Motley Fool Hidden Gems Investing - Meet the Fool: Tim Beyers

Episode Date: August 25, 2024

To become an expert, you may not always need expertise. You may just need to start asking better questions.  Tim Beyers is a lead analyst at The Motley Fool and a frequent guest on Motley Fool Money. He’s also the host of This Week in Tech, a weekly show on our premium livestream. In today’s show, Tim talks with Mary Long about: What convinced him to buy Amazon for the first time (and why he sold 2 years later). Unit economics, and one company that excels at it. The relationship between enthusiasm and education. Members of any Motley Fool Service can watch “This Week in Tech” at 10:00 am ET on Fridays, or any time at the Fool Live replay hub.  To become a Motley Fool member, head to www.fool.com/signup. Have an analyst you want us to feature on an upcoming “Meet the Fool” episode? Want to share your own investing journey with us? Send a note (or a voice recording!) to [e-mail] Host: Mary Long Guest: Tim Beyers Engineer: Dez Jones, Kyle Carruthers Tickers mentioned: DUOL Learn more about your ad choices. Visit megaphone.fm/adchoices

From morning hockey with a cup of coffee to Timbits and road trips, Tim's and Canadian Tire have always gone together. Now it's official. You can now earn Canadian Tire money at Tim's. Link your Triangle Rewards and Tim's Rewards accounts to earn twice with every Tim's run. Terms and conditions apply. Visit timhordens.ca slash triangle for details. And so that ability, I think, in investing and in life generally,

The ability to humbly ask a question of whether or not I heard what I heard. Does this make sense? If it doesn't, what am I missing? And so then gradually I keep accumulating little bits of extra knowledge. It's not that I have deep expertise in this, Mary. It's that I have learned enough over time to be able to ask a better question than I used to be able to ask. I'm Mary Long, and that's Tim Byers. He's a lead analyst at The Motley Fool,

a frequent guest on this show, and a co-host on This Week in Tech, a weekly show on our members-only live stream. I recently caught up with Tim to learn more about how he went from a communications career to being one of our resident tech experts. We also discuss the magazine cover that originally convinced him to buy Amazon, on, how time has made him a more conservative investor, and one company that excels at unit economics. We have dedicated some time this summer to getting to know a handful of our foolish analysts that are frequent guests on the show a bit better.

And today we're chatting with Mr. Tim Byers out of Denver, Colorado. Tim, thanks for being here. Thanks for having me, Mary. Fully caffeinated, ready to go. Fully caffeinated and ready to go. Okay, when Tim and I are both in the office together, we are two of the coffee fiends that can constantly count on each other to brew a pot of coffee. Tony Southcote is another one of those coffee-loving fools. Tim, what is the origin story of that phrase, though?

Because I've heard you say it a million times, but I don't quite know how it came about. I think it came about from former fool, Chris Hill, who like us, he is in that class of fools who just like always had a cup of coffee. Bill Barker is in this class as well. So I always felt like, you know, it was kind of my greeting to Chris, like, okay, are we fully caffeinated? Yes, we are fully caffeinated and we are ready to go. So that would be kind of my signal that, all right, we are doing Motley Fool money. Let's go. Let's ride. Love that. Okay, Tim, let's maybe start at the very beginning. When did you get started investing, whether it was professionally or as a hobbyist?

Oh, boy. So I got interested in investing all the way back in high school. I was in a stock market club whereby I don't know if I have this right. I recall I loosely recall us coming like third in the state of California for being just outrageous and picking a lot of horribly volatile penny stocks. So I would not recommend that. Not foolish investing at all. But some of this came from a friend of mine growing up whose dad was very much into stock investing and, you know, was part of the, you know, that was just like part of his DNA.

And that was something very interesting to me. So I did not grow up with it in the family. It was more tangential than that. And so I always had an interest. So by the time that I encountered the Motley Fool Investment Guide a few years into my career, this is, I'm going to say 1996, maybe 1995, probably 1996. And I read the investment guide and I, I mean, I immediately went all in. i was just like completely enthralled by it and um so i was reading things at the fool so we don't publish these things anymore but we used to have at the fool um these regular missives out to

membership that uh you know you could read every day and usually they're like two or three times a day you'd get wrecked fool fool on the hill um and these were like little news bites that you would get every day i i'd get the full watch daily the full watch weekly and i would be reading this stuff it would come in my inbox i'd be reading it all the time so long before i was an analyst at the fool. I was a voracious reader of our content. And so like friends of mine today who, you know, I've known for a long time, long before that I was readers. Like I was a reader of Bill Mann long before I knew and made fun of Bill Mann morning, you know, on the morning show, like I would read his stuff. So it's just kind of funny that way. What was it about the Motley Fool investment

guide that clicked for you? That it described a process of business-focused investing that I found simple, attractive. It's very empowering. It's written in the spirit of what I still consider for most investors, the best get started guide. You can't go wrong with the Motley Fool investment guide, but if you want a super basic get started guide for business focused investing, just proving that you can do it, one up on Wall Street from Peter Lynch is by far the best. And you don't have this today, Mary. So this is a bit of a cultural shift that I think made the investment guide so powerful in its time. And I remember this. There were um you know tv ads from big banks and um they were just the most insulting um really

i would like offensive ads like one of them that i remember distinctly i'm not going to get it right word for word but it was like a broker or no it was like a doctor or like somebody who was a patient that was going to do surgery on themselves instead of the doctor and the message of it was like you wouldn't do surgery on yourself why would you invest by yourself and so the message coming back from Wall Street at that time is like, you can't do this. You are not capable. You have to pay us outrageous amounts of money. You do need to pay transaction fees. You do need to pay broker fees. Who do you think you are and what are you doing? And so I imagine, as this is true of every young person ever you know i'm in my 20s i know a little bit about this i know that people do invest

and so it was almost like a screw you to wall street so that appeals to somebody who's young hungry interested i'm like yeah that's right like this is you know i can do this is very empowering. Does that make sense? Totally makes sense. Plus, they didn't even know who they were. When you're going, wait, I can do this. I'm thinking, yeah, of course you can do this. You're Tim Byers. You came in third in the stock market class, the third in California stock market class. Oh, that was long. Come on. Come on. I should not get any credit for that whatsoever. So I take it that that stock market class did not necessarily inform your investing philosophy when you found? No, no, no. It was

just like, that's the adrenaline rush of investing. And I remember at that time, I was either what, 16 or 17. So I really knew nothing. I did not get schooled about investing until I started reading things like the Motley Fool Investment Guide. And you should know that I read the Motley Fool investment guide. I got way out over my skis. I got way too excited. I was not thoughtful at all. And so this is the time, like in 1999, I buy my initial shares of Amazon when Jeff Bezos appears on the cover of Time Magazine. That's not a great way to, that's not an investment thesis. He appears as person of the year on the cover of Time Magazine. That's not an investment thesis. that is a speculation and so you know like within two years when the stock falls to what is today

a you know split adjusted price of 35 cents a share and i sell it like that is not an a sell thesis either so what it did is it fed my enthusiasm but enthusiasm without understanding and knowledge is dangerous. Enthusiasm with knowledge, context, understanding is powerful. But you see how wide that gulf can be. Yeah. But enthusiasm can't lead to understanding. That can be the door that opens up. And you realize, just as you've just described, oh, wow, when I bought into this, I actually had no idea what I was doing. There was very little thought behind it but now moving forward i have this desire to fill that void and like and develop understanding so that i don't make a senseless decision be it a purchase a sell what

have you again right and so what when i learned that after like the beauty of that amazon mistake and what what happened after that this is like 2001 and i didn't join the fool for 2000 until 2003. So I spent the next two years reading. I sold everything. I went to cash and I just spent the next two years really digging in, really reading, learning everything I could. I read as many books as I could get my hands on. I read like Intelligent Investor, Benjamin Graham. I read uh, the original Roger Lowenstein, uh, uh, Buffett biography. I read one up on mall street. I read the sequel beating the street. I read about financial statements. I read the money masters. I read just about anything I could get my hands on that were books that the fool was really

recommending. Read another great book, Joel Greenblatt's you could be a stock market. You It was only after I had ramped up my learning. And I will say the thing that changed everything is I, people know this. I was in the PR and marketing field and I graduated with a, you know, a master's degree from Syracuse University in public relations. Like I'd done that. I'd been a communications major all the way through. Should have been a history major.

I like history a lot more, but that was like practical at the time. So I did all this. I got into Syracuse. I got my degree. I was working in tech as a, you know, doing PR and marketing. I was writing things, pitching things, all of this stuff and learning how to communicate highly complex technologies. and um so you know at the time i really thought that i could do it but i didn't have a way to

prove it until november of 2003 when the fool for the first time in i don't know how long They had an open call for contract writers and said, Hey, if you want to do this, it was in one of those full watch, you know, emails, Mary, I saw this voraciously reading. Yeah. It's like, I'm going to do this. I'm going to do this. And I spent a month digging in, really doing a deep thesis work on stock. And I submitted my, you know, my, my entry and our managing editor at the time, a man named Bob Bobala came back to me, wrote me a note and said, Hey, we're going to buy this. What else you got? And that's how it started. And here we are almost 21 years later. So Tim, one of the things that's fascinating to me is like, it sounds as though you're investing

education, like that you're entirely self-taught. Just that description of like, I literally took two years and I consumed everything I could on the subject. I knew that you came from this PR and marketing background. And so when you talk about, okay, I had this communications degree, I go work at tech companies and I really learn how to communicate complex tech topics to laymen. That all makes sense. But I also think of you today as truly an expert in tech, not just as someone who's able to communicate complex topics, but who really knows the nitty gritty of what's happening at so many of these tech companies. I mean, is that also self-taught? Do you attribute that knowledge to the communications background? It's impressive to me if the answer is yes.

I don't know, but I would say learning tech is like learning another language. So that's what I would say it is. I don't think it was a communications background. I think it was a lot of generosity from a lot of people willing to spend time with me to teach me things that I didn't know. And then just sheer immersion into the field in order to learn the language of that industry. And some of that was like immersive reading. A lot of it was talking with people, recognizing that I didn't understand this particular dialect, which is where I failed in my tech career and i did i had some spectacular flame outs it was because i had two things that were wrong i was too cocky at the time i thought i knew everything i needed to know i knew none of

what i needed to know and then i did not course correct and i flamed out spectacularly and then And by virtue of that, you know, those failures, they teach you humility, which you absolutely need. And I did, you know, thankfully, through some real pain, you know, gain some some humility there. And I have learned since that there is no substitute for talking with experts who can help you. like the best way to learn in my opinion Mary is this is the framing that I use and I'm sure you've heard me use this so I'll be talking with our friend Tim White and Tim will be explaining something complex to me and I'll use this particular framing I'm sure I'll see the smile on your face if you recognize this framing and then what I will say is okay let me see if I heard

you correctly yeah yeah you're shaking your head this is i'm shaking my head and and yeah and verbally confirming i have in fact heard this framework at play and i and and and so i will play that back to tim to some degree and then he will point out the the the fine tuning of what i missed and so what ends up happening it's a little bit like a chat gpt interface i'm like i think this is what i heard okay and then i get an answer back nope that's not right let's try it you know with this little extra thing and so that ability i think in investing and in life generally the ability to um humbly ask a question of whether or not i heard what i heard does this make sense if it doesn't what am i missing and so then gradually i keep accumulating

little bits of extra knowledge. It's not that I have deep expertise in this, Mary. It's that I have learned enough over time to be able to ask a better question than I used to be able to ask. That's it. It is not like you're giving me way too much credit when you say deep expertise here. That is not true. I don't know. But even asking great questions is also is a skill that's more difficult than maybe we often think. But I think it's fair to give you plenty of credit for being an expert. It sounds like if I'm hearing this right.

Nice, well done. That your investing career, we can almost think of it as like three different cobblestones. So we've got this like exposure, the enthusiasm of the stock market, stock picking class that you take in high school. Okay, jump to the next cobblestone of Jeff Bezos is on the cover of Time. I'm buying Amazon stock. Now I'm selling Amazon stock and I'm resetting

my knowledge base. That's cobblestone two. And then cobblestone three is, okay, whoa, I've just spent two years really learning and just being a sponge and soaking up everything that I can on this topic. And now I'm really in this. Whether it's from cobblestone one to Cobblestone 3, or just looking at maybe your tenure at The Fool, how would you describe your investing philosophy as having changed? I'm more conservative than I used to be in the sense that I spend more time with valuations than I used to. I spend a lot of time on unit economics. So I'll come back to that because those are terms that we may need to define. But broadly, I'm more conservative. I like to be investing in tech because it gives me two things. I reduce my intellectual risk. So I've not deviated from investing in tech. And I don't invest in tech because it is of the moment. That's not why I invest in tech. That has never been why I invest in tech.

The reason that I invest in tech is because I have low intellectual risk in that category. I have very high intellectual risk in banks. I have very low intellectual risk in tech, meaning that if I am going to aim my time and attention on a tech company and evaluate the business, I feel way more confident that I'm going to make accurate judgments of the business. Whereas if I tried to do that with a bank, I feel like the possibility, the variance of me being wrong is just really high. I could be, you know, my chances of being wrong are way, way higher. So that's one reason, reduce intellectual risk.

The other is that tech is such a broad category as to be meaningless. The economics of a database business is really different from the economics of a software as a service business. And yet, they all kind of get lumped together. And because they all get lumped together, it has never not been true that mispricing in tech is rampant. It's rampant. That's always been true. And it's only gotten worse as the stock market has become more volatile. That's an opportunity. The extreme pricing exists all across the tech markets. That has also always been true, but mispricing is rampant in this industry. I think there's always going to be opportunities to fish in this pond, but my primary reason is because I've developed enough

time in in the tech industry and met with enough people who know more than i do uh that it is it has low intellectual risk for me mary and that is what i prize the most when i say i'm conservative i like to know that my odds of being right are at least pretty good and if they're pretty good it's because I am shopping in an area of the market where I feel relatively confident in my ability to assess. You mentioned unit economics. Why is that a standout, something that you like to pay attention to so much? Because I very often am investing in companies that don't yet have profits so um and you know you can have a company that isn't yet profitable on a gross basis but the unit level profit that they show is is good and getting better and so what that tells

you is as they get bigger over time those unit economics are going to show up and eventually deliver gross profit. Like it's going to show up as, okay, this company is very profitable now. So if on a unit basis, so let's say, and you can always break this down. I'm going to make this super simple here. Like a company has $300 worth of servers that it uses to deliver a product And the capacity of units it can deliver is 3,000. As of today, as it is young in its life, that $300, they're only yet delivering, even though it has a capacity of 3,000, they're only delivering 100. and each the revenue on each of those hundred is 10 bucks so or even let's say it's a dollar right on a hundred so that's a hundred dollars you know so 100 units hundred dollars three hundred dollar servers this is not a company that's showing a lot of profits yet now there's accounting rules

here like useful life of those servers and there may be like an accounting profit especially as those things age forget all that for a second here what i'm saying is you have these servers right you're only doing 100 units now but as you get up to 200 units 300 units 500 units and you have that fixed cost well now you're getting somewhere so what you want to get a sense of is what is it that a company can do in order to drive operating profits per unit? Am I seeing changes in the business that as the scale goes up, the operating margins get better? If that's true, that's unit economic power. That's happening. And so you're starting to see a company that can scale to profitable. It's going to deliver cash flows. And I can feel confident about that. Direction

really, really, really matters when you're dealing with companies that are selling a vision, but that vision is still in a formative stage and they have to deliver on the promise. You need to be able to measure whether or not they actually could deliver on that promise. Is there a company that you think is capable of delivering on that promise right now and really stands out from this perspective. I could tell you one that is delivering on that promise. They reported earnings recently, which is Duolingo. I knew you were going to say Duolingo. Did you know? How did you know that? Because you've talked to me about the unit economics of Duolingo and how impressive it is before. And so I set you up for that a little bit.

And I mean, one way you can look at it, so this is a unit economics argument for Duolingo is, So the last quarter they just reported, they had some outstanding numbers. But the quarter before that, they spent, for every dollar that they spent in sales and marketing, they were getting back about $6 in new revenue. So fast forward to the most recent quarter, the one they just reported, that ratio went up to, for every $1 of sales and marketing, they got $21 in new revenue. So it was 6 to 1. Now it's 21 to 1. That is incredible. And accordingly, their cash flow from operations, ballooning. Their profits, ballooning. And in particular, if they trade

for any kind of premium, if they trade for any kind of premium whatsoever, you want to see those kinds of unit economic values that can get you to the kind of cash flows you need to justify the price. Tim Byers, it's always a pleasure to talk to you. I feel like we started this off with the promise that we would learn more about you and talk less about companies. And surprise, surprise, we wound up talking about companies or companies, singular. That's the way I like it. We don't need to talk about me. We need to talk about members and what members want. So I know you wanted to do that, but I am glad that we got it off of me and onto what members need. There we go. I think it worked out pretty well. Thanks so much for the time, Tim. Again, always a pleasure to chat with

you. Thanks, Mary. Members of any Motley Fool service can watch This Week in Tech with Tim Byers and Tim White on Motley Fool Live every Friday from 10 a.m. to 11 a.m. Eastern and anytime on the Replay Hub. To become a Motley Fool member, head to fool.com slash sign up. We'll also include a link in the show notes. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.