Chit Chat Stocks - Why Does the Stock Market Go Up? With Brian Feroldi

Episode Date: May 11, 2022

Brian Feroldi joins us to discuss his new book, "Why Does The Stock Market Go Up?". We start the discussion off by catching up on Zillow and how the company has done over the last few years. Listen in to hear Brett, Ryan, and Brian banter about Zillow and the stock market as a whole. 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/ Buy Brian's book here: https://www.amazon.com/Why-Does-Stock-Market-Everything/dp/1735066168 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Zillow | (3:18) Brian's New Book | (12:52) Financial Literacy | (24:12) 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

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Welcome to Chit Chat Money. Today, we have a bonus interview with our friend, Brian Feroldi. He just released his new book. And so we kind of wanted to talk through what the book was about, what the process was like, and we get into some stock-specific questions as well. What is the title of the book though? I think people should know that. Why Does the Market Go Up? And he gets into why he named it that. And it's actually, I think it's a really good title because it's a question that isn't really answered. And he kind of talks about that a lot. But before we get into it, what were some of your highlights? I think just all the stuff around why the financial education part of maybe not even the school system, but just in general, why we're so bad at educating people about not just personal finance, but I think even worse is why investing works.

Because like you mentioned in the show, 99% of people probably have no idea why stocks go up. And it's not like, it's not like rocket science, but it is something that, you know, it takes a little bit of time to learn. And I just think his idea and talking about why, like, you know, he was talking with some of his friends and colleagues about, you know, why isn't there a quick answer to this? Why is it all sounds so complicated? And so he decided to just write it himself. And sounds like I said, a perfect niche. So it's a perfect gift for someone like, you're listening to this, you might be more of an investing nerd yourself. you might already have gone through this journey of learning how the stock market goes up, but it seems like a perfect gift for either, you know, a son or a daughter or a friend that's trying to get into the market. Yeah. And it's all, yeah, that's, I think you kind of hit the nail on the head there. This is a part of, I think our listener base is fairly fundamental focus. They're pretty, I guess, far along in their investing journey, but when you're helping someone else out in there, when they're beginning, these are a lot of the lessons that you can kind

to take away to hopefully apply and understand where they're at. So I think Brian really puts that in context with some of the questions we asked. So I hope you guys enjoy this interview without further ado. Here you go. Welcome to Chit Chat Money. On this show, host 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. Brian 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.

Okay, welcome in. Today, we are joined by Brian Ferroldi. This is, I want to say, third time now on the show. And last time you were on, we actually discussed Zillow, which we'll get to because I think people maybe want to hear a follow-up to that. But before we get in, Brian just released his new book, Why Does the Stock Market Go Up? So we're going to talk about that, some of the stuff in the book, sort of the process of writing a book. But let's start with, before we get to the book, let's start with some stock-specific stuff. So I want to follow up on the Zillow discussion we had. Obviously, a ton has happened or changed since we last spoke. So I'm curious, how has your thinking around the company changed? Have you

just discarded it and said, like, I'm done? Or is it still investable for you? Yeah. So when I was on the show, I pitched Zillow. The thing that I said at the end is the thesis for the stock right now, the growth thesis for the stock right now is Zillow buying, right? It's the iBuying business. And it was pretty much like a week later, They're like, oh, by the way, it was close. It felt like a week. They're like, yeah, just kidding. We're completely abandoning that business altogether. And that obviously removed a huge growth lever for the business. And I'm truly of two minds about it. But on the plus side, I like that management said, we tried this, it failed, we're abandoning it, we're laying off staff, we're focusing on our core business, which by the way, is still growing at a pretty rapid clip, is higher margin and all that kind of stuff.

The market puked that up, right? Because they essentially lost billions of dollars on doing so. It removed a huge growth engine for the company. And obviously, over the next year, 18 months, every time this company reports earnings, its revenue is going to be down 80% year over year. And that's not going to make for good headline numbers. So, I expect this company to be, quote, unquote, dead money for the near term. However, the core, when I bought Zillow in the first place, I bought it for the advertising business. I bought it for its position in the real estate market.

And that is still a good business with high margins and everything along those lines. I think this is a big case of management having to eat humble pie and focus on profits as opposed to just revenue. So a net negative, I still own my shares because I wasn't going to sell into the massive negativity that we've seen. But I'm not like foaming at the mouth to buy. Do you think it's a positive that management wasn't kind of, they were able to say, all right, we're going to, we do this, the stock's probably going

to go down 50%. Sort of an Amazon fire phone situation. Or something. Yeah. There's very similar situations that happen, but there's a lot of management teams that would pretend that everything's going fine until it totally, well, not maybe not blows up, but then just for maybe one or two more years, they pretend like it was going fine just because they're afraid of the short-term volatility or the short-term pushback. Do you think that's honestly a positive for that management team, too, that they're trying to act in the best way for shareholders over the long term? Yeah, definitely. It's better for them to do it than to continue doing it when they knew that it was going to be a failing business down the road. I think it calls into question the

entire iBuying industry because, in theory, Zillow had the lowest customer house acquisition costs and, quote-unquote, the best data to go after. What does that say for the rest of the industry. Now, Opendoor, I haven't followed that company as closely, but the last time I looked, that company was doing gangbusters growth, still investing hugely in itself. So to answer your question, yeah, I like when management says, we made a mistake, like I made a mistake. The thing that I'm scratching my head over, it was like, why wasn't this obvious sooner? Because I vividly remember when they said that we're going to be testing this out. This was like three or four years ago. They said, we're doing a test in a couple of markets about the home buying and the

home flipping. And then from there, they said, this is working, this is working, that's working, then they scaled it up. And it was just more recently, they said, this isn't working anymore. Now, we've obviously seen massive changes in the real estate market, right? With prices absolutely soaring. And I would say now with interest rates on the rise, the housing market is definitely going to be impacted. So what does that mean for other companies that are in the eye buying? If all of a sudden real estate prices start flattening out or even declining, like that could really put some pressure on those companies to follow suit. So it's a lesson in humility. It just shows that like anything else, management teams don't always get them right, just like we as investors don't

always get them right. This is kind of a broad question, but aside from Zillow, generally, how do you assess when a company makes a huge pivot like this? Because this was, as we can see from the stock price, sort of a crux of the investment thesis was this iBuying component. And are you usually, do you take a while to digest it? Does it sometimes, does a thesis breaker mean you automatically sell? Kind of, what are your rule of thumbs there? Yeah. So situations like this are rare when they come up.

And in general, I am, I consider my portfolio changes to be like driving like a cruise ship. I am generally slow to make changes on the upside or slow on the downside. And I know that I'm not going to react faster than the market can. I'm not going to digest faster than the market can. And I just know that that means that I'm going to hold losers for too long. That is just a downside of taking the strategy that I do. However, I'm okay with that, with accepting that I'm going to hold losers for too long because I've made the mistake many times of selling winners way too early. And on a dollar basis, that is a way more expensive mistake. So my default is always, always, always hold. And if I have questions about the business,

I usually default to not buying. It would have to be something serious going on. And for me to have no hope of the company returning, for me to consider selling it. But I'm also very diversified. I own dozens of stocks. So if one of them blows up over the last year, if many of them blow up, the overall strength of my portfolio is still pretty good. Okay. We're going to get to the book, but we have one more question about the market lately. Are there any stocks that have been of interest to you? I know it's very difficult. Maybe difficult is the wrong word, but there's so much price changes. Prices are changing rapidly. So it's kind of hard to evaluate sometimes. I guess, are there any stocks that

maybe look attractive right here? I don't know. There's a broad question, but what are your thoughts on that? God, yes. I mean, there's tons of stocks that look attractive right here. The time to be buying these stocks is when nobody wants them and nobody wants to own growth stocks right now. Everyone is looking at their growth stocks that they're holding and saying, oh God, earnings is coming up. How much money am I about to lose when the company reports earnings? So I can tell you that over the last couple of months, I've opened up positions in stocks that I didn't own previously. And I'm down on these companies because of what's happened to the market. But I think that C Limited is very interesting right now. I didn't buy that on the way up. And

there's been shifts in the gaming division there. But I opened up a position in C Limited. I opened up a position in Roku, a smaller company that really caught my eye. I opened up a startup position in that called SEMRush. I've added my business in Zoom and things like that. And all those decisions were made recently and they all look terrible right now because the stocks are down so much. But I still think many of those are high quality businesses and I'm going to continue to buy high quality businesses. I think right now is a great time to invest in these high growth names if you can accept that valuations can continue to plunge. Yeah, that's I think a good lesson for anyone that wants to invest in growth stocks. I know it's hard to classify anything to

growth or value. It's kind of a vague definition, but this is part of the process is sometimes there's a lot of volatility. And if you buy something, you maybe shouldn't expect it to drop 20%, but you should be okay with that happening. I think it's something you have, because it's going to happen quite a few times if you're within these types of companies. It's also funny that you hear so often that like, there is no difference between growth and value. They're, they're the exact same, right? Growth is part of the value equation, but it's like all the, all the growth stocks trade down in tandem. And so it's like, obviously someone's, someone's, someone's classifying it like that. So I just think, yeah, like if someone, I don't know, Brian, So does crypto, right? It's like anything high growth, anything risk, like crypto has been going down in tandem with high growth stocks, too. Yeah, a lot of these stocks trade together. And what's so interesting is that if you look over the last two years, they have by far been the

weirdest years for the stock market that I've ever seen. And I even heard David Gardner say the exact same thing. He's been investing for 30 years. And he's like, the last two years, the volatility we've seen in the last two years is unmatched with anything else I've ever seen in my investing career. You've had so many companies that are down 50, 60, 70% in a matter of months. And it just shows you how much fear there is right now going on the market and how many macro things are happening right now. But also we're saying, okay, what's the alternative? What's the alternative? Do we invest in cash? Do we invest in bonds? No, thank you to like either of those. So I want my money in high quality businesses for the long term. And I just accept

that occasionally it's going to feel awful. And right now it feels awful. us slash opportunities. That's, that's a good segue to the book. Why, why stocks go up and down, right? What, no, why does the stock market go up? Yeah, exactly. The let's, so let's talk about the book. How was the process? I've always kind of been curious about this. How was the process of writing the book? What was sort of the inspiration, I guess? What, when did you say, all right, it's time for me to write a book. So I've had this idea in my head for like more than a decade now. Like you guys, when I first learned about investing, I just devoured every book that I could get my hands on about money and investing in Wall Street. So I read like

The Motley Fool Investment Guide, One Up on Wall Street, Securities Analysis, Warren Buffett and The Interpretation of Financial Statements, right? There's dozens of books out there about investing. Many of them are awesome. They're really, really good. And they're all, by and large, a lot of them say the same things, right? Put your money in the market, invest in good companies or index funds for the long term, except the fact that occasionally bear markets are going to come and you have to have the wherewithal to go through them. I get all that. They do a great job of saying those things. However, the number one question I had about investing when I first started was why? Why does the stock market go up? Why is it that the Dow was 40, 130 years ago,

and now it's in the 30,000s or whatever it is. Why is the S&P 500 go up 10% on average each and every year? It never made sense to me why the stock market was defying gravity permanently and just kept going up and up and up and up over time. That was the number one question that I had. And I never found a book that just addressed that question, like the most important question that I had about investing. So two years ago, I was speaking with Morgan Housel and Brian Stoffel about this and how I had this thought in my head for a couple of years. And they're like, well, maybe you're the one that's supposed to write the book on it. So I thought that there was a missing piece of education out there that could apply broadly to new investors or anybody

with money in the market. And oh, by the way, there's a hundred million Americans that have money in the markets. Many of them don't know it because they're investing through a 401k, a 403B, an IRA, but in a very real way, millions of people are betting their financial future on the stock market going up. And I don't have any research to back this up. I just know it's true. 99% of them don't know the answer to that question. Why does the stock market go up? So that's what I wrote the book for. Okay. And I think maybe we should try to answer that a bit in some of the later questions. However, I think the most important question to ask here is, who should read this book? And if, say, you're listening and you're an experienced

investor, who's a perfect gift? Say you're maybe a professional listening to this. What's the perfect person to gift this book to? Yep. So the people that are listening to this podcast and people such as yourselves, we're financial nerds, right? We love this stuff. We love digging into SEC filings, thinking through business models, studying valuations, studying investor psychology. This kind of stuff interests us. I would say that even the people listening to this, if they read my book, would still learn a thing or two because I learned a thing or two writing the book, but it was mostly designed for people that knew nothing. And to your point, friends and family of people that are into investing. If a family member came up to me

and they said, I'm interested in learning about investing, what's the first book that I should read? Or what resource can you give me? I didn't have a great answer previously to that. There's some wonderful books like The Millionaire Next Door, The Simple Path to Wealth, those kinds of things. But I just wanted an introduction to the stock market. And I think that my book is a really good gift to give to somebody that knows nothing and can get them up to speed on the basics quickly. Yeah, it's interesting. The Millionaire Next Door, that's a nice starter one, but it doesn't actually talk about investing that much. If I remember, it's just kind of save, invest, and it's just telling these anecdotes about how the people that saved a lot or saved more than

they spent ended up being fairly wealthy over time, but they don't say why. So I guess maybe this book can be a better for that in that regard. Or even like one up on Wall Street, fantastic book. And that's all about how to pick stocks and why you should. Again, a great book, but I don't think that's necessary. If you just want to figure out why is my 401k going up? Why should I, why should I have faith that my 401k will go up over the next 20 years? Yeah. And I, yeah, that may not be the first one someone should read it. So this kind of leads into a question that maybe, you know, a little bit more about now because you've researched and wrote this book. How do you think, you know, we can improve teaching others about

investing in personal finance? I know that's a big thing you're doing with your newsletter and your YouTube channel. And why do you think the education system is so bad at teaching everyone this stuff. Yeah, I've read all the conspiracy theories about this, right? They're trying to keep people uneducated so that way Wall Street can extract fees and all that kind of thing. And if you look, while we're making progress on this front, some states, I think that Florida, for example, just announced that you have to take a basic personal finance class in order to graduate high school now. I mean, that is a big win. But I don't know about you guys, I was taught nothing about money, about finance, about investing growing up. Nothing about compound interest or

how the stock market works, the difference between a stock and a bond, none of that. That was all learned after I graduated from just my own interest in it. I think it's not taught in part though, because the teachers themselves don't know the answer to these questions. The teacher themselves might not have the money skills to actually educate people on how to do that. But we're spoiled today in that if you are interested in this subject, you can get like unlimited free information, high quality information from YouTube videos, from podcasts, from audio books, from blogs that are really, really good about teaching you how to do these things. So I would love it if this became a part of school and a bigger part. So I think if we all work together, we can make that happen. When did you first start investing?

And I know you already, well, I think I know the answer to this question. Well, read the book and you'll know the answer to these questions, right? I was going to say, what were some of the biggest questions you had when you started, aside from why does the market go up? What were some of the big questions you had? Yeah. So to answer the first question, I started investing in air quotes in 2004. And I say that because that's when I signed up for my 401k and I started putting money into the market. Although I vividly remember this. I sat down to sign up for my first day on the job, my first day real job. The HR person hands me the brochure for the 401k. And there's three options, low growth,

medium growth, high growth, right? And she says to me, okay, here you go. Which one do you want to do? And I looked at her, I said, I don't know. I don't know what any of these words mean. What do I choose? And she said, I can't help you with that. I'm not allowed to tell you about that. I was like, well, what am I supposed to do? Like, this actually seems like an important decision. I literally have no education about what I'm supposed to do here. But I did pick the high growth one because that sounded the best. And that's when I would say I start investing because I was just putting money in and going.

Beyond that, I was putting money into a brokerage account and buying and selling penny stocks. I was trading at the time. So that's my first venture into it. So I wouldn't say that I was investing at the time. I was trading slowly over time. I became an investor after I failed miserably with that early on, but I started putting money into the markets in 2004. But the biggest questions that I had were about, like people that start today, you pull up the stocks app on your phone, you see prices moving.

I had no idea why that was happening. I had no idea. Why is this going up today? Why is this going down today? It seems like gambling. It's pure, pure gambling. Stock price is going up and down. Here's the other one that I didn't know. I had heard, even before I started investing, the stock market goes up 10% per year. I was like, okay, all I see is a squiggly line. Where is this magical 10% per year coming from? Because I see sometimes it's up, sometimes it's down, sometimes it's flat for a long period of time. So I don't even understand how the market compounded on itself. I don't understand the concept of the market resets on January 1st and the returns are measured from January 1st throughout the rest of the year.

I didn't even know that. So like so many basic questions about investing. I tried to answer in the book. So I wrote down as many as I can. And I also talked to my friends that know nothing about investing. I was like, what questions do you have about investing? And even things like, how do I invest? So people, lots of people don't know you need to open up a brokerage account to put money into the market. Like they think you go through a bank or like even that whole process is confusing to them. But I had all those same questions myself when I started. Yeah. And what's, I think a good example of this is how there's no like, I don't know, basic education for people is that so many people get confused on market cap versus stock price.

There's so many people and it's an honest mistake, but you laugh at yourself back and say, when you were first learning the first few months of learning, when you think the stock price, the higher the stock price, uh, nominally, the, the more expensive it is. Um, even though something that's worth $5 could be much more expensive on a market cap basis than something that's $2,000 a share. Have you found that to be like a, I don't know, is that something that people could just, is that one of those things that people should learn about like super early and that you, it feels like, I don't know that everyone should be able to know that super easily, but I don't know, it gets lost in the shuffle and there's just no basic education on that.

Well, that's a concept that is so counterintuitive to every other price that we see in our lives, right? You go to a store, you see one shirt's $5, one shirt's $500. Which one is more expensive? It's obvious. The $500 one is more expensive. You see a $5 stock and a $50 stock and you say, which one's more expensive? The answer is, I don't know. I need more information. That is completely counterintuitive. So it makes so much sense to me why investors like myself started out by looking at penny stocks, by focusing on the dollar price of one share. It also makes sense why people still get really excited about stock splits, right? They see that the price of this stock is about to go down by a factor of 10 or 20 and how it's natural to think,

oh, that means that it's going to 5X afterwards. Oh, that means that I can get on the ground floor Again, we both know that a stock split has no impact on the value of a company at all. It's a marketing event more so than anything else. However, lots of people still don't understand that. And it makes complete sense why, because the only thing we're ever shown is price. How often do people talk about market cap? How many people even realize that you can look up the number of shares that are outstanding? That information you have to search for.

It's not presented to you the same way that price is. this episode is brought to you by La Quinta by Wyndham here you are miles from home and ready to start your vacation good thing you're staying at La Quinta by Wyndham 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 Right. And it seems so complicated, but it's not like crazy math. I mean, there are a ton of metrics and numbers you can look at, but they're really the core metric shares, outstanding market cap, earnings, cash flow. There's not that many to learn and it's not too difficult. So it feels like, I don't know, do you think the industry tries to overcomplicate things or is that just kind of a byproduct of people trying to make it more complicated for themselves? Historically, there's no doubt that people in finance have benefited from the broad population,

have no idea what they're doing and not knowing information. There's still a lot that they can get away with. The thing that still blows my mind a little bit is that if somebody's managing your money and you're extracting fees from them, you don't have to send them a bill. You just take those fees out of their account a little bit every single day as an expense ratio and the client never sees a bill. When I was researching the book, I initially wasn't going to put in anything about financial advisors. But after talking with a lot of my friends and saying, how do you invest? They say, oh, we have a guy. We have a guy that invests for us. And I was like, all right, how did you find them? And then how much did they get paid? And the answer was a friend

or through work. And I have no idea. I have no idea. Doesn't that sound weird? No, yeah. We've seen, I mean, we, we, we talk with people and, you know, we, we can't say anything exact, but we've seen some things that you're quite surprising how high the fees people are paying. And there's ways to sell it or craft your management fee that make it sound better. It's like, I think the one I always hear is we only make money when you make money or we, we make more money when you make more money or something like that. And it's like just a, like an absurd, like 2% management fee or something like that. It's like, all right, well, there's better structures to have here. But what's interesting is if say someone read your book and knew the basics, you'd be like, okay, that's gonna be quite the headwind for me. These guys better be pretty good.

But I guess we'll move to maybe another topic here. And that is an experience with previous volatility. I mean, you were investing, you know, your account, I guess you're still more learning about it maybe in 08, correct me if I'm wrong, but, you know, you experienced the stock market crash in 2008. How has that helped you, I don't know, navigate now any similarities and differences? And what do you think people in general can learn or how can history help people, you know, navigate current market environments just by learning through all the history?

Yeah. If you look back at the long-term returns of Dow, the S&P 500, the NASDAQ, you, of course, see 2008. You, of course, see the dot-com crash. And if you're looking at the chart, you're like, tremendous buying opportunity. Look, it's obvious. Look how much the market is up from those time periods. And it's easy to be like, oh, that's awful. The NASDAQ plunged 70% over a two-year period, but look, it came back. It was a great buying opportunity. Seeing that and living through that are two completely different things. Two completely different things. Everyone understands that you have to deal with volatility conceptually. What they don't really understand is what it's actually like to live through it moment by moment,

seeing your portfolio go red, red, red, red, red, day after day, while simultaneously being exposed to the news. And the news is always bad, always bad when things are happening right now. So when you see your portfolio plunging and things that are going on negatively in the news, it takes a lot of gusto to continue to think, oh, it's a great buying opportunity. It's really, really hard to do. However, so when I was investing, I had enough money in the market in 2007 and 2008, that I can tell you, it felt awful to be continually buying that whole time. I remember buying in August of 2008. I bought like I always did that month. And then that next month I was down like 15%, whole portfolio. And then I bought again that next month, down 15%,

whole portfolio. I bought again, down 10%, whole portfolio. And it kept going down and down and down and down. Meanwhile, what was the news at the time? Record layoffs, people getting kicked out of their houses, big banks going under, the government stepping in, like living through that period and not knowing when the bottom is, it's very, very scary and very, very unnerving. However, looking back, of course, I see that those are like some of the best purchases of my life. Looking back today, even after the recent plunge, like I got Google for, I've owned that for like 13 years now. My split adjusted price on that is under $200 a share. And it's like, it felt awful at the time to be doing so, but that was a generational buying opportunity. I'm hopeful

that that's what we're going through right now, that this is like a really good buying opportunity for people. But the markets have been rocky for what, like a year now, if you're into growth stock investing, maybe 14 months. I think my portfolio peaked in February of 2021. And it's just felt like you can do no right. You buy anything and you've lost money on it. So the feelings are very similar to then as to now. You said you worked at a public company at one point. What were some of the lessons that you took away from that working experience? And then also, can you give us some context around like the size and, uh, I guess maybe your role at the time. Yeah. So that was, uh, I accidentally got a phenomenal education about what it's like to,

to be an individual stock owner by working at this company. Uh, so I joined a company called Insulet Corporation, um, in 2004, they were three years after they were, they were founded, they were purely funded on venture capital and they were still in the R and D stage. It was pre FDA approval for this medical device. So after I joined, they got FDA approval, they started to launch, and I joined the sales team. Soon after I launched, they went public. They went public at, I think, $15 per share. And within a matter of months, like three or four months later, the stock was at $27. So it went from $15 to $27. By the way, just for fun, I looked back at the S1 filing at the time. Now they know what I'm doing. Would you guys invest in this,

in this company? I was trading at 50 times sales at the IPO and had a negative gross margin of 50%. Oh, wow. That's not, that's not our cup of tea. Had you bought, you'd be up 1,330% right now. Wow. I mean, that's some of those, some of those early stage, like medical device companies. I mean, you have to, well, one, if it's in your circle of confidence, it's probably easier, but I mean, things look, it looks like garbage for a while. And then it looks like the most beautiful company, highest quality company in the world. It's a 14 bagger, despite being down like 30% from its high.

However, during that period, so we went public at 15. Within a matter of months, we were at 27 for no reason, like no reason at all, right? It was just valuation expanded. So we went from what, 50 times sales to, I don't know, 80 times sales. Sound familiar, by the way? What happened next? uh, the great recession, the great recession, our stock went from 27 to $2 and 70 cents. It was a 90% drop peak, peak, peak to drop. And you were an owner. Oh, and I'm an owner. Yeah.

Everyone that worked at the company, uh, was all my options were underwater, right? Everyone that got RSU, all that kind of stuff, hugely, uh, hugely underwater at the time. So it felt, it felt, It felt awful. And the crazy thing about that was we were a better, stronger business at $2.70 per share than we were at 27. We had more customers. We had more revenue. Our gross margin had improved. Like our moat that we were building was wider. And yet our stock was down 90%. Now, if you manage to buy at any time during that period, you've got a multi-bagger on your hands. But that just showed me that what the stock does and what the business is doing is just two totally different things. It's all about sentiment. It's all about sentiment in the short term. However, the company had a

recurring revenue business model. It's grown its revenue 20%, 30%. Kager, I don't even know what the Kager is over the last 15 years. And it's been a fantastic, fantastic investment. But man, did it put investors through gut-wrenching declines. How big was the workforce at that time? And what did morale look like as that drawdown kind of occurred? So I was employee number 60. I think at the time when we were going through a downturn, we had like 100, 120, something along those lines. And then they had a downsize in March of 2009 because we were funded in cash and we needed

to extend our runway as long as possible. So what do you think morale was like with the stock down 90% and people going through, uh, and seeing some of our friends, uh, uh, fired for no reason. They did nothing wrong. Uh, they were like, oh, it was awful. It was just, just awful. Um, but, um, yeah, it, it felt, it felt terrible. If we had a glass door at the time, I'm sure the ratings would not have been good. yeah that that that that does make sense what um okay i think maybe you're on the inside look there but just in general i don't know if you hit on this in the book at all but like it seems like and we're experiencing it now that even though the business say for example a good example would be zoom video subscription business very very steady growth um it seems like price the stock price drives the sentiment and not the other way around. Did that happen in 2008 as well? Because I think, I don't know. It's hard for people to contextualize why they are getting

so negative on a company. And if it's just the stock price going down, that's making them kind of trying to convince themselves that they're wrong just because the market's telling them it is. Yeah. And in some cases, when a stock price is going down, the market's correct. Yeah. In fact, oftentimes the market is correct that this stock is no longer quality or things are going south. And you can see that investors can get way too overexcited on the upside and way too pessimistic on the downside. That's good for us if we're investors because we can take advantage of those enormous price swings, but it can be totally unnerving if you are unprepared for it. But I think what you just said is really insightful. And this is something I've really come

to internalize, is that price drives narrative. It isn't necessarily the other way around, right? A company could be executing very, very well. The business could be doing great. But if its stock is down, the narrative about that company is blank, blank, blank is going under. Just look at Tesla as a great example. From like 2014 to 2019, it was like a five or six-year period, Tesla stock was down slash flat, even though every single earnings report that came out was like record, record, record, record, right? It was just doing that. And then the narrative changed in 2020 and it 20-bagged from there, right? And then it was suddenly Tesla could do, well, not no wrong, but it's in a completely different place today. So yeah, you're absolutely right. Price,

A narrative follows price. And I feel the same way. When I saw Zillow plunge, I wasn't like, hooray, the business is doing wonderful. I was like, oh God, what happened now? So it's natural for people to think that. What were your biggest investing mistakes throughout, since 2004?

So I've made a ton and I'm still making mistakes to this day, right? That is just how it goes. I try whenever I make a mistake to learn from it. I'll tell you the biggest mistake I've ever made was over-allocating to a single idea that I thought was a sure thing. And I was so confident in that idea, I put a synthetic long on top of that. Do you guys know what a synthetic long is? Yes. Vaguely. Yes. It's like the most bullish option position that you can have. You buy calls and you finance the

buying of calls by selling puts. So it's pure leverage. It's basically saying this stock's going up, you make a ton of money. And if it goes down, you lose a ton of money. So I did that on Kinder Morgan, an oil pipeline company in 2014. It was my number one position with my capital. And then I added on an options position on top of that because I was so confident in the company's business model and future. And I think I got that one wrong, obviously. And the company had take or pay contracts, meaning that it didn't matter in theory what the price of oil and natural gas was. What mattered was just moving it. They get paid for just moving it, not for energy prices swings. Well, energy prices plunged, plunged, and so did Kinder Morgan stock. And I was like,

that doesn't make any sense. They have these contracts in place. They get paid for moving it, not for the price. What I didn't realize was that those contracts only matter if the people on the other side of them can afford to pay them. And their customers were hit so badly that they had to renegotiate things, delay payments, and kingdom work and stock got crushed. And I got crushed with leverage. So that was so far the largest dollar loss that I've had to take. And it's a major reason why on my checklist now, I have negative points against any company that relies on outside forces, such as oil prices, gold prices, interest rates, commodity prices, as a part of its success, because I can't predict those things.

No, it's a great lesson. I think we're on the same exact boat there. I know you have to go. So last question, I think, I don't know, this is a good wrap up one. What is some advice you have for anyone looking to start their investment journey today? And I know that, you know, that's what I was going to say. It's kind of saying pick up the book and read what you had to wrote on all those pages. But, you know, maybe a little tease for any advice you have from the book. It's a great time to get started investing. Like today, like right now, I think it's a great time to get started investing given where prices have done, so long as you can do so with what I think is the most important thing, which is a long-term mindset. If you can't invest with a

long-term mindset, you are just going to do terribly because you're going to panic whenever things go down, you're going to get scared, and it's very easy to do so. As we said before, When you see your portfolio value plunging, even if you know that that's an okay, it's just an entirely different thing to experience it. So I would just say, the advice I give to everybody that wants to get started with the market is dollar cost average into index funds. If you dollar cost average into index funds, focused on increasing your income and increasing your savings rate, the odds of you doing extremely well 10, 20, 30 years from now are unbelievably, be high. So that is just great advice that I think everyone should do.

All right. I think that's all the questions we have. Where is the best place to find you for any listeners? And what's the best place to pick up the book? The book's available at all online retailers, Amazon, Barnes and Nobles, etc. It's called Why Does the Stock Market Go Up? If you're a financial nerd like we are and you want to see me analyze businesses. You can connect with me on Twitter. That's at Brian Feraldi and my YouTube channel, which is Brian Feraldi. All right. And I'm sure we're going to link to probably the Amazon one in the show notes. So anyone that's maybe confused on the title or anything where you can't find it, it'll be just one click below us.

You're anti Barnes and Noble? I think there might be a wider audience at Amazon at this point. Okay. All right. Well, that's going to do it for us. We want to remind our listeners that Brett and I are not financial advisors. So anything we say or discuss here on Chitchat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast.

Thank you to Brian for coming on the show and thank you all for listening. We'll see you next time.