I'm going 20% cash because the market's overbought. I'm trash at timing the market and I don't even try. So I just find businesses that I believe are fairly valued relative to their long-term potential and just repeatedly, continuously buy their shares and build my positions up. Very similar. I mean, I almost always have a cash balance and then I almost

always deploy it and buy stocks that keep going down farther than where I buy them. I get so excited that I got a good, a good stock that I want to buy. And then I get in and then it falls farther. And I'm like, I should have been a little more patient with that, but I've got the same strategy. Yeah. That works depressing in the short term, impressive over the longterm, but just to add a little bit, you know, some more context, the way I typically do things is actually tend to upgrade my portfolio during sell-offs, which is kind of interesting. Something we've chatted about, I think maybe a time or two before, which is, you know, when money gets tight or growth gets a little bit slower, this is kind of a lot of risk off mode for the market. And it kind

of makes you take a real hard look at your portfolio and say, okay, which of these companies has got farther to fall? Maybe if you were on risk on mode a couple of months ago or a year ago, and you're worried that maybe balance sheet isn't as strong as it used to look, or maybe the growth isn't as strong as it used to look. This is something I'm thinking a lot about in terms of SaaS companies. There's a lot of cloud-based companies that got a lot of attention in 2020, certainly in 2021 and then you kind of see you know there's certainly some great companies there they're going to be around for a long time and i like those but maybe i want to put money into those versus more some of the more speculative names that came out hot but didn't endure when

when the market kind of dries up and so i kind of think of it a lot of the times is yeah there's cash on the side that i that i put to work way too too quickly then i also kind of start thinking okay well how does the market change and how should i adjust my portfolio when stuff like like this happens. I guess maybe a question to spring off of that. And I kind of in your boat, and I think for us, we have an investment fund. So the philosophy can be a little bit different with that, like Steve mentioned. But do you guys treat like holdings? I think Steve mentioned something a bit there too. Like any sort of holdings in your portfolio, is that where you're really hesitant to maybe sell something just because, you know, selling can be, I don't know,

there's a lot of studies out there that selling is very hard to do, or do you treat that the same as cash or do you treat it differently? I know, I hope you guys are understanding I'm having trouble kind of. Yeah. Well, I guess one of those, the healthy debate is what we should call it. The healthy debate that Brett and I have frequently is whether or not it's good to have a bit of a cash buffer in the portfolio or just to redeploy from existing holdings that you think where you think maybe the opportunity isn't quite as good your least favorite existing holding yeah is that is that something you guys do maybe maybe like sell from sell from your least favorite and add to your most is that uh yeah uh that's that's kind of how i i approach um in a nutshell i guess

maybe oversimplifying a little bit, but yeah, I tend to call my losers and find places that I'd rather redeploy cash in higher conviction names. It reminds me of something, actually, I was thinking about Markel, which is one of my favorite long-time personal holdings. I bought my first shares of Markel back in like 2008, 2009. And, uh, it's, it's one of those like mini Berkshires, but something Tom Gaynor said, I was looking up the quote, um, as you guys were talking, uh, and he said, uh, in general, we hope to be able to buy a stock and never sell it. Uh, I think that if you limit your buying to things, you will be able to own for a long time. You'll put more thought into whether to buy it or not. And that leads to better long-term decisions.

And I think key to determining when to sell is whether you've established a comprehensive thesis for owning the stock in the first place, because it should be fairly clear when that thesis is broken. And if it is broken, compared to your original thesis, or changed for the worse, sometimes the thesis actually improves thanks to optionality, for example. But if it is broken, then you can sell it. But I think key is, is, is building a thesis, knowing when it's broken and really as a general rule, I'm hesitant to sell. I think we, everyone should be hesitant to sell. And because you look back at your biggest mistakes in investing, you ask anyone who's been investing for any meaningful period of time and you ask them about their biggest mistakes,

it's always selling something too soon. And so, yeah, it's the hardest part of investing, I think, but, um, yeah, I try and just sell, uh, sell stocks where I think the thesis is broken, redeploy that cash into more promising ideas and, you know, don't look back. That's, that's the other thing. It's all opportunity costs, right? Like, like, like, and you got to think long-term in this because you're going to, you're going to shake out your profits if you're just trying to jump in and out. I mean, then you got Elon Musk going and buying Twitter and then all of a sudden the stock pops up 30% just off of something short-term that people aren't thinking. I mean, stuff like that is a lot of noise in a couple of months, but like, if you're thinking about

something in terms of a five or seven year period, there's always opportunity costs that you can have that if you see something better for that money, that's okay, in my opinion, to upgrade your portfolio to the better opportunity. I personally did this this past month in financial services. And, you know, investing is personal. I won't say the name of the company, but I had a very large position, a retirement account that was in financial services industry. And I looked at it, and I'm looking it up right here to make sure I got the month right. I redeployed it into Steve's January 2022, a seven investing pick, which is amazing by the way. And then also my recommendation from this past month as well, because in quite honesty, looking at what's going on out there

and seeing how this entire industry is getting disrupted, I have a lot more faith in those two companies long-term than I did when I bought this position several, several years ago. Because the world changes, right? It doesn't stay static. It's not the same that it was five years ago when you might've bought a position that's been sitting around. Don't get stuck sitting on your hands, if there's legacy positions, you see that there's better opportunities elsewhere, but you're still thinking long-term, to me, that's an opportunity to improve your returns if you reemployed it somewhere else. That's a great point. Yeah. I have, and there's another topic that we want to get to, which Simon will talk about in a bit,

but before we get there, I want to, Steve kind of brought something up and I want to ask the question. The biggest investing mistake. I'm curious if you guys, do you have one in particular that is maybe like the glaringly obvious big investment mistake? Was it an error of omission selling early? Is it, I don't know if you can name particular examples, but. How much time do we have and how many examples can we give? Let's go with one. Go ahead, Steve. So biggest, biggest mistakes investing. Is that where we're going? Yeah. Oh man. Um, I can think of a handful of stocks. I wish I wouldn't have sold, you know, that it always comes down to it. Right. And I actually wrote about, uh, one in particular that,

that still pains me, uh, from about seven years ago. Now, um, I wrote about this, uh, a year and a half ago on seven investing, uh, was selling, uh, it was about 300 shares of NVIDIA in 2015. uh so that was the rationale he was buying a house if i remember correctly i was yeah and it was i i kind of what happened is i sold evenly across my portfolio i was like you know what i don't want to overthink this and i should have probably focused on just selling the stocks that because nvidia was still really high conviction idea and uh it was one of those things that i was hanging on to and uh it was about a triple from my original cost basis at the time, you know, now what is it? I look in like those, those shares I'm still holding.

I didn't sell them all, but you know, some of those shares I still have in my Roth IRA. And it's like a 60 or 70 bagger. Right. And, and, uh, what's left anyway, but it's funny because, uh, I think I sold those. It was like 275 shares for like five or 6,000 bucks. And, uh, those 275 shares would be like way more than the down payment I put on my, my house. now. But it's one of those things that it pains me to see from the taxable part of my portfolio anyway, that I sold those few hundred shares. And I'm like, but there's a few others. Lululemon was another one that I sold some of back then and a couple other stocks that really pained me. But it's always looking back and being like, man, I didn't want to sell it, but still no regrets at

the same time you sell well if you invest to have money to do the things that you want to do and buying a house for me you know has is i don't think of it as an investment even though you know now i look at housing prices that have been since 2015 in our area the housing has more than doubled and uh so i mean that i guess in and of itself hasn't been a terrible investment but uh yeah there's, you look back and video, I think is maybe the one that pains me the most, uh, right now. And, and it wasn't, you didn't adjust selectivity. You said you sold sort of evenly across the portfolio or was it? Yeah, I just, I just sold a bunch of, you know, I was like, all right, you know, I want to kind of maintain my allocations and I just kind of sold. And in

retrospect, there were a few stocks that I was kind of just meh about back then. And, uh, I would have preferred to just use those, um, you know, and just, just cut bait. And I think that's something I feel like I've gotten a lot better at over the last decade or so is trying to figure out, um, when it comes time to sell when I need money for something, you know, if you're buying a car or you're buying a house or, you know, you're, you're spending money on, on a vacation or something like that. Um, and you need money, uh, and I'm looking outside of my regular savings to do it. You know, if I want to sell down some of my portfolio holdings to do it, uh, I focus on the stocks that I, I dislike the most. I mean, I need to focus less on specific allocations and

more on, well, this thesis just is really not holding up. And I did a lot too much hanging on to those losers, hoping they would turn around. And looking back, even, you know, some of them just never have, or they've just kind of treaded water for a decade. And that's equally frustrating because you're too hesitant to sell, even though your thesis is broken. And, and so no regrets, I guess, you know, I think it also like some of the stocks we sold at seven investing on the scorecard recently, and some of them were down pretty hard. And I took some flack for one specific sell recommendation that I made and from some of the members on our discord forum and, and stick by it. I'm like, you know what? Like, I don't care that it's down so much.

That doesn't mean it has to rebound. I kind of think of it as the philosophy of every day, like you're deciding whether to buy or sell or keep something in your portfolio. And just because you don't sell something, that's still a kind of a decision in my mind. Like you got a real, I mean, it's not every day, but maybe every quarter. For some people. And that speaks to the merits of not checking your portfolio multiple times per day, every single day, you know, it's check in, you know,

once a month, once a quarter or something and subscribe to updates from their investor relations page, you know, look at the latest quarterly earnings and see if everything's on track. And when you do that, you sleep a lot better too. It's for you. Credentials to advance, confidence to stand out in your career. At Regent University, you'll join more than 30,000 world changers making a difference in high-demand fields.

Pursue your bachelor's, master's, or doctorate online or on campus in Virginia Beach. Your degree from top-ranked Regent University is waiting. So is the world you will elevate. Say yes to your purpose and position yourself for a brighter future. Visit regent.edu slash learn more. regent.edu slash learn more. Yeah.

Simon, do you have anything on mistakes? Well, yeah, Steve, don't worry. You actually wanted that house instead of that small Caribbean island from those Nvidia shares. Yeah. Montana is a nice place. It's much nicer there in the summer. I think mine was buying into the hype cycle. I think that some of my biggest mistakes broadly are just kind of getting excited about momentum

and seeing stocks going up and trying to jump in too quickly without really understanding the businesses and buying stocks I shouldn't have ever bought in the first place, right? And so the example of this is maybe to go back maybe 13 years, 13, 14 years ago, I was so excited into buying into these small cap Chinese companies, right? Investing internationally. These were companies I didn't know a whole lot about. just the governance of these companies themselves was a mess. You couldn't trust a lot of the numbers that were being put out there, but they were so exciting for investors to get into these

growth stories. And they were showing 200% revenue growth year over year. And I got caught up in a lot of that too. I was like, oh, well, I want to be a part of this. It was kind of the FOMO is really the way that I thought about it back then. And looking back, it's amazing. I didn't completely lose my shirt on all of these because if you followed what's going on in China today and just kind of a lot of those companies, you can't trust a lot of the numbers, especially for small caps. It's a miracle that it's been completely wiped out by a lot of those investments. But it's still like there's always that FOMO feeling, right? You don't want to miss out on what everybody's talking about. There's headlines going on. I know personally people that were

really caught up in the AMC and GameStop thing last year. And they're like, no, no, no, Simon, and trust me, this is a sure thing. I know we're going to make money on this. I'm like, are you sure of that? Or are you just convincing yourself of that? Because I've been through that feeling and I know how that feels. So I think it kind of goes on both sides, right? We talked about what to do during a sell-off when the market's tough and you're trying to evaluate if you want to raise money or upgrade your portfolio. It goes to the same way on the other side too. Our emotions are wired against us. We want to keep getting that dopamine rush when the stock market's hot and things are going well. But a lot of times, if you're being honest with yourself and you're

looking at those, those are kind of investing mistakes too, of being like, why am I in this in the first place? So I would say that that's probably one of my biggest investment mistakes. It was, I should have done a lot more homework on stuff that I was just getting caught up in the hype cycle for. Remember 3D printing 15 years ago? Sure do. Same thing. Absolutely. yeah right in there sometimes though the that's kind of i don't know the hype cycle though like sometimes it's you know yeah right and there there are a couple things that people are calling hype right now uh that i honestly think we're on the cusp uh in this inflection point where we're

starting to see some really cool things happening in growth actually materializing right space economy stuff uh for example you'd be selective obviously there's there's uh not all space stocks are created equal but uh yeah i think i think one of my big takeaways from the hype cycle thing is is to be much more selective about what you choose uh and and the industries you think or the the trends uh that you think are more than just you know the pogs of uh of investing so well and just maybe to add one more thing to that, because I think it's important is that the hype cycle is necessary to pick the winners of industries, right? Like Steve just mentioned the space economy, which is very capital intensive, right? It's very hard to raise money. If you're launching

satellites into the air or doing operations in orbit and stuff like that, like that's not easy. And we've seen satellite crashes and we've seen a lot happen in the last couple of months, but it's like, if you can take advantage as a, as a business, if you can take advantage when there is a hype cycle and your valuation of your company is at a peak and raise money from the markets, and then that's going to make you stronger than your competitors who are not doing that, there's some long-term implications from that as well. And so sometimes we say, oh, gosh, it came out too hot out of the gate. Look at how much it's up from the IPO.

And all investors got burned from this. But then sometimes if you zoom out and you look at that over three to five years, you realize, wow, that company was much better capitalized than everybody else who didn't do what they did. and so maybe there's actually you know some positive things that come out of the hype cycle too it's just you got to be a little bit more wary about dilution and things like that that when valuations are spicy you got you certainly got to pay attention to that kind of stuff it is yeah it's fine like when when the hype cycle bursts some of like the best investments

are found there from the survivors like bottom of the dot-com or like after the dot-com burst Even now, I think there's probably some hidden gems in SPAC land that have kind of gotten sold off with the crowd. It is, I think you raise a good point there where if they have the capital to survive and it's viable business, that's a good place to be searching. Yeah. Do we want to move to the next topic? Simon, you kind of had the notes on that. I don't know if you want to introduce it and maybe we can have a little discussion about it. Yeah, absolutely. You know, I think that this is something worth paying attention to as retail investors. You guys are kind of on the cusp of retail and institutional, but yeah, right. So, but, but seven investing, you know, we're kind of always individual investors that don't have

assets under management or funds or anything like that. But I'm always interested in what institutions are doing. Like, where is the big money going? Because when people that have 40 or 50 or $100 billion funds are selling off certain assets in mass, that just like you just said, in terms of the height cycle, that's the opportunity to actually say, okay, maybe we're getting something at a bargain that's going to rotate back again. And I certainly think that we are in the middle of what institutions are calling the sector rotation right now, right? This is like the buzzword, but let's look at some of the numbers of what that means and like where the money in these big funds, these big institutional funds has been going. And so I

pulled the funds flow report of where institutional money within American funds, American-based funds at least, is going here in 2022 and then also for the last 12 months. And I wanted to kind of present this just kind of as a little bit of context for this market craziness that we're in right now. Why is it the way that it is? Well, it's because billions, tens of billions of dollars of money is exchanging hands in kind of a lot of ways. But there's kind of two things that stand out to me, right? The first is year-to-date, year-to-date 2022. And this is, by the way, the end of February, not end of March. We don't have that report yet, but the end of February, so one month removed. There was $175 billion that came out of American money market funds, right? So very,

very low interest rates. Those were kind of the safe haven when everything was going crazy in October and November and December, but there's been a lot of money pulled out of those here in the first two months of 2022. And the other thing that kind of was interesting was large growth funds, right? So these are kind of like the Googles and the Apples and the Facebooks and the Amazons, you know, growth style investments that were very, very large market capitalizations. 20 billion dollars out of those funds in the first two months of 2022 but if we look at that over the last 12 month period 104 billion dollars has moved out of those funds that's a lot of cheddar guys right let's so 175 billion dollars with the b out of money markets and over the last

12 months 104 billion dollars out of large growth funds where is that money going right that's that's a lot of money that's moving hands? And the answer is it's going more and more towards value, quote unquote, value investments, large value investments. The two ETFs that had the largest inflows over the last 12 months were large blend, which is a blend, of course, of value and growth, again, defined by kind of the nine block. There's not a whole lot of- Quantitative, right? Quantitative. quantitative screens that are that are doing this but large blend has had 206 billion dollars moved into that fund over the last 12 months large value 92 billion dollars that's going into that fund so

this this is the sector rotation we keep talking about of um kind of risk off let's move money out of large growth you know let's kind of take it it's kind of counterintuitive right the s&p has been supported by a lot of those large growth the googles of the world you know i've been doing very very well this last year. But when you look at it kind of in the bigger picture of who's at the top of the S&P 500 and where's the money going, it's moving out of growth, it's moving into value. Now, my analysis on this is an interesting one because when you see something of that kind of magnitude, it's fine as a safe haven, right? It's probably people calling the manager on the fund and saying, hey, I'm in risk-off mode right now. I'm a risk-averse investor. Don't lose my money.

don't screw this up. I need dividend checks to pay for my mortgage, to pay whatever it is. It's like, there's a clear imperative for getting into value-based stocks. But I also think as a gross style investor and like the stuff that Steve and I've talked about, about like the biggest mistakes we made of selling NVIDIA or the biggest mistakes of not catching on to the way that the world is moving is in time. And I don't know if this is in three months or 12 months or two years. I don't know when it's going to happen, but those investors are going to get that same FOMO feeling we just talked about. And it's not going to be, let's go pile into Chinese small cap growth companies, but it is going to say, I'm tired of getting a 6% or a 7% return every year.

I'm ready to start getting a 13% or a 14% return a year. Let's start moving some of this money into growth. Let's start going risk on again, because we're not getting it out of these value stocks that we're in right now. That will only last so long and those valuation multiples will swell so high. Eventually, you got to look at profitable revenue growth. And to do that, it's going to have to rotate back. So the pendulum is going to swing the other way, in my opinion. It's a matter of time of when, but I'm almost certain that in due time, just the animal spirits and the mentality of the market and where the money has been moving these past 12 months, I'm almost certain it's going to eventually change because this isn't sustainable for periods of years.

That's a great overview. I think I agree with most of that. And I would add on to is looking at that type of stuff can be very helpful for understanding if you're confused about why a stock is moving where it is in the short run and there might not be any business news. So for example, if you have something in your portfolio, it's dropped 30%. Well, look, it's probably in the growth bucket in those factor buckets. And that's probably what's driving it down. You can check if it's in one of those big ETFs, maybe like the ARK ETF that If that was getting hammered and something you own is also in there, that could be a correlation as well. I try to look at that because when you can understand that the business isn't 30% worse, all it is is flows in the short run.

Okay, that makes me a lot more calm about, all right, the business is fine. The stock might be down, but it's not like, I don't know, it's not like the business is way worse than it was 28 days ago. that can make me a lot more psych like my mind you know doesn't get all crazed out about you know or something's going wrong whatever whatever and it might give you even the opportunity to buy some shares on the cheap while these giant funds are forced i wouldn't call it forced liquidation because it's not like they're getting the tap on like a margin call or anything but if their mandates or their investors are telling them to switch out or do whatever that can provide a buying opportunity a lot of the times this episode is brought to you by la quinta by windham here you

are miles from home and ready to start your vacation good thing you're staying at la quinta by windham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. It's just pressure. It is funny how it's like there's the difference in or the disparities in time horizons between like someone who actually like an investor with a true long-term mindset and like doesn't need returns now versus a lot of these funds where maybe they don't have like a mandate that says they have to hit a certain

percentage, but there's just pressure from investors and you don't want to deal with the withdrawals. A pension or whatever. Yeah. You could just, it's funny how that creates such a big opportunity, like especially for, I guess the retail investors. Yeah. But we don't know how long it can go. It might keep going. It can keep going. Yeah. Like you said, it could be two years. What do they say? The market can stay rational longer than you can stay solvent that's why that's why this is a good lesson why uh never go on margin right no matter how cheap that late is offered by a margin scary yeah it's really interesting i mean like the i always like to tell kind of the the dynamic of the market how do you make money off of stocks

it's typically one of three things right you're either doing it because the fundamental growth of the business that's the first one the second one is the valuation expands what people are willing to pay as a multiple of whatever the fundamental is is increasing or it's dividends And so let's exclude dividends just for a minute. Say you've got a company that's doing a billion dollars in revenue, market pays 10 times revenue, it's worth $10 billion. If that revenue goes to $2 billion and you're still paying 10 times revenue, it's up to $20 billion.

You made money that way, you doubled your money. Or the other example would be, it's still a billion dollars of revenue, but the market's going to pay 20 times sales instead of 10. You can double your money that way. And it's kind of this continual trade-off of like, you've got these fluctuations, like We just saw risk off in the market now, valuation contraction of what the market cap of a company like that, that was a large growth company could be, even if the fundamentals are totally fine.

Things like that, I see as an opportunity as a long-term investor. And Steve and I chat about this ad nauseum when we're picking stocks, a lot of these small cap companies or mid caps or smaller companies, these are the babies getting thrown out with the bathwater because sector rotation, right? People are not wanting to take the risk on a company that's still growing revenue 50%, 70% or more per year and are doing just fine and the fundamentals look great. That is, to me, the opportunity for a long-term investor that says, okay, we got to keep an eye on what's going on out there.

Yes, we know inflation rates are going up. Yes, we know interest rates are going up. There's a lot of headwinds. But at the end of the day, unless that's impacting the business, you're just getting a better and better deal every time that the sector rotation happens or the emotion of the market this risk off? Or even headlines. Sometimes there's emotional headlines, some short seller reports that don't make any sense. And we say, all right, we dug into this. Does this carry any water? And it doesn't. And then we say, well, maybe that's an opportunity. I mean, stuff like

this is kind of why valuation matters, but it's also not everything when you're picking stocks and holding them for five years or more. Yeah. It's funny too. It's so easy, I guess, in theory that as the multiples contract, you're getting a better opportunity, but Brett kind of alluded to it earlier. It's, it's difficult in practice because it's, it's kind of a demoralizing feeling for like a year to have a multiple compressed, despite good fundamental results. If your thesis is coming true, I know we've probably all had that happen, but that's just the way it goes. And it makes you, and it's, I feel like nothing tests, nothing tests your thesis, like how well you know your thesis, like a

50% drawdown because then you start to second guess yourself of like, all right, well, maybe my thesis isn't right because someone else probably had that thesis and they're selling it. So it's like, yeah, it is, it is kind of a, it's, it's, it's opportunity, but it doesn't always feel like it. Yeah, for sure. Any other? Yeah. I mean, to add to that, it's opportunity, but it doesn't always feel like it. Uh, I, I, I've, I've sort of reiterated this time and again, uh, in our discord forum, when people are talking about, you know, how painful it is to like check their portfolio and see like on days like today, right. Uh, when things are, you know, NASDAQ's down two and a half percent and half their stocks are down 9%, you know, and, and, uh, it's,

i think back to every other time i felt awful like that right and uh you know 2009 comes to mind uh big crashes since then like march 2020 you know when when one of the recommendations on one of the first recommendations on our seven investing scorecard was down 65 percent in three weeks and went on to right crazy and uh went on to like quadruple from our cost basis at one point after that. And, you know, really interesting, uh, to look at, you know, some of these crazy movements, but every single time I look back and I, I just feel terrible, uh, about the way, you know, the stocks that I have are doing, especially when those businesses are healthy and growing and their thesis is playing out like I'd hoped it would. And you have this crazy

multiple compression, um, every single time it's always in retrospect turned out to be a fantastic buying opportunity and i'm always happy i did but at the time it's it's so hard to like force yourself uh to take advantage of it and that's that's key to you know these are the times when when fortunes are made on the other side of it right so that's fun yeah like even using that example like march 2020 it retrospect in retrospect it's so easy to be like well you know i mean obviously we should have been buying right then right but like in that moment everyone everyone thought the world was ending yeah like they're like what do you mean that companies have no revenue for the next year because no one's gonna buy anything it's like i mean that didn't really

play out but it is it's yeah it's funny how the best time to buy always it i know it's like a cliche but it never feels like it like they don't sound the alarms at the bottom what what are you guys's thoughts in general about doubling down i know that's a tough topic sometimes you know can get dangerous right or just buying doubling down doubling down i mean is when doubling down when something has maybe fallen a lot you could look at the last like several of my last most recent recommendations this month this month you double down again this month and then yeah um so it's uh it really depends on the business um and i say over time uh is key as well like it's not, you know, if I have money I want to put to work, I generally put it to work over the

course of several months in specific positions. So, you know, too many people I think say, all right, I've got 10 grand, I'm going to put it all to work. And, you know, it's like they're measuring their, they do it all at once. And, you know, I think dollar cost averaging is fantastic and adding money continuously to your portfolio over time. But I don't mind continuing to the cost average for sometimes years into my favorite stocks. And, uh, you know, we're a little bit of a disadvantage on the seven investing scorecard sometimes because we just snapshot a point in time each month. And then we generally don't recommend re-recommend stocks for at least a few months after we've, we've first put them on the scorecard. But, um, yeah, I, I just,

patience is key. Um, just, I like adding to positions when, when, uh, you know, I keep this big picture view and say, okay, you know, this company's chasing, uh, here's total addressable market, which I'm, you know, often take with a grain of salt, of course, because they say, well, you've got a $600 billion market and you're not going to capture all that anytime in the near future. Um, but the reasonable chance of them sustaining outsized growth rates and, and, uh, you know, at a reasonable valuation, I love adding to businesses like that. I have no problem, uh, quote unquote, uh, doubling down on positions because eventually, um, the, uh, it all reverts to that mean, right. And especially when things are on the downside. So, uh, eventually though,

you have to be patient. Like, for example, let's go back to it. Somebody mentioned earlier in the podcast and video. Um, I, I think I bought my first shares of Nvidia after the crash in 2009 and a great time to buy, right. Didn't feel like it at the time. It felt pretty painful, but, Um, uh, they, they just churned along and did almost nothing for several years. And, uh, you know, it was, and I'd sold, I mentioned earlier that I sold, uh, a bunch of shares, a handful of shares, a few hundred shares in 2015 for about triple my cost basis. I think I bought my first shares at like seven or eight bucks a share. And, uh, but man, I mean, the number of times shares were down 20, 30, 40, 50% from their

highs, uh, in those first six, seven years that I owned it, um, there's more than I can count. And, uh, and you're tempted to sell each time, but I'm like, you know what patients I'm thinking very long-term. And, uh, sometimes it takes years for these theses to play out. And, uh, and then, you know, you, you eventually look back and, and those 30% drops 50, 60% drops. Sometimes you can barely even see them in the, in the chart because the rest of the chart is so high. and uh blips in the radar is what i like to call them uh you know generally 10 years down the road what's happening now is kind of inconsequential so i don't mind doubling down i'll stop talking now and let someone else that was great that was great well yeah it's funny most people

it's like when brett asked that question i was thinking like well of course you got to double down like what else can i do i don't have i don't have a whole lot of winners to add to right now so It's like, it's my only option. Yeah. Any other, Simon, do you have anything on that or? Yeah, I mean, I guess a personal example for me is, again, we've got kind of a bias of thinking that the stock has to be lower than our initial cost basis for us to buy back into it again, right?

That is, again, that's an anchor that is weighing on you that there shouldn't be weighing on you. You want to, you always want to say, oh, I bought it at $50. Now it's at $60. I'm not going to wait. I'm not going to buy it again until I get to $40. But in reality, I think for me, it's more interesting to say like, all right, well, if you're getting a better deal on it today, of course, the good companies are going to continue to go on and succeed. So they should be going up in their stock prices. But like, if you like the relative valuation compared to whatever

multiple of whatever fundamental you like, it's okay to add to it. I was just looking at a personal example, which is a company called Trupanion, which is offering pet insurance to North America, right? And you can follow me on Twitter and Seven Investments got some coverage on this too. But it's one that I looked back and I bought it three years after my initial purchase of it, and the stock had tripled. So I bought it at three times what my original cost basis was. And you might say, oh, man, that's crazy. So I mean, you could have gotten a better deal. But actually, to me, I was ecstatic about buying it even at the higher price, because I really liked the valuation that it was at, at the, at the triple what I had already bought it in the first

time. So, I mean, stuff like that is, I think it's really pays to, to look for metrics that are important in any industry for, for Trupanion, who's an insurer, you know, things like acquisition costs, lifetime values, you know, revenue growth, subscriber growth, things like, things like that. And then a relative valuation based on whatever metrics you want to look at. But that gives you good deals. That gives you a little bit more insight than just kind of, oh, the stock is up or down, or I bought it at this price or that price. Market doesn't care what your cost basis was. All it cares about is what's going to happen in the years forward. And how is this price, how is this stock priced for those years in the future?

It's all counterintuitive, right? I wonder sometimes if I should just be like, yeah, I want to do this and then do the exact opposite all the time. Because you're fighting your instincts a lot of the times when you're investing. That's another big challenge, right just not doing what you're tempted to do and it's like simon you kind of mentioned this where it's there's like this natural inclination to associate stock price appreciation with valuation appreciation even if like you know i i do it all the time where like i see a stock you see a stock jump like five percent after earnings and it could be cheaper than it was yesterday. And so it's, it's, it's just, it is a natural feeling, but yeah, kind of to your point,

like if, if you're getting a better deal on the future cash flows, then maybe this is the right time to add. On that point, on that note, by the way, one more thing to add, uh, Chris Mayer, uh, has what he calls in his book, a hundred beggars. Um, he's a good conversationalist, but, uh, one of the, one of the chapters is dedicated to what he calls the twin engines of growth. And one of those twin engines is expanding multiples, right? And that's one of the best things ever is when you've owned a company forever and it's actually growing its earnings. But at the same time, the market decides, you know what, we're going to assign a higher multiple to this stock because it deserves it. And that can be one of those sort of like turbocharge your returns as soon as the

market decides your stock is suddenly worth a higher multiple than it was before because it's a higher quality business. It's made more progress. So yeah, that's fun. I'd like to make, maybe if you don't mind, one last comment on this, which is that valuation multiples tend to have a floor and a ceiling associated with them, whereas fundamentals do not have a ceiling associated with them. And that's important to, you know, when we think about this relationship, valuations are going to go up and valuations are going to go down, right? The market's going to be on risk on mode one year, and then two years later, it's going to be risk off mode, and then it's going to be risk on a mode. If you wash all that

out and say, okay, market was paying 40 times sales this year. It paid 10 times sales the next year. It goes back up again. And you just look at the fundamentals. That's the more important thing to look at as investors. Let me just give the extreme example. Say that a company doubles its sales and its valuation multiple as a function of sales gets cut in half. You don't lose any money in that case. The valuation multiple gets cut in half and you still don't lose any money. But eventually, back to sector rotation, like we talked about, where's the big money going? What is the valuation multiple that's right, quote unquote, out there? There's going to be greed that's going to overcome an extremely low valuation multiple.

The market is going to recognize the winners over time, and it's going to reward the Teslas and the Amazons and the Netflixes out there, right? So find the companies that are performing really, really well. You can wash out a lot of what the market's thinking, risk on, risk off. If you have fundamental growth and you're willing to hold five, seven years, you're you just find no matter what price you're paying. People have been calling Amazon an expensive stock for a long time. They've been calling Tesla an expensive stock for a long time. Those companies continue to perform. And there's actually some quantitative research that shows that profitable

revenue growth is 70% correlated to long-term investment returns. It's not easy. That sounds so easy in retrospect. You can just find the companies that were going to grow 50% a year for a decade. That's really, really hard to do. But if you nab them and you add to them on the way up, that's a great recipe for success if you're a long-term investor. Yeah. All problems are solved by 20% earnings growth, right? Yeah. Over a decade. Over a decade. All right. Any other topics or? I think when we wrap up, do you guys want to give a short pitch or maybe one of you, Simon, probably of what 7investing is? Remember, use code money to get $100 off if I'm not getting that wrong on your subscription. Yeah. Thanks very much, guys. We're 7investing.com

or 7investing.com slash subscribe. If you're ready to get started today, we're long-term investors. And, you know, we spend basically all day, every day going out and seeing what's going on, seeing what's happening in the market, finding what we think are the best stock market opportunities. And Steve does this every month. I do this every month. We've got five other lead advisors that are doing this. We collect all of our best ideas. And on the first of every month, we publish them. So we just published our very top ideas, our best stock market recommendations for April, just five days ago, Steve. And we chat about them with our subscribers on subscriber calls, company updates, deep dives. We kind of continually cover them and see how they're doing

over time too. And sometimes we make re-recommendations of previous picks too. Steve had a re-recommendation of one of his favorite companies this month. But we put them all together and then we present them to subscribers. We say investing is personal. Maybe you want an income company that just pays you a dividend, is very low risk. Maybe you want to swing for the fences and you want to take a really higher risk bet on a company that's growing very quickly. We try to have the full buffet of options every single month. And we have a lot of fun talking shop about it too, throughout the process too. So 7investing.com, if you'd like to check us out today. Perfect. All right. Well, I'm going to throw the disclosure in here and sign off.

Brett and I are not financial advisors. Anything we say or discuss here at Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed on this podcast. Thank you all for listening. We'll see you next time.